S-1

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As filed with the Securities and Exchange Commission on March 30, 2007

Registration No. 333-            

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

QUARK BIOTECH, INC.
(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of
incorporation or organization) 2834
(Primary Standard Industrial
Classification Code Number) 94-3192416
(I.R.S. Employer
Identification Number)

6501 Dumbarton Circle
Fremont, CA 94555
(510) 402-4020
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)

Daniel Zurr, Ph.D.
Chief Executive Officer
6501 Dumbarton Circle
Fremont, CA 94555
(510) 402-4020
(Name, address, including zip code, and telephone number, including area code, of agent for service)

Copies to:

Robert L. Jones, Esq.
Robert J. Brigham, Esq.
Cooley Godward Kronish LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
(650) 843-5000 Alan F. Denenberg, Esq.
Davis Polk & Wardwell
1600 El Camino Real
Menlo Park, CA 94025
(650) 752-2000

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.

        If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

        If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

        If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering.    o

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Proposed maximum aggregate offering price(1)	Amount of registration fee(2)
Common Stock, $0.001 par value per share	$86,250,000	$2,648

(1)

Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes shares which may be purchased by the underwriters to cover over-allotments, if any.

(2)

Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED MARCH 30, 2007

PRELIMINARY PROSPECTUS

                  Shares

Common Stock

        Quark Biotech, Inc. is offering                        shares of common stock. This is our initial public offering, and no public market currently exists for our shares. We anticipate that the initial public offering price will be between $                        and $                        per share.

        We have applied to list our common stock on the NASDAQ Global Market under the symbol "QURK."

Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 7.

	Per Share	Total
Public offering price	$	$
Underwriting discounts and commissions	$	$
Proceeds, before expenses, to Quark Biotech, Inc.	$	$

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

        We have granted the underwriters the right to purchase up to                        additional shares of common stock to cover any over-allotments. The underwriters can exercise this right at any time within 30 days after the offering. The underwriters expect to deliver the shares on or about                  , 2007.

JPMorgan Banc of America Securities LLC

CIBC World Markets

C.E. Unterberg, Towbin

The date of this prospectus is                        , 2007

TABLE OF CONTENTS

	Page
Summary	1
Risk Factors	7
Forward-Looking Statements	27
Use of Proceeds	28
Dividend Policy	28
Capitalization	29
Dilution	30
Selected Financial Data	32
Management's Discussion and Analysis of Financial Condition and Results of Operations	33
Business	46
Management	68
Compensation Discussion and Analysis	71
Certain Relationships and Related Party Transactions	87
Principal Stockholders	89
Description of Capital Stock	91
Shares Eligible for Future Sale	96
Material U.S. Tax Consequences for Non-U.S. Holders of Common Stock	98
Underwriting	101
Notice to Investors	104
Legal Matters	107
Experts	107
Where You Can Find Additional Information	107
Index to Financial Statements	F-1

You should rely only on the information contained in this prospectus and any free-writing prospectus that we authorize to be distributed to you. We have not, and the underwriters have not, authorized anyone to provide you with information different from or in addition to that contained in this prospectus or any related free-writing prospectus. If anyone provides you with different or inconsistent information, you should not rely on it. We are offering to sell, and are seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock. Our business, financial conditions, results of operations and prospects may have changed since that date.

This prospectus contains market data and industry forecasts that were obtained from industry publications. We have not independently verified any of this information.

SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including the section entitled "Risk Factors," and our financial statements and related notes included elsewhere in this prospectus.

Our Business

        We are a clinical-stage biopharmaceutical company focused on discovering and developing novel therapeutics based on our proprietary gene discovery science and technology, with an initial focus on RNA interference-based therapeutics for the treatment of diseases associated with oxidative stress. We believe that our insight into the molecular mechanisms underlying these diseases, combined with our ability to successfully deliver synthetic short-interfering RNA, or siRNA, to specific organs in the body, enables us to rapidly develop drug candidates, often directed against the same target across multiple therapeutic areas. We have two product candidates in clinical development: RTP801i-14 for the treatment of wet age-related macular degeneration, or wet AMD, and AKIi-5 for the prevention of acute renal failure, or ARF. We have licensed RTP801i-14 to Pfizer on an exclusive worldwide basis. Our product candidate portfolio is based on novel targets and therapeutic concepts discovered using our BiFAR target gene discovery platform. We believe that the combination of this platform and our expertise in designing RNAi-based therapeutics will enable us to continue to advance new product candidates into clinical development.

RNAi Overview

        RNA interference, or RNAi, is a recently discovered process that occurs naturally within cells and, facilitated by siRNA, selectively silences the activity of specific genes. Genes are the basic units of inheritance. Genes provide cells with instructions for producing proteins encoded by them. Many human diseases are caused by the abnormal behavior of proteins. The ability to stop or reduce production of a protein by selectively silencing the gene that directs its synthesis could be very beneficial in the treatment of disease. We believe that RNAi-based therapeutics potentially have significant advantages over traditional therapies, including broad applicability to treat many diseases, the ability to selectively inhibit expression of disease-associated target genes, inherent drug potency and shortened drug discovery timelines. To date, the major challenge in the development of RNAi-based therapeutics has been delivery of siRNA molecules to the organ and cells relevant to a particular disease.

Our Approach

        Our insight into the pathogenesis of diseases associated with oxidative stress, combined with our proprietary targets and our solution to siRNA delivery, led us to select siRNA as the modality for our first clinical programs. We believe that our integrated discovery and development approach is particularly well-suited to RNAi-based therapeutics and is based on the following three main capabilities:

•

Identifying clinically attractive drug targets using our BiFAR discovery platform. Using our BiFAR discovery platform, we have identified and validated many gene and protein targets for diseases, including diseases associated with oxidative stress. We focus on diseases expressed in organs that we view as attractive based on our ability to successfully deliver our siRNA molecules to the target organ and cells. We select the route of delivery that is clinically relevant for the given organ.



•

Selection of diseases associated with oxidative stress across several therapeutic areas for the same target. We believe that our focus on diseases associated with oxidative stress, which share

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common molecular mechanisms, will enable us to more quickly identify drug candidates capable of treating multiple diseases based on proprietary targets common to diseases in different organs of the body. For example, we have demonstrated in pre-clinical models that inhibition of the RTP801 gene has beneficial therapeutic effects in various diseases associated with oxidative stress, such as wet AMD and chronic obstructive pulmonary disease, or COPD.

•

Designing and modifying our siRNA molecules to enable successful local or systemic delivery. Our siRNA drug candidates have a chemically modified, stabilized structure and properties that we believe offer significant advantages over standard siRNAs. In pre-clinical studies, we have successfully delivered siRNA molecules and suppressed target genes in the back of the eye, inner ear, tubules of the kidney, inner lung and spinal cord, demonstrating both local and systemic delivery.

        We believe that our approach has the potential to generate several Investigational New Drug applications, or INDs, in the coming years, either for new indications for the same drug or for new drugs.

Our Product Candidates

        The following table sets forth the status of our product pipeline:

Product Candidate	Indication	Status	Commercialization Rights
RTP801i-14	Wet Age-related Macular Degeneration	Phase I/IIa ongoing (completion expected 2H 2007)	Pfizer (Worldwide)
AKIi-5	Acute Renal Failure	Phase I ongoing (completion expected 2H 2007)	Quark (Worldwide)
AHLi-11	Acute Hearing Loss	Pre-clinical studies (IND expected to be filed 2H 2007)	Quark (Worldwide)
CTPi-1	Chronic Obstructive Pulmonary Disease	Pre-clinical studies	Pfizer (Worldwide)
BT16	Dyslipidemia	Clinical trials in Japanese population expected to be initiated in 2007	Sanwa (Japan, South Korea, China and Taiwan); Syndrome X (Rest of World)
Pipeline siRNAs and Antibodies		In vivo proof-of-concept studies	Quark (Worldwide)

        RTP801i-14 for Wet Age-Related Macular Degeneration.    RTP801i-14 is in a Phase I/IIa clinical trial for the treatment of wet AMD. RTP801i-14 is a stabilized, synthetic, chemically modified siRNA that inhibits our proprietary target RTP801, a gene we believe plays a significant role in wet AMD. Wet AMD is the leading cause of central vision loss in the elderly and occurs when the light sensing cells in the central portion of the retina, called the macula, malfunction and over time cease to work. We have licensed RTP801i-14 to Pfizer on an exclusive worldwide basis. We have successfully completed dosing of the first cohort of patients in our Phase I/IIa clinical trial, with no drug-related adverse events noted in this cohort. We expect to complete dosing and initial follow-up on all patients in this trial in the second half of 2007. Depending on the results of this initial follow-up, we expect to initiate a dose-ranging Phase II clinical trial measuring RTP801i-14 clinical activity.

        AKIi-5 for Acute Renal Failure.    AKIi-5 is currently in a Phase I trial for the prevention of ARF through the systemic delivery of AKIi-5 in patients undergoing major cardiac surgery. Based on publicly available information, we believe that this is the first human clinical trial involving the systemic delivery of siRNA. AKIi-5 is a synthetic, chemically modified siRNA molecule designed to temporarily inhibit the expression of p53, a gene we believe plays a significant role in ARF. ARF is a syndrome characterized by a rapid decline of kidney function leading to death in a high percentage of cases.

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Major cardiac surgery is one of the many causes of ARF. Currently, there are no effective drug therapies to prevent ARF. We expect to complete our Phase I clinical trial in the second half of 2007. Depending on the results of this trial, we expect to initiate a dose-ranging Phase II clinical trial measuring AKIi-5 clinical activity.

        AHLi-11 for Acute Hearing Loss.    AHLi-11 is currently in pre-clinical development. The active ingredient of AHLi-11 is a synthetic, chemically modified siRNA that is a temporary and reversible inhibitor of p53, and is the same active ingredient as in AKIi-5. Using the pre-clinical package that has been prepared for AKIi-5, with additional studies specific to AHLi-11, we believe that we will be able to file an IND with the FDA in the second half of 2007 for AHLi-11 for the prevention of hearing loss induced by a chemotherapeutic agent, one of the many causes of acute hearing loss.

        CTPi-1 for Chronic Obstructive Pulmonary Disease.    CTPi-1 is currently in pre-clinical development for the treatment of COPD. CTPi-1 is a synthetic, chemically modified siRNA molecule designed to inhibit our proprietary target RTP801. We are conducting pre-clinical studies of CTPi-1. We have licensed CTPi-1 to Pfizer on an exclusive worldwide basis, and there can be no assurance that Pfizer will choose to continue developing CTPi-1.

The BiFAR Platform and its Applications

        Our BiFAR target discovery platform directly identifies clinically relevant critical genes and proteins that are responsible for certain disease traits. We have applied this platform in several disease programs. The application of the BiFAR platform to diseases associated with oxidative stress yielded our pool of proprietary targets from which we have derived our current product candidates. In addition, from 1995 through 2005, the BiFAR platform allowed us to generate cash for our operations as well as rights to potential products through agreements with several pharmaceutical companies. These agreements relate to the discovery of novel target genes potentially suitable for the development of drugs to treat or prevent retinopathy, depression, heart failure, autoimmune diseases, diabetes, liver fibrosis, chronic renal failure, stroke, neurodegenerative diseases, osteoarthritis and cancer. Through December 31, 2005, we had received from these research collaborators an aggregate of approximately $78.7 million for research and development funding, milestone payments or as equity investments.

Our License Agreement With Pfizer

        In September 2006, we granted Pfizer an exclusive worldwide license to develop and commercialize drug candidates that inhibit our proprietary target gene RTP801 through RNAi. Under the agreement, Pfizer has the exclusive right to develop and commercialize drugs for both ophthalmic and non-ophthalmic indications. Pfizer is responsible for all future pre-clinical and clinical development costs of the licensed drug candidates, as well as all regulatory filings and approvals. During a transition period, we are continuing existing pre-clinical and clinical development of certain product candidates, with funding from Pfizer. Through March 2007, Pfizer had paid us an aggregate of $25.2 million in up-front fees, cost reimbursements and milestone payments. The agreement provides for up to $299 million in additional development and product approval milestone payments, assuming the development and approval in all major markets of a product for two ophthalmic indications and at least one non-ophthalmic indication. Pfizer is required to pay us royalties on any sales of licensed products and up to an additional $309 million of sales-based milestone payments.

Corporate Information

        We were incorporated in California in December 1993 under the name Expression Systems, Inc. In April 1997, we changed our name to Quark Biotech, Inc. We plan to reincorporate in Delaware prior to the completion of this offering. Our principal executive offices are located at 6501 Dumbarton Circle, Fremont, California, 94555, and our telephone number is (510) 402-4020. Our website address is

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www.quarkbiotech.com. The information contained on our website is not incorporated into and does not constitute a part of this prospectus, and the only information that you should rely on in making your decision whether to invest in our common stock is the information contained in this prospectus and any free writing prospectus. As used in this prospectus, references to "Quark," "our," "us" and "we" refer collectively to Quark Biotech, Inc. and all of its subsidiaries unless the context requires otherwise.

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THE OFFERING

Common stock offered by us	shares
Common stock to be outstanding after this offering	shares
Use of proceeds	To fund research and product development activities, general administrative activities and working capital and for other general corporate purposes.
Proposed NASDAQ Global Market symbol	QURK

        The number of shares of common stock that will be outstanding immediately after this offering is based on 37,517,445 shares of common stock outstanding as of March 28, 2007 and excludes:

•

3,870 shares of common stock issuable upon exercise of outstanding warrants with an exercise price of $2.89 per share that will survive completion of this offering;



•

2,097,900 shares of common stock issuable upon exercise of outstanding warrants with an exercise price of $1.43 per share, which expire upon completion of this offering;



•

4,651,480 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.74 per share; and



•

1,003,576 shares of common stock reserved for future issuance under our 2007 Equity Incentive Plan.

        Except as otherwise indicated, all information in this prospectus assumes:

•

a            -for-            reverse stock split of our common stock and preferred stock to be effected prior to the completion of this offering;



•

our re-incorporation in Delaware prior to the completion of this offering;



•

the conversion of all our outstanding shares of preferred stock into 29,858,905 shares of common stock prior to the completion of this offering;



•

the filing of our amended and restated certificate of incorporation, which will occur immediately prior to the completion of this offering; and



•

no exercise of the underwriters' over-allotment option.

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SUMMARY FINANCIAL DATA

        The following summary financial data should be read together with our audited financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

			Years Ended December 31,
			2004			2005			2006
			(in thousands, except share and per share data)
Statements of Operations Data:
Revenues, net:			$	4,871		$	3,438		$	4,252
Operating costs and expenses:
	Research and development			16,132			9,049			18,881
	General and administrative			2,772			2,224			2,981
	Impairment and write-off of property and equipment			2,470			—			—
		Total operating costs and expenses		21,374			11,273			21,862
Operating loss				(16,503	)		(7,835	)		(17,610	)
Financial income, net				253			377			656
Other income (expenses)				17			—			(5	)
Net loss				(16,233	)		(7,458	)		(16,959	)
	Changes of redemption value of Series F Preferred Stock			809			(118	)		638
	Net loss to common stockholders		$	(15,424	)	$	(7,576	)	$	(16,321	)
Net loss per common share:
	Basic and diluted net loss per share		$	(2.05	)	$	(1.00	)	$	(2.14	)
Weighted average number of shares used in computing basic and diluted net loss per share:				7,523,540			7,539,430			7,623,540
Proforma net loss per common share:
	Basic and diluted net loss per share (unaudited):								$	(0.46	)
Weighted average number of shares used in computing basic and diluted net loss per share proforma (unaudited):										36,786,974

	As of December 31, 2006
	Actual		As adjusted(1)
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	19,842	$
Working capital		4,637
Total assets		22,892
Deferred revenues		11,677
Redeemable convertible preferred stock		236
Total stockholders' equity		5,410

⁽¹⁾

The as adjusted balance sheet data reflects (i) the conversion of all our outstanding shares of preferred stock into 29,858,905 shares of common stock prior to the completion of this offering, and (ii) the sale of            shares of common stock in this offering at an assumed initial public offering price of $            per share, after deducting underwriting discounts and commissions and estimated offering expenses.

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the following risks, as well as all of the other information contained in this prospectus, before investing in our common stock. If any of the following possible events actually occur, our business, business prospects, cash flow, results of operations or financial condition could be harmed. In this case, the trading price of our common stock could decline, and you might lose all or part of your investment in our common stock. In assessing these risks, you should also refer to the other information contained in this prospectus, including our financial statements and related notes. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.

Risks Related to Our Business

Our success is dependent on the success of our lead product candidates, RTP801i-14 and AKIi-5, and we cannot be certain that they will achieve success in clinical trials, that they will receive regulatory approval or be successfully commercialized.

        Our lead product candidates, RTP801i-14 and AKIi-5, are currently being evaluated in a Phase I/IIa clinical trial for the treatment of wet AMD, and a Phase I clinical trial for the prevention of ARF, respectively, and will require the successful completion of these and planned Phase II and Phase III clinical trials before we are able to submit a New Drug Application, or NDA, to the U.S. Food and Drug Administration, or FDA, for approval. This process can take many years and require the expenditure of substantial resources. In September 2006, we licensed RTP801i-14 to Pfizer on an exclusive worldwide basis. As a result, we will not control the development of RTP801i-14. Clinical trials required for FDA approval of RTP801i-14 and AKIi-5 may not be successfully completed. If these clinical trials fail to demonstrate that RTP801i-14 and AKIi-5 are safe and effective, they will not receive regulatory approval. Even if RTP801i-14 and AKIi-5 receive regulatory approval, they may never be successfully commercialized. If RTP801i-14 and AKIi-5 do not receive regulatory approval or are not successfully commercialized, we may not be able to generate revenue, become profitable or continue our operations.

Other than RTP801i-14 and AKIi-5, all of our other programs are in pre-clinical studies or early stage research. If we are unable to develop and commercialize our early stage product candidates, our business will be adversely affected.

        A key element of our strategy is to discover, develop and commercialize a portfolio of new products, in addition to our RTP801i-14 and AKIi-5 drug candidates. We are seeking to do so through our internal research programs and intend to explore strategic collaborations for the development of new products. Whether or not any product candidates are ultimately identified, research programs to identify new disease targets and product candidates require substantial technical, financial and human resources. Our research programs may initially show promise in identifying potential product candidates, yet fail to yield a successful commercial product for many reasons, including the following:

•

competitors may develop alternatives that render our product candidates obsolete;



•

a product candidate may not have a sustainable intellectual property position in major markets;



•

a product candidate may, after additional studies, be shown to have harmful side effects or other characteristics that indicate it is unlikely to be effective;



•

a product candidate may not receive regulatory approval;



•

a product candidate may not be capable of production in commercial quantities at an acceptable cost, or at all; or

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•

a product candidate may not be accepted by patients, the medical community or third-party payors.

There is a limited amount of information upon which you can evaluate our business and prospects.

        We have limited experience in drug development and have not yet demonstrated an ability to successfully overcome many of the risks and uncertainties frequently encountered by companies in new and rapidly evolving fields, particularly in the biopharmaceutical area. For example, to execute our business plan, we will need to successfully:

•

execute product development activities;



•

build and maintain a strong intellectual property portfolio;



•

obtain regulatory approvals;



•

gain market acceptance for our products, if approved;



•

develop and maintain successful strategic relationships;



•

develop sales and marketing capabilities or collaborate with others for these functions; and



•

manage our spending as costs and expenses increase due to clinical trials and in anticipation of regulatory approvals and commercialization.

        If we are unsuccessful in accomplishing these objectives, we may not be able to develop product candidates, raise capital, expand our business or continue our operations.

We have a history of losses and may never be profitable.

        We have experienced significant operating losses since our inception. To date, we have neither developed any products nor generated any revenues from the sale of products. Further, we do not expect to generate any such revenues in the foreseeable future. We expect to continue to incur annual net operating losses for at least the next several years as we expand our efforts to discover, develop and commercialize novel therapeutics. We anticipate that the majority of any revenue we generate over the next several years will continue to be from collaborations with pharmaceutical companies, but we cannot be certain that we will be able to secure or maintain these collaborations, or meet the obligations associated with these collaborations, or achieve any milestones that we may be required to meet to receive payments.

        To become and remain profitable, we must succeed in developing and commercializing novel drugs that achieve market acceptance. This will require us and our licensees and collaborators to be successful in a range of challenging activities, including the pre-clinical testing and clinical trial stages of development and obtaining regulatory approval, and manufacturing, marketing and selling these product candidates. These activities may not be successful, and we may never generate revenues that are significant enough to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we cannot become and remain profitable, the market price of our common stock could decline. In addition, we may be unable to raise capital, expand our business, diversify our product pipeline or continue our operations.

We will require substantial additional funds to continue our research and development activities. If additional funds are not available we may need to significantly scale back or cease our operations.

        We have used substantial funds to develop our technologies and will require substantial funds to conduct further research and development, including pre-clinical testing and clinical trials of any product candidates, and to manufacture and market any products that are approved for commercial

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sale. Because the successful development of our product candidates is uncertain, we are unable to estimate the actual funds we will require to develop and commercialize them.

        Our future capital requirements and the period for which we expect our existing resources to support our operations may vary from what we expect. We have based our expectations on a number of factors, many of which are difficult to predict or are outside of our control, including:

•

our progress in demonstrating that siRNAs can be used as drugs;



•

progress in our research and development programs, as well as the magnitude of the spending to support these programs;



•

the timing, receipt and amount of milestone and other payments, if any, from present and future collaborators;



•

our ability to establish and maintain additional collaborative arrangements;



•

the resources, time and costs required to initiate and complete our pre-clinical testing and clinical trials, obtain regulatory approvals, protect our intellectual property and obtain and maintain licenses to third-party intellectual property; and



•

the timing, receipt and amount of sales and royalties, if any, from our potential products.

If our estimates and predictions relating to these factors are incorrect, we may need to modify our operating plan.

        We will be required to seek additional funding in the future and intend to do so through either collaborative arrangements, public or private equity offerings or debt financings, or a combination of one or more of these funding sources. Additional funds may not be available to us on acceptable terms or at all. In addition, the terms of any financing may adversely affect the holdings or the rights of our stockholders. For example, if we raise additional funds by issuing equity securities, our stockholders will experience further dilution. Debt financing, if available, may involve restrictive covenants that could limit our flexibility in conducting future business activities. If we are unable to obtain funding on a timely basis, we may be required to significantly curtail one or more of our research or development programs. We also could be required to seek funds through arrangements with collaborators or others that may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise pursue on our own.

We expect to rely on revenues from our licensees and collaborators as an important source of revenue. If our relationships with Pfizer or any future licensees and collaborators are unsuccessful, a collaborator terminates a collaboration or there is competition between us and a collaborator for the development of drugs targeting the same diseases, our business could be adversely affected.

        In September 2006, we entered into a license agreement with Pfizer under which we licensed to Pfizer the exclusive worldwide rights to develop and commercialize our RNAi technology based molecules derived from and inhibiting our proprietary target gene RTP801 for both ophthalmic indications and non-ophthalmic indications. We expect that a substantial amount of the funding for our operations will come from our license agreement with Pfizer and other similar agreements we may enter into in the future, through expense reimbursement, milestone payments and, if a product candidate is successfully commercialized, royalties.

        Pfizer may terminate the agreement without cause at any time upon prior written notice. If not terminated, the agreement will remain in effect in each country at least until the expiration of all relevant patents or ten years from the first commercial sale of the licensed product. Pfizer may at any time and for any reason discontinue the development of or regulatory approval process for the drug candidates it licensed from us, and instead elect to commercialize its own proprietary drug candidates

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or those of other licensors. Additionally, if Pfizer terminates its agreement with us, we would be required under the Atugen agreement to complete Phase II trials of a licensed product candidate in at least one indication within three years of the termination. Pfizer has significantly greater financial resources than we do and has far more experience in developing and marketing drugs, which could put us at a competitive disadvantage if we were to compete with Pfizer in the development of RNAi-based drugs targeting the same disease. If required to develop RTP-801, we may not be able to do so successfully, do so as efficiently as Pfizer or at all. If we are unable to meet the remaining development milestones as specified in our RTP-801 development plan, we may lose our rights to one or more of the Atugen patents. Although our agreement with Pfizer grants us the option to take an exclusive license to Pfizer intellectual property relating to RTP-801, this license would then impose an additional cost that may not be commercially feasible. In addition, this option does not extend to (i) Pfizer's intellectual property licensed from third parties under agreements that prohibit transferring rights to another party such as us, and (ii) certain devices Pfizer has used in conjunction with developing RTP-801.

        In the future, we hope to enter into similar license or collaboration agreements with pharmaceutical companies for the development of product candidates we may identify. If our relationship with Pfizer or any future collaborations are unsuccessful or terminated early, our business would be adversely affected.

Because we have licensed some of our drug candidates to third parties, we are more dependent on third parties for the successful development and commercialization of those drug candidates.

        Our decision to license some of our drug candidates to third parties means we have relinquished control over how those drug candidates are developed and commercialized and how they are perceived in the marketplace. As a result, our success is dependent, in part, on the efforts of those licensees. In addition, our drug candidates may receive negative publicity relating to the activities of our licensees, regardless of whether such publicity is properly attributable to the merits of our drug candidates. If we receive negative publicity based on the activities of our licensees, our business, financial condition and results of operations and the value of our common stock could be materially and adversely affected.

We may not be able to execute our business strategy if we are unable to enter into license or collaboration agreements with other companies that can provide capabilities and funds for the development and commercialization of our drug candidates. If we are unsuccessful in forming or maintaining these relationships, our business may be adversely affected.

        We do not have any manufacturing, sales, marketing or distribution capabilities and have limited drug development capabilities. Accordingly, we have and plan to continue to enter into agreements with other companies that can provide such capabilities. For example, we may enter into agreements with major pharmaceutical companies to jointly develop specific drug candidates and to jointly commercialize them if they are approved. In such agreements, we would expect our pharmaceutical collaborators to provide substantial capabilities in clinical development, regulatory affairs, marketing and sales. We may not be successful in entering into any such agreements on favorable terms. Even if we do succeed in securing such agreements, we may not be able to maintain them if, for example, development or approval of a drug candidate is delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering into these agreements could delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the market. Any such delay could adversely affect our business.

        We have granted licenses and agreed to collaborate with third parties to fund all or part of the costs of drug development and commercialization, such as our collaboration with Pfizer, as well as collaborations with Sanwa Kagaku Kenkyusho Co., Ltd, Mitsubishi Pharma Corporation, Sankyo Co., Ltd., Astellas Pharma Inc., AstraZeneca, Taisho Pharmaceutical Co., Ltd. and Shionogi & Co. We may not, however, be able to enter into additional collaborations, and the terms of

10

any collaboration agreement we do secure may not be favorable to us. If we are not successful in our efforts to enter into future collaboration arrangements, we may not have sufficient funds to develop drug candidates internally, or to bring any drug candidates to market, which would substantially harm our business.

RNAi-based drug development is unproven and may never lead to marketable products.

        Our future success depends on the successful development of products based on RNAi technology. Neither we nor any other company has received regulatory approval to market therapeutics utilizing siRNAs. The scientific discoveries that form the basis for our efforts to discover and develop new siRNA drugs are relatively new. The scientific evidence to support the feasibility of developing drugs based on these discoveries is both preliminary and limited. Skepticism as to the feasibility of developing RNAi therapeutics has been expressed in scientific literature.

        Very few drug candidates based on these discoveries have ever been tested in animals or humans. Currently, no drugs based on RNAi technology have been approved or have progressed beyond Phase II clinical trials. We currently have only limited data suggesting that we can introduce into siRNAs the properties typically required of drugs, such as the ability to be stable in the body long enough to reach the tissues in which their effects are required, or the ability to enter cells within these tissues in order to exert their effects. We may make significant expenditures trying to optimize these properties without success. In addition, these compounds may not demonstrate in patients the chemical and pharmacological properties ascribed to them in laboratory studies, and they may interact with human biological systems in unforeseen, ineffective or harmful ways. As a result, we may never succeed in developing a marketable product. If we do not successfully develop and commercialize drugs based upon our siRNA drug candidates, we may not become profitable and the value of our common stock will decline.

Any failure or delay in completing clinical trials for our product candidates could severely harm our business.

        Each of our product candidates must undergo extensive pre-clinical studies and clinical trials as a condition to regulatory approval. Pre-clinical studies and clinical trials are expensive and take many years to complete. We estimate that clinical trials and related regulatory review in initial indications for our most advanced product candidates, RTP801i-14 and AKIi-5, will continue for at least several more years, but could take significantly longer to complete. The completion of clinical trials for our product candidates may be delayed or halted for many reasons, including:

•

delays or failure in reaching agreement on acceptable clinical trial contracts or clinical trial protocols with prospective sites;



•

regulators or institutional review boards may not authorize us to commence a clinical trial;



•

our inability, or the inability of our collaborators or licensees, to manufacture or obtain from third parties materials sufficient to complete our pre-clinical studies and clinical trials;



•

delays in patient enrollment, and variability in the number and types of patients available for clinical trials;



•

risks associated with trial designs;



•

difficulty in maintaining contact with patients after treatment, resulting in incomplete data;



•

poor effectiveness of product candidates during clinical trials;



•

safety issues, including serious adverse events;



•

the failure of patients to complete clinical trials due to side effects, dissatisfaction with the product candidate or other reasons;

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•

governmental or regulatory delays and changes in regulatory requirements, policy and guidelines; and



•

varying interpretation of data by the FDA and similar foreign regulatory agencies.

        Clinical trials may require the enrollment of large numbers of patients, and suitable patients may be difficult to identify and recruit. Our ability to enroll sufficient numbers of patients in our clinical trials depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and competition for patients from other clinical trials. Patients participating in the trials may not live through completion of the trial or may suffer adverse medical effects unrelated to treatment with our product candidate. The results from pre-clinical testing and prior clinical trials may not be predictive of results obtained in later and larger clinical trials. A number of companies in the pharmaceutical industry have suffered significant setbacks in clinical trials, even in advanced clinical trials after showing promising results in earlier clinical trials. Our failure to adequately demonstrate the safety and effectiveness of any of our product candidates will prevent us from receiving regulatory approval and negatively impact our business.

        It is possible that none of our product candidates will complete clinical trials in any of the markets in which we intend to sell those product candidates. We also do not know and are unable to predict what clinical trials the FDA will require us to conduct, which could result in additional delays in bringing our product candidates to market. Accordingly, we may not receive the regulatory approvals needed to market our product candidates. Any failure or delay in completing clinical trials for our product candidates would delay commercialization of our product candidates and severely harm our business and financial condition.

We may be unable to obtain U.S. or foreign regulatory approval and, as a result, be unable to commercialize our drug candidates.

        Our drug candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization. Rigorous pre-clinical testing and clinical trials and an extensive regulatory approval process are required to be successfully completed in the United States and in many foreign jurisdictions before a new drug can be sold. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we may develop will obtain the regulatory approvals necessary for us or our licensees or collaborators to begin selling them.

        We have little experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The time required to obtain FDA and other approvals is unpredictable. Any analysis we perform of data from pre-clinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unexpected delays or increased costs due to new government regulations, for example, from future legislation or administrative action, or from changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

        Because the drugs we are intending to develop may represent a new class of drug, the FDA has not yet established any definitive policies, practices or guidelines in relation to these drugs. While we expect any product candidates that we develop will be regulated as a new drug under the Federal Food, Drug, and Cosmetic Act, the FDA could decide to regulate them or other products we may develop as biologics under the Public Health Service Act. The lack of policies, practices or guidelines may hinder or slow review by the FDA of any regulatory filings that we may submit. Moreover, the FDA may respond to these submissions by defining requirements we may not have anticipated. Such responses could lead to significant delays in the clinical development of our product candidates. In addition, because there may be approved treatments for some of the diseases for which we may seek approval, in order to receive regulatory approval, we will need to demonstrate through clinical trials that the

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product candidates we develop to treat these diseases, if any, are not only safe and effective, but safer or more effective than existing products.

        Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular drug candidate. Furthermore, any regulatory approval to market a product may be subject to limitations on the indicated uses for which we may market the product. These limitations may limit the size of the market for the product.

        We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of local regulations in foreign jurisdictions. Approval by the FDA does not assure approval by regulatory authorities outside the United States.

Even if we obtain regulatory approvals, our marketed drugs will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and foreign regulations, we could lose our approvals to market drugs and our business would be seriously harmed.

        Following any initial regulatory approval of any drugs we may develop, we will also be subject to continuing regulatory review, including the review of adverse drug experiences and clinical results that are reported after our drugs are made commercially available. This would include results from any post-marketing tests or vigilance required as a condition of approval. The manufacturer and manufacturing facilities we use to make any of our drug candidates will also be subject to periodic review and inspection by the FDA. The discovery of any previously unknown problems with the product, manufacturer or facility may result in restrictions on the drug or manufacturer or facility, including withdrawal of the drug from the market. We do not have, and currently do not intend to develop, the ability to manufacture material for our clinical trials or on a commercial scale. We expect to continue to contract with third parties to manufacture these materials for us. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured products ourselves, including reliance on the third-party manufacturer for regulatory compliance. Our product promotion and advertising will also be subject to regulatory requirements and continuing regulatory review.

        If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and criminal prosecutions.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

        Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend on, among other things, their acceptance by physicians, patients, third-party payors and other members of the medical community as a therapeutic and cost-effective alternative to competing products and treatments. If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may develop and commercialize will depend on many factors, including:

•

our ability to provide acceptable evidence of safety and efficacy;



•

the prevalence and severity of adverse side effects;



•

the availability, relative cost and relative efficacy of alternative and competing treatments;



•

the effectiveness of our marketing and distribution strategy;



•

publicity concerning our products, if any, or competing products and treatments; and

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•

our ability to obtain sufficient third-party insurance coverage or reimbursement.

        If our approved product candidates, if any, do not become widely accepted by physicians, patients, third-party payors and other members of the medical community, our business, financial condition and results of operation would be materially and adversely affected.

The pharmaceutical market is intensely competitive. If we are unable to compete effectively with existing drugs, new treatment methods and new technologies, we may be unable to commercialize any drugs that we develop.

        The pharmaceutical market is intensely competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research organizations are pursuing the development of novel drugs for the same indications that we are targeting or expect to target. Many of our competitors have:

•

much greater financial, technical and human resources than we have at every stage of the discovery, development, manufacture and commercialization of products;



•

more extensive experience in pre-clinical testing, conducting clinical trials, obtaining regulatory approvals, and in manufacturing and marketing pharmaceutical products;



•

product candidates that are based on previously tested or accepted technologies;



•

products that have been approved or are in late stages of development; and



•

collaborative arrangements in our target markets with leading companies and research institutions.

        We will face intense competition from drugs that have already been approved and accepted by the medical community for the treatment of the indications for which we may develop drugs. We also expect to face competition from new drugs that enter the market. We believe a significant number of drugs are currently under development, and may become commercially available in the future, for the treatment of some conditions for which we are developing or in the future may try to develop drugs, such as wet AMD. Any competitive drugs may be more effective, or marketed and sold more effectively, than any products we develop.

        If we successfully develop drug candidates, and obtain approval for them, we will face competition based on many different factors, including:

•

the safety and effectiveness of our products;



•

the ease with which our products can be administered;



•

the timing and scope of regulatory approvals for these products;



•

the availability and cost of manufacturing, marketing and sales capabilities;



•

price;



•

reimbursement coverage; and



•

patent position.

        Our competitors may develop or commercialize products with significant advantages over any products we develop based on any of the factors listed above or on other factors. Our competitors may therefore be more successful in commercializing their products than we are, which could adversely affect our competitive position and business. Competitive products may make any products we develop obsolete or noncompetitive before we can recover the expenses of developing and commercializing our drug candidates. Furthermore, we also face competition from existing and new treatment methods that reduce or eliminate the need for drugs, such as the use of advanced medical devices. The development

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of new medical devices or other treatment methods for the indications we are targeting could make our drug candidates noncompetitive, obsolete or uneconomical.

        In addition to the competition we face from competing drugs in general, we also face competition from other companies working to develop novel drugs using technology that competes more directly with our own. Any of these companies may develop its RNAi technology more rapidly and more effectively than us. We may also compete with companies working to develop antisense-based drugs. Like RNAi product candidates, antisense drugs seek to suppress the activity of specific genes. The development of antisense drugs is more advanced than that of RNAi therapeutics, and antisense technology may become the preferred technology for drugs that silence specific genes.

It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.

        Our commercial success will depend in part on obtaining and maintaining patent protection and trade secret protection for our product candidates, their use and the methods used to manufacture them, as well as successfully defending these patents against third-party challenges. Our ability to protect our product candidates from unauthorized making, using, selling, offering to sell or importation by third parties is dependent upon the extent to which we have rights under valid and enforceable patents, or have trade secrets that cover these activities.

        We have licensed several patents and patent applications relating to RNAi technology. In addition, we have and are seeking patents in the United States, Europe and selected other jurisdictions for our product candidates, delivery methodologies and target genes. However, any patents we obtain or license from third parties may be challenged, invalidated, held unenforceable or circumvented. The existence of a patent will not necessarily protect us from competition or from claims of a third party that our products infringe their issued patents. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. The biotechnology patent situation outside the United States is even more uncertain. Competitors may successfully challenge our owned and licensed patents, produce similar drugs that do not infringe our patents, or produce drugs in countries where we do not have patent protection or that do not respect our patents. Accordingly, we cannot predict the breadth of claims that may be allowed or enforced in our owned or licensed patents and patent applications. To the extent we rely on third parties for our proprietary rights, we will have limited control over the prosecution, protection and defense of such rights.

        The degree of future protection to be afforded by our proprietary rights is uncertain and may not adequately protect our rights or permit us to gain or keep our competitive advantage. For example:

•

others may be able to make compounds that are similar to our product candidates but that are not covered by the claims of our patents, or for which we are not licensed under our license agreements;



•

we or our licensors or collaborators might not have been the first to make the inventions covered by our pending patent applications, or the pending patent applications and issued patents of our licensors;



•

we or our licensors or collaborators might not have been the first to file patent applications for these inventions;



•

others may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual property rights;



•

our pending patent applications may not result in issued patents;



•

our issued patents and the issued patents of our licensors or collaborators may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges by third parties;

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•

we may not develop additional proprietary technologies that are patentable; or



•

the patents of others may have an adverse effect on our business.

        We also may rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, contractors, outside scientific collaborators and other advisors may unintentionally or willfully disclose our information to competitors. Enforcing a claim that a third party illegally obtained and is using any of our product candidates is expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States are sometimes less willing to protect trade secrets. Moreover, our competitors may independently develop equivalent knowledge, methods and know-how.

        Our research and development collaborators may have rights to publish data and other information to which we have rights. In addition, we sometimes engage individuals or entities to conduct research that may be relevant to our business. The ability of these individuals or entities to publish or otherwise publicly disclose data and other information generated during the course of their research is subject to certain contractual limitations. These contractual provisions may be insufficient or inadequate to protect our trade secrets and may impair our patent rights. If we do not apply for patent protection prior to such publication or if we cannot otherwise maintain the confidentiality of our technology and other confidential information, then our ability to receive patent protection or protect our proprietary information may be jeopardized.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

        The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be substantial. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation could have a material adverse effect on our ability to continue our operations. Should third parties file patent applications, or be issued patents claiming technology also claimed by us in pending applications, we may be required to participate in interference proceedings before the U.S. Patent and Trademark Office to determine priority of invention which could result in substantial costs to us or an adverse decision as to the priority of our inventions. An unfavorable outcome in an interference proceeding could require us to cease using the technology or to license rights from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on commercially acceptable terms.

        Third parties are, and have been, actively seeking patent protection in the RNAi field. We are aware of a number of currently pending patent applications that, if granted, might arguably cover our activities or product candidates, depending on the scope of claims allowed, if any, including patent applications owned by Sirna Therapeutics, Inc., which was recently acquired by Merck & Co., Inc. In addition, claims could be made that we infringe existing patents which we have concluded do not cover our work in the RNAi field. Furthermore, patent applications and granted patents may exist of which we are unaware that could cover our work in the RNAi field. If any parties successfully claim that our creation or use of proprietary technologies infringes upon their intellectual property rights, we might be forced to pay damages, potentially including treble damages, if we are found to have willfully infringed on such parties' patent rights. In addition to any damages we might have to pay, a court could require us to stop the infringing activity or obtain a license. Any license required under any patent may not be made available on commercially acceptable terms, if at all. In addition, such licenses are likely to be non-exclusive and, therefore, our competitors may have access to the same technology licensed to us. If we fail to obtain a required license and are unable to design around a patent, we may be unable to

16

effectively market any products we successfully develop, which could limit our ability to generate revenues or achieve profitability and possibly prevent us from generating revenue sufficient to sustain our operations. Moreover, we expect that a number of our collaborations will provide that royalties payable to us for licenses to our intellectual property may be offset by amounts paid by our collaborators to third parties who have competing or superior intellectual property positions in the relevant fields, which could result in significant reductions in our revenues from any products developed through collaborations.

If we fail to comply with our obligations under any inbound licenses or related agreements, we could lose license rights that are necessary for developing and protecting our RNAi technology and any related product candidates that we develop.

        We have licensed certain patents and patent applications from Atugen AG and Alnylam Pharmaceuticals, Inc. relating to RNAi technology that are important for the development of our drug candidates. Atugen and Alnylam both have the right to terminate their license agreements with us if we default under them. Maintaining our licenses with Atugen and Alnylam is critical to our continued development of our product candidates. Loss of one or more of these licenses could jeopardize our intellectual property position.

        Our current inbound licenses impose, and any future inbound licenses we enter into are likely to impose, various development, commercialization, funding, royalty, diligence, sublicensing, insurance and other obligations on us. If we breach any of these obligations, the licensor may have the right to terminate the license or render the license non-exclusive, which could result in us being unable to develop, manufacture and sell products that are covered by the licensed technology or enable a competitor to gain access to the licensed technology. Additionally, some of these licenses impose field-of-use restrictions that may limit future growth with regard to new markets or products. In addition, while we cannot currently determine the amount of the royalty obligations we will be required to pay on sales of future products, if any, the amounts may be significant. The amount of our future royalty obligations will depend on the technology and intellectual property we use in products that we successfully develop and commercialize, if any. Therefore, even if we successfully develop and commercialize products, we may be unable to achieve or maintain profitability.

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.

        In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our licensees, collaborators, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.

We rely on third parties to conduct our clinical trials. If these third parties do not perform as contractually required or otherwise expected, we may not be able to obtain regulatory approval for or commercialize our product candidates.

        We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to conduct our clinical trials. We have, in the ordinary course of business, entered into agreements with these third parties. Nonetheless, we are responsible for confirming that each of our clinical trials is conducted in accordance with its general investigational

17

plan and protocol. Moreover, the FDA requires us to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our pre-clinical development activities or clinical trials may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our product candidates.

We do not have manufacturing experience or resources and we must incur significant costs to develop this expertise or rely on third parties to manufacture our product candidates.

        We do not have manufacturing experience for our RNAi drug candidates, which requires us to depend on third parties that might not be able to deliver sufficient quantities of product at acceptable quality levels in a timely manner, or at all. In order to develop products, apply for regulatory approvals and commercialize our products, we will need to develop, contract for, or otherwise arrange for the necessary manufacturing capabilities. We may manufacture clinical trial materials ourselves, but more likely would rely on others to manufacture the materials we will require for any clinical trials that we initiate. Only a limited number of manufacturers supply synthetic siRNA. We currently rely on several contract manufacturers, including Avecia, Agilent Technologies, and Biosprings for our supply of synthetic siRNA, and Pyramid Laboratories for the supply of our final material for clinical trials. There are risks inherent in pharmaceutical manufacturing that could affect the ability of our contract manufacturers to meet our delivery time requirements or provide adequate amounts of material to meet our needs. Included in these risks are synthesis and/or purification failures and contamination during the manufacturing process, both of which could result in unusable product and cause delays in our development process. The manufacturing process for any products that we may develop is an element of the FDA approval process and we need to contract with manufacturers who can meet the FDA requirements on an ongoing basis. In addition, if we receive the necessary regulatory approval for any product candidate, we also expect to rely on third parties, including our collaborators, to produce materials required for commercial production. We may experience difficulty in obtaining adequate manufacturing capacity for our needs. If we are unable to obtain or maintain contract manufacturing for these product candidates, or to do so on commercially reasonable terms, we may not be able to successfully develop and commercialize our products.

        To the extent that we enter into manufacturing arrangements with third parties, we will depend on these third parties to perform their obligations in a timely manner and consistent with regulatory requirements. The failure of a third-party manufacturer to perform its obligations as expected could adversely affect our business in a number of ways, including:

•

we may not be able to initiate or continue clinical trials of products that are under development;



•

we may be delayed in submitting applications for regulatory approvals for our products;



•

we may lose the cooperation of our collaborators;



•

we may be required to cease distribution or recall some or all batches of our products; and



•

ultimately, we may not be able to meet commercial demands for our products.

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        If a third-party manufacturer with whom we contract fails to perform its obligations, we may be forced to manufacture the materials ourselves, for which we may not have the capabilities or resources, or enter into an agreement with a different third-party manufacturer, which we may not be able to do on reasonable terms, if at all. In addition, if we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer or the reverification of an existing manufacturer could negatively affect our ability to develop product candidates or produce approved products in a timely manner or within budget. Furthermore, a manufacturer may possess technology related to the manufacture of our product candidates or approved products that such manufacturer owns independently. This would increase our reliance on such manufacturer or require us to obtain a license from such manufacturer in order to have another third-party manufacture our products.

The loss of members of our management team could substantially disrupt our business operations.

        Our success depends to a significant degree upon the continued contributions of our management team, and particularly Daniel Zurr, Ph.D., our founder, President and Chief Executive Officer. The loss of Dr. Zurr, whether from retirement, competing offers, or other causes, could prevent us from executing our business strategy, cause us to lose a strategic partner or otherwise materially affect our operations. Dr. Zurr, as well as the rest of our management team and key employees, are at-will employees, and we do not maintain any key-person life insurance policies.

We rely on highly skilled personnel and if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to maintain our operations or grow effectively.

        Our performance is largely dependent on the talents and efforts of highly skilled individuals. Our future success depends on our continuing ability to identify, hire, develop, motivate and retain qualified management, clinical and scientific personnel for all areas of our organization. In this regard, in anticipation of increased development and commercialization activities, we are currently planning to increase the total number of our full time employees significantly over the next couple of years. As a result, we expect personnel costs to increase in the future. The increase in costs will depend on the timing and compensation of the new hires. If we are unable to hire and train a sufficient number of qualified employees for any reason, we may not be able to implement our development and commercialization activities or grow effectively. We have in the past maintained a rigorous, highly selective and time-consuming hiring process. We believe that our approach to hiring has significantly contributed to our success to date. However, our highly selective hiring process has made it more difficult for us to hire a sufficient number of qualified employees and, as we grow, our hiring process may prevent us from hiring the personnel we need in a timely manner. If we do not succeed in attracting qualified personnel and retaining and motivating existing personnel, our existing operations may suffer and we may be unable to grow effectively.

We may have difficulty managing our growth as we expand our operations.

        We have grown significantly since our incorporation in 1993. As of March 1, 2007, we had 63 employees, with offices and laboratory space in Fremont, California, Boulder, Colorado and Ness Ziona, Israel. This growth, and the geographical separation of our sites, has placed a strain on our administrative and operational infrastructure, and we anticipate that our continued growth will have a similar impact. If drug candidates we develop enter and advance through clinical trials, we will need to expand our development, regulatory, manufacturing, marketing and sales capabilities or contract with other organizations to provide these capabilities for us. As our operations expand, we expect that we will need to manage additional relationships with various collaborators, suppliers and other organizations. Our ability to manage our operations and growth will require us to continue to improve

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our operational, financial and management controls, reporting systems and procedures in at least two different countries. We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls.

We lack marketing and commercialization experience for biopharmaceutical products and we may have to rely on third parties for these capabilities.

        We currently do not have sales, marketing or distribution capabilities. We intend to hire sales and marketing personnel to enable us to commercialize some of our product candidates. If we are unsuccessful in hiring and retaining sales and marketing personnel with appropriate technical and sales expertise or in developing an adequate distribution capability to support them, our ability to generate product revenues will be adversely affected. To the extent we cannot or choose not to use internal resources for the marketing, sales or distribution of any potential products in the United States or elsewhere, we intend to rely on collaboration partners or licensees. We may not be able to establish or maintain such relationships. To the extent that we depend on collaboration partners or other third parties for marketing, sales and distribution, any revenues we receive will depend upon their efforts. Such efforts may not be successful, and we will not be able to control the amount and timing of resources that our licensees or collaborators or other third parties devote to our products.

If any products we develop become subject to unfavorable pricing regulations, third-party reimbursement practices or healthcare reform initiatives, our business could be harmed.

        Our ability to commercialize any product candidate profitably will depend in part on the extent to which reimbursement for such product candidate and related treatments will be available from government health administration authorities, private health insurers or private payors, and other organizations in the United States and internationally. Even if we succeed in bringing one or more product candidates to market, these products may not be considered cost-effective, and the amount reimbursed for any product may be insufficient to allow us to sell it profitably. Because our product candidates are in the early stages of development, we are unable at this time to determine their cost-effectiveness and the level or method of reimbursement. There may be significant delays in obtaining coverage for newly approved products, and coverage may be more limited than the purposes for which the product candidate is approved by the FDA or foreign regulatory agencies. Moreover, eligibility for coverage does not mean that any product will be reimbursed in all cases or at a rate that covers our costs, including research, development, manufacture, sale and distribution. Increasingly, the third-party payors who reimburse patients, such as government and private payors, are requiring that companies provide them with predetermined discounts from list prices and are challenging the prices charged for medical products. If the reimbursement we are able to obtain for any product we develop is inadequate in light of our development and other costs, our business could be harmed.

We face potential product liability exposure, and if successful claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

        The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, product liability claims may result in:

•

decreased demand for our product candidates;



•

impairment of our business reputation;



•

withdrawal of clinical trial participants;

20

•

costs of related litigation;



•

substantial monetary awards to patients or other claimants;



•

loss of revenues; and



•

the inability to commercialize our product candidates.

        Although we currently have product liability insurance coverage for our clinical trials for expenses or losses up to an aggregate annual limit, our insurers may not reimburse us, or our insurance coverage may not be sufficient to reimburse us, for any or all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing. On occasion, large judgments have been awarded in class action lawsuits based on products that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to fall and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

If we or our licensees, collaborators, manufacturers or service providers fail to comply with applicable laws and regulations, we or they could be subject to enforcement actions, which could affect our ability to market and sell our products and may harm our reputation.

        If we or our licensees, collaborators, manufacturers or service providers fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, which could affect our ability to develop, market and sell our products under development successfully and could harm our reputation and lead to reduced acceptance of our products by the market. These enforcement actions include:

•

warning letters;



•

recalls or public notification or medical product safety alerts;



•

restrictions on, or prohibitions against, marketing our products;



•

restrictions on importation of our products;



•

suspension of review or refusal to approve pending applications;



•

suspension or withdrawal of product approvals;



•

product seizures;



•

injunctions; and



•

civil and criminal penalties and fines.

We are subject to foreign exchange risk.

        We expect to derive substantially all of our revenues in U.S. dollars. However, the substantial majority of our Israeli subsidiary's expenses are denominated in New Israeli Shekels, or NIS, and we anticipate that a material portion of our Israeli subsidiary's expenses will continue to be denominated in NIS. We do not engage in foreign currency hedging arrangements. Accordingly, fluctuations in exchange rates between the U.S. dollar and NIS may adversely affect our results of operations.

21

We may incur significant costs complying with environmental laws and regulations, and failure to comply with these laws and regulations could expose us to significant liabilities.

        We use hazardous chemicals and radioactive and biological materials in our business and are subject to a variety of federal, state and local laws and regulations governing the use, generation, manufacture, storage, handling and disposal of these materials. Although we believe our safety procedures for handling and disposing of these materials and waste products comply with these laws and regulations, we cannot eliminate the risk of accidental injury or contamination from the use, storage, handling or disposal of hazardous materials. In the event of contamination or injury, we could be held liable for any resulting damages. We are uninsured for third-party contamination injury.

We have significant operations in Israel, which may be adversely affected by acts of terrorism or major hostilities.

        Our primary research and development facilities are located in Ness Ziona, Israel. We are subject to a number of risks and challenges that specifically relate to these operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Any hostilities involving Israel could adversely affect our operations. In addition, our operations could be materially and adversely affected by acts of terrorism or major hostilities in the Middle East. Any such effects may not be covered by insurance. These operations may not be successful if we are unable to meet and overcome these challenges, which could limit the growth of our business and may have an adverse effect on our business and operating results.

We are subject to the risk of natural disasters, including earthquakes.

        We have facilities located in the San Francisco Bay Area, Boulder, Colorado, and Israel. The San Francisco Bay area is in close proximity to known earthquake fault zones. If a fire, earthquake, flood or other natural disaster disrupts our research or development efforts, our business, financial condition and operating results could be materially adversely affected. Although we maintain personal property and general business interruption coverage, we do not maintain earthquake or flood insurance coverage for personal property or resulting business interruption.

Risks Related to Our Common Stock and this Offering

The market price of our common stock may be highly volatile, and you may not be able to resell your shares at or above the initial public offering price.

        Prior to this offering, there has not been a public market for our common stock. We cannot assure you that an active trading market for our common stock will develop following this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for the shares was determined by negotiations between us and representatives of the underwriters and may not be indicative of prices that will prevail in the open market.

        The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

•

new products or services introduced or announced by us or our licensees or collaborators, or our competitors, and the timing of these introductions or announcements;



•

the issuance of patents to competitors;



•

actual or anticipated results from and any delays in our clinical trials;



•

actual or anticipated regulatory approvals or our product candidates or competing products;

22

•

actions taken by regulatory agencies with respect to our product candidates, clinical trials, manufacturing process or sales and marketing activities;



•

changes in laws or regulations applicable to our products, including but not limited to clinical trial requirements for approvals;



•

the success of our development efforts and clinical trials;



•

the success of our efforts to discover, acquire or in-license additional products or product candidates;



•

developments concerning our licensing and collaboration arrangements, including but not limited to those with our sources of manufacturing supply;



•

actual or anticipated variations in our quarterly operating results;



•

announcements of technological innovations by us, our licensees or collaborators, or our competitors;



•

actual or anticipated changes in earnings estimates or recommendations by securities analysts;



•

conditions or trends in the biotechnology and biopharmaceutical industries;



•

announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;



•

general economic and market conditions and other factors that may be unrelated to our operating performance or the operating performance of our competitors;



•

changes in the market valuations of similar companies;



•

sales of common stock or other securities by us or our stockholders in the future;



•

additions or departures of key scientific or management personnel;



•

developments relating to proprietary rights held by us or our competitors;



•

disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies; and



•

trading volume of our common stock.

        In addition, the stock market in general and the market for biotechnology and biopharmaceutical companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management's attention and resources, which could materially and adversely affect our business and financial condition.

Our principal stockholders and management beneficially own a significant percentage of our stock and will be able to exercise significant influence over matters subject to stockholder approval.

        As of March 28, 2007, our executive officers, directors and principal stockholders, together with their respective affiliates, beneficially owned approximately 72% of our voting stock, including shares subject to outstanding options and warrants, and we expect that upon completion of this offering, that same group will continue to beneficially own at least            % of our outstanding voting stock. Accordingly, even after this offering, these stockholders will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, including

23

the election of our board of directors and approval of significant corporate transactions. This concentration of ownership could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could have a material and adverse effect on the fair market value of our common stock.

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

        As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the Securities and Exchange Commission and the NASDAQ Global Market, impose various requirements on public companies, including requiring the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect director and officer liability insurance to be expensive, and we may be required to incur substantial costs to maintain the same or similar coverage in the future.

        The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. As a result of our compliance with Section 404, we will incur substantial accounting expense and expend significant management efforts and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge to ensure such compliance.

Future sales of our common stock in the public market could cause our stock price to fall.

        Sales of a substantial number of shares of our common stock in the public market after this offering, or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. After this offering, we will have                                    shares of common stock outstanding,                  shares if the underwriters exercise their over-allotment option in full.

        Substantially all of our existing stockholders are subject to lock-up agreements with the underwriters of this offering that restrict the stockholders' ability to transfer shares of our common stock for at least 180 days from the date of this prospectus. The lock-up agreements, together with restrictions under the securities laws described in "Shares Eligible for Future Sale," limit the number of shares of common stock that may be sold immediately following this offering.

        All of the shares of common stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act of 1933, as amended, except for any shares purchased by our affiliates as defined in Rule 144 under the Securities Act of 1933, as amended. The remaining 37,517,445 shares of common stock outstanding after this offering, plus an additional                   shares issuable upon the exercise of outstanding options and 2,101,770 shares issuable upon the exercise of outstanding warrants, will be available for sale after the expiration of the contractual lock-up period, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended. J.P. Morgan Securities Inc. and Banc of America Securities LLC could release all or some portion of the shares subject to lock-up agreements prior to expiration of the lock-up period.

        After this offering, the holders of approximately 36,378,905 shares of common stock based on shares outstanding as of March 28, 2007, including 2,101,770 shares underlying outstanding warrants,

24

will be entitled to rights with respect to registration of such shares under the Securities Act of 1933, as amended. If such holders, by exercising their registration rights, cause a large number of securities to be registered and sold in the public market, these sales could have an adverse effect on the market price for our common stock. If we were to initiate a registration and include shares held by these holders pursuant to the exercise of their registration rights, these sales may impair our ability to raise capital.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

        Provisions in our certificate of incorporation and our bylaws may delay or prevent an acquisition of us or a change in our management. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team. These provisions include:

•

a prohibition on actions by our stockholders by written consent;



•

limitations on the removal of directors; and



•

advance notice requirements for election to our board of directors and for proposing matters that can be acted upon at stockholder meetings.

        Moreover, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which prohibits a person who owns in excess of 15% of our outstanding voting stock from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding voting stock, unless the merger or combination is approved in a prescribed manner. These provisions would apply even if the proposed merger or acquisition could be considered beneficial by some stockholders.

If you purchase shares of common stock sold in this offering, you will experience immediate dilution. You will experience further dilution if we issue shares in future financing transactions or upon exercise of options or warrants.

        If you purchase shares of common stock in this offering, you will experience immediate dilution of $            per share because the price that you pay will be substantially greater than the net tangible book value per share of the shares you acquire. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares. If we issue additional common stock or issue securities convertible into or exchangeable or exercisable for common stock, our stockholders will experience additional dilution. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights superior to our existing stockholders.

Because our management will have broad discretion over the use of the net proceeds from this offering, you may not agree with how we use them and the proceeds may not be invested successfully.

        We intend to use the net proceeds from this offering for general corporate purposes, and therefore, our management will have broad discretion as to the use of the offering proceeds. Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess

25

whether the proceeds are being used appropriately. It is possible that the proceeds will be invested in a way that does not yield a favorable, or any, return for our company.

We have not declared any dividends on our common stock to date, and we have no intention of declaring dividends in the foreseeable future.

        The decision to pay cash dividends on our common stock rests with our board of directors and will depend on our earnings, unencumbered cash, capital requirements and financial condition. We do not anticipate declaring any dividends in the foreseeable future, as we intend to use any excess cash to fund our operations. Investors in our common stock should not expect to receive dividend income on their investment, and investors will be dependent on the appreciation of our common stock to earn a return on their investment.

26

FORWARD-LOOKING STATEMENTS

        Some of the statements under the sections of this prospectus entitled "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business" and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "ongoing," "plan," "potential," "predict," "project," "should," "will," "would," or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:

•

our ability to continue to develop our product candidates;



•

the successful and timely completion of clinical trials;



•

our ability to maintain and form relationships with our licensees and collaborators;



•

our ability to obtain and maintain regulatory clearance or approval of our products;



•

the impact of competition on our product candidates; and



•

our ability to obtain and maintain intellectual property protection for our products.

        In addition, you should refer to the section of this prospectus entitled "Risk Factors" for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all.

27

USE OF PROCEEDS

        We estimate that the net proceeds from the sale of shares of our common stock in this offering will be approximately $                        million, or approximately $                        million if the underwriters exercise their over-allotment option in full, based upon an assumed initial public offering price of $                        per share, after deducting underwriting discounts and commissions and estimated offering expenses. We currently expect to use our net proceeds from this offering for research and product development activities, general administrative activities, and to fund working capital and other general corporate purposes.

        The expected use of net proceeds of this offering represents our current intentions based upon our present plans and business conditions. The amounts we actually expend in these areas will depend upon a number of factors, including the success of research and product development efforts, FDA approval of our products, cash generated from future operations and actual expenses to operate our business. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the closing of this offering. Accordingly, our management will have broad discretion in the application of the net proceeds, and investors will be relying on the judgment of our management regarding the application of the proceeds of this offering.

        The amount and timing of our expenditures will depend on several factors, including the progress of our research and development efforts and the amount of cash used by our operations. Pending their uses, we plan to invest the net proceeds of this offering in short- and intermediate-term, interest-bearing obligations, investment-grade instruments, certificates of deposit or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

        We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings to support our operations and finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our board of directors.

28

CAPITALIZATION

        The following table sets forth our capitalization as of December 31, 2006:

•

on an actual basis;



•

on an as adjusted basis to reflect:



•

the conversion of all of our outstanding shares of preferred stock into 29,858,905 shares of common stock immediately prior to the closing of this offering; and



•

the sale of            shares of common stock in this offering at an assumed initial offering price of $            per share, after deducting underwriting discounts and commissions and estimated offering expenses.

        You should read the information in this table together with our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.

			As of December 31, 2006
			Actual			As adjusted
			(in thousands, except share and per share data)
Series F Redeemable Convertible Preferred stock $0.001 par value: 1,143,764 shares authorized, issued and outstanding at December 31, 2006; Aggregate liquidation preference of $13,725 at December 31, 2006; No shares authorized or issued and outstanding proforma			$	236		$	—
Stockholders' equity:
Common stock $0.001 par value: Authorized: 72,500,000 shares at December 31, 2006; Issued and outstanding: 7,623,540 shares at December 31, 2006;            shares authorized and 37,482,445 shares, issued and outstanding proforma				8
Series A-E, G Convertible Preferred stock $0.001 par value: Authorized: 24,735,847 shares at December 31, 2006; Issued and outstanding: 21,588,982 and 24,735,847 shares issued at December 31, 2006, respectively; Aggregate liquidation preference of $72,676 at December 31, 2006; 10,000,000 shares authorized and none issued and outstanding proforma				25
Additional paid in capital				69,781
Accumulated deficit				(64,404	)
	Total stockholders' equity			5,410
		Total capitalization	$	5,646		$

        The outstanding share information in the table above is as of December 31, 2006 and excludes:

•

3,870 shares of common stock issuable upon exercise of outstanding warrants with an exercise price of $2.89 per share that will survive completion of this offering;



•

2,097,900 shares of common stock that may be issued upon exercise of outstanding warrants which expire upon completion of this offering;



•

1,692,175 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.58 per share; and



•

1,186,149 shares of common stock reserved for future issuance under our 1997 Stock Plan.

29

DILUTION

        If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share and the pro forma net tangible book value per share of our common stock after this offering. Net tangible book value per share is determined by dividing the number of outstanding shares of our common stock into our total tangible assets (total assets less intangible assets) less total liabilities and redeemable convertible preferred stock. As of December 31, 2006, we had a historical net tangible book value of our common stock of $             million, or approximately $             per share, not taking into account the conversion of our outstanding redeemable convertible preferred stock. The pro forma net tangible book value of our common stock as of December 31, 2006 was approximately $            million, or approximately $            per share, based on the number of shares outstanding as of December 31, 2006, after giving effect to the conversion of all outstanding convertible preferred stock, including redeemable convertible preferred stock, into shares of common stock upon the closing of this offering.

        Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of common stock offered in this offering at an assumed initial public offering price of $            per share, after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of December 31, 2006 would have been approximately $            million, or approximately $            per share of common stock. This represents an immediate increase in pro forma as adjusted net tangible book value of $            per share to existing stockholders, and an immediate dilution of $            per share to investors participating in this offering. The following table illustrates this per share dilution:

Assumed initial public offering price per share		$
Historical net tangible book value per share as of December 31, 2006	$
Pro forma increase in net tangible book value per share attributable to conversion of convertible preferred stock
Pro forma net tangible book value per share before this offering
Pro forma increase in net tangible book value per share attributable to investors participating in this offering
Pro forma as adjusted net tangible book value per share after this offering
Pro forma dilution per share to investors participating in this offering		$

        If the underwriters exercise their over-allotment option in full to purchase            additional shares of common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $            per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $            per share and the pro forma dilution to new investors purchasing common stock in this offering would be $            per share.

        The following table summarizes, on a pro forma basis as of December 31, 2006, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted average price per share paid by existing stockholders and by investors participating in this

30

offering at an assumed initial public offering price of $            per share, before deducting underwriting discounts and commissions and estimated offering expenses:

					Total consideration
		Shares purchased
								Weighted average price per share
		Number	Percent		Amount	Percent
		(in thousands)
Existing stockholders before this offering				%	$		%	$
Investors participating in this offering
	Total		100.0	%	$	100.0	%	$

        The above discussion and tables are as of December 31, 2006 and exclude:

•

3,870 shares of common stock issuable upon exercise of outstanding warrants with an exercise price of $2.89 per share;



•

1,632,675 shares of common stock issuable upon the exercise of outstanding options with a weighted average exercise price of $1.58 per share; and



•

1,186,149 shares of common stock reserved for future issuance under our 1997 Stock Plan.

        The following table summarizes, on a pro forma basis as of December 31, 2006, after giving effect to the exercise of all stock options and warrants outstanding as of December 31, 2006, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted average price per share paid by existing stockholders and by investors participating in this offering at an assumed initial public offering price of $            per share, before deducting underwriting discounts and commissions and estimated offering expenses:

		Shares purchased			Total consideration
								Weighted average price per share
		Number	Percent		Amount	Percent
		(in thousands)
Existing stockholders before this offering				%	$		%	$
Investors participating in this offering
	Total		100.0	%	$	100.0	%	$

        The number of shares of common stock outstanding in the table above is based on the proforma number of shares outstanding as of December 31, 2006 and assumes no exercise of the underwriters' over-allotment option. If the underwriters' over-allotment option is exercised in full, the number of shares of common stock held by existing stockholders will be reduced by            % of the total number of shares of common stock to be outstanding after this offering, and the number of shares of common stock held by investors participating in this offering will be increased to            shares or            % of the total number of shares of common stock to be outstanding after this offering.

        Effective upon the closing of this offering, an aggregate of                                    shares of our common stock will be reserved for future issuance under our benefit plans. To the extent that any of these options or warrants are exercised, new options are issued under our benefit plans or we issue additional shares of common stock in the future, there will be further dilution to investors participating in this offering.

31

SELECTED FINANCIAL DATA

        The following selected financial data should be read together with our financial statements and accompanying notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results.

        We derived the statements of operations data for the years ended December 31, 2004, 2005 and 2006 and the balance sheet data as of December 31, 2005 and 2006 from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 are derived from our unaudited financial statements, which are not included in this prospectus.

			Years ended December 31,
			2002			2003			2004			2005			2006
			(in thousands, except share and per share data)
			(unaudited)
Statements of Operations Data:
Revenues, net:			$	17,360		$	12,415		$	4,871		$	3,438		$	4,252
Operating costs and expenses:
	Research and development			20,648			18,875			16,132			9,049			18,881
	General and administrative			2,933			3,437			2,772			2,224			2,981
	Impairment and write-off of property and equipment			—			—			2,470			—			—
		Total operating costs and expenses		23,581			22,312			21,374			11,273			21,862
Operating loss				(6,221	)		(9,897	)		(16,503	)		(7,835	)		(17,610	)
Financial income, net				807			295			253			377			656
Other income (expenses), net				(3	)		(40	)		17			—			(5	)
Net loss				(5,417	)		(9,642	)		(16,233	)		(7,458	)		(16,959	)
Changes of Redemption Value of Series F Preferred Stock				267			468			809			(118	)		638
Net loss to common stockholders			$	(5,150	)	$	(9,174	)	$	(15,424	)	$	(7,576	)	$	(16,321	)
Net loss per common share:
	Basic and diluted net loss per share		$	(0.69	)	$	(1.22	)	$	(2.05	)	$	(1.00	)	$	(2.14	)
Weighted average number of shares used in computing basic and diluted net loss per share:				7,492,036			7,517,992			7,523,540			7,539,430			7,623,540
Proforma net loss per common share:
	Basic and diluted net loss per share (unaudited):														$	(0.46	)
Weighted average number of shares used in computing basic and diluted net loss per share proforma (unaudited):																36,786,974

		As of December 31,
		2002		2003		2004		2005		2006
		(in thousands)
		(unaudited)
Balance Sheet Data:
	Cash and cash equivalents	$	34,883	$	26,440	$	14,549	$	18,326	$	19,842
	Working capital		29,766		21,699		11,415		15,537		4,637
	Total assets		47,533		37,259		19,211		21,430		22,892
	Deferred revenues		1,924		1,540		413		53		11,677
	Redeemable convertible preferred stock		2,033		1,565		756		874		236
	Total stockholders' equity		38,682		29,788		14,386		17,185		5,410

32

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. You should review the "Risk Factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements described in the following discussion and analysis.

Overview

        We are a clinical-stage biopharmaceutical company focused on discovering and developing novel therapeutics based on our proprietary gene discovery science and technology, with an initial focus on RNA interference-based therapeutics for the treatment of diseases associated with oxidative stress. We believe that our insight into the molecular mechanisms underlying these diseases, combined with our ability to successfully deliver synthetic siRNA to specific organs in the body, enables us to rapidly develop drug candidates, often directed against the same target across multiple therapeutic areas. We have two product candidates in clinical development: RTP801i-14 for the treatment of wet AMD and AKIi-5 for the prevention of ARF. We have licensed RTP801i-14 to Pfizer on an exclusive worldwide basis. Our product candidate portfolio is based on novel targets and therapeutic concepts discovered using our BiFAR target gene discovery platform. We believe that the combination of this platform and our expertise in designing RNAi-based therapeutics will enable us to continue to advance new product candidates into clinical development.

        We have incurred significant net losses since our inception in December 1993. From inception through December 31, 2006, we have funded our operations primarily through gross proceeds of $83.0 million from the sale of equity securities and $88.8 million pursuant to our license and collaboration agreements with pharmaceutical companies. Through 2005, a substantial portion of our revenues were from our BiFAR gene discovery collaboration agreements with several pharmaceutical companies. In connection with the expiration of research funding under some of those agreements, we ceased certain of our product development efforts. In September 2006, we licensed our drug candidates that inhibit RTP801 to Pfizer, and we may seek to license our other product candidates to third parties in the future. For the next several years, we expect that our revenues will consist primarily of payments from Pfizer and any future licensees and collaborators. We have not achieved profitability and we expect to incur significant net losses over the next several years as we expand our research and development activities, advance our product candidates into later stages of clinical development, and expend resources on collaborations and other general corporate activities.

Agreement with Pfizer

        In September 2006, we granted Pfizer an exclusive worldwide license to develop and commercialize drug candidates that inhibit our proprietary target gene RTP801 through RNAi. The lead product candidate under this agreement is RTP801i-14, currently in a Phase I/IIa clinical trial for the treatment of wet AMD. Under the agreement, Pfizer has the exclusive right to develop drugs for both ophthalmic and non-ophthalmic indications.

        Pursuant to the agreement, Pfizer is responsible for all future pre-clinical and clinical development costs of the licensed drug candidates, as well as all regulatory filings and approvals. The parties will share oversight of development through product-specific committees, but Pfizer has ultimate decision-making authority. During a transition period, we are continuing existing pre-clinical and clinical development of certain product candidates for ophthalmic and non-ophthalmic indications, with funding by Pfizer.

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        Pfizer will be responsible for manufacturing all product candidates for pre-clinical and clinical development and for commercial supply. If, however, Pfizer desires a second commercial manufacturing site, Pfizer will consider engaging us to manufacture products commercially, provided that we can competitively satisfy its manufacturing requirements. Pfizer has worldwide commercialization rights to all product candidates licensed under the agreement, but has agreed to appoint us its exclusive distributor in Israel of products developed under the agreement.

        In connection with the agreement, through March 2007, Pfizer had paid us an aggregate of $25.2 million in up-front fees, cost reimbursements and milestone payments. The agreement provides for up to $299 million in additional development and product approval milestone payments, assuming the development and approval in all major markets of a product for two ophthalmic indications and at least one non-ophthalmic indication. Pfizer is required to pay us royalties on any sales of licensed products and up to an additional $309 million of sales-based milestone payments.

Financial Operations Overview

        The following is a description of components of our revenue and operating expenses.

        Revenues.    Our revenues are comprised of upfront and milestone payments, research and development services and cost reimbursements under license and collaboration agreements. The majority of our revenues are derived from payments and cost reimbursements received pursuant to agreements with our licensees and collaborators. We expect a significant portion of our revenues over the next two years will be pursuant to our agreement with Pfizer.

        Research and Development Expenses.    The majority of our operating expenses to date have been for research and development activities. Costs associated with our research activities and product development efforts include the following:

•

costs for conducting pre-clinical studies, clinical trials, and manufacturing;



•

employee and consultant-related expenses, which include salaries and benefits;



•

license fees paid to third parties for use of their intellectual property; and



•

facilities, depreciation and other expenses, which include direct and indirect expenses for rent and maintenance of facilities, depreciation of leasehold improvements and equipment and laboratory and other supplies.

        Research and development expenses, including those paid to third parties, are expensed as incurred. We expect our research and development expenses to increase in the future as we continue to develop our product candidates and advance new product candidates into clinical development.

        The majority of our research and development programs are at an early stage and may not result in any approved products. Product candidates that may appear promising at early stages of development may not reach the market for a variety of reasons. Product candidates may be found to be ineffective or to cause harmful side effects during clinical trials, may take longer to advance through clinical trials than had been anticipated, may fail to receive necessary regulatory approvals and may prove impracticable to manufacture in commercial quantities at reasonable cost and with acceptable quality. As part of our business strategy we may enter into new license and collaboration agreements with third parties to complete the development and commercialization of our product candidates and it is uncertain which of our product candidates, if any, may be subject to future license and collaboration agreements. The participation of a licensee or collaborator may accelerate the time to completion and reduce the cost to us of a product candidate or it may delay the time to completion and increase the cost to us due to the alteration of our existing strategy.

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        As a result of the uncertainties discussed above and those associated with clinical trial enrollment, as well as the risks inherent in the drug development process, we are unable to estimate with any certainty the duration and costs of the current or future clinical stages of our product candidates or when, or to what extent, we will generate revenue or receive royalties from the commercialization and sale of any of our product candidates. Any failure or delay in completing clinical trials, or in obtaining regulatory approvals, would cause our research and development expenses to increase and, in turn, have a material adverse effect on our results of operations.

        General and Administrative Expenses.    General and administrative expenses consist principally of salaries and related costs for personnel in executive, finance, accounting, business development, information technology, legal and human resources functions. Other general and administrative expenses include facility costs not otherwise included in research and development expenses, patent related costs and professional fees for legal, consulting and accounting services.

Critical Accounting Policies and Significant Judgments and Estimates

        Our management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as reported revenues and expenses during the reporting periods. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances. The SEC considers an accounting policy to be critical if it is important to a company's financial condition and results of operations, and if it requires the exercise of significant judgment and the use of estimates on the part of management in its application. We have discussed the selection and development of the critical accounting policies with the audit committee of our board of directors, and the audit committee has reviewed our related disclosures in this prospectus. Although we believe that our judgments and estimates are appropriate, actual results may differ from those estimates.

        We believe the following to be our critical accounting policies because they are both important to the portrayal of our financial condition and results of operations and they require critical management judgment and estimates about matters that are uncertain:

•

revenue recognition;



•

pre-clinical study and clinical trial accruals;



•

impairment of long-lived assets;



•

stock-based compensation; and



•

income taxes.

        If actual results or events differ materially from those contemplated by us in making these estimates, our reported financial condition and results of operations for future periods could be materially affected. See "Risk Factors" for certain matters that may affect our future results of operations or financial condition.

    Revenue Recognition

        We recognize revenue in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements, or SAB 104, and Emerging Issues Task Force, or EITF, Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21, and EITF Issue No. 99-19, Reporting revenue Gross Versus Net as an Agent, or EITF 99-19.

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    Agreement with Pfizer

        This multiple element arrangement was analyzed to determine whether the deliverables, which include a license, participation in joint steering and research committees and performance obligations such as research services, can be separated or whether they must be accounted for as a single unit of accounting in accordance with EITF 00-21. According to EITF 00-21, we consider whether (i) the license has stand-alone value and (ii) the fair value of any of the undelivered performance obligations can be determined. Because we cannot determine the fair value of the undelivered performance obligations, the arrangement is accounted for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. In addition, revenues are recognized only when we have a contractual right to receive payments, the contract price is fixed or determinable and the collection of the resulting receivable is reasonably assured.

        Whenever we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue will be recognized. Our management estimates that our performance obligations will cease by December 2007.

        As we can reasonably estimate when the performance obligations cease or become inconsequential and the performance obligations are provided on a best-efforts basis, the total payments under the arrangement, excluding royalties and payments contingent upon achievement of substantive milestones, are recognized as revenue on a straight-line basis over the period we expect to complete our performance obligations.

        Significant management judgment is required in determining the period over which we expect to complete our performance obligations under an arrangement. In addition, as we are involved in joint steering and research committees as part of this multiple element arrangement that is accounted for as a single unit of accounting, we assess whether its involvement constitutes a performance obligation or a right to participate. Because we can be released from our joint steering and research committees without significant penalty, such services are considered inconsequential or perfunctory and are not considered to be performance obligations.

        This collaboration agreement also contains milestone payments. During the period in which we have research performance obligations, milestone payments are considered to be substantive. Substantive milestone payments are considered to be performance bonuses that are recognized upon achievement of the milestone only if all of the following conditions are met:

•

the milestone payments are non-refundable;



•

achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;



•

the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone; and



•

a reasonable amount of time passes between the up-front license payment and the first milestone payment as well as between each subsequent milestone payment.

        Determination as to whether a payment meets the aforementioned conditions involves management's judgment. If any of these conditions are not met, the resulting payment would not be considered a substantive milestone, and therefore the resulting payment would be considered part of the consideration for the single unit of accounting and be recognized as revenue as such performance obligations are performed under either the relative performance or straight-line methods, as applicable, and in accordance with these policies as described above. In addition, the determination that one such payment was not a substantive milestone could prevent us from concluding that subsequent milestone

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payments were substantive milestones and, as a result, any additional milestone payments could also be considered part of the consideration for the single unit of accounting and would be recognized as revenue as such performance obligations are performed under either the relative performance or straight-line methods, as applicable.

        Reimbursement of costs is recognized as revenue on a gross basis as costs are being incurred in accordance with the provisions of EITF 99-19, provided the amounts are determinable, and collection of the related receivable is reasonably assured.

    Research Collaborations with Pharmaceutical Companies

        Under these agreements, our performance obligations were provided on a best-efforts basis. The total payments under each arrangement, excluding royalties and payments contingent upon achievement of development milestones by our collaborators, were recognized as revenue on a straight-line basis over the periods in which we completed our performance obligations. Revenue was limited to the lower of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line basis, as of the period ending dates.

        We have no further performance obligations and are not involved in our collaborators' research and development plans. We may be entitled to future milestone payments and royalties from our collaborators, depending on the progress of development of a drug candidate. Revenue from such milestone payments and royalties will be recognized when due and collection is reasonably assured.

Deferred Revenue

        Amounts received prior to of the culmination of the earnings process are recorded as deferred revenue in the accompanying consolidated balance sheets. Although we follow detailed guidelines in measuring revenue, certain judgments affect the application of our revenue policy. For example, in connection with our collaboration agreement with Pfizer, we have recorded on our balance sheet deferred revenue based on our best estimate of when such revenue will be recognized. Our deferred revenue consists of amounts that are expected to be recognized as revenue by December 31, 2007. However, this estimate is based on our operating plans as of December 31, 2006 and on our estimated performance periods under the collaboration agreement with Pfizer in which we have recorded deferred revenues. The timing of satisfying our performance obligations can be difficult to estimate. Accordingly, our estimates may change in the future. If these estimates and judgments change over the course of these agreements, it may affect the timing and amount of revenue that we recognize and record in future periods.

Accrued Research and Development Costs

        We estimate our accrued research and development costs based on our estimates of the services received pursuant to contracts with multiple research institutions and clinical research organizations that conduct and manage pre-clinical studies, clinical trials and other research activities on our behalf. The financial terms of these agreements vary from contract to contract and may result in uneven payment flows. Accrued research and development costs include the following:

•

fees paid to contract research organizations in connection with pre-clinical studies;



•

fees paid to contract research organizations and other clinical sites in connection with clinical trials; and



•

fees paid to contract manufacturers in connection with the production of components and drug materials for pre-clinical studies and clinical trials.

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        We record accruals for these research and development costs based upon the estimated amount of work completed. All such costs are included in research and development expenses based on these estimates. Costs of setting up a pre-clinical study or clinical trial are expensed immediately. Costs related to patient enrollment in clinical trials are accrued as patients are enrolled in the trial. We only recently commenced clinical trials.

Impairment of Long-lived Assets

        We review our long-lived assets for impairment in accordance with Statement of Financial Accounting Standards, or SFAS, No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS No. 144, whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.

        In 2004, we ceased certain of our product development efforts due to the expiration of research funding under some of our collaboration agreements with pharmaceutical companies. Consequently, we abandoned certain property and equipment and vacated certain research facilities. As a result, we recorded a charge to the statement of operations of $2.5 million related to impairment of this property and equipment and the write-off of the outstanding balance of leasehold improvements in the facilities where lease agreements were terminated.

Stock-Based Compensation

        Through December 31, 2005, we accounted for stock-based employee compensation arrangements using the intrinsic value method in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion, or APB, No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and related interpretations, including the Financial Accounting Standards Board, or FASB, Interpretation, or FIN No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25. Under APB No. 25, compensation expense is based on the difference, if any, on the date of grant between the fair value of our common stock and the exercise price of the stock option. For periods through December 31, 2005, under APB 25, the compensation cost relating to stock options was charged on the date of grant of such options, to stockholders' equity, under deferred compensation, and was thereafter amortized as expense by the straight-line method over the vesting period. We complied with the disclosure-only provisions required by Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment to SFAS Statement No. 123, or SFAS 123.

        Under APB No. 25, we recognized stock-based compensation expense, which is a non-cash charge, for employee stock options granted in 2005 at exercise prices that, for financial reporting purposes, were determined to be below the fair value of the underlying common stock on the date of grant.

        The fair value of the common stock underlying stock options granted during this period was estimated by our board of directors with input from management based upon several factors, including progress and milestones attained in our business. In the absence of a public trading market for our common stock, our board of directors was required to estimate the fair value of our common stock. Our board of directors considered numerous objective and subjective factors in determining the fair value of our common stock at each option grant date, including the factors described below:

•

the common stock underlying the option involved illiquid securities in a private company;

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•

prices of our Series A, Series B, Series C, Series D, Series E, Series F and Series G preferred stock issued by us primarily to outside investors in arm's-length transactions, and the rights, preferences and privileges of the preferred stock relative to the common stock;



•

our performance and the status of research and product development efforts;



•

developments concerning our collaborations;



•

the composition of and additions to the management team;



•

our stage of development and business strategy, including our regulatory review status with regulatory authorities; and



•

the likelihood of achieving a liquidity event for the shares of common stock underlying these stock options, such as an initial public offering, merger or sale of us, given prevailing market conditions.

        In connection with the preparation of the financial statements necessary for the filing of our initial public offering, we have reassessed the fair value of our common stock at option grant dates from January 2005 to the present. We did not use a contemporaneous valuation from an unrelated valuation specialist at the time of these option grants, because we believed our board of directors' estimates of the fair value of our common stock to be reasonable and consistent with our understanding of how similarly situated companies in the biotechnology industry were valued. In addition, management's efforts at the time were focused on product development and the financial and managerial resources available to support an unrelated party valuation were limited.

        Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, or SFAS 123(R), which requires companies to measure the cost of employee services received in exchange for an award of equity instruments (typically stock options) based on the grant-date fair value of the award. The fair value is estimated using option-pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Prior to the adoption of SFAS 123(R), this accounting treatment was optional and pro forma disclosures were required. In March 2005, the SEC released SEC Staff Accounting Bulletin No. 107, Share-Based Payment, or SAB 107. SAB 107 states the SEC staff's position regarding the application of SFAS 123(R) and contains interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides the SEC staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made relating to the accounting for share-based payment transactions.

        We adopted SFAS 123(R) using the prospective-transition method because all prior grants were measured using the minimum value method for Statement 123 required pro forma disclosures. As such, we will continue to apply APB 25 in future periods to equity awards outstanding at the date of Statement 123(R) adoption that were measured using the minimum value method. Under this transition method, any compensation costs that will be recognized from January 1, 2006 will include only compensation cost for all share-based payments granted or modified subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

        In accordance with the provisions of SFAS No. 123(R), a nonpublic entity that used the minimum value method for pro forma disclosure purposes under the original provisions of SFAS No. 123 should no longer continue to provide those pro forma disclosures for outstanding awards.

        We apply SFAS No. 123(R) and Emerging Issues Task Force No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, or EITF 96-18, with respect to options and warrants issued to non-employees.

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SFAS No. 123(R) and EITF 96-18 require the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

        In accordance with the prospective transition method, our financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123(R). Total employee stock-based compensation expense recognized under SFAS 123(R) for the year ended December 31, 2006 was approximately $8,000, all of which were included in research and development expenses. Basic and diluted net loss per share for the year ended December 31, 2006 were the same for 2006 as they would have been if we had continued to account for share-based payments under APB 25.

        As of December 31, 2006, total compensation related to nonvested options not yet recognized in the financial statements is approximately $40,000 and the weighted-average period over which it is expected to be recognized is approximately 3.5 years. We have not recognized, and do not expect to recognize in the near future, any tax benefit related to employee stock-based compensation costs as a result of the full valuation allowance on our net deferred tax assets and our net operating loss carryforwards.

    Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

        Since December 2005, our board of directors determined the estimated fair value of our common stock on the date of grant based on several factors, including the price at which Series G preferred stock was issued by us to outside investors in arms-length transactions in 2006, and the rights, preferences and privileges of the preferred stock relative to the common stock, important developments relating to advancement of our technology and clinical programs, our stage of development and business strategy, the likelihood of achieving a liquidity event for the shares of common stock, such as an initial public offering or sale of our company, given prevailing market conditions, and the market prices of various publicly held life science companies and the level of broad based life science stock indices

        As part of our preparation for our initial public offering, and in accordance with the valuation approaches set forth in the American Institute of Certified Public Accountants, or AICPA, Practice Aid, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors reassessed, retrospectively, the fair value of our common stock in 2005 and 2006. In reassessing the fair value of our common stock, we considered numerous objective and subjective factors, including:

•

a third-party independent valuation;



•

the pricing of private sales of our preferred shares;



•

the comparative rights and preferences of our ordinary shares and our preferred shares;



•

the progression of our research and product development efforts;



•

significant changes, events and milestones in our business development, including the entry into significant license agreements and collaboration arrangements; and



•

the likelihood of an initial public offering.

        The retrospective analysis utilized the following methods outlined in the AICPA Practice Aid:

        Option Pricing Model.    Because the proceeds of any liquidation event are to be divided among the holders of our preferred shares prior to the holders of our common shares, we determined that the shares of common stock have the nature of a stock option, which has a positive value only when our liquidation value exceeds the liquidation preference of our preferred shares. Accordingly, an option pricing model was used to estimate the value of our common stock as the net value of a series of call

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options representing the present value of the expected future returns to our common stock at various times.

        Discounted Future Cash Flow Method (DCF).    As a reasonableness check to the above model we performed a valuation using DCF methodology, which holds the value based on the stream of benefits investors expect to receive, the timing of such benefits and the risk borne by investors. Underlying projected cash flows that we used for DCF considered both the possibility of a successful initial public offering and the possibility that a public offering would not be accomplished.

        Based on the foregoing, we determined that the fair value of our common stock in December 2005 was $0.29 per share. Between December 2005 and June 2006 the following factors contributed to an increase in the valuation of our common stock:

•

the progression of our research and development efforts, including progress in the development of two lead product candidates. During the period we completed the pre-clinical studies for AKIi-5 and were making the preparations for filing an IND. We completed the in-life animal testing in the toxicology studies of RTP801i-14 and were awaiting the lab results; and



•

the progression of discussions with Pfizer.

Based on the above, we determined the fair value of one share of our common stock to be $0.65 as of June 2006.

        Stock-based compensation expense includes the fair value of each option to purchase shares of our common stock on the date of grant and is amortized over the vesting period of the underlying option, generally four years using the straight-line method. There are significant judgments and estimates inherent in the determination of the reassessed fair values. For this and other reasons, the reassessed fair value used to compute the stock-based compensation expense may not be reflective of the fair market value that would result from the application of other valuation methods, including accepted valuation methods for tax purposes.

        Stock-based compensation expense is recognized over the period of expected service by the non-employee. As the service is performed, we are required to update these assumptions and periodically revalue unvested options and make adjustments to the stock-based compensation expense using the new valuation. These adjustments may result in higher or lower stock-based compensation expense in the statement of operations than originally estimated or recorded. Ultimately, the final compensation charge for each option grant to non-employees is unknown until those options have vested or services have been completed.

    Income taxes

        We are required to calculate and account for income taxes in each jurisdiction in which we operate. This involves estimating the current tax exposure in each jurisdiction as well as making judgments regarding the recoverability of deferred tax assets. Our estimates regarding the valuation allowance for deferred tax assets require that we make significant estimates and judgments regarding our future operating results. Our ability to realize deferred tax assets depends on our future taxable income as well as limitations on their utilization. A deferred tax asset is reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. The projections of our operating results on which the establishment of a valuation allowance are based involve significant estimates regarding future demand for our products, competitive conditions, product development efforts, approvals of regulatory agencies and product costs. If actual results differ from these projections, or if our expectations of future results change, it may be necessary for us to adjust the valuation allowance. Although we believe that our estimates and judgments about the tax contingencies and valuation allowance are reasonable, actual results could differ, and we may be exposed to income tax expenses that could be material.

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Results of Operations

    Comparison of Years Ended December 31, 2005 and 2006

        Revenue.    Revenue increased from $3.4 million in 2005 to $4.3 million in 2006. This increase of $814,000 was primarily due to $3.8 million in revenue recognized in accordance with our agreement with Pfizer, offset by a decrease of $3.3 million in revenue from our research collaborations with pharmaceutical companies.

        Research and Development Expenses.    Research and development expenses increased from $9.0 million in 2005 to $18.9 million in 2006. This increase of $9.9 million was primarily due to a $7.8 million increase in pre-clinical expenses as we advanced our product candidates through pre-clinical development and increased manufacturing of materials used in our pre-clinical studies and a $2.7 million increase in license expenses primarily to Atugen and Alnylam.

        General and Administrative Expenses.    General and administrative expenses increased from $2.2 million in 2005 to $3.0 million in 2006. This increase was primarily due to $397,000 in professional costs incurred in conjunction with the consummation of our collaboration with Pfizer.

        Net Financial Income.    Net financial income increased from $377,000 in 2005 to $656,000 in 2006. This increase was primarily due to increases in our cash balances in 2006 compared to 2005 as a result of our sale of preferred stock in late 2005 and early 2006, as well as increased interest yields on cash and short-term investments.

    Comparison of Years Ended December 31, 2004 and 2005

        Revenue.    Revenue decreased from $4.9 million in 2004 to $3.4 million in 2005. The decrease of $1.5 million was primarily due to the expiration of research and development funding under agreements with certain of our research collaborators of $3.4 million, offset by $2.1 million of net revenues received from Sanwa.

        Research and Development Expenses.    Research and development expenses decreased from $16.1 million in 2004 to $9.0 million in 2005. This decrease of $7.1 million was due primarily to our decision to discontinue the development of certain products and a decrease in expenses related to the expiration of research funding periods under some of our research collaboration agreements with pharmaceutical companies. This included a decrease of $2.9 million in employee payroll and related expenses and a decrease of $2.4 million in expenses related to pre-clinical studies.

        General and Administrative Expenses.    General and administrative expenses decreased from $2.8 million in 2004 to $2.2 million in 2005. This decrease was due primarily to our decision in 2004 to discontinue the development of certain products, resulting in a decrease of $415,000 in employee payroll and related expenses and professional service fees.

        Impairment and Write-off of Property and Equipment.    In 2004, as a result of the cessation of certain of our product development efforts, we recorded a charge to the statement of operations of $2.5 million related to impairment of related property and equipment and the write-off of the outstanding balance of leasehold improvements in the facilities for which lease agreements were terminated.

        Net Financial Income.    Net financial income increased from $253,000 in 2004 to $377,000 in 2005 as a result of increased interest yields on cash and short-term investments.

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Liquidity and Capital Resources

        Since inception, we have financed our operations primarily through private placements of equity securities, receiving aggregate net proceeds from such sales totaling $83.0 million and proceeds from collaboration and license agreements totaling $88.8 million. As of December 31, 2006, we had $19.8 million in cash and cash equivalents, as compared to $18.3 million and $14.5 million as of December 31, 2005 and 2004, respectively. Our cash and investment balances are held in bank deposits and money market funds.

        Net cash used in operating activities was $13.5 million, $6.9 million and $3.3 million in 2004, 2005 and 2006, respectively. The use of cash in each period resulted primarily from funding our efforts in research and development, personnel-related costs and obtaining licenses to intellectual property rights. The decrease in net cash used in operating activities in 2005 compared to 2004 was primarily due to the reduction of our research and development expenses in 2005 compared to 2004. The decrease in net cash used in operating activities in 2006 compared to 2005 was primarily due to the receipt of $14.9 million pursuant to our agreement with Pfizer.

        Net cash provided by investing activities was $1.6 million, $364,000 and $378,000 in 2004, 2005 and 2006, respectively. In 2004, we vacated certain research and development facilities and as a result $1.9 million in deposits was released to us.

        Net cash provided by financing activities was $0, $10.4 million and $4.5 million in 2004, 2005 and 2006, respectively. The net cash provided by financing activities resulted primarily from the sale of preferred stock of $10.3 million and $4.5 million in 2005 and 2006, respectively.

        Based on our current operating plans, we believe that our existing capital resources, funds to be received pursuant to our agreement with Pfizer and the net proceeds from this offering, together with interest thereon, will be sufficient to meet our financial obligations for at least the next 24 months.

        We will need to raise additional funds to support our operations, and such funding may not be available to us on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to continue development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations. We may seek to raise additional funds through public or private financing, strategic partnerships or other arrangements. Any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. If we raise funds through collaborative or licensing arrangements, we may be required to relinquish, on terms that are not favorable to us, rights to some of our technologies or product candidates that we would otherwise seek to develop or commercialize ourselves. Our failure to raise capital when needed may harm our business and operating results.

    Contractual Obligations

        Our future contractual obligations at December 31, 2006 were as follows:

	Payments due by period
Contractual Obligations
	Total		<1 Year		1-3 Years		3-5 Years		Thereafter
	(in thousands)
Operating lease obligations	$	657	$	467	$	190	$	—	$	—

        In the future, we may owe royalties and other contingent payments under certain research and development agreements based on the achievement of development milestones, and specified other objectives, mainly Atugen, Alnylam and the University of Illinois. These potential obligations are not included in the above table.

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    Off-Balance Sheet Arrangements

        We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Recent Accounting Pronouncements

        In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxes, or FIN 48. FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. The recently issued literature also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. We are currently assessing the effect of the adoption of the provisions of FIN 48 on our financial position and results of operations.

        In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We are currently evaluating the effect that the adoption of SFAS 157 will have on our financial position and results of operations.

        In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS 159. SFAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 will be effective for us beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating the impact that SFAS 159 will have on our consolidated financial statements.

Quantitative and Qualitative Disclosures about Market Risk

    Interest Rate Risk

        We are exposed to market risk related to changes in interest rates primarily from our investments in certain short-term investments. Our current investment policy is to maintain an investment portfolio through highly rated financial institutions in Israel and the United States, primarily in money market funds as of December 31, 2006. While our cash and investment balances will increase upon completion of this offering, we will maintain an investment portfolio consisting mainly of U.S. money market and government grade securities, directly or through managed funds. We do not utilize derivative financial instruments, derivative commodity instruments or other market risk-sensitive instruments to manage exposure to interest rate changes. Accordingly, we believe that, while the securities we hold are subject to changes in the financial standing of the issuer of such securities, we are not subject to any material risks arising from changes in interest rates.

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    Exchange Rate Risk

        We are exposed to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, against the New Israeli Shekels, or NIS. We expect to derive substantially all of our revenues in U.S. dollars. However, the majority of our Israeli subsidiary's expenses are denominated in NIS, and we anticipate that a material portion of our Israeli subsidiary's expenses will continue to be denominated in NIS. If the U.S. dollar weakens against the NIS, we will experience a negative impact on our results of operations.

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BUSINESS

Overview

        We are a clinical-stage biopharmaceutical company focused on discovering and developing novel therapeutics based on our proprietary gene discovery science and technology, with an initial focus on RNA interference-based therapeutics for the treatment of diseases associated with oxidative stress. We believe that our insight into the molecular mechanisms underlying these diseases, combined with our ability to successfully deliver synthetic siRNA to specific organs in the body, enables us to rapidly develop drug candidates, often directed against the same target across multiple therapeutic areas. We have two product candidates in clinical development: RTP801i-14 for the treatment of wet AMD and AKIi-5 for the prevention of ARF. We have licensed RTP801i-14 to Pfizer on an exclusive worldwide basis. Our product candidate portfolio is based on novel targets and therapeutic concepts discovered using our BiFAR target gene discovery platform. We believe that the combination of this platform and our expertise in designing RNAi-based therapeutics will enable us to continue to advance new product candidates into clinical development.

        RTP801i-14 is in Phase I/IIa development for the treatment of wet AMD. RTP801i-14 is a stabilized, chemically modified siRNA that inhibits our proprietary target RTP801, a gene we believe plays a significant role in wet AMD. We have licensed RTP801i-14 to Pfizer on an exclusive worldwide basis. Pfizer will be responsible for development in collaboration with us and is required to make payments to us upon achievement of development and commercialization milestones, as well as pay us royalties from sales of any approved products. Our second siRNA product candidate, AKIi-5, is currently in a Phase I trial for the prevention of ARF, through the systemic delivery of AKIi-5 in patients undergoing major cardiac surgery. Based on publicly available information, we believe that this is the first human clinical trial involving the systemic delivery of siRNA. In addition, in the second half of 2007, we expect to file an IND for AHLi-11, the same siRNA molecule as AKIi-5, for the prevention of acute hearing loss.

        Our insight into the pathogenesis of diseases associated with oxidative stress, combined with our proprietary targets and our solution to siRNA delivery, led us to select siRNA as the modality for our first clinical programs. We believe that RNAi offers great therapeutic promise due to its ability to selectively silence disease-causing genes or proteins. We believe that our integrated discovery and development approach is particularly well-suited to RNAi-based therapeutics and is based on the following three main capabilities:

•

Identifying clinically attractive drug targets using our BiFAR discovery platform. Using our BiFAR discovery platform, we have identified and validated many gene and protein targets for diseases, including diseases associated with oxidative stress. We focus on diseases expressed in organs where we have successfully delivered our siRNA molecules.



•

Selection of diseases associated with oxidative stress across several therapeutic areas for the same target. We believe that our focus on diseases associated with oxidative stress, which share common molecular mechanisms, will enable us to more quickly identify drug candidates capable of treating multiple diseases based on proprietary targets common to diseases in different organs of the body. For example, we have demonstrated in pre-clinical models that inhibition of the RTP801 gene has beneficial therapeutic effects in various diseases associated with oxidative stress, such as wet AMD. Furthermore, we have also demonstrated that temporary and reversible inhibition of the gene p53 limits the injury caused by oxidative stress in the kidney and in the inner ear, and thus is potentially useful for the treatment of ARF and acute hearing loss.



•

Designing and modifying our siRNA molecules to enable successful local or systemic delivery. We believe we have potentially addressed a major challenge to the effective delivery of siRNA. For example, in pre-clinical models we have successfully delivered siRNA molecules and suppressed

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target genes in the back of the eye, inner ear, tubules of the kidney, inner lung and spinal cord, demonstrating both local and systemic delivery.

        We develop our product candidates using our BiFAR target gene discovery platform. This platform directly identifies clinically relevant critical genes and proteins that are responsible for certain disease traits. BiFAR works by high throughput, genome-wide functional screening of inhibitory elements, such as siRNA, that block activity of key components of pathologic cell responses and thus reverse the disease phenotype. Our BiFAR discovery platform is the basis for several collaboration agreements with pharmaceutical companies and has generated many innovative targets potentially suitable to create drugs to treat a wide range of diseases. We believe that BiFAR is a validated technology platform that could be further used to identify novel targets across multiple therapeutic areas and enables us to address these targets with a variety of therapeutic modalities, including biologics and small molecules.

        We believe we have a solid intellectual property position relating to the development and commercialization of our product candidates. We seek patent protection in the United States, Europe and selected other jurisdictions for our product candidates, delivery methodologies, target genes and our proprietary discovery technology. As of March 25, 2007, we owned 20, and exclusively licensed 10, granted U.S. and European patents. We also owned over 170, and exclusively licensed over 25, patent applications in the United States and elsewhere. In addition, we have in-licensed several patents and patent applications relating to RNAi technology.

RNAi Overview

        RNA interference, or RNAi, is a recently discovered process that occurs naturally within cells and selectively silences the activity of specific genes. Genes are the basic units of inheritance. Each gene consists of a defined segment of a substance known as deoxyribonucleic acid, or DNA. Genes provide cells with instructions for producing proteins encoded by them. Many human diseases are caused by the abnormal behavior of proteins. A particular protein may, for example, be present in too great a quantity, be too active or appear in the wrong place or at the wrong time. In these circumstances, the ability to stop or reduce production of the protein by selectively silencing the gene that directs its synthesis could be very beneficial in the treatment of disease. Harnessing the natural phenomenon of RNAi holds potential for the development of a new class of drugs applicable to a wide range of diseases that result from undesirable protein production or viral replication.

        The DNA molecule is double-stranded, composed of two complementary strands of building blocks called nucleotides. The information in DNA is translated into proteins with the help of another substance called messenger ribonucleic acid, or mRNA. While the predominant form of RNA is a single-stranded molecule, cells also contain fragments of double-stranded RNA. Double-stranded RNA is processed into small fragments called short-interfering RNA, or siRNAs, that act as guides for the sequence-specific silencing of target genes. This occurs when the guide strand siRNA connects with a mRNA molecule having complementary nucleotide sequences and thereby induces its degradation, thus silencing the corresponding target gene. The potential application of the RNAi process for drug development was significantly advanced when it was shown in animal models that the introduction of synthetic siRNAs complementary to the target gene would silence this gene.

        We believe that RNAi-based therapeutics have potentially significant advantages over traditional therapies, including the following:

•

Broad Applicability.  RNAi-based drugs can potentially treat any disease or condition for which an abnormal gene function or a viral agent is identified as the cause of, or as an essential contributing factor to, the disease. Importantly, included are diseases in which the protein causing the disease cannot be targeted effectively by existing drug classes, such as small molecules or monoclonal antibodies, due to poor accessibility of the target protein.

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•

Safety and Therapeutic Precision.  Because RNAi is a naturally occurring process and because natural siRNA consists of nucleic acids, siRNA drugs metabolize into naturally occurring and safe building blocks. RNAi-based drugs may reduce or avoid some of the side effects associated with traditional small molecule drugs, as they can be designed to selectively inhibit expression of disease-associated target genes, with minimal interference with other genes in the body.



•

Inherent Potency.  RNAi-based drugs may have a higher potency than certain small molecule drugs because one siRNA molecule may trigger destruction of multiple target mRNA molecules, thus potentially blocking the synthesis of many protein molecules.



•

Shortened and Simplified Drug Discovery Timelines.  When a target gene is identified, the siRNA drug candidate is rationally designed for the sequence-specific silencing of that gene. This standard process typically takes a number of months and results in the identification of a drug candidate ready for animal studies. In contrast, the identification of small molecule drug candidates is expensive and time-consuming, involving multiple cycles of both challenging chemical synthesis design and testing, and often takes years.

        To date, major challenges in the development of RNAi-based therapeutics have been delivery and stability:

•

Delivery.  Delivery of RNAi-based therapeutics is generally more challenging than traditional small molecule or antibody delivery due to the very fast degradation and excretion of siRNA from the body. In addition, the siRNA needs to overcome multiple tissue barriers to get inside the target cells where it elicits its biological activity. Systemic delivery of a chemically synthesized siRNA to the tissue and cell relevant to the disease in a specific organ in the body is particularly challenging. Therefore, a delivery system capable of transporting a siRNA molecule, protected chemically from rapid degradation and excretion, through physical barriers within the body to the target tissue while enhancing cellular uptake of the siRNA molecule, is key to the success of therapeutic applications of siRNA drugs.



•

Stability.  To date, one of the major limitations of RNAi has been the instability of unmodified siRNAs, which generally break down rapidly in the body. This degradation restricts the duration and magnitude of their potential therapeutic activity. Effective drugs need to be stable in body fluids and in cells to ensure an adequate therapeutic response. Chemically modified siRNA must achieve an optimal balance between stability and low toxicity as the safety profile of siRNA therapeutics depends on the fact that they can be easily degraded by the body into naturally occurring building blocks.

Our Approach

        Our integrated siRNA discovery and development strategy is based on the following main capabilities:

•

Identifying clinically attractive target genes and proteins using our BiFAR platform, that when inhibited, reverse disease phenotypes;



•

Harnessing our insight into the pathogenesis of diseases associated with oxidative stress in various organs of the body to generate drug candidates that may be active across multiple therapeutic areas, focusing on diseases representing significant unmet medical needs; and



•

Delivering our modified siRNA molecules either locally or systemically to the appropriate diseased organs and cells in the body.

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        We believe that our siRNA drug candidates meet the primary challenges of RNAi-based therapeutics development:

        Delivery.    In pre-clinical studies, we have successfully delivered our siRNA candidates locally and systemically to target cells in various organs of interest including the back of the eye, inner ear, tubules of the kidney, inner lung and spinal cord.

        Stability.    Our siRNA drug candidates have a chemically modified, stabilized structure and properties that we believe offer significant advantages over standard siRNAs. We chemically modify our drug candidates with a naturally occurring nucleotide, which neither produces toxic metabolites nor elicits unwanted cellular responses. We have shown in pre-clinical studies of both systemic and local delivery, that our siRNA drug candidates had a good safety profile at dose levels well above the proposed clinical range. In addition, we believe we have demonstrated in vitro and in vivo stability of our drug candidates, with the drug persisting for just the sufficient time for it to exert its desired action.

        Our pipeline generation methodology is schematically shown below:

        We begin by identifying indications we view as attractive due to our ability to successfully deliver our siRNA molecules to the target organ and cells, and we select the route of administration that is clinically relevant for drug delivery to a given organ. From the potential indications, we select those associated with oxidative stress since it is the main pathogenic feature of numerous diseases in various organs. This allows us to potentially use one siRNA for multiple indications. We focus on diseases that represent an unmet medical need with significant market potential. We then utilize our pool of proprietary target genes previously identified by our BiFAR platform as essential for diseases associated with oxidative stress to identify potential siRNA candidates that inhibit these specific target genes. As a next step, we synthesize stabilized siRNA molecules selected by our proprietary software and we test their activity in cell culture in vitro and in in vivo animal models of each disease. This process typically takes only a few months for each disease. The outputs of this process are novel siRNA drug candidates

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that inhibit our newly selected target gene and hence are potential drugs for the selected indications in each organ. We believe that this approach has the potential to generate several new IND applications in the coming years, either for new indications for the same drug or for new drugs.

Our Product Candidates

        Our current product pipeline includes siRNA drug candidates targeting diseases associated with oxidative stress that represent significant unmet medical needs. In addition, our small molecule drug candidate BT16 is in development for dyslipidemia in Japan by our sublicensee, Sanwa. The following table sets forth the status of our product pipeline:

Product Candidate	Indication	Status	Commercialization Rights
RTP801i-14	Wet Age-related Macular Degeneration	Phase I/IIa ongoing (completion expected 2H 2007)	Pfizer (Worldwide)
AKIi-5	Acute Renal Failure	Phase I ongoing (completion expected 2H 2007)	Quark (Worldwide)
AHLi-11	Acute Hearing Loss	Pre-clinical studies (IND expected to be filed 2H 2007)	Quark (Worldwide)
CTPi-1	Chronic Obstructive Pulmonary Disease	Pre-clinical studies	Pfizer (Worldwide)
BT16	Dyslipidemia	Clinical trials in Japanese population expected to be initiated in 2007	Sanwa (Japan, South Korea, China and Taiwan); Syndrome X (Rest of World)
Pipeline siRNAs and Antibodies		In vivo proof-of-concept studies	Quark (Worldwide)

    RTP801i-14 for Wet Age-Related Macular Degeneration

        The Drug Candidate.    RTP801i-14 is a synthetic, chemically modified siRNA molecule designed to inhibit the expression of the hypoxia-inducible gene RTP801. Using our BiFAR platform, we discovered the gene RTP801 and identified it as a likely major factor in the induction of various diseases associated with oxidative stress. In September 2006, we exclusively licensed RTP801i-14 to Pfizer for all ophthalmic indications, and are collaborating with them in the development of the drug candidate.

        Disease Background and Market Opportunity.    AMD is the leading cause of central vision loss in the elderly. AMD occurs when the light sensing cells in the central portion of the retina, called the macula, malfunction and over time cease to work. Wet AMD is the more severe form of the disease and accounts for approximately 10% of all AMD cases, yet it causes approximately 90% of blindness associated with AMD. Wet AMD occurs when abnormal blood vessels grow through a process known as neovascularization, or angiogenesis, in the layer of the vascular system immediately behind the retina, called the choroid. This growth is known as choroidal neovascularization, or CNV, and damages the macula. These new blood vessels are weak and leak blood and fluid under the retina. This process causes damage to the retina resulting in impaired vision, blind spots and eventually blindness. Of the 15 million Americans with some form of AMD, close to 1.8 million adults 40 years and older have been diagnosed with the more rapidly progressive wet AMD with associated vision loss, and 200,000 new cases of wet AMD are diagnosed each year, according to National Eye Institute data. The National Eye Institute estimates that the number of people with wet AMD in the United States will increase by 50% to 2.95 million by 2020.

        Limitations of Current Therapy.    Current treatments for wet AMD generally slow further vision impairment, and only significantly improve vision in a minority of cases. Treatment options that attempt to control the abnormal blood vessel growth and leaking associated with wet AMD include laser

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photocoagulation and photodynamic therapy, as well as the angiogenesis inhibitor drugs Lucentis, the standard-of-care treatment, and Macugen. Current non-drug therapies utilize a laser to limit the growth of abnormal blood vessels but have been shown to be destructive to the ocular tissues. Lucentis and Macugen are inhibitors of the angiogenic growth factor, VEGF, as are most of the drug therapies currently in development. According to published data, in its pivotal clinical trials, Lucentis significantly improved vision in 29% to 40% of patients treated. Other currently available treatments have not been shown to restore a significant portion of lost visual acuity. Furthermore, a high rate of localized side effects, primarily inflammation resulting from intravitreal injection, or injection into the back of the eye, is reported in patients being treated with anti-VEGF drugs.

        Given the limitations of current treatments, we believe that there is a significant need for additional treatments to improve the rate of visual gain, as well as permit less frequent intravitreal injections than the currently used regimen of one injection every four weeks for Lucentis or six weeks for Macugen.

        Pre-clinical Studies.    We have conducted pharmacology studies of RTP801i-14 in the mouse laser-induced model of CNV, an accepted wet AMD model. In these studies, RTP801i-14 appeared to possess the following properties:

•

It specifically inhibited expression of RTP801 in the choroid;



•

It inhibited both abnormal blood vessel growth and leakage in a dose-dependent manner. Furthermore, in a side-by-side comparison, the magnitude of RTP801i-14's effect on blood vessel growth and its dose response behavior was better than that produced by Macugen and an antibody that inhibits mouse VEGF;



•

It acted synergistically in combination with Macugen and with an antibody that inhibits mouse VEGF to prevent both neovascularization and vessel leakage. These results indicate that it acts through a different pathway than anti-VEGF drugs;



•

It exhibited anti-apoptotic activity that is not exhibited by the anti-VEGF drugs; and



•

It exhibited significantly better anti-inflammatory properties compared to anti-VEGF drugs in a side-by-side comparison.

        The potential efficacy seen in the mouse model was further confirmed in a monkey laser-induced CNV model of wet AMD.

        Our pre-clinical studies demonstrated that RTP801i-14 mediated inhibition of the RTP801 hypoxia/stress pathway, indicating that it may be beneficial in the context of wet AMD-type pathology in the eye. In addition, this different mechanism of action is independent of, and potentially complementary to, those associated with the existing anti-VEGF therapies. In addition, RTP801i-14 has showed anti-inflammatory activity, which may increase its therapeutic potential since inflammation is now considered to play a significant part in the pathogenesis of the disease. The anti-inflammatory effect of RTP801i-14 may also contribute to a reduction in the rate of the inflammation, which is inherently associated with intravitreal injection.

        In our pre-clinical studies, RTP801i-14 was resistant to degradation in body fluids. Based on these studies, we believe that RTP801i-14 delivered locally (i.e., intravitreal) will persist for several weeks, suggesting that relatively infrequent dosing may be possible in humans. Following intravitreal injection in animals we did not observe any significant systemic exposure, demonstrating a favorable distribution profile combining the desired prolonged local exposure with the desired limited systemic exposure. We therefore believe that RTP801i-14 has little potential for systemic effects in humans. In pre-clinical toxicology studies, a low frequency of mild and reversible ocular inflammation was observed. This inflammation did not increase in severity at higher doses.

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        Phase I/IIa Clinical Trial.    Under our agreement with Pfizer, we are conducting a multi-center Phase I/IIa, open-label, dose-escalation clinical trial of a single intravitreal injection of RTP801i-14 in up to 42 patients with CNV at up to six sites. Patients are enrolled in dose cohorts of three to six patients each. Up to six additional patients may be treated at the highest dose of the cohort or the maximum tolerated dose achieved in the cohort, if lower. The primary objectives of the trial are to determine the safety, tolerability, dose-limiting toxicities and pharmacokinetics of RTP801i-14. As the trial is conducted in patients, secondary objectives include determination of the changes in visual acuity after administration of RTP801i-14. Although change in visual acuity can indicate clinical activity of the drug candidate, the trial is not designed to measure clinical activity in a statistically significant manner. We have successfully completed dosing of the first cohort of patients in this trial, with no drug-related adverse events noted in this cohort. Accordingly, a higher dose will be administered to the next cohort of patients.

        We expect to complete dosing and initial follow-up on all patients in this trial in the second half of 2007. Depending on the results of this initial follow-up, we expect to initiate a dose-ranging Phase II clinical trial measuring RTP801i-14 clinical activity.

    AKIi-5 for Acute Renal Failure

        The Drug Candidate.    AKIi-5 is a synthetic, chemically modified siRNA molecule designed to temporarily inhibit the expression of the human gene p53. The primary indication for which we intend to develop AKIi-5 is the prevention of ARF in patients undergoing major cardiovascular surgery.

        Disease Background and Market Opportunity.    ARF is a syndrome characterized by a rapid decline of kidney function leading to death in a high percentage of cases. Major cardiac surgery is one of the many causes of ARF. During cardiac bypass surgery, lack of oxygen caused by reduced local blood flow to the kidneys, followed by rapid reintroduction of oxygen, or reperfusion, to the kidneys upon removal of the patient from cardiopulmonary bypass, initiates a chain of events that can lead to ARF.

        According to American Heart Association estimates, of the over 6.8 million inpatient cardiovascular operations and procedures performed yearly in the United States, more than 700,000 are major adult cardiac surgery procedures, including over 500,000 coronary artery bypass graft, or CABG, procedures. At least 40% of patients undergoing cardiac surgery are at a moderate to high degree of risk for developing ARF, according to a published study. The mortality rate following onset of ARF was reported to reach 88% in cardiac surgery patients in one published study. A retrospective study has shown that hospital costs for serious diseases complicated by ARF are significantly higher than for non-ARF admissions, particularly when patients are on renal dialysis during the ARF episode. Reported cost increases include 150% for complicating ARF without dialysis and up to 500% for complicating ARF with dialysis.

        Limitations of Current Therapy.    Currently, there are no approved drug therapies that effectively prevent or treat ARF. Generally, the goals of currently available treatments are to correct or treat the underlying condition of kidney failure and support patients with renal replacement, such as dialysis, until their kidneys have healed and can function properly. However, despite the use of aggressive dialysis regimens, the mortality rate, particularly in post surgery patients, remains high.

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        Pre-clinical Studies.    We have conducted pre-clinical studies in rats and monkeys. Rats treated with a single bolus injection of AKIi-5 were significantly protected from ischemia/reperfusion-induced acute kidney injury. In the rat studies, AKIi-5 was most potentially efficacious when administered within a well-determined time window of hours post injury, and effectively prevented the development of ARF. Our pharmacokinetic, distribution, and toxicity studies in rats and monkeys indicate that AKIi-5 appears to have a favorable safety profile and has a relatively short residence time in the kidney. In these studies, AKIi-5 accumulated rapidly and predominantly in the kidneys, specifically in proximal tubules, following intravenous administration. In the studies, the chemical structure, which is common to our siRNAs, was resistant to degradation in body fluids. AKIi-5 was shown to be safe at all doses that were tested in these studies, with little or no systemic exposure outside the kidney. In addition, the duration of the p53 inhibitory effect in the studies was desirably short in all tissues tested.

        Phase I Clinical Trial.    The FDA has recently accepted our application to initiate a Phase I clinical trial of AKIi-5 in patients undergoing major cardiac surgery. Based on publicly available information, we believe that this is the first human clinical trial involving the systemic delivery of siRNA. This trial is a multi-center, open-label, dose-escalation Phase I trial assessing the safety and pharmacokinetics of AKIi-5 administered intravenously as a single dose to patients undergoing major cardiac surgery. Up to 24 patients will be enrolled in this trial in a number of centers in the United States and Israel. We expect to complete this trial in the second half of 2007. Depending on the results of this trial, we expect to initiate a dose-ranging Phase II clinical trial measuring AKIi-5 clinical activity.

    AHLi-11 for Acute Hearing Loss

        The Drug Candidate.    The active ingredient of AHLi-11 is a synthetic, chemically modified siRNA that is a temporary and reversible inhibitor of p53, and is the same active ingredient as in AKIi-5.

        Disease Background and Market Opportunity.    Hearing loss is a major problem in the United States and throughout the world and is an under-diagnosed and under-treated health issue. An estimated 28 million Americans have some degree of hearing loss, according to the National Center on Hearing Assessment and Management.

        Most types of hearing loss arise from damage to, or loss of, sensory cells in the ear, known as cochlear hair cells, or their associated neurons due to hereditary or environmental causes, or a combination of the two. This type of hearing loss is called sensorineural hearing loss and it represents the largest market segment, with an estimated 17 million Americans affected. Sensorineural hearing loss can be a result of several conditions, including aging and chronic or acute noise exposure (acoustic trauma), which together cause a majority of sensorineural hearing loss, as well as ototoxicity-induced hearing loss, which is caused by exposure to certain chemotherapeutic agents, such as cisplatin and carboplatin, and certain aminoglycoside antibiotics, such as gentamycin. In all these conditions, similar molecular mechanisms, most likely associated with oxidative stress and stress response, are suspected to trigger death of cochlear hair cells. We believe cisplatin-induced ototoxicity is particularly suitable for relatively rapid drug development since a high percentage of cisplatin treated patients suffer some degree of hearing loss.

        Limitations of Current Therapy.    At present, no therapeutic means are available by which cochlear damage can be prevented or reversed. The principal way to preserve what is left of a patient's hearing is the use of hearing aids to amplify sounds at pre-set frequencies and cochlear implants to stimulate the cochlear nerve. It is estimated, however, that only 25% of the Americans who could be potentially helped by hearing aids actually use the devices, according to the National Center on Hearing Assessment and Management. Corticosteroids are used in the management of several inner ear disorders; however, there are no well-controlled studies showing that this approach is indeed efficacious. No therapies are currently available to treat or prevent acoustic trauma or cancer

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therapy-induced ototoxicity. Furthermore, for many cancer patients, physicians frequently prescribe sub-optimal chemotherapy regimens in order to prevent hearing loss.

        Pre-clinical Studies.    We have applied siRNA to the round window membrane of rat and chinchilla inner ears and we have demonstrated delivery of siRNA into target cells along with its persistence in the cochlear hair cells for at least 15 days. AHLi-11 appears to protect cochlear hair cells from carboplatin-induced apoptosis in a chinchilla model. It was previously shown that our small molecule temporary p53 inhibitor, Pifithrin-alpha, is able to suppress p53 and protects cochlear and vestibular hair cells from cisplatin-induced apoptosis in the ex vivo system. In the chinchilla study, AHLi-11 also protected cochlear hair cells from acoustic trauma-induced apoptosis and attenuated hearing loss.

        Development Status.    Using the pre-clinical package that has been prepared for AKIi-5, with additional studies specific to AHLi-11, we believe that we will be able to file an IND with the FDA for AHLi-11 for the prevention of cisplatin-induced hearing loss in the second half of 2007. We are initially targeting the acute hearing loss segments, in which the agent that we develop will be administered prior to or shortly after exposure to an ototoxic agent. The disease endpoints in hearing loss prevention are well characterized, and the outcome of the treatment is generally known within two to five days following cisplatin treatment. Since the hearing loss is bilateral but only one ear is treated during a clinical trial, each patient serves as his or her own control.

    CTPi-1 for Chronic Obstructive Pulmonary Disease

        The Drug Candidate.    CTPi-1 is a synthetic, chemically modified siRNA molecule designed to inhibit the proprietary target RTP801. In 2006, we exclusively licensed to Pfizer the right to develop and commercialize all siRNA inhibitors of RTP801, including CTPi-1, for all therapeutic indications. We are conducting pre-clinical studies of CTPi-1 on behalf of Pfizer at its expense. There can be no assurance that Pfizer will continue to develop CTPi-1.

        Disease Background and Market Opportunity.    COPD is a chronic progressive disease characterized by development of expiratory airflow obstruction, eventually leading to a largely irreversible loss of lung function. Chronic cigarette smoking is the most significant risk factor for this global health issue. According to the National Heart, Lung, and Blood Institute, 12 million Americans have been diagnosed with COPD and an additional 12 million Americans are believed to be undiagnosed COPD sufferers. COPD is currently the fourth leading cause of death in the United States, and by 2020 is expected to rise to the third leading cause of death in the United States.

        Limitations of Current Therapy.    Currently, there is no cure for COPD. Current treatment options only work to address the symptoms and improve quality of life. Combinations of long-acting beta-agonists, or LABAs, and bronchodilators with inhaled corticosteroids are currently considered the best available treatment. Survival time is improved with long-term oxygen therapy and mechanical ventilation. However, new therapies are needed to better alleviate disease symptoms, reduce the number and severity of exacerbations, and improve the survival rate.

        Pre-clinical Studies.    Our pre-clinical studies have shown that siRNA is efficiently delivered into the inner lungs of mice and monkeys using special inhalers, which we believe would also be a compatible means of delivery to humans. In our studies, six months of cigarette smoking did not lead to emphysema development in mice in which the RTP801 gene had been knocked out. Results from mice treated by CTPi-1 delivered intratracheally and by inhalation have shown reduction of cigarette smoking-induced inflammation and apoptosis in mouse lungs, an efficacy trend similar to that obtained in the knock-out mice.

        Development Status.    Dosing optimization and pharmacokinetic studies are presently being performed in animals.

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    BT16 for Dyslipidemia

        BT16 is a small molecule, originally developed by the Hebrew University of Jerusalem and in-licensed by us in 2003. BT16 acts on the nuclear factor HNF-4, which had been independently identified in our BiFAR based discovery programs as a potential drug target for metabolic syndrome. In 2004, we returned the rights to the BT16 intellectual property, but subsequently acquired the rights to develop and commercialize BT16-based products in Japan, China, South Korea, and Taiwan, for the sole purpose of sublicensing these rights. We sublicensed these rights to Sanwa, from whom we are entitled to receive milestone and royalty payments, a portion of which are owed to our upstream licensor. Dyslipidemia, a component of metabolic syndrome, is a disorder of the lipid metabolism and is an independent risk factor for coronary artery disease. In Japan, metabolic syndrome is prevalent in approximately 10% to 20% of the general population based on data from community-based screening programs. One Phase I and two Phase IIa trials have been conducted by the inventor and by us and demonstrated that BT16 was safe and well-tolerated with no drug-related adverse events reported. Results from these trials indicate that BT16 caused a significant reduction in plasma triglycerides and a reduction in plasma cholesterol, demonstrating that BT16 has the potential to be active in treating patients with dyslipidemia. These clinical trials were performed in a predominately Caucasian study population. As a result, Japanese regulatory authorities have requested that Sanwa repeat a Phase I trial in Japan on a Japanese study population prior to proceeding with further human clinical trials. Sanwa has informed us that it intends to initiate this Phase I trial in 2007.

Other Research Programs

        We have developed additional siRNA and antibody product candidates, based on our targets, some of which have advanced to in vivo testing for proof-of-concept demonstration. Additional pipeline product candidates are in the design stage. We anticipate initiation of proof of concept studies in a number of eye, lung and kidney diseases. Our antibody program includes a monoclonal antibody in proof-of-concept animal testing for treatment of chronic kidney failure.

        Our additional research programs are directed to developing novel and proprietary siRNA structures and stabilization chemistry and proprietary specific cell type-targeted siRNA delivery systems. Specifically, we are generating novel aptamer-siRNA and antibody-siRNA complexes to guide the active siRNA to the target disease cells.

The BiFAR Platform

        Our BiFAR target discovery platform directly identifies clinically relevant critical genes and proteins that are responsible for certain disease traits, or the disease phenotype. It works by high throughput, genome-wide functional screening of inhibitory elements, such as siRNAs that, when inhibited, reverse the disease phenotype. We have in the past applied the BiFAR platform in several disease programs, including neurodegenerative diseases, stroke, diabetes, autoimmune diseases, liver fibrosis, kidney diseases, osteoarthritis, cancer and others, some in collaboration with our partners, and have generated many innovative targets, potentially suitable to create drugs to treat those diseases. Most of our research collaborators, have selected a number of targets we discovered for the development of small molecule drugs.

        We believe that the BiFAR platform is applicable to many medical conditions and diseases, and is particularly effective for identification of target genes implicated in oxidative stress-induced diseases. In practice, a specific phenotype representing a clinical endpoint for a given unmet medical need is first defined and translated to a relevant cell system that can mimic the phenotype upon application of a suitable pathological stimulus. Complex libraries of gene inhibitory elements such as siRNA, antisense and/or dominant negative peptides are used to inhibit genes and proteins in the cell system, one gene per cell. Following application of the pathological stimulus, microarrays are utilized to measure the

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change in the abundance of inhibitory elements in the cell system compared to a control thus selecting those genes, the inhibition of which has a critical effect on the disease phenotype. The technology is compatible with any microarray format, oligomer or complementary DNA. It uses, if so desired from a drug development perspective, innovative proprietary technologies to identify secreted/membrane proteins without any prior knowledge of their sequence. We use the target genes that we discover, and which are critical for the disease phenotype, to develop sequence-based inhibitory drug product candidates, such as siRNA molecules and antibodies. RTP801, the target gene for our wet AMD and COPD drug candidates, was discovered through our BiFAR platform.

        BiFAR is covered by granted patents in the United States and Europe which cover the basic method of functional screening for target genes using inhibitory elements in combination with DNA microarrays.

Our Strategy

        Our goal is to discover, develop and commercialize novel therapeutics addressing significant unmet medical needs by using our novel targets to develop sequence-dependent drugs, primarily siRNAs and antibodies. To achieve this goal, we are pursuing the following strategies:

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Pursue clinical development of our drug candidates for the treatment of ARF and for hearing loss;



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Maximize the value of our current collaborations, including our collaboration with Pfizer, and selectively enter into new collaborations for drug candidates that we develop, while seeking to retain marketing rights in major markets when possible;



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Augment and develop our pipeline based on our proprietary target genes utilizing our know-how and intellectual property in siRNA and antibody drugs and their local or systemic delivery to specific target cells;



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Expeditiously introduce additional potential drug candidates to pre-clinical studies and clinical trials; and



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Maintain and expand our patent portfolio in targets and technologies and further strengthen our intellectual property position in modified siRNA.

Our License and Collaboration Agreements

    Our License Agreement with Pfizer

        In September 2006, we granted Pfizer an exclusive worldwide license to develop and commercialize drug candidates that inhibit our proprietary target gene RTP801 through RNAi. The lead product candidate under the agreement is our drug candidate RTP801i-14 for treating wet AMD, currently in a Phase I/IIa clinical trial. Under the agreement, Pfizer has the exclusive right to develop drugs for both ophthalmic and non-ophthalmic indications.

        Pursuant to the agreement, Pfizer is responsible for all future pre-clinical and clinical development costs of the licensed drug candidates, as well as all regulatory filings and approvals. The parties will share oversight of development through product-specific committees, but Pfizer has ultimate decision-making authority. During a transition period, we are continuing existing pre-clinical and clinical development of certain product candidates for ophthalmic and non-ophthalmic indications, with funding from Pfizer.

        Pfizer will be responsible for manufacturing all product candidates for pre-clinical and clinical development and for commercial supply. If, however, Pfizer desires a second commercial manufacturing site, Pfizer will consider engaging us to manufacture products commercially, provided that we can

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competitively satisfy its manufacturing requirements. Pfizer has worldwide commercialization rights to all product candidates licensed under the agreement, but has agreed to appoint us its exclusive distributor in Israel of products developed under the agreement.

        In connection with the agreement, through March 2007 Pfizer had paid us an aggregate of $25.2 million in up-front fees, cost reimbursements and milestone payments. The agreement provides for up to $299 million in additional development and product approval milestone payments, assuming the development and approval in all major markets of a product for two ophthalmic indications and at least one non-ophthalmic indication. Pfizer is required to pay us royalties on any sales of licensed products and up to an additional $309 million of sales-based milestone payments.

        Pfizer may terminate the agreement without cause at any time upon prior written notice. If not terminated, the agreement will remain in effect in each country until at least the later of the expiration of all relevant patents or ten years from the first commercial sale of the licensed product in each such country.

    Our License Agreement with Sanwa

        In December 2004, we granted Sanwa an exclusive license in Japan, China, South Korea and Taiwan to develop and commercialize our small molecule drug BT16, currently in development for treating dyslipidemia and metabolic syndrome.

        Through December 31, 2006, Sanwa has paid to us $4 million in license and milestone fees under the agreement, a portion of which we have paid to our up-stream licensor pursuant to our license agreement. We may receive future development milestone payments of up to $14 million, as well as royalties on any sales of licensed products by Sanwa in Japan, China, South Korea and Taiwan. Sanwa is responsible for all development, regulatory approvals, and commercialization in the specified countries. Unless earlier terminated, the agreement will remain in effect on a country-by-country basis until the later of the expiration of all relevant valid patents or ten years after the first commercial sale of licensed products. Sanwa may terminate the agreement without cause at any time upon 60 days prior written notice.

        The licensed technology relating to BT16 was originally developed by researchers at the Hebrew University of Jerusalem. In 2003, the Hebrew University assigned its BT16 intellectual property rights to Syndrome X Ltd. In December 2004, we entered into a research and license agreement with Syndrome X, in which Syndrome X granted us an exclusive license under the BT16 intellectual property, solely for the purpose of granting sublicenses in Japan, China, South Korea, and Taiwan. We concurrently sublicensed these rights to Sanwa. We owe Syndrome X a portion of any payments we receive from Sanwa.

    Our Research Collaborations with other Pharmaceutical Companies

        Between 1995 and 2004 we entered into collaboration agreements with Mitsubishi Pharmaceutical Corporation, Sankyo Co., Ltd., Taisho Pharmaceutical Co., Ltd., AstraZeneca, Astellas Pharma Inc., and Shionogi & Co., Ltd. Under each collaboration, we applied our BiFAR platform to discover novel target genes potentially suitable for drug development in a disease field of interest to the collaborator. Each agreement required the collaborator to fund our research during an initial feasibility period and, if successful, a follow on research period of at least three years. Each collaboration agreement proceeded beyond the initial feasibility period, and in most the funded research stage was extended beyond the initial three year period. The funded research stage has now been completed under each of these collaborations.

        In each case, our BiFAR discovery platform yielded target genes potentially suitable for development of therapies to treat the diseases of interest. Most of these collaborators have selected a

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number of targets for further development, and we have granted exclusive licenses in specific disease areas requiring the collaborator to develop and commercialize products within specified time periods. We retain rights to non-selected or returned targets, as well as those that are not developed within the time limits. All of these collaborators are required to make payments to us upon the achievement of certain development milestones and to pay royalties on sales of any licensed products. In most cases these collaborators have granted us certain commercialization rights in the United States and major European countries.

    The Atugen Agreements

        In December 2004, we entered into a collaboration agreement with Atugen. Pursuant to this agreement, Atugen granted us an exclusive worldwide license under its RNAi technology to develop and commercialize our RNAi product candidates based on our target gene RTP801 for diseases other than cancer.

        In September 2006, we amended the Atugen collaboration agreement in connection with the Pfizer license agreement, under which we sublicensed to Pfizer our rights under the license from Atugen. This amendment clarified payments among the parties, terminated a license we granted to Atugen in 2004, and provided for a direct license from Atugen to Pfizer in the event of termination of the Pfizer agreement. Under the amended Atugen collaboration agreement, we pay Atugen a percentage of our receipts from Pfizer under the Pfizer agreement, including milestone and royalty payments, but excluding payments specifically committed to cover research and development costs.

        In April 2005, we entered into a second agreement with Atugen, the option and license agreement, pursuant to which Atugen granted us options to non-exclusive licenses to Atugen's RNAi-related intellectual property to develop and commercialize siRNA product candidates based on five additional proprietary target genes, including p53. Within certain time limits, we may exercise our option with respect to a target gene once we obtain proof of concept, subject to payment of an option fee. Our product candidates that are directed at the temporary inhibition of p53 are subject to this option and license agreement, and we intend to exercise our option for these candidates. In addition to the option fee payments, we are required to make development milestone payments based on the progress of clinical trials and regulatory approval of licensed products in the United States, Japan and Europe. We are also required to pay royalties on sales of any licensed products for which we have exercised an option.

        Atugen has the right under this second agreement to enter into future good faith negations with us to establish a joint development program for certain oncology applications of our siRNA drugs using Atugen intellectual property.

    The Alnylam Agreements

        In conjunction with the Pfizer agreement executed in September 2006, we entered into a set of license agreements with Alnylam Pharmaceuticals, Inc. Pursuant to these agreements, Alnylam granted us non-exclusive worldwide licenses under three families of patents and patent applications owned or controlled by Alnylam. Each agreement is specific to one of our proprietary targets p53 and RTP801 and to certain therapeutic fields, including all indications we contemplate for these target genes. Alnylam has also granted us an option to enter into license agreements for additional target genes that are the subject of any of our active research and development programs. We sublicensed our rights under the RTP801 Alnylam agreements to Pfizer in the September 2006 license agreement.

        Pursuant to the terms of the license agreements, through December 31, 2006, we paid Alnylam upfront fees totaling $800,000. The agreements provide for annual maintenance fees and up to $7.4 million in additional development and product approval milestone payments. We are also required to pay royalties on our sales or sales by our sublicensee. The royalty rates vary based on which patent

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families cover the products sold. Under the Pfizer agreement, Pfizer will partially reimburse our payments to Alnylam under the RTP801 agreements.

    Our Agreement with the University of Illinois

        In September 1999, the University of Illinois at Chicago, or UIC, granted us an exclusive worldwide license under its patents and patent applications related to the therapeutic inhibition of p53 and small molecule p53 inhibitors for all uses and indications.

        Under the agreement, we are required to pay UIC a royalty on sales of products incorporating intellectual property licensed from UIC and a share of any payments we receive from sublicensees, including milestone and royalty payments. To date, we have not granted any sublicenses under our license from UIC. UIC may terminate the agreement if we do not meet a general diligence obligation to use commercially reasonable efforts to bring licensed products to market. Our license with respect to a particular licensed product will terminate for failure to meet specific development milestones, which we may extend for one year by paying an extension fee.

Competition

        The pharmaceutical and biotechnology industries are intensely competitive, and several of our product candidates, if commercialized, would compete with existing drugs and therapies. In addition, there are many pharmaceutical companies, biotechnology companies, public and private universities, government agencies and research organizations actively engaged in research and development of products targeting the same markets as our product candidates. Many of these organizations have substantially greater financial, technical, manufacturing and marketing resources than we have. Our ability to compete successfully will depend largely on our ability to:

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design and develop products that are superior to other products in the market;



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attract and retain qualified scientific, product development and commercial personnel;



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obtain patent and/or other proprietary protection for our product candidates and technologies;



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obtain required regulatory approvals; and



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successfully collaborate with pharmaceutical companies in the design, development and commercialization of new products.

        We expect to compete on, among other things, product efficacy and safety, time to market, price, extent of adverse side effects and the basis of and convenience of treatment procedures. In order to compete successfully, we will need to identify and develop products and exploit these products commercially before others are able to develop competitive products.

        RTP801i-14.    If approved for wet AMD, we anticipate that RTP801i-14 would compete with other marketed therapeutics, particularly VEGF inhibitor drugs, primarily Genentech's Lucentis, recently approved by the FDA and which has become the standard-of-care for the treatment of wet AMD. RTP801i-14 may also face competition from off-label use of Genentech's Avastin, currently approved for the treatment of various cancers. Additional wet AMD therapeutics that are in development could also compete with RTP801i-14.

        AKIi-5.    We are not aware of specific drugs marketed or in late stage development for the prevention of ARF. However, in response to the unmet medical need, new products could be developed, or existing products could be used off-label.

        AHLi-11.    We are not aware of specific drugs marketed or in late stage development for the prevention of hearing loss due to ototoxicity or acoustic trauma. Antioxidants are being tested for the

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treatment of hearing loss due to their ability to reduce the toxic effects of free radicals. If approved for acute hearing loss, AHLi-11 would compete with such products.

        CTPi-1.    If Pfizer chooses to pursue development of CTPi-1 and it is eventually approved, we anticipate that CTPi-1 would compete with marketed drugs used in the treatment of COPD, primarily certain new combination treatments, such as AstraZeneca's Symbicort, and GlaxoSmithKline's Advair/Seretide. We also expect CTPi-1 would compete with other drugs such as bronchodilators, including anticholinergics, short-acting and long-acting beta-agonists, theophylline, inhaled corticosteroids, as well as drugs approved for other indications. Additionally, a large number of potential treatments in development could also compete with CPTi-1.

Manufacturing and Supply

        All of our current good manufacturing practices, or cGMP, manufacturing is outsourced to third parties with oversight by our internal managers. We have limited non-cGMP manufacturing capacity in-house. We rely on third-party manufacturers to produce sufficient quantities of material for use in pre-clinical studies and clinical trials, particularly synthetic siRNA. We intend to continue this practice for any future clinical trials and large-scale commercialization of any RNAi drug candidates for which we retain significant development and commercialization rights.

        Avecia, Agilent Technologies and Biosprings are the primary contract manufacturers on which we rely for our supply of synthetic siRNA, and Pyramid Laboratories is our primary contract manufacturer for the supply of our final material for clinical trials. All of our contract manufacturers are experienced in manufacturing synthetic siRNA under current good manufacturing practices. Over time, we intend to establish long term commercial supply agreements with our contract manufacturers. The commercial manufacturers will be selected based on results of demonstration syntheses, regulatory track record, commercial manufacturing and control experience, staff experience, training and skill, intellectual property considerations and price.

        Pfizer will be responsible for manufacturing all product candidates for pre-clinical and clinical development and for commercial supply under our agreement.

Intellectual Property

        We place considerable importance on obtaining patent protection for our technologies, product candidates and processes, maintaining our intellectual property estate and making every effort in ensuring that we and our sublicensees have the necessary freedom to operate in the siRNA space. Our policy is to seek patent protection for the inventions that we consider important to the development of our business. We intend to continue using our scientific expertise to pursue and file patent applications on new developments with respect to technologies, uses, methods and compositions to enhance our intellectual property position in the areas that are important to the development of our business.

        We believe we have a solid intellectual property position relating to the development and commercialization of our product candidates. We seek patent protection in the United States, Europe and selected other jurisdictions for our product candidates, delivery methodologies and target genes. As of March 25, 2007, we owned 20, and exclusively licensed 10, granted U.S. and European patents and we also owned over 170, and exclusively licensed over 25, patent applications in the United States and elsewhere. In addition, we have in-licensed several patents and patent applications relating to RNAi technology.

        Specifically, our RTP801-based product candidates, including RTP801i-14 and CTPi-1, are covered by pending patent applications claiming compositions of matter and their use in various indications, including wet AMD and COPD. We also have patents granted in the United States and Europe claiming the RTP801 gene, RTP801 polypeptide and antibodies to the RTP801 polypeptide and in

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Europe for RNA targeting mRNA. Our product candidates based on temporary inhibition of p53, including AKIi-5 and AHLi-11, are claimed as compositions of matter in pending patent applications as are their use in ARF, hearing impairment and other indications. We also have granted patents in the United States and Europe on a method of "temporary inhibition" of p53 for therapeutics purposes using an inhibitor. BT16 is covered by a patent granted in Japan as adjunct therapy for the treatment of dyslipidemia, hypertension and other diseases.

        Even if we are granted patents by government authorities or obtain them through licensing, there can be no assurance that our patents will provide significant protection, competitive advantage or commercial benefit. The validity and enforceability of patents issued to pharmaceutical and biotechnology companies has proven highly uncertain. Legal considerations surrounding the validity of patents in the fields of pharmaceuticals and biotechnology are in transition, and we cannot assure you that the historical legal standards surrounding questions of validity will continue to be applied or that current defenses relating to issued patents in these fields will be sufficient in the future. In addition, we cannot assure you as to the degree and range of protections any of our patents, if issued, may afford us or whether patents will be issued. For example, patents which may issue to us may be subjected to further governmental review that may ultimately result in the reduction of their scope of protection, and pending patent applications may have their requested breadth of protection significantly limited before being issued, if issued at all. Further, since publication of discoveries in scientific or patent literature often lags behind actual discoveries, we cannot assure you that we were the first to invent subject matter covered by our pending patent applications, or that we were the first to file patent applications for these inventions.

        Many pharmaceutical and biotechnology companies and university and research institutions have filed patent applications or have received patents in our areas of product development. Many of these entities' applications, patents and other intellectual property rights could prevent us from obtaining patents or could call into question the validity of any of our patents, if issued, or could otherwise adversely affect our ability to develop, manufacture or commercialize product candidates. Many companies, universities and institutions have filed patent applications on particular aspects of RNAi technology. In the therapeutic field, there are different patent families concerning, among others, siRNAs of specific lengths and including in their structures specific modifications as well as delivery systems and uses of such siRNAs. There is considerable uncertainty in the RNAi-related intellectual property landscape stemming from the fact that the earliest filed patents are just being granted, and many are still in prosecution and subject to change.

        We have pending patent applications claiming as composition of matter all our siRNA drug candidates. We have licenses from Atugen under their patent family related to specific modifications to general siRNA structures. Atugen's European patent was recently allowed. Further, we have intellectual property related to RNAi technologies, including pending patent applications covering compositions of matter, methods of use, routes of delivery and novel modified siRNA structures.

        We have also licensed from Alnylam other patents in the siRNA space on a non-exclusive basis, including:

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European patent EP 1230375 and corresponding patents and applications, known as the "Glover patent," which claim RNAi uses in mammalian cells;



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European patent EP 1144623 and corresponding patents and applications, known as the "Kreutzer-Limmer patent," which claim therapeutic uses of double-stranded RNAi of specific lengths; and



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United States Patents 7056704 and 7078196 and corresponding patents and applications, known as the "Tuschl patents," which cover certain structural features of siRNAs.

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        In addition, we routinely screen the patent literature and, when we believe appropriate, enter into discussions with academic and commercial entities that hold patents on technology or processes that we may wish to license in order to engage in some of our activities. However, we cannot assure you that these licenses, or any others that we may obtain for our product candidates, will be available on commercially reasonable terms, if at all, or that we will be able to develop alternative technologies if we cannot obtain licenses. Moreover, we are aware of a number of currently pending patent applications that, if granted, might arguably cover our activities or product candidates, depending on the scope of claims allowed, if any, including patent applications owned by Sirna Therapeutics, Inc., which was recently acquired by Merck & Co., Inc.

        To protect our rights in any of our patents, if issued, and in our proprietary rights, we may need to litigate against infringing third parties, or avail ourselves of the courts or participate in hearings to determine the scope and validity of these patents or other proprietary rights. These types of proceedings are often costly and time-consuming, and we cannot assure you that the deciding authorities will rule in our favor. An unfavorable decision could allow third parties to use our technology without being required to pay us licensing fees or may compel us to license needed technologies to avoid infringing third-party patent and proprietary rights, which may or may not be available. Although we believe that we would have valid defenses to allegations that our current product candidates, production methods and commercial activities infringe the intellectual property rights of third parties, we cannot be certain that a third party will not challenge our position in the future. Also, even if some of these activities were covered by a third party's patent rights, we may be exempt from claims of infringement to the extent that our activities are pre-commercialization activities related to seeking regulatory approval for a product candidate. However, the precise scope of protection for pre-commercialization activities is uncertain and we cannot assure you that any defense would be successful. Further, this defense is only available for pre-commercialization activities, and could not be used as a defense for sale and marketing of any of our product candidates. There has been, and we believe that there will continue to be, significant litigation in the biopharmaceutical and pharmaceutical industries regarding patent and other intellectual property rights.

        Accordingly, third parties could bring legal actions against us claiming we infringe their patents or proprietary rights, and seek monetary damages and/or to enjoin clinical testing, manufacturing and marketing of one or more of our commercial products. If we become involved in any such litigation, it could consume a substantial portion of our resources, and cause a significant diversion of effort by our technical and management personnel regardless of the outcome of the litigation. If any of these actions were successful, in addition to any potential liability for damages, we could be required to obtain a license to continue to manufacture or market the affected product, in which case we may be required to pay substantial royalties or grant cross-licenses to our patents. Moreover, there can be no assurance that any such license will be available on acceptable terms or at all. Ultimately, we could be prevented from commercializing a product, or forced to cease some aspect of our business operations as a result of claims of patent infringement or violation of intellectual property rights of others, which could have a material and adverse effect on our business, financial condition and operations. Further, the outcome of intellectual property litigation is subject to uncertainties that cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party. This can be especially true in intellectual property cases that may turn on the testimony of experts as to technical facts upon which experts may reasonably disagree.

        While we pursue patent protection for our product candidates and aspects of our technologies when appropriate, we also rely on trade secrets, know-how and continuing technological advancement to develop and maintain our competitive position. To protect this competitive position, we regularly enter into confidentiality and proprietary information agreements with third parties, including employees, licensees, collaborators and suppliers. Our employment policy requires, where appropriate, each new employee to enter into an agreement that contains provisions generally prohibiting the

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disclosure of confidential information to anyone outside of Quark and providing that any invention conceived by an employee within the scope of his or her employment duties is our exclusive property. Furthermore, our know-how that is accessed from third parties through licenses, collaborations and research and development contracts and through our relationships with scientific consultants is generally protected through confidentiality agreements. We cannot, however, assure you that these protective arrangements will be honored by third parties, including employees, licensees, collaborators and suppliers, or that these arrangements will effectively protect our rights relating to unpatented proprietary information, trade secrets and know-how. In addition, we cannot assure you that other parties will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our proprietary information and technologies.

Government Regulation

        The testing, manufacturing, and potential labeling, advertising, promotion, distribution, export and marketing of our product candidates are subject to extensive regulation by governmental authorities in the United States and in other countries. In the United States, the FDA, under the Public Health Service Act, the Federal Food, Drug and Cosmetic Act, or FDCA, and its implementing regulations, regulates pharmaceutical products. Failure to comply with applicable U.S. requirements may subject us to administrative or judicial sanctions, such as FDA refusal to approve pending applications for approval of products, withdrawal of approval of approved products, warning letters, untitled letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, civil penalties and/or criminal prosecution.

    Drug Approval Process

        At the present time, we believe that our RNA interference-based product candidates will be regulated by the FDA as biologics. To obtain FDA approval of a product candidate, we must, among other things, submit data supporting safety and efficacy as well as detailed information on the manufacture and composition of the product candidate and proposed labeling. The testing and collection of data and the preparation of necessary applications are expensive and time-consuming. The FDA may not act quickly or favorably in reviewing these applications, and we may encounter significant difficulties or costs in our efforts to obtain FDA approvals that could delay or preclude us from marketing our products.

        The steps required before a drug may be approved for marketing in the United States generally include:

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preclinical laboratory tests and animal tests;



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submission to the FDA of an Investigational New Drug Application, or IND, for human clinical testing, which must become effective before human clinical trials commence;



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adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug product for each indication;



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the submission to the FDA of a biologics license application, or BLA;



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satisfactory completion of an FDA inspection of the manufacturing facilities at which the product is made to assess compliance with cGMP;



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potential FDA inspection of the nonclinical and clinical trial sites that generated the data in support of the BLA; and



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FDA review and approval of the BLA.

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        Preclinical studies may include laboratory evaluations of the product chemistry, toxicity, and formulation, as well as animal studies to assess the potential safety and efficacy of the product candidate. The conduct of the preclinical tests and formulation of the compounds for testing must comply with federal regulations and requirements. The results of the preclinical studies, together with manufacturing information and analytical data, are submitted to the FDA as part of the IND, which must become effective before clinical trials may be commenced. The IND will become effective automatically 30 days after receipt by the FDA, unless the FDA raises concerns or questions about the conduct of the clinical trials as outlined in the IND prior to that time. In this case, the IND sponsor and the FDA must resolve any outstanding concerns before clinical trials can proceed.

        Clinical trials involve the administration of the product candidate to healthy volunteers or patients under the supervision of a qualified principal investigator. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety, and the effectiveness criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND. Clinical trials must be conducted in accordance with the FDA's good clinical practices requirements. Further, each clinical trial must be reviewed and approved by an independent institutional review board, or IRB, at or servicing each institution at which the clinical trial will be conducted. The IRB will consider, among other things, clinical trial design, patient informed consent, ethical factors, and the safety of human subjects. Continuing review and approval by the IRB is required at least annually. The FDA may order the partial, temporary or permanent discontinuation of a clinical trial at any time or impose other sanctions if it believes that the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial subjects. The IRB may also require the clinical trial at that site to be halted, either temporarily or permanently, for failure to comply with the IRB's requirements, or may impose other conditions.

        Clinical trials typically are conducted in three sequential phases prior to approval, but the phases may overlap. A fourth, or post-approval, phase may include additional clinical studies. These phases generally include the following:

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Phase I.  Phase I clinical trials involve the initial introduction of the drug into human subjects, frequently healthy volunteers. These studies are designed to determine the metabolism and pharmacologic actions of the drug in humans, the adverse effects associated with increasing doses, and, if possible, to gain early evidence of effectiveness. In Phase I, the drug is usually tested for safety, including adverse effects, dosage tolerance, absorption, distribution, metabolism, excretion and pharmacodynamic properties.



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Phase II.  Phase II clinical trials usually involve studies in a limited patient population to evaluate the efficacy of the drug for specific, targeted indications, to determine dosage tolerance and optimal dosage, and to identify possible adverse effects and safety risks. Although there are no statutory or regulatory definitions for Phase IIa and Phase IIb, Phase IIa is commonly used to describe a Phase II clinical trial evaluating efficacy, adverse effects, and safety risks and Phase IIb is commonly used to describe a subsequent Phase II clinical trial that also evaluates dosage tolerance and optimal dosage.



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Phase III.  If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II (or sometimes Phase I) studies, the clinical trial program will be expanded to further demonstrate clinical efficacy, optimal dosage and safety within an expanded patient population at geographically dispersed clinical trial sites. Phase III studies usually include several hundred to several thousand patients. Generally, two adequate and well-controlled Phase III clinical trials are required by the FDA for approval, but for some product candidates, only one Phase III trial may be required.



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Phase IV.  Phase IV clinical trials are studies required of or agreed to by a sponsor that are conducted after the FDA has approved a product for marketing. These studies are used to gain

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additional experience from the treatment of patients in the intended therapeutic indication and to document a clinical benefit in the case of drugs approved under accelerated approval regulations. If the FDA approves a product while a company has ongoing clinical trials that were not necessary for approval, a company may be able to use the data from these clinical trials to meet all or part of any Phase IV clinical trial requirement. These clinical trials are often referred to as Phase III/IV post approval clinical trials. Failure to promptly conduct Phase IV clinical trials could result in withdrawal of approval for products approved under accelerated approval regulations.

        The applicant must submit to the FDA the results of the preclinical and clinical trials, together with, among other things, detailed information on the manufacture and composition of the product candidate and proposed labeling, in the form of a BLA, including payment of a user fee. The FDA reviews all BLAs submitted before it accepts them for filing and may request additional information rather than accepting a BLA for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the BLA. Under the goals and policies agreed to by the FDA under the Prescription Drug User Fee Act, or PDUFA, the FDA has ten months in which to complete its initial review of a standard BLA and respond to the applicant, and six months to complete its review of a priority BLA. The FDA does not always meet its PDUFA goal dates for standard and priority BLAs. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the BLA sponsor otherwise provides additional information or clarification regarding information already provided in the submission within the last three months before the PDUFA goal date. If the FDA's evaluations of the BLA and the clinical and manufacturing procedures and facilities are favorable, the FDA may issue either an approval letter or a complete response letter, which contains the conditions that must be met in order to secure final approval of the BLA. If and when those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter, authorizing commercial marketing of the drug for certain indications. If the FDA's evaluation of the BLA submission and the clinical and manufacturing procedures and facilities is not favorable, the FDA may refuse to approve the BLA and issue a not approvable letter. Sponsors that receive either a complete response letter or a not approvable letter may submit to the FDA information that represents a complete response to the issues identified by the FDA. Such resubmissions are classified under PDUFA as either Class 1 or Class 2. The classification of a resubmission is based on the information submitted by an applicant in response to an action letter. Under the goals and policies agreed to by the FDA under PDUFA, the FDA has two months to review a Class 1 resubmission, and six months to review a Class 2 resubmission. The FDA may also refer an application to the appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendations of the advisory committee.

        The FDA has various programs, including fast track, priority review, and accelerated approval (Subpart H), that are intended to facilitate the development and expedite the review of certain drugs, and/or provide for approval on the basis surrogate endpoints or restricted distribution. Generally, drugs that may be eligible for one or more of these programs are those for serious or life-threatening conditions, those with the potential to address unmet medical needs, and those that provide meaningful benefit over existing treatments. We cannot be sure that any of our drug candidates will qualify for any of these programs, or that, if a drug does qualify, that the review time will be shorter than a standard review.

        After approval, certain changes to the approved product, such as adding new indications, making certain manufacturing changes, or making certain additional labeling claims, are subject to further FDA review and approval. Obtaining approval for a new indication generally requires that additional clinical studies be conducted. We cannot be sure that any additional approval for new indications for any product will be approved on a timely basis, or at all.

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        After a drug has been approved by the FDA for sale, the FDA may require that certain post-approval requirements be satisfied, including the conduct of additional clinical studies. If such post-approval conditions are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of an approved BLA are required to:

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report certain adverse reactions to the FDA;



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submit annual and periodic reports summarizing product information and safety data;



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comply with certain requirements concerning advertising and promotional labeling for their products; and



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continue to have quality control and manufacturing procedures conform to cGMP after approval.

        The FDA periodically inspects the sponsor's records related to safety reporting and/or manufacturing facilities, including assessment of compliance with current good manufacturing practice, or cGMP. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to maintain cGMP compliance. Discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved BLA, including withdrawal of the product from the market.

    Orphan Drug Designation and Exclusivity

        Some jurisdictions, including Europe and the United States, may designate drugs, including biologics, for relatively small patient populations as orphan drugs. The FDA grants orphan drug designation to drugs intended to treat a rare disease or condition that affects fewer than 200,000 individuals in the United States or more than 200,000 individuals in the United States and for which there is no reasonable expectation that the cost of developing and making available in the United States a drug for this type of disease or condition will be recovered from sales in the United States for that drug. In the United States, orphan drug designation must be requested before submitting an application for marketing approval. An orphan drug designation does not convey any advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the indication for which it has such designation, the product is entitled to orphan drug exclusivity, which means the FDA may not approve any other application to market the same drug for the same indication for a period of seven years, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Competitors may receive approval of different drugs or biologics for the indications for which the orphan product has exclusivity.

    Other Regulatory Requirements

        We are subject to a variety of foreign regulations governing clinical trials and the marketing of any potential products. Outside of the United States, our ability to market any products we may develop depends upon receiving a marketing authorization from the appropriate regulatory authorities. The requirements governing the conduct of clinical trials, marketing authorization, pricing and reimbursement vary widely from country to country. In any country, however, we will only be permitted to commercialize our products if the appropriate regulatory authority is satisfied that we have presented adequate evidence of safety, quality and efficacy. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The time needed to secure approval may be longer or shorter than that required for FDA approval. The regulatory approval and oversight process in other countries includes all of the risks associated with regulation by the FDA and certain state regulatory agencies as described above.

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Employees

        As of March 1, 2007, we had 63 employees, 31 of whom were engaged directly in research and development, 23 in general administrative and marketing activities, and 9 in regulatory, clinical affairs and quality activities. None of our employees is covered by a collective bargaining agreement, and we consider our relationship with our employees to be good.

Facilities

        Our corporate headquarters are located in Fremont, California, where we occupy approximately 5,540 square feet of office space. The annual lease payments for our corporate headquarters building are approximately $125,048, and the fixed-term lease expires October 31, 2009. Our research and development facility is located in Ness Ziona, Israel, where we occupy approximately 22,884 square feet of office and laboratory space. The annual lease payments for this space are approximately $300,000. The fixed-term lease expires December 31, 2007, after which we may extend the term for an additional year. We also have a small office in Boulder, Colorado, which we rent on a month-to-month basis.

Legal Proceedings

        We are not currently involved in any material legal proceedings. However, litigation is common in the biopharmaceutical industry, and we may become involved in material legal proceedings in the future.

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MANAGEMENT

Executive Officers and Directors

        The following table sets forth information regarding our executive officers and directors, including their ages and positions, as of March 1, 2007:

Name	Age	Position(s)
Daniel Zurr, Ph.D.	63	President, Chief Executive Officer and Director
Yaron Garmazi, CPA (Isr)	42	Chief Financial Officer
Rami Skaliter, Ph.D.	49	Chief Operating Officer
Shai S. Erlich, Ph.D.	41	Chief Development Officer
Elena Feinstein, M.D., Ph.D.	48	Chief Scientific Officer
Juliana Friedman, M.Sc.	55	Senior Vice President, Strategy & Planning
Gavin B. Samuels, M.D.	38	Senior Vice President, Business Development
Philip B. Simon, Chairman	54	Chairman of the Board of Directors
Joseph Rubinfeld, Ph.D.	74	Vice Chairman of the Board of Directors
Steven B. Fink	56	Director
Ms. Tomomi Okamoto	46	Director

Daniel Zurr, Ph.D. is our President, Chief Executive Officer and a member of our Board of Directors. Dr. Zurr founded Quark in 1993. Prior to joining Quark, Dr. Zurr served as vice president for corporate business development for Israel Chemicals, Ltd. From 1980 to 1983, Dr. Zurr served as the director of licensing at G.D. Searle, a specialty pharmaceutical company. Dr. Zurr was the chief executive officer of Plantex-Ikapharm, a pharmaceutical company, from 1972 to 1980. Dr. Zurr obtained his M.Sc. at the Hebrew University of Jerusalem and his Ph.D. from Imperial College, University of London.

Yaron Garmazi, CPA (Isr) is our Chief Financial Officer. Mr. Garmazi joined Quark in February 2007. Prior to Quark, Mr. Garmazi served as chief financial officer of Passave, Inc., a semiconductor company, from May 2005 to May 2006, as chief financial officer of Ness Technologies Inc., an information technology services company, from June 2004 to May 2005, and as chief financial officer of Envara, Inc., a semiconductor company from September 2002 to May 2004. From December 2000 to August 2002, Mr. Garmazi served as a managing director at ABN AMRO Inc.'s investment banking representative office in Tel Aviv. From January 1999 to December 2000, Mr. Garmazi served as chief financial officer at Nogatech, Inc., a semiconductor company. From March 1995 to December 1998, Mr. Garmazi served as controller at DSPC, Inc., a semiconductor company. From December 1992 to March 1995, Mr. Garmazi served as a senior manager at Doron & Co., an accounting firm. Mr. Garmazi is a licensed Israeli CPA and holds a B.A. in Business Administration from the Tel Aviv Business College.

Rami Skaliter, Ph.D. is our Chief Operating Officer. Dr. Skaliter joined Quark in 1995. He has served in various executive positions, including Executive Vice President of Research & Development. Dr. Skaliter obtained his B.Sc. in Biology at the Ben-Gurion University of the Negev, and both his M.Sc. and Ph.D. in Biochemistry at the Weizmann Institute of Science. Between 1993 and 1995, Dr. Skaliter completed his post-doctoral fellowship at Stanford University.

Shai S. Erlich, Ph.D. is our Chief Development Officer. Dr. Erlich joined Quark in 1999. He has served in various executive positions, including Senior Vice President of Pharmaceutical Development,

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from May 2004 to January 2007, Vice President of Portfolio Management from May 2002 to May 2004 and Vice President of Product Development Strategic Planning from April 2000 to May 2002. Dr. Erlich obtained his B.Sc. at the Ben-Gurion University of the Negev, and holds an M.Sc. in Cancer Genetics from Tel Aviv University, and a Ph.D. in Gene Therapy from Mount Sinai School of Medicine.

Elena Feinstein, M.D., Ph.D. is our Chief Scientific Officer. Dr. Feinstein joined Quark in 1998. She has served in various executive positions, including Senior Vice President of Research from November 2005 to November 2006, Vice President of Technology Development from 2002 to 2006, and Vice President of Research from 2001 to 2002. Prior to joining Quark, Dr. Feinstein worked from 1985 until 1997 at the Weizmann Institute of Science as a doctoral fellow, post-doctoral fellow, scientist and senior staff scientist. Dr. Feinstein obtained her M.D. from the 2nd Moscow Medical Institute (Moscow Medical University) and completed her Ph.D. in Chemical Immunology at the Weizmann Institute of Science.

Juliana Friedmann, M.Sc. is our Senior Vice President of Strategy and Planning. Ms. Friedmann joined Quark in 1998. From 1983 until 1998, Ms. Friedmann worked at Dead Sea Bromine, part of Israel Chemicals Ltd., holding a number of progressively senior positions. Previously Ms. Friedmann worked as a patent attorney in Italy. Ms. Friedmann received both her B.S. in Chemical Engineering and her M.Sc. from Ben-Gurion University of the Negev.

Gavin B. Samuels, M.D. is our Senior Vice President of Business Development. Dr. Samuels joined Quark in March 2007. From 2000 to March 2007 Dr. Samuels held several positions at Pfizer. Between 1998 and 2000 Dr. Samuels served as senior associate - healthcare strategy & corporate affairs at Merck Sharpe & Dohme in Australia. Between 1997 and 1998 Dr. Samuels served as critical care director at Eastbay Health in New Zealand. Between 1996 and 1997, Dr. Samuels served as medical director at New Zealand Clinics Ltd. During 1995 Dr. Samuels was a primary care physician at the Gold Coast Medical Center, in Australia. Dr. Samuels obtained his medical degree from the University of Witwatersrand, South Africa, an M.B.A. from the University of New England, Australia and a degree in Health Economics from Monash University, Melbourne, Australia.

Philip B. Simon, CPA is the Chairman of our Board of Directors. Mr. Simon is a partner of Howson & Simon LLP and the president of Lawrence Investments, LLC. Lawrence Investments is the parent company of Tako Ventures, LLC, one of Quark's major investors. Mr. Simon serves on the boards of directors of several private companies affiliated with Lawrence Investments. Mr. Simon joined Lawrence Investments in 1997. Mr. Simon has worked for 25 years as a partner at Howson & Simon. Mr. Simon holds an A.B. from Yale University and a J.D. from Stanford Law School. He is a member of the California Society of Certified Public Accountants.

Joseph Rubinfeld, Ph.D. is the Vice Chairman of our Board of Directors. Dr. Rubinfeld is the president and chief executive officer of JJ Pharma. Dr. Rubinfeld co-founded SuperGen, Inc. in 1991. He has served as chief executive officer, president and a director of SuperGen since its inception and was chief scientific officer from SuperGen's inception until September 1997. Dr. Rubinfeld was one of the four initial founders of Amgen, Inc. in 1980 and served as vice president and chief of operations until 1983. From 1987 to 1990, he was a senior director at Cetus Corporation, a biotechnology company. From 1968 to 1980, Dr. Rubinfeld was employed at Bristol-Myers Company in a variety of positions, most recently as vice president and director of research and development. Prior to that, Dr. Rubinfeld was a research scientist with several pharmaceutical and consumer product companies including Schering-Plough Corporation and Colgate-Palmolive Co. Dr. Rubinfeld is a member of the board of directors of AVI BioPharma, Inc. He received a B.A. in Chemistry from the City College of New York, and both an M.A. and Ph.D. in Chemistry from Columbia University.

Steven B. Fink is a member of our Board of Directors. Mr. Fink is chief executive officer of Lawrence Investments. Prior to joining Lawrence Investments, Mr. Fink was a founding partner and

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continues to serve as managing director and vice chairman of Knowledge Universe, an educational holding company. Mr. Fink serves as vice chairman of Heron International, a European real estate company. Mr. Fink also serves on numerous boards of directors, including LeapFrog Enterprises, C-COR, Inc, Nobel Learning Communities, Vistage International and several private companies. He holds a B.S. from the University of California at Los Angeles and both a J.D. and an LL.M. from New York University.

Tomomi Okamoto is a member of our Board of Directors. Ms. Okamoto is the senior operating officer and chief technology officer of Trans-Science, Inc. Ms. Okamoto joined Trans-Science in April 2003. Since 2004, she has been a life-science business consultant for the Commonwealth of Pennsylvania, Japan Representative Office. Previously, from 2000 to 2003, she was engaged in bioinformatics business planning for drug discovery at Fujitsu Group, after working from 1988 to 1996 as a researcher in drug discovery at Life Science Research Institutes, Nippon Steel Corporation Group and from 1985 to 1988 at Life Science Research Group in Toshiba R&D Center. Ms. Okamoto holds an M.A. in Engineering in Material Science from Tsukuba University Graduate School and completed Global Business Training Program at the JAIMS, USA.

Board Composition

        Our board of directors currently consists of five members. Directors are elected for a one-year term each year at our annual meeting of stockholders. Under Delaware law, our directors may be removed for cause by the affirmative vote of the holders of a majority of our voting stock.

Board Committees

Compensation Committee

        Our compensation committee consists of Dr. Zurr, Dr. Rubinfeld and Mr. Simon. The functions of this committee include, among other things:

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determining the compensation and other terms of employment of our executive officers and senior management and reviewing and approving corporate performance goals and objectives relevant to such compensation;



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evaluating and recommending to our board of directors the equity incentive plans, compensation plans and similar programs advisable for us, as well as modification or termination of existing plans and programs; and



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reviewing and approving the terms of any employment agreements, severance arrangements, change-in-control protections and any other compensatory arrangements for our executive officers.

        Each member of our compensation committee, except Dr. Zurr, is a non-employee director, as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, and satisfies the NASDAQ independence requirements.

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COMPENSATION DISCUSSION AND ANALYSIS

Overview and Objectives

        We believe that compensation of our executive officers should focus executive behavior on the achievement of short-term corporate objectives as well as long-term business targets and strategies. It is the responsibility of the compensation committee of our board of directors to administer our executive compensation practices to ensure that they are competitive and include incentives designed to appropriately motivate executive performance. Tying short and long-term cash and equity incentives to the achievement of clearly identifiable corporate objectives promotes the dual goals of attracting and retaining the best possible executive talent while creating value for our stockholders by aligning their interests with those of our executive officers. While we intend to create an executive compensation program that is competitive with comparable public biotechnology companies, we remain committed to establishing compensation plans that link a proper portion of executives' overall compensation to the attainment of our corporate performance milestones. We have chosen a mix of awards, both cash and equity, short-term and long-term, and seek to administer our compensation plans to strike a proper balance that advances company objectives, and fulfills our executives' and stockholders' expectations.

        Our compensation programs for our named executive officers are designed to achieve the following objectives:

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attract and retain talented and experienced executives to make us competitive in the pharmaceutical and biotechnology industry, where there is significant competition for talented employees;



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motivate and reward executives whose knowledge, skills and performance significantly impact corporate results;



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reward the achievement of specifically measured corporate goals and the individual contributions to the achievement of such goals;



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incentivize management to achieve overall corporate objectives and to enhance stockholder value;



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encourage increased team-work among all disciplines within the company; and



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ensure fairness and promote stability among our executive management team.

        As discussed in further detail below, our executive compensation program consists of the following three principal components:

        Base Salary.    Base salary for our executive officers is determined at commencement of employment and re-evaluated periodically. In determining whether to adjust an executive's base salary, our compensation committee takes such factors as company performance in prior years, individual performance, general economic factors and compensation equity among our executive officers, into consideration.

        Bonuses.    In 2006 we adopted an annual management incentive plan designed to offer incentive compensation to executive management and other key employees by rewarding the achievement of specifically measured corporate goals and the individual contributions to the achievement of such goals.

        Stock Option Grants.    Our executive officers receive stock option grants as long-term incentives to ensure a portion of compensation is linked to our long-term success.

        The compensation committee does not have any formal policies for allocating compensation among salary, bonus awards and stock option grants.

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Role of the Compensation Committee in Setting Executive Compensation

        The compensation committee determines the salary, bonus awards and stock option grants for our executive officers as well as the budget for our management incentive compensation plan. Dr. Zurr, our President and Chief Executive Officer, is a member of our compensation committee and makes recommendations regarding executive compensation, however, Dr. Zurr does not participate in discussions regarding his own compensation. None of our other executive officers participate in the compensation committee's executive compensation discussions. The compensation committee does not delegate any of its functions to others in determining executive compensation. The compensation committee has not historically engaged third-party consultants with respect to executive compensation matters.

        We discuss each of the primary elements of our executive compensation in greater detail below. While we have identified particular compensation objectives that each element of executive compensation serves, our compensation programs are designed to complement each other and collectively serve all of our executive compensation objectives described above.

Compensation Components

        The components of our compensation program are as follows:

    Annual Compensation

    Base salary

        The base salaries of all executive officers are reviewed periodically and adjusted to reflect individual roles and performance. We believe that a competitive base salary is a necessary element of any compensation program designed to attract and retain talented and experienced executives. We also believe that a periodic review of base salaries not only motivates and rewards executives for their overall performance, but creates a performance incentive going forward.

    Bonuses

        Historically, our compensation committee has not granted discretionary cash bonuses to our executive officers. In 2006, we established our management incentive compensation plan, an annual pay-for-performance plan which conditions bonus awards upon the attainment of company performance milestones. The primary objectives of the plan are to provide an incentive for superior work and to tie our executives' goals and interests to our interests and those of our stockholders. We believe awarding bonuses upon attainment of clear milestone targets instills confidence in executive management that a portion of compensation will be result-oriented and within their control. The general terms of the plan are:

Governance.    The plan is governed by the compensation committee of the board of directors. The compensation committee is responsible for approving the overall budget of the incentive awards that may be made to participants upon attainment of milestones, and for determining and approving any incentive awards for our president and chief executive officer.

Eligibility.    Our named executive officers are eligible to receive incentive awards under the plan in addition to other key employees selected at the sole discretion of our chief executive officer. Generally, to be eligible an employee must have been with us for at least six consecutive months and have made a significant contribution to the established milestones. The employee generally must be employed at the time of payment of the bonus. If the employee is involuntarily terminated during the plan period and prior to payment, the company will pay the employee for bonuses earned during the period.

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Form of Incentive Bonus Awards.    Incentive awards may take the form of cash payments, the grant of stock options, or a combination of both. The type of award is determined at the discretion of our compensation committee, subject to the final approval by our board of directors.

Plan Term.    The period of the plan runs from April 1, 2006 to March 31, 2007, and terminates upon payment of the bonus awards for the plan period, unless our chief executive officer and compensation committee agree to extend the plan for an additional period. All bonuses earned upon the achievement of milestones during the plan period were paid in March 2007.

Selection of Bonus Milestones.    Our chief executive officer presents a list of corporate milestone objectives for the upcoming plan year to our board for approval. The board takes the objectives and formulates a list of specific company milestones that will trigger an obligation to make an incentive award and develops a list of those executive officers and key employees responsible personally or through their department for achieving the milestones. The detailed plan will indicate the total target incentive compensation (bonus) amounts set for individuals and, where appropriate, a company department (as a group) for each specific company milestone in addition to conditions, if any, to receipt of the bonus upon attainment of the milestones. Where a company division is the named beneficiary as a group, the head of the division will have the responsibility, subject to approval of our chief executive officer, to distribute the bonus among the employees within the division according to individual contribution to achievement of the respective milestone for which the bonus is awarded.

    Long-term Incentives

        Our salary and bonus programs are intended to compensate our executive officers for short-term performance. We also use equity incentives to reward long-term performance and to help align the interests of our executive officers with those of our stockholders. We believe that long-term performance is achieved through an ownership culture that rewards such performance by our executive officers through the use of equity incentives. Our current long-term incentives consist solely of stock option grants under our 1997 Stock Plan, which was terminated in March 2007, and 2007 Equity Incentive Plan. However, certain of our executive officers have also acquired equity in our company through direct investment in our common stock and in our prior preferred stock offerings. We believe the grant of stock options is a valuable retention tool and the best approach to achieve our compensation goals with respect to long-term compensation and option grants currently provides tax and other advantages to our employees relative to other forms of equity compensation. We typically make grants of stock options to our executive officers on a periodic, but not necessarily annual, basis. The date of grant and the fair market value of the award are based upon the date of the meeting at which the grant is approved. We typically make an initial award of stock options to new employees and periodic awards tied to vesting in prior grants or changes in responsibilities.

        Stock option awards provide our executive officers with the right to purchase shares of our common stock at a fixed exercise price typically for a period of up to ten years, subject to continued employment with our company. Stock options are earned on the basis of continued service to us and grants made to new employees generally vest over four years, beginning with 25% vesting one year after the date of grant, then pro-rata vesting monthly thereafter. Since 2003, grants made to existing employees generally vest in equal monthly installments over four years. Our stock option committee has the authority to determine the vesting schedule and may at times adjust the vesting schedule for a particular award based on the individual employee's circumstances. Stock option awards granted to employees who are residents of Israel are made under a sub-plan of our 2007 Equity Incentive Plan. Awards to residents of Israel are granted in trust to a trustee for the benefit of the named employee for certain tax reasons described in further detail below.

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        The exercise price of each stock option granted under our 1997 Stock Plan is not less than the fair market value of our common stock on the date of grant. The fair market value of our common stock for purposes of determining the exercise price of stock options has been determined by our board of directors based on a number of factors applicable to common stock of privately-held companies including, among others, the total company valuation implied by the most recent venture capital round of financing, the market value of similarly situated public companies, our current and anticipated future risks and opportunities, the rights and preferences of our preferred stock existing at the time and the lack of a liquid market for our capital stock.

        Our 1997 Stock Plan was terminated in March 2007 and many option awards made pursuant to the plan may also soon expire. In March 2007, our board of directors adopted the Quark Biotech, Inc. 2007 Equity Incentive Plan in connection with this offering to replace the 1997 Stock Plan and in March 2007 the plan was approved by our stockholders. The plan will provide a mechanism to continue our practice of making equity awards to attract and retain talented employees. In March 2007, our compensation committee approved option grants to purchase 3,018,805 shares of our common stock to certain of our executive officers, including certain of our named executive officers. The plan is described in detail under "2007 Equity Incentive Plan" below. Our board will determine whether additional option grants will be made to employees to continue our philosophy of incentivizing long-term performance and aligning our executives' interests with that of our stockholders'.

        Additionally, we made a loan to our Chief Executive Officer in the principal amount of $350,000 in April 1997, as a means of incentivizing long-term performance tied to the accomplishment of significant company milestones. The loan was granted to Dr. Zurr in exchange for a promissory note to repay the principal and interest within a fixed term. Under the note, we agreed to forgive the debt upon an initial public offering or upon entering into a significant collaboration or joint venture agreement with a major United States or European based pharmaceutical company. The note was forgiven in full by the Company in March 2007, and the Company agreed to reimburse Dr. Zurr for 50% of his tax liability resulting from the forgiveness of the note.

    Other Compensation

        All of our executive officers are eligible for health benefits made generally available to other employees. We also have a 401(k) plan that all employees resident in the United States are eligible to participate in, including our named executive officers resident in the United States. The 401(k) plan is intended to qualify as a tax-qualified plan under Section 401(k) of the Internal Revenue Code. Employees contribute their own pre-tax compensation, as salary deductions. Contributions may be made up to plan limits, including "catch-up" contributions, subject to government limitations. The plan permits us to make discretionary matching contributions, subject to established limits. In 2006, we matched 100% of participant contributions up to the first four percent of eligible compensation. We plan to match participant contributions at this same level in 2007.

        We do not believe it is necessary for the attraction or retention of management talent to provide the officers with a substantial amount of compensation in the form of perquisites. In 2006, we provided an allowance to our executive officers for automobile and gasoline expenses, cell phone use, internet and telephone connections for home office use, relocation assistance and reimbursement for travel expenses and tax reimbursements. We believe these expenses are justified by the nature of our business operations. Our chief executive offices are located in Fremont, California, and our principal operations are located in Israel. Consistent with our past practices, we intend to continue to maintain our current benefits and perquisites for our executive officers. The compensation committee in its discretion may revise, amend or add to our officers' executive benefits and perquisites if deemed advisable, subject to full board approval.

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    Tax Considerations

        Grants made to Israeli employees are granted under Section 102(b)(2) of the Israel Income Tax Ordinance pursuant to which the options or the common stock issued upon their exercise must be allocated or issued to a trustee and be held in trust for the lesser of (a) 30 months, or (b) two years following the end of the tax year in which the options are granted, provided that options granted after January 1, 2006 are only subject to being held in trust for two years. Under Section 102, any tax payable by an employee from the grant or exercise of the options is deferred until the transfer of the options or ordinary shares by the trustee to the employee or upon the sale of the options or common stock and gains are subject to a capital gains tax of 25%.

        Effective January 1, 2006, we adopted the fair value provisions of SFAS 123(R). Under SFAS 123(R), we are required to estimate and record an expense for each award of equity compensation (including stock options) over the vesting period of the award. The compensation committee has determined to retain for the foreseeable future our stock option program as the sole component of its long-term compensation program, and, therefore, to record this expense on an ongoing basis according to SFAS 123(R). The compensation committee has considered, and may in the future consider, the grant of restricted stock to our executive officers in lieu of stock option grants in light of the accounting impact of SFAS 123(R) with respect to stock option grants and other considerations.

        Section 162(m) of the Internal Revenue Code of 1986 limits our deduction for federal income tax purposes to not more than $1 million of compensation paid to certain executive officers in a calendar year. Compensation above $1 million may be deducted if it is "performance-based compensation." The compensation committee has not yet established a policy for determining which forms of incentive compensation awarded to our executive officers shall be designed to qualify as "performance-based compensation." To maintain flexibility in compensating our executive officers in a manner designed to promote our objectives, the compensation committee has not adopted a policy that requires all compensation to be deductible. However, the compensation committee intends to evaluate the effects of the compensation limits of Section 162(m) on any compensation it proposes to grant, and the compensation committee intends to provide future compensation in a manner consistent with our best interests and those of our stockholders.

Summary Compensation Table

        The following table provides information regarding the compensation earned during the year ended December 31, 2006 by our Chief Executive Officer, principal financial officer, and three other most highly compensated executive officers at December 31, 2006 whose combined salary and bonus awards exceeded $100,000 during 2006. We refer to our Chief Executive Officer, principal financial officer, and these other executive officers as our "named executive officers" elsewhere in this prospectus.

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Summary Compensation Table for Fiscal 2006

Name and Principal Position		Salary		Bonus	Non-Equity Incentive Plan Compensation	All Other Compensation			Total
Daniel Zurr
	Chief Executive Officer	$	250,000	—	—	$	67,907	(1)	$	317,907
Smadar Samira Shakked
	Senior Vice President, Finance	$	90,071	—	—	$	55,768	(2)	$	145,839
Shai Erlich
	Senior Vice President, Pharmaceutical Development	$	226,666	—	—	$	27,355	(3)	$	254,021
Juliana Friedmann
	Senior Vice President, Strategy and Planning	$	95,251	—	—	$	34,863	(4)	$	130,114
Rami Skaliter
	Chief Operating Officer	$	108,763	—	—	$	36,928	(5)	$	145,691
Yaron Garmazi(6)
	Chief Financial Officer		—	—	—		—			—

⁽¹⁾

Amount includes $36,077 paid for health and welfare benefits for Dr. Zurr, including a manager's insurance policy, disability, and an education fund; $12,320 provided by the Company as a vehicle and gasoline allowance; $878 for internet and telephone reimbursement to maintain a home office; $1,330 for cell phone reimbursement; $6,035 for professional tax preparation fees; $11,267 for gross-up payments for vehicle taxes.

⁽²⁾

Amount includes $20,154 paid for health and welfare benefits for Ms. Shakked, including a manager's insurance policy, disability, and an education fund; $10,810 provided by the Company as a vehicle and gasoline allowance; $21,709 for relocation and moving expenses; $3,095 for gross-up payments for vehicle taxes.

⁽³⁾

Amount includes $24,407 paid for health and welfare benefits for Dr. Erlich, including a manager's insurance policy, disability, and an education fund; $2,948 for cell phone reimbursement.

⁽⁴⁾

Amount includes $21,458 paid for health and welfare benefits for Ms. Friedmann, including a manager's insurance policy, disability, and an education fund; $12,956 provided by the Company as a vehicle and gasoline allowance; $449 for internet and telephone reimbursement to maintain a home office.

⁽⁵⁾

Amount includes $25,118 paid for health and welfare benefits for Dr. Skaliter, including a manager's insurance policy, disability, and an education fund; $9,709 provided by the Company as a vehicle and gasoline allowance; $1,870 for cell phone reimbursement; $231 for internet and telephone reimbursement to maintain a home office.

⁽⁶⁾

Yaron Garmazi, our Chief Financial Officer, joined Quark in February 2007 and is not reflected in the Summary Compensation Table for fiscal 2006. See, "Compensation Discussion and Analysis — Employment Agreements and Potential Payments Upon Termination" elsewhere in this prospectus which contains a description of our employment agreement with Mr. Garmazi.

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Employment Agreements and Potential Payments Upon Termination

        We have entered into employment agreements with each of our named executive officers, the general terms of which are described in greater detail below. The amount of compensation payable to each named executive officer at, following, or in connection with their termination or a change-in-control is described below. Regardless of the manner in which a named executive officer's employment terminates, the named executive officer is entitled to receive amounts accrued during their term of employment, including salary and unused vacation pay. Additionally, our Israeli executive officers are entitled to one month's salary for each year of employment or a portion thereof.

Daniel Zurr

        In January 2002, we and our wholly-owned subsidiary QBI Enterprises, Ltd., or QBI, each entered into a separate employment agreement with Daniel Zurr, our President and Chief Executive Officer. Each agreement provides that Dr. Zurr will receive an annual base salary of $125,000. Dr. Zurr is eligible to receive an annual bonus in an amount up to 100% of his base salary, based upon the achievement of certain milestones consistent with our business to be agreed upon by Dr. Zurr and our Board of Directors. Our Board has sole discretion to determine the level of progress and achievement under each milestone and the bonus to be paid. We have agreed to provide relocation reimbursement for out-of-pocket expenditures up to $80,000 in the event Dr. Zurr relocates on our behalf to the United States from Israel. Under the terms of Dr. Zurr's agreement with QBI, QBI is obligated to pay a certain percentage of Dr. Zurr's annual base salary towards a supplemental manager's insurance policy which would cover payments made towards severance, pension and disability and an education fund. QBI's aggregate obligations total approximately 23% of Dr. Zurr's base salary, of which QBI is entitled to withhold 7.5% from Dr. Zurr's salary to cover its obligations. Dr. Zurr is also entitled to the use of a company automobile and reimbursement for expenses associate with its use, including maintenance and all taxes. Dr. Zurr's employment may be terminated under each of the two agreements, with or without cause, at any time upon thirty days advance written notice. Assuming Dr. Zurr's employment was terminated, other than for cause, at December 31, 2006, he would have been entitled to a lump sum payment of $177,601.

Smadar Samira Shakked

        In September 1997, QBI entered into an employment agreement with Smadar Samira Shakked, our Senior Vice President of Finance. Under the terms of the agreement, as amended, Ms. Shakked is entitled to an annual salary of approximately $108,000. QBI is obligated to pay a certain percentage of Ms. Shakked's base salary to apply towards a manager's insurance policy which would cover payments made towards severance, pension, disability and an education fund. QBI's aggregate obligations total approximately 23% of Ms. Shakked's base salary, of which QBI is entitled to withhold 7.5% from Ms. Shakked's salary to cover its obligations. Ms. Shakked is also entitled to an automobile allowance. Ms. Shakked was also awarded options to purchase an aggregate of 60,000 shares of our common stock under our 1997 Stock Plan for Israeli Employees. Ms. Shakked's employment is terminable without notice at any time for cause and otherwise terminable by either party upon 60 days advance written notice.

        In January 2007 an addendum to Ms. Shakked's employment agreement was entered into pursuant to which she was granted a leave of absence from QBI from December 2006 through July 2007 to temporarily relocate to the United States and work for Quark. Quark entered into an agreement with Ms. Shakked in November 2006 that provides Ms. Shakked will commence employment with Quark effective January 1, 2007. The agreement is for a fixed seven month term and provides Ms. Shakked with a monthly salary of approximately $16,667, general reimbursement of living expenses of approximately $667 per month and a one-time signing bonus of $17,333. Ms. Shakked will also be reimbursed for relocation expenses up to $5,500 and for the use of a cell phone. Ms. Shakked is also

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entitled to benefits made generally available to our United States employees such as medical, dental, life, accidental death and dismemberment and short and long-term disability coverage as well as reimbursement of reasonable travel and entertainment expenses incurred by Ms. Shakked in fulfilling her duties as an employee. Either party may terminate the agreement upon 60 days advance written notice for any reason, provided however, we may terminate the agreement for cause at any time. Assuming Ms. Shakked's employment was terminated, other than for cause, at December 31, 2006, she would have been entitled to $117,111.

Shai Erlich

        In March 2003, we entered into an employment agreement with Shai Erlich, Ph.D., our current Chief Development Officer. Under the agreement, as amended, Dr. Erlich is entitled to an annual salary of $230,000 and benefits made generally available to all employees, including medical, dental, life and accidental death and disability insurance, and participation in our 401(k) plan. Additionally, Dr. Erlich was granted an option to purchase 10,000 shares of our common stock under our 1997 Stock Plan to replace previous grants that had been made under our plan for Israeli employees. The agreement also provides Dr. Erlich with limited reimbursement of relocation expenses. Either party may terminate the agreement upon 60 days advance written notice for any reason, provided however, we may terminate the agreement for cause at any time. In the event we have cause to terminate Dr. Erlich's employment, subject to certain limitations, such termination would be effective upon notice to Dr. Erlich. Assuming Dr. Erlich's employment was terminated, other than for cause, at December 31, 2006, he would have been entitled to $54,200.

Juliana Friedman

        In February 1998 QBI entered into an employment agreement with Juliana Friedman, our Senior Vice President of Strategy and Planning. Under the agreement, Ms. Friedman is entitled to an annual salary of approximately $100,000. Additionally, QBI is obligated to pay a certain percentage of Ms. Friedman's base salary to apply towards a manager's insurance policy which would cover payments made towards severance, pension, disability and an education fund. QBI's aggregate obligations total approximately 23% of Ms. Friedman's base salary, of which QBI is entitled to withhold 7.5% from Ms. Friedman's salary to cover its obligations. Ms. Friedman is also entitled to the use of a company vehicle and reimbursement for expenses associated with its use and upkeep, including all taxes. Ms. Friedman is also entitled to reimbursement of approved business expenses and use of a cell phone and reimbursement for telephone and internet to maintain a home office. Ms. Friedman was additionally granted an option to purchase 60,000 shares of our common stock under our 1997 Stock Plan. Ms. Friedman's employment is terminable without notice at any time for cause and is now otherwise terminable by the us upon 90 days advance written notice, or by Ms. Friedman upon 60 days advance written notice. Assuming Ms. Friedman's employment was terminated, other than for cause, at December 31, 2006, she would have been entitled to $111,138.

Rami Skaliter, Ph.D.

        In October 1995 QBI entered into an employment agreement with Rami Skaliter, Ph.D., our acting Chief Operating Officer. Under the terms of the agreement, as amended, Dr. Skaliter is entitled to an annual salary of $114,000. Dr. Skaliter also received a grant of an option to purchase 80,000 shares of our common stock under our 1997 Stock Plan. Additionally, pursuant to the agreement QBI is obligated to establish and pay a certain percentage of Dr. Skaliter's salary to a manager's insurance policy which would cover payments made towards severance, pension, disability, and an education fund. QBI's aggregate obligations total approximately 23% of Dr. Skaliter's base salary, of which QBI is entitled to withhold 7.5% from Dr. Skaliter's salary to cover its obligations. Dr. Skaliter is entitled to the use of a company automobile and reimbursement for expenses associated with its use and upkeep,

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including all taxes, and reimbursement for a company cell phone. Assuming Dr. Skaliter's employment was terminated, other than for cause, at December 31, 2006, he would have been entitled to $148,873.

Yaron Garmazi

        In March 2007 QBI entered into an employment agreement with Yaron Garmazi, effective February 21, 2007. Under the terms of the agreement, Mr. Garmazi is entitled to a salary of approximately $230,000 per year and a one-time sign-on bonus of $15,700. Mr. Garmazi also received an option to purchase 1,401,305 shares of our common stock under our 2007 Equity Incentive Plan. The options vest over a four year period with 25% of the options vesting January 29, 2008 and the balance of the options vesting in equal monthly installments thereafter. However, six months after the completion of an initial public offering of Quark, 40% of the total number of shares subject to the option grant will immediately be vested with the balance vesting thereafter in equal monthly installments of ¹/48^th of the original grant. Further, in the event of our merger, change-in-control, or sale of all or substantially all of our assets, all unvested options held by Mr. Garmazi will immediately vest upon completion of the transaction. Additionally, pursuant to the agreement QBI is obligated to establish and contribute a percentage of Mr. Garmazi's salary to a manager's insurance policy, an education fund, and a recreation fund, as required under Israeli law. Mr. Garmazi is also entitled to the use of a company automobile and reimbursement for expenses associated with its use and upkeep, including all taxes, and reimbursement for a company cell phone and travel expenses incurred in fulfilling his duties to the QBI and Quark. Mr. Garmazi's employment may be terminated for cause at any time or without cause by either party upon 120 days notice, during which time Mr. Garmazi will continue his employment with both QBI and Quark. QBI may waive Mr. Garmazi's obligation to continue service to QBI, but shall be required to continue his salary and benefits during the 120 day period.

Grants of Plan-Based Awards

        All stock options granted to our named executive officers are incentive stock options, to the extent permissible under the Internal Revenue Code of 1986, as amended. The exercise price per share of each stock option granted to our named executive officers prior to December 31, 2006 was not less than the fair market value of our common stock as determined by our board of directors on the date of the grant. Stock options are granted under our 2007 Equity Incentive Plan, 1997 Stock Plan or our 2003 Israeli Stock Option Plan.

        No grants of plan-based awards were made to our named executive officers in 2006.

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Outstanding Equity Awards At December 31, 2006

        The following table sets forth certain information regarding equity awards granted to our named executive officers outstanding as of December 31, 2006. The options generally have four year vesting terms and expire 10 year after the date of grant.

	Option Awards
Name (a)	Number of securities underlying unexercised options (#) exercisable (b)	Number of securities underlying unexercised options (#) unexercisable (c)	Equity incentive plan awards: number of securities underlying unexercised unearned options (#) (d)	Option exercise price ($) (e)	Option expiration date (f)
Daniel Zurr	—	—	—	—	—
Rami Skaliter	20,000	—	—	0.40	01/17/07
	80,000	—	—	0.55	02/19/08
	20,000	—	—	2.00	11/30/09
	60,000	20,000	—	2.00	12/04/13
Smadar Samira Shakked	60,000	—	—	0.40	10/01/07
	20,000	—	—	2.00	11/30/09
	15,000	5,000	—	2.00	12/04/13
Shai Erlich	11,575	925	—	6.00	05/16/13
	7,500	—	—	2.00	05/16/13
	23,333	11,667	—	2.00	12/29/15
Juliana Friedmann	60,000	—	—	0.55	02/19/08
	20,000	—	—	2.00	11/30/09

Option Exercises and Stock Vested

        None of our named executive officers exercised stock options or had shares of restricted stock vest in 2006.

Pension Benefits

        None of our named executive officers participate in or have account balances in qualified or non-qualified defined benefit plans sponsored by us. Our compensation committee may elect to adopt qualified or non-qualified benefit plans in the future if it determines that doing so is in the best interest of the company and our stockholders, but we do not currently maintain such plans.

Nonqualified Deferred Compensation

        None of our named executive officers participate in or have account balances in nonqualified defined contribution plans or other nonqualified deferred compensation plans maintained by us. Our compensation committee may elect to provide our officers and other employees with non-qualified defined contribution or other nonqualified deferred compensation benefits in the future if it determines that doing so is in the best interest of the company and our stockholders, but we do not currently maintain such plans.

Compensation of Non-Employee Directors

        Our outside directors are reimbursed for the actual costs of company-related travel only. No other compensation is currently paid to our outside directors in connection with their services.

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2007 Equity Incentive Plan

        Our board of directors adopted the 2007 Equity Incentive Plan, or 2007 Plan, in March 2007 and our stockholders approved the 2007 Plan in March 2007. The 2007 Plan will terminate on March 1, 2017, unless sooner terminated by our board of directors.

Stock Awards.

        The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, restricted stock unit awards, stock appreciation rights, performance stock awards, performance cash awards, and other stock-based awards, collectively, the "stock awards".

Eligibility.

        Incentive stock options may be granted only to our employees (including employees of our parent or subsidiary corporations). Our employees, directors, and consultants (and those of our affiliates) are eligible to receive all other types of stock awards under the 2007 Plan. Pursuant to Exhibit B to the 2007 Plan, referred to as the "Israeli sub-plan", stock awards may be granted to participants who are subject to taxation in the state of Israel in a manner that qualifies the awards for favorable tax treatment under Section 102 of the 1961 Israeli Income Tax Ordinance (New Version). The Israeli sub-plan modifies the terms of stock awards granted to Israeli participants only to the extent necessary to comply with the requirements set by Israeli law.

Share Reserve.

        The maximum number of shares of common stock available for issuance under the 2007 Plan is 5,655,056, such number consisting of (i) the 1,186,149 shares of common stock that were reserved for issuance but not made subject to any awards under our now-expired 1997 Stock Plan, (ii) 1,662,175 shares of common stock issuable upon exercise of options originally granted under our 1997 Stock Plan, (iii) 3,018,805 shares of common stock that are issuable upon exercise of options outstanding under the 2007 Plan, and (iv) an additional 1,003,576 shares.

        If stock awards granted under the 2007 Plan expire or otherwise terminate without being exercised in full or are settled in cash, the shares of common stock not acquired pursuant to those awards become available for subsequent issuance under the 2007 Plan. If any shares of common stock issued pursuant to a stock award are forfeited because of a failure to vest in those shares, the forfeited shares will become available for subsequent issuance under the 2007 Plan. In addition, shares withheld in satisfaction of applicable withholding taxes or reacquired as consideration for the exercise of an option will become available for subsequent issuance under the 2007 Plan.

Award Limits.

        No person may be granted stock awards whose value is determined by reference to an increase over an exercise or strike price of at least one hundred percent (100%) of the fair market value of the common stock on the date of grant (such as options and stock appreciation rights) covering more than 2,000,000 shares of common stock during any calendar year. In addition, no person may be granted performance stock awards covering more than 75,000 shares of common stock during any calendar year. Finally, no person may be granted performance cash awards with a value exceeding $1,000,000 during any calendar year.

Administration.

        Subject to the provisions of the 2007 Plan, our board of directors has the authority to determine what type of stock award will be granted, the provisions of each stock award granted, the number of shares subject to each stock award, and the time or times a participant is permitted to receive stock pursuant to a stock award. Our board of directors has the power to accelerate the vesting and

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exercisability of a stock award. Our board of directors also has the authority to reprice any outstanding options and to cancel outstanding options and grant new stock awards in substitution therefore. As administrator of the 2007 Plan, our board of directors has the authority to construe and interpret its provisions. Our board of directors has the power to suspend or terminate the 2007 Plan at any time, to amend the 2007 Plan in any respect deemed necessary or advisable, to submit any amendment to the 2007 Plan for stockholder approval, to approve forms of award agreements for use under the 2007 Plan, to exercise such powers and to perform such acts that are not inconsistent with the provisions of the 2007 Plan, and to adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the 2007 Plan by employees, directors or consultants who are foreign nationals or employed outside the United States.

        Our board of directors has the authority to delegate some or all of the administration of the 2007 Plan to a committee or committees composed of one or more members of our board. In the discretion of our board of directors, a committee may consist solely of two or more "non-employee directors" within the meaning of Rule 16b-3 of the Exchange Act, or solely of two or more "outside directors" within the meaning of Section 162(m) of the Code. The 2007 Plan also permits delegation of limited authority to one or more officers with respect to grants to employees other than officers of Quark. As used herein with respect to the administration of the 2007 Plan, "committee" refers to any committee appointed by our board, any subcommittee thereof, as well as our board of directors acting in its authority to administer the 2007 Plan.

Stock Options.

        Options may be granted under the 2007 Plan pursuant to stock option agreements in the form adopted from time to time by the committee. The exercise price of options generally may not be less than 100% of the fair market value of the stock subject to the option on the date of grant. The exercise price may, at the discretion of the committee, be paid in (a) cash or check, (b) pursuant to a broker-assisted cashless exercise, (c) by delivery of other shares of common stock, (d) by a "net exercise" arrangement, or (e) in any other form of legal consideration acceptable to the committee. Options generally become exercisable in cumulative increments, or "vest," as based on the optionee's continued service with Quark or an affiliate. Shares covered by different options granted under the 2007 Plan may be subject to different vesting terms. The maximum term of options granted under the 2007 Plan is 10 years, subject to earlier expiration in the event of a termination of service. Options under the 2007 Plan generally expire three (3) months after termination of a participant's service, with such period extended in the case of death or disability to twelve (12) months and eighteen months, respectively. Notwithstanding the foregoing, the post-termination exercise period will be extended in the event that exercise of the option following termination of service is prohibited by applicable securities laws. In no event, however, may an option be exercised beyond the expiration of its term. Except as otherwise provided in the applicable stock option agreement, options granted under the 2007 Plan are not transferable other than by will or the laws of descent and distribution.

Special Rules for Incentive Stock Options.

        No incentive stock option may be granted under the 2007 Plan to any person who, at the time of the grant, owns (or is deemed to own) stock possessing more than 10% of the total combined voting power of Quark or its affiliates, unless the exercise price of such option is at least 110% of the fair market value of the common stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant. The aggregate fair market value, determined on the date of grant, of the shares of common stock with respect to which incentive stock options are exercisable for the first time by a participant during any calendar year (under the 2007 Plan and any other equity plans of Quark and its affiliates) may not exceed $100,000 (any excess of such amount is treated as nonstatutory stock options). No more than 5,655,056 shares of common stock may be issued pursuant to the exercise of incentive stock options.

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Restricted Stock Awards.

        Restricted stock awards may be granted under the 2007 Plan pursuant to the form of restricted stock award agreement adopted from time to time by our committee. Restricted stock awards may be granted in consideration for services rendered to Quark or an affiliate or for any other form of legal consideration acceptable to the committee. Restricted stock awards may be subject to vesting in accordance with a schedule to be determined by the committee. Upon termination of a participant's service, any or all of the unvested shares of common stock subject to the restricted stock award may be forfeited by the participant and reacquired by Quark, as provided under the terms of the applicable award agreement. Rights to acquire shares under a restricted stock award agreement generally are not transferable, except as expressly permitted by the committee.

Restricted Stock Unit Awards.

        Restricted stock unit awards may be granted under the 2007 Plan pursuant to the form of restricted stock unit award agreement adopted from time to time by the committee. At the time of grant, the committee will determine the consideration, if any, to be paid by the participant upon delivery of each share of common stock subject to the restricted stock unit award. The consideration to be paid (if any) by the participant for each share of common stock subject to a restricted stock unit award may be paid in services rendered to Quark or an affiliate or any other form of legal consideration as determined by the committee. Restricted stock award units may be subject to vesting pursuant to a schedule determined by the committee. Vested units may be settled by the delivery of shares of common stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the committee. The committee may also impose restrictions or conditions that delay the delivery of the shares of common stock (or their cash equivalent) subject to a restricted stock unit award to a time after vesting. Upon the termination of a participant's service, the unvested portion of the restricted stock unit award will be forfeited by the participant and reacquired by Quark unless otherwise provided in the restricted stock unit award agreement. Dividend equivalents may be credited in respect of shares of common stock covered by a restricted stock unit award, as determined by the committee and contained in the award agreement. Such dividend equivalents may be converted into additional shares of common stock covered by the restricted stock unit award in such manner as determined by the committee. Any additional shares covered by the restricted stock unit award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying restricted stock unit award agreement to which they relate.

Stock Appreciation Rights.

        Stock appreciation rights may be granted under the 2007 Plan pursuant to the form of stock appreciation rights agreement adopted from time to time by the committee. Stock appreciation rights may be granted as stand-alone stock awards or in tandem with other stock awards. Each stock appreciation right will be denominated in shares of common stock equivalents. The strike price of each stock appreciation right will generally not be less than one hundred percent (100%) of the fair market value of the common stock equivalents subject to the stock appreciation right on the date of grant. The appreciation distribution payable on the exercise of a stock appreciation right will be not greater than an amount equal to the excess of (a) the aggregate fair market value (on the date of the exercise of the stock appreciation right) of a number of shares of common stock equal to the number of common stock equivalents in which the participant is vested under such stock appreciation right, and with respect to which the participant is exercising the stock appreciation right on such date, over (b) the strike price that will be determined by our board of directors at the time of grant of the stock appreciation right. Stock appreciation rights will be subject to vesting on such schedules as determined by the committee. The appreciation distribution may be paid in common stock, in cash, in any combination of the two or in any other form of consideration, as determined by the committee. The

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maximum term of stock appreciation rights granted under the 2007 Plan is 10 years, subject to earlier expiration in the event of a termination of service. Stock appreciation rights granted under the 2007 Plan generally expire three (3) months after termination of a participant's service.

Performance Stock Awards.

        A performance stock award is a stock award that may be granted, may vest, or may be exercised based upon the attainment during a performance period of certain performance goals. The performance goals may be set in respect of any one or more of the following criteria: (i) earnings per share; (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization; (iv) total stockholder return; (v) return on equity; (vi) return on assets, investment, or capital employed; (vii) operating margin; (viii) gross margin; (ix) operating income; (x) net income (before or after taxes); (xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi) increases in revenue or product revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or attainment of working capital levels; (xix) economic value added (or an equivalent metric); (xx) market share; (xxi) cash flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt reduction; (xxv) implementation or completion of projects or processes; (xxvi) customer satisfaction; (xxvii) stockholders' equity; and (xxviii) to the extent that an Award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by the committee. Performance goals may be based on a company-wide basis, with respect to one or more business units, divisions, affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices. At the time of the grant of any performance award, the committee is authorized to determine whether, when calculating the attainment of performance goals (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (iii) to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) to exclude the effects of any statutory adjustments to corporate tax rates; and (v) to exclude the effects of any "extraordinary items" as determined under generally accepted accounting principles. In addition, the committee retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of performance goals. The maximum number of shares that may be granted to any participant in a calendar year is 75,000. A performance stock award may, but need not, require the completion of a specified period of continuous service. The length of any performance period, the performance goals to be achieved during the performance period, and the measure of whether and to what degree such performance goals have been attained will be determined by the committee. In addition, to the extent permitted by applicable law and the applicable award agreement, the committee may determine that cash may be used in payment of performance stock awards.

Performance Cash Awards.

        A performance cash award is a cash award that may be granted upon the attainment during a performance period of certain performance goals (as described above). A performance cash award may also require the completion of a specified period of continuous service. The length of any performance period, the performance goals to be achieved during the performance period, and the measure of whether and to what degree such performance goals have been attained will be conclusively determined by the committee in its sole discretion. The maximum amount that may be granted to any participant in a calendar year is $1,000,000. The committee may provide for or may permit a participant to elect for, the payment of any performance cash award to be deferred to a specified date or event. The committee may specify the form of payment of performance cash awards, which may be cash or other property. In addition, the committee may determine that common stock authorized under the 2007 Plan may be used in payment of performance cash awards.

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Other Stock Awards.

        The committee may grant other incentive awards based in whole or in part by reference to the value of Quark's common stock. Subject to the provisions of the 2007 Plan, the committee has the authority to determine the persons to whom and the dates on which such other stock awards will be granted, the number of shares of common stock (or cash equivalents) to be subject to each award, and other terms and conditions of such awards. Such awards may be granted either alone or in addition to other stock awards granted under the 2007 Plan.

Tax Withholding.

        The committee may require a participant to satisfy any federal, state, local, or foreign tax withholding obligation relating to a stock award by (a) causing the participant to tender a cash payment; (b) withholding shares of common stock from the shares of common stock issued or otherwise issuable to the participant in connection with the award; (iii) withholding cash from an award settled in cash or other payments made to a participant; or (iv) by such other method as may be set forth in the award agreement.

Changes to Capital Structure.

        In the event any change is made to our common stock without the receipt of consideration, whether through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure, or otherwise, our board of directors will appropriately adjust: (a) the class(es) and maximum number of securities subject to the 2007 Plan, (b) the class(es) and maximum number of securities that may be issued pursuant to the exercise of incentive stock options, (c) the class(es) and maximum number of securities (or amount of cash consideration) that may be awarded to any person pursuant to performance stock awards and other stock-based awards intended to satisfy the requirements of Section 162(m) of the Code (such as options and stock appreciation rights), and (d) the class(es) and number of securities and price per share of stock subject to outstanding stock awards. Our board of directors will make such adjustments, and its determination will be final, binding and conclusive.

Corporate Transactions; Changes in Control.

        In the event of certain significant corporate transactions, outstanding stock awards under the 2007 Plan may be assumed, continued, or substituted by any surviving corporation. If the surviving corporation does not assume, continue, or substitute such stock awards, then (a) with respect to any such stock awards that are held by individuals performing services for Quark or its affiliates at the effective time of the transaction, the vesting and exercisability provisions of such stock awards will be accelerated in full and such stock awards will be terminated if not exercised prior to the effective date of the corporate transaction, and (b) all other outstanding stock awards will be terminated if not exercised prior to the effective date of the corporate transaction. A stock award may be subject to additional acceleration of vesting and exercisability as may be provided in the stock award agreement for such stock award or as may be provided in any other written agreement between Quark or any affiliate and the participant. The acceleration of stock awards in connection with significant corporate transactions and changes in control may be viewed as an anti-takeover provision, which may have the effect of discouraging a proposal to acquire or otherwise obtain control of Quark.

Duration, Termination, and Amendment.

        Our board of directors may suspend or terminate the 2007 Plan at any time. The 2007 Plan is scheduled to terminate immediately prior to the 10^th anniversary of the date it was adopted by our

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board of directors. No rights may be granted under the 2007 Plan while the 2007 Plan is suspended or after it is terminated. Our board of directors may amend or modify the 2007 Plan at any time, subject to any stockholder approval required by applicable law or regulation.

Compensation Committee Interlocks and Insider Participation

        The members of our Compensation Committee for the fiscal year ended December 31, 2006 included Dr. Zurr, our Chief Executive Officer, Dr. Rubinfeld and Mr. Simon. None of our executive officers currently serves or in the prior three years has served as a member of the Board of Directors or compensation committee of any entity that has one or more executive officers serving on our board or compensation committee.

Limitation of Liability and Indemnification

        Our amended and restated certificate of incorporation, which will become effective upon the closing of this offering, limits the liability of our directors to the fullest extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except for liability for any:

•

breach of their duty of loyalty to us or our stockholders;



•

act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;



•

unlawful payment of dividends or redemption of shares as provided in Section 174 of the Delaware General Corporation Law; or



•

transaction from which the directors derived an improper personal benefit.

        These limitations of liability do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies such as injunctive relief or rescission.

        Our amended and restated bylaws, which will become effective upon the closing of this offering, provide that we will indemnify our directors and executive officers, and may indemnify other officers, employees and other agents, to the fullest extent permitted by law. Our amended and restated bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in connection with their services to us, regardless of whether our amended and restated bylaws permit such indemnification. We have obtained such a directors' and officers' liability insurance policy.

        We intend to enter into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our amended and restated bylaws. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys' fees, judgments, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers, or any of our subsidiaries or any other company or enterprise to which the person provides services at our request.

        At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling us, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

        The following is a summary of transactions from January 1, 2004 to December 31, 2006 to which we have been a party in which the amount involved exceeded $120,000 and in which any of our executive officers, directors or beneficial holders of more than five percent of our capital stock had or will have a direct or indirect material interest, other than compensation arrangements which are described under the section of this prospectus entitled "Compensation Discussion and Analysis."

Policies and Procedures for Related Party Transactions

        We anticipate adopting a policy prior the closing of this offering, but do not currently have a policy in place.

Sale of Securities

        In December 2005, February 2006 and May 2006, we issued and sold to holders of more than 5% of our capital stock an aggregate of 6,643,346 shares of Series G preferred stock at a purchase price of $1.43 per share, for an aggregate consideration of approximately $9,500,000. Upon the closing of this offering, these shares will convert into an aggregate of 6,643,346 shares of common stock.

        In December 2005, February 2006 and May 2006, in connection with the issuance of shares of Series G preferred stock to investors, we issued and sold warrants to purchase an aggregate of 1,328,668 shares of common stock. The warrants have an exercise price of $1.43 per share. These warrants will terminate if not exercised prior to the closing of this offering.

        The participants in these preferred stock and common stock warrant issuances include the following director and holders of more than 5% of our capital stock. The following table presents the number of shares issued to these related parties in these issuances. For a description of current beneficial ownership, see "Principal Stockholders".

Purchaser	Series G preferred stock	Common stock warrants
Executive Officers and Directors
Tomomi Okamoto(1)	4,195,804	839,160
5% Stockholders
Trans-science Global Bio-Technology Fund(1)	4,195,804	839,160
Asuka DBJ Investment LPS	2,447,542	489,508

⁽¹⁾

Includes 3,076,923 shares of Series G preferred stock and warrants to purchase 615,384 shares of common stock beneficially owned by Trans-Science Global Bio-Technology Fund, 769,231 shares of Series G preferred stock and warrants to purchase 153,846 shares of common stock beneficially owned by TS-US No. 1 Investment Partnership and 349,650 shares of Series G preferred stock and warrants to purchase 69,930 shares of common stock beneficially owned by Trans-Science No. 3 Investment Limited Partnership.

Amended and Restated Investors' Rights Agreement

        We have entered into an investors' rights agreement with the purchasers of our outstanding preferred stock and certain holders of common stock, warrants to purchase Series D Preferred stock and warrants to purchase our common stock, including entities with which certain of our directors are affiliated. As of March 28, 2007, the holders of 36,378,905 shares of our common stock, including the shares of common stock issued upon the automatic conversion of our preferred stock and shares of common stock issued upon exercise of warrants, are entitled to rights with respect to the registration of their shares under the Securities Act. For a description of these registration rights, see "Description of Capital Stock — Registration Rights."

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Employment Agreements

        We have entered into employment agreements with our executive officers and directors. For more information regarding these agreements, see "Compensation Discussion and Analysis — Employment Agreements and Potential Payments Upon Termination."

Stock Options Granted to Executive Officers and Directors

        We have granted stock options to our executive officers and directors. For more information regarding these stock options, see "Management — Executive Compensation."

Our Agreement with Trans-Science, Inc.

        In January 2006, we entered into a Support Services Agreement with Trans-Science, Inc., or Trans-Science, one of our principal stockholders. Under the terms of the agreement, we agreed to establish a registered entity in Japan that would be mutually agreeable to both parties after consulting our legal and tax advisors. Trans-Science agreed to provide support services necessary in connection with the establishment of our Japanese entity at the direction of a representative designated by us. We designated Tomomi Okamoto, one of the members of our board of directors and the senior operating officer and chief technology officer of Trans-Science, as our representative to coordinate the establishment of our Japanese entity and direct the support services to be provided. Such services included, among others, assistance in determining the legal form of entity in Japan and its establishment; assistance with business development activities to be designated by our board of directors; provide investor relations support and communications with our current Japanese stockholders; and provide support for any attempt to offer our capital stock in a public offering in Japan if we would so choose. In consideration for such services, we agreed to pay Trans-Science a service fee of $75,000 per quarter for the term of the agreement, in addition to any fees and expenses incurred by Trans-Science in establishing the Japanese legal entity. We did not provide additional compensation under the terms of the agreement to Ms. Okamoto. Trans-Science was responsible for paying all compensation earned by Ms. Okamoto in acting as our designated representative under the agreement.

        The agreement was amended effective January 1, 2007, to govern the relationship between the parties through April 30, 2007. As amended, the agreement will terminate on April 30, 2007, however, the parties have agreed to negotiate in good faith a new support agreement during the month of April. The amendment further provides that during this term, the fee payable to Trans-Science will be $36,000 in addition to reasonable expenses pre-approved by Quark, incurred by Trans-Science in connection with the agreement.

Indemnification Agreements with Executive Officers and Directors

        Effective upon the closing of this offering, we will have entered into an indemnification agreement with each of our directors and executive officers. These indemnification agreements and our amended and restated certificate of incorporation and amended and restated bylaws will indemnify each of our directors and officers to the fullest extent permitted by the Delaware General Corporation Law. See "Management — Limitation of Liability and Indemnification."

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PRINCIPAL STOCKHOLDERS

        The following table sets forth information regarding the beneficial ownership of our common stock as of March 28, 2007 and as adjusted to reflect the sale of the common stock in this offering for:

•

each person, or group of affiliated persons, known by us to beneficially own more than 5% of our common stock;



•

each of our named executive officers;



•

each of our directors; and



•

all of our executive officers and directors as a group.

        The percentage ownership information shown in the table is based upon 37,517,445 shares of common stock outstanding as of March 28, 2007, assuming the conversion of all outstanding shares of our preferred stock as of March 28, 2007 and the issuance of                        shares of common stock in this offering. The percentage ownership information assumes no exercise of the underwriters' over-allotment option.

        Information with respect to beneficial ownership has been furnished by each director, officer or beneficial owner of more than 5% of our common stock. We have determined beneficial ownership in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options or warrants that are either immediately exercisable or exercisable on or before May 27, 2007, which is 60 days after March 28, 2007. These shares are deemed to be outstanding and beneficially owned by the person holding those options or warrants for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws.

        Except as otherwise noted below, the address for each person or entity listed in the table is c/o Quark Biotech, Inc., 6501 Dumbarton Circle, Fremont, California 94555.

		Percentage of shares beneficially owned (%)
	Number of shares beneficially owned
Name and Address of Beneficial Owner		Before offering	After offering
5% Stockholders
Tako Ventures, LLC(1) Attn: Lawrence J. Ellison Oracle Corporation 500 Oracle Parkway Redwood Shores, CA 94605	16,270,990	43.4
Trans-Science Funds(2) The Imperial Hotel Tower Uchisaiwaicho, Chiyoda-ku Tokyo 100-0011	5,034,964	13.1
Asuka DBJ Investment LPS(3) Landic Akasaka Bldg. 8F, 2-3-4 Akasaka, Minato-ku Tokyo 107-0052	2,937,050	7.7

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Executive Officers and Directors
Daniel Zurr, Ph.D.	5,000,000	13.3
Rami Skaliter, Ph.D.(4)	188,333	*
Smadar Samira Shakked(5)	97,083	*
Shai Erlich, Ph.D.(6)	46,979	*
Juliana Freidmann, M.Sc.(7)	80,000	*
Steven Fink(8)	16,270,990	43.4
Tomomi Okamoto(9)	5,034,964	13.1
Joseph Rubinfeld, Ph.D.(10)	169,133	*
Philip B. Simon(11)	16,420,990	43.6
All executive officers and directors as a group (10 persons)	27,114,564	72.0

*

Represents beneficial ownership of less than 1%.

⁽¹⁾

Tako Ventures, LLC is an investment entity controlled by Lawrence J. Ellison.

⁽²⁾

Includes 3,076,923 shares and warrants to purchase 615,384 shares that are exercisable within 60 days of March 28, 2007 that are beneficially owned directly by Trans-Science Global Bio-Technology Fund. Also includes 769,231 shares and warrants to purchase 153,846 shares that are exercisable within 60 days of March 28, 2007 that are beneficially owned directly by TS-US No. 1 Investment Partnership and 349,650 shares and warrants to purchase 69,930 shares that are exercisable within 60 days of March 28, 2007 that are beneficially owned directly by Trans-Science No. 3.

⁽³⁾

Includes 489,508 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of March 28, 2007.

⁽⁴⁾

Includes 168,333 shares of common stock issuable upon the exercise of stock options exercisable within 60 days of March 28, 2007.

⁽⁵⁾

Includes 97,083 shares of common stock issuable upon the exercise of stock options exercisable within 60 days of March 28, 2007.

⁽⁶⁾

Includes 46,979 shares of common stock issuable upon the exercise of stock options exercisable within 60 days of March 28, 2007.

⁽⁷⁾

Includes 80,000 shares of common stock issuable upon the exercise of stock options exercisable within 60 days of March 28, 2007.

⁽⁸⁾

Includes 16,270,990 shares of common stock beneficially owned directly by Tako Ventures, LLC. Mr. Fink is Chief Executive Officer of Lawrence Investments, LLC, the parent company of Tako Ventures, LLC. Mr. Fink disclaims beneficial ownership of the shares held by Tako Ventures, LLC except to the extent of his pecuniary interest therein.

⁽⁹⁾

Includes 4,195,804 shares and warrants to purchase 839,160 shares referenced in footnote 1. Ms. Tomomi is a                         of Trans-Science Global Bio-Technology Fund, a                         of TS-US No. 1 Investment Partnership and a                         of Trans-Science No. 3. Ms. Tomomi disclaims beneficial ownership of the shares held by Trans-Science Global Bio-Technology Fund, TS-US No. 1 Investment Partnership and Trans-Science No. 3 except to the extent of her pecuniary interest therein.

⁽¹⁰⁾

Includes 100,000 shares of common stock issuable upon the exercise of stock options exercisable within 60 days of March 28, 2007.

⁽¹¹⁾

Includes 150,000 shares of common stock issuable upon the exercise of stock options exercisable within 60 days of March 28, 2007. Includes 16,270,990 shares of common stock beneficially owned directly by Tako Ventures, LLC. Mr. Simon is president of Lawrence Investments, LLC, the parent company of Tako Ventures, LLC. Mr. Simon disclaims beneficial ownership of the shares held by Tako Ventures, LLC except to the extent of his pecuniary interest therein.

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DESCRIPTION OF CAPITAL STOCK

        Upon completion of this offering and the filing of our amended and restated certificate of incorporation, our authorized capital stock will consist of 75,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share.

        The following is a summary of the rights of our common stock and preferred stock. This summary is not complete. For more detailed information, please see our amended and restated certificate of incorporation and amended and restated bylaws, which are filed as exhibits to the registration statement of which this prospectus is a part.

Common Stock

Outstanding Shares.

        Based on 37,517,445 shares of common stock outstanding as of March 28, 2007, which assumes the conversion of all outstanding preferred stock into 29,858,905 shares of common stock upon the completion of this offering, the issuance of                                     shares of common stock in this offering, and no exercise of outstanding options or warrants, there will be                                     shares of common stock outstanding upon completion of this offering. As of March 28, 2007, assuming the conversion of all outstanding preferred stock into common stock upon the completion of this offering, we had approximately 100 record holders of our common stock.

        As of March 28, 2007, there were 4,651,480 shares of common stock subject to outstanding options, 2,097,900 shares of common stock subject to outstanding warrants which expire upon completion of this offering and 3,870 shares of common stock subject to outstanding warrants which survive the offering.

Voting Rights.

        Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of the stockholders, including the election of directors. Our amended and restated certificate of incorporation and amended and restated bylaws do not provide for cumulative voting rights. Because of this, the holders of a majority of the shares of common stock entitled to vote in any election of directors have the ability to elect all of the directors standing for election.

Dividends.

        Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of our outstanding shares of common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds.

Liquidation.

        In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.

Rights and Preferences.

        Holders of our common stock have no preemptive or subscription rights, and there are no redemption or sinking fund provisions applicable to our common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights

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of the holders of shares of any series of our preferred stock that we may designate and issue in the future.

Fully Paid and Nonassessable.

        All of our outstanding shares of common stock are, and the shares of common stock to be issued in this offering will be, fully paid and nonassessable.

Preferred Stock

        Upon the closing of this offering, all outstanding shares of preferred stock will convert into shares of common stock. See Notes 10 and 11 to our financial statements for a description of the currently outstanding preferred stock. Following completion of this offering, our amended and restated certificate of incorporation will be amended and restated to delete all references to such shares of preferred stock. Under the amended and restated certificate of incorporation, our board of directors will have the authority, without further action by the stockholders, to issue up to 5,000,000 shares of preferred stock in one or more series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.

        Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying, deferring or preventing a change in our control and may adversely affect the market price of the common stock and the voting and other rights of the holders of common stock. We have no current plans to issue any shares of preferred stock.

Warrants

        As of March 28, 2007, warrants to purchase a total of 2,097,900 shares of our common stock were outstanding with a weighted average exercise price of $1.43 per share. These warrants have a net exercise provision under which the holder may, at their option and in lieu of payment of the exercise price in cash, convert the warrants and receive a net amount of shares of common stock based on the fair market value of our common stock at the time of exercise of the warrant after deduction of the aggregate exercise price. Each warrant contains provisions for the adjustment of the exercise price and the number of shares issuable upon exercise of the warrant in the event of stock dividends, stock splits, reorganizations, reclassifications and consolidations. Warrants exercisable for 2,097,900 shares of common stock will terminate if not exercised prior to the closing of this offering.

        As of March 28, 2007, warrants exercisable for a total of 2,799 shares of our Series D preferred stock were outstanding. These warrants were issued in connection with our Series D preferred stock private financing that took place in August and September of 1997. These warrants are immediately exercisable at an exercise price of $4.00 per share of Series D preferred stock, subject to certain adjustments, including upon the conversion of our Series D preferred stock into shares of our common stock. These warrants will expire upon the earlier of September 9, 2007 or three years after the closing of this offering. However, if our common stock maintains a certain per share price following the closing of this offering, we have the right upon written notice to each warrant-holder to terminate the warrant to the extent not exercised within thirty days following receipt by the warrant-holder of such notice. Upon completion of this offering, these warrants will convert into warrants to purchase 3,870 shares of our common stock, at an exercise price of $2.89 per share. These warrants for Series D preferred stock have net exercise provisions under which the holder may, at their option and in lieu of payment of the

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exercise price in cash, surrender the warrant and receive a net amount of shares of Series D preferred stock based on the fair market value of our Series D preferred stock at the time of exercise of the warrant after deduction of the aggregate exercise price. These warrants also contain provisions for the adjustment of the exercise price and the aggregate number of shares issuable upon the exercise of the warrant in the event of stock dividends, stock splits or stock combinations, reclassifications, combinations or exchanges.

Registration Rights

        Under our Third Amended and Restated Investor Rights Agreement, following the completion of this offering, the holders of 36,378,905 shares of common stock, including the shares of common stock issued upon exercise of warrants to purchase common stock, or their permitted transferees, have the right to require us to register their shares with the SEC so that those shares may be publicly resold, or to include their shares in any registration statement we file, in each case as described below.

Demand Registration Rights.

        At any time beginning six months after the completion of this offering, the holders of at least 33% of shares having registration rights issued upon conversion of Series A, Series B, Series C, Series D, Series E, Series F and Series G preferred stock, shares held by certain of our founders and other holders and shares of common stock issued upon exercise of warrants to purchase common stock, have the right to request that we file registration statements for such holders, so long as the aggregate value of securities to be sold under such registration statement is at least $3,000,000 or such requesting holders include at least an aggregate of 15% of securities held by them in such registration. We are only obligated to file up to two registration statements upon the request of such holders and shall not be required to effect a service of process in order to effect a registration. The registration rights are subject to other specified conditions and limitations, including the right of underwriters to limit the number of shares in any such registration under certain circumstances, or if our President shall sign a certificate to be furnished to such holders which includes a statement that, in the good faith judgment of our board of directors, it would be seriously detrimental to the Company or our stockholders to effect such a registration in the near future.

"Piggyback" Registration Rights.

        Following the completion of this offering, if we register any securities on our own account for public sale, we are required to give stockholders holding registration rights notice of such registration and include their shares in the registration statement. The underwriters of any underwritten offering will have the right to limit the number of shares having registration rights to be included in the registration.

Form S-3 Registration Rights.

        If we are eligible to file a registration statement on Form S-3, and holders of at least 2% of our then outstanding shares having registration rights, assuming the exercise or conversion of all outstanding warrants and stock options to purchase common stock, shall request the Company to file a registration on Form S-3 with an aggregate offering price to the public that would exceed $1,000,000, then we shall be obligated to use our best efforts to register such shares. However, we shall not be required to effect such registration more than twice in any twelve month period.

Expenses of Registration.

        We will pay all expenses relating to all demand registrations, Form S-3 registrations and piggyback registrations, other than underwriting discounts and commissions and stock transfer taxes.

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Expiration of Registration Rights.

        The registration rights described above terminate as to each holder at such time as a public market for the Company's common stock exists, and all shares held by such holder may be sold within a three month period pursuant to Rule 144 or any other applicable exemption from registration.

Delaware Anti-Takeover Law and Provisions of our Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws

Delaware Anti-Takeover Law

        We are subject to Section 203 of the Delaware General Corporation Law. Section 203 generally prohibits a public Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless:

•

prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder;



•

the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding (a) shares owned by persons who are directors and also officers and (b) shares owned by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or



•

on or subsequent to the date of the transaction, the business combination is approved by the board and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66²/3% of the outstanding voting stock which is not owned by the interested stockholder.

        Section 203 defines a business combination to include:

•

any merger or consolidation involving the corporation and the interested stockholder;



•

any sale, transfer, pledge or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;



•

subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; and



•

the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.

        In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any entity or person affiliated with or controlling or controlled by the entity or person.

Amended and Restated Certificate of Incorporation and Amended and Restated Bylaws

        Provisions of our amended and restated certificate of incorporation and amended and restated bylaws, which will become effective upon the closing of this offering, may delay or discourage transactions involving an actual or potential change in our control or change in our management, including transactions in which stockholders might otherwise receive a premium for their shares, or transactions that our stockholders might otherwise deem to be in their best interests. Therefore, these

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provisions could adversely affect the price of our common stock. Among other things, our amended and restated certificate of incorporation and amended and restated bylaws:

•

permit our board of directors to issue up to 5,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate, including the right to approve an acquisition or other change in our control;



•

provide that the authorized number of directors may be changed only by resolution of the board of directors;



•

provide that all vacancies, including newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum;



•

require that any action to be taken by our stockholders must be effected at a duly called annual or special meeting of stockholders and not be taken by written consent;



•

provide that stockholders seeking to present proposals before a meeting of stockholders or to nominate candidates for election as directors at a meeting of stockholders must provide notice in writing in a timely manner, and also specify requirements as to the form and content of a stockholder's notice;



•

do not provide for cumulative voting rights (therefore allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election, if they should so choose);



•

provide that special meetings of our stockholders may be called only by the chairman of the board, our chief executive officer or by the board of directors pursuant to a resolution adopted by a majority of the total number of authorized directors; and



•

provide that stockholders will be permitted to amend our amended and restated bylaws only upon receiving at least 66 ²/3% of the votes entitled to be cast by holders of all outstanding shares then entitled to vote generally in the election of directors, voting together as a single class.

        The amendment of any of these provisions would require approval by the holders of at least 66 ²/3% of our then outstanding common stock, voting as a single class.

Listing

        We are applying to have our common stock listed on the NASDAQ Global Market under the symbol "QURK."

Transfer Agent and Registrar

        The transfer agent and registrar for our common stock is Mellon Investor Services. The transfer agent and registrar's address is Newport Office Center VII, 480 Washington Blvd., Jersey City, New Jersey 07310.

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SHARES ELIGIBLE FOR FUTURE SALE

        Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices. Furthermore, since only a limited number of shares will be available for sale shortly after this offering because of contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after the restrictions lapse could adversely affect the prevailing market price for our common stock as well as our ability to raise equity capital in the future.

        Based on the number of shares of common stock outstanding as of                                    , 2007, upon the closing of this offering,                        shares of our common stock will be outstanding, assuming no exercise of the underwriters' over-allotment option and no exercise of options or warrants. All of the shares sold in this offering will be freely tradable unless held by our affiliates. Except as set forth below, the remaining 37,517,445 shares of common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will generally become available for sale in the public market as follows:

•

shares of common stock will be eligible for immediate sale upon the closing of this offering;



•

37,517,445 shares of common stock will be eligible for sale under Rule 144 or Rule 701 upon expiration of lock-up agreements 180 days after the date of this prospectus, unless the lock-up is otherwise extended; and



•

shares of common stock will be eligible for sale from time to time thereafter upon expiration of their respective one-year holding periods, but could be sold earlier if the holders exercise any available registration rights.

Rule 144

        In general, pursuant to Rule 144 promulgated under the Securities Act as in effect on the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:

•

1% of the number of shares of our common stock then outstanding, which will equal approximately                        shares immediately after this offering; or



•

the average weekly trading volume of our common stock on the NASDAQ Global Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

        Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 144(k)

        Pursuant to Rule 144(k) promulgated under the Securities Act as in effect on the date of this prospectus, a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. 5,554,110 shares of our common stock will qualify for resale under Rule 144(k) within 180 days of the date of this prospectus. Substantially all shares qualifying for resale under Rule 144(k) are subject to lock-up agreements as described below and under "Underwriting" and will become eligible for sale at the expiration of those agreements.

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Rule 701

        Rule 701 under the Securities Act, as in effect on the date of this prospectus, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Most of our employees, executive officers, directors or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701, but all holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements as described below and under "Underwriting" and will become eligible for sale at the expiration of those agreements.

Lock-Up Agreements

        We, our directors, executive officers and the holders of substantially all of our outstanding stock, options and warrants, have agreed with the underwriters that for a period of at least 180 days following the date of this prospectus, not to offer, sell, assign, transfer, pledge, contract to sell or otherwise dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for shares of common stock, subject to specified exceptions. J.P. Morgan Securities Inc. and Banc of America Securities LLC may, at any time without prior notice, release all or any portion of the shares from the restrictions in any such agreement.

        See "Underwriting" for a more complete description of these lock-up agreements.

Registration Rights

        Upon the closing of this offering, the holders of 36,378,905 shares of our common stock and warrants to purchase up to 2,101,770 shares of our common stock will be entitled to rights with respect to the registration of their shares under the Securities Act, subject to the lock-up agreements described above. Registration of these shares under the Securities Act would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares purchased by affiliates, immediately upon the effectiveness of this registration. Any sales of securities by these stockholders could have a material adverse effect on the trading price of our common stock. See "Description of Capital Stock — Registration Rights."

Equity Incentive Plans

        We intend to file with the SEC a registration statement under the Securities Act covering the shares of common stock reserved for issuance under our 2007 Equity Incentive Plan. The registration statement is expected to be filed and become effective as soon as practicable after the closing of this offering. Accordingly, shares registered under the registration statement will be available for sale in the open market following its effective date, subject to the lock-up agreements described above, if applicable.

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MATERIAL U.S. TAX CONSEQUENCES FOR
NON-U.S. HOLDERS OF COMMON STOCK

        The following is a general discussion of the material U.S. federal income and estate tax consequences of the ownership and disposition of our common stock by a non-U.S. holder. For purposes of this discussion, you are a "non-U.S. holder" if you are a beneficial owner of our common stock and you are not, for U.S. federal income tax purposes:

•

an individual who is a citizen or resident of the United States;



•

a corporation or any other entity taxable as a corporation for United States federal income tax purposes created or organized in or under the laws of the United States, or of any political subdivision of the United States;



•

an estate whose income is subject to U.S. federal income taxation regardless of its source; or



•

a trust, in general, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust or if the trust has made a valid election to be treated as a U.S. person under applicable U.S. Treasury regulations.

        If you are an individual, you may be treated as a resident of the United States in any calendar year for U.S. federal income tax purposes, instead of a nonresident, by, among other ways, if you have a "substantial presence" in the United States, as defined in the Internal Revenue Code of 1986, as amended (the "Code") and applicable U.S. Treasury regulations. Residents are taxed for U.S. federal income tax purposes as if they were U.S. citizens. If a partnership or other flow-through entity is a beneficial owner of our common stock, the tax treatment of a partner in the partnership or owner of the entity will generally depend on the status of the partner or owner and the activities of the partnership or entity. Such holders and their partners or owners should consult their own tax advisors regarding U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

        This discussion does not purport to address all aspects of U.S. federal income and estate taxes or specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position, including:

•

U.S. state or local or any non-U.S. tax consequences;



•

the tax consequences for the stockholders, partners or beneficiaries of a non-U.S. holder;



•

special tax rules that may apply to particular non-U.S. holders, such as financial institutions, insurance companies, tax-exempt organizations, U.S. expatriates, broker-dealers and traders in securities, or partnerships, S corporations and other pass-through entities; and



•

special tax rules that may apply to a non-U.S. holder that holds our common stock as part of a "straddle," "hedge," "conversion transaction," "synthetic security" or integrated investment.

        The following discussion is based on provisions of the Code, existing and proposed U.S. Treasury regulations and administrative and judicial interpretations, all as of the date of this prospectus, and all of which are subject to change, possibly with retroactive effect. The following summary assumes that you hold our common stock as a capital asset (generally, property held for investment). Each non-U.S. holder should consult a tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding and disposing of shares of our common stock.

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Dividends

        We do not anticipate paying cash dividends on our common stock in the foreseeable future. See the section of this prospectus entitled "Dividend Policy." In the event, however, that we pay dividends on our common stock, we will have to withhold a U.S. federal withholding tax at a rate of 30%, or a lower rate under an applicable income tax treaty, from the gross amount of the dividends paid to you. You should consult your tax advisors regarding your entitlement to benefits under a relevant income tax treaty. Generally, in order for us to withhold tax at a lower treaty rate, you must provide us with a properly executed Form W-8BEN certifying your eligibility for the lower treaty rate.

        Special certification and other requirements apply to certain non-U.S. holders that are claiming eligibility for a lower treaty rate and that are entities rather than individuals. A non-U.S. holder that is a foreign partnership or a foreign trust is urged to consult its tax advisor regarding its status under U.S. Treasury regulations and the certification requirements applicable to it.

        If you are eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty, you may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund with the U.S. Internal Revenue Service.

        If the dividend is effectively connected with your conduct of a trade or business in the United States and, if an income tax treaty applies, is attributable to a permanent establishment that you maintain in the United States, the dividend will generally be exempt from the U.S. federal withholding tax, provided that you supply us with a properly executed Form W-8ECI. In this case, the dividend will be taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons and, if you are a foreign corporation, you may be subject to an additional branch profits tax at a rate of 30% or a lower rate as may be specified by an applicable income tax treaty.

Gain on Dispositions of Common Stock

        You generally will not be subject to U.S. federal income tax on gain recognized on a disposition of our common stock unless:

•

the gain is effectively connected with your conduct of a trade or business in the United States and, if an income tax treaty applies, the gain is attributable to a permanent establishment maintained by you in the United States; in this case, the gain will be taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons and, if you are a foreign corporation, you may be subject to an additional branch profits tax at a rate of 30% or a lower rate as may be specified by an applicable income tax treaty;



•

you are an individual who is present in the United States for 183 days or more in the taxable year of the disposition and meets other requirements; in this case, you will be subject to U.S. federal income tax at a rate of 30% (or a reduced rate under an applicable treaty) on the gain derived from the sale, which may be offset by U.S. source capital losses, even though you are not considered a resident of the United States; or



•

we are or have been a "U.S. real property holding corporation" for U.S. federal income tax purposes at any time during the shorter of the five-year period ending on the date of disposition or the period that you held our common stock; in this case, subject to the discussion below, the gain will be taxed on a net income basis in the manner described in the first bullet paragraph above.

        Generally, a corporation is a "U.S. real property holding corporation" if the fair market value of its "U.S. real property interests" equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business. The tax relating to stock in a "U.S. real property holding corporation" generally will not apply to a

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non-U.S. holder whose holdings, direct, indirect and constructive, at all times during the applicable period, constituted 5% or less of our common stock, provided that our common stock was regularly traded on an established securities market. We believe that we are not currently, and we do not anticipate becoming in the future, a "U.S. real property holding corporation" for U.S. federal income tax purposes.

Federal Estate Tax

        Common stock owned or treated as owned by an individual who is a non-U.S. holder (as specially defined for U.S. federal estate tax purposes) at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax.

Information Reporting and Backup Withholding

        Information returns will be filed with the U.S. Internal Revenue Service in connection with payments of dividends and the proceeds from a sale or other disposition of our common stock. Dividends paid to you may be subject to information reporting and U.S. backup withholding. The backup withholding tax rate currently is 28%. You generally will be exempt from such backup withholding if you provide a properly executed Form W-8BEN or otherwise meet documentary evidence requirements for establishing that you are a non-U.S. holder or otherwise establish an exemption.

        The gross proceeds from the disposition of our common stock may be subject to information reporting and backup withholding. If you sell your shares of our common stock outside the United States through a non-U.S. office of a non-U.S. broker and the sales proceeds are paid to you outside the United States, then the U.S. backup withholding and information reporting requirements generally (except as provided in the following sentence) will not apply to that payment. However, information reporting, but not backup withholding, will apply to a payment of sales proceeds, even if that payment is made outside the United States, if you sell our common stock through a non-U.S. office of a broker that:

•

is a U.S. person;



•

derives 50% or more of its gross income in specific periods from the conduct of a trade or business in the United States;



•

is a "controlled foreign corporation" for U.S. tax purposes; or



•

is a foreign partnership, if at any time during its tax year, one or more of its partners are U.S. persons who in the aggregate hold more than 50% of the income or capital interests in the partnership, or the foreign partnership is engaged in a U.S. trade or business

Unless the broker has documentary evidence in its files that you are a non-U.S. person and various other conditions are met or you otherwise establish exemption.

        If you receive payments of the proceeds of a sale of our common stock to or through a U.S. office of a broker, the payment is subject to both U.S. backup withholding and information reporting unless you provide a properly executed Form W-8BEN certifying that you are a non-U.S. person or you otherwise establish an exemption.

        You generally may obtain a refund of any amount withheld under the backup withholding rules that exceeds your income tax liability by timely filing a refund claim with the U.S. Internal Revenue Service.

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UNDERWRITING

        We are offering the shares of common stock described in this prospectus through a number of underwriters. J.P. Morgan Securities Inc. and Banc of America Securities LLC are acting as joint book running managers of the offering and as representatives of the underwriters. We have entered into an underwriting agreement with the underwriters. Subject to the terms and conditions of the underwriting agreement, we have agreed to sell to the underwriters, and each underwriter has severally agreed to purchase, at the public offering price less the underwriting discounts and commissions set forth on the cover page of this prospectus, the number of shares of common stock listed next to its name in the following table:

Underwriter		Number of shares
J.P. Morgan Securities Inc.
Banc of America Securities LLC
CIBC World Markets Corp.
C.E. Unterberg, Towbin, LLC
	Total

        The underwriters are committed to purchase all the common shares offered by us if they purchase any shares. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may also be increased or the offering may be terminated.

        The underwriters propose to offer the shares of common stock directly to the pubic at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession not in excess of $                        per share. Any such dealers may resell shares to certain other brokers or dealers at a discount of up to $                        per share from the initial public offering price. After the initial public offering of the shares, the offering price and other selling terms may be changed by the underwriters. The representatives have advised us that the underwriters do not intend to confirm discretionary sales in excess of 5% of the common shares offered in this offering.

        The underwriters have an option to buy up to                        additional shares of common stock from us to cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days from the date of this prospectus to exercise this over-allotment option. If any shares are purchased with this over-allotment option, the underwriters will purchase shares in approximately the same proportion as shown in the table above.

        The underwriting fee is equal to the public offering price per share of common stock less the amount paid by the underwriters to us per share of common stock. The underwriting fee is $                        per share. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters assuming both no exercise and full exercise of the underwriters' option to purchase additional shares.

	No exercise	Full exercise
Per share	$	$
Total to be paid by us	$	$

        We estimate that the total expenses of this offering, including registration, filing and listing fees, printing fees and legal and accounting expenses, but excluding the underwriting discounts and commissions, will be approximately $                        .

        We, our officers and directors and the holders of substantially all of our outstanding stock, options and warrants, have agreed not to offer, pledge, announce the intention to sell, sell, contract to sell, sell

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any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock or enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any such transaction is to be settled by delivery of common stock or such other securities, in cash or otherwise, in each case without the prior written consent of J.P. Morgan Securities Inc. and Banc of America Securities LLC. In addition, we have agreed not to file, and such holders have agreed not to exercise any rights that would require the filing of, a registration statement with the SEC relating to any such shares without the prior written consent of J.P. Morgan Securities Inc. and Banc of America Securities LLC. The foregoing restrictions are subject to certain exceptions relating to our issuance of equity awards and shares of our common stock under our existing equity incentive plans, the acquisition of shares pursuant to outstanding options, warrants or convertible securities (provided that the shares acquired upon exercise or conversion of such securities remain subject to these restrictions) and the sale of our common stock acquired in this offering or in open market transactions following this offering. Notwithstanding the foregoing, if (1) during the last 17 days of the 180-day restricted period, we issue an earnings release or material news or a material event relating to our company occurs; or (2) prior to the expiration of the 180-day restricted period, we announce that we will release earnings results during the 16-day period beginning on the last day of the 180-day period, the restrictions described above shall continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or material event.

        We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933.

        We will apply to have our common stock approved for listing on the NASDAQ Global Market under the symbol "QURK."

        In connection with this offering, the underwriters may engage in stabilizing transactions, which involves making bids for, purchasing and selling shares of common stock in the open market for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. These stabilizing transactions may include making short sales of the common stock, which involves the sale by the underwriters of a greater number of shares of common stock than they are required to purchase in this offering, and purchasing shares of common stock on the open market to cover positions created by short sales. Short sales may be "covered" shorts, which are short positions in an amount not greater than the underwriters' over-allotment option referred to above, or may be "naked" shorts, which are short positions in excess of that amount. The underwriters may close out any covered short position either by exercising their over-allotment option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriters will consider, among other things, the price of shares available for purchase in the open market compared to the price at which the underwriters may purchase shares through the over-allotment option. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market that could adversely affect investors who purchase in this offering. To the extent that the underwriters create a naked short position, they will purchase shares in the open market to cover the position.

        The underwriters have advised us that, pursuant to Regulation M of the Securities Act of 1933, they may also engage in other activities that stabilize, maintain or otherwise affect the price of the common stock, including the imposition of penalty bids. This means that if the representatives of the underwriters purchase common stock in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them.

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        These activities may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock, and, as a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the NASDAQ Global Market, in the over-the-counter market or otherwise.

        Prior to this offering, there has been no public market for our common stock. The initial public offering price will be determined by negotiations between us and the representatives of the underwriters. In determining the initial public offering price, we and the representatives of the underwriters expect to consider a number of factors including:

•

the information set forth in this prospectus and otherwise available to the representatives;



•

our prospects and the history and prospects for the industry in which we compete;



•

an assessment of our management;



•

our prospects for future earnings;



•

the general condition of the securities markets at the time of this offering;



•

the recent market prices of, and demand for, publicly traded common stock of generally comparable companies; and



•

other factors deemed relevant by the underwriters and us.

        Neither we nor the underwriters can assure investors that an active trading market will develop for our common shares, or that the shares will trade in the public market at or above the initial public offering price.

        A prospectus in electronic format may be made available on the websites maintained by one or more underwriters, or selling group members, if any, participating in the offering. The underwriters may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the representatives to underwriters and selling group members that may make Internet distributions on the same basis as other allocations.

        At our request, the underwriters have reserved for sale, at the initial public offering price, up to                        shares offered in this prospectus for our business associates. The number of shares of common stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this prospectus.

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NOTICE TO INVESTORS

European Economic Area

        In relation to each member state of the European Economic Area which has implemented the Prospectus Directive, or a relevant member state, with effect from and including the date on which the Prospectus Directive is implemented in that relevant member state, or the relevant implementation date, the underwriter has not made and will not make an offer of our common stock to the public in that relevant member state prior to the publication of a prospectus in relation to the common stock which has been approved by the competent authority in that relevant member state or, where appropriate, approved in another relevant member state and notified to the competent authority in that relevant member state, all in accordance with the Prospectus Directive, except that it may, with effect from and including the relevant Implementation Date, make an offer of our common stock to the public in that relevant member state at any time:

•

to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities;



•

to any legal entity which has two or more of (i) an average of at least 250 employees during the last financial year, (ii) a total balance sheet of more than €43,000,000 and (iii) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or



•

in any other circumstances which do not require the publication by the issuer of a prospectus as required by Article 3 of the Prospectus Directive.

        For the purposes of this provision, the expression an "offer of our common stock to the public" in relation to any of our common stock in any relevant member state means the communication in any form and by any means of sufficient information on the terms of the offer and the common stock to be offered so as to enable an investor to decide to purchase or subscribe for our common stock, as the same may be varied in that member state by any measure implementing the Prospectus Directive in that member state and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each relevant member state.

United Kingdom

        The underwriter has not made and will not make an offer of our common stock to the public in the United Kingdom within the meaning of section 102B of the Financial Services and Markets Act 2000 (as amended), or the FSMA, except to legal entities which are authorized or regulated to operate in the financial markets or whose corporate purpose is solely to invest in securities or otherwise in circumstances which do not require the publication by the company of a prospectus as required by the Prospectus Rules of the Financial Services Authority. The underwriter has only communicated and will only communicate an invitation or inducement to engage in investment activity (within the meaning of section 21 of FSMA) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or in circumstances in which section 21 of FSMA does not apply to the company, and the underwriter has complied with and will comply with all applicable provisions of FSMA with respect to anything done by it in relation to our common stock in, from or otherwise involving the United Kingdom.

France

        Neither this prospectus nor any offering material relating to our common stock has been or will be submitted to the "Commission des Opérations de Bourse" for approval ("Visa"), in France. The underwriter has not offered or sold and will not offer or sell any of our common stocks or distribute or cause to be distributed any copies of this prospectus or any offering material relating to our common

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stock, directly or indirectly, in France, except (a) with the prior authorization of the French Ministry for Economy and Finance in accordance with Articles 9 and 10 of the 'Décret' of December 29, 1989 regulating financial relations between France and foreign countries, or (b) to qualified investors ("investisseurs qualifiés"), and/or a restricted group of investors ("cercle restreint d'investisseurs"), in each case acting for their account, all as defined in, and in accordance with, Article L. 411-l and L. 411-2 of the Monetary and Financial Code and "Décret" no. 98-880 dated October 1, 1998.

Germany

        This prospectus is not a Securities Selling Prospectus within the meaning of the German Securities Sales Prospectus Act of September 9, 1998 and has not been filed with and approved by the German Federal Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) or any other competent German governmental authority under the relevant laws. The underwriter has not offered or sold and will not offer or sell any of our common stock or distribute copies of this prospectus or any document relating to our common stock, directly or indirectly, in Germany except to persons falling within the scope of section 2 numbers 1 (persons who as part of their profession, occupation or business, purchase or sell securities for their own account or for the account of third parties), 2 (a restricted circle of persons) and 3 (employees by their employer or related group companies) of the German Securities Sales Prospectus Act of September 8, 1998 and by doing so has not taken, and will not take, any steps which would constitute a public offering of our common stock in Germany.

Italy

        The offering of our common stock in Italy has not been registered with the Commissione Nazionale per le Società e la Borsa ("CONSOB") pursuant to Italian securities legislation and, accordingly: (i) our common stock cannot be offered, sold or delivered in the Republic of Italy ("Italy") in a solicitation to the public at large (sollecitazione all'investimento) within the meaning of Article 1, paragraph 1, letter (t) of Legislative Decree no. 58 of February 24, 1998 (the "Financial Services Act"), nor may any copy of this prospectus or any other document relating to our common stock be distributed in Italy, (ii) our common stock cannot be offered, sold and/or delivered, nor may any copy of this prospectus or any other document relating to our common stock be distributed, either in the primary or in the secondary market, to individuals in Italy, and (iii) sales of our common stock in Italy shall only be: (a) negotiated with "Professional Investors" (operatori qualificati), as defined under Article 31, paragraph 2, of CONSOB Regulation no. 11522 of July 1, 1998, as amended ("CONSOB Regulation No. 11522"), (b) made by an investment firm, bank or financial intermediary permitted to conduct such activities in Italy in accordance with the Italian Banking Act, the Financial Services Act, CONSOB Regulation no. 11522 and all the other relevant provisions of Italian law, and (c) effected in accordance with any other Italian securities, tax and exchange control and other applicable laws and regulations and any other applicable requirement or limitation which may be imposed by CONSOB or the Bank of Italy.

Switzerland

        This prospectus does not constitute a prospectus within the meaning of Article 652a and Art. 1156 of the Swiss Code of Obligations (Schweizerisches Obligationenrecht), and none of this offering of our common stock has been or will be approved by any Swiss regulatory authority.

Israel

        This document does not constitute a prospectus approved by the Israeli Securities Authority. The securities are being offered in Israel solely to investors of the categories listed in the annex to Israeli Securities Law and possibly to a limited number of other investors, in all cases under circumstances that do no constitute an "offering to the public" under Section 15 of the Israeli Securities Law. This

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document may not be reproduced or used for any other purpose or furnished to any other person other than those to whom copies have been sent.

        Nothing in this document should be considered consulting as defined in the Investment Consulting, Investments Marketing and Portfolio Management Law—1995.

Japan

        Our common stock has not been and will not be registered under the Securities and Exchange Law of Japan and may not be offered or sold, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan (which term as used herein means any person resident in Japan, including any corporation or other entity organized under the laws of Japan) or to, or for the account or benefit of, any person for reoffering or resale, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan, except (i) pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Securities and Exchange Law of Japan and (ii) in compliance with any other relevant laws and regulations of Japan.

106

LEGAL MATTERS

        The validity of the shares of common stock being offered by this prospectus will be passed upon for us by Cooley Godward Kronish LLP, Palo Alto, California. The underwriters are being represented by Davis Polk & Wardwell, Menlo Park, California.

EXPERTS

        Our consolidated financial statements at December 31, 2006 and 2005, and for each of the three years in the period ended December 31, 2006, appearing in this prospectus and the registration statement of which this prospectus forms a part have been audited by Kost, Forer Gabbay and Kasierer, a member of Ernst & Young Global, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

        We have filed with the SEC a registration statement on Form S-1 under the Securities Act of 1933, as amended, with respect to the shares of common stock being offered by this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits. For further information with respect to Quark Biotech, Inc. and the common stock offered by this prospectus, we refer you to the registration statement and its exhibits. Statements contained in this prospectus as to the contents of any contract or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract or other document filed as an exhibit to the registration statement. Each of these statements is qualified in all respects by this reference.

        You can read our SEC filings, including the registration statement, over the Internet at the SEC's website at http://www.sec.gov. You may also read and copy any document we file with the SEC at its public reference facilities at 100 F Street, N.E., Washington, D.C. 20549. You may also obtain copies of these documents at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference facilities.

        Upon the closing of this offering, we will be subject to the information reporting requirements of the Securities Exchange Act of 1934, as amended, and we will file reports, proxy statements and other information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at the public reference room and website of the SEC referred to above. We also maintain a website at www.quarkbiotech.com, at which you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on, or that can be accessed through, our website is not part of this prospectus.

107

QUARK BIOTECH, INC.

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2006

IN U.S. DOLLARS

Index

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-5
Statements of Changes in Stockholders' Equity	F-6
Consolidated Statements of Cash Flows	F-7
Notes to Consolidated Financial Statements	F-8

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Quark Biotech, Inc.

        We have audited the accompanying consolidated balance sheets of Quark Biotech, Inc. ("the Company") as of December 31, 2005 and 2006, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2005 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, in conformity with U.S. generally accepted accounting principles.

        As discussed in Note 2j to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standard No. 123(R), "Share-Based Payment", effective January 1, 2006.

	/S/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel	KOST FORER GABBAY & KASIERER
March 29, 2007	A Member of Ernst & Young Global

F-2

QUARK BIOTECH, INC.

Consolidated Balance Sheets

U.S. dollars in thousands

			December 31,
			2005		2006
ASSETS
CURRENT ASSETS:
	Cash and cash equivalents		$	18,326	$	19,842
	Accounts receivable			—		647
	Other receivables and prepaid expenses (Note 4)			111		313
	Loan to related party (Note 5)			—		560
		Total current assets		18,437		21,362
LONG-TERM LEASE DEPOSIT AND RESTRICTED BANK DEPOSIT				299		208
LONG-TERM LOAN TO RELATED PARTY (Note 5)				538		—
SEVERANCE PAY FUND				462		520
PROPERTY AND EQUIPMENT, NET (Note 6)				1,694		802
		Total assets	$	21,430	$	22,892

The accompanying notes are an integral part of the consolidated financial statements.

F-3

QUARK BIOTECH, INC.

Consolidated Balance Sheets

U.S. dollars in thousands (except share data)

			Year ended December 31,
									Pro forma shareholders' equity as of December 31, 2006
			2005			2006
									(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
	Trade payables		$	473		$	2,155
	Accrued research and development fees			1,195			1,688
	Other payables and accrued expenses (Note 7)			1,179			1,205
	Deferred revenues			53			11,677
		Total current liabilities		2,900			16,725
ACCRUED SEVERANCE PAY				471			521
COMMITMENTS AND CONTINGENT LIABILITIES (Note 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 10):
	Series F Redeemable Convertible Preferred stock $0.001 par value: 1,143,764 shares authorized, issued and outstanding at December 31, 2005 and 2006; Aggregate liquidation preference of $13,725 at December 31, 2006; No shares authorized or issued and outstanding pro-forma (unaudited)			874			236		$	—
STOCKHOLDERS' EQUITY:
	Share capital (Note 11):
		Common A stock $0.001 par value: Authorized: 72,500,000 shares at December 31, 2005 and 2006; Issued and outstanding: 7,623,540 shares at December 31, 2005 and 2006;        shares authorized and 37,482,445 shares, issued and outstanding pro-forma (unaudited)		8			8			37
		Series A-E, G Convertible Preferred stock $0.001 par value: Authorized: 24,735,847 shares at December 31, 2005 and 2006; Issued and outstanding: 21,588,982 and 24,735,847 shares issued at December 31, 2005 and 2006, respectively; Aggregate liquidation preference of $72,676 at December 31, 2006; 10,000,000 shares authorized and none issued and outstanding pro-forma (unaudited)		22			25			—
	Additional paid-in capital			65,238			69,781			70,013
	Accumulated deficit			(48,083	)		(64,404	)		(64,404	)
		Total stockholders' equity		17,185			5,410		$	5,646
		Total liabilities and stockholders' equity	$	21,430		$	22,892

The accompanying notes are an integral part of the consolidated financial statements.

F-4

QUARK BIOTECH, INC.

Consolidated Statements of Operations

U.S. dollars in thousands (except share and per share data)

			Year ended December 31,
			2004			2005			2006
Revenues, net (Note 14)			$	4,871		$	3,438		$	4,252
Operating costs and expenses:
	Research and development			16,132			9,049			18,881
	General and administrative			2,772			2,224			2,981
	Impairment and write-off of property and equipment			2,470			—			—
		Total operating costs and expenses		21,374			11,273			21,862
Operating loss				(16,503	)		(7,835	)		(17,610	)
Financial income, net (Note 12)				253			377			656
Other income (expenses)				17			—			(5	)
	Net loss			(16,233	)		(7,458	)		(16,959	)
Changes of redemption value of Series F Preferred stock				809			(118	)		638
	Net loss to Common stockholders		$	(15,424	)	$	(7,576	)	$	(16,321	)
Net loss per share of Common stock (Note 13):
Basic and diluted net loss per share			$	(2.05	)	$	(1.00	)	$	(2.14	)
Weighted average number of shares used in computing basic and diluted net loss per share				7,523,540			7,539,430			7,623,540
Proforma net loss per share of Common stock (Note 2(k)):
Basic and diluted net loss per share (unaudited)									$	(0.46	)
Weighted average number of shares used in computing basic and diluted net loss per share — proforma (unaudited)										36,786,974

The accompanying notes are an integral part of the consolidated financial statements.

F-5

QUARK BIOTECH, INC.

Statements of Changes in Stockholders' Equity

U.S. dollars in thousands (except share data)

		Common A stock				Convertible Preferred stock
									Additional paid-in Capital		Accumulated deficit			Total stockholders' equity
		Stock	Amount			Stock	Amount
Balance at January 1, 2004		7,523,540	$	8		14,246,336	$	14	$	54,850	$	(25,083	)	$	29,789
	Compensation related to options to non-employees	—		—		—		—		21		—			21
	Changes in the redemption value of Series F Preferred stock	—		—		—		—		—		809			809
	Net loss	—		—		—		—		—		(16,233	)		(16,233	)
Balance at December 31, 2004		7,523,540		8		14,246,336		14		54,871		(40,507	)		14,386
	Issuance of shares of Preferred stock and warrants, net	—		—		7,342,646		8		10,341		—			10,349
	Exercise of options	100,000		—	(*)	—		—		13		—			13
	Compensation related to options to non-employees	—		—		—		—		13		—			13
	Changes in the redemption value of Series F Preferred stock	—		—				—		—		(118	)		(118	)
	Net loss	—		—		—		—		—		(7,458	)		(7,458	)
Balance at December 31, 2005		7,623,540		8		21,588,982		22		65,238		(48,083	)		17,185
	Issuance of shares of Preferred stock and warrants, net	—		—		3,146,865		3		4,456		—			4,459
	Stock-based compensation to employees	—		—		—		—		8		—			8
	Compensation related to options to non-employees	—		—		—		—		79		—			79
	Changes in the redemption value of Series F Preferred stock	—		—		—		—		—		638			638
	Net loss	—		—		—		—		—		(16,959	)		(16,959	)
Balance at December 31, 2006		7,623,540	$	8		24,735,847	$	25	$	69,781	$	(64,404	)	$	5,410

(*)

Represents an amount lower than $ 1.

The accompanying notes are an integral part of the consolidated financial statements.

F-6

QUARK BIOTECH, INC.

Consolidated Statements of Cash Flows

U.S. dollars in thousands

				Year ended December 31,
				2004			2005			2006
Cash flows from operating activities:
	Net loss			$	(16,233	)	$	(7,458	)	$	(16,959	)
	Adjustments to reconcile net loss to net cash used in operating activities:
		Depreciation and amortization			1,729			814			595
		Impairment and write-off of property and equipment			2,470			—			—
		Stock-based compensation			21			13			87
		Increase in accounts receivable			—			—			(647	)
		Decrease (increase) in other receivables and prepaid expenses			403			364			(202	)
		Increase (decrease) in trade payables			260			(489	)		1,682
		Increase (decrease) in accrued research and development fees			(512	)		527			493
		Increase (decrease) in other payables and accrued expenses			(418	)		(313	)		26
		Increase (decrease) in deferred revenues			(1,127	)		(360	)		11,624
		Losses (gain) on sale of property and equipment			9			(13	)		12
		Severance pay, net			(78	)		(28	)		(8	)
		Accrued interest on loan to a related party and other			(38	)		(6	)		(24	)
			Net cash used in operating activities		(13,514	)		(6,949	)		(3,321	)
Cash flows from investing activities:
	Purchase of property and equipment				(420	)		(29	)		(144	)
	Proceeds from the release of restricted deposit				1,873			—			94
	Proceeds from sale of property and equipment				266			393			429
	Long-term lease deposit and other				(96	)		—			(1	)
		Net cash provided by investing activities			1,623			364			378
Cash flows from financing activities:
	Proceeds from issuance of stock and warrants, net				—			10,349			4,459
	Exercise of options				—			13			—
		Net cash provided by financing activities			—			10,362			4,459
Increase (decrease) in cash and cash equivalents					(11,891	)		3,777			1,516
Cash and cash equivalents at the beginning of the year					26,440			14,549			18,326
Cash and cash equivalents at the end of the year				$	14,549		$	18,326		$	19,842

The accompanying notes are an integral part of the consolidated financial statements.

F-7

QUARK BIOTECH, INC.

Notes to Consolidated Financial Statements

U.S. dollars in thousands (except share and per share data)

NOTE 1:- GENERAL

        Quark Biotech, Inc. ("the Company") was incorporated in the State of California in December 1993.

        The Company is a clinical-stage biopharmaceutical company focused on discovering and developing novel therapeutics, based on its proprietary gene discovery science and technology, with an initial focus on RNA interference-based therapeutics for the treatment of diseases associated with oxidative stress. The Company's product candidate portfolio is based on novel targets and therapeutic concepts discovered using its proprietary target gene discovery platform.

        QBI Enterprises Ltd. ("Ltd."), a wholly-owned subsidiary, is engaged in research and development.

        For major license and collaboration agreements and customers, see Notes 3 and 14.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

        The consolidated financial statements are prepared according to United States generally accepted accounting principles ("U.S. GAAP").

a. Use of estimates:

        The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

b. Financial statements in U.S. dollars:

        The accompanying financial statements have been prepared in U.S. dollars.

        Ltd. conducts the majority of its operations in Israel. However, most of the Ltd. revenues are in U.S. dollars and the Company's management believes that the U.S. dollar is the currency of the primary economic environment in which Ltd. operates. The functional and reporting currency of Ltd. is thus the U.S. dollar.

        Transactions and balances denominated in U.S. dollars are presented at their original amounts. Monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation" ("SFAS No. 52"). All transaction gains and losses of the remeasurement of monetary balance sheet items are reflected in the consolidated statements of operations as financial income or expenses, as appropriate.

c. Principles of consolidation:

        The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated upon consolidation.

d. Cash equivalents:

        Cash equivalents are short-term, highly liquid investments that are readily convertible to cash with an original maturity of three months or less when purchased.

F-8

e. Property and equipment:

        Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets at the following rates:

	%
Machinery and equipment	15 - 33
Office furniture and equipment	6 - 33
Motor vehicles	15
Leasehold improvements	Over the shorter of the term of the lease or its useful life

f. Impairment of long-lived assets:

        The Company's long-lived assets are reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"), whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. During 2004, the Company recorded a charge of $ 2,470 with respect to impairment and write-off of property and equipment.

g. Royalty-bearing grants:

        Royalty-bearing grants from several sources for funding approved research and development projects are recognized at the time the Company is entitled to such grants, on the basis of the costs incurred. Research and development grants amounted to $ 34, $ 0, and $ 172 and were recorded as revenues for the years ended December 31, 2004, 2005 and 2006, respectively.

h. Revenue recognition:

        The Company generates revenues mainly from periodic fees for research services under its collaborations with pharmaceutical companies, from research and development cost reimbursements and upfront and milestone payments and, to a lesser extent, from certain short term research service agreements and grants received.

        The Company's revenue recognition policies are in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB 104") and Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") and EITF Issue No. 99-19, "Reporting Revenue Gross Versus Net as an Agent" ("EITF 99-19").

        License agreement with Pfizer:

        This multiple element arrangement was analyzed to determine whether the deliverables, which include a license, a participation in joint steering and research committees and performance obligations

F-9

such as research services, can be separated or whether they must be accounted for as a single unit of accounting in accordance with EITF 00-21. According to EITF 00-21, the Company considered whether (i) the license has stand-alone value and (ii) the fair value of any of the undelivered performance obligations can be determined. Because the Company could not determine the fair value of the undelivered performance obligations, the arrangement is being accounted for as a single unit of accounting and the license payments and payments for performance obligations are recognized as revenue over the estimated period of when the performance obligations are performed. In addition, revenues are recognized only when the Company has a contractual right to receive payments, the contract price is fixed or determinable and the collection of the resulting receivable is reasonably assured.

        Whenever the Company determines that an arrangement should be accounted for as a single unit of accounting, it must determine the period over which the performance obligations will be performed and revenue will be recognized. Management estimates that the Company's performance obligations will cease by December 2007.

        As the Company can reasonably estimate when the performance obligations cease or become inconsequential and the performance obligations are provided on a best-efforts basis, the total payments under the arrangement, excluding royalties and payments contingent upon achievement of substantive milestones, are recognized as revenue on a straight-line basis over the period the Company expects to complete its performance obligations.

        Significant management judgment is required in determining the period over which the Company is expected to complete its performance obligations under the arrangement. In addition, as the Company is involved in joint steering and research committees as part of this multiple element arrangement that is accounted for as a single unit of accounting, the Company assesses whether its involvement constitutes a performance obligation or a right to participate. Because the Company can be released from its joint steering and research committee services without significant penalty, such services are considered inconsequential or perfunctory and are not considered to be performance obligations.

        This collaboration agreement also contains milestone payments. During the period in which the Company has research performance obligations, milestone payments are considered to be substantive. Substantive milestone payments are considered to be performance bonuses that are recognized upon achievement of the milestone only if all of the following conditions are met:

•

the milestone payments are non-refundable;



•

achievement of the milestone involves a degree of risk and was not reasonably assured at the inception of the arrangement;



•

the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone; and



•

a reasonable amount of time passes between the upfront license payment and the first milestone payment as well as between each subsequent milestone payment.

        Reimbursement of costs is recognized as revenue on a gross basis as costs are being incurred in accordance with the provisions of EITF 99-19 provided the amounts are determinable, and collection of the related receivable is reasonably assured.

F-10

        Research collaborations with pharmaceutical companies:

        Under these agreements, the Company's performance obligations were provided on a best-efforts basis, there was no discernible pattern of outputs as the research services were performed and the research services were limited in the agreement to a specified period. The total payments under the arrangement, excluding royalties and payments contingent upon achievement of development milestones by the collaborators, were recognized as revenue on a straight-line basis over the period in which the Company completed its performance obligations. Revenue was limited to the lower of the cumulative amount of payments received or the cumulative amount of revenue earned, as determined using the straight-line basis, as of the period ending date.

        The Company has no further performance obligations and the Company is not involved in the collaborators' research and development plans. The Company may be entitled to future milestone payments and royalties from its collaborators, depending on the progress of their development of a drug. Revenue from such milestone payments and royalties will be recognized when due and collection is reasonably assured.

        Development milestone payments from Sanwa:

        The Company has no performance obligations under this arrangement and the Company is not involved in the research and development with Sanwa. Therefore revenue with respect to any payments received are recognized when it is due and collection is reasonably assured.

        The Company accounts for Sanwa's development milestone revenue in accordance with EITF No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent". Accordingly, the Company records such revenue on a net basis (sublicense revenues received less revenues transferred to SX, see Note 3c).

        Other short term service agreements:

        Under certain short term fixed-price service contracts, the Company agrees to perform limited research services using its technology and research platforms for a fixed price. Under these agreements, revenue is deferred until the Company completes its performance obligations.

        Grants:

        Revenue from grants from the Chief Scientist of the Government of Israel and the Israel-United States Bi-National Industrial Research and Development Foundation ("BIRD-F") is related to the reimbursement of qualifying research and development expenses. Revenue is recognized as related research and development expenses are incurred. Grant payments received, but not yet earned, are recorded as deferred revenue.

        Deferred revenue:

        Deferred revenue is recognized for payments received in advance of the culmination of the earnings process. Deferred revenue is expected to be recognized within the next twelve months.

i. Research and development costs:

        Research and development costs, including direct and allocated expenses, consist of independent research and development costs and costs associated with collaborative research and development arrangements. All such costs are expensed as incurred.

F-11

j. Accounting for stock-based compensation:

        1.     Prior to January 1, 2006, the Company accounted for its employee stock option plans using the intrinsic value method prescribed by APB 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations. Accordingly, the compensation cost relating to stock options was charged on the date of grant of such options, to stockholders' equity, under deferred compensation, and was thereafter amortized as an expense by the straight-line method over the vesting period.

        SFAS No. 148, "Accounting for Stock-Based Compensation — Transition and Disclosure" ("SFAS No. 148") amends SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") to provide alternative methods to voluntary transition to the fair value based methods of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect for the method used on reported results.

        As provided for in SFAS No. 148, the Company has elected to continue to follow APB No. 25 and related interpretations in accounting for its employee stock options. Compensation expense, if any, was based on the difference between the exercise price of an option or the amount to be paid for the award and the market price or fair value of the underlying common stock at the date of the grant. To the extent that compensation expense was recognized with respect to stock options issued to employees or directors, such expense was amortized over the vesting period of such options.

        For pro forma disclosures purposes that were provided in previous periods under the provisions of SFAS No. 123, the Company estimated the fair value of each option granted through December 31, 2005 on the date of its grant using the minimum value method.

        2.     Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R) "Share-Based Payment" ("SFAS No. 123(R)"), which requires companies to measure the cost of employee services received in exchange for an award of equity instruments (typically stock options) based on the grant-date fair value of the award. The fair value is estimated using option-pricing models. The resulting cost is recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Prior to the adoption of SFAS 123(R), this accounting treatment was optional and pro forma disclosures were required.

        In March 2005, the SEC released SAB No. 107, "Share-Based Payment" ("SAB 107"). SAB 107 states the SEC staff's position regarding the application of SFAS 123(R) and contains interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides the SEC staff's views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made relating to the accounting for share-based payment transactions.

        The Company adopted SFAS 123(R) using the prospective-transition method because all prior grants was measured using the minimum value method for Statement 123 required pro forma disclosures. As such, the Company will continue to apply APB 25 in future periods to equity awards outstanding at the date of Statement 123(R) adoption that were measured using the minimum value method. Under this transition method, any compensation costs that will be recognized from January 1, 2006 will include only compensation cost for all share-based payments granted or modified subsequent

F-12

to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

        In accordance with the provisions of SFAS No. 123(R), a nonpublic entity that used the minimum value method for pro forma disclosure purposes under the original provisions of SFAS No. 123 should no longer continue to provide those pro forma disclosures for outstanding awards.

        3.     The Company applies SFAS No. 123(R) and EITF No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF 96-18"), with respect to options and warrants issued to non-employees. SFAS No. 123(R) and EITF 96-18 require the use of option valuation models to measure the fair value of the options and warrants at the measurement date.

k. Basic and diluted net loss per share:

        The Company applies the two class method as required by EITF No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128" ("EITF 03-6"). EITF 03-6 requires the loss per share for each class of shares (Common and Preferred stock) to be calculated assuming 100% of the Company's earnings are distributed as dividends to each class of shares based on their contractual rights.

        According to the provisions of EITF 03-6 the Company's series of Preferred stock and warrants for Preferred stock are not participating securities in losses, and therefore are not included in the computation of net loss per share.

        Basic and diluted net losses per share are computed based on the weighted average number of shares of Common stock outstanding during each year. Diluted net losses per share is computed based on the weighted-average number of shares of Common stock outstanding during the period, plus dilutive potential shares considered outstanding during the period, in accordance with SFAS No. 128, "Earnings Per Share".

        For the years ended December 31, 2004, 2005 and 2006, all outstanding options and warrants have been excluded from the calculation of the diluted loss per share since their effect was anti-dilutive.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

        Basic and diluted pro forma net loss per share (unaudited), as presented in the statements of operations, have been calculated as described above and also give effect to the automatic conversion of all series of Preferred stock, that will occur upon closing of the Initial Public Offering ("IPO").

        The following table presents the calculation of proforma basic and diluted net loss per share:

1. Numerator:

	Year ended December 31, 2006
	(Unaudited)
Net loss to Common stock as reported	$	(16,321	)
Reverse changes of redemption value of series F Preferred stock		638
Net loss available to Common stock — Proforma	$	(16,959	)

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2. Denominator:

	Year ended December 31, 2006
	Number of shares
	(Unaudited)
Weighted average number of shares of shares of Common stock	7,623,540
Effect of weighted average potential shares of Common stock assumed from conversion of Preferred stock	29,163,434
Denominator for proforma basic and diluted net loss per share of Common stock	36,786,974

l. Unaudited proforma shareholders' equity:

        The Company's Board of Directors has authorized the filing of a Registration Statement with the U.S. Securities and Exchange Commission to register the Company's common stock for an IPO. Upon the consummation of the IPO, all of the authorized, issued, and outstanding Series Preferred shares will automatically be converted into shares of common stock. Unaudited proforma shareholders' equity at December 31, 2006, as adjusted for the assumed conversion of such shares is disclosed in the balance sheet.

m. Income taxes:

        The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 prescribes the use of the liability method whereby deferred tax asset and liability account balances are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

n. Fair value of financial instruments:

        The following methods and assumptions were used by the Company and its subsidiaries in estimating their fair value disclosures for financial instruments:

        The carrying values of cash and cash equivalents, restricted cash, accounts receivable, trade payables, and other accounts payable approximate their fair value due to the short-term maturities of these instruments.

        The carrying amounts of the long-term deposit and the long-term loan to a related party approximate their fair value. Their fair values were estimated using a discounted cash flows analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements.

o. Concentrations of credit risks:

        Financial instruments that potentially subject the Company and its subsidiaries to concentrations of credit risk consist principally of cash and cash equivalents and restricted cash.

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        Cash and cash equivalents are deposited in major banks or financial institutions in the United States and Israel. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company's investments are financially sound and, accordingly, minimal credit risk exists with respect to these investments.

        The Company has no off-balance sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

p. Retirement plans and severance pay:

        The Company sponsors a 401(k) retirement savings plan covering all of the U.S. employees. Each eligible employee may contribute a portion of their eligible compensation to the plan. The Company will match this contribution up to 4% of an employee's eligible compensation.

        The Company's matching contribution to the plan was approximately $78, $62 and $55 for the years ended December 31, 2004, 2005 and 2006, respectively.

        The liability of the Company's Israeli subsidiary for severance pay is calculated pursuant to Israel's Severance Pay Law, based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. Employees of the subsidiary are entitled to one month's salary for each year of employment or a portion thereof. The value of these policies and/or funds is recorded as an asset in the Company's balance sheet.

        The deposited funds may be withdrawn only upon the fulfillment of the provisions of Israel's Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies and includes immaterial interest income.

        Severance pay expenses for the years ended December 31, 2004, 2005 and 2006 amounted to $357, $236 and $163, respectively.

q. Recently issued accounting pronouncements in the United States:

        1.     In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. The recently issued literature also provides guidance on derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any income tax uncertainties.

        FIN 48 is effective for fiscal years beginning after December 15, 2006. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings.

        The Company is currently assessing the effect of the adoption of the provisions of FIN 48 on its financial position and results of operations.

        2.     In September 2006, the FASB issued Statement of Financial Accounting Standards ("SFAS") 157, "Fair Value Measurements". SFAS 157 defines fair value, establishes a framework for measuring

F-15

fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the effect that the adoption of SFAS 157 will have on its financial position and results of operations.

        3.     In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS No. 159 is effective for the Company beginning in the first quarter of fiscal year 2008, although earlier adoption is permitted. The Company is currently evaluating the impact that SFAS No. 159 will have on its consolidated financial statements.

NOTE 3:- MAJOR RESEARCH AND DEVELOPMENT COLLABORATIONS

        a.     In September 2006, the Company entered into a license agreement with Pfizer Inc. ("Pfizer") whereby it licensed to Pfizer, under its specific patent rights and technologies, the exclusive worldwide rights to develop and commercialize the RNAi technology based molecules derived from and inhibiting its proprietary target gene RTP801 for ophthalmic indications and non-ophthalmic indications.

        Pursuant to the agreement, Pfizer is responsible for all preclinical and clinical development costs of the licensed products, as well as all regulatory filings and approvals. The parties will share oversight of development through product-specific committees, but ultimately Pfizer has decision-making authority. According to the agreement, during a transition period the Company is continuing existing preclinical and clinical development of certain product candidates for ophthalmic and non-ophthalmic indications, with funding by Pfizer. At the end of the transition period Pfizer will take over the development activities.

        Pfizer will be responsible for manufacturing all product candidates for preclinical and clinical development and for commercial supply. Pfizer is also responsible for commercializing all product candidates licensed under the agreement, but has agreed to appoint the Company as exclusive distributor in Israel of products developed under the agreement.

        In connection with the agreement Pfizer paid the Company during 2006 approximately $14,860 in upfront fees and reimbursement of on-going research and development expenses that were incurred after effectiveness of the agreement.

        Pfizer may terminate the agreement without cause at any time upon prior written notice. If not terminated, the agreement will remain in effect in each country at least until the later of expiration of all relevant patents or ten years from the first commercial sale of the licensed product in such country.

        b.     Research collaborations with pharmaceutical companies:

        Under these agreements the Company collaborated with certain pharmaceutical companies applying the Company's technology platform to discover and validate novel target genes potentially suitable for drug development in a specific disease field of interest to the collaborator. The technology yielded in each case a number of target genes, potentially suitable for the development of therapies to treat the diseases of interest. The Company performed research services under these agreements on a "best efforts" basis.

F-16

        These agreements provided for a defined period for each of the research and development plans. The research was funded by the collaborating partner and the Company was entitled to non-refundable fixed dollar amounts to be paid periodically by the collaborators. From time to time, at the discretion of the collaborator, the term of the research and development services were extended in consideration for additional funding for the extended period.

        Under the agreements, the parties established a steering committee to oversee the research plan and in most cases the collaborator has the right to terminate the collaboration if the steering committee reaches a deadlock regarding the collaborator's request.

        Each of the collaborators selected a number of target genes for further development. In the event that a collaborator decides to pursue drug development for any of the target genes, the collaborator obtains an exclusive license to develop, manufacture and sell the products in defined territories in consideration for future financial obligations to the Company that include development milestone payments and royalties from sales of each product developed based on the Company's discoveries. In the event that the collaborator completes successful drug development, certain agreements also grant the Company an option to long-term co-marketing rights in certain territories in consideration for royalty obligation to the collaborator.

        According to the agreements, after the completion of the defined research term, the Company had no further peformance obligations in the drug development phase conducted by the collaborator. Under these agreements, the Company is entitled to use all target genes that are not used by the collaborator.

        The services under the above agreements were completed by December 31, 2005. With respect to above agreements, the Company received from its collaborators milestone payments of $2,989, $750 and $0 during the years ended December 31, 2004, 2005 and 2006, respectively. No royalty payments were received.

        c.     In 2003, the Company and Syndrome X Ltd. ("SX") entered into a Joint Venture Agreement (the "JV Agreement"), under which they agreed to incorporate a joint venture company in the United States (Quark Metabolix Inc., or "QMI"), to be owned 80% and 20% by the Company and SX, respectively, in order to develop and commercialize products based on certain know how for Dyslipidemia and Metabolic Syndrome ("BT 16"). BT16 is owned by SX. Under the JV Agreement, the Company agreed to conduct and fund the development plans of QMI while SX provided the know-how.

        Consequently, QMI and SX entered into a License Agreement (the "License Agreement") whereby SX granted to QMI an exclusive, worldwide, perpetual license to certain patents, for the commercial development, production and marketing related to BT16. According to the agreement, upon the termination of the licenses granted under the License Agreement, all rights granted to QMI are to be reverted to SX.

        On September 12, 2004, the Company notified QMI of the termination of its obligations and on the same date QMI notified SX of the immediate termination of the License Agreement. QMI has been an inactive company since the termination of the above agreements.

        Subsequent to the termination of the JV, on December 17, 2004, the Company and SX entered into a new agreement whereby SX agreed to license its rights in BT16 to the Company for the sole purpose of the Company granting sublicense of such rights in certain listed countries to a third party

F-17

sub-licensee that was pre-approved by SX. In consideration for the license, SX is entitled to receive certain percentages, as defined in the agreement, of all sublicense revenues that the Company may receive pursuant to the sub-license agreement.

        In December 2004, the Company entered into a license agreement with Sanwa Kagaku Kenkyusho Co., Ltd ("Sanwa") pursuant to which the Company granted to Sanwa an exclusive license to develop and commercialize BT16 in Japan, China, South Korea and Taiwan. Sanwa is responsible, at its cost and expense, for all research and development activities which are necessary to obtain regulatory approval for licensing the product under development.

        According to the agreement with Sanwa, the Company is entitled to non-refundable upfront fees and contingent development milestone payments as well as royalties on any product sales by Sanwa in Japan, China, South Korea and Taiwan. Unless earlier terminated, the agreement will remain in effect on a country-by-country basis until the later of, the date that any such product shall no longer be subject to a valid claim of patent or application in a country or, generally, 10 years after the first commercial sale of BT16 under the agreement in a country. Sanwa may terminate the agreement without cause at any time. (See also Note 8c.)

        Through December 31, 2006, the Company had received from Sanwa upfront and milestone payments of $4,000.

NOTE 4:- OTHER RECEIVABLES AND PREPAID EXPENSES

	December 31,
	2005		2006
Prepaid expenses	$	79	$	236
Government authorities		1		14
Employees		5		7
Grant receivable		8		—
Others		18		56
	$	111	$	313

NOTE 5:- RELATED PARTIES

        a.     In April 1997, the Company granted a loan in the amount of $350 (principal amount) to its CEO. The loan bore annual interest at the rate of 6.49% on the principal amount. The principal plus the accrued interest on this original note was due after five years. The term of the loan was extended by the Company.

        According to the terms of the loan, the entire amount of principal plus any accrued interest shall be forgiven in certain events as described in the agreement, including: (i) An initial public offering of the Company's Common stock with aggregate proceeds of at least $75,000; (ii) if the Company will enter into significant collaboration agreement with a major U.S. or European based pharmaceutical company, as defined in the agreement; (iii) the CEO's death during the term of the loan, or (iii) the CEO becomes "permanently disabled" during the term of the loan.

        In February 2006, the terms of this loan were amended. The annual interest rate was decreased to 4.38%. The principal amount increased to include all accrued and unpaid interest at the date of the

F-18

amendment. The maturity date of the loan was extended to January 2007. All other terms remained unchanged.

        In November 2006, the Board of Directors of the Company decided to amend the second criterion for forgiveness of the loan to say that 50% of the loan principal and the accrued interest will be waived effective upon and subject to the actual cash receipt by the Company of the Pfizer Phase I milestone payment. In addition, upon a waiver, the Company decided to pay on behalf of the CEO any additional amount necessary in order to cover the taxes owed by the CEO on such forgiveness. All other terms of the loan have not been changed.

        Subsequent to the balance sheet date the Company received the above milestone payment and consequently 50% of the loan outstanding amount was waived. In addition, in March 2007, in contemplation of the proposed IPO, the Board of Directors decided to waive the remaining balance of the loan.

        b.     In January 2006, the Company entered into an agreement with a stockholder to receive certain business support services in Japan. In consideration, the Company shall pay the related party a quarterly fee of $75. The Company has the right to terminate the agreement upon giving three months prior written notice thereof to the other party. In 2006 the Company paid and accrued $300 with respect to this agreement.

NOTE 6:- PROPERTY AND EQUIPMENT

		December 31,
		2005		2006
Cost:
	Machinery and equipment	$	6,150	$	5,674
	Office furniture and equipment		2,252		860
	Motor vehicles		48		3
	Leasehold improvements		602		595
			9,052		7,132
Accumulated depreciation:
	Machinery and equipment		6,190		5,175
	Office furniture and equipment		613		637
	Motor vehicles		47		2
	Leasehold improvements		508		516
			7,358		6,330
Depreciated cost		$	1,694	$	802

        Depreciation expenses were $1,729, $814 and $595 for the years ended December 31, 2004, 2005 and 2006, respectively.

        During 2004, the Company decided to cease the development of certain products. The Company also faced the expiration of research funding under some of its collaboration agreements with pharmaceutical companies. Consequently, the Company abandoned part of its property and equipment and terminated lease agreements for certain facilities. As a result, the Company performed an

F-19

impairment test for property and equipment that was abandoned and wrote-off the outstanding balance of leasehold improvements in the facilities that were vacated. The total charge in 2004 with respect to the above impairment and write-off amounted to $2,470.

NOTE 7:- OTHER PAYABLES AND ACCRUED EXPENSES

	December 31,
	2005		2006
Employees and payroll accruals	$	584	$	615
Accrued expenses		579		590
Others		16		—
	$	1,179	$	1,205

NOTE 8:- COMMITMENTS AND CONTINGENT LIABILITIES

        a.     The facilities of the Company and one of its subsidiaries are leased under various operating lease agreements for periods ending no later than 2009. The Company also leases motor vehicles under various operating leases, which expire on various dates, the latest of which is in May 2009.

        Future minimum lease payments under non-cancelable operating leases are as follows:

Year ended December 31,
2007	$	467
2008	$	108
2009	$	82

        Rent expenses for the years ended December 31, 2004, 2005 and 2006 were $922, $721 and $600, respectively.

        As of December 31, 2006, one subsidiary has provided guarantees for the fulfillment of the lease commitments in the approximate amount of $160. The Company pledged a bank deposit in the same amount to secure the guarantees.

        b.     As a result of the Company's decision to close its facilities in Ohio, the Company received on November 14, 2003 a claim letter from the State of Ohio Department of Development Technology asking the Company to refund an amount of approximately $1,404 related to certain benefits that were received under the Action Fund Program ("TAF Grant"). No further action has been taken by the Ohio Department of Development Technology. Under the TAF Grant agreements there are no refund provisions in the event that the Company leaves Ohio. The Company believes that no funds will be required to be refunded under the TAF Grant arrangement and, consequently, no provision was recorded in the Company's books.

        c.     On December 17, 2004, the Company sublicensed certain rights in the BT16 to Sanwa (see Note 3.c). Concurrently, the Company and SX entered into an agreement whereby SX agreed to license its rights to the Company for the sole purpose of granting a sublicense of such rights in certain countries to Sanwa. In consideration for the license, SX is entitled to receive certain percentages of all sublicense revenues that the Company may receive pursuant to the sub-license agreement.

F-20

        d.     In December 2004, the Company and Atugen AG entered into a collaboration related to the RTP801 gene discovered by the Company. This agreement grants the Company an exclusive, royalty-bearing, worldwide license to develop, manufacture and commercialize products inhibiting this gene for any human therapeutic indication except oncology, based on Atugen's proprietary RNA interference technology. In addition, the Company granted Atugen a royalty-bearing license to develop oncology applications for RTP801.

        This Agreement was amended in September 2006, in connection with the Pfizer license agreement (see Note 3.a). Under the amendment, the Company sublicensed to Pfizer its rights under the license from Atugen. This amendment clarified the payments arrangement among the parties, terminated the license granted to Atugen in 2004 for oncology applications, and provided for a direct license from Atugen to Pfizer in the event of termination of the Pfizer agreement. Under the amended Atugen collaboration agreement, the Company will pay Atugen a percentage of the receipts from Pfizer under the Pfizer agreement, including milestone and royalty payments, but excluding payments specifically committed to cover research and development costs.

        In April 2005, the Company entered into a second agreement with Atugen, pursuant to which Atugen granted to the Company the right to receive options to non-exclusive licenses to Atugen's RNAi-related intellectual property to develop and commercialize siRNA product candidates based on a specified number of target genes as defined in the agreement. The Company can purchase an option for a target gene upon payment of an option fee. Thereafter, the Company may exercise each option within certain time limits upon payment of an additional fee to license the relevant Atugen intellectual property to the target gene. According to the agreement, if the Company exercises any of its options, it will be required to make development milestone payments based on the progress of clinical trials and regulatory approval of licensed products in the United States, Japan and Europe. In addition, the Company is required to pay royalties on sales of licensed products as defined in the agreement. As of December 31, 2006 the Company had purchased an option for one target gene.

        During 2006 the Company paid or accrued $2,197 with respect to these agreements. The charge was recorded as research and development expense.

        e.     In July 2005, the Company signed a license and option agreement with Icos Corporation, according to which Icos shall grant the Company an option for a non-exclusive, worldwide, non-transferable license on its technology patents and materials for the purpose of developing and manufacturing the Company's products in the quantities necessary to support the research, development, clinical and commercial activities of the Company as well as to commercialize such products. The option is exercisable within a period of 30 days after the first regulatory approval for such licensed product. In consideration, the Company shall pay annual maintenance fees of up to $20 per year, option exercising fees and development milestone payments upon achievement of clinical milestones and marketing approval amounting to $700, as well as royalty payments on the net sales for each licensed product. Through December 31, 2006 the Company had not exercised its option and paid only the annual maintenance fees as described above.

        f.      In conjunction with the Pfizer license agreement in September 2006, the Company entered into a set of license agreements with Alnylam Pharmaceuticals, Inc. ("Alnylam") Pursuant to these agreements, Alnylam granted the Company non-exclusive worldwide licenses under three families of patents and patent applications owned or controlled by Alnylam. Each agreement is specific to one of the Company's target genes and to certain therapeutic fields, including all indications contemplated for

F-21

these target genes. The Company sublicensed its rights under the RTP801 Alnylam agreements to Pfizer in the September 2006 license agreement with Pfizer.

        Pursuant to the terms of the license agreements, through December 31, 2006, the Company paid Alnylam upfront fees totaling $800. The agreements provide for annual maintenance fees and up to $7,400 in additional development and product development milestone payments. The Company is also required to pay royalties on sales. The royalty rates vary based on which patent families cover the products sold. As of December 31, 2006, no development milestone payments or royalties had been paid or accrued.

        g.     In September 1999, the Company and the University of Illinois ("UIC") entered into an exclusive worldwide license under certain UIC patents and patent applications related to a target gene of the Company and small molecule inhibitors thereof, for all uses and indications. Under the agreement, the Company may be required to pay UIC a future royalty calculated as certain percentages of sales of licensed products by the Company and a share of any sublicensing revenues as defined in the agreement. Through December 31, 2006, the Company has not granted any sublicenses under this license agreement.

        h.     In addition to the agreements above, the Company is a party to a number of research agreements with institutions and companies for the license and use of their know-how. Such agreements may obligate the Company in the future to pay royalties and/or milestone payments on future products it may develop. The Company's obligations are contingent upon the potential success of certain current research activities and they are contingent upon developing drugs candidates based on such intellectual property for the Company's pipeline. As of December 31, 2006 none of the above projects has reached the stage where royalties and/or milestone payments should have been paid or accrued.

        i.      The Israeli subsidiary is obligated to pay royalties to the Israel-United States Bi-National Industrial Research and Development Foundation ("BIRD-F"), of 3% to 7% of sales proceeds from products arising from research and development funded by grants in accordance with the terms of the respective agreement. The maximum amount of royalties payable to BIRD-F is limited to 150% of the grants received, adjusted based on the U.S. Consumer Price Index.

        At December 31, 2006, the Company's subsidiary has a remaining contingent royalty obligation to BIRD-F in the amount of $841.

        j.      Royalty commitments to the Chief Scientist:

        The Israeli subsidiary participates in programs sponsored by the Chief Scientist of the Government of Israel, for the support of research and development projects. In exchange for the Chief Scientist's participation in the programs, the subsidiary is required to pay royalties of 3% to 5% of sales of products developed with funds provided by the Chief Scientist, up to a dollar-linked amount equal to 100% of the Chief Scientist's research and development grants related to such projects. The subsidiary has no obligation to repay the full amount of the grant if sales are not sufficient.

        Royalty expenses were immaterial for each of the three years in the period ended December 31, 2006.

        As of December 31, 2006, the Company's subsidiary had a remaining contingent obligation to pay royalties in the amount of approximately $1,054 (excluding accrued interest) upon the successful sale of products derived from such research and development.

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NOTE 9:- TAXES ON INCOME

        a.     The Company and its subsidiaries are separately taxed under the domestic tax laws of the state of incorporation of each entity. QMI is included in the Company's consolidated tax returns.

        b.     Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985:

        Results for tax purposes of the Israeli subsidiary are measured in terms of earnings in NIS after certain adjustments for increases in the Israeli CPI. As explained in Note 2b, the financial statements are measured in U.S. dollars. The difference between the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes a further difference between taxable income and the income before taxes shown in the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the difference between the functional currency and the tax bases of assets and liabilities.

        c.     Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (the "Law"):

                1.     Part of one of the Israeli subsidiary's research facilities has been granted the status of an "Approved Enterprise". Under this Law, the subsidiary has elected the alternative system of benefits — waiver of grants in return for tax exemptions. The subsidiary is also a "foreign investment" company, as defined by the law. Based on the percentage of foreign ownership of the subsidiary, the income of the subsidiary derived from the subsidiary's "Approved Enterprise" expansion program is tax-exempt for a period of two years and subject to a reduced tax rate of 15% for an additional period of eight years, depending on the level of foreign investors in the Company, commencing with the first year it earns taxable income.

        The subsidiary's benefit period for the first and second plans commenced in 2000 and 2001, and will expire in 2009 and 2010, respectively.

        The Law also grants entitlement to claim accelerated depreciation on equipment used by the "Approved Enterprise" during five tax years.

        Should the subsidiary derive income from sources other than the "Approved Enterprise" during the periods of benefits, such income shall be taxed at the regular corporate tax rate of 31%.

        If the retained tax-exempt income is distributed in a manner other than in the complete liquidation of the subsidiary, it would be taxed at the corporate tax rate applicable to such profits as if the subsidiary had not elected the alternative tax benefits (rate of 10% – 25% based on the percentage of foreign ownership in the Company).

        As of December 31, 2006, approximately $2,225 was derived from tax exempt profits earned by the Israeli subsidiary's "Approved Enterprise". The Company's board of directors has determined that such tax-exempt income will not be distributed as dividends and intends to reinvest the amount of its tax exempt income. Accordingly, no deferred income taxes have been provided on income attributable to Ltd.'s "Approved Enterprise" as the undistributed tax-exempt income is essentially permanent in duration.

                2.     Conditions for entitlement to the benefits:

        The entitlement to the above benefits is conditional upon Ltd.'s fulfilling the conditions stipulated by the Law, regulations published thereunder and the instruments of approval for the specific

F-23

investments in approved enterprises. In the event of failure to comply with these conditions, the benefits may be cancelled and Ltd. may be required to refund the amount of the benefits, in whole or in part, with the addition of interest. Management believes that Ltd. has complied with all relevant conditions.

                3.     On April 1, 2005, an amendment to the Law came into effect ("the Amendment") and has significantly changed the provisions of the Law. The Amendment limits the scope of enterprises which may be approved by the Investment Center by setting criteria for the approval of a facility as a Beneficiary Enterprise, such as provisions generally requiring that at least 25% of the Beneficiary Enterprise's income will be derived from export. Additionally, the Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies no longer require Investment Center approval in order to qualify for tax benefits.

        However, the Law provides that terms and benefits included in any certificate of approval already granted will remain subject to the provisions of the law as they were on the date of such approval. Therefore, the existing Approved Enterprise of the Israeli subsidiary will generally not be subject to the provisions of the Amendment. As a result of the Amendment, tax-exempt income generated under the provisions of the amended Law, will subject the Company to taxes upon distribution or liquidation and the Company may be required to record deferred tax liability with respect to such tax-exempt income. As of December 31, 2006, the Company did not generate income under the provision of the amended Law.

                4.     The Company believes that as of December 31, 2006 Ltd. may not be entitled to any material tax benefits from its Approved Enterprise status.

        d.     Tax rates applicable to the companies:

                1.     The income of the Israeli subsidiaries (other than income from the "Approved Enterprise," see a. above) is taxed at the regular rate. Through December 31, 2003, the corporate tax rate was 36%. In July 2004, an amendment to the Israeli Income Tax Ordinance was enacted. One of the provisions of this amendment gradually reduces the corporate tax rate from 36% to 30%. The rates are as follows: 35% in 2004, 34% in 2005, 31% in 2006 and 30% in 2007 and thereafter.

                2.     Under an amendment to the Israeli Income Tax Ordinance on July 25, 2005, a gradual decrease in the corporate tax rate in Israel will be in effect as follows: in 2006 — 31%, in 2007 — 29%, in 2008 — 27%, in 2009 — 26% and in 2010 and thereafter — 25%.

        e.     Losses for tax purposes:

        As of December 31, 2006, the US Companies had a loss carryforward of approximately $57,952. If not utilized, the loss carryforward will expire in the years 2008 through 2026.

        Utilization of U.S. loss carryforwards may be subject to substantial annual limitation due to the "change in ownership" provisions of the Internal Revenue Code of 1986 and similar state provisions. The annual limitations may result in the expiration of losses before utilization.

        As of December 31, 2006, the Israeli subsidiary has accumulated losses for tax purposes in the amount of approximately $3,030, which may be carried forward and offset against taxable income in the future, for an indefinite period.

F-24

        f.      The statute of limitations has expired for all tax years through 2002 in the U.S. In Israel, final tax assessments have been received by the Israeli subsidiary up to and including the tax year ended December 31, 2001.

        g.     Deferred income taxes:

        Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:

		December 31,
		2005			2006
Deferred tax assets:
	Loss carryforward	$	18,683		$	19,704
	Temporary differences-Deferred Revenue		18			3,970
	Accrued vacation pay and severance pay and other reserves		3,348			4,973
Deferred tax assets before valuation allowance			22,049			28,647
Valuation allowance			(22,049	)		(28,647	)
Net deferred tax asset		$	—		$	—

        The Company and its subsidiaries have provided a valuation allowance in respect of deferred tax assets resulting from the tax loss carryforward. Management currently believes that it is more likely than not that the deferred tax regarding these tax loss carryforwards and other temporary differences will not be realized.

        h.     Loss before taxes on income consists of the following:

	Year ended December 31,
	2004		2005		2006
United States	$	15,398	$	7,348	$	16,875
Israel		835		110		84
	$	16,233	$	7,458	$	16,959

        As stated above, the Company has not recorded any tax benefit for each of the three years in the period ended December 31, 2006 as the Company does not believe that it is more likely than not that such tax assets will be realized.

NOTE 10:- REDEEMABLE CONVERTIBLE PREFERRED STOCK

	December 31, 2005 and 2006
	Authorized	Issued and outstanding
	Number of shares
Series F Redeemable Preferred stock of $0.001 par value	1,143,764	1,143,764

F-25

        a.     From March to November 2001, the Company issued 1,143,764 shares of Series F Redeemable Preferred stock, for total consideration of $13,725, net of issuance expenses of $70.

        b.     The rights, preferences and restrictions of Series F Redeemable Preferred stock are as follows:

        Dividends — The holders of the Series F Preferred stock shall be entitled to receive dividends, when and if declared by the Board of Directors, at the rate of $0.78 per share per annum. The right to such dividends shall not be cumulative and no right shall accrue to holders of Preferred stock by reason of the fact that dividends on such shares are not declared in any prior year.

        Liquidation preference — The holders of Series F Preferred stock shall be entitled to receive prior and in preference to any distribution of any of the assets or surplus funds of the Company to the holders of other Preferred and Common stock by reason of their ownership of Series F Redeemable Preferred stock, the amount equal to the sum of $12 per share for each share of Series F Redeemable Preferred stock.

        Voting rights — Each holder of a share of Series F Preferred stock shall be entitled to one vote.

        Conversion — Each share of Series F Preferred stock is convertible, at the holder's option, or automatically upon a qualified IPO of the Company. Originally, each share of Preferred stock was convertible on a one-for-one basis. Pursuant to the Series G Convertible Preferred stock investment round and according to anti-dilution protection rights, the holders of Series F Preferred stock became entitled to receive an additional 476,698 shares of Common stock upon conversion (see also Note 11b).

        c.     Redemption rights — According to the terms of the Series F Preferred stock effective March 23, 2006, any holder of Series F Preferred stock may request redemption. The redemption price for each share shall be equal to the amount derived by dividing the net book asset value of the Company at the redemption date by the total number of shares of capital stock of the Company on a fully diluted basis.

        EITF Topic D-98, "Classification and Measurement of Redeemable Securities" and ASR 268 requires preferred securities that are redeemable for cash or other assets, outside the control of the issuer, to be classified outside of permanent equity. Changes in the redemption value are recognized immediately as they occur as changes of redemption value of Series F Preferred stock, and the carrying value of the security is adjusted to equal the redemption amount at the end of each reporting period.

        Considering the terms of the Series F Redeemable Preferred stock and based on paragraph 61 of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", the Company concluded that Series F Redeemable Preferred stock are more akin to equity than to debt and, therefore, there is no need to bifurcate its embedded conversion option feature.

F-26

NOTE 11:- SHARE CAPITAL

        Share capital is composed as follows:

		December 31, 2005		December 31, 2006
		Authorized	Issued and outstanding	Authorized	Issued and outstanding
		Number of shares
Common A stock of $0.001 par value		72,500,000	7,623,540	72,500,000	7,623,540
Series A Preferred stock of $0.001 par value		967,497	967,497	967,497	967,497
Series B Preferred stock of $0.001 par value		4,219,914	4,219,914	4,219,914	4,219,914
Series C Preferred stock of $0.001 par value		1,568,692	1,568,692	1,568,692	1,568,692
Series D Preferred stock of $0.001 par value		5,439,413	5,439,413	5,439,413	5,439,413
Series E Preferred stock of $0.001 par value		2,050,820	2,050,820	2,050,820	2,050,820
Series G Preferred stock of $0.001 par value		10,489,511	7,342,646	10,489,511	10,489,511
Undesignated Preferred stock of $0.001 par value		9,675,090	—	9,675,090	—
		34,410,937	21,588,982	34,410,937	24,735,847
	Total	106,910,937	29,212,522	106,910,937	32,359,387

        a.     The rights, preferences and restrictions of Series A-E Preferred, Series G Preferred and Common stock are as follows:

        Dividends — 

        1.     The holders of the Series A, Series B, Series C, Series D, Series E and Series G Preferred stock shall be entitled to receive dividends, when and if declared by the Board of Directors, at the rate of $0.08, $0.08, $0.26, $0.26, $0.64 and $0.093 per share, respectively per annum. The right to such dividends shall not be cumulative and no right shall accrue to holders of Preferred stock by reason of the fact that dividends on such stock are not declared in any prior year.

        2.     No dividends shall be paid for the Common stock until dividends have been paid for the Preferred stock. After payment of dividends to the holders of the Preferred stock, the holders of Preferred stock and the holders of Common stock shall be entitled to receive any additional dividends as declared by the Company.

        Liquidation preference — The holders of Series A, Series B, Series C, Series D, Series E and Series G, have a liquidation preference equal to $1.25, $1.25, $4, $4, $9.83 and $1.72, per share, respectively and any declared but unpaid dividends.

        The holders of the Preferred stock will be entitled to their liquidation preferences based on their seniority. The holders of Series G Preferred stock shall be the first to receive their liquidation

F-27

preferences and they will be followed by the holders of Series F, Series E, Series D, Series C, Series B and Series A.

        Voting rights — Each holder of Common A stock, Series A, B, C, D, E and G Preferred stock shall be entitled to one vote.

        Conversion — Each share of each Series of Preferred stock is convertible, at the holder's option, or automatically upon a qualified Initial Public Offering ("IPO") of the Company. Originally each share of Preferred stock was convertible on a one-for-one basis. Pursuant to the Series G Convertible Preferred stock investment round and according to anti-dilution protection rights, the holders of Series C, D and E Preferred stock are entitled to receive an additional shares of Common stock upon conversion (see also b. below).

        b.     Series G Convertible Preferred stock investment round:

        In December 2005, the Company entered into the Series G Convertible Preferred stock investment agreement with new investors. According to the agreement, the Company issued to the investors in 2005 and 2006 10,489,311 shares of Series G Convertible Preferred stock, at $1.43 per share. In addition, the investors received warrants to purchase up to 2,097,900 shares of Common stock of the Company at $1.43 per share. The warrants shall expire 24 months after their issuance, or earlier upon a qualified IPO, or change of control (see also Note 15.b).

        The Series G Convertible Preferred stock investment round triggered certain anti-dilution protection rights of previous investors. Accordingly, the holders of Series C, D and E Preferred shares are entitled to receive 429,647, 1,489,776 and 820,912 additional shares of common stock upon conversion, respectively.

        In addition to the above anti-dilution adjustments and as part of the Series G Convertible Preferred stock investment, the holders of Series C Preferred stock and Series D Preferred stock agreed to waive 4,533,141 warrants that they received as part of their original investments in consideration for additional conversion rights. Accordingly, the holders of Series C and D Preferred shares are entitled to receive an additional 170,613 and 591,616 shares of common stock, respectively, on top of the number of shares that they should have received under their original anti-dilution adjustment provisions.

        Consequently, in 2005 the Company valued the incremental value of the additional conversion rights that were granted to the holders of Series C and D Preferred shares over the fair value of the warrants they waived. According to the Company's analysis the Company determined that no incremental value was transferred to the stockholders and therefore no charge was recorded as a deemed dividend.

        c.     Stock Option Plans:

        The Company has authorized through its 1994 and 1997 option plans, the grant of options to officers, directors, advisors, management and other key employees of up to 2,925,864 shares of the Company's Common stock. The options granted generally have four-year vesting terms and expire 10 years after the date of grant. As of December 31, 2006, an aggregate of 1,186,149 options of the Company were available for future grants. See also Note 15a for subsequent option issuances.

F-28

        As a result of the adoption of SFAS No. 123(R), operating expenses during the year ended December 31, 2006 include a non-cash charge of $ 8 for share-based payments to employees. Basic and diluted net loss per share for the year ended December 31, 2006 were the same for 2006 as they would have been if the Company had continued to account for share-based compensation under APB 25.

        The fair value of stock-based awards was estimated using the Black-Scholes option valuation model for all grants starting January 1, 2006, with the following assumptions for the year ended December 31, 2006:

	Year ended December 31, 2006
Exercise price	$	2
Expected term (years)		6.1
Volatility		72	%
Risk free interest rate		4.85	%
Dividend yield		0	%

        Because the Company is a private Company, the computation of expected volatility is based on realized historical stock price volatility of certain companies that the Company considered to be comparable. The Company used the "simplified" method to establish the expected term of the awards as allowed under SAB 107. The interest rate for periods within the expected term of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

        The Company recognizes stock compensation costs net of a 15% forfeiture rate and recognizes the compensation costs for only those shares expected to vest on a straight-line basis over the requisite service period of the award, which is the option vesting term of four years. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

        As of December 31, 2006, there was an unrecognized stock compensation cost of $ 40 related to stock options that is expected to be recognized over the remaining vesting period that is approximately 3 years.

        The following is a summary of the status of the Company's stock option grants to its employees:

		Year ended December 31,
		2004					2005					2006
		Number of options		Weighted average exercise price		Intrinsic value	Number of options		Weighted average exercise price		Intrinsic value	Number of options		Weighted average exercise price		Weighted average remaining contractual term	Intrinsic value
Outstanding at beginning of year		2,075,050		$	2.64	—	1,422,089		$	1.87	—	1,469,050		$	2.07	—	—
	Granted	—		$	—	—	350,000		$	2	—	228,750		$	2	—	—
	Exercised	—		$	—	—	(100,000	)	$	0.125	—	—		$	—	—	—
	Forfeited	(652,961	)	$	3.63	—	(203,039	)	$	0.58	—	(270,625	)	$	8.97	—	—
Outstanding at end of year		1,422,089		$	1.87		1,469,050		$	2.07		1,427,175		$	1.95	4.08
Exercisable options		986,087		$	1.84		938,721		$	2.40		1,191,227		$	1.94	3.22

F-29

        The weighted average exercise prices and fair values of the options granted during 2006 were as follows:

	Year ended December 31, 2006
	Weighted average fair value		Weighted average exercise price
Exercise price greater than market price at date of grant	$	0.3	$	2

        The options outstanding as of December 31, 2006, have been separated into ranges of exercise prices, as follows:

Ranges of exercise price	Options outstanding as of December 31, 2006	Weighted average remaining contractual life (years)	Weighted average exercise price		Options exercisable as of December 31, 2006	Weighted average exercise price of options exercisable
$0.4-0.55	440,000	0.94	$	0.48	440,000	$	0.48
$2	836,625	5.6	$	2	601,602	$	2
$6	150,550	4.84	$	6	149,625	$	6
	1,427,175				1,191,227

        Since January 1, 2005, the Company granted stock options to its employees under its plans with exercise prices as follows:

Grants made during the years ended December 31, 2005 and 2006	Number of options granted	Weighted average exercise price		Weighted average fair value per share		Weighted average intrinsic value per share
March, 2005	257,500	$	2	$	0.29	—
December, 2005	92,500	$	2	$	0.29	—
June, 2006	228,750	$	2	$	0.65	—

        The fair value assigned to the Common stock in order to calculate the compensation resulting from employee options, was determined primarily by management and the Board of Directors. In determining fair value, management has considered a number of factors, including valuations and appraisals.

        The Company has accounted for its options to non-employees under the fair value method as stated in SFAS 123(R). The fair value for these options was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions for 2005 and 2006: risk-free interest rates of 4.44%-4.88%, dividend yield of 0%, volatility factors of the expected market price of the Company's Common stock of approximately 75%, and expected life of the options of nine to ten years.

        Compensation expenses recognized by the Company related to its consultants' compensation awards were $21, $13 and $79 for the years ended December 31, 2004, 2005 and 2006, respectively.

F-30

        The Company's outstanding options to consultants as of December 31, 2006, are as follows:

Issuance date	Options for Ordinary shares	Exercise price per share		Options exercisable	Exercisable through
August 1997	100,000	$	0.4	100,000	August 2007
December 1998	15,000	$	0.55	15,000	December 2008
May 2000	25,000	$	2	25,000	May 2010
September 2000	20,000	$	2	20,000	September 2010
November 2000	5,000	$	2	5,000	November 2010
March 2001	20,000	$	6	20,000	March 2011
March 2005	30,000	$	2	30,000	March 2015
December 2005	50,000	$	2	50,000	December 2015
	265,000			265,000

        d.     As of December 31, 2006, the Company had outstanding warrants to purchase 2,799 Series D Preferred Shares at a price of $4 per share.

NOTE 12:- FINANCIAL INCOME

		Year ended December 31,
		2004			2005			2006
Financial expenses:
	Foreign currency transaction losses	$	(22	)	$	(30	)	$	(80	)
	Others		(10	)		(76	)		(6	)
			(32	)		(106	)		(86	)
Financial income:
	Interest from money market funds and marketable securities		262			415			708
	Foreign currency transaction gains		14			32			34
	Other		9			36			—
			285			483			742
		$	253		$	377		$	656

NOTE 13:- LOSS PER SHARE

        The following table sets forth the computation of the basic and diluted net loss per share:

a. Numerator:

	Year ended December 31,
	2004			2005			2006
Net loss available to common stockholders as reported	$	(15,424	)	$	(7,576	)	$	(16,321	)

F-31

b. Denominator:

	Year ended December 31,
	2004		2005		2006
Weighted average number of shares of Common Stock	7,523,540		7,539,430		7,623,540
Effect of dilutive securities:
Employee stock options and warrants	—	(*)	—	(*)	—	(*)
Denominator for diluted net losses per share of Common Stock	7,523,540		7,539,430		7,623,540

(*)

Anti-dilutive.

NOTE 14:- MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

a. Summary information about geographic areas:

        The Company operates in one reportable segment (see Note 1 for a brief description of the Company's business). The following data is presented in accordance with Statement of Financial Accounting Standards No. 131, "Disclosure About Segments of an Enterprise and Related Information".

        The following present total revenues and long-lived assets by geographic area as of and for the years ended December 31, 2004, 2005 and 2006:

	Year ended December 31,
	2004				2005				2006
	Total revenues		Long-lived assets		Total revenues		Long-lived assets		Total revenues		Long-lived assets
Japan	$	4,556	$	—	$	3,265	$	—	$	9	$	—
United States		282		580		173		226		4,060		90
Israel		33		2,351		—		1,468		183		712
	$	4,871	$	2,931	$	3,438	$	1,694	$	4,252	$	802

b. Revenue breakdown:

	Year ended December 31,
	2004		2005		2006
Upfront and milestone payments, net		—		2,025		1,459
Research and development services		4,837		1,413		252
Cost reimbursement in collaborations		—		—		2,369
Grants		34		—		172
Total revenues	$	4,871	$	3,438	$	4,252

F-32

c. Major customer data as a percentage of total revenues:

	2004	2005	2006
Customer A	69%	30%	—
Customer B	18%	4%	—
Customer C	—	61%	—
Customer D	—	—	90%

NOTE 15:- SUBSEQUENT EVENTS

        a.     In March 2007, the Company terminated previous option plans and adopted a new option plan and increased the amount of shares of Common stock available for issuance upon exercise of stock options. On the same date, the Company granted 3,018,805 options to employees and non-employees under this plan. Consequently an aggregate of of 1,003,576 options of the Company are still available for future grant.

        b.     In March 2007, the Company extended by six months the exercise period of warrants to purchase 2,097,900 shares of common stock that were originally issued in conjunction with the sale of Series G Preferred Stock.

F-33

Shares

QUARK BIOTECH, INC.

Common Stock

PROSPECTUS

        Through and including                                    , 2007, all dealers that buy, sell or trade the common stock may be required to deliver a prospectus, regardless of whether they are participating in this offering. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

JPMorgan Banc of America Securities LLC

CIBC World Markets

C.E. Unterberg, Towbin

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

        The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of the common stock being registered. All amounts shown are estimates except for the SEC registration fee, the NASD filing fee and the NASDAQ Global Market filing fee.

		Amount to be Paid
SEC Registration Fee		$	2,648
NASD Filing Fee			9,125
NASDAQ Global Market Filing Fee			*
Blue Sky Qualification Fees And Expenses			*
Printing and Engraving Expenses			*
Legal Fees and Expenses			*
Accounting Fees and Expenses			*
Transfer Agent and Registrar Fees and Expenses			*
Miscellaneous Expenses			*
	Total	$

*

To be provided by amendment.

Item 14. Indemnification of Directors and Officers.

        We are incorporated under the laws of the State of Delaware. Section 145 of the Delaware General Corporation Law provides that a Delaware corporation may indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person was an officer, director, employee or agent of such corporation, or is or was serving at the request of such person as an officer, director, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, provided that such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation's best interests and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was illegal. A Delaware corporation may indemnify any persons who are, or are threatened to be made, a party to any threatened, pending or completed action or suit by or in the right of the corporation by reason of the fact that such person was a director, officer, employee or agent of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation or enterprise. The indemnity may include expenses (including attorneys' fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit provided such person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the corporation's best interests except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify him or her against the expenses which such officer or director has actually and reasonably incurred. Our amended and restated certificate of incorporation

II-1

and amended and restated bylaws, each of which will become effective upon the closing of this offering, provide for the indemnification of our directors and officers to the fullest extent permitted under the Delaware General Corporation Law.

        Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:

•

transaction from which the director derives an improper personal benefit;



•

act or omission not in good faith or that involves intentional misconduct or a knowing violation of law;



•

unlawful payment of dividends or redemption of shares; or



•

breach of a director's duty of loyalty to the corporation or its stockholders.

        Our amended and restated certificate of incorporation and amended and restated bylaws include such a provision. Expenses incurred by any officer or director in defending any such action, suit or proceeding in advance of its final disposition shall be paid by us upon delivery to us of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified by us.

        Section 174 of the Delaware General Corporation Law provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for such actions. A director who was either absent when the unlawful actions were approved, or dissented at the time, may avoid liability by causing his or her dissent to such actions to be entered in the books containing minutes of the meetings of the board of directors at the time such action occurred or immediately after such absent director receives notice of the unlawful acts.

        As permitted by the Delaware General Corporation Law, we have entered into indemnity agreements with each of our directors and executive officers, that require us to indemnify such persons against any and all expenses (including attorneys' fees), witness fees, damages, judgments, fines, settlements and other amounts incurred (including expenses of a derivative action) in connection with any action, suit or proceeding, whether actual or threatened, to which any such person may be made a party by reason of the fact that such person is or was a director, an officer or an employee of Quark or any of its affiliated enterprises, provided that such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe his or her conduct was unlawful. The indemnification agreements also set forth certain procedures that will apply in the event of a claim for indemnification thereunder.

        At present, there is no pending litigation or proceeding involving any of our directors or executive officers as to which indemnification is required or permitted, and we are not aware of any threatened litigation or proceeding that may result in a claim for indemnification.

        We have an insurance policy covering our officers and directors with respect to certain liabilities, including liabilities arising under the Securities Act or otherwise.

        We plan to enter into an underwriting agreement which provides that the underwriters are obligated, under some circumstances, to indemnify our directors, officers and controlling persons against specified liabilities, including liabilities under the Securities Act.

II-2

Item 15. Recent Sales of Unregistered Securities.

        The following list sets forth information regarding all unregistered securities sold by us since our inception through March 28, 2007.

        (1)   We have granted options under our 1994 Stock Option Plan, to purchase 1,130,000 shares of common stock to our employees, directors, and consultants, having exercise prices ranging from $0.0001 to $0.40 per share. Of these, options to purchase 975,000 shares of common stock have been exercised for aggregate consideration of $162,072.50, at exercise prices ranging from $0.0001 to $0.40 per share.

        (2)   We have granted options under our 1997 Stock Option Plan, to purchase 3,589,800 shares of common stock to our employees, directors, and consultants, having exercise prices ranging from $0.40 to $6.00 per share. Of these, options to purchase 77,540 shares of common stock have been exercised for aggregate consideration of $67,301.50, at exercise prices ranging from $0.40 to $6.00 per share.

        (3)   We have granted options under our 2003 Israeli Stock Plan, to purchase 489,250 shares of common stock to our Israeli employees, directors, and consultants, with an exercise price of $2.00 per share. Of these, options to purchase 5,000 shares of common stock have been exercised for aggregate consideration of $10,000.00.

        (4)   On January 14, 1994, we issued and sold 5,000,000 shares of our common stock to one of our founders and executive officers for $500.00.

        (5)   On January 14, 1994, we issued and sold 600,000 shares of our common stock to one of our founders and executive officers for $60.00.

        (6)   On January 14, 1994, we issued and sold 325,000 shares of our common stock to one of our founders and executive officers for $32.50.

        (7)   On January 14, 1994, we issued and sold 675,000 shares of our common stock to one of our founders and executive officers for $67.50.

        (8)   On January 14, 1994, we issued and sold 1,000 shares of our common stock to one of our executive officers for $0.10.

        (9)   On February 18, 1994, we issued and sold an aggregate of 645,000 shares of our Series A Preferred Stock to a total of 11 accredited investors for aggregate consideration of $806,250.00.

        (10) On March 14, 1994, we issued and sold an aggregate of 543,000 shares of our Series A Preferred Stock to a total of 14 accredited investors for aggregate consideration of $678,750.00.

        (11) On March 31, 1994, we issued and sold an aggregate of 132,000 shares of our Series A Preferred Stock to a total of 6 accredited investors for aggregate consideration of $165,000.00.

        (12) On May 3, 1994, we issued and sold 40,000 shares of our Series A Preferred Stock to a total of 1 accredited investor for aggregate consideration of $50,000.00.

        (13) On June 1, 1995, we issued and sold 4,000,000 shares of our Series B Preferred Stock to a total of 1 accredited investor for aggregate consideration of $5,000,000.00.

        (14) On August 30, 1995, we issued and sold an aggregate of 266,824 shares of our Series B Preferred Stock to a total of 8 accredited investors for aggregate consideration of $333,530.00.

        (15) On October 3, 1996, we issued and sold 1,375,000 shares of our Series C Preferred Stock to a total of 1 accredited investor for aggregate consideration of $5,500,000.00.

        (16) On December 31, 1996, we issued and sold an aggregate of 68,692 shares of our Series C Preferred Stock to a total of 7 accredited investors for aggregate consideration of $274,768.00.

II-3

        (17) On May 30, 1997, we issued and sold 125,000 shares of our Series C Preferred Stock to a total of 1 accredited investor for aggregate consideration of $500,000.00.

        (18) On August 28, 1997, we issued and sold an aggregate of 5,000,000 shares of our Series D Preferred Stock and issued a warrant to purchase up to 4,125,000 shares of our Series D Preferred Stock to a total of 1 accredited investor for aggregate consideration of $20,000,000.00.

        (19) On September 9, 1997, we issued and sold an aggregate of 439,413 shares of our Series D Preferred Stock and issued warrants to purchase up to 410,940 shares of our Series D Preferred Stock to a total of 1 accredited investor for aggregate consideration of $1,757,652.00

        (20) On December 17,1999, we issued and sold 2,034,588 shares of our Series E Preferred Stock to a total of 1 accredited investor for aggregate consideration of $20,000,000.00.

        (21) On May 26, 2000, we issued and sold an aggregate of 16,232 shares of our Series E Preferred Stock to a total of 6 accredited investors for aggregate consideration of $159,569.56.

        (22) On March 27, 2001 we issued and sold an aggregate of 458,333 shares of our Series F Preferred Stock to a total of 2 accredited investors for aggregate consideration of $5,499,996.00.

        (23) On April 12, 2001 we issued and sold an aggregate of 335,434 shares of our Series F Preferred Stock to a total of 2 accredited investors for aggregate consideration of $4,025,208.00.

        (24) On December 27, 2005, we issued and sold an aggregate of 7,342,646 shares of our Series G Preferred Stock and issued warrants to purchase up to 1,468,528 shares of our common stock to a total of 4 accredited investors for aggregate consideration of $10,499,983.78.

        (25) On February 24, 2006, we issued and sold an aggregate of 1,923,086 shares of our Series G Preferred Stock and issued warrants to purchase up to 384,617 shares of our common stock to a total of 3 accredited investors for aggregate consideration of $2,750,012.98.

        (26) On May 1, 2006, we issued and sold an aggregate of 1,223,779 shares of our Series G Preferred Stock and issued warrants to purchase up to 244,755 shares of our common stock to a total of 3 accredited investors for aggregate consideration of $1,750,003.97.

        The offers, sales and issuances of the securities described in Item 15(1) through 15(3) were exempt from registration under the Securities Act under Rule 701 in that the transactions were under compensatory benefit plans and contracts relating to compensation as provided under Rule 701. The recipients of such securities were our employees, directors or consultants and received the securities under our 2007 Equity Incentive Plan, 1997 Stock Plan, 2003 Israeli Stock Option Plan or 1994 Stock Option Plan. Appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions had adequate access, through employment or business relationships, to information about us.

        The offers, sales, and issuances of the securities described in Items 15(4) through 15(26) were exempt from registration under the Securities Act under Section 4(2) of the Securities Act and Regulation D promulgated thereunder as transactions by an issuer not involving a public offering. The recipients of securities in each of these transactions acquired the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the securities issued in these transactions. Each of the recipients of securities in these transactions was an accredited or sophisticated person and had adequate access, through employment, business or other relationships, to information about us.

II-4

Item 16. Exhibits and Financial Statement Schedules.

(a)

Exhibits.

Exhibit Number	Description of Document
1.1†	Form of Underwriting Agreement.
3.1	Amended and Restated Articles of Incorporation of the Registrant, as currently in effect.
3.2†	Certificate of Amendment to Articles of Incorporation of the Registrant.
3.3†	Form of Certificate of Incorporation of the Registrant to be effective upon the completion of this offering.
3.4	Amended and Restated Bylaws of the Registrant, as currently in effect.
3.5†	Form of Amended and Restated Bylaws of the Registrant to be effective upon the completion of this offering.
4.1	Reference is made to exhibits 3.1 through 3.5.
4.2†	Specimen Common Stock Certificate.
4.3†	Third Amended and Restated Investor Rights Agreement, dated as of December 27, 2005, by and between the Registrant and the persons and entities named therein.
4.4†	Amendment No. 1 to Third Amended and Restated Investor Rights Agreement of the Registrant.
4.5	Form of Series D Preferred Stock Purchase Warrant of Registrant.
5.1†	Opinion of Cooley Godward Kronish LLP.
10.1	Form of Indemnification Agreement between the Registrant and its officers and directors.
10.2	Employment Agreement, dated as of January 1, 2002, by and between the Registrant and Daniel Zurr.
10.3	Employment Agreement, dated as of January 1, 2002, by and between QBI Enterprises, Ltd. and Daniel Zurr.
10.4†	Employment Agreement, dated as of September 14, 1997, by and between QBI Enterprises, Ltd. and Smadar Samira Shakked.
10.5†	Employment Agreement, dated as of November 13, 2006, by and between the Registrant and Smadar Samira Shakked.
10.6†	Employment Agreement, dated as of October 1, 1995, by and between QBI Enterprises, Ltd. and Rami Skaliter.
10.7†	Employment Agreement, dated as of February 1, 1998, by and between QBI Enterprises, Ltd. and Juliana Friedman.
10.8	Employment Agreement, dated as of March 7, 2007, by and between QBI Enterprises, Ltd. and Yaron Garmazi.
10.9†	Employment Agreement, dated as of March 9, 2003, by and between Registrant and Shai Erlich.
10.10	Reserved.
10.11†	1997 Stock Plan.
10.12†	1997 Stock Option Plan for Israeli Employees.
10.13†	Form of Option Agreement and Form of Option Grant Notice under the 1997 Stock Plan.

II-5

10.14†	Form of Option Agreement and Form of Option Grant Notice under the 1997 Stock Plan for Israeli Employees.
10.15†	2003 Stock Option Plan for Israeli Employees.
10.16†	Form of Option Agreement and Form of Option Grant Notice under the 2003 Israeli Stock Option Plan.
10.17	2007 Equity Incentive Plan.
10.18†	Form of Stock Option Agreement and Form of Option Grant Notice under the 2007 Equity Incentive Plan.
10.19	Lease Agreement, dated September 8, 2006, by and between the Registrant and John Arrillaga, Trustee and Richard T. Peery, Trustee.
10.20	Lease Contract, dated December 15, 1995, by and between the Registrant and Kiryat Weizmann Science Park Ltd.
10.21†*	Exclusive License Agreement, dated September 3, 1999, by and between the Registrant and The Board of Trustees of The University of Illinois.
10.22†*	Collaboration Agreement, dated as of December 6, 2004, by and among the Registrant, QBI Enterprises, Ltd., and Atugen AG.
10.23†*	License Agreement, dated as of December 17, 2004, by and between Registrant and Sanwa Kagaku Kenkyusho Co., Ltd.
10.24†*	Option and License Agreement, dated as of April 19, 2005, by and among the Registrant, QBI Enterprises, Ltd., and Atugen AG.
10.25†*	Amendment to Collaboration Agreement, dated as of May 25, 2006, by and among the Registrant, QBI Enterprises, Ltd., and Atugen AG.
10.26†*	Deed of Amendment and Option, dated as of September 25, 2006, by and among the Registrant, Atugen AG, QBI Enterprises, Ltd., and Pfizer Inc.
10.27†*	License Agreement, dated as of September 25, 2006, by and between Registrant and Pfizer Inc.
10.28†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.29†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.30†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.31†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.32†*	Letter agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
21.1	List of Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm.
23.2†	Consent of Cooley Godward Kronish LLP (included in Exhibit 5.1).

II-6

24.1 Power of Attorney (see page II-9 to this Registration Statement on Form S-1).

*

Confidential Treatment Requested. The redacted portions will be filed separately with the SEC as required by Rule 406 of Regulation C.

†

To be filed by amendment.

(b)

Financial Statement Schedules.

        No financial statement schedules are provided because the information called for is not required or is shown either in the financial statements or the notes thereto.

Item 17. Undertakings.

        The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.

        Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

        The undersigned Registrant hereby undertakes that:

        (1)   For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

        (2)   For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

        That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, if the Registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the Registration Statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the Registration Statement or made in a document incorporated or deemed incorporated by referenced into the Registration Statement or prospectus that is part of the Registration Statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the Registration Statement or prospectus that was part of the Registration Statement or made in any such document immediately prior to such date of first use.

II-7

        That, for the purpose of determining liability of the Registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, the undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

(i)

Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424;



(ii)

Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant;



(iii)

The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and



(iv)

Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser.

II-8

SIGNATURES

        Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 30^th day of March, 2007.

QUARK BIOTECH, INC.
By:	/s/  DANIEL ZURR Daniel Zurr, Ph.D. President and Chief Executive Officer

POWER OF ATTORNEY

        KNOW ALL BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel Zurr and Yaron Garmazi, and each of them singly, as his true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him and in his name, place or stead, in any and all capacities, to sign any and all amendments to this Registration Statement (including post-effective amendments), and to sign any registration statement for the same offering covered by this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) promulgated under the Securities Act, and all post-effective amendments thereto, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their, his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

        Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/  DANIEL ZURRDANIEL ZURR, PH.D.	President, Chief Executive Officer and Director (Principal Executive Officer)	March 30, 2007
/s/  YARON GARMAZIYARON GARMAZI	Chief Financial Officer (Principal Financial and Accounting Officer)	March 30, 2007
/s/  PHILIP B. SIMONPHILIP B. SIMON	Chairman of the Board	March 30, 2007
/s/  JOSEPH RUBINFELDJOSEPH RUBINFELD, PH.D.	Vice-Chairman of the Board	March 30, 2007
/s/  STEVEN B. FINKSTEVEN B. FINK	Director	March 30, 2007
/s/  TOMOMI OKAMOTOTOMOMI OKAMOTO	Director	March 30, 2007

II-9

EXHIBIT INDEX

Exhibit Number	Description of Document
1.1†	Form of Underwriting Agreement.
3.1	Amended and Restated Articles of Incorporation of the Registrant, as currently in effect.
3.2†	Certificate of Amendment to Articles of Incorporation of the Registrant.
3.3†	Form of Certificate of Incorporation of the Registrant to be effective upon the completion of this offering.
3.4	Amended and Restated Bylaws of the Registrant, as currently in effect.
3.5†	Form of Amended and Restated Bylaws of the Registrant to be effective upon the completion of this offering.
4.1	Reference is made to exhibits 3.1 through 3.5.
4.2†	Specimen Common Stock Certificate.
4.3†	Third Amended and Restated Investor Rights Agreement, dated as of December 27, 2005, by and between the Registrant and the persons and entities named therein.
4.4†	Amendment No. 1 to Third Amended and Restated Investor Rights Agreement of the Registrant.
4.5	Form of Series D Preferred Stock Purchase Warrant of Registrant.
5.1†	Opinion of Cooley Godward Kronish LLP.
10.1	Form of Indemnification Agreement between the Registrant and its officers and directors.
10.2	Employment Agreement, dated as of January 1, 2002, by and between the Registrant and Daniel Zurr.
10.3	Employment Agreement, dated as of January 1, 2002, by and between QBI Enterprises, Ltd. and Daniel Zurr.
10.4†	Employment Agreement, dated as of September 14, 1997, by and between QBI Enterprises, Ltd. and Smadar Samira Shakked.
10.5†	Employment Agreement, dated as of November 13, 2006, by and between the Registrant and Smadar Samira Shakked.
10.6†	Employment Agreement, dated as of October 1, 1995, by and between QBI Enterprises, Ltd. and Rami Skaliter.
10.7†	Employment Agreement, dated as of February 1, 1998, by and between QBI Enterprises, Ltd. and Juliana Friedman.
10.8	Employment Agreement, dated as of March 7, 2007, by and between QBI Enterprises, Ltd. and Yaron Garmazi.
10.9†	Employment Agreement, dated as of March 9, 2003, by and between Registrant and Shai Erlich.
10.10	Reserved.
10.11†	1997 Stock Plan.
10.12†	1997 Stock Option Plan for Israeli Employees.
10.13†	Form of Option Agreement and Form of Option Grant Notice under the 1997 Stock Plan.
10.14†	Form of Option Agreement and Form of Option Grant Notice under the 1997 Stock Plan for Israeli Employees.
10.15†	2003 Stock Option Plan for Israeli Employees.

10.16†	Form of Option Agreement and Form of Option Grant Notice under the 2003 Israeli Stock Option Plan.
10.17	2007 Equity Incentive Plan.
10.18†	Form of Stock Option Agreement and Form of Option Grant Notice under the 2007 Equity Incentive Plan.
10.19	Lease Agreement, dated September 8, 2006, by and between the Registrant and John Arrillaga, Trustee and Richard T. Peery, Trustee.
10.20	Lease Contract, dated December 15, 1995, by and between the Registrant and Kiryat Weizmann Science Park Ltd.
10.21†*	Exclusive License Agreement, dated September 3, 1999, by and between the Registrant and The Board of Trustees of The University of Illinois.
10.22†*	Collaboration Agreement, dated as of December 6, 2004, by and among the Registrant, QBI Enterprises, Ltd., and Atugen AG.
10.23†*	License Agreement, dated as of December 17, 2004, by and between Registrant and Sanwa Kagaku Kenkyusho Co., Ltd.
10.24†*	Option and License Agreement, dated as of April 19, 2005, by and among the Registrant, QBI Enterprises, Ltd., and Atugen AG.
10.25†*	Amendment to Collaboration Agreement, dated as of May 25, 2006, by and among the Registrant, QBI Enterprises, Ltd., and Atugen AG.
10.26†*	Deed of Amendment and Option, dated as of September 25, 2006, by and among the Registrant, Atugen AG, QBI Enterprises, Ltd., and Pfizer Inc.
10.27†*	License Agreement, dated as of September 25, 2006, by and between Registrant and Pfizer Inc.
10.28†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.29†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.30†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.31†*	License Agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
10.32†*	Letter agreement, dated as of September 26, 2006, by and between the Registrant and Alnylam Pharmaceuticals, Inc.
21.1	List of Subsidiaries of the Registrant.
23.1	Consent of Independent Registered Public Accounting Firm.
23.2†	Consent of Cooley Godward Kronish LLP (included in Exhibit 5.1).
24.1	Power of Attorney (see page II-9 to this Registration Statement on Form S-1).

*

Confidential Treatment Requested. The redacted portions will be filed separately with the SEC as required by Rule 406 of Regulation C.

†

To be filed by amendment.

QuickLinks

TABLE OF CONTENTS
SUMMARY
THE OFFERING
SUMMARY FINANCIAL DATA
RISK FACTORS
FORWARD-LOOKING STATEMENTS
USE OF PROCEEDS
DIVIDEND POLICY
CAPITALIZATION
DILUTION
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
COMPENSATION DISCUSSION AND ANALYSIS
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
PRINCIPAL STOCKHOLDERS
DESCRIPTION OF CAPITAL STOCK
SHARES ELIGIBLE FOR FUTURE SALE
MATERIAL U.S. TAX CONSEQUENCES FOR NON-U.S. HOLDERS OF COMMON STOCK
UNDERWRITING
NOTICE TO INVESTORS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
QUARK BIOTECH, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2006 IN U.S. DOLLARS Index
Report of Independent Registered Public Accounting Firm
QUARK BIOTECH, INC.
Consolidated Balance Sheets
QUARK BIOTECH, INC.
Consolidated Balance Sheets
QUARK BIOTECH, INC.
Consolidated Statements of Operations
QUARK BIOTECH, INC. Statements of Changes in Stockholders' Equity U.S. dollars in thousands (except share data)
QUARK BIOTECH, INC. Consolidated Statements of Cash Flows U.S. dollars in thousands
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES
POWER OF ATTORNEY
EXHIBIT INDEX

EX-3.1

Exhibit 3.1

AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

QUARK BIOTECH, INC.

Daniel Zurr and Akbar Khan certify that:

1.             They are the Chief Executive Officer and Secretary of Quark Biotech, Inc., a California corporation.

2.             The Articles of Incorporation of this corporation are amended and restated to read in full as follows:

I

The name of this corporation is Quark Biotech, Inc.

II

The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.

III

This corporation is authorized to issue two classes of shares to be designated respectively common stock and preferred stock.  The total number of shares of common stock this corporation shall have authority to issue is 72,500,000, all of which shall be designated as “Class A Common Stock Voting” (the “Common Stock”), and the total number of shares of preferred stock this corporation shall have authority to issue is 35,555,951, of which 967,497 shares shall be designated Series A Preferred Stock (“Series A Preferred”), 4,221,164 shares shall be designated Series B Preferred Stock (“Series B Preferred”), 1,568,692 shares shall be designated Series C Preferred Stock (“Series C Preferred”), 5,439,413 shall be designated Series D Preferred Stock (“Series D Preferred”), 2,050,820 shares shall be designated Series E Preferred Stock (“Series E Preferred”), 1,143,764 shares shall be designated Series F Preferred Stock (“Series F Preferred”) and 10,489,511 shares shall be designated Series G Preferred (“Series G Preferred”) (the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred and Series G Preferred are collectively referred to hereinafter as the “Preferred Stock”).  The par value of each share of Common Stock and each share of Preferred Stock is $0.001 per share.

The corporation shall from time to time in accordance with the laws of the State of California increase the authorized amount of its Common Stock if at any time the number of

1

shares of Common Stock remaining unissued and available for issuance shall not be sufficient to permit conversion of the Preferred Stock.

The relative rights, preferences, privileges and restrictions granted to or imposed on the respective classes of the shares of capital stock or the holders thereof are as follows:

1.             Dividends.

(a)           The holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred and Series G Preferred shall be entitled to receive, when and as declared by the Board of Directors, dividends at the rate of $0.08, $0.08, $0.26, $0.26, $0.64, $0.78 and $0.093 per share, respectively (in each case as adjusted for any stock split, stock dividend, recapitalization (that does not change in any material respect the economic relationship of the then existing shareholders) or similar event (“Recapitalizations”) with respect to such shares) per annum as the Board of Directors may from time to time determine out of funds legally available therefor.  No dividends shall be paid on the Common Stock of the corporation during any fiscal year of the corporation until dividends in the total amount of $0.08 per share on the Series A Preferred and the Series B Preferred, $0.26 per share on the Series C Preferred and the Series D Preferred, $0.64 per share on the Series E Preferred, $0.78 per share on the Series F Preferred and $0.093 per share of the Series G Preferred shall have been paid or declared and set apart during that fiscal year.  The right to such dividends on shares of Preferred Stock shall not be cumulative, and no right shall accrue to holders of Preferred Stock by reason of the fact that dividends on such shares are not declared in any prior year.  No dividend shall be paid on the Common Stock in any year, other than dividends payable solely in Common Stock, until all dividends for such year have been declared and paid on the Preferred Stock.  In the event that the Board of Directors shall have declared a dividend, the amount of which is insufficient to permit payment of the full aforesaid dividends, such dividends will be paid ratably to each holder of Preferred Stock in proportion to the dividend amounts which each such holder is entitled.  In the event that the Board of Directors shall have declared and paid, or set apart for payment, all dividends on the Preferred Stock at the rate specified in this Section in any one year, and shall elect to declare additional dividends in that year out of funds legally available therefor, such additional dividends shall be declared and paid on each share of Preferred Stock at the same time as any dividends are declared and paid on the Common Stock, in an amount equal to the dividends paid on such number of shares of Common Stock into which such shares of Preferred Stock, on the record date for such dividend payments, are convertible.

(b)           As authorized by Section 402.5(c) of the California Corporations Code, the provisions of Sections 502 and 503 of the California Corporations Code shall not apply with respect to repurchases by the corporation of shares of Common Stock issued to or held by employees, officers, directors or consultants of the corporation or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of such repurchase.

2.             Liquidation Preference.  In the event of any liquidation, dissolution, or winding up of the corporation, either voluntary or involuntary, distributions to the shareholders of the corporation shall be made in the following manner:

2

(a)           The holders of the Series G Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of any other series of Preferred Stock and Common Stock by reason of their ownership of Series G Preferred, the amount equal to the sum of (i) $1.72 per share for each share of Series G Preferred then held by them (as adjusted for Recapitalizations with respect to such shares) and (ii) an amount equal to all declared but unpaid dividends or distributions on each share of Series G Preferred.  If the assets and funds distributed among the holders of the Series G Preferred pursuant to this Section 2(a) shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the corporation legally available for distribution shall be distributed ratably among the holders of the Series G Preferred in proportion to the preferential amount that each such holder is otherwise entitled to receive.

(b)           After payment has been made to the holders of the Series G Preferred of the full amounts to which they shall be entitled as set forth in Section 2(a), holders of the Series F Preferred and Series E Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred and the Common Stock by reason of their ownership of Series F Preferred and Series E Preferred, the amount equal to the sum of (i) $12.00 per share for each share of Series F Preferred and $9.83 per share for each share of Series E Preferred then held by them, as the case may be (as adjusted for Recapitalizations with respect to such shares), and (ii) an amount equal to all declared but unpaid dividends or distributions on each share of Series F Preferred or the Series E Preferred, as the case may be.  If the assets and funds distributed among the holders of the Series F Preferred and the Series E Preferred pursuant to this Section 2(b) shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the corporation legally available for distribution pursuant to this Section 2(b) shall be distributed ratably among the holders of the Series F Preferred and the Series E Preferred in proportion to the preferential amount that each such holder is otherwise entitled to receive.

(c)           After payment has been made to the holders of the Series G Preferred, Series F Preferred and Series E Preferred of the full amounts to which they shall be entitled as set forth in Section 2(a) and (b), respectively, holders of the Series D Preferred and Series C Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Series A Preferred, the Series B Preferred and the Common Stock by reason of their ownership of Series C Preferred and Series D Preferred, the amount equal to the sum of (i) $4.00 per share for each share of Series D Preferred and Series C Preferred then held by them (as adjusted for Recapitalizations with respect to such shares), and (ii) an amount equal to all declared but unpaid dividends or distributions on each share of Series D Preferred and Series C Preferred, as the case may be.  If the assets and funds distributed among the holders of the Series D Preferred and Series C Preferred pursuant to this Section 2(c) shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the corporation legally available for distribution pursuant to this Section 2(c) shall be distributed ratably among the holders of the Series D Preferred and Series C Preferred in proportion to the preferential amount that each such holder is otherwise entitled to receive.

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(d)           After payment has been made to the holders of the Series G Preferred, Series F Preferred, Series E Preferred, Series D Preferred and Series C Preferred of the full amounts to which they shall be entitled as set forth in Sections 2(a), (b) and (e), respectively, holders of the Series B Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets or surplus funds of the corporation to the holders of the Series A Preferred and the Common Stock by reason of their ownership of such stock, the amount equal to the sum of (i) $1.25 per share for each share of Series B Preferred then held by them (as adjusted for Recapitalizations with respect to such shares), and (ii) an amount equal to all declared but unpaid dividends or distributions on each share of Series B Preferred.  If the assets and funds distributed among the holders of the Series B Preferred pursuant to this Section 2(d) shall be insufficient to permit the payment to such holders of the full preferential amount, then the entire assets and funds of the corporation legally available for distribution pursuant to this Section 2(d) shall be distributed ratably among the holders of the Series B Preferred in proportion to the preferential amount that each such holder is otherwise entitled to receive.

(e)           After payment has been made to the holders of the Series G Preferred, Series F Preferred, Series E Preferred, Series D Preferred, Series C Preferred and the Series B Preferred of the full amounts to which they shall be entitled as set forth in Sections 2(a), (b), (c) and (d), respectively, then holders of the Series A Preferred shall be entitled to receive the amount equal to the sum of (i) $1.25 per share for each share of Series A Preferred then held by them (as adjusted for Recapitalizations with respect to such shares), and (ii) an amount equal to declared but unpaid dividends or distributions on each share of Series A Preferred.  If the assets and funds thus distributed among the holders of the Series A Preferred pursuant to this Section 2(e) shall be insufficient to permit the payment to such holders of the full aforesaid preferential amount, then the entire assets and funds of the corporation legally available for distribution pursuant to this Section 2(e) shall be distributed ratably among the holders of the Series A Preferred in proportion to the preferential amount that each such holder is otherwise entitled to receive.

(f)            After payment has been made to the holders of the Preferred Stock of the full amounts to which they shall be entitled as set forth in Section 2(a) through (e) above, then the entire remaining assets and funds of the corporation legally available for distribution, if any, shall be distributed on a pro rata basis to the holders of the outstanding Series G Preferred and Common Stock in a manner such that the amount distributed to each holder of Series G Preferred Stock or Common Stock shall equal the amount obtained by multiplying such remaining assets and funds by a fraction, the numerator of which shall be the sum of the total number shares of Common Stock (assuming conversion of the Series G Preferred into Common Stock) then held by the holder, and the denominator of which shall be the sum of the of the total number of shares of Common Stock (assuming conversion of the Series G Preferred into Common Stock) then outstanding.

(g)           For purposes of this Section 2, a merger or consolidation of the corporation with or into any other person or entity, or the merger of any other person or entity into the corporation, or the sale of all or substantially all of the assets of the corporation, or any other corporate reorganization (a “Major Transaction”), in which the shareholders of the corporation receive distributions in cash, property or securities of another person or entity as a result of such Major Transaction, and in which the shareholders of the corporation immediately

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prior to such Major Transaction will not hold at least fifty percent (50%) of the voting power of the surviving, continuing or purchasing entity following such Major Transaction (which includes a series of related transactions), shall be treated as a liquidation, dissolution or winding up of the corporation.

3.             Voting Rights and Directors.

(a)           Preferred Stock and Common Stock.  Except as otherwise required by law or by this Section 3 or Section 5 hereof, the holder of each share of Common Stock issued and outstanding shall have one vote, and the holder of each share of Preferred Stock issued and outstanding shall be entitled with respect to such share to a number of votes equal to the number of shares of Common Stock into which such share of Preferred Stock could be converted at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited, such votes to be counted together with all other shares of the corporation having general voting power and not separately as a class.  Holders of Preferred Stock shall be entitled to notice of any shareholders’ meeting in accordance with the Bylaws of the corporation.  Fractional votes by the holders of Preferred Stock shall not, however, be permitted, and any fractional voting rights shall (after aggregating all shares into which such shares of Preferred Stock held by each holder could he converted) be rounded to the nearest whole number.

(b)           Board of Directors Election and Removal.

(i)            Election.  The holders of the Series G Preferred (with cumulative voting rights as among themselves in accordance with Section 708 of the California Corporations Code), shall be entitled to elect two (2) directors of the corporation; the holders of the Series F Preferred, Series E Preferred, Series D Preferred, Series C Preferred, Series B Preferred and Series A Preferred (the “Existing Preferred”), voting together as a separate class (with cumulative voting rights as among themselves in accordance with Section 708 of the California Corporations Code), shall be entitled to elect two (2) directors of the corporation; and the holders of the Common Stock, voting as a separate class (with cumulative voting rights as among themselves in accordance with Section 708 of the California Corporations Code), shall be entitled to elect one (1) director of the corporation; and the holders of the Preferred Stock and the Common Stock, voting together as a single class (with cumulative voting rights as among themselves in accordance with Section 708 of the California Corporations Code), shall be entitled to elect the remaining authorized number of directors, if any, of the corporation.

(ii)           Quorum; Required Vote.

(A)          Quorum.  At any meeting held for the purpose of electing directors, the presence in person or by proxy of the holders of a majority of the shares of a specified series, class or classes of stock given the right to elect such director or directors pursuant to Section 3(b)(i) above (“Specified Stock”) shall constitute a quorum of the Specified Stock for the election of directors to be elected solely by the holders of the Specified Stock.

(B)          Required Vote.  With respect to the election of any director or directors by the holders of the outstanding shares of Specified Stock, that candidate or

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those candidates (as applicable) shall be elected who either: (1) in the case of any such vote conducted at a meeting of the holders of such Specified Stock, receive the highest number of affirmative votes of the outstanding shares of such Specified Stock, up to the number of directors to be elected by such Specified Stock; or (2) in the case of any such vote taken by written consent without a meeting, are elected by the unanimous written consent of the holders of shares of such Specified Stock.

(iii)         Vacancy.  If there shall be any vacancy in the office of a director elected by the holders of any Specified Stock pursuant to Section 3(b)(i), then a successor to hold office for the unexpired term of such director may be elected by the majority vote, conducted either at a meeting of the holders of such Specified Stock or by written consent without a meeting, of holders of the shares of such Specified Stock that are entitled to elect such director under Section 3(b)(i), unless such vacancy was created by a removal, in which case such successor may be elected either by the majority vote of holders of the shares of such Specified Stock that are entitled to elect such director cast at a meeting of such holders or, in the case of any such vote taken by written consent without a meeting, the unanimous written consent of the holders of shares of such Specified Stock.

(iv)          Removal.  Subject to Section 303 of the Corporations Code, any director who shall have been elected to the Board of Directors by the holders of any Specified Stock pursuant to Section 3(b)(i) may be removed during his or her term of office, either with or without cause, by the affirmative vote of shares representing a majority of the voting power of all the outstanding shares of such Specified Stock entitled to vote, given either a meeting of such shareholders duly called for that purpose or pursuant to a written consent of shareholders without a meeting.  Any vacancy created by such removal may be filled only in the manner provided in Section 3(b)(iii).

(v)            Procedures.  Any meeting of the holders of any Specified Stock, and any action taken by the holders of any Specified Stock by written consent without a meeting, in order to elect or remove a director under this Section 3(b), shall be held in accordance with the procedures and provisions of the corporation’s Bylaws, the California Corporations Code and applicable law regarding shareholder meetings and shareholder actions by written consent, as such are then in effect (including but not limited to procedures and provisions for determining the record date for shares entitled to vote).

(vi)          Termination.  Notwithstanding anything in this Section 3(b) to the contrary, the provisions of this Section 3(b) shall cease to be of any further force or effect upon the earlier of (A) the closing of a Qualified TO (as defined in Section 4(b)), and (B) a Major Transaction.

4.             Conversion.  The holders of the Preferred Stock have conversion rights as follows (the “Conversion Rights”):

(a)           Right to Convert.  Each share of Preferred Stock shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, into such number of fully paid and nonassessable shares of Common Stock as is determined (i) in the case of the Series A Preferred by dividing $1.2500 by the Series A Conversion Price (as defined

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below) in effect at the time of conversion, (ii) in the case of the Series B Preferred by dividing $1.2500 by the Series B Conversion Price (as defined below) in effect at the time of conversion, (iii) in the case of the Series C Preferred by dividing $1.9772 by the Series C Conversion Price (as defined below) in effect at the time of conversion, (vi) in the case of the Series D Preferred by dividing $1.9772 by the Series D Conversion Price (as defined below) in effect at the time of conversion, (iii) in the case of the Series E Preferred by dividing $2.0024 by the Series E Conversion Price (as defined below) in effect at the time of conversion, (iv) in the case of the Series F Preferred by dividing $2.0260 by the Series F Conversion Price (as defined below) in effect at the time of conversion, and (v) in the case of the Series G Preferred by dividing $1.4300 by the Series G Conversion Price (as defined below) in effect at the time of conversion.  The number of shares of Common Stock into which each share of a series of Preferred Stock may be converted is hereinafter referred to as the “Conversion Rate” for each such series.

As of the date these Amended and Restated Articles of incorporation are filed with the Secretary State of the State of California (the “Filing Date”):

(i)            The “Series A Conversion Price” shall be one dollar and twenty-five cents ($1.25),

(ii)           The “Series B Conversion Price” shall be one dollar and twenty-five cents ($1.25),

(iii)         The “Series C Conversion Price” shall be one dollar forty-three cents ($1.43),

(iv)          The “Series D Conversion Price” shall be one dollar forty-three cents ($1.43),

(v)            The “Series E Conversion Price” shall be one dollar forty-three cents ($1.43),

(vi)          The “Series F Conversion Price” shall be one dollar forty-three cents ($1.43), and

(vii)         The “Series G Conversion Price” shall be one dollar forty-three cents ($1.43).

The Series A Conversion Price, the Series B Conversion Price, the Series C Conversion Price, the Series D Conversion Price, the Series E Conversion Price, the Series F Conversion Price and/or the Series G Conversion Price, as applicable, shall be collectively referred to as the “Conversion Price”, and shall be subject to adjustment as provided in Sections 4(d) and (e) below.  Upon any adjustment in a Conversion Price pursuant to Sections 4(d) and (e) below, the corresponding Conversion Rate shall be appropriately adjusted.

(b)           Automatic Conversion.

(i)            Qualified IPO.  Each share of Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate upon the

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closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the corporation to the public if (x) the price per share (determined without regard to underwriter commissions and expenses) is not less than $1.43 (as adjusted for Recapitalizations), (y) the aggregate gross proceeds to the corporation are not less than $20,000,000 (or ¥2,000,000,000 if the primary listing of shares is on a Japan exchange or over-the-counter market) before deduction of underwriting discount and commissions, and (z) the pre-offering market capitalization of the corporation is at least $200,000,000 (or ¥20,000,000,000 if the primary listing of shares in on a Japan exchange or over-the-counter market), calculated as the number of outstanding shares, assuming the conversion or exchange of all Convertible Securities (as defined in Section 4(d)(i)(3) below) and the exercise of all Options (as defined in Section 4(d)(i)(1) below), multiplied by the mid-point of the range of sales prices published in the initial preliminary prospectus (such an initial public offering is referred to as a “Qualified IPO”).

(ii)           Consent.  Each share of a series of Existing Preferred Stock shall automatically be converted into shares of Common Stock at the then effective Conversion Rate upon the written consent of holders of at least a majority of the then outstanding shares of such series of Existing Preferred Stock.  Each share of Series G Preferred shall automatically be converted into shares of Common Stock at the then effective Conversion Rate upon the written consent of holders of at least two-thirds of the then outstanding shares of Series G Preferred.

(c)           Mechanics of Conversion.  No fractional shares of Common Stock shall be issued upon conversion of Preferred Stock into Common Stock.  In lieu of any fractional shares to which the holder would otherwise be entitled, the corporation shall pay cash equal to such fraction multiplied by the fair value of such shares at the time of conversion.  Before any holder of Preferred Stock shall be entitled to convert the same into full shares of Common Stock and to receive certificates therefor, the holder shall surrender the certificate or certificates therefor, duly endorsed, at the office of the corporation or of any transfer agent for the Preferred Stock, and shall give written notice to the corporation at such office that the holder elects to convert the same.

In the event of an automatic conversion pursuant to Section 4(b), the applicable outstanding shares of Preferred Stock shall be converted automatically without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the corporation or its transfer agent, and provided further that the corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such automatic conversion unless the certificates evidencing such shares of Preferred Stock are either delivered to the corporation or its transfer agent as provided above, or the holder notifies the corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the corporation to indemnify the corporation from any loss incurred by it in connection with such certificates.  The corporation shall, as soon as practicable after the delivery of such certificates or such indemnification agreement in the case of a lost certificate, issue and deliver at such office to such holder of Preferred Stock, a certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled as aforesaid and a check payable to the holder in the amount of any cash amounts payable as the result of a conversion into fractional shares of Common Stock.

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Subject to the requirements of this Section 4, such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the certificates representing the shares of Preferred Stock to be converted, or such indemnification agreement in the case of a lost certificate, or in the case of automatic conversion on the date of closing of the Qualified IPO or the date of election by holders of Preferred Stock pursuant to Section 4(b)(ii) (as the case may be), and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

(d)           Conversion Price Adjustments.  The Conversion Price shall be subject to adjustment from time to time as follows:

(i)            Special Definitions.  For purposes of this Section 4(d), the following definitions shall apply:

(1)           “Options” shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities.

(2)           “Series G Original Issue Date” shall mean the date on which the first share of Series G Preferred was first issued.

(3)           “Convertible Securities” shall mean any evidences of indebtedness, shares (other than Preferred Stock) or other securities convertible into or exchangeable for Common Stock.

(4)           “Additional Shares of Common Stock” shall mean all shares of Common Stock issued (or, pursuant to Section 4(d)(iii) below, deemed to be issued) by the corporation after the Series G Original Issue Date other than shares of Common Stock or Convertible Securities issued or issuable:

(A)          upon conversion of shares of the Preferred Stock or exercise of outstanding Options;

(B)          pursuant to employee or director stock plans, employee or director option plans, other employee stock incentive plans approved by the Board of Directors or other stock arrangements involving employees or consultants of the corporation which have been approved by the Board of Directors (“Service Stock Plans”), provided that such grants or issuances after the Filing Date do not exceed one million five hundred thousand (1,500,000) shares of Common Stock in the aggregate, assuming the exercise or conversion of all such grants or issuances (as adjusted for Recapitalizations);

(C)          pursuant to any event for which adjustment has already been made pursuant to this Section 4(d) or Section 4(e);

(D)          as a dividend or distribution on the Preferred Stock;

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(E)           pursuant to equipment lease financing or bank financing transactions or leasehold arrangements approved by the Board of Directors not to exceed two hundred fifty thousand (250,000) shares (as adjusted for Recapitalizations);

(F)           in connection with technology licenses or technology acquisitions, sponsored research, collaboration, development agreements, distribution or marketing agreements, or any other strategic partnership relationships approved by the Board of Directors, not to exceed one million (1,000,000) shares (as adjusted for Recapitalizations);

(G)          pursuant to any acquisition, merger or purchase of all or substantially all the assets of another corporation approved by the Board of Directors, provided that shareholders of the corporation immediately prior to such acquisition, merger or purchase continue to hold a majority of the outstanding capital stock of the corporation immediately following such transaction, or pursuant to a joint venture approved by the Board of Directors;

(H)          in connection with any Recapitalization by the corporation; or

(I)            to the public in a Qualified IPO,

(ii)           No Adjustment of Conversion Price.  No adjustment in the Conversion Price shall be made in respect of the issuance of Additional Shares of Common Stock unless the consideration per share for an Additional Share of Common Stock issued or deemed to be issued by the corporation is less than the Conversion Price in effect on the date of and immediately prior to such issue.

(iii)         Deemed Issue of Additional Shares of Common Stock.  Except as provided in Section 4(d)(i)(4) above, in the event the corporation at any time or from time to time after the Series G Original Issue Date shall issue any Options or Convertible Securities or shall fix a record date for the determination of holders of any class of securities entitled to receive any such Options or Convertible Securities, then the maximum number of shares (as set forth in the instrument relating thereto without regard to any provisions contained therein for a subsequent adjustment of such number) of Common Stock issuable upon the exercise of such Options or, in the case of Convertible Securities and Options therefor, the conversion or exchange of such Convertible Securities, shall be deemed to be Additional Shares of Common Stock issued as of the time of such issue or, in case such a record date shall have been fixed, as of the close of business on such record date, provided that Additional Shares of Common Stock shall not be deemed to have been issued unless the consideration per share (determined pursuant to Section 4(d)(v)(2) below) of such Additional Shares of Common Stock would be less than the Conversion Price in effect on the date of and immediately prior to such issue, or such record date, as the case may be, and provided further that in any such case in which Additional Shares of Common Stock are deemed to be issued:

(1)           no further adjustment in the Conversion Price shall be made upon the subsequent issue of Convertible Securities or shares of Common Stock upon the exercise of such Options or conversion or exchange of such Convertible Securities;

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(2)           if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the corporation, or increase or decrease in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Price computed upon the initial issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or the rights of conversion or exchange under such Convertible Securities;

(3)           on the expiration or cancellation of any Options or the termination of the right to convert or exchange any Convertible Securities which shall have not been exercised, the Conversion Price computed upon the initial issue thereof (or upon the occurrence of a record date with respect thereto), and any subsequent adjustments based thereon, shall be recomputed as if the only Additional Shares of Common Stock issued were shares of Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the corporation upon such exercise, or for the issue of all such Convertible Securities which were actually converted or exchanged plus the consideration actually received by the corporation upon such conversion or exchange, if any; and

(4)           no readjustment pursuant to clause (2) or clause (3) above shall have the effect of increasing the Conversion Price to an amount which exceeds the lower of (i) the Conversion Price on the original adjustment date (unless the Conversion Price is increased above the initial Conversion Price pursuant to Section 4(e)(ii)), or (ii) the Conversion Price that would have resulted from any issuances of Additional Shares of Common Stock between the original adjustment date and such readjustment date.

(iv)          Adjustment of Conversion Price Upon Issuance of Additional Shares of Common Stock.

(1)           In the event this corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii), but excluding stock dividends, subdivisions or split-ups that are the subject of adjustment pursuant to Section 4(e)) without consideration or for a consideration per share less than the Conversion Price applicable on and immediately prior to such issue, then and in such event, the Conversion Price shall be reduced, concurrently with such issue, to a price (calculated to the nearest cent) determined by multiplying the Conversion Price in effect on the date of and immediately prior to such issue by a fraction, the numerator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue, (ii) the number of shares of Common Stock issuable upon conversion of the Preferred Stock outstanding immediately prior to such issue and (iii) the number of shares of Common Stock which the aggregate consideration received by the corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect on the date of and immediately prior to such issue; and the denominator of which shall be the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue, (ii) the number

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of shares of Common Stock issuable upon conversion of the Preferred Stock outstanding immediately prior to such issue and (iii) the number of such Additional Shares of Common Stock so issued, provided that for purposes of this Section 4(d)(iv), all shares of Common Stock issuable upon exercise, conversion or exchange of outstanding Options or Convertible Securities, as the case may be, shall be deemed to be outstanding, and immediately after any Additional Shares of Common Stock shall be deemed issued pursuant to Section 4(d)(iii) above, such Additional Shares of Common Stock shall be deemed to be outstanding.

(2)           Notwithstanding Section 4(d)(iv)(1) above, in the event that on or before the Adjustment Termination Date (as defined below), this corporation shall issue Additional Shares of Common Stock (including Additional Shares of Common Stock deemed to be issued pursuant to Section 4(d)(iii), but excluding stock dividends, subdivisions or split-ups that are the subject of adjustment pursuant to Section 4(e)) without consideration or for a consideration per share less than the Series G Conversion Price applicable on and immediately prior to such issue, then and in such event, the Series G Conversion Price shall be reduced, concurrently with such issue, to a price equal to the issue price of such Additional Shares of Common Stock.  For the purposes of this paragraph, “Adjustment Termination Date” shall mean the earliest of:  (a) the date that is (x) eighteen (18) months after the date of the Series G Original Issuance Date if fifteen million dollars ($15,000,000) worth or more of Series G Preferred has been issued pursuant to the Series G Preferred Stock and Warrant Purchase Agreement, dated as of December 21, 2005, and as amended from time to time (the “Series G Purchase Agreement”), or (y) fifteen (15) months after the date of the Series G Original Issuance Date if less than fifteen million dollars ($15,000,000) worth of Series G Preferred has been issued pursuant to the Series G Purchase Agreement; (b) the corporation has entered into one or more partnership, collaboration or similar transactions in which the corporation has received not less than fifteen million dollars ($15,000,000) in non-deferred cash payments; or (c) the closing of the sale to a third party investor of not less than ten million dollars ($10,000,000) worth of preferred stock of the corporation after the date of the Series G Original Issuance Date that ranks equal to or senior to the Series G Preferred and excluding securities sold pursuant to the Series G Purchase Agreement.

(v)            Determination of Consideration.  For purposes of this Section 4(d), the consideration received by the corporation for the issue of any Additional Shares of Common Stock shall be computed as follows:

(1)           Cash and Property.  Such consideration shall:

(A)          insofar as it consists of cash, be computed at the aggregate amount of cash received by the corporation (excluding amounts paid or payable for accrued interest or accrued dividends);

(B)          insofar as it consists of property other than cash, be computed at the fair value thereof at the time of such issue, as determined in good faith by the Board of Directors; and

(C)          in the event Additional Shares of Common Stock are issued together with other shares or securities or other assets of the corporation for

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consideration which covers both, be the proportion of such consideration so received, computed as provided in clauses (A) and (B) above, as determined in good faith by the Board of Directors.

(2)           Options and Convertible Securities.  The consideration per share received by the corporation for Additional Shares of Common Stock deemed to have been issued pursuant to Section 4(d)(iii), relating to Options and Convertible Securities, shall be determined by dividing

(A)          the total amount, if any, received or receivable by the corporation as consideration for the issue of such Options or Convertible Securities, plus the minimum aggregate amount of additional consideration (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such consideration) payable to the corporation upon the exercise of such Options or the conversion or exchange of such Convertible Securities, or in the case of Options for Convertible Securities, the exercise of such options for Convertible Securities and the conversion or exchange of such Convertible Securities; by

(B)          the maximum number of shares of Common Stock (as set forth in the instruments relating thereto, without regard to any provision contained therein for a subsequent adjustment of such number) issuable upon the exercise of such Options or the conversion or exchange of such Convertible Securities.

(e)           Adjustment of Conversion Price for Certain Other Events.  The Conversion Price shall be subject to adjustment from time to time as follows:

(i)            Adjustments for Subdivisions of Common Stock.  If the number of shares of Common Stock outstanding is increased by a stock dividend payable in shares of Common Stock or by a subdivision or split up of stock, then the Conversion Price then in effect shall, concurrently with the effectiveness of such dividend, subdivision or split up, be proportionately decreased so that the number of shares of Common Stock issuable on conversion of each share of Preferred Stock shall be increased in proportion to such increase of outstanding shares of Common Stock.

(ii)           Adjustments for Combinations of Common Stock.  If the number of shares of Common stock outstanding is decreased by a combination of the outstanding shares of Common Stock, then the Conversion Price then in effect shall, concurrently with the effectiveness of such combination, be proportionately increased so that the number of shares of Common Stock issuable upon conversion of each share of such Preferred Stock shall be decreased in proportion to such decrease in outstanding shares of Common Stock.

(iii)         Adjustments for Stock Dividends and Other Distributions.  In the event the corporation at any time or from time to time makes, or fixes a record date for the determination of holders of Common Stock entitled to receive any distribution (excluding any repurchases of securities by the corporation not made on a pro rata basis from all holders of any class of the corporation’s securities) payable in property or in securities of the corporation other than shares of Common Stock, then and in each such event the holders of Preferred Stock shall receive at the time of such distribution, the amount of property or the number of securities of the

13

corporation that they would have received had their Preferred Stock been converted into Common Stock on the date of such event.

(iv)          Adjustments for Reclassification, Exchange and Substitution.  Except as provided in Section 2, upon any liquidation, dissolution or winding up of the corporation, if the Common Stock issuable upon conversion of the Preferred Stock shall be changed into the same or a different number of shares of any other class or classes of stock, whether by capital reorganization, reclassification or otherwise (other than a subdivision or combination of shares provided for above), each share of Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the corporation deliverable upon conversion of such share of Preferred Stock shall have been entitled upon such reorganization or reclassification.

(f)            No Impairment.  Except as provided in Section 5, the corporation will not, by amendment of its Articles of Incorporation or Bylaws 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 to be observed or performed hereunder by the corporation but will at all times in good faith assist in the carrying out of all the provisions of this Section 4 and in the taking of all such action as may be necessary or appropriate in order to protect the conversion rights of the holders of the Preferred Stock against impairment.

(g)           Certificate as to Adjustments.  Upon the occurrence of each adjustment or readjustment of a Conversion Price pursuant to this Section 4, the corporation at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each holder of Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based.  The corporation shall, upon the written request at any time of any holder of Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (i) such adjustments and readjustments, (ii) the applicable Conversion Price at the time in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of Preferred Stock.  Notwithstanding the foregoing, no adjustment of any Conversion Price shall be made if the amount of any such adjustment would be an amount less than $0.05, but any such amount shall be carried forward and an adjustment with respect thereof shall be made at the time of and together with any subsequent adjustment which, together with such amount and any other amount(s) so carried forward, shall aggregate an increase or decrease of $0.05 or more.

(h)           Notices of Record Date.  In the event that the corporation shall propose at any time:

(i)            to declare any dividend or distribution upon its Common Stock, whether in cash, property, stock or other securities, whether or not a regular cash dividend and whether or not out of earnings or earned surplus;

(ii)           to effect any reclassification or recapitalization of its Common Stock outstanding involving a change in the Common Stock; or

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(iii)         to merge or consolidate with or into any other person or entity, or sell, lease or convey all or substantially all its property or business or to effect a reorganization as defined in the California Corporations Code, or to liquidate, dissolve or wind up;

then, in connection with each such event, the corporation shall send to the holders of the Preferred Stock:

(1)           at least ten (10) days’ prior written notice of the date on which a record shall be taken for such dividend or distribution rights (and specifying the date on which the holders of Common Stock shall be entitled thereto) or for determining rights to vote in respect of the matters referred to in (ii) or (iii) above; and

(2)           in the case of the matters referred to in (ii) and (iii) above, at least ten (10) days’ prior written notice of the date when the same shall take place (and specifying the date on which the holders of Common Stock shall be entitled to exchange their Common Stock for securities or other property deliverable upon the occurrence of such event).

Each such written notice shall be delivered personally or given by first class mail, postage prepaid, addressed to the holders of Preferred Stock at the address for each such holder as shown on the books of the corporation, provided, however, that the corporation shall provide the holders of Series D Preferred with at least twelve (12) days’ prior written notice of those matters set forth in (1) and (2) above delivered by overnight courier.  Failure to give such notice, or any defect therein shall not affect the legality of any such action with respect to any party other than with respect to the holders of the Preferred Stock.

5.             Covenants.

(a)           In addition to any other rights provided by law, so long as at least one million (1,000.000) shares of Series G Preferred shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than two-thirds (2/3^rds) of the outstanding shares of the Series G Preferred, voting as a single class:

(i)            amend, waive or repeal any provision of the corporation’s Articles of Incorporation or Bylaws (whether by merger, consolidation or otherwise) if such action would adversely alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Series G Preferred Stock;

(ii)           increase or decrease the authorized number of shares of the Series G Preferred;

(iii)         authorize, create or issue any class or series of stock having any preference or priority as to dividends, liquidation rights or assets superior to or on a parity with the Series G Preferred.

(b)           In addition to any other rights provided by law, so long as at least twenty-five percent (25%) of the authorized Preferred Stock shall be outstanding, this corporation shall not, without first obtaining the affirmative vote or written consent of the holders of not less than sixty percent (60%) of the then outstanding shares of Preferred Stock, voting as a single class:

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(i)            increase or decrease the total number of authorized shares of Preferred Stock;

(ii)           engage in any business other than the business engaged in or proposed to be engaged in by the corporation immediately prior to Series G Original Issuance Date;

(iii)         enter into a Major Transaction;

(iv)          amend, waive or repeal any provision of the corporation’s Articles of Incorporation or Bylaws if such action would materially adversely alter or change the preferences, rights, privileges or powers of, or the restrictions provided for the benefit of, the Preferred Stock;

(v)            redeem or purchase any of the Preferred Stock or any of the Common Stock, provided, however, that this restriction shall not apply to the repurchase of shares of Common Stock from employees, officers, directors, consultants or other persons performing services for the corporation upon or after termination of the employment, consulting or other relationship between the corporation and such persons;

(vi)          increase or decrease the authorized number of directors;

(vii)         authorize or effect any liquidation, dissolution or winding up of the corporation;

(viii)        authorize or create any class or series of stock having any preference or priority as to dividends, liquidation rights or assets superior to or on a parity with the Series G Preferred; or

(ix)          take any action that results in the payment or declaration of any dividends on any shares of Common Stock.

6.             Status of Converted Stock.  In case any shares of any series of Preferred Stock shall be converted pursuant to Section 4 hereof, the shares so converted shall not be reissued and shall not resume the status of authorized but unissued shares of Preferred Stock.

7.             Redemption.

(a)           Beginning from March 23, 2006 (provided that at such time the corporation has not completed its initial public offering of its securities), any holder of Series F Preferred may request redemption (the “Requesting Holder”) by sending a written notice (a “Redemption Notice”) to the corporation requesting payment of the Redemption Price (as defined below) for shares of Series F Preferred held by such holder.  The Redemption Notice shall set forth (i) the amount of shares held by the Requesting Holder; (ii) the number of shares to be redeemed (“Designated Shares”); and (iii) the address at which such Requesting Holder may receive payment of the Redemption Price upon surrender of its share certificates for the Designated Shares.  Upon such request, the corporation shall redeem the Designated Shares thirty (30) days from the date of the Redemption Notice (the “Redemption Date”) through cash

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payment of the Redemption Price (as defined below), payable in three equal annual installments commencing on the Redemption Date, from any source of funds legally available to the corporation therefor.

(b)           The redemption price for each share of Designated Shares shall be equal to the amount derived by dividing the net asset value of the corporation at the Redemption Date (as reflected in the corporation’s financial statements (book value)) by the total number of shares of capital stock of the corporation on a fully diluted, as converted basis, as adjusted for Recapitalizations (the “Redemption Price”).

(c)           If the corporation has sufficient and legally available funds to redeem all of the Designated Shares at the Redemption Price, then all Designated Shares shall be redeemed subject to the provisions of this Section 7.  in the event the corporation does not have sufficient funds legally available to redeem all Designated Shares, the corporation may, subject to the approval of the Requesting Holder, reduce the Redemption Price and provide the Requesting Holder with notice (a “Reply Notice”) setting forth the reduced Redemption Price at which the Requesting Holder may redeem the Designated Shares.  Upon receipt of the Reply Notice, the Requesting Holder shall notify the corporation in writing within twenty (20) days as to whether the Requesting Holder chooses to (i) accept the reduced Redemption Price, or (ii) decline the reduced Redemption Price and remain a Series F Preferred shareholder.  If the Requesting Holder elects to accept the reduced Redemption Price, then such payment shall constitute full payment of the Redemption Price for the Designated Shares and the Requesting Holder shall have no further rights with respect to such shares.

(d)           From and after the Redemption Date, unless there shall have been a default in payment of the applicable Redemption Price, all rights of the holders of shares of Series F Preferred designated for redemption as holders of Series F Preferred (except the right to receive the applicable Redemption Price upon surrender of their certificate or certificates) shall cease with respect to such shares, and such shares shall not thereafter be transferred on the books of the corporation or be deemed to be outstanding for any purpose whatsoever.

The redemption rights set forth in this Section 7 shall terminate upon the filing of a registration statement for the initial public offering of the corporation’s securities.

IV

1.             Limitation of Directors’ Liability.  The liability of the directors of this corporation for monetary damages shall be eliminated to the fullest extent permissible under California law.

2.             Indemnification of Corporate Agents.  This corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with agents, votes of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to the applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to this corporation and its shareholders.

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3.             Repeal or Modification.  Any repeal or modification of the foregoing provisions of this Article IV shall not adversely affect any right or protection of an agent of this corporation relating to acts or omissions occurring prior to such repeal or modification.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

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3.             The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the Board of Directors.

4.             The foregoing amendment and restatement of Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Sections 902 and 903 of the Corporations Code.  The total number of outstanding shares of Class A Common Stock Voting of the corporation is 7,523,540, of the Series A Preferred is 967,497, of the Series B Preferred is 4,221,164, of the Series C Preferred is 1,568,692, of the Series D Preferred is 5,439,413, of the Series E Preferred is 2,050,820 and of Series F Preferred is 1,143,764.  The number of shares of Common Stock in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Class A Common Stock.  The number of Preferred Shares in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Preferred Stock.  The number of shares of the Series A Preferred voting in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Series A Preferred.  The number of shares of the Series B Preferred voting in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Series B Preferred.  The number of shares of the Series C Preferred voting in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Series C Preferred.  The number of shares of the Series D Preferred voting in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Series D Preferred.  The number of the Series E Preferred voting in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Series E Preferred.  The number of the

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Series F Preferred voting in favor of the amendment equaled or exceeded the vote required.  The vote required was a majority of the outstanding shares of Series F Preferred.

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We further declare under penalty of perjury under the laws of the State of California that the matters set forth in the foregoing Amended and Restated Articles of Incorporation are true and correct of our own knowledge.

Executed at Fremont, California, this 21^st day of December, 2005.

/s/ DANIEL ZURR

Daniel Zurr, Ph.D.

Chief Executive Officer

/s/ AKBAR KHAN

Akbar Khan

Secretary

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EX-3.4

Exhibit 3.4

BYLAWS

OF

QUARK BIOTECH, INC.


AS AMENDED AND RESTATED
EFFECTIVE AUGUST 28, 1997

TABLE OF CONTENTS

		Page
ARTICLE I	CORPORATE OFFICES	1
1.1	PRINCIPAL OFFICE	1
1.2	OTHER OFFICES	1
ARTICLE II	MEETINGS OF SHAREHOLDERS	1
2.1	PLACE OF MEETINGS	1
2.2	ANNUAL MEETING	1
2.3	SPECIAL MEETING	1
2.4	NOTICE OF SHAREHOLDERS’ MEETINGS	2
2.5	MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE	2
2.6	QUORUM	3
2.7	ADJOURNED MEETING; NOTICE	3
2.8	VOTING	3
2.9	VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT	4
2.10	SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING	5
2.11	RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS	6
2.12	PROXIES	6
2.13	INSPECTORS OF ELECTION	7
ARTICLE III	DIRECTORS	7
3.1	POWERS	7
3.2	NUMBER OF DIRECTORS	7
3.3	ELECTION AND TERM OF OFFICE OF DIRECTORS	8
3.4	RESIGNATION AND VACANCIES	8
3.5	PLACE OF MEETINGS; MEETINGS BY TELEPHONE	9
3.6	REGULAR MEETINGS	9
3.7	SPECIAL MEETINGS; NOTICE	9
3.8	QUORUM	9
3.9	WAIVER OF NOTICE	10
3.10	ADJOURNMENT	10
3.11	NOTICE OF ADJOURNMENT	10

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3.12	BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING	10
3.13	FEES AND COMPENSATION OF DIRECTORS	10
3.14	APPROVAL OF LOANS TO OFFICERS	11
ARTICLE IV	COMMITTEES	11
4.1	COMMITTEES OF DIRECTORS	11
4.2	MEETINGS AND ACTION OF COMMITTEES	12
ARTICLE V	OFFICERS	12
5.1	OFFICERS	12
5.2	ELECTION OF OFFICERS	12
5.3	SUBORDINATE OFFICERS	12
5.4	REMOVAL AND RESIGNATION OF OFFICERS	12
5.5	VACANCIES IN OFFICES	13
5.6	CHAIRMAN OF THE BOARD	13
5.7	PRESIDENT	13
5.8	VICE PRESIDENTS	13
5.9	SECRETARY	13
5.10	CHIEF FINANCIAL OFFICER	14
ARTICLE VI	INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS	14
6.1	INDEMNIFICATION OF DIRECTORS AND OFFICERS	14
6.2	INDEMNIFICATION OF OTHERS	15
6.3	PAYMENT OF EXPENSES IN ADVANCE	15
6.4	INDEMNITY NOT EXCLUSIVE	15
6.5	INSURANCE INDEMNIFICATION	15
6.6	CONFLICTS	15
ARTICLE VII	RECORDS AND REPORTS	16
7.1	MAINTENANCE AND INSPECTION OF SHARE REGISTER	16
7.2	MAINTENANCE AND INSPECTION OF BYLAWS	16
7.3	MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS	17

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7.4	INSPECTION BY DIRECTORS	17
7.5	ANNUAL REPORT TO SHAREHOLDERS; WAIVER	17
7.6	FINANCIAL STATEMENTS	18
7.7	REPRESENTATION OF SHARES OF OTHER CORPORATIONS	18
ARTICLE VIII	GENERAL MATTERS	18
8.1	RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING	18
8.2	CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS	19
8.3	CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED	19
8.4	CERTIFICATES FOR SHARES	19
8.5	LOST CERTIFICATES	19
8.6	CONSTRUCTION; DEFINITIONS	20
ARTICLE IX	AMENDMENTS	20
9.1	AMENDMENT BY SHAREHOLDERS	20
9.2	AMENDMENT BY DIRECTORS	20

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BYLAWS

OF

QUARK BIOTECH, INC.

ARTICLE I

CORPORATE OFFICES

1.1          PRINCIPAL OFFICE

The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California.  If the principal executive office is located outside such state and the corporation has one or more business offices in such state, then the board of directors shall fix and designate a principal business office in the State of California.

1.2          OTHER OFFICES

The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business.

ARTICLE II

MEETINGS OF SHAREHOLDERS

2.1          PLACE OF MEETINGS

Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors.  In the absence of any such designation, shareholders’ meetings shall be held at the principal executive office of the corporation.

2.2          ANNUAL MEETING

The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors.  At the meeting, directors shall be elected, and any other proper business may be transacted.

2.3          SPECIAL MEETING

A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting.

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If a special meeting is called by any person or persons other than the board of directors or the president or the chairman of the board, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president or the secretary of the corporation.  The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request.  If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice.  Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held.

2.4          NOTICE OF SHAREHOLDERS’ MEETINGS

All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting.  The notice shall specify the place, date, and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders (but subject to the provisions of the next paragraph of this Section 2.4 any proper matter may be presented at the meeting for such action).  The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, the board intends to present for election.

If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California (the “Code”), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, then the notice shall also state the general nature of that proposal.

2.5          MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE

Written notice of any meeting of shareholders shall be given either (i) personally or (ii) by first-class mail or (iii) by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) on the record date for the shareholders’ meeting, or (iv) by telegraphic or other written communication.  Notices not personally delivered shall be sent charges prepaid and shall be addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice.  If no such address appears on the corporation’s books or is given, notice shall be deemed to have been

2

given if sent to that shareholder by mail or telegraphic or other written communication to the corporation’s principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located.  Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication.

If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, then all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one (1) year from the date of the giving of the notice.

An affidavit of the mailing or other means of giving any notice of any shareholders’ meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice.

2.6          QUORUM

The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders.  The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum.

2.7          ADJOURNED MEETING; NOTICE

Any shareholders’ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy.  In the absence of a quorum, no other business may be transacted at that meeting except as provided in Section 2.6 of these bylaws.

When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken.  However, if a new record date for the adjourned meeting is fixed or if the adjournment is for more than forty-five (45) days from the date set for the original meeting, then notice of the adjourned meeting shall be given.  Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws.  At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting.

2.8          VOTING

The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of

3

Sections 702 through 704 of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership).

The shareholders’ vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder at the meeting and before the voting has begun.

Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the articles of incorporation, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote of the shareholders.  Any shareholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote them against the proposal; but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder’s approving vote is with respect to all shares which the shareholder is entitled to vote.

If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number or a vote by classes is required by the Code or by the articles of incorporation.

At a shareholders’ meeting at which directors are to be elected, a shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) if the candidates’ names have been placed in nomination prior to commencement of the voting and the shareholder has given notice prior to commencement of the voting of the shareholder’s intention to cumulate votes.  If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination either (i) by giving one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder’s shares are normally entitled or (ii) by distributing the shareholder’s votes on the same principle among any or all of the candidates, as the shareholder thinks fit.  The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect.

2.9          VALIDATION OF MEETINGS; WAIVER OF NOTICE; CONSENT

The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though they had been taken at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof.  The waiver of notice or consent or approval need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent or approval shall state the general nature of the proposal.  All such waivers, consents,

4

and approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

Attendance by a person at a meeting shall also constitute a waiver of notice of and presence at that meeting, except when the person objects at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.  Attendance at a meeting is not a waiver of any right to object to the consideration of matters required by the Code to be included in the notice of the meeting but not so included, if that objection is expressly made at the meeting.

2.10SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING

Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted.

In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors.  However, a director may be elected at any time to fill any vacancy on the board of directors, provided that it was not created by removal of a director and that it has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors.

All such consents shall be maintained in the corporate records.  Any shareholder giving a written consent, or the shareholder’s proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary.

If the consents of all shareholders entitled to vote have not been solicited in writing and if the unanimous written consent of all such shareholders has not been received, then the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting.  Such notice shall be given to those shareholders entitled to vote who have not consented in writing and shall be given in the manner specified in Section 2.5 of these bylaws.  In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate “agent,” pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval.

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2.11RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS

For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code.

If the board of directors does not so fix a record date:

(a)           the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and

(b)           the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action by the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later.

The record date for any other purpose shall be as provided in Article VIII of these bylaws.

2.12        PROXIES

Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation.  A proxy shall be deemed signed if the shareholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder’s attorney-in-fact.  A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) the person who executed the proxy revokes it prior to the time of voting by delivering a writing to the corporation stating that the proxy is revoked or by executing a subsequent proxy and presenting it to the meeting or by voting in person at the meeting, or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy.  The dates contained on the forms of proxy presumptively determine the order of execution, regardless of the postmark dates on the envelopes in which they are mailed.  The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code.

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2.13        INSPECTORS OF ELECTION

Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment.  If no inspector of election is so appointed, then the chairman of the meeting may, and on the request of any shareholder or a shareholder’s proxy shall, appoint an inspector or inspectors of election to act at the meeting.  The number of inspectors shall be either one (1) or three (3).  If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, then the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed.  If any person appointed as inspector fails to appear or fails or refuses to act, then the chairman of the meeting may, and upon the request of any shareholder or a shareholder’s proxy shall, appoint a person to fill that vacancy.

Such inspectors shall:

(a)           determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies;

(b)           receive votes, ballots or consents;

(c)           hear and determine all challenges and questions in any way arising in connection with the right to vote;

(d)           count and tabulate all votes or consents;

(e)           determine when the polls shall close;

(f)            determine the result; and

(g)           do any other acts that may be proper to conduct the election or vote with fairness to all shareholders.

ARTICLE III

DIRECTORS

3.1          POWERS

Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors.

3.2          NUMBER OF DIRECTORS

The number of directors of the corporation shall be not less than five nor more than nine.  The exact number of directors shall be nine (9) until changed, within the limits specified above,

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by a bylaw amending this Section 3.2, duly adopted by the board of directors or by the shareholders.  The indefinite number of directors may be changed, or a definite number may be fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the fixed number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of an action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to vote thereon.

No reduction of the authorized number of directors shall have the effect of removing any director before that director’s term of office expires.

3.3          ELECTION AND TERM OF OFFICE OF DIRECTORS

Directors shall be elected at each annual meeting of shareholders to hold office until the next annual meeting.  Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified.

3.4          RESIGNATION AND VACANCIES

Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective.  If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective.

Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; however, a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum), or by the unanimous written consent of all shares entitled to vote thereon.  Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified.

A vacancy or vacancies in the board of directors shall be deemed to exist (i) in the event of the death, resignation or removal of any director, (ii) if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, (iii) if the authorized number of directors is increased, or (iv) if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be elected at that meeting.

The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon.

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3.5          PLACE OF MEETINGS; MEETINGS BY TELEPHONE

Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board.  In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation.  Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation.

Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting.

3.6          REGULAR MEETINGS

Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors.

3.7          SPECIAL MEETINGS; NOTICE

Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two directors.

Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director’s address as it is shown on the records of the corporation.  If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting.  If the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting.  Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director.  The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation.

3.8          QUORUM

A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these bylaws.  Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees), Section 317(e) of the Code (as to indemnification of directors), the articles of incorporation, and other applicable law.

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A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting.

3.9          WAIVER OF NOTICE

Notice of a meeting need not be given to any director (i) who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or (ii) who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such directors.  All such waivers, consents, and approvals shall be filed with the corporate records or made part of the minutes of the meeting.  A waiver of notice need not specify the purpose of any regular or special meeting of the board of directors.

3.10        ADJOURNMENT

A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place.

3.11        NOTICE OF ADJOURNMENT

Notice of the time and place of holding an adjourned meeting need not be given unless the meeting is adjourned for more than twenty-four (24) hours.  If the meeting is adjourned for more than twenty-four (24) hours, then notice of the time and place of the adjourned meeting shall be given before the adjourned meeting takes place, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment.

3.12        BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING

Any action required or permitted to be taken by the board of directors may be taken without a meeting, provided that all members of the board individually or collectively consent in writing to that action.  Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors.  Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board.

3.13        FEES AND COMPENSATION OF DIRECTORS

Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors.  This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services.

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3.14        APPROVAL OF LOANS TO OFFICERS¹

The corporation may, upon the approval of the board of directors alone, make loans of money or property to, or guarantee the obligations of, any officer of the corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the board of directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the corporation, (ii) the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the Code) on the date of approval by the board of directors, and (iii) the approval of the board of directors is by a vote sufficient without counting the vote of any interested director or directors.

ARTICLE IV

COMMITTEES

4.1          COMMITTEES OF DIRECTORS

The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board.  The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee.  The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors.  Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to:

(a)           the approval of any action which, under the Code, also requires shareholders’ approval or approval of the outstanding shares;

(b)           the filling of vacancies on the board of directors or in any committee;

(c)           the fixing of compensation of the directors for serving on the board or any committee;

(d)           the amendment or repeal of these bylaws or the adoption of new bylaws;

(e)           the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable;

(f)            a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or

(g)           the appointment of any other committees of the board of directors or the members of such committees.

⁽¹⁾     This section is effective only if it has been approved by the shareholders in accordance with Sections 315(b) and 152 of the Code.

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4.2          MEETINGS AND ACTION OF COMMITTEES

Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee, that special meetings of committees may also be called by resolution of the board of directors, and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee.  The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws.

ARTICLE V

OFFICERS

5.1          OFFICERS

The officers of the corporation shall be a president, a secretary, and a chief financial officer.  The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws.  Any number of offices may be held by the same person.

5.2          ELECTION OF OFFICERS

The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment.

5.3          SUBORDINATE OFFICERS

The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine.

5.4          REMOVAL AND RESIGNATION OF OFFICERS

Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors.

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Any officer may resign at any time by giving written notice to the corporation.  Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective.  Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party.

5.5          VACANCIES IN OFFICES

A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office.

5.6          CHAIRMAN OF THE BOARD

The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws.  If there is no president, then the chairman of the board shall also be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 5.7 of these bylaws.

5.7          PRESIDENT

Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation.  He shall preside at all meetings of the shareholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors.  He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws.

5.8          VICE PRESIDENTS

In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president.  The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board.

5.9          SECRETARY

The secretary shall keep or cause to be kept, at the principal executive office of the corporation or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors and shareholders.  The minutes shall show the time and place of each meeting, whether regular or special (and, if special, how

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authorized and the notice given), the names of those present at directors’ meetings or committee meetings, the number of shares present or represented at shareholders’ meetings, and the proceedings thereof.

The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation’s transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation.

The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required to be given by law or by these bylaws.  He shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws.

5.10        CHIEF FINANCIAL OFFICER

The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings, and shares.  The books of account shall at all reasonable times be open to inspection by any director.

The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of directors.  He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws.

ARTICLE VI

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES,
AND OTHER AGENTS

6.1          INDEMNIFICATION OF DIRECTORS AND OFFICERS

The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation.  For purposes of this Section 6.1, a “director” or “officer” of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who

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was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.

6.2          INDEMNIFICATION OF OTHERS

The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation.  For purposes of this Article VI, an “employee” or “agent” of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation.

6.3          PAYMENT OF EXPENSES IN ADVANCE

Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the Board of Directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI.

6.4          INDEMNITY NOT EXCLUSIVE

The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation.

6.5          INSURANCE INDEMNIFICATION

The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI.

6.6          CONFLICTS

No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears:

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(1)           That it would be inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or

(2)           That it would be inconsistent with any condition expressly imposed by a court in approving a settlement.

ARTICLE VII

RECORDS AND REPORTS

7.1          MAINTENANCE AND INSPECTION OF SHARE REGISTER

The corporation shall keep either at its principal executive office or at the office of its transfer agent or registrar (if either be appointed), as determined by resolution of the board of directors, a record of its shareholders listing the names and addresses of all shareholders and the number and class of shares held by each shareholder.

A shareholder or shareholders of the corporation who holds at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders’ names, addresses, and shareholdings during usual business hours on five (5) days’ prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent’s usual charges for such list, a list of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand.  Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled.

The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder’s interests as a shareholder or as the holder of a voting trust certificate.

Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand.

7.2          MAINTENANCE AND INSPECTION OF BYLAWS

The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in California the original or a copy of these bylaws as amended to date, which bylaws shall be open to inspection by the shareholders at all reasonable times during office hours.  If the principal executive office of the

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corporation is outside the State of California and the corporation has no principal business office in such state, then the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date.

7.3MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS

The accounting books and records and the minutes of proceedings of the shareholders, of the board of directors, and of any committee or committees of the board of directors shall be kept at such place or places as are designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation.  The minutes shall be kept in written form, and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.

The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder’s interests as a shareholder or as the holder of a voting trust certificate.  The inspection may be made in person or by an agent or attorney and shall include the right to copy and make extracts.  Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation.

7.4          INSPECTION BY DIRECTORS

Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind as well as the physical properties of the corporation and each of its subsidiary corporations.  Such inspection by a director may be made in person or by an agent or attorney.  The right of inspection includes the right to copy and make extracts of documents.

7.5          ANNUAL REPORT TO SHAREHOLDERS; WAIVER

The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation.  Such report shall be sent at least fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days) before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation.

The annual report shall contain (i) a balance sheet as of the end of the fiscal year, (ii) an income statement, (iii) a statement of changes in financial position for the fiscal year, and (iv) any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation.

The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by fewer than one hundred (100) holders of record.

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7.6          FINANCIAL STATEMENTS

If no annual report for the fiscal year has been sent to shareholders, then the corporation shall, upon the written request of any shareholder made more than one hundred twenty (120) days after the close of such fiscal year, deliver or mail to the person making the request, within thirty (30) days thereafter, a copy of a balance sheet as of the end of such fiscal year and an income statement and statement of changes in financial position for such fiscal year.

If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, then the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request.  If the corporation has not sent to the shareholders its annual report for the last fiscal year, the statements referred to in the first paragraph of this Section 7.6 shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request.

The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or by the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation.

7.7          REPRESENTATION OF SHARES OF OTHER CORPORATIONS

The chairman of the board, the president, any vice president, the chief financial officer, the secretary or assistant secretary of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation.  The authority herein granted may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority.

ARTICLE VIII

GENERAL MATTERS

8.1RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING

For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the shareholders entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action.  In that case, only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of

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any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code.

If the board of directors does not so fix a record date, then the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later.

8.2          CHECKS; DRAFTS; EVIDENCES OF INDEBTEDNESS

From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments.

8.3CORPORATE CONTRACTS AND INSTRUMENTS: HOW EXECUTED

The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances.  Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

8.4CERTIFICATES FOR SHARES

A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are fully paid.  The board of directors may authorize the issuance of certificates for shares partly paid provided that these certificates shall state the total amount of the consideration to be paid for them and the amount actually paid.  All certificates shall be signed in the name of the corporation by the chairman of the board or the vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder.  Any or all of the signatures on the certificate may be facsimile.

In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate ceases to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue.

8.5          LOST CERTIFICATES

Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and cancelled at the same time.  The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of

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replacement certificates on such terms and conditions as the board may require; the board may require indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate.

8.6          CONSTRUCTION; DEFINITIONS

Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Code shall govern the construction of these bylaws.  Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

ARTICLE IX

AMENDMENTS

9.1          AMENDMENT BY SHAREHOLDERS

New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, then the authorized number of directors may be changed only by an amendment of the articles of incorporation.

9.2          AMENDMENT BY DIRECTORS

Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended or repealed by the board of directors.

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EX-4.5

Exhibit 4.5

THE SECURITY EVIDENCED BY THIS WARRANT AND THE SECURITIES TO BE PURCHASED UNDER THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES. THE SALE, TRANSFER OR ASSIGNMENT IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.

No.	Right to Purchase
, 1997	Shares of Series D Preferred Stock
Void after Expiration Date (as defined herein)

QUARK BIOTECH, INC.

SERIES D PREFERRED STOCK PURCHASE WARRANT

Quark Biotech, Inc., a California corporation (the “Company”), hereby certifies that, for good and valuable consideration,                                                             , (the “Warrant Holder”), is entitled, subject to the terms set forth below, to purchase from the Company at any time during the period commencing at 9:00 a.m. on                  , 1997 and ending at 5:00 p.m. on the Expiration Date (as defined in Section 3), up to the number of fully-paid and non-assessable shares of Series D Preferred Stock of the Company set forth in Section 1 below for the price per share set forth in Section 2 below, subject to adjustment as herein provided.

1.         Number of Shares. Subject to adjustment as provided in Section 8 below, this Warrant shall be exercisable for up to                                                                                shares of Series D Preferred Stock of the Company (the “Shares”) or, in the event of automatic conversion of the Company’s Series D Preferred Stock, an equivalent number of shares of Common Stock (determined using the applicable conversion ratio at the time of such conversion, subject to further adjustment as provided in Section 8.) As used herein, the term “Warrant Shares” shall mean the Shares or other securities obtained on conversion of the Shares.

2.         Exercise Price. This Warrant shall be exercisable at a price (the “Exercise Price”) equal to Four Dollars ($4.00) per Share, in U.S. dollars, subject to adjustment as provided in Section 8 below. Notwithstanding the foregoing, in the event that this Warrant has not been exercised contemporaneous with or prior to the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act at an offering price to

the public of at least $8.00 per share (as adjusted for stock splits, stock dividends, recapitalization and similar events (“Recapitalizations”)) with gross proceeds to the Company (net of underwriting commissions and discounts) of at least $10,000,000 (a “Qualified IPO”), then the Exercise Price shall be equal to the per share offering price of the company’s equity securities (prior to underwriter commissions and offering expenses) in the Qualified IPO (the “Gross IPO Price”). The Company agrees to provide Warrant Holder with no fewer than thirty (30) days notice prior to the closing of a Qualified IPO.

3.         Term. This Warrant may be exercised in whole or in part, at any time after issuance and prior to 5:00 p.m. on the date of the first to occur of the following (the date of such occurrence being referred to herein as the “Expiration Date”):

(a)       5:00 p.m, Pacific Daylight Time, September 9, 2007; and

(b)       three (3) years after the closing of the Qualified IPO; provided, however, that in the event, following the closing of the Qualified IPO, the per share closing sales price of the Company’s Common Stock (as reported by The Wall Street Journal or other widely available reporting source) for a period of thirty (30) consecutive trading days is at least equal to the greater of (i) $20.00 (appropriately adjusted for Recapitalizations) or (ii) the per share Gross IPO Price multiplied by two (appropriately adjusted for Recapitalizations), the Company shall have the right, upon written notice to the Warrant Holder to be given within 15 days, to declare that this Warrant shall terminate, and this Warrant shall terminate, to the extent not exercised within thirty (30) days following receipt of such notice.

4.         Exercise or Conversion of Warrant.

4.1       Exercise. During the Exercise Period, this Warrant may be exercised in whole or in part by the Warrant Holder by executing and delivering to the Company at its principal office the written notice of exercise in the form attached hereto as Exhibit W-l, specifying the portion of the Warrant to be exercised and accompanied by this Warrant, and paying to the Company the amount obtained by multiplying the number of Warrant Shares designated in the notice of exercise by the Exercise Price, as then in effect, (i) in cash (in immediately available funds), (ii) where permitted by law, by cancellation of indebtedness of the Company to the Warrant Holder, or (iii) by surrender of shares of the Company’s Common Stock, that are clear of all liens, claims, encumbrances or security interests (a “Surrender”).

4.2       Right to Convert Warrants into Shares: Net Exercise. In lieu of exercising this Warrant or any portion hereof, the Warrant Holder shall have the right to convert this Warrant or any portion hereof during the Exercise Period into Warrant Shares by executing and delivering to the Company at its principal office the written notice of conversion in the form attached as Exhibit W-l, specifying the portion of the Warrant to be converted, and accompanied by this Warrant. The number of Warrant Shares to be issued upon such conversion shall be that number of Warrant Shares equal to the quotient obtained by dividing (x) the value of the converted portion of the Warrant at the

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time the conversion right is exercised (determined by subtracting the aggregate Exercise Price for the Warrant Shares represented by the portion of the Warrant to be converted (the “Aggregate Price”) from the Fair Market Value of such Warrant Shares at the time of conversion) by (y) the Fair Market Value of one Warrant Share at such time (a “Net Exercise”). “Fair Market Value” means, as of any date, the value of a Warrant Share determined as follows:

(a)       if such Warrant Share is then quoted on The Nasdaq National Market, the simple average of the closing sale prices as reported on The Nasdaq National Market for the ten (10) consecutive trading days prior to such date;

(b)       if such Warrant Share is publicly traded and is then listed on a national securities exchange, the simple average of the closing sale prices on the principal national securities exchange on which the Warrant Share is listed or admitted to trading for the ten (10) consecutive trading days prior to such date;

(c)       if such Warrant Share is publicly traded but is not quoted on The Nasdaq National Market nor listed or admitted to trading on a national securities exchange, the simple average of the closing bid prices for the ten (10) consecutive trading days prior to such date, as reported by The Wall Street Journal or other widely available reporting source, for the over-the-counter market;

(d)       if none of the foregoing is applicable, by the Board of Directors of the Company in good faith (without discount for restriction); or

(e)       only if the Warrant is exercised contemporaneously with the Qualified IPO, the per share Gross IPO Price.

Any portion of this Warrant that is converted shall be immediately canceled.

4.3       Investment Letter. Upon exercise or conversion of the Warrant in accordance with Sections 4.1 or 4.2 hereof, the Warrant Holder shall either (i) execute and deliver to the Company an investment letter in the form attached hereto as Exhibit W-2 or (ii) deliver to the Company an opinion of counsel for the Warrant Holder reasonably satisfactory to the Company, stating that such exercise or conversion is exempt from the registration and prospectus delivery requirements of such the Securities Act.

4.4       Limitation on Exercise or Conversion. Notwithstanding Sections 4.1 and 4.2 and any other provisions of this Warrant, the Warrant Holder’s rights to obtain shares of Series D Preferred (or other securities that the Warrant Holder may otherwise become entitled to receive in accordance with Section 8 below) upon exercise or conversion of this Warrant shall be subject to the expiration or early termination of any applicable waiting periods relating to the acquisition of such securities by the Warrant Holder under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

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5.         Delivery of Stock Certificates, Etc. As soon as practicable after the exercise or conversion of this Warrant (in full or in part) in accordance with Section 4 above, the Company at its expense will cause to be issued in the name of and delivered to the Warrant Holder (i) a certificate or certificates for the number of fully paid and nonassessable Warrant Shares to which the Warrant Holder shall be entitled upon such exercise or conversion and (ii) a new Warrant of like tenor to purchase all of the Warrant Shares that may be purchased pursuant to the portion, if any, of the Warrant not exercised or converted by the Warrant Holder. The Warrant Holder shall for all purposes be deemed to have become the holder of record of such Warrant Shares at the close of business on the date on which this Warrant was surrendered together with a notice of exercise or conversion and, in the case of exercise, payment of the Exercise Price was made, irrespective of the date of delivery of such certificate or certificates, except that, if the date of such surrender, notice and payment is a date when the stock transfer books of the Company are closed, the Warrant Holder shall be deemed to have become the holder of record of such Warrant Shares at the close of business on the next succeeding date on which the stock transfer books are open.

6.         Covenants as to Series D Preferred. The Company covenants and agrees that all the Shares will, upon issuance, be validly issued and outstanding, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and free from all taxes, liens and charges with respect to the issuance thereof. The Company further covenants and agrees that the Company will at all times have authorized and reserved, and free from preemptive rights, a sufficient number of shares of Series D Preferred to provide for the exercise of the rights represented by this Warrant, and a sufficient number of shares of Common Stock available for conversion into Common Stock of the Series D Preferred to be issued on exercise of this Warrant.

7.         Registration Rights. This Warrant and the Shares issued or issuable upon the exercise or conversion of this Warrant are subject to registration in accordance with the registration rights in favor of the Warrant Holder as provided for in Section 2 of that certain Investor Rights Agreement dated August 28, 1997 by and among the Company, purchasers of the Company’s Preferred Stock, certain holders of the Company’s Common Stock and the founders of the Company (the “Investor Rights Agreement”).

8.         Adjustments.

8.1       In the event that the Company shall (i) pay a dividend in, or make a distribution of, shares of capital stock or other securities (including, without limitation, any rights or options to subscribe to or purchase any additional shares of any class of its capital stock, any evidence of its indebtedness or assets, or any other rights or options) on its outstanding Series D Preferred (or, if all or any portion of this Warrant is then exercisable for Common Stock, its Common Stock), (ii) subdivide its outstanding shares of Series D Preferred (or, if all or any portion of this Warrant is then exercisable for Common Stock, its Common Stock) into a greater number of such shares or (iii) combine its outstanding shares of Series D Preferred (or, if all or any portion of this Warrant is then exercisable for Common Stock, its Common Stock) into a smaller number of such shares, the total number of Shares or shares of Common Stock purchasable upon the exercise of

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this Warrant shall be adjusted so that upon the subsequent exercise of this Warrant, the Warrant Holder shall be entitled to receive at the same aggregate Exercise Price the number of shares of capital stock and other securities (of one or more classes) which such holder would have owned or would have been entitled to receive immediately following the happening of any of the events described above had this Warrant been exercised in full immediately prior to the record date with respect to such event. Any adjustment made pursuant to this Section shall, in the case of a dividend or distribution of stock or other securities, become effective as of the record date therefor and, in the case of a subdivision or combination, be made as of the effective date thereof. If, as a result of an adjustment made pursuant to this Section, the Warrant Holder shall become entitled to receive shares or other units of two or more classes of capital stock or other securities of the Company upon a subsequent exercise hereof, the Board of Directors of the Company (whose reasonable determination shall be conclusive and, upon request by the Warrant Holder, shall be evidenced by a certified Board resolution delivered to the Warrant Holder) shall determine the allocation of the adjusted Exercise Price between or among shares of such classes of capital stock. The above provisions of this Section 8.1 shall apply similarly to successive stock dividends, subdivisions and combinations.

8.2       In the event of a capital reorganization or a reclassification of the Series D Preferred (or, if all or any portion of this Warrant is then exercisable for Common Stock, its Common Stock) (except as provided in Section 8.1 above or Section 8.4 below), any Warrant Holder, upon exercise of this Warrant, shall be entitled to receive, in substitution for the Series D Preferred or Common Stock to which it would have become entitled upon exercise immediately prior to such reorganization or reclassification, the shares (of any class or classes) or other securities or property of the Company (or cash) that it would have been entitled to receive at the same aggregate Exercise Price upon such reorganization or reclassification if this Warrant had been exercised immediately prior to the record date with respect to such event; and in any such case, appropriate provision (as determined by the Board of Directors of the Company, whose reasonable determination shall be conclusive and, upon request by the Warrant Holder, shall be evidenced by a certified Board resolution delivered to the Warrant Holder) shall be made for the application of this Section 8.2 with respect to the rights and interests thereafter of the Warrant Holder (including but not limited to the allocation of the Exercise Price between or among shares of classes of capital stock or other securities), to the end that this Section 8.2 (including the adjustments of the number of shares of Series D Preferred or other securities purchasable and the Exercise Price thereof) shall thereafter be reflected, as nearly as reasonably practicable, in all subsequent exercises of this Warrant for any shares or securities or other property (or cash) thereafter deliverable upon the exercise hereof. The above provisions of this Section 8.2 shall apply similarly to successive reorganizations or recapitalizations.

8.3       Whenever the number of Warrant Shares purchasable upon exercise of this Warrant is adjusted as provided in this Section 8, the Company will promptly deliver to the Warrant Holder a certificate signed by an officer of the Company setting forth the number and kind of securities or other property purchasable upon exercise of this Warrant as so adjusted, and setting forth a brief statement of the facts accounting for such adjustments; provided, however, that failure

5

to deliver any notice required under this Section 8.3. or any defect therein, shall not affect the legality or validity of any such adjustments under this Section 8.

8.4       In the event of any consolidation or share exchange reorganization of the Company with, or merger of the Company into, another corporation (other than a consolidation, share exchange, reorganization or merger which does not result in any reclassification or change of the outstanding Warrant Shares), or in case of any sale of all or substantially all of the assets of the Company, the acquiring entity shall execute and deliver to the Warrant Holder a new warrant providing that the Warrant Holder shall have the right thereafter (until the expiration of this Warrant) to receive, upon exercise of such warrant, solely the kind and amount of shares of stock and other securities and property (or cash) receivable upon such consolidation, share exchange reorganization, merger, sale or transfer by a holder of the number of shares of Warrant Shares of the Company for which this Warrant might have been exercised immediately prior to such consolidation, share exchange reorganization, merger, sale or transfer. Such new warrant shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided in this Section 8.4. The above provision of this Section 8.4 shall similarly apply to successive consolidations, share exchange reorganizations, mergers, sales or transfers.

8.5       Irrespective of any adjustments in the number or kind of shares or other securities or property issuable upon exercise of this Warrant, this Warrant and any replacement Warrants thereafter issued may continue to express the same price and number and kind of shares as are stated in the original Warrant.

8.6       For the purpose of this Warrant, the term “Series D Preferred” shall mean (i) the class of stock designated as Series D Preferred in the Restated Articles of Incorporation of the Company, as amended, or (ii) any other class of stock resulting from successive changes or reclassifications of such Series D Preferred, or from the conversion of Series D Preferred into Common Stock pursuant to the Restated Articles of Incorporation. In the event that at any time as a result of an adjustment made pursuant to this Section 8, the Warrant Holder shall become entitled to receive any shares of capital stock of the Company other than shares of Series D Preferred, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Series D Preferred contained in this Section 8, and all other provisions of this Warrant, with respect to the Series D Preferred, shall apply on like terms to any such other shares.

8.7       The Company may, from time to time and to the extent permitted by law, reduce the exercise price of this Warrant by any amount for a period of not less than twenty (20) days. If the Company so reduces the exercise price of this Warrant, it will give the Warrant Holder not less than fifteen (15) days’ notice of such decrease, and shall take such other steps as may be required under applicable law in connection with any offers or sales of securities at the reduced price.

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8.8       Whenever the number of Shares or other securities purchasable upon the exercise of this Warrant is adjusted as provided in Section 8, the Exercise Price for each Share or other security payable upon exercise shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Shares or other securities purchasable upon the exercise of the Warrant immediately prior to such adjustment, and the denominator of which shall be the number of Shares or other security so purchasable immediately thereafter.

9.         No Fractional Interests. The Company shall not be required to issue any replacement or balance Warrant evidencing a fraction of a Warrant or to issue fractions of shares or other securities upon the exercise or conversion of this Warrant. If any fraction (calculated to the nearest one-hundredth) of a Warrant or of a share or other securities would, except for the provisions of this Section 9, be issuable upon the exercise or conversion of any Warrant, the Company shall, at its option, either purchase such fraction for an amount in cash equal to the current value of such fraction computed on the basis of the Fair Market Value thereof, or issue the required fractional Warrant, or share or other security. The Warrant Holder expressly waives any right to receive a replacement Warrant evidencing any fraction of a Warrant or to receive any fractional share or other securities upon exercise or conversion of this Warrant, except as expressly provided in this Section 9. Each adjustment in the number of Warrant Shares purchasable hereunder shall be calculated to the nearest whole share with fractional shares disregarded.

10.       No Shareholder Rights. This Warrant, as such, shall not entitle the Warrant Holder to vote, receive dividends or be deemed the holder of Series D Preferred or any other securities of the Company which may at any time be issuable on the exercise of this Warrant for any purpose whatever, nor shall anything contained herein be construed to confer upon the Warrant Holder any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidation, merger, conveyance or otherwise), or to receive notice of meetings or other actions affecting shareholders or to receive dividend or subscription rights, or otherwise, until this Warrant shall have been exercised or converted in accordance with the provisions hereof.

11.       Transfer and Exchange of Warrant. Subject to Section 9, this Warrant is exchangeable, upon the surrender hereof by the Warrant Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the rights to subscribe for and purchase the number of Shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the right to subscribe for and purchase such number of Shares as shall be designated by the Warrant Holder at the time of such surrender. This Warrant and all rights hereunder may be transferred, in whole or in part, on the books of the Company maintained for such purpose at the principal office of the Company, by the Warrant Holder hereof in person, or by duly authorized attorney, upon surrender of this Warrant properly endorsed and upon payment of any necessary transfer tax or other governmental charge imposed upon such transfer. Upon any partial

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transfer, the Company will issue and deliver to the Warrant Holder a new Warrant with respect to the Warrant balance not so transferred. Each taker and holder of this Warrant or any Warrant issued upon transfer hereof, by taking or holding the same, consents and agrees to be bound by the terms, conditions, representations and warranties hereof (and as a condition to any transfer of this Warrant the transferee shall upon request by the Company execute an agreement confirming the same), and, when this Warrant shall have been so endorsed and presented, the person in possession of this Warrant may be treated by the Company, and all other persons dealing with this Warrant, as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented hereby, any notice to the contrary notwithstanding provided, however, that until a transfer of this Warrant is duly registered on the books of the Company, the Company may treat the Warrant Holder hereof as the owner of this Warrant for all purposes.

12.       Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant is lost, stolen, mutilated or destroyed, the Company may, on such customary and reasonable terms as to indemnity or otherwise as it may in its discretion impose (which shall, in the case of a mutilated Warrant, include the surrender thereof), issue a new Warrant of like denomination and tenor as the Warrant so lost, stolen, mutilated or destroyed.

13.       Restrictions on Transfer.

13.1     Certificates. Certificates representing any of the Shares acquired pursuant to the provisions of this Warrant shall have endorsed thereon the following legends, as appropriate.

(a)       Unless such Shares are received in a transaction registered under the Securities Act and qualified (if necessary) under applicable state securities laws:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.”

(b)       Any legend required to be placed thereon by any applicable state securities laws.

13.2     Compliance with Act. The Warrant Holder, by acceptance hereof, agrees that this Warrant and the Shares to be issued upon the exercise or conversion hereof are being acquired

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solely for its own account and not as a nominee for any other party and not with a view toward the resale or distribution thereof and that it will not offer, sell or otherwise dispose of this Warrant or any Shares to be issued upon the exercise or conversion hereof except under circumstances which will not result in a violation of the Securities Act or of applicable state securities laws.

14.       Notice of Certain Corporate Actions. In case the Company after the date hereof shall propose (i) to offer to the holders of Series D Preferred or Common Stock, generally, rights to subscribe to or purchase any additional shares of any class of its capital stock, any evidences of its indebtedness or assets, or any other rights or options or (ii) to effect any reclassification of Series D Preferred (other than a reclassification involving merely the subdivision or combination of outstanding shares of Series D Preferred or Common Stock) or any capital reorganization, or any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or any sale, transfer or other disposition of its property and assets substantially as an entirety, or the liquidation, voluntary or involuntary dissolution or winding-up of the Company, then, in each such case, the Company shall deliver to the Warrant Holder notice of such proposed action, which notice shall specify the date on which the books of the Company shall close or a record be taken for such offer of rights or options, or the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up shall take place or commence, as the case may be, and which shall also specify any record date for determination of holders of Series D Preferred or Common Stock entitled to vote thereon or participate therein and shall set forth such facts with respect thereto as shall be reasonably necessary to indicate any adjustments in the Exercise Price and the number or kind of shares or other securities purchasable upon exercise of the Warrant which will be required as a result of such action. Such notice shall be sent, in the case of any action covered by clause (i) above, at least ten (10) days prior to the record date for determining holders of the Series D Preferred or Common Stock for purposes of such action or, if a record is not to be taken, the date as of which the holders of shares of Series D Preferred or Common Stock of record are to be entitled to such offering; and, in the case of any action covered by clause (ii) above, at least twenty (20) days prior to the earlier of the date on which such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up is expected to become effective and the date on which it is expected that holders of shares of Series D Preferred or Common Stock of record on such date shall be entitled to exchange their shares for securities or other property deliverable upon such reclassification, reorganization, consolidation, merger, sale, transfer, other disposition, liquidation, voluntary or involuntary dissolution or winding-up.

15.       Taxes. The Company shall pay all documentary, stamp or other transactional taxes attributable to the issuance or delivery of shares of capital stock or other securities of the Company upon the exercise hereof.

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16.       Miscellaneous.

16.1     Entire Agreement. This Warrant and the related agreements referenced herein constitute the entire agreement of the parties and supersede all prior undertakings and agreements with respect to the subject matter hereof.

16.2     Waivers and Amendments. This Warrant or any provision hereof may be changed, waived, discharged or terminated only by a statement in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.

16.3     Applicable Law. This Warrant shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the internal laws (excluding conflicts of law rules) of the State of California applicable to contracts made and performed in that State; provided, however, that if the Company has merged into a Delaware corporation, then this Warrant shall be governed and controlled as to validity, enforcement, interpretation, construction, effect and in all other respects by the internal laws (excluding conflict of law rules) of the State of Delaware applicable to contracts made and performed in that State.

16.4     Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to the Purchaser, at the Purchaser’s address set forth on Schedule of Purchasers (including electronic mail address), or at such other address as the Purchaser shall have furnished to the Company in writing, with copies to Philip B. Simon at Howson & Simon CPAs L.P., 101 Ygnacio Valley Road, Suite 310, Walnut Creek, CA 94596, facsimile (510) 977-9064, e-mail 102466.3043@compuserve.com and to Andrew L. Dudnick, Esq. at Springs Rivin Detwiler Dudnick & Stikker, LLP, 351 California Street, Fifteenth Floor, San Francisco, CA 94104, facsimile (415) 982-1401, e-mail dudnick@netcom.com, or (b) if to the Company, at the address set forth on the cover page of this Agreement and addressed to the attention of the President, or at such other address as the Company shall have furnished to the Purchaser. Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally or sent by telegram, telefax or telex (receipt confirmed) or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or if sent by electronic mail, then one business day following delivery if receipt confirmed or two business days following delivery if followed by certified mail or courier delivery.

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16.5     Headings. The headings in this Warrant are for convenience of reference only and shall not affect the meaning or interpretation of this Warrant.

QUARK BIOTECH, INC.:
By:
Title:	President

EXHIBIT W-1
NOTICE OF EXERCISE OR CONVERSION

Date: ____________, 19 __

Quark Biotech, Inc.
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304

Attention: ________________________

The undersigned hereby elects to exercise or convert the enclosed Warrant dated _____________, 1997 issued to it by Quark Biotech, Inc. (the “Company”).

The undersigned elects to:

oExercise the Warrant and to purchase thereunder _____________ shares of the Series D Preferred or Common Stock of the Company, as applicable, (the “Shares”) at an exercise price of $4.00 per Share (subject to adjustment pursuant to Section 2 and Section 8 of the Warrant), or an aggregate purchase price of ___________ Dollars ($____________) (the “Purchase Price”). Pursuant to the terms of the Warrant, the undersigned has delivered the Purchase Price herewith in full, of which Purchase Price, $___________ is to be paid by tender of ________ shares of the Company’s Series D Preferred or Common Stock, as applicable, which are delivered herewith in form suitable for transfer.

oConvert the value of ________________________ shares of the Series D Preferred or Common Stock, as applicable, issuable pursuant to the Warrant at the Exercise Price (as defined in the Warrant) of $4.00 per Share (subject to adjustment pursuant to Section 2 and Section 8 of the Warrant).

The undersigned hereby represents and warrants that all of the representations and warranties of the undersigned set forth in Section 13.2 of the Warrant are true and correct as of the date hereof, and that the undersigned has executed and delivered the Investment Letter attached as Exhibit W-2 to the Warrant.

Very truly yours,

Warrant Holder

By:

Title:

Accepted and Acknowledged:

Quark Biotech, Inc.

By:

Dated: _________________, 19__

EXHIBIT W-2

THIS AGREEMENT MUST BE COMPLETED, SIGNED AND RETURNED TO QUARK BIOTECH, INC. ALONG WITH THE SUBSCRIPTION FORM BEFORE THE SERIES D PREFERRED OR COMMON STOCK, AS APPLICABLE, ISSUABLE UPON EXERCISE OF THE WARRANT DATED ____________, 1997 WILL BE ISSUED.

INVESTMENT LETTER

______________,19__

Quark Biotech, Inc.
38 Tamar Street
Omer 84965 Israel

Attention: _______________________

Dear M__________________:

The undersigned, _____________________ (“Purchaser”), intends to acquire up to _________ shares of the Series D Preferred or Common Stock, as applicable, (the “Stock”) of Quark Biotech, Inc. (“Quark Biotech”) from Quark Biotech pursuant to the exercise of certain warrants to purchase stock held by the Purchaser. The Stock will be issued to Purchaser in a transaction not involving a public offering and pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “1933 Act”) and applicable state securities laws. In connection with such purchase and in order to comply with the exemptions from registration relied upon by Quark Biotech, Purchaser represents, warrants and agrees as follows:

The Purchaser is an accredited investor within the meaning of Rule 501 under the 1933 Act and has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of the purchase of the Stock and of protecting Purchaser’s interests in connection therewith.

Purchaser is acquiring the Stock for its own account, to hold for investment, and Purchaser shall not make any sale, transfer or other disposition of the Stock in violation of the 1933 Act or the General Rules and Regulations promulgated thereunder by the Securities and Exchange Commission (the “SEC”) or in violation of any applicable state securities law.

Purchaser has been advised that the Stock has not been registered under the 1933 Act or state securities laws on the ground that this transaction is exempt from registration, and that reliance by Quark Biotech on such exemptions is predicated in part on Purchaser’s representations set forth in this letter.

Purchaser has been informed that under the 1933 Act, the Stock must be held indefinitely unless it is subsequently registered under the 1933 Act or unless an exemption from such registration

(such as Rule 144) is available with respect to any proposed transfer or disposition by Purchaser of the Stock. Purchaser further agrees that Quark Biotech may refuse to permit Purchaser to sell, transfer or dispose of the Series D Preferred (except as permitted under Rule 144) unless there is in effect a registration statement under the 1933 Act and any applicable state securities laws covering such transfer, or unless Purchaser furnishes an opinion of counsel reasonably satisfactory to counsel for Quark Biotech, to the effect that such registration is not required.

Purchaser also understands and agrees that there will be placed on the certificate(s) for the Stock, or any substitutions therefor, the following legend stating in substance:

“THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, THE SALE IS MADE IN ACCORDANCE WITH RULE 144 UNDER THE ACT, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE SECURITIES REASONABLY SATISFACTORY TO THE COMPANY, STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT.”

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Purchaser has carefully read this letter and has discussed its requirements and other applicable limitations upon Purchaser’s resale of the Stock with Purchaser’s counsel.

Very truly yours,

Purchaser

By:

Title:

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EX-10.1

Exhibit 10.1

INDEMNITY AGREEMENT

THIS INDEMNITY AGREEMENT (this “Agreement”) dated as of                           , 20    , is made by and between QUARK BIOTECH, INC., a Delaware corporation (the “Company”), and                                  (“Indemnitee”).

RECITALS

A.The Company desires to attract and retain the services of highly qualified individuals as directors, officers, employees and agents.

B.The Company’s bylaws (the “Bylaws”) require that the Company indemnify its directors, and empowers the Company to indemnify its officers, employees and agents, as authorized by the Delaware General Corporation Law, as amended (the “Code”), under which the Company is organized and such Bylaws expressly provide that the indemnification provided therein is not exclusive and contemplates that the Company may enter into separate agreements with its directors, officers and other persons to set forth specific indemnification provisions.

C.Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and available insurance as adequate under the present circumstances, and the Company has determined that Indemnitee and other directors, officers, employees and agents of the Company may not be willing to serve or continue to serve in such capacities without additional protection.

D.The Company desires and has requested Indemnitee to serve or continue to serve as a director, officer, employee or agent of the Company, as the case may be, and has proferred this Agreement to Indemnitee as an additional inducement to serve in such capacity.

E.Indemnitee is willing to serve, or to continue to serve, as a director, officer, employee or agent of the Company, as the case may be, if Indemnitee is furnished the indemnity provided for herein by the Company.

AGREEMENT

NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the parties hereto, intending to be legally bound, hereby agree as follows:

1.Definitions.

(a)Agent. For purposes of this Agreement, the term “agent” of the Company means any person who:  (i) is or was a director, officer, employee or other fiduciary of the Company or a subsidiary of the Company; or (ii) is or was serving at the request or for the convenience of, or representing the interests of, the Company or a subsidiary of the Company, as a director, officer, employee or other fiduciary of a foreign or domestic corporation, partnership,  joint venture, trust or other enterprise.

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(b)Expenses. For purposes of this Agreement, the term “expenses” shall be broadly construed and shall include, without limitation, all direct and indirect costs of any type or nature whatsoever (including, without limitation, all attorneys’, witness, or other professional fees and related disbursements, and other out-of-pocket costs of whatever nature), actually and reasonably incurred by Indemnitee in connection with the investigation, defense or appeal of a proceeding or establishing or enforcing a right to indemnification under this Agreement, the Code or otherwise, and amounts paid in settlement by or on behalf of Indemnitee, but shall not include any judgments, fines or penalties actually levied against Indemnitee for such individual’s violations of law. (1) The term “expenses” shall also include reasonable compensation for time spent by Indemnitee for which he is not compensated by the Company or any subsidiary or third party (i) for any period during which Indemnitee is not an agent, in the employment of, or providing services for compensation to, the Company or any subsidiary; and (ii) if the rate of compensation and estimated time involved is approved by the directors of the Company who are not parties to any action with respect to which expenses are incurred, for Indemnitee while an agent of, employed by, or providing services for compensation to, the Company or any subsidiary.

(c)Proceedings. For purposes of this Agreement, the term “proceeding” shall be broadly construed and shall include, without limitation, any threatened, pending, or completed action, suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, and whether formal or informal in any case, in which Indemnitee was, is or will be involved as a party or otherwise by reason of:  (i) the fact that Indemnitee is or was a director or officer of the Company; (ii) the fact that any action taken by Indemnitee or of any action on Indemnitee’s part while acting as director, officer, employee or agent of the Company; or (iii) the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, and in any such case described above, whether or not serving in any such capacity at the time any liability or expense is incurred for which indemnification, reimbursement, or advancement of expenses may be provided under this Agreement.

(d)Subsidiary. For purposes of this Agreement, the term “subsidiary” means any corporation or limited liability company of which more than 50% of the outstanding voting securities or equity interests are owned, directly or indirectly, by the Company and one or more of its subsidiaries, and any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary.

(e)Independent Counsel. For purposes of this Agreement, the term “independent counsel” means a law firm, or a partner (or, if applicable, member) of such a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past

(1) It should be noted that the indemnification of expenses does not specifically provide for a “gross-up” to the Indemnitee with respect to income taxes incurred upon receipt of the indemnity amounts that are not offset fully by allowable deductions, e.g., fines and penalty amounts.  However, an Indemnitee might argue that a tax cost is “indirect expense” of the litigation.

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five (5) years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party, or (ii) any other party to the proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “independent counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement.

2.Agreement to Serve. Indemnitee will serve, or continue to serve, as a director, officer, employee or agent of the Company or any subsidiary, as the case may be, faithfully and to the best of his or her ability, at the will of such corporation (or under separate agreement, if such agreement exists), in the capacity Indemnitee currently serves as an agent of such corporation, so long as Indemnitee is duly appointed or elected and qualified in accordance with the applicable provisions of the bylaws or other applicable charter documents of such corporation, or until such time as Indemnitee tenders his or her resignation in writing; provided, however, that nothing contained in this Agreement is intended as an employment agreement between Indemnitee and the Company or any of its subsidiaries or to create any right to continued employment of Indemnitee with the Company or any of its subsidiaries in any capacity.

The Company acknowledges that it has entered into this Agreement and assumes the obligations imposed on it hereby, in addition to and separate from its obligations to Indemnitee under the Bylaws, to induce Indemnitee to serve, or continue to serve, as a director, officer, employee or agent of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director, officer, employee or agent of the Company.

3.Indemnification.

(a)Indemnification in Third Party Proceedings. Subject to Section 10 below, the Company shall indemnify Indemnitee to the fullest extent permitted by the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits Indemnitee to broader indemnification rights than the Code permitted prior to adoption of such amendment), if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any proceeding, for any and all expenses, actually and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of such proceeding.

(b)Indemnification in Derivative Actions and Direct Actions by the Company. Subject to Section 10 below, the Company shall indemnify Indemnitee to the fullest extent permitted by the Code, as the same may be amended from time to time (but, only to the extent that such amendment permits Indemnitee to broader indemnification rights than the Code permitted prior to adoption of such amendment), if Indemnitee is a party to or threatened to be made a party to or otherwise involved in any proceeding by or in the right of the Company to procure a judgment in its favor, against any and all expenses actually and reasonably incurred by Indemnitee in connection with the investigation, defense, settlement, or appeal of such proceedings.

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4.Indemnification of Expenses of Successful Party. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any proceeding or in defense of any claim, issue or matter therein, including the dismissal of any action without prejudice, the Company shall indemnify Indemnitee against all expenses actually and reasonably incurred in connection with the investigation, defense or appeal of such proceeding.

5.Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any expenses actually and reasonably incurred by Indemnitee in the investigation, defense, settlement or appeal of a proceeding, but is precluded by applicable law or the specific terms of this Agreement to indemnification for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.

6.Advancement of Expenses. To the extent not prohibited by law, the Company shall advance  the expenses incurred by Indemnitee in connection with any proceeding, and such advancement shall be made within twenty (20) days after the receipt by the Company of a statement or statements requesting such advances (which shall include invoices received by Indemnitee in connection with such expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice) and upon request of the Company, an undertaking to repay the advancement of expenses if and to the extent that it is ultimately determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by the Company. Advances shall be unsecured, interest free and without regard to Indemnitee’s ability to repay the expenses. Advances shall include any and all expenses actually and reasonably incurred by Indemnitee pursuing an action to enforce Indemnitee’s right to indemnification under this Agreement, or otherwise and this right of advancement, including expenses incurred preparing and forwarding statements to the Company to support the advances claimed. Indemnitee acknowledges that the execution and delivery of this Agreement shall constitute an undertaking providing that Indemnitee shall, to the fullest extent required by law, repay the advance if and to the extent that it is ultimately determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by the Company. The right to advances under this Section shall continue until final disposition of any proceeding, including any appeal therein. This Section 6 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 10(b).

7.Notice and Other Indemnification Procedures.

(a)Notification of Proceeding. Indemnitee will notify the Company in writing promptly upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any proceeding or matter which may be subject to indemnification or advancement of expenses covered hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise.

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(b)Request for Indemnification and Indemnification Payments. Indemnitee shall notify the Company promptly in writing upon receiving notice of any demand, judgment or other requirement for payment that Indemnitee reasonably believes to the subject to indemnification under the terms of this Agreement, and shall request payment thereof by the Company. Indemnification payments requested by Indemnitee under Section 3 hereof shall be made by the Company no later than sixty (60) days after receipt of the written request of Indemnitee. Claims for advancement of expenses shall be made under the provisions of Section 6 herein.

(c)Application for Enforcement. In the event the Company fails to make timely payments as set forth in Sections 6 or 7(b) above, Indemnitee shall have the right to apply to any court of competent jurisdiction for the purpose of enforcing Indemnitee’s right to indemnification or advancement of expenses pursuant to this Agreement. In such an enforcement hearing or proceeding, the burden of proof shall be on the Company to prove that indemnification or advancement of expenses to Indemnitee is not required under this Agreement or permitted by applicable law. Any determination by the Company (including its Board of Directors, stockholders or independent counsel) that Indemnitee is not entitled to indemnification hereunder, shall not be a defense by the Company to the action nor create any presumption that Indemnitee is not entitled to indemnification or advancement of expenses hereunder.

(d)Indemnification of Certain Expenses. The Company shall indemnify Indemnitee against all expenses incurred in connection with any hearing or proceeding under this Section 7 unless the Company prevails in such hearing or proceeding on the merits in all material respects.

8.Assumption of Defense. In the event the Company shall be requested by Indemnitee to pay the expenses of any proceeding, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, or to participate to the extent permissible in such proceeding, with counsel reasonably acceptable to Indemnitee. Upon assumption of the defense by the Company and the retention of such counsel by the Company, the Company shall not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that Indemnitee shall have the right to employ separate counsel in such proceeding at Indemnitee’s sole cost and expense. Notwithstanding the foregoing, if Indemnitee’s counsel delivers a written notice to the Company stating that such counsel has reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense or the Company shall not, in fact, have employed counsel or otherwise actively pursued the defense of such proceeding within a reasonable time, then in any such event the fees and expenses of Indemnitee’s counsel to defend such proceeding shall be subject to the indemnification and advancement of expenses provisions of this Agreement.

9.Insurance. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Company or of any subsidiary (“D&O Insurance”), Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has D&O Insurance

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in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies.

10.Exceptions.

(a)Certain Matters. Any provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee on account of any proceeding with respect to (i) remuneration paid to Indemnitee if it is determined by final judgment or other final adjudication that such remuneration was in violation of law (and, in this respect, both the Company and Indemnitee have been advised that the Securities and Exchange Commission believes that indemnification for liabilities arising under the federal securities laws is against public policy and is, therefore, unenforceable and that claims for indemnification should be submitted to appropriate courts for adjudication, as indicated in Section 10(d) below); (ii) a final judgment rendered against Indemnitee for an accounting, disgorgement or repayment of profits made from the purchase or sale by Indemnitee of securities of the Company against Indemnitee or in connection with a settlement by or on behalf of Indemnitee to the extent it is acknowledged by Indemnitee and the Company that such amount paid in settlement resulted from Indemnitee’s conduct from which Indemnitee received monetary personal profit, pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or other provisions of any federal, state or local statute or rules and regulations thereunder; (iii) a final judgment or other final adjudication that Indemnitee’s conduct was in bad faith, knowingly fraudulent or deliberately dishonest or constituted willful misconduct (but only to the extent of such specific determination); or (iv) on account of conduct that is established by a final judgment as constituting a breach of Indemnitee’s duty of loyalty to the Company or resulting in any personal profit or advantage to which Indemnitee is not legally entitled. For purposes of the foregoing sentence, a final judgment or other adjudication may be reached in either the underlying proceeding or action in connection with which indemnification is sought or a separate proceeding or action to establish rights and liabilities under this Agreement.

(b)Claims Initiated by Indemnitee. Any provision herein to the contrary notwithstanding, the Company shall not be obligated to indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought by Indemnitee against the Company or its directors, officers, employees or other agents and not by way of defense, except (i) with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or under any other agreement, provision in the Bylaws or Certificate of Incorporation or applicable law, or (ii) with respect to any other proceeding initiated by Indemnitee that is either approved by the Board of Directors or Indemnitee’s participation is required by applicable law. However, indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors determines it to be appropriate.

(c)Unauthorized Settlements. Any provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement to

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indemnify Indemnitee under this Agreement for any amounts paid in settlement of a proceeding effected without the Company’s written consent. Neither the Company nor Indemnitee shall unreasonably withhold consent to any proposed settlement; provided, however, that the Company may in any event decline to consent to (or to otherwise admit or agree to any liability for indemnification hereunder in respect of) any proposed settlement if the Company is also a party in such proceeding and determines in good faith that such settlement is not in the best interests of the Company and its stockholders.

(d)Securities Act Liabilities. Any provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement to indemnify Indemnitee or otherwise act in violation of any undertaking appearing in and required by the rules and regulations promulgated under the Securities Act of 1933, as amended (the “Act”), or in any registration statement filed with the SEC under the Act. Indemnitee acknowledges that paragraph (h) of Item 512 of Regulation S-K currently generally requires the Company to undertake in connection with any registration statement filed under the Act to submit the issue of the enforceability of Indemnitee’s rights under this Agreement in connection with any liability under the Act on public policy grounds to a court of appropriate jurisdiction and to be governed by any final adjudication of such issue. Indemnitee specifically agrees that any such undertaking shall supersede the provisions of this Agreement and to be bound by any such undertaking.

11.Nonexclusivity and Survival of Rights. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed exclusive of any other rights which Indemnitee may at any time be entitled under any provision of applicable law, the Company’s Certificate of Incorporation, Bylaws or other agreements, both as to action in Indemnitee’s official capacity and Indemnitee’s action as an agent of the Company, in any court in which a proceeding is brought, and Indemnitee’s rights hereunder shall continue after Indemnitee has ceased acting as an agent of the Company and shall inure to the benefit of the heirs, executors, administrators and assigns of Indemnitee. The obligations and duties of the Company to Indemnitee under this Agreement shall be binding on the Company and its successors and assigns until terminated in accordance with its terms. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his or her corporate status prior to such amendment, alteration or repeal. To the extent that a change in the Code, whether by statute or judicial decision, permits greater indemnification or advancement of expenses than would be afforded currently under the Company’s Certificate of Incorporation, Bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, by Indemnitee

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shall not prevent the concurrent assertion or employment of any other right or remedy by Indemnitee.

12.Term. This Agreement shall continue until and terminate upon the later of: (a) five (5) years after the date that Indemnitee shall have ceased to serve as a director or and/or officer, employee or agent of the Company; or (b) one (1) year after the final termination of any proceeding, including any appeal then pending, in respect to which Indemnitee was granted rights of indemnification or advancement of expenses hereunder.

No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against an Indemnitee or an Indemnitee’s estate, spouse, heirs, executors or personal or legal representatives after the expiration of five (5) years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such five-year period; provided, however, that if any shorter period of limitations is otherwise applicable to such cause of action, such shorter period shall govern.

13.Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who, at the request and expense of the Company, shall execute all papers required and shall do everything that may be reasonably necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

14.Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so as to provide indemnification to Indemnitee to the fullest extent now or hereafter permitted by law.

15.Severability. If any provision of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, (a) the validity, legality and enforceability of the remaining provisions of the Agreement (including without limitation, all portions of any paragraphs of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (b) to the fullest extent possible, the provisions of this Agreement (including, without limitation, all portions of any paragraph of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable and to give effect to Section 14 hereof.

16.Amendment and Waiver. No supplement, modification, amendment, or cancellation of this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.

17.Notice. Except as otherwise provided herein, any notice or demand which, by the provisions hereof, is required or which may be given to or served upon the parties hereto shall be in writing and, if by telegram, telecopy or telex, shall be deemed to have been validly served,

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given or delivered when sent, if by overnight delivery, courier or personal delivery, shall be deemed to have been validly served, given or delivered upon actual delivery and, if mailed, shall be deemed to have been validly served, given or delivered three (3) business days after deposit in the United States mail, as registered or certified mail, with proper postage prepaid and addressed to the party or parties to be notified at the addresses set forth on the signature page of this Agreement (or such other address(es) as a party may designate for itself by like notice). If to the Company, notices and demands shall be delivered to the attention of the Secretary of the Company.

18.Governing Law. This Agreement shall be governed exclusively by and construed according to the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware.

19.Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute but one and the same Agreement. Only one such counterpart need be produced to evidence the existence of this Agreement.

20.Headings. The headings of the sections of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction hereof.

21.Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior agreements, understandings and negotiations, written and oral, between the parties with respect to the subject matter of this Agreement; provided, however, that this Agreement is a supplement to and in furtherance of the Company’s Certificate of Incorporation, Bylaws, the Code and any other applicable law, and shall not be deemed a substitute therefor, and does not diminish or abrogate any rights of Indemnitee thereunder.

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IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the date first above written.

QUARK BIOTECH, INC.
By:
	Name:
	Title:
INDEMNITEE
Signature of Indemnitee
Print or Type Name of Indemnitee

EX-10.2

Exhibit 10.2

QUARK BIOTECH, INC.

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (THE “AGREEMENT”) is dated as of January 1, 2002 by and between Quark Biotech, Inc., a California corporation (the “Company”), and Daniel Zurr (“Executive”).

1.             Term. The Company hereby employs Executive and Executive hereby accepts employment effective as of January 1, 2002 (the “Commencement Date”), on the terms and conditions set forth herein. The term of this Agreement shall begin on the Commencement Date and shall continue for a period of three (3) years thereafter (the “Termination Date”).

2.             Duties. Executive agrees to serve the Company as its President and Chief Executive Officer, or in such other executive capacity as the Company’s Board of Directors (the “Board”) may from time to time request. During the term of this Agreement, Executive will devote all of his normal business time and attention to, and use his best efforts to advance, the business of the Company and its subsidiary QBI Enterprises, Ltd. Executive agrees not to engage actively in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the Board. Additionally, subject to the Board’s prior approval, the Executive may serve on the board of directors of other companies if in so doing Executive does not materially adversely affect Executive’s performance as an employee of the Company.

3.             Confidential Information. Executive acknowledges that he has executed the Proprietary Information Agreement of the Company (the “Proprietary Information Agreement”) and agrees to be bound by its terms.

4.             Compensation and Fringe Benefits.

(a)           Base Compensation. During the term of this Agreement the Company shall pay Executive an annual salary of one hundred twenty five thousand dollars ($125,000) payable in equal installments on the regular employment payroll dates of the Company. Executive’s annual salary shall be adjusted on each one-year anniversary of the date of this Agreement to compensate for changes in the cost of living. The amount of each annual cost of living increase shall be the rate determined for such annual period by the “Consumer Price Index for Urban Wage Earners and Clerical Workers (All Items) published by the Bureau of Labor Statistics, U.S. Department of Labor (1967 equals 100).”

(b)           Incentive Compensation:  Executive shall be entitled to an annual bonus in an amount up to 100% of annual base compensation, based upon annual milestones agreed to by the Executive and the Company’s Board of Directors that are consistent with the Company’s business plan for each year, and subject to the sole discretion of the Company’s Board of Directors. The agreed upon milestones and the Incentive Compensation attributable to the milestones shall be set forth in a memo executed by the Executive and the Company’s Board of Directors and it shall be attached as an addendum to this Employment Agreement. The agreed

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upon milestones for the fiscal year ended December 31, 2002 and the incentive compensation attributable to the milestones, is attached to this Agreement.

(c)           In addition to the incentive compensation described in Section 4 (b) above, the Company shall forgive fifty percent (50%) of the home loan made to the Executive upon the occurrence of one of the following:

(i)            In the event of an underwritten Initial Public Offering whereby a minimum of $75 million is raised for the Company; or

(ii)           In the event the Company enters into a significant collaboration or joint venture agreement with a major United States or European based pharmaceutical company, as determined by the Company’s Board of Directors. The Board’s decision shall be based upon the size of the cash payment and financial commitments made by the pharmaceutical company and the scope of the agreement and impact on the Company. The definitions of “significant” and “major” shall be at the discretion of the Board.

(iii)          In the event of the Executive’s death. The Company may, at its sole discretion, obtain and maintain one or more term policies of life insurance on the life of the Executive providing an aggregate benefit in the amount of 50% of the home loan. The Company, in its sole discretion, may name itself or the Executive’s designee as the beneficiary and/or owner of the policy or policies. In the event the Executive names the beneficiary, the home loan will not be forgiven; but rather it will be repaid from the insurance proceeds. The Executive agrees to fully cooperate with the Company in its effort to obtain and maintain the above described policy or policies of insurance.

(iv)          In the event the Executive becomes “permanently disabled.” “Permanently disabled” shall mean a total physical or mental disability that renders the Executive unable to perform his normal duties for the Company for a period of 120 consecutive days and that the Executive is unlikely to be able to return to work to perform his normal duties for the Company within 365 days, as determined by a licensed physician. The Company and the Executive, or his legal representative, shall use their best efforts to agree on the physician to determine physical disability. If they cannot agree within ten (10) days after the first party makes a written proposal stating the name of a physician, then the other party shall select a physician within ten (10) days and within ten (10) days thereafter the two physicians shall select a third physician. All such physicians must be board certified in the medical area giving rise to the alleged disability. The determination of the third physician shall be final and binding. If one party fails to select a physician within said ten (10) day period, the physician name by the other party shall make the determination of permanent disability.

(d)           Executive shall be entitled to participate in such group life, pension, disability, accident, hospital and medical insurance plans, and such other plan or plans which may be instituted by the Company for the benefit of its executive employees generally, upon such terms as may be therein provided of general application to all executive employees of the Company and such other benefits as are mutually deemed appropriate to the position held by Executive and to the discharge of Executive’s duties. Executive shall be entitled to not less than twenty (20) business days’ vacation per year, with remuneration, which shall be coordinated with

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the vacation periods of other officers of the Company in a manner that will minimize disruption of Company’s management efforts. Executive shall further be entitled to the use of a car (with retail value not greater than $25,000) during the term of his employment with the Company. In addition, the Company shall provide Executive with social benefits equivalent to what Executive receives under Israel law including, but not limited to, severance pay, pension fund contributions, disability insurance and contributions to the “Further Education Fund.”

(e)           In order for the Company to determine the portion of Executive’s compensation above which is United States source income, Executive agrees to keep accurate records of the time spent working in the United States and on the last day of each fiscal quarter, shall submit to the Company a written report of such time.

5.             Expenses. The Company will pay or reimburse Executive for reasonable travel, entertainment or other expenses incurred by Executive in the furtherance of or in connection with the performance of Executive’s duties hereunder in accordance with the Company’s established policies. Executive shall furnish the Company with evidence of the incurrence of such expenses within a reasonable period of time from the date that they were incurred. The company will further provide Executive with a relocation reimbursement of up to $80,000 for out-of-pocket expenses in connection with his relocation to the United States from Israel, in the event Executive makes such a move.

6.             Termination Without Cause. Executive’s employment hereunder may be terminated by the Company, with or without Cause (as defined in Section 7 below), at any time during the term hereof upon thirty (30) days advance written notice from the Board; provided, however, that in the event of a termination without Cause, Executive shall continue to receive from the Company the full amount and scope of compensation and benefits described in Section 4 for a period of (a) ten (10) months from the date of such termination if the termination occurs within the first year of Executive’s employment with the Company, (b) eight (8) months from the date of termination if the termination occurs within the second year, and (c) six (6) months from the date of termination if the termination occurs within the third year. For purposes of this Agreement, a Constructive Termination (as defined below) shall be deemed to be a termination without Cause. The term “Constructive Termination” means Executive’s voluntary resignation from employment following the occurrence (without Executive’s express written consent) of any of the following events: (i) an adverse change of Executive’s title to other than the President or Chief Executive Officer, or (ii) a significant reduction in Executive’s duties, position or responsibilities, or the removal of Executive from such position or responsibilities (including without limitation Executive’s position on the Board), provided, however, that Executive shall provide prior written notice to the Company of his intent to resign due to clause (i) or (ii) above, and the Company shall have five (5) days to cure (or reverse) the events described in clause (i) or (ii), as applicable.

7.             Termination for Cause. Executive’s employment hereunder may be terminated at any time during the term of this Agreement by the Company for “Cause.” The term “Cause” is defined as any one or more of the following occurrences:

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(a)           Executive’s conviction by, or entry of a plea of guilty or nolo contendere in, a court of competent and final jurisdiction for any crime which constitutes a felony in the jurisdiction involved, which convicted or plea materially injures the Company; or

(b)           Executive’s commission of an act of fraud or misappropriation of funds or property, whether prior to or subsequent to the date hereof, upon the Company; or

(c)           Gross negligence by Executive in the scope of Executive’s employment resulting in a material injury to the Company, violation by Executive of any duty of loyalty to the Company resulting in a material injury to the Company, or any other misconduct on the part of Executive resulting in a material injury to the Company; or

(d)           Breach of Proprietary Information Agreement.

Notwithstanding of foregoing, as to clauses (c) and (d) only Executive shall not be deemed to have been terminated for Cause without (i) five (5) days written notice to Executive setting forth the reasons for the Company’s intention to terminate for Cause, and (ii) an opportunity for Executive, within such five (5) day period, to cure (if the matter is susceptible to cure).

If Executive’s employment hereunder shall be terminated by the company for Cause pursuant to this Section 7, except as set forth in Sections 8 and 9, this Agreement shall terminate as of the date of such termination of employment and Executive shall then not be considered an employee of the Company for any purpose, and his salary and all other benefits shall cease upon the termination of his employment.

8.             Miscellaneous.

(a)           Arbitration.

(i)            At the option of the Company or Executive, any and all disputes of controversies whether of law or fact of any nature whatsoever rising from or respecting this Agreement shall be decided by arbitration by the American Arbitration Association (the “Association”) and in accordance with the rules and regulations of the Association.

(ii)           The arbitrators shall be selected as follows: the Company and Executive shall mutually agree upon one independent qualified arbitrator. The Company reserves the right to object to any individual arbitrator who shall be employed by or affiliated with a competing organization.

(iii)          Arbitration shall take place at San Francisco, California, or any other location mutually agreeable to the parties. At the request of the Company, arbitration proceedings will be conducted in the utmost secrecy; in such case all documents, testimony and records shall be received, heard and maintained by the arbitrators in secrecy under seal, available for the inspection only of the Company or Executive and their respective attorneys and the respective experts who shall agree in advance and in writing to receive all such information confidentially and to maintain such information in secrecy until such information shall become generally known. The arbitrator shall be able to decree any and all relief of an equitable nature,

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including but not limited to such relief as a temporary restraining order, a temporary and/or a permanent injunction, and shall also be able to award damages, with or without an accounting and costs. The decree or judgment of an award rendered by the arbitrator may be entered in any court having jurisdiction thereof.

(iv)          Reasonable notice of the time and place of arbitration shall be given to all persons, other than the parties, as shall be required by law, in which case such persons or those authorized representatives shall have the right to attend, and/or participate in all the arbitration hearings in such manner as the law shall require.

(v)           All expenses relating to arbitration shall be split by the parties; provided, however, that the prevailing party in such arbitration shall reimburse the other party for its costs and expenses, including reasonable attorneys fees, incurred in connection with such arbitration.

(b)           Assignment. This Agreement shall be binding upon and inure to the benefit of (i) the heirs, executors and legal representatives of Executive upon Executive’s death and (ii) any successor or assignee of the Company. Notwithstanding the above, Executive’s duties and responsibilities set forth in Section 2 above shall not be assignable or delegable. Any successor of the Company shall be deemed substituted for the Company under the terms of this Agreement for all purposes. As used herein, “successor” shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company.

(c)           Notice. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to Executive, at 11000 Cedar Avenue, Suite 140, Cleveland, Ohio 44106, or at such other address as Executive shall have furnished to the Company in writing (including electronic mail address), or (b) if to the Company, at 11000 Cedar Avenue, Suite 140, Cleveland, Ohio 44106, or to such other address as the Company shall have furnished to Executive in writing (including electronic mail address). Each such notice or communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally or sent by telegram, telefax or telex (receipt confirmed), or, if sent by mail, at the earlier of its receipts or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as described above, or if sent by electronic mail, then one business day following delivery.

(d)           Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

(e)           Entire Agreement. This Agreement represents the entire agreement and understanding between the Company and Executive concerning Executive’s employment relationship with the Company, and supersedes and replaces any and all prior agreements and understandings concerning Executive’s employment relationship with the Company.

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(f)            No Oral Modification, Cancellation or Discharge. This Agreement may only be amended, canceled or discharged in writing signed by Executive and the Company. Notwithstanding anything in this Agreement to the contrary, any consent, waiver, amendment, modification or other agreement delivered by electronic mail shall be effective.

(g)           Governing Law. This Agreement shall be governed by the laws of the State of California.

(h)           Acknowledgement. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this agreement.

(i)            Survivability. Notwithstanding any other provision of this Agreement, the obligations, covenants and duties of the Company and Executive under Section 3, Section 4(d) and Section 5 of this Agreement, as well as any obligations of the Company to pay accrued benefits to Executive prior to termination of this Agreement, shall survive any termination of this Agreement.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

QUARK BIOTECH, INC.		DANIEL ZURR
By:	/s/ Philip B. Simon	/s/ Daniel Zurr
		Signature
Title:	Philip B. Simon,
	Member of Board of Directors and Compensation Committee of Quark Biotech, Inc.

For purposes of Section 8 only:

GODDARD & EPHRAT, F/B/O/ZWI ZURR

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2002 INCENTIVE COMPENSATION

MILESTONES

QUARK BIOTECH, INC.

A CALIFORNIA CORPORATION

As set forth in Section 4(b) of the Employment Agreement to which this is attached, Daniel Zurr shall be entitled to incentive compensation of up to 100% of his base compensation, as described in Section 4(a) of the Employment Agreement, based upon achievement of the following milestones on or before 31 December 2002 and subject to the provisions set forth in Section 4(b):

1.An underwritten initial public offering whereby a minimum of $75mm is raised for the Company;

2.Completion of a significant collaboration or joint venture agreement with a major United States or European based pharmaceutical company as described in Section 4(c)(ii) of the Employment Agreement;

3.The initiation of two products into Clinical Trials

4.Successful implementation of pre-IPO strategies, including, but not limited to, the hiring of a chief financial officer, VP R&D, and VP Business Development for the Company, the establishment of a United States based headquarters, the initiation and execution of a public relations strategy, and such other operational and business strategies necessary for, or an enhancement for, an initial public offering.

Rather than establishing specific incentives for the achievement of each milestone, the Company’s Board of Directors shall evaluate the level of achievement and success in implementing these milestones and the value that has been created for the Company’s shareholders by the achievement of all or a portion of the milestones.

EX-10.3

Exhibit 10.3

QUARK ENTERPRISES, LTD.

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) is dated as of January 1, 2002 by and between QBI Enterprises, Ltd., an Israeli limited liability company (“QBI”), and Daniel Zurr (“Executive”).

1.             Term. QBI hereby employs Executive and Executive hereby accepts employment effective as of January 1, 2002 (the “Commencement Date”), on the terms and conditions set forth herein. The term of this Agreement shall begin on the Commencement Date and shall continue for a period of three (3) years thereafter (the “Termination Date”).

2.             Duties. Executive agrees to serve QBI as its President and Chief Executive Officer, or in such other executive capacity as QBI’s Board of Directors (the “Board”) may from time to time request. During the term of Executive’s employment under this Agreement, Executive will devote all of his normal business time and attention to, and use his best efforts to advance, the business of QBI (including the business of QBI’s parent company, Quark Biotech, Inc. (“Parent”)). Services rendered by the Executive to Parent shall not be considered contrary to or in breach of this Agreement and shall be subject to a separate agreement entered into between Executive and the Parent.

Executive’s duties shall be in the nature of management duties that demand a special level of loyalty and accordingly the Law of Work Hours and Rest – 1951 shall not apply to the Agreement. The parties hereto confirm that this is a personal services contract and that the relationship between the parties hereto shall not be subject to any general or special collective employment agreement or any custom or practice of QBI in respect of any of its other employees or contractors.

3.             Confidential Information. Executive acknowledges that he has executed the Proprietary Information Agreement of QBI (the “Proprietary Information Agreement”) and agrees to be bound by its terms.

4.             Compensation and Fringe Benefits.

(a)           Base Compensation. During the term of this Agreement the Company shall pay Executive an annual salary of one hundred twenty five thousand dollars ($125,000) payable in equal installments on the regular employment payroll dates of the Company. Executive’s annual salary shall be adjusted on each one-year anniversary of the date of this Agreement to compensate for changes in the cost of living. The amount of each annual cost of living increase shall be the rate determined for such annual period by the “Consumer Price Index for Urban Wage Earners and Clerical Workers (All Items) published by the Bureau of Labor Statistics, U.S. Department of Labor (1967 equals 100).”

(b)           Incentive Compensation:  Executive shall be entitled to an annual bonus in an amount up to 100% of annual base compensation, based upon annual milestones agreed to by the Executive and the Company’s Board of Directors that are consistent with the Company’s

1

business plan for each year, and subject to the sole discretion of the Company’s Board of Directors. The agreed upon milestones and the Incentive Compensation attributable to the milestones shall be set forth in a memo executed by the Executive and the Company’s Board of Directors and it shall be attached as an addendum to this Employment Agreement. The agreed upon milestones for the fiscal year ended December 31, 2002 and the incentive compensation attributable to the milestones, is attached to this Agreement.

(c)           In addition to the incentive compensation described in Section 4 (b) above, the Company shall forgive fifty percent (50%) of the home loan made to the Executive upon the occurrence of one of the following:

(i)            In the event of an underwritten Initial Public Offering whereby a minimum of $75 million is raised for the Company; or

(ii)           In the event the Company enters in a significant collaboration or joint venture agreement with a major United States or European based pharmaceutical company, as determined by Company’s Board of Directors. The Board’s decision shall be based upon the size of the cash payment and financial commitments made by the pharmaceutical company and the scope of the agreement and impact on the Company. The definitions of “significant” and “major” shall be at the discretion of the Board.

(iii)          In the event of the Executive’s death. The Company may, at its sole discretion, obtain and maintain one or more term policies of life insurance on the life of the Executive providing an aggregate benefit in the amount of 50% of the home loan. The Company, in its sole discretion, may name itself or the Executive’s designee as the beneficiary and/or owner of the policy or policies. In the event the Executive names the beneficiary, the home loan will not be forgiven; but rather it will be repaid from the insurance proceeds. The Executive agrees to fully cooperate with the Company in its effort to obtain and maintain the above described policy or policies of insurance.

(iv)          In the event the Executive becomes “permanently disabled.” “Permanently disabled” shall mean a total physical or mental disability that renders the Executive unable to perform his normal duties for the Company for a period of 120 consecutive days and that the Executive is unlikely to be able to return to work to perform his normal duties for the Company within 365 days, as determined by a licensed physician. The Company and the Executive, or his legal representative, shall use their best efforts to agree on the physician to determine physical disability. If they cannot agree within ten (10) days after the first party makes a written proposal stating the name of a physician, then the other party shall select a physician within ten (10) days and within ten (10) days thereafter the two physicians shall select a third physician. All such physicians must be board certified in the medical area giving rise to the alleged disability. The determination of the third physician shall be final and binding. If one party fails to select a physician within said ten (10) day period, the physician named by the other party shall make the determination of permanent disability.

5.             Expenses. QBI will pay or reimburse Executive for reasonable travel, entertainment or other expenses incurred by Executive in the furtherance of or in connection with the performance of Executive’s duties hereunder in accordance with QBI’s established policies.

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Executive shall furnish QBI with evidence of the incurrence of such expenses within a reasonable period of time from the date that they were incurred.

6.             Benefits. Executive shall be entitled to the following benefits:

(a)           Manager’s Insurance.

(i)            QBI shall effect a Manager’s Insurance Policy (the “Policy”) for Executive and shall pay a sum equal to 13.33% of Executive’s annual base compensation toward such Policy, (of which 8.33% will be on account of severance pay and 5% on account of pension fund payments) and a further 2.5% of Executive’s annual base compensation on account of disability pension payments. QBI shall deduct 5% from Executive’s annual base compensation to be paid on behalf of Executive towards such Policy. Payments by QBI towards the Policy under this Section 6(a) shall be in lieu of any statutory obligations to pay severance pay, subject to the approval of the Minister of Labor under Section 14 of the Severance Pay Law 5723-1963; provided however, that all amounts due to Executive for severance pay under the law shall be paid to Executive under the Policy.

(ii)           Notwithstanding any other provision of this Agreement, upon termination of Executive’s employment hereunder for any reason whatsoever (including, without limitation, termination for cause and termination in event of illness or death) the Executive shall be entitled to the release to his order of (and to receive and be paid) all amounts accumulated under the Policy and in the Further Education Fund (referred to in clause 6(b) below).

(b)           Further Education Fund Contributions. Executive is entitled to elect to participate in a further education fund. Should Executive so elect to participate in such a further education fund, QBI shall pay a sum equal to 7.5% of Executive’s annual base compensation and shall deduct 2.5% from Executive’s annual base compensation to be paid on behalf of Executive toward a further education fund. Use of these funds shall be in accordance with the by-laws of the fund.

(c)           Sick Leave. Executive shall be entitled to fully paid sick leave pursuant to the Sick Pay Law - 1976.

(d)           Vacation. Executive shall be entitled to an annual vacation of twenty (20) working days at full pay. Executive shall not be entitled to receive from the Company any Sabbatical Year Leave.

(e)           Reserve Duty. Executive shall continue to receive the annual salary provided for hereunder during periods of military reserve duty. Executive hereby assigns and undertakes to pay to QBI any amounts received from the National Insurance Institute as compensation of such reserve duty service.

(f)            Stock Options. Executive shall be eligible to receive grants of options to purchase shares of Parent on the terms the Parent’s 1997 Stock Plan for Israeli Employees.

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(g)           Travel Expenses. It is expressly agreed that Executive’s annual salary as set forth in Section 4 includes travel allowances to which Executive is entitled under applicable Israeli law.

(h)           Automobile. QBI will provide the Executive during the course of his employment with the use of an automobile of 2600cc engine size (Audi or similar model), and shall bear and pay all expenses relating thereto. All taxes assessed on the Executive with respect to the use of a car and/or reimbursement of car expenses hereunder, shall be grossed up and paid by QBI.

7.             Termination of Employment of Executive. If Executive’s employment with Parent, pursuant to the Quark Employment Agreement, is terminated, then Executive’s employment with QBI shall terminate as of the date of such termination of employment with Parent. If Executive’s employment with Parent was terminated without Cause under the Quark Employment Agreement, then Executive shall continue to receive from QBI the full amount and scope of compensation described in Section 4 for a period of (a) ten (10) months from the date of such termination if the termination occurs within the first year of Executives employment with Parent, (b) eight (8) months from the date of termination if the termination occurs with the second year , and (c) six (6) months from the date of termination if the termination occurs within the third year. If Executive’s employment with Parent was terminated for Cause under the Quark Employment Agreement, then Executive shall then not be considered an employee of QBI for any purpose, and his salary and all other benefits shall cease upon the termination of his employment. In addition to the above, Executive’s employment hereunder may be terminated by the Board of Directors of QBI, with or without cause, at any time during the term hereof upon thirty (30) days advance written notice from the Board of Directors of QBI.

8.             Miscellaneous.

(a)           Assignment. This Agreement shall be binding upon and inure to the benefit of (i) the heirs, executors and legal representatives of Executive upon Executive’s death and (ii) any successor or assignee of QBI. Notwithstanding the above, Executive’s duties and responsibilities set forth in Section 2 above shall not be assignable or delegable. Any successor of QBI shall be deemed substituted for QBI under the terms of this Agreement for all purposes. As used herein, “successor” shall include any person, firm, corporation or other business entity which at any time, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of QBI.

(b)           Notice. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed (a) if to Executive, at 58 Ben Nun Street, Herzlia on the Beach, Israel or at such other address as Executive shall have furnished to QBI in writing (including electronic mail address), or (b) if to QBI, at P.O. Box 741, Nes-Ziona 74106, Israel, or to such other address as QBI shall have furnished to Executive in writing (including electronic mail address). Each such notice or communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally or sent by telegram, telefax or telex (receipt confirmed), or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained

4

receptacle for the deposit of the United States mail, address and mailed as described above, or if sent by electronic mail, then one business day following delivery.

(c)           Severability. In the event that any provision hereof becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision.

(d)           Entire Agreement. This Agreement represents the entire agreement and understanding between QBI and Executive concerning Executive’s employment relationship with QBI, and supersedes and replaces any and all prior agreements and understandings concerning Executive’s employment relationship with QBI.

(e)           No Oral Modification, Cancellation or Discharge. This Agreement may only be amended, canceled or discharged in writing signed by Executive and QBI. Notwithstanding anything in this Agreement to the contrary, any consent, waiver, amendment, modification or other agreement delivered by electronic mail shall be effective.

(f)            Governing Law. This Agreement shall be governed by the laws of Israel.

(g)           Acknowledgement. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this agreement.

(h)           Survivability. Notwithstanding any other provision of this Agreement, the obligations, covenants and duties of QBI and Executive under Section 3, and Section 5 of this Agreement, as well as any obligations of QBI to pay accrued benefits to Executive prior to termination of this Agreement, shall survive any termination of this Agreement.

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

QUARK ENTERPRISES, LTD.		DANIEL ZURR
By:	/s/ Philip B. Simon	/s/ Daniel Zurr
		Signature
Title:	Philip B. Simon,
	Member of Board of Directors and Compensation Committee of Quark Biotech, Inc.

6

2002 INCENTIVE COMPENSATION

MILESTONES

QUARK ENTERPRISES, LTD

As set forth in Section 4(b) of the Employment Agreement to which this is attached, Daniel Zurr shall be entitled to incentive compensation of up to 100% of his base compensation, as described in Section 4(a) of the Employment Agreement, based upon achievement of the following milestones on or before 31 December 2002 and subject to the provisions set forth in Section 4(b):

1.An underwritten initial public offering whereby a minimum of $75mm is raised for the Company;

2.Completion of a significant collaboration or joint venture agreement with a major United States or European based pharmaceutical company as described in Section 4(c)(ii) of the Employment Agreement;

3.The initiation of two products into Clinical Trials

4.Successful implementation of pre-IPO strategies, including, but not limited to, the hiring of a chief financial officer, VP R&D, and VP Business Development for the Company, the establishment of a United States based headquarters, the initiation and execution of a public relations strategy, and such other operational and business strategies necessary for, or an enhancement for, an initial public offering.

Rather than establishing specific incentives for the achievement of each milestone, the Company’s Board of Directors shall evaluate the level of achievement and success in implementing these milestones and the value that has been created for the Company’s shareholders by the achievement of all or a portion of the milestones.

EX-10.8

Exhibit 10.8

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made and entered into as of March 7, 2007, by and between, Q.B.I. Enterprises Ltd. (the “Company”) and Yaron Garmazi (the “Executive”);

WITNESSETH THAT:

WHEREAS, the Company and the Executive desire to enter into this Agreement pertaining to the employment of the Executive by the Company effective as of February 21, 2007 (the “Effective Date”);

NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth below and other good and valuable consideration, the receipt of which is hereby acknowledged, the Executive and the Company hereby agree as follows:

1.Performance of Services. The Executive’s employment with the Company shall be subject to the following:

(a)Subject to the terms of this Agreement, the Company hereby agrees to employ the Executive in the position of Chief Financial Officer (“CFO”) of the Company and of its parent company Quark Biotech Inc. (“Quark”) and the Executive hereby agrees to be in the employ of the Company in such position.

(b)While the Executive is employed by the Company, the Executive shall devote his full time and best efforts, energies and talents to serving the Company and shall not be engaged in any other employment nor engage in any other business activities for any other person, firm or company without the prior written consent of the Company.

(c)The Executive shall report to the Chief Executive of the Company and of Quark (the “CEO”) and shall perform the duties, undertake the responsibilities and exercise the authority customary for a CFO of a company and shall perform such duties as may be assigned to him by the CEO.

(d)The Executive agrees that he shall perform his duties faithfully and efficiently subject to the direction of the CEO. The Executive’s duties shall include providing services for both the Company and its Affiliates (as defined below) as determined by the Company. For purposes of this Agreement, the term “Affiliate” shall mean Quark and any corporation, partnership, joint venture or other entity in which at least a fifty percent interest in such entity is owned, directly or indirectly, by Quark or the Company.

(e)Notwithstanding the foregoing provisions of paragraph 1(b), in the first four months after the Effective Date, the Executive shall be entitled to provide services to his previous employer.

(f)The Executive’s place of employment shall be in Israel, provided that the Company may require the Executive to travel outside Israel in order to fulfill his duties with the Company and Quark.

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(g)The Executive’s position is a “senior managerial position”, as defined in the Israeli Work and Rest Hours Law, 1951, and requires a high level of trust. Accordingly, the provisions of said law shall not apply to the Executive and the Executive agrees that he may be required to work beyond the regular working hours of the Company, for no additional compensation other than as specified in this Agreement.

(h)The term of employment of the Executive under this Agreement shall commence on the Effective Date and shall continue until terminated in accordance with the provisions of Section 5 below (the “Employment Period”).

2.Compensation and Benefits. Subject to the terms of this Agreement, during the Employment Period, the Company shall compensate the Executive for his services as follows:

(a)Base Salary. The Executive shall receive base salary at a monthly rate of 19,167 US Dollars, inclusive of travel expenses to which the Executive is entitled in accordance with applicable laws. Said salary and travel expenses shall be paid in arrears by the 9^th day of each month in respect to a preceding month in which the Executive was in employment (the “Salary”). The Salary shall be paid in New Israeli Shekel (“NIS”) calculated in accordance with the representative rate of exchange of the NIS against the Dollar published by the Bank of Israel as in effect on the last day of the month in respect of which the Salary was paid. In addition within seven (7) days from the Effective Date the Company will pay the Executive a one time signature bonus in the amount of 15,700 US Dollars.

(b)Stock Awards. Within 30 days from the date hereof, the Executive shall be granted an award in the form of a stock options (“Stock Options”) to purchase shares of common stock of Quark, all in accordance with the terms and principles detailed in Exhibit A and in Quark’s Stock Option Plan for Israeli Employees. The Stock Options will be granted under Quark’s standard stock option agreement for QBI employees to be entered into between the Executive and Quark.

(c)Managers’ Insurance. During the Employment Period, the Company shall take out a Managers’ Insurance (Bituach Menahalim) policy and shall contribute thereto, on a monthly basis, 18.33% of the Executive’s monthly Salary, 8.33% of which shall be in respect of severance compensation (the “Severance Component”), 5% of which shall be in respect of pension, and 5% of which shall be deducted by the Company from the monthly payment of the Executive’s Salary as the Executive’s contribution to said Managers’ Insurance. The parties acknowledge and agree that in accordance with Section 14 to the Severance Pay Law 5723-1963. the allocation to Managers’ Insurance under this Section 2(c) shall be in lieu of severance pay according to the Severance Pay Law that Executive may be entitled to.

(d)Disability. During the Employment Period, the Company shall take out Disability Insurance (Ovdan Kosher Avoda) as in effect immediately prior to the Effective Date and contribute thereto, on a monthly basis, 2.5% of the Executive’s monthly Salary.

(e)Education Fund. During the Employment Period, the Company shall contribute to an Education Fund (Keren Hishtalmut), on a monthly basis, 7.5% of the Executive’s monthly Salary, subject to the Executive’s contribution of an additional 2.5% of his

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monthly Salary. All tax obligations related to the Education Fund shall be borne by the Executive.

(f)Recreation Funds. During the Employment Period, the Company shall provide and pay the Executive Recreation Funds (Dmei Havra’ah) at the rate required by applicable law and regulations.

(g)Vacation. During each calendar year during the Employment Period, the Executive shall be entitled to 20 working days of vacation (or a pro rata number of days for any partial year that occurs during the Employment Period) determined in accordance with applicable employment laws of Israel and Company policies.

(h)Use of Company Car. During his employ with the Company hereunder, the Executive shall have the use of a Company car free of charge. Any income tax which may be assessed on such use of the car shall be for the account of the Company. The Executive will be responsible for the payment of fines (if any) imposed with respect to the use of the car by him.

(i)Expenses. The Company will pay or reimburse Executive for reasonable travel or other expenses incurred by Executive in the furtherance of or in connection with the performance of Executive’s duties hereunder in accordance with the Company’s established policies (including reimbursement for telephone expenses). Executive shall furnish the Company with evidence of the incurrence of such expenses within a reasonable period of time from the date that they were incurred.

(j)Use of Company Cell Phone. During his employ with the Company hereunder, the Executive shall have the use of a Company cell phone free of charge. Any income tax which may be assessed on such use of the cell phone shall be for the account of the Company.

(k)Taxes. All sums mentioned in this Agreement are pre-tax. The Executive shall bear and pay any and all taxes imposed on his Salary, the Stock Options and any all benefits hereunder.

3.Termination. The Executive’s employment with the Company during the Agreement Term may be terminated under the following circumstances:

(a)Death. The Executive’s employment hereunder shall terminate upon his death.

(b)Disability. If the Executive becomes Disabled, the Company may terminate his employment with the Company. For purposes of this Agreement, the Executive shall be deemed to be “Disabled” if he has a physical or mental disability which renders him incapable of performing substantially all of his duties hereunder for a period of 90 days (which need not be consecutive) in any 12-month period. In the event of a dispute as to whether the Executive is Disabled, the Company may, at its expense, refer him to a licensed practicing physician of the Company’s choice and the Executive agrees to submit to such tests and examination as such physician shall deem appropriate. The determination of such physician shall be final and binding on the Company and Executive.

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(c)Cause. The Company may terminate the Executive’s employment hereunder immediately and at any time for Cause by written notice to the Executive detailing the basis for the Cause termination. For purposes of this Agreement, “Cause” means (i) gross negligence or willful failure by the Executive to perform his duties as an employee of the Company (other than any such failure resulting from incapacity due to physical or mental illness), (ii) willful misconduct by the Executive which is materially injurious to the Company or its Affiliates, monetarily or otherwise, (iii) the engaging by the Executive in egregious misconduct involving moral turpitude to the extent that his creditability and reputation no longer conforms to the standard of senior executives of the Company and its Affiliates, (iv) the commission by the Executive of an act of dishonesty or breach of trust; or (v) a material breach of this Agreement.

(d)Termination by Executive. The Executive may terminate his employment hereunder at any time for any reason by giving the Company prior written notice not less than 120 days prior to such termination.

(e)Mutual Agreement. This Agreement may be terminated at any time by mutual written agreement of the parties.

(f)Termination by the Company without Cause. The Company may terminate the Executive’s employment hereunder at any time for any reason by giving the Executive prior written notice not less than 120 days prior to such termination. During the Notice Period, the Executive will continue in the employ of the Company pursuant to the terms of this agreement and to receive the Salary and other benefits hereunder. Notwithstanding the above, the Company may, at any time during any Notice Period, waive at its sole discretion, the Executives obligation to continue in the employment of the Company and to forthwith terminate his employment hereunder, by paying the Executive an amount equal to the Executive’s Salary multiplied by the number of months remaining until the end of the applicable Notice Period.

(g)Date of Termination. “Date of Termination” means the last day that the Executive is employed by the Company under the terms of this Agreement under circumstances in which his employment is terminated in accordance with one of the foregoing provisions of this paragraph 3.

4.Rights Upon Termination.

(a)In the event of Termination for any reason, the Company shall:

(i)Pay the Executive’s Salary for the period ending on the Date of Termination.

(ii)Transfer to the Executive, within 30 days following Date of Termination, any and all allocations accrued under his Managers’ Insurance and Educational Fund.

(b)Notwithstanding any provision of this Section 4 to the contrary, the Company shall have no obligation to transfer or release the Severance Component of the Managers’ Insurance in circumstances where Israeli laws denies the Executive’s right to

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severance payment by pursuant to Sections 17 to the Israeli Severance Payment Law 5723 –1963.

(c)The Company and Executive agree and acknowledge that in the event the Company transfers ownership of the Manager’s Insurance to the Executive, that such transfer shall constitute the payment of any severance pay the Company is required to pay to the Executive pursuant to the Severance Pay Law (5727-1963).

5.Confidentiality and Noncompetition. In consideration for the payments and benefits contemplated by Section 2, the Executive acknowledges and agrees that simultaneous with the execution of this Agreement, he will be required to execute and comply with the Non-competition and Proprietary Information Agreement in the form attached to this Agreement as Exhibit B.

6.Representations and Warranties.

(a)The Executive represents and warrants that: (i) the execution and delivery of this Agreement and the fulfillment of the terms hereof will not constitute a default under or breach of any agreement or other instrument to which he is a party or by which he is bound, including without limitation, any confidentiality or non competition agreement, and do not require the consent of any person or entity; (ii) he shall not utilize, during his employment with the Company any proprietary information of any of his previous employers.

(b)The Executive shall inform the Company, immediately upon becoming aware of every matter in which he or a member of his immediate family or affiliate has a personal interest or which might create a conflict of interests with his duties to the Company.

7.Successors. This Agreement shall be binding upon, and inure to the benefit of, the Company and its successors and assigns and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business.

8.Notices. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, postage prepaid, or sent by facsimile or prepaid overnight courier to the parties at the addresses set forth below (or such other addresses as shall be specified by the parties by like notice):

To the Company:

Q.B.I. Enterprises Ltd.

PO Box 741,

Nes Ziona 74106

Israel

Attn:  Daniel Zurr

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To the Executive:

Yaron Garmazi, at the most recent address shown in the records of the Company.

Notices hereunder shall be deemed to be effective (a) upon receipt if delivered personally, (b) on the tenth (10^th) day following the date of mailing if sent by registered or certified air mail; (c) on the second (2^nd) day following the date of transmission or delivery to the overnight courier if sent by overnight courier; and (d) on the next day after the date sent by facsimile (with receipt confirmation). A party may change its address listed above by sending notice to the other party in accordance with this Section 8.

9.Severability. The invalidity or unenforceability of any provision of this Agreement will not affect the validity or enforceability of any other provision of this Agreement, and this Agreement will be construed as if such invalid or unenforceable provision were omitted (but only to the extent that such provision cannot be appropriately reformed or modified).

10.Waiver of Breach. No waiver of any party hereto of a breach of any provision of this Agreement by any other party will operate or be construed as a waiver of any subsequent breach by such other party. The failure of any party hereto to take any action by reason of such breach will not deprive such party of the right to take action at any time while such breach continues.

11.Amendment. This Agreement may not be amended, modified or canceled other than by a written instrument executed by both Parties, or by their duly authorized representatives.

12.Survival of Agreement. Except as otherwise expressly provided in this Agreement, the rights and obligations of the parties to this Agreement shall survive the termination of the Executive’s employment with the Company.

13.Entire Agreement. This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof and supersedes all prior and contemporaneous agreements, if any, between the Executive and the Company or its Affiliates relating to the subject matter hereof.

14.Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of Israel without regard to principals of conflict of laws. Any proceeding related to or arising out of this Agreement shall be commenced, prosecuted or continued in Israel.

15.Acknowledgement by Executive. The Executive represents to the Company that he is knowledgeable and sophisticated as to business matters, including the subject matter of this Agreement, that he has read this Agreement and that he understands its terms. The Executive acknowledges that, prior to assenting to the terms of this Agreement; he has been given a reasonable time to review it, to consult with counsel of his choice, and to negotiate at arm’s-length with the Company as to the contents. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against any party hereto.

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IN WITNESS WHEREOF, the Executive has hereunto set his hand and the Company has caused these presents to be executed in its name and on its behalf, as of the date above first written.

EXECUTIVE	Q.B.I. ENTERPRISES LTD.
/s/ Yaron Garmazi	By	/s/ Daniel Zurr
Yaron Garmazi	Its

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Exhibit A

ESOP PARTICIPATION

1.The Executive shall be entitled to an option award in accordance with the Company’s 2007 ESOP plan (the “Plan”) and subject to the terms and conditions of such plan as adopted by the Company, or as amended from time to time.

2.The number of Quark shares of common stock to be awarded to the Executive is 1,401,305 shares of common stock of Quark (the “Stock Options”).

3.The Stock Option award shall be Approved 102 Awards as defined in the Plan and shall accordingly be issued to a Trustee to be held in accordance with the requirements applicable to Approved 102 Awards.

4.The exercise price per share of Quark common stock that shall derive from the exercise of the Stock Options shall be $0.75 per share.

5.The Stock Options shall be subject to a four (4) year vesting period commencing January 29, 2007, all in accordance with the provisions of the Plan (25% of the Stock Options shall vest after 12 months and 1/48^th of the Stock Options shall vest each month thereafter, subject to Executive’s continued employment).

6.The Executive shall be entitled to acceleration of the option vesting period as follows:

a.In the event of the consummation of the initial public offering (“IPO”) of Quark prior to the vesting of forty percent (40%) of the total number of shares that shall derive on the exercise of the Stock Options, the vesting provisions shall be accelerated so that upon the consummation of the IPO forty percent (40%) of the total number of shares that derive from the exercise of the Stock Options shall be vested. The balance of the shares that derive from the exercise of the Stock Options shall then vest on a monthly basis until the end of the vesting period (1/48th of the Stock Options shall vest each month thereafter subject to Executive’s continued employment).

b.In the event that (i) Quark is merged with any other entity in which the shareholders of Quark receive distributions in cash, property or securities of another entity as a result of such merger, and in which the shareholders of Quark immediately prior to such merger will not hold at least fifty percent (50%) of the voting power of the surviving, continuing or purchasing entity following such merger, or (ii) all or substantially all of the issued share capital of Quark is acquired by a third party, (collectively: an “M&A Transaction”) then all shares that derive from the exercise of the Stock Options shall vest on the consummation of the M&A Transaction.

For the purposes hereof IPO shall mean: Qualified IPO as defined in Quark’s Amended and Restated Articles of Incorporation (as in force immediately prior to the IPO.

Exhibit B

QBI ENTERPRISES, LTD.

QUARK BIOTECH, INC.

NON-COMPETITION AND PROPRIETARY

INFORMATION AGREEMENT

This Non-Competition And Proprietary Information Agreement, is made as of the      day of February, 2007, by and between QBI Enterprises, Ltd., a corporation organized under the laws of Israel (“QBI”) and its parent company Quark Biotech Inc., a California corporation (“Quark Biotech”), (together, the “Company”), and Yaron Garmazi, an employee of QBI (the “Employee”).

As an employee of QBI and in consideration of the compensation now and hereafter paid to me by QBI, I agree to the following:

1.Confidential Information.

(a)Company Information. I agree at all times during the term of my employment and thereafter, to hold in strictest confidence, and not to use, except for the benefit of the Company, or to disclose to any person, firm or corporation without written authorization of the Board of Directors of Quark Biotech (the “Board”), any trade secrets, confidential knowledge, data or other proprietary information (collectively refereed to as the “Confidential Information”) relating to products, processes, know-how, designs, formulas, development of experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to the business of the Company. I understand that Confidential Information does not include any of the foregoing items which have become publicly known and made generally available through no wrongful act of mine or of others who were under confidentiality obligations as to the item or items involved.

(b)Former Employer Information. I agree that I will not, during my employment with the Company, improperly use or disclose any proprietary information or trade secrets of any former or concurrent employers or companies, if any and that I will not bring onto the premises of the Company any unpublished document or proprietary information belonging to my former or concurrent employers or companies, if any unless consented to in writing by such employers or companies.

(c)Third Party Information. I recognize that the Company has received and in the future will receive from third parties their confidential or proprietary information subject to a duty on the Company’s part to maintain the confidentiality of such information and to use it only for certain limited purposes. I agree that I owe the Company and such third parties, during the term of my employment and thereafter, a duty to hold all such confidential or proprietary information in the strictest confidence and not to disclose it to any person, firm or corporation (except as necessary in carrying out my work for the Company consistent with the Company’s agreement with such third party) or use it for the benefit of anyone other than for the Company or such third party (consistent with the Company’s agreement with such third party) without the express written authorization of the Board.

2.Retaining and Assigning Inventions and Original Works.

(a)Inventions and Original Works Retained by Me. I have attached hereto, as Exhibit A, a list describing all patents, patent applications, inventions, improvements, developments, original works of authorship, trademarks, trademark applications, copyrights, copyright applications, trade secrets or other proprietary information which were made by me prior to my employment with the Company, (collectively referred to as “Prior Inventions”) which belong to me, which relate to the Company’s proposed business, products or research and development, and which are not assigned to the Company hereunder; or, if no such list is attached, I represent that there are no such Prior Inventions. If in the course of my employment with the Company, I incorporate into a Company product, process or machine a Prior Invention or creation in which I have an interest, The Company is hereby granted and shall have a nonexclusive, royalty-free, irrevocable, perpetual, worldwide license to make, have made, modify, use and sell such invention or creation as part of or in connection with such product, process or machine.

(b)Inventions and Original Works Assigned to the Company. I agree that I will promptly make full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all my right, title, and interest in and to any and all inventions, discoveries, improvements, technology, trade-secrets, computer programs, know-how, designs, formulas, original works of authorship, or any other confidential materials, data, information, or instructions, technical or otherwise and whether or not patentable or registrable under copyright or similar laws and whether or not reduced to practice (collectively referred to as “Inventions”), which I may solely or jointly conceive or develop or reduce to practice, or cause to be conceived or developed or reduced to practice, during the period of time I am in the employ of the Company. I recognize, however that to the extent I am employed in California, Section 2870 of the California Labor Code exempts from this provision and Inventions that I develop entirely on my own time, without using the Company’s equipment, supplies, facilities, or trade secret information except for those Inventions that either relate at the time of conception or reduction to practice of the Invention to the Company’s business, or actual or demonstrably anticipated research or development of the Company’s or results from any work performed by me for the Company.

I acknowledge that all original works of authorship which are made by me (solely or jointly with others) within the scope of my employment with the Company and which are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act (17 USCA Section 101).

(c)Inventions Assigned to the United States. I agree to assign to the United States government or other third party all my right, title, and interest in and to any and all Inventions, original works of authorship, developments, improvements or trade secrets whenever such full title is required to be in the United States or other third party by a contract between the Company and the United States or any of its agencies or such third parties.

(d)Maintenance of Records. I agree to keep and maintain adequate and current written records of all Inventions made by me (solely or jointly with others) during the term of my employment with the Company. The records will be in the form of notes, sketches,

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drawings, and any other format that may be specified by the Company. The records will be available to and remain the sole property of the Company at all times.

(e)Obtaining Letters Patent and Copyright Registrations. I agree that, whenever requested by the Company, I shall assist the Company, or its designee, in obtaining United States or foreign letters patent and copyright registrations as the case may be, covering Inventions assigned hereunder to the Company, and I shall execute any patent or copyright applications or such other documents as the Company, or its counsel, to apply for and obtain such letters patent or copyrights.

I agree that my obligation to execute or cause to be executed, when it is in my power to do so, any such instrument or papers shall continue after the termination of this Agreement, but the Company shall compensate me at a reasonable rate for time actually spent by me at the Company’s request on such assistance.

If the Company is unable because of my mental or physical incapacity or for any other reason to secure my signature to apply for or to pursue any application for any United States or foreign letters patents or copyright registrations, as the case may be, covering Inventions assigned to the Company as above, then I hereby irrevocably designate and appoint the Company and its duly authorized officers and agents as my agent and attorney in fact, to act for and in my behalf and stead to execute and file any such applications and to do all other lawfully permitted acts to further the prosecution and issuance of letters patent or copyright registrations thereon with the same legal force and effect as if executed by me.

I hereby waive and quitclaim to the Company and all claims, of any nature whatsoever, which I now or may hereafter have for infringement of any patents or copyright resulting from any such application for letters patent or copyright registrations assigned hereunder to the Company.

(f)Exception to Assignments. To the extent that I am employed in California, I understand that the provisions of this Agreement requiring assignment of Inventions to the Company do not apply to any invention which qualifies fully under the provisions of California Labor Code Section 2870 (See Exhibit B). I will advise the Company promptly in writing of any inventions that I believe meet the criteria in Subparagraph 2(b) above; and I will at the time provide to the Company all evidence necessary to substantiate that belief. I understand that that the Company will keep in confidence and will not disclose to third parties without my consent any confidential information disclosed in writing to the Company relating to Inventions that qualify fully under the provisions of Section 2870 of the California Labor Code.

3.Conflicting Employment. I agree that, during the term of my employment with the Company, I will not engage in any other employment, occupation, consulting or other business activity that is directly related to the business in which the Company is now involved or becomes involved during the term of my employment, nor will I engage in any other activities that conflict with my obligations to the Company.

4.Restriction on Competing Activities. Beginning on the date I commence my employment with the Company and ending twelve months after the end of my employment with

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the Company (the “Non-Competition Period”), I will not, directly or indirectly, alone or as a partner, officer, director, owner, employee, or consultant of any business or other entity, be engaged in any business or other enterprise that competes, directly or indirectly, in any way with the Company’s business as currently conducted or as may be conducted on the date my employment with the Company terminates.

5.Returning Company Documents. I agree that, at the time of leaving the employ of the Company, I will deliver to the Company (and will not keep in my possession, recreate or deliver to anyone else) any and all devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items developed by me pursuant to my employment with the Company or otherwise belonging to the Company, its successors or assigns, including, without limitation, those records maintained pursuant to paragraph 3(d). In the event of the termination of my employment, I agree to sign and deliver the “Termination Certification” attached hereto as Exhibit C.

6.Notification of New Employer. In the event that I leave the Company, I hereby grant consent to notification by the Company to my new employer about my rights and obligations under this Agreement.

7.Non-Solicitation. I agree that for a period of twelve (12) months immediately following the termination of my relationship with the Company for any reason, whether with or without cause, I shall not either directly or indirectly solicit, induce, recruit or encourage any of the Company’s employees to leave their employment, or any customers, clients, or other entities to terminate their relationship with the Company, or attempt to solicit, induce, recruit, encourage or take away employees, customers, or clients of the Company, either for myself or for any other person or entity.

8.Conflict of Interest Guidelines. I agree to diligently adhere to the Conflict of Interest Guidelines attached as Exhibit D hereto.

9.Representations. I agree to execute any proper oath or verify any proper document required to carry out the terms of this Agreement. I represent that my performance of all the terms of this Agreement will not breach any agreement to keep in confidence proprietary information acquired by me in confidence or in trust prior to my employment by the Company. I have not entered into, and I agree I will not enter into, any oral or written agreement in conflict herewith.

10.General Provisions.

(a)Governing Law; Consent to Personal Jurisdiction. This Agreement will be governed by the laws of the State of Israel. I hereby expressly consent to the personal and exclusive jurisdiction of the appropriate courts in Israel (as applicable) for any lawsuit filed by me against the Company or against me by the Company arising from or relating to this Agreement.

(b)Entire Agreement. This Agreement sets forth the entire agreement and understanding between the Company and me relating to the subject matter herein and all prior

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representations, understandings, and agreements concerning the subject matter of this Agreement have been merged into this Agreement. Any subsequent changes in my duties, salary, or compensation will not effect the validity or scope of this Agreement.

(c)Severability. If one or more of the provisions in this Agreement are deemed void by law, then the remaining provisions will continue in full force and effect.

(d)Successors and Assigns. This Agreement will be binding upon my heirs, executors, administrators and other legal representatives and will be for the benefit of the Company, its successors, and its assigns.

Date:
	Signature
	TYPE NAME
Witness:

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Exhibit A

LIST OF PRIOR INVENTIONS

AND ORIGINAL WORKS OF AUTHORSHIP

Title Date Identifying Number or Brief Description

No inventions or improvements

Additional Sheets Attached

By:

TYPE NAME

Date:

Exhibit B

CALIFORNIA LABOR CODE SECTION 2870

INVENTION ON OWN TIME - EXEMPTION FROM AGREEMENT

(a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

(1)Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or

(2)Result from any work performed by the employee for the employer.

(b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.”

Exhibit C

TERMINATION CERTIFICATION

This is to certify that I do not have in my possession, nor have I failed to return, any devices, records, data, notes, reports, proposals, lists, correspondence, specifications, drawings, blueprints, sketches, materials, equipment, other documents or property, or reproductions of any aforementioned items belonging to Quark Biotech, Inc., Q.B.I. Enterprises Ltd. and their subsidiaries, affiliates, successors or assigns (together, the “Company”).

I further certify that I have complied with all the terms of the Company’s Employment, Confidential Information, Invention Assignment and Arbitration Agreement signed by me, including the reporting of any inventions and original works of authorship (as defined therein), conceived or made by me (solely or jointly with others) covered by that agreement.

I further agree that, in compliance with the Employment and Proprietary Information, Agreement I will preserve as confidential all trade secrets, confidential knowledge, data or other proprietary information relating to products, processes, know-how, designs, formulas, developmental or experimental work, computer programs, data bases, other original works of authorship, customer lists, business plans, financial information or other subject matter pertaining to any business of the Company or any of its employees, clients, consultants or licensees.

I further agree that, in compliance with the Employment and Proprietary Information, Agreement, for twelve (12) months from this date, (i) I will not, directly or indirectly, be engaged in any business or other enterprise that competes, directly or indirectly, in any way with the Company’s business (ii) hire any employees of the Company and I will not solicit, induce, recruit or encourage any of the Company’s employees to leave their employment.

Date:
	By:
	TYPE NAME

Exhibit D

CONFLICT OF INTEREST GUIDELINES

It is the policy of Quark to conduct its affairs in strict compliance with the letter and spirit of the law and to adhere to the highest principles of business ethics. Accordingly, all officers, employees and independent contractors must avoid activities which are in conflict, or give the appearance of being in conflict, with these principles and with the interests of the Company. The following are potentially compromising situations which must be avoided. Any exceptions must be reported to the President and written approval for continuation must be obtained.

1.Revealing confidential information to outsiders or misusing confidential information. Unauthorized divulging of information is a violation of this policy whether or not for personal gain and whether or not harm to the Company is intended.

2.Accepting or offering substantial gifts, excessive entertainment, favors or payments which may be deemed to constitute undue influence or otherwise be improper or embarrassing to the Company.

3.Participating in civic or professional organizations that might involve divulging confidential information of the Company.

4.Initiating or approving personnel actions affecting reward or punishment of employees or applicants where there is a family relationship or is or appears to be a personal or social involvement.

5.Initiating or approving any form of personal or social harassment of employees.

6.Investing or holding outside directorship in suppliers, customers, or competing companies, including financial speculations, where such investment or directorship might influence in any manner a decision or course of action of the Company.

7.Borrowing from or lending to employees, customers or suppliers.

8.Acquiring real estate of interest to the Company.

9.Improperly using or disclosing to the Company any proprietary information or trade secrets of any former or concurrent employer or other person or entity with whom obligations of confidentiality exist.

10.Unlawfully discussing prices, costs, customers, sales or markets with competing companies or their employees.

11.Making any unlawful agreement with distributors with respect to prices.

12.Improperly using or authorizing the use of any inventions which are the subject of patent claims of any other person or entity.

13.Engaging in any conduct which is not in the best interest of the Company.

Each officer, employee and independent contractor must take every necessary action to ensure compliance with these guidelines and to bring problem areas to the attention of higher management for review. Violations of this conflict of interest policy may result in discharge without warning.

EX-10.17

Exhibit 10.17

QUARK BIOTECH, INC.

2007 EQUITY INCENTIVE PLAN

APPROVED BY BOARD ON:  MARCH 2, 2007 (“EFFECTIVE DATE”)

APPROVED BY STOCKHOLDERS:          , 2007

TERMINATION DATE: MARCH  1, 2017

1.             GENERAL.

(a)           Eligible Award Recipients.  The persons eligible to receive Awards are Employees, Directors and Consultants.

(b)           Available Awards.  The Plan provides for the grant of the following Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) Restricted Stock Awards, (iv) Restricted Stock Unit Awards, (v) Stock Appreciation Rights, (vi) Performance Stock Awards, (vii) Performance Cash Awards, and (viii) Other Stock Awards. Israeli Optionees may be issued with Awards in accordance with Exhibit B of the Plan.

(c)           General Purpose.  The Company, by means of the Plan, seeks to secure and retain the services of the group of persons eligible to receive Awards as set forth in Section 1(b), to provide incentives for such persons to exert maximum efforts for the success of the Company and any Affiliate and to provide a means by which such eligible recipients may be given an opportunity to benefit from increases in value of the Common Stock through the granting of Stock Awards.

(d)           Compliance with Section 25102(o) California Code of Corporations.  In the case of a Participant who is a resident of the State of California, notwithstanding anything to the contrary in the Plan or in such Participant’s Stock Award Agreement, the terms and conditions set forth in Exhibit A hereto shall apply to any Stock Award granted to such Participant in reliance on Section 25102(o) of the California Corporate Securities Law of 1968, as amended from time to time, (“Section 25102(o)”) and shall be deemed to be a part of the Plan, if and to the extent compliance with the terms set forth on Exhibit A is required under Section 25102(o).  In the event of any conflict or inconsistency between the provisions of Exhibit A and any provisions otherwise appearing in the Plan, the provisions of Exhibit A shall control solely with respect to Stock Awards granted under the Plan to residents of the State of California in reliance on Section 25102(o), if and to the extent compliance with the terms set forth on Exhibit A required under Section 25102(o), provided that, for the avoidance of doubt, with respect to any requirement set forth on Exhibit A, the corresponding provision set forth in the applicable Stock Award Agreement or the Plan shall control in lieu of the minimum requirement set forth on Exhibit A as long as such corresponding provision of the Stock Award Agreement or the Plan is no less favorable to the Participant than the applicable minimum requirement set forth on Exhibit A.

(e) Israeli Optionees In the case of a Participant who is an Israeli Optionee (as defined in Exhibit B), notwithstanding anything to the contrary in the Plan or in such Participant’s Stock

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Award Agreement, the terms and conditions set forth in Exhibit B hereto shall apply to any Stock Award granted to such Participant.

2.             ADMINISTRATION.

(a)           Administration by Board.  The Board shall administer the Plan unless and until the Board delegates administration of the Plan to a Committee or Committees, as provided in Section 2(c).

(b)           Powers of Board.  The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan:

(i)            To determine from time to time (A) which of the persons eligible under the Plan shall be granted Awards; (B) when and how each Award shall be granted; (C) what type or combination of types of Award shall be granted; (D) the provisions of each Award granted (which need not be identical), including the time or times when a person shall be permitted to receive cash or Common Stock pursuant to a Stock Award; and (E) the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person.

(ii)           To construe and interpret the Plan and Awards granted under it, and to establish, amend and revoke rules and regulations for its administration (including rules and regulations relating to sub-plans established for the purpose of qualifying for preferred tax treatment under foreign tax laws).  The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement or in the written terms of a Performance Cash Award, in a manner and to the extent it shall deem necessary or expedient to make the Plan or Award fully effective.

(iii)         To settle all controversies regarding the Plan and Awards granted under it.

(iv)          To accelerate the time at which a Stock Award may first be exercised or the time during which an Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Award stating the time at which it may first be exercised or the time during which it will vest.

(v)            To suspend or terminate the Plan at any time.  Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect except with the written consent of the affected Participant.

(vi)          To amend the Plan in any respect the Board deems necessary or advisable, including, without limitation, relating to Incentive Stock Options and certain nonqualified deferred compensation under Section 409A of the Code and/or to bring the Plan or Stock Awards granted under the Plan into compliance therewith, subject to the limitations, if any, of applicable law. However, except as provided in Section 9(a) relating to Capitalization Adjustments, stockholder approval shall be required for any amendment of the Plan that either (A) materially increases the number of shares of Common Stock available for issuance under the Plan, (B) materially expands the class of individuals eligible to receive Awards under the Plan, (C) materially increases the benefits accruing to Participants under the Plan or materially reduces the price at which shares of Common Stock may be issued or purchased under the Plan, (D)

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materially extends the term of the Plan, or (E) expands the types of Awards available for issuance under the Plan, but only to the extent required by applicable law or listing requirements. Except as provided above, rights under any Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (1) the Company requests the consent of the affected Participant, and (2) such Participant consents in writing.

(vii)         To submit any amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of (A) Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to Covered Employees, (B) Section 422 of the Code regarding Incentive Stock Options or (C) Rule 16b-3.

(viii)        To approve forms of Award Agreements for use under the Plan and to amend the terms of any one or more Awards, including, but not limited to, amendments to provide terms more favorable to the Participant than previously provided in the Award Agreement, subject to any specified limits in the Plan that are not subject to Board discretion; provided however, that the Participant’s rights under any Award shall not be impaired by any such amendment unless (A) the Company requests the consent of the affected Participant, and (B) such Participant consents in writing.  Notwithstanding the foregoing, subject to the limitations of applicable law, if any, and without the affected Participant’s consent, the Board may amend the terms of any one or more Awards if necessary to maintain the qualified status of the Award as an Incentive Stock Option or to bring the Award into compliance with Section 409A of the Code and the related guidance thereunder.

(ix)          Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company and that are not in conflict with the provisions of the Plan or Awards.

(x)           To adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the Plan by Employees, Directors or Consultants who are foreign nationals or employed outside the United States.

(xi)          To effect, at any time and from time to time, with the consent of any adversely affected Optionholder, (1) the reduction of the exercise price of any outstanding Option under the Plan, (2) the cancellation of any outstanding Option under the Plan and the grant in substitution therefore of (A) a new Option under the Plan or another equity plan of the Company covering the same or a different number of shares of Common Stock, (B) a Restricted Stock Award (including a stock bonus), (C) a Stock Appreciation Right, (D) Restricted Stock Unit, (E) an Other Stock Award, (F) cash and/or (G) other valuable consideration (as determined by the Board, in its sole discretion), or (3) any other action that is treated as a repricing under generally accepted accounting principles.

(c)           Delegation to Committee.

(i)            General.  The Board may delegate some or all of the administration of the Plan to a Committee or Committees.  If administration of the Plan is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers

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theretofore possessed by the Board that have been delegated to the Committee, including the power to delegate to a subcommittee of the Committee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board.  The Board may retain the authority to concurrently administer the Plan with the Committee and may, at any time, revest in the Board some or all of the powers previously delegated.

(ii)           Section 162(m) and Rule 16b-3 Compliance.  In the sole discretion of the Board, the Committee may consist solely of two (2) or more Outside Directors, in accordance with Section 162(m) of the Code, or solely of two (2) or more Non-Employee Directors, in accordance with Rule 16b-3.  In addition, the Board or the Committee, in its sole discretion, may (A) delegate to a Committee of Directors who need not be Outside Directors the authority to grant Awards to eligible persons who are either (I) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (II) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code, or (B) delegate to a Committee of Directors who need not be Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act.

(d)           Delegation to an Officer.  The Board may delegate to one (1) or more Officers the authority to do one or both of the following (i) designate Employees who are not Officers to be recipients of Options (and, to the extent permitted by applicable law, other Stock Awards) and the terms thereof, and (ii) determine the number of shares of Common Stock to be subject to such Stock Awards granted to such Employees; provided, however, that the Board resolutions regarding such delegation shall specify the total number of shares of Common Stock that may be subject to the Stock Awards granted by such Officer and that such Officer may not grant a Stock Award to himself or herself.  Notwithstanding anything to the contrary in this Section 2(d), the Board may not delegate to an Officer authority to determine the Fair Market Value of the Common Stock pursuant to Section 13(w)(ii) below.

(e)           Effect of Board’s Decision. All determinations, interpretations and constructions made by the Board in good faith shall not be subject to review by any person and shall be final, binding and conclusive on all persons.

3.             SHARES SUBJECT TO THE PLAN.

(a)           Share Reserve.  Subject to the provisions of Section 9 relating to adjustments upon changes in stock, the aggregate number of shares of Common Stock of the Company that may be issued pursuant to Stock Awards after the Effective Date shall not exceed 5,655,056 shares (such number consisting of (i) the 1,186,149 shares of Common Stock that have been reserved but not made subject to any awards under the Quark Biotech, Inc. 1997 Stock Plan (such plan, including its subplan (the 2003 Israeli Stock Option Plan), is referred to herein as the “1997 Plan”) as of the Effective Date, (ii) up to 1,662,175 shares of Common Stock that are subject to awards outstanding under the 1997 Plan as of the Effective Date that expire or otherwise terminate without having been exercised in full, and (iii) an additional 2,806,732 shares to be approved by the stockholders of the Company as part of the approval of this Plan. 

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For clarity, the limitation in this subsection 3(a) is a limitation in the number of shares of the Company’s common stock that may be issued pursuant to the Plan.  Accordingly, this subsection 3(a) does not limit the granting of Stock Awards except as provided in subsection 7(a).  Shares may be issued in connection with a merger or acquisition as permitted by NASD Rule 4350(i)(1)(A)(iii) or, if applicable, NYSE Listed Company Manual Section 303A.08, or AMEX Company Guide Section 711 and such issuance shall not reduce the number of shares available for issuance under the Plan.  Furthermore, if a Stock Award (i) expires or otherwise terminates without having been exercised in full or (ii) is settled in cash (i.e., the holder of the Stock Award receives cash rather than stock), such expiration, termination or settlement shall not reduce (or otherwise offset) the number of shares of the Company’s Common Stock that may be issued pursuant to the Plan.

(b)           In addition, if any shares of Common Stock issued pursuant to a Stock Award are forfeited back to the Company because of the failure to meet a contingency or condition required to vest such shares in the Participant, then the shares which are forfeited shall revert to and again become available for issuance under the Plan.  Also, any shares reacquired by the Company pursuant to subsection 8(g) or as consideration for the exercise of an Option shall again become available for issuance under the Plan.  Notwithstanding the provisions of this subsection 3(b), any such shares shall not be subsequently issued pursuant to the exercise of Incentive Stock Options.

(c)           Share Reserve Limitation.  Notwithstanding the provisions of Section 3(a) and (b), to the extent it is necessary to comply with Section 260.140.45 of Title 10 of the California Code of Regulations, the total number of shares of Common Stock issuable upon exercise of all outstanding Stock Awards and the total number of shares of Common Stock provided for under any Common Stock bonus or similar plan of the Company shall not exceed the applicable percentage as calculated in accordance with the conditions and exclusions of Section 260.140.45 of Title 10 of the California Code of Regulations, based on shares of the Common Stock of the Company that are outstanding at the time the calculation is made.

(d)           Incentive Stock Option Limit.  Notwithstanding anything to the contrary in this Section 3(d), subject to the provisions of Section 9(a) relating to Capitalization Adjustments the aggregate maximum number of shares of Common Stock that may be issued pursuant to the exercise of Incentive Stock Options granted after the Effective Date shall be 5,655,056 shares of Common Stock.

(e)           Section 162(m) Limitation on Annual Grants.  Subject to the provisions of Section 9(a) relating to Capitalization Adjustments, at such time as the Company may be subject to the applicable provisions of Section 162(m) of the Code, no Employee shall be eligible to be granted during any calendar year Stock Awards whose value is determined by reference to an increase over an exercise or strike price of at least one hundred percent (100%) of the Fair Market Value of the Common Stock on the date the Stock Award is granted covering more than  2,000,000 shares of Common Stock.

(f)            Source of Shares.  The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock, including shares repurchased by the Company on the market or otherwise.

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(g)           Arbitration.  Any dispute or claim concerning any Stock Awards granted (or not granted) pursuant to the Plan or any disputes or claims relating to or arising out of the Plan shall be fully, finally and exclusively resolved by binding and confidential arbitration conducted pursuant to the rules of Judicial Arbitration and Mediation Services, Inc. (“JAMS”) in Sacramento, California.  The Company shall pay all arbitration fees.  In addition to any other relief, the arbitrator may award to the prevailing party recovery of its attorneys’ fees and costs.  By accepting a Stock Award, Participants and the Company waive their respective rights to have any such disputes or claims tried by a judge or jury.

4.             ELIGIBILITY.

(a)           Eligibility for Specific Stock Awards.  Incentive Stock Options may be granted only to employees of the Company or a parent corporation or subsidiary corporation (as such terms are defined in Code Sections 424(e) and (f)).  Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.

(b)           Ten Percent Stockholders.  A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock on the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant.

(c)           Consultants.   A Consultant shall be eligible for the grant of a Stock Award only if, at the time of grant, (i) a Form S-8 Registration Statement under the Securities Act (“Form S-8”) is available to register either the offer or the sale of the Company’s securities to such Consultant, (ii) such grant complies with the requirements of Rule 701 of the Securities Act, or (iii) the Company determines that such grant will otherwise comply with the securities laws of all relevant jurisdictions.

5.             OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate.  All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates shall be issued for shares of Common Stock purchased on exercise of each type of Option. If an Option is not specifically designated as an Incentive Stock Option, then the Option shall be a Nonstatutory Stock Option. The provisions of separate Options need not be identical; provided, however, that each Option Agreement shall include (through incorporation of provisions hereof by reference in the Option Agreement or otherwise) the substance of each of the following provisions:

(a)           Term.  Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders, no Option shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Option Agreement.

(b)           Exercise Price.  Subject to the provisions of Section 4(b) regarding Ten Percent Stockholders and the requirements set forth on Exhibit A, the exercise price of each Option shall be generally not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted.  Notwithstanding the foregoing, an

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Option may be granted with an exercise price lower than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option if such Option is granted pursuant to an assumption of or substitution for another option in a manner consistent with the provisions of Section 424(a) of the Code (whether or not such options are Incentive Stock Options) or is otherwise granted in a manner designed to satisfy the requirements of Section 409A of the Code and applicable securities laws.

(c)           Consideration.  The exercise price of Common Stock acquired pursuant to the exercise of an Option shall be paid, to the extent permitted by applicable law and as determined by the Board in its sole discretion, by any combination of the methods of payment set forth below.  The Board shall have the authority to grant Options that do not permit all of the following methods of payment (or otherwise restrict the ability to use certain methods) and to grant Options that require the consent of the Company to utilize a particular method of payment.  The methods of payment permitted by this Section 5(c) are:

(i)            by cash, check, bank draft or money order payable to the Company;

(ii)           pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of the stock subject to the Option, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds;

(iii)         by delivery to the Company (either by actual delivery or attestation) of shares of Common Stock;

(iv)          by a “net exercise” arrangement pursuant to which the Company will reduce the number of shares of Common Stock issued upon exercise by the largest whole number of shares with a Fair Market Value that does not exceed the aggregate exercise price; provided, however, that the Company shall accept a cash or other payment from the Participant to the extent of any remaining balance of the aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued; provided, further, that shares of Common Stock will no longer be outstanding under an Option and will not be exercisable thereafter to the extent that (A) shares are used to pay the exercise price pursuant to the “net exercise,” (B) shares are delivered to the Participant as a result of such exercise, and (C) shares are withheld to satisfy tax withholding obligations;  or

(v)            in any other form of legal consideration that may be acceptable to the Board.

(d)           Transferability of Options.  The Board may, in its sole discretion, impose such limitations on the transferability of Options as the Board shall determine, subject to the provisions of Exhibit A, as applicable.  In the absence of such a determination by the Board to the contrary, the following restrictions on the transferability of Options shall apply:

(i)            Restrictions on Transfer.  An Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder; provided, however, that the Board may, in its sole

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discretion, permit transfer of the Option in a manner consistent with applicable tax and securities laws upon the Optionholder’s request.

(ii)           Domestic Relations Orders.  Notwithstanding the foregoing, an Option may be transferred pursuant to a domestic relations order, provided, however, that an Incentive Stock Option may be deemed to be a Nonqualified Stock Option as a result of such transfer.

(iii)         Beneficiary Designation.  Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form provided by or otherwise satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be the beneficiary of an Option with the right to exercise the Option and receive the Common Stock or other consideration resulting from an Option exercise.

(e)           Vesting Generally.  The total number of shares of Common Stock subject to an Option may vest and therefore become exercisable in periodic installments that may or may not be equal.  The Option may be subject to such other terms and conditions on the time or times when it may or may not be exercised (which may be based on the satisfaction of Performance Goals or other criteria) as the Board may deem appropriate.  The vesting provisions of individual Options may vary.  The provisions of this Section 5(e) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised, including but not limited to those provisions set forth on Exhibit A.

(f)            Termination of Continuous Service.  Except as otherwise provided in the applicable Option Agreement or other agreement between the Optionholder and the Company (which provisions shall comply with the provisions of Exhibit A, as applicable), in the event that an Optionholder’s Continuous Service terminates (other than for Cause or upon the Optionholder’s death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination of Continuous Service) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder’s Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement.  If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(g)           Extension of Termination Date.  If the exercise of the Option following the termination of the Optionholder’s Continuous Service (other than for Cause) would be prohibited at any time during the post-termination exercise period solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of a period of three (3) months after the termination of the Optionholder’s Continuous Service during which the exercise of the Option would not be in violation of such registration requirements, or (ii) the expiration of the term of the Option as set forth in the Option Agreement.

(h)           Disability of Optionholder.  In the event that an Optionholder’s Continuous Service terminates as a result of the Optionholder’s Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the

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date of termination of Continuous Service), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination of Continuous Service (or such longer or shorter period specified in the Option Agreement; provided, however, that any shorter period shall comply with the provisions of Exhibit A, as applicable), or (ii) the expiration of the term of the Option as set forth in the Option Agreement.  If, after termination of Continuous Service, the Optionholder does not exercise his or her Option within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.

(i)            Death of Optionholder.In the event that (i) an Optionholder’s Continuous Service terminates as a result of the Optionholder’s death, or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder’s Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder’s estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated as the beneficiary of the Option upon the Optionholder’s death, but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement; provided, however, that any shorter period shall comply with the provisions of Exhibit A, as applicable), or (ii) the expiration of the term of such Option as set forth in the Option Agreement.  If, after the Optionholder’s death, the Option is not exercised within the time specified herein or in the Option Agreement (as applicable), the Option shall terminate.  If the Optionholder designates a third party beneficiary of the Option in accordance with Section 5(d)(iii), then upon the death of the Optionholder such designated beneficiary shall have the sole right to exercise the Option and receive the Common Stock or other consideration resulting from an Option exercise.

(j)            Termination for Cause.  Except as explicitly provided otherwise in an Optionholder’s Option Agreement, in the event that an Optionholder’s Continuous Service is terminated for Cause, the Option shall terminate upon the termination date of such Optionholder’s Continuous Service, and the Optionholder shall be prohibited from exercising his or her Option from and after the time of such termination of Continuous Service.

(k)           Non-Exempt Employees.  No Option granted to an Employee that is a non-exempt employee for purposes of the Fair Labor Standards Act shall be first exercisable for any shares of Common Stock until at least six (6) months following the date of grant of the Option.  The foregoing provision is intended to operate so that any income derived by a non-exempt employee in connection with the exercise or vesting of an Option will be exempt from his or her regular rate of pay.

(l)            Early Exercise.  The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder’s Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option.  Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate, including but not limited to those set forth on Exhibit A hereto.  The Company will not exercise its repurchase option until at least six (6) months (or such longer or shorter period of time required to avoid a charge to earnings for financial accounting

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purposes) have elapsed following exercise of the Option unless the Board otherwise specifically provides in the Option.

6.             PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.

(a)           Restricted Stock Awards.  Each Restricted Stock Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate (including the terms and conditions set forth on Exhibit A, as applicable).  To the extent consistent with the Company’s Bylaws, at the Board’s election, shares of Common Stock may be (x) held in book entry form subject to the Company’s instructions until any restrictions relating to the Restricted Stock Award lapse; or (y) evidenced by a certificate, which certificate shall be held in such form and manner as determined by the Board.  The terms and conditions of Restricted Stock Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Award Agreements need not be identical; provided, however, that each Restricted Stock Award Agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions:

(i)            Consideration.  A Restricted Stock Award may be awarded in consideration for (A) past (or, to the extent permitted by applicable law, future) services actually or to be rendered to the Company or an Affiliate, or (B) any other form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii)           Vesting.  Shares of Common Stock awarded under the Restricted Stock Award Agreement may be subject to forfeiture to the Company in accordance with a vesting schedule to be determined by the Board.

(iii)         Termination of Participant’s Continuous Service.  In the event a Participant’s Continuous Service terminates, the Company may receive via a forfeiture condition, any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination of Continuous Service under the terms of the Restricted Stock Award Agreement.

(iv)          Transferability.  Rights to acquire shares of Common Stock under the Restricted Stock Award Agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the Restricted Stock Award Agreement, as the Board shall determine in its sole discretion, so long as Common Stock awarded under the Restricted Stock Award Agreement remains subject to the terms of the Restricted Stock Award Agreement.

(b)           Restricted Stock Unit Awards.  Each Restricted Stock Unit Award Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate (including the terms and conditions set forth on Exhibit A, as applicable).  The terms and conditions of Restricted Stock Unit Award Agreements may change from time to time, and the terms and conditions of separate Restricted Stock Unit Award Agreements need not be identical; provided, however, that each Restricted Stock Unit Award Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

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(i)            Consideration.  At the time of grant of a Restricted Stock Unit Award, the Board will determine the consideration, if any, to be paid by the Participant upon delivery of each share of Common Stock subject to the Restricted Stock Unit Award. The consideration to be paid (if any) by the Participant for each share of Common Stock subject to a Restricted Stock Unit Award may be paid in any form of legal consideration that may be acceptable to the Board in its sole discretion and permissible under applicable law.

(ii)           Vesting.  At the time of the grant of a Restricted Stock Unit Award, the Board may impose such restrictions or conditions to the vesting of the Restricted Stock Unit Award as it, in its sole discretion, deems appropriate.

(iii)         Payment.  A Restricted Stock Unit Award may be settled by the delivery of shares of Common Stock, their cash equivalent, any combination thereof or in any other form of consideration, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.

(iv)          Additional Restrictions.  At the time of the grant of a Restricted Stock Unit Award, the Board, as it deems appropriate, may impose such restrictions or conditions that delay the delivery of the shares of Common Stock (or their cash equivalent) subject to a Restricted Stock Unit Award to a time after the vesting of such Restricted Stock Unit Award.

(v)            Dividend Equivalents.  Dividend equivalents may be credited in respect of shares of Common Stock covered by a Restricted Stock Unit Award, as determined by the Board and contained in the Restricted Stock Unit Award Agreement.  At the sole discretion of the Board, such dividend equivalents may be converted into additional shares of Common Stock covered by the Restricted Stock Unit Award in such manner as determined by the Board.  Any additional shares covered by the Restricted Stock Unit Award credited by reason of such dividend equivalents will be subject to all the terms and conditions of the underlying Restricted Stock Unit Award Agreement to which they relate.

(vi)          Termination of Participant’s Continuous Service.  Except as otherwise provided in the applicable Restricted Stock Unit Award Agreement, such portion of the Restricted Stock Unit Award that has not vested will be forfeited upon the Participant’s termination of Continuous Service.

(vii)         Compliance with Section 409A of the Code.   Notwithstanding anything to the contrary set forth herein, any Restricted Stock Unit Award granted under the Plan that is not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Restricted Stock Unit Award will comply with the requirements of Section 409A of the Code.  Such restrictions, if any, shall be determined by the Board and contained in the Restricted Stock Unit Award Agreement evidencing such Restricted Stock Unit Award.  For example, such restrictions may include, without limitation, a requirement that any Common Stock that is to be issued in a year following the year in which the Restricted Stock Unit Award vests must be issued in accordance with a fixed pre-determined schedule.

(c)           Stock Appreciation Rights.  Each Stock Appreciation Right Agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate

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(including the terms and conditions set forth on Exhibit A, as applicable).  Stock Appreciation Rights may be granted as stand-alone Stock Awards or in tandem with other Stock Awards.  The terms and conditions of Stock Appreciation Right Agreements may change from time to time, and the terms and conditions of separate Stock Appreciation Right Agreements need not be identical; provided, however, that each Stock Appreciation Right Agreement shall include (through incorporation of the provisions hereof by reference in the Agreement or otherwise) the substance of each of the following provisions:

(i)            Term.  No Stock Appreciation Right shall be exercisable after the expiration of ten (10) years from the date of its grant or such shorter period specified in the Stock Appreciation Right Agreement.

(ii)           Strike Price. Each Stock Appreciation Right will be denominated in shares of Common Stock equivalents.  The strike price of each Stock Appreciation Right shall generally not be less than one hundred percent (100%) of the Fair Market Value of the Common Stock equivalents subject to the Stock Appreciation Right on the date of grant.

(iii)         Calculation of Appreciation.  The appreciation distribution payable on the exercise of a Stock Appreciation Right will be not greater than an amount equal to the excess of (A) the aggregate Fair Market Value (on the date of the exercise of the Stock Appreciation Right) of a number of shares of Common Stock equal to the number of Common Stock equivalents in which the Participant is vested under such Stock Appreciation Right, and with respect to which the Participant is exercising the Stock Appreciation Right on such date, over (B) the strike price that will be determined by the Board at the time of grant of the Stock Appreciation Right.

(iv)          Vesting.  At the time of the grant of a Stock Appreciation Right, the Board may impose such restrictions or conditions to the vesting of such Stock Appreciation Right as it, in its sole discretion, deems appropriate.

(v)            Exercise.  To exercise any outstanding Stock Appreciation Right, the Participant must provide written notice of exercise to the Company in compliance with the provisions of the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(vi)          Payment.  The appreciation distribution in respect to a Stock Appreciation Right may be paid in Common Stock, in cash, in any combination of the two or in any other form of consideration, as determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.

(vii)         Termination of Continuous Service.  In the event that a Participant’s Continuous Service terminates (other than for Cause), the Participant may exercise his or her Stock Appreciation Right (to the extent that the Participant was entitled to exercise such Stock Appreciation Right as of the date of termination) but only within such period of time ending on the earlier of (A) the date three (3) months following the termination of the Participant’s Continuous Service (or such longer or shorter period specified in the Stock Appreciation Right Agreement), or (B) the expiration of the term of the Stock Appreciation Right as set forth in the

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Stock Appreciation Right Agreement.  If, after termination, the Participant does not exercise his or her Stock Appreciation Right within the time specified herein or in the Stock Appreciation Right Agreement (as applicable), the Stock Appreciation Right shall terminate.

(viii)        Termination for Cause.  Except as explicitly provided otherwise in an Participant’s Stock Appreciation Right Agreement, in the event that a Participant’s Continuous Service is terminated for Cause, the Stock Appreciation Right shall terminate upon the termination date of such Participant’s Continuous Service, and the Participant shall be prohibited from exercising his or her Stock Appreciation Right from and after the time of such termination of Continuous Service.

(ix)          Compliance with Section 409A of the Code.   Notwithstanding anything to the contrary set forth herein, any Stock Appreciation Rights granted under the Plan that are not exempt from the requirements of Section 409A of the Code shall contain such provisions so that such Stock Appreciation Rights will comply with the requirements of Section 409A of the Code.  Such restrictions, if any, shall be determined by the Board and contained in the Stock Appreciation Right Agreement evidencing such Stock Appreciation Right.  For example, such restrictions may include, without limitation, a requirement that a Stock Appreciation Right that is to be paid wholly or partly in cash must be exercised and paid in accordance with a fixed pre-determined schedule.

(d)           Performance Awards.

(i)            Performance Stock Awards.  A Performance Stock Award is a Stock Award that may be granted, may vest, or may be exercised based upon the attainment during a Performance Period of certain Performance Goals.  A Performance Stock Award may, but need not, require the completion of a specified period of Continuous Service.  Notwithstanding the foregoing, to the extent required by applicable law, any Performance Stock Award will be subject to the provisions of Exhibit A, including provisions regarding minimum vesting requirements  The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Committee in its sole discretion.  The maximum number of shares that may be granted to any Participant in a calendar year attributable to Stock Awards described in this Section 6(d)(i) shall not exceed 75,000 shares of Common Stock.  In addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board may determine that cash may be used in payment of Performance Stock Awards.

(ii)           Performance Cash Awards.  A Performance Cash Award is a cash award that may be granted upon the attainment during a Performance Period of certain Performance Goals.  A Performance Cash Award may also require the completion of a specified period of Continuous Service.  The length of any Performance Period, the Performance Goals to be achieved during the Performance Period, and the measure of whether and to what degree such Performance Goals have been attained shall be conclusively determined by the Committee in its sole discretion.  The maximum value that may be granted to any Participant in a calendar year attributable to cash awards described in this Section 6(d)(i) shall not exceed one million dollars ($1,000,000). The Board may provide for or, subject to such terms and conditions as the Board

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may specify, may permit a Participant to elect for, the payment of any Performance Cash Award to be deferred to a specified date or event.  The Committee may specify the form of payment of Performance Cash Awards, which may be cash or other property, or may provide for a Participant to have the option for his or her Performance Cash Award, or such portion thereof as the Board may specify, to be paid in whole or in part in cash or other property. In addition, to the extent permitted by applicable law and the applicable Award Agreement, the Board may determine that Common Stock authorized under this Plan may be used in payment of Performance Cash Awards, including additional shares in excess of the Performance Cash Award as an inducement to hold shares of Common Stock.

(e)           Other Stock Awards.  Other forms of Stock Awards valued in whole or in part by reference to, or otherwise based on, Common Stock may be granted either alone or in addition to Stock Awards provided for under Section 5 and the preceding provisions of this Section 6.  Subject to the provisions of the Plan (including Exhibit A, as applicable), the Board shall have sole and complete authority to determine the persons to whom and the time or times at which such Other Stock Awards will be granted, the number of shares of Common Stock (or the cash equivalent thereof) to be granted pursuant to such Other Stock Awards and all other terms and conditions of such Other Stock Awards.

7.             COVENANTS OF THE COMPANY.

(a)           Availability of Shares.  During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock reasonably required to satisfy such Stock Awards.

(b)           Securities Law Compliance.  The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award.  If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority that counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained.

(c)           No Obligation to Notify.  The Company shall have no duty or obligation to any holder of a Stock Award to advise such holder as to the time or manner of exercising such Stock Award.  Furthermore, the Company shall have no duty or obligation to warn or otherwise advise such holder of a pending termination or expiration of a Stock Award or a possible period in which the Stock Award may not be exercised.  The Company has no duty or obligation to minimize the tax consequences of a Stock Award to the holder of such Stock Award.

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8.             MISCELLANEOUS.

(a)           Use of Proceeds from Sales of Common Stock.  Proceeds from the sale of shares of Common Stock pursuant to Stock Awards shall constitute general funds of the Company.

(b)           Corporate Action Constituting Grant of Stock Awards.  Corporate action constituting a grant by the Company of a Stock Award to any Participant shall be deemed completed as of the date of such corporate action, unless otherwise determined by the Board, regardless of when the instrument, certificate, or letter evidencing the Stock Award is communicated to, or actually received or accepted by, the Participant.

(c)           Stockholder Rights.  No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has exercised the Stock Award pursuant to its terms and the Participant shall not be deemed to be a stockholder of record until the issuance of the Common Stock pursuant to such exercise has been entered into the books and records of the Company.

(d)           No Employment or Other Service Rights.  Nothing in the Plan, any Stock Award Agreement or other instrument executed thereunder or in connection with any Award granted pursuant to the Plan shall confer upon any Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant’s agreement with the Company or an Affiliate, or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be.

(e)           Incentive Stock Option $100,000 Limitation.  To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionholder during any calendar year (under all plans of the Company and any Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options, notwithstanding any contrary provision of the applicable Option Agreement(s).

(f)            Investment Assurances.  The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant’s knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant’s own account and not with any present intention of selling or otherwise

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distributing the Common Stock.  The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (x) the issuance of the shares upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act, or (y) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws.  The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock.

(g)           Withholding Obligations.  Unless prohibited by the terms of a Stock Award Agreement, the Company may, in its sole discretion, satisfy any federal, state, local or foreign tax withholding obligation relating to an Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) causing the Participant to tender a cash payment; (ii)  withholding shares of Common Stock from the shares of Common Stock issued or otherwise issuable to the Participant in connection with the Award; provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax requried to be withheld by law (or such lower amount as may be necessary to avoid classification of the Award as a liability for financial accounting purposes); (iii) withholding cash from an Award settled in cash; (iv) withholding payment from any payments otherwise payable to a Participant; or (v) by such other method as may be set forth in the Award Agreement.

(h)           Electronic Delivery.  Any reference herein to a “written” agreement or document shall include any agreement or document delivered electronically or posted on the Company’s intranet.

(i)            Deferrals.  To the extent permitted by applicable law, the Board, in its sole discretion, may determine that the delivery of Common Stock or the payment of cash, upon the exercise, vesting or settlement of all or a portion of any Award may be deferred and may establish programs and procedures for deferral elections to be made by Participants.  Deferrals by Participants will be made in accordance with Section 409A of the Code. Consistent with Section 409A of the Code, the Board may provide for distributions while a Participant is still an employee.  The Board is authorized to make deferrals of Stock Awards and determine when, and in what annual percentages, Participants may receive payments, including lump sum payments, following the Participant’s termination of employment or retirement, and implement such other terms and conditions consistent with the provisions of the Plan and in accordance with applicable law.

(j)            Compliance with Section 409A of the Code.  To the extent that the Board determines that any Award granted under the Plan is subject to Section 409A of the Code, the Award Agreement evidencing such Award shall incorporate the terms and conditions necessary to avoid the consequences specified in Section 409A(a)(1) of the Code.  To the extent applicable, the Plan and Award Agreements shall be interpreted in accordance with Section 409A of the Code and Department of Treasury regulations and other interpretive guidance issued thereunder, including without limitation any such regulations or other guidance that may be issued or amended after the Effective Date.  Notwithstanding any provision of the Plan to the contrary, in

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the event that following the Effective Date the Board determines that any Award may be subject to Section 409A of the Code and related Department of Treasury guidance (including such Department of Treasury guidance as may be issued after the Effective Date), the Board may adopt such amendments to the Plan and the applicable Award Agreement or adopt other policies and procedures (including amendments, policies and procedures with retroactive effect), or take any other actions, that the Board determines are necessary or appropriate to (1) exempt the Award from Section 409A of the Code and/or preserve the intended tax treatment of the benefits provided with respect to the Award, or (2) comply with the requirements of Section 409A of the Code and related Department of Treasury guidance.

9.             ADJUSTMENTS UPON CHANGES IN COMMON STOCK; OTHER CORPORATE EVENTS.

(a)           Capitalization Adjustments.  In the event of a Capitalization Adjustment, the Board shall appropriately adjust: (i) the class(es) and maximum number of securities subject to the Plan pursuant to Section 3(a), (ii) the class(es) and maximum number of securities that may be issued pursuant to the exercise of Incentive Stock Options pursuant to Section 3(d), (iii) the class(es) and maximum number of securities that may be awarded to any person pursuant to Section 3(d) and 6(d)(i), and (iv) the class(es) and number of securities and price per share of stock subject to outstanding Stock Awards.  The Board shall make such adjustments, and its determination shall be final, binding and conclusive.

(b)           Dissolution or Liquidation.  Except as otherwise provided in the Stock Award Agreement, in the event of a dissolution or liquidation of the Company, all outstanding Stock Awards (other than Stock Awards consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall terminate immediately prior to the completion of such dissolution or liquidation, and the shares of Common Stock subject to the Company’s repurchase option may be repurchased by the Company notwithstanding the fact that the holder of such Stock Award is providing Continuous Service, provided, however, that the Board may, in its sole discretion, cause some or all Stock Awards to become fully vested, exercisable and/or no longer subject to repurchase or forfeiture (to the extent such Stock Awards have not previously expired or terminated) before the dissolution or liquidation is completed but contingent on its completion.

(c)           Corporate Transaction.   The following provisions shall apply to Stock Awards in the event of a Corporate Transaction unless otherwise provided in the instrument evidencing the Stock Award or any other written agreement between the Company or any Affiliate and the holder of the Stock Award or unless otherwise expressly provided by the Board at the time of grant of a Stock Award.

(i)            Stock Awards May Be Assumed.  Except as otherwise stated in the Stock Award Agreement, in the event of a Corporate Transaction, any surviving corporation or acquiring corporation (or the surviving or acquiring corporation’s parent company) may assume or continue any or all Stock Awards outstanding under the Plan or may substitute similar stock awards for Stock Awards outstanding under the Plan (including but not limited to, awards to acquire the same consideration paid to the stockholders of the Company pursuant to the Corporate Transaction), and any reacquisition or repurchase rights held by the Company in respect of Common Stock issued pursuant to Stock Awards may be assigned by the Company to

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the successor of the Company (or the successor’s parent company, if any), in connection with such Corporate Transaction.  A surviving corporation or acquiring corporation (or its parent) may choose to assume or continue only a portion of a Stock Award or substitute a similar stock award for only a portion of a Stock Award.  The terms of any assumption, continuation or substitution shall be set by the Board in accordance with the provisions of Section 2.

(ii)           Stock Awards Held by Current Participants.  Except as otherwise stated in the Stock Award Agreement, in the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Stock Awards or substitute similar stock awards for such outstanding Stock Awards, then with respect to Stock Awards that have not been assumed, continued or substituted and that are held by Participants whose Continuous Service has not terminated prior to the effective time of the Corporate Transaction (referred to as the “Current Participants”), the vesting of such Stock Awards (and, if applicable, the time at which such Stock Awards may be exercised) shall (contingent upon the effectiveness of the Corporate Transaction) be accelerated in full to a date prior to the effective time of such Corporate Transaction as the Board shall determine (or, if the Board shall not determine such a date, to the date that is five (5) days prior to the effective time of the Corporate Transaction), and such Stock Awards shall terminate if not exercised (if applicable) at or prior to the effective time of the Corporate Transaction, and any reacquisition or repurchase rights held by the Company with respect to such Stock Awards shall lapse (contingent upon the effectiveness of the Corporate Transaction).

(iii)         Stock Awards Held by Persons other than Current Participants.  Except as otherwise stated in the Stock Award Agreement, in the event of a Corporate Transaction in which the surviving corporation or acquiring corporation (or its parent company) does not assume or continue such outstanding Stock Awards or substitute similar stock awards for such outstanding Stock Awards, then with respect to Stock Awards that have not been assumed, continued or substituted and that are held by persons other than Current Participants, the vesting of such Stock Awards (and, if applicable, the time at which such Stock Award may be exercised) shall not be accelerated and such Stock Awards (other than a Stock Award consisting of vested and outstanding shares of Common Stock not subject to the Company’s right of repurchase) shall terminate if not exercised (if applicable) prior to the effective time of the Corporate Transaction; provided, however, that any reacquisition or repurchase rights held by the Company with respect to such Stock Awards shall not terminate and may continue to be exercised notwithstanding the Corporate Transaction.

(iv)          Payment for Stock Awards in Lieu of Exercise.  Notwithstanding the foregoing, in the event a Stock Award will terminate if not exercised prior to the effective time of a Corporate Transaction, the Board may provide, in its sole discretion, that the holder of any Stock Award that is not exercised prior to such effective time will receive a payment, in such form as may be determined by the Board, equal in value to the excess, if any, of (A) the value of the property the holder of the Stock Award would have received upon the exercise of the Stock Award, over (B) any exercise price payable by such holder in connection with such exercise.

(d)           Change in Control.  A Stock Award may be subject to additional acceleration of vesting and exercisability upon or after a Change in Control as may be provided in the Stock Award Agreement for such Stock Award or as may be provided in any other written agreement

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between the Company or any Affiliate and the Participant, but in the absence of such provision, no such acceleration shall occur.

10.          TERMINATION OR SUSPENSION OF THE PLAN.

(a)           Plan Term.  Unless sooner terminated by the Board pursuant to Section 2, the Plan shall automatically terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier.  No Awards may be granted under the Plan while the Plan is suspended or after it is terminated.

(b)           No Impairment of Rights.  Termination of the Plan shall not impair rights and obligations under any Award granted while the Plan is in effect except with the written consent of the affected Participant.

11.          EFFECTIVE DATE OF PLAN.

This Plan shall become effective on the Effective Date (as set forth on the first page of this Plan); provided, however, that no Award shall be exercised unless and until the Plan has been approved by the shareholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board.

12.          CHOICE OF LAW.

Except as (and solely to the extent) expressly provided in Exhibit B hereto, the law of the State of California shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state’s conflict of laws rules.

13.          DEFINITIONS.   As used in the Plan, the definitions contained in this Section 13 shall apply to the capitalized terms indicated below:

(a)           “Affiliate” means, at the time of determination, any “parent” or “subsidiary” of the Company as such terms are defined in Rule 405 of the Securities Act.  The Board shall have the authority to determine the time or times at which “parent” or “subsidiary” status is determined within the foregoing definition.

(b)           “Applicable Laws” means the requirements relating to the administration of compensatory cash and equity-based award plans under United States federal, state and local laws, the rules and regulations of any stock exchange or quotation system on which the Common Stock is listed or quoted and/or the applicable laws of any other country or jurisdiction where Awards are granted under the Plan.

(c)           “Award” means a Stock Award or a Performance Cash Award.

(d)           “Board” means the Board of Directors of the Company.

(e)           “Capitalization Adjustment” means any change that is made in, or other events that occur with respect to, the Common Stock subject to the Plan or subject to any Stock Award

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after the Effective Date without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company.  Notwithstanding the foregoing, the conversion of any convertible securities of the Company shall not be treated as a transaction “without receipt of consideration” by the Company.

(f)            “Cause” means with respect to a Participant, the occurrence of any of the following events:  (i) such Participant’s commission of any felony or any crime involving fraud, dishonesty or moral turpitude under the laws of the United States or any state thereof; (ii) such Participant’s attempted commission of, or participation in, a fraud or act of dishonesty against the Company; (iii) such Participant’s intentional, material violation of any contract or agreement between the Participant and the Company or of any statutory duty owed to the Company; (iv)  such Participant’s unauthorized use or disclosure of the Company’s confidential information or trade secrets; or (v) such Participant’s gross misconduct. The determination that a termination of the Participant’s Continuous Service is either for Cause or without Cause shall be made by the Company in its sole discretion.  Any determination by the Company that the Continuous Service of a Participant was terminated by reason of dismissal without Cause for the purposes of outstanding Awards held by such Participant shall have no effect upon any determination of the rights or obligations of the Company or such Participant for any other purpose.

Notwithstanding the foregoing or any other provision of this Plan, the definition of Cause (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Cause or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.

(g)           “Change in Control” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i)            any Exchange Act Person becomes the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities other than by virtue of a merger, consolidation or similar transaction .  Notwithstanding the foregoing, a Change in Control shall not be deemed to occur (A) on account of the acquisition of securities of the Company by an investor, any affiliate thereof or any other Exchange Act Person from the Company in a transaction or series of related transactions the primary purpose of which is to obtain financing for the Company through the issuance of equity securities or (B) solely because the level of Ownership held by any Exchange Act Person (the “Subject Person”) exceeds the designated percentage threshold of the outstanding voting securities as a result of a repurchase or other acquisition of voting securities by the Company reducing the number of shares outstanding, provided that if a Change in Control would occur (but for the operation of this sentence) as a result of the acquisition of voting securities by the Company, and after such share acquisition, the Subject Person becomes the Owner of any additional voting securities that, assuming the repurchase or other acquisition had not occurred, increases the percentage of the then outstanding

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voting securities Owned by the Subject Person over the designated percentage threshold, then a Change in Control shall be deemed to occur;

(ii)           there is consummated a merger, consolidation or similar transaction involving (directly or indirectly) the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately prior thereto do not Own, directly or indirectly, either (A) outstanding voting securities representing more than fifty percent (50%) of the combined outstanding voting power of the surviving Entity in such merger, consolidation or similar transaction or (B) more than fifty percent (50%) of the combined outstanding voting power of the parent of the surviving Entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such transaction;

(iii)         there is consummated a sale, lease, exclusive license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries, other than a sale, lease, license or other disposition of all or substantially all of the consolidated assets of the Company and its Subsidiaries to an Entity, more than fifty percent (50%) of the combined voting power of the voting securities of which are Owned by stockholders of the Company in substantially the same proportions as their Ownership of the outstanding voting securities of the Company immediately prior to such sale, lease, license or other disposition; or

(iv)          individuals who, on the date this Plan is adopted by the Board, are members of the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the members of the Board; (provided, however, that if the appointment or election (or nomination for election) of any new Board member was approved or recommended by a majority vote of the members of the Incumbent Board then still in office, such new member shall, for purposes of this Plan, be considered as a member of the Incumbent Board).

For the avoidance of doubt, the term Change in Control shall not include a sale of assets, merger or other transaction effected exclusively for the purpose of changing the domicile of the Company.

Notwithstanding the foregoing or any other provision of this Plan, the definition of Change in Control (or any analogous term) in an individual written agreement between the Company or any Affiliate and the Participant shall supersede the foregoing definition with respect to Awards subject to such agreement; provided, however, that if no definition of Change in Control or any analogous term is set forth in such an individual written agreement, the foregoing definition shall apply.

(h)           “Code” means the Internal Revenue Code of 1986, as amended.

(i)            “Committee” means a committee of two (2) or more Directors to whom authority has been delegated by the Board in accordance with Section 2(c).

(j)            “Common Stock” means the common stock of the Company.

(k)           “Company” means Quark Biotech, Inc., a California corporation.

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(l)            “Consultant” means any person, including an advisor, who is (i) engaged by the Company or an Affiliate to render consulting or advisory services and is compensated for such services, or (ii) serving as a member of the board of directors of an Affiliate and is compensated for such services.  However, service solely as a Director, or payment of a fee for such service, shall not cause a Director to be considered a “Consultant” for purposes of the Plan.

(m)          “Continuous Service” means that the Participant’s service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated.  A change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s service with the Company or an Affiliate, shall not terminate a Participant’s Continuous Service.  For example, a change in status from an employee of the Company to a consultant to an Affiliate or to a Director shall not constitute an interruption of Continuous Service.  To the extent permitted by law, the Board or the chief executive officer of the Company, in that party’s sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave.  Notwithstanding the foregoing, a leave of absence shall be treated as Continuous Service for purposes of vesting in a Stock Award only to such extent as may be provided in the Company’s leave of absence policy, in the written terms of any leave of absence agreement or policy applicable to the Participant, or as otherwise required by law.

(n)           “Corporate Transaction” means the occurrence, in a single transaction or in a series of related transactions, of any one or more of the following events:

(i)            the consummation of a sale or other disposition of all or substantially all, as determined by the Board in its sole discretion, of the consolidated assets of the Company and its Subsidiaries;

(ii)           the consummation of a sale or other disposition of at least ninety percent (90%) of the outstanding securities of the Company;

(iii)         the consummation of a merger, consolidation or similar transaction following which the Company is not the surviving corporation; or

(iv)          the consummation of a merger, consolidation or similar transaction following which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger, consolidation or similar transaction are converted or exchanged by virtue of the merger, consolidation or similar transaction into other property, whether in the form of securities, cash or otherwise.

(o)           “Covered Employee” shall have the meaning provided in Section 162(m)(3) of the Code and the regulations promulgated thereunder.

(p)           “Director” means a member of the Board.

(q)           “Disability” means, with respect to a Participant,  the inability of such Participant to engage in any substantial gainful activity by reason of any medically determinable physical or

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mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, as provided in Section 22(e)(3) and 409A(a)(2)(c)(i) of the Code.

(r)           “Effective Date” means the effective date of this Plan document, which is the earlier of (i) the date that this Plan is first approved by the Company’s shareholders or (ii) the date this Plan is approved by the Board.

(s)           “Employee” means any person employed by the Company or an Affiliate.  However, service solely as a Director, or payment of a fee for such services, shall not cause a Director to be considered an “Employee” for purposes of the Plan.

(t)            “Entity” means a corporation, partnership, limited liability company or other entity.

(u)           “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(v)            “Exchange Act Person” means any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act), except that “Exchange Act Person” shall not include (i) the Company or any Subsidiary of the Company, (ii) any employee benefit plan of the Company or any Subsidiary of the Company or any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any Subsidiary of the Company, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) an Entity Owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their Ownership of stock of the Company; or (v) any natural person, Entity or “group” (within the meaning of Section 13(d) or 14(d) of the Exchange Act) that, as of the Effective Date of the Plan as set forth in Section 11, is the Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the combined voting power of the Company’s then outstanding securities.

(w)           “Fair Market Value” means, as of any date, the value of the Common Stock determined as follows:

(i)            If the Common Stock is listed on any established stock exchange or traded on any established market, unless otherwise determined by the Board, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the date of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable.  Unless otherwise provided by the Board, if there is no closing sales price (or closing bid if no sales were reported) for the Common Stock on the date of determination, then the Fair Market Value shall be the closing selling price (or closing bid if no sales were reported) on the last preceding date for which such quotation exists.

(ii)           In the absence of such markets for the Common Stock, the Fair Market Value shall be determined by the Board in good faith.

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(x)           “Incentive Stock Option” means an option granted pursuant to Section 5 of the Plan that is intended to be, and qualifies as, an “incentive stock option” within the meaning of Section 422 of the Code and the regulations promulgated thereunder.

(y)           “Non-Employee Director” means a Director who either (i) is not a current employee or officer of the Company or an Affiliate, does not receive compensation, either directly or indirectly, from the Company or an Affiliate for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act (“Regulation S-K”)), does not possess an interest in any other transaction for which disclosure would be required under Item 404(a) of Regulation S-K, and is not engaged in a business relationship for which disclosure would be required pursuant to Item 404(b) of Regulation S-K; or (ii) is otherwise considered a “non-employee director” for purposes of Rule 16b-3.

(z)           “Nonstatutory Stock Option” means any option granted pursuant to Section 5 of the Plan that does not qualify as an Incentive Stock Option.

(aa)         “Officer” means any person designated by the Company as an officer; provided, however, that at any time that any class of the equity securities of the Company is registered pursuant to Section 12 of the Exchange Act, “Officer” shall mean a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(bb)         “Option” means an Incentive Stock Option or a Nonstatutory Stock Option to purchase shares of Common Stock granted pursuant to the Plan.

(cc)         “Option Agreement” means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an Option grant.  Each Option Agreement shall be subject to the terms and conditions of the Plan.

(dd)         “Optionholder” means a person to whom an Option is granted pursuant to the Plan or, if permitted under the terms of this Plan, such other person who holds an outstanding Option.

(ee)         “Other Stock Award” means an award based in whole or in part by reference to the Common Stock which is granted pursuant to the terms and conditions of Section 6(e).

(ff)           “Other Stock Award Agreement” means a written agreement between the Company and a holder of an Other Stock Award evidencing the terms and conditions of an Other Stock Award grant.  Each Other Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(gg)         “Outside Director” means a Director who either (i) is not a current employee of the Company or an “affiliated corporation” (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an “affiliated corporation” who receives compensation for prior services (other than benefits under a tax-qualified retirement plan) during the taxable year, has not been an officer of the Company or an “affiliated corporation,” and does not receive remuneration from the Company or an

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“affiliated corporation,” either directly or indirectly, in any capacity other than as a Director, or (ii) is otherwise considered an “outside director” for purposes of Section 162(m) of the Code.

(hh)         “Own,” “Owned,” “Owner,” “Ownership”  A person or Entity shall be deemed to “Own,” to have “Owned,” to be the “Owner” of, or to have acquired “Ownership” of securities if such person or Entity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares voting power, which includes the power to vote or to direct the voting, with respect to such securities.

(ii)           “Participant” means a person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award.

(jj)           “Performance Cash Award” means an award of cash granted pursuant to the terms and conditions of Section 6(d)(ii).

(kk)        “Performance Criteria” means the one or more criteria that the Board shall select for purposes of establishing the Performance Goals for a Performance Period.  The Performance Criteria that shall be used to establish such Performance Goals may be based on any one of, or combination of, the following: (i) earnings per share; (ii) earnings before interest, taxes and depreciation; (iii) earnings before interest, taxes, depreciation and amortization; (iv) total stockholder return; (v) return on equity; (vi) return on assets, investment, or capital employed; (vii) operating margin; (viii) gross margin; (ix) operating income; (x) net income (before or after taxes); (xi) net operating income; (xii) net operating income after tax; (xiii) pre-tax profit; (xiv) operating cash flow; (xv) sales or revenue targets; (xvi) increases in revenue or product revenue; (xvii) expenses and cost reduction goals; (xviii) improvement in or attainment of working capital levels; (xix) economic value added (or an equivalent metric); (xx) market share; (xxi) cash flow; (xxii) cash flow per share; (xxiii) share price performance; (xxiv) debt reduction; (xxv) implementation or completion of projects or processes; (xxvi) customer satisfaction; (xxvii) stockholders’ equity; and (xxviii) to the extent that an Award is not intended to comply with Section 162(m) of the Code, other measures of performance selected by the Board.  Partial achievement of the specified criteria may result in the payment or vesting corresponding to the degree of achievement as specified in the Stock Award Agreement or the written terms of a Performance Cash Award.  The Board shall, in its sole discretion, define the manner of calculating the Performance Criteria it selects to use for such Performance Period.

(ll)           “Performance Goals” means, for a Performance Period, the one or more goals established by the Board for the Performance Period based upon the Performance Criteria.  Performance Goals may be based on a Company-wide basis, with respect to one or more business units, divisions, Affiliates, or business segments, and in either absolute terms or relative to the performance of one or more comparable companies or the performance of one or more relevant indices.  At the time of the grant of any Award, the Board is authorized to determine whether, when calculating the attainment of Performance Goals for a Performance Period: (i) to exclude restructuring and/or other nonrecurring charges; (ii) to exclude exchange rate effects, as applicable, for non-U.S. dollar denominated net sales and operating earnings; (iii) to exclude the effects of changes to generally accepted accounting standards required by the Financial Accounting Standards Board; (iv) to exclude the effects of any statutory adjustments to corporate tax rates; and (v) to exclude the effects of any “extraordinary items” as determined under

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generally accepted accounting principles.  In addition, the Board retains the discretion to reduce or eliminate the compensation or economic benefit due upon attainment of Performance Goals.

(mm)       “Performance Period” means the period of time selected by the Board over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of a Stock Award or a Performance Cash Award.  Performance Periods may be of varying and overlapping duration, at the sole discretion of the Board.

(nn)         “Performance Stock Award” means a Stock Award granted under the terms and conditions of Section 6(d)(i).

(oo)         “Plan” means this Quark Biotech, Inc. 2007 Equity Incentive Plan.

(pp)         “Restricted Stock Award” means an award of shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(a).

(qq)         “Restricted Stock Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Award evidencing the terms and conditions of a Restricted Stock Award grant.  Each Restricted Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(rr)         “Restricted Stock Unit Award” means a right to receive shares of Common Stock which is granted pursuant to the terms and conditions of Section 6(b).

(ss)         “Restricted Stock Unit Award Agreement” means a written agreement between the Company and a holder of a Restricted Stock Unit Award evidencing the terms and conditions of a Restricted Stock Unit Award grant.  Each Restricted Stock Unit Award Agreement shall be subject to the terms and conditions of the Plan.

(tt)           “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time.

(uu)         “Securities Act” means the Securities Act of 1933, as amended.

(vv)          “Stock Appreciation Right” means a right to receive the appreciation on Common Stock that is granted pursuant to the terms and conditions of Section 6(c).

(ww)        “Stock Appreciation Right Agreement” means a written agreement between the Company and a holder of a Stock Appreciation Right evidencing the terms and conditions of a Stock Appreciation Right grant.  Each Stock Appreciation Right Agreement shall be subject to the terms and conditions of the Plan.

(xx)         “Stock Award” means any right to receive Common Stock granted under the Plan, including an Incentive Stock Option, a Nonstatutory Stock Option, a Restricted Stock Award, a Restricted Stock Unit Award, a Stock Appreciation Right, a Performance Stock Award or any Other Stock Award.

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(yy)         “Stock Award Agreement” means a written agreement between the Company and a Participant evidencing the terms and conditions of a Stock Award grant.  Each Stock Award Agreement shall be subject to the terms and conditions of the Plan.

(zz)         “Subsidiary” means, with respect to the Company, (i) any corporation of which more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, Owned by the Company, and (ii) any partnership, limited liability company or other entity in which the Company has a direct or indirect interest (whether in the form of voting or participation in profits or capital) of more than fifty percent (50%).

(aaa)       “Ten Percent Stockholder” means a person who Owns (or is deemed to Own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Affiliate.

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EXHIBIT A

PROVISIONS APPLICABLE FOR AWARDS MADE PURSUANT TO

SECTION 25102(O) OF THE CALIFORNIA CORPORATE SECURITIES LAW OF 1968

As provided in Section 1(d) of the Plan, in the case of a Participant who is a resident of the State of California, notwithstanding anything to the contrary in the Plan or in such Participant’s Stock Award Agreement, the following terms shall apply to any Stock Award granted to such Participant in reliance on Section 25102(o) and shall be deemed to be a part of the Plan, if and to the extent compliance with the terms set forth below is required under Section 25102(o).  In the event of any conflict or inconsistency between the following provisions and any provisions otherwise appearing in the Plan, the following provisions shall control solely with respect to Stock Awards granted under the Plan to residents of the State of California in reliance on Section 25102(o) , if and to the extent compliance with the terms set forth below is required under Section 25102(o), provided that, for the avoidance of doubt, with respect to any requirement set forth herein, the corresponding provision set forth in the applicable Stock Award Agreement or the Plan shall control in lieu of the minimum requirement set forth herein as long as such corresponding provision of the Stock Award Agreement or the Plan is no less favorable to the Participant than the applicable minimum requirement set forth herein:

1.             Exercise Price.  The Exercise Price shall not be less than 100% of the Fair Market Value of the Common Stock subject to the Stock Award at the time the Stock Award is granted, except that the Exercise Price shall not be less than (i) one hundred ten percent (110%) of the Fair Market Value of the Common Stock in the case of any Participant who owns securities possessing more than 10% of the total combined voting power (as defined in Section 194.5 of the California Corporations Code in the case of a corporate issuer) of all classes of securities of the Company or its Affiliates possessing voting power, or (ii) such lower percentage of the Fair Market Value of the Common Stock on the date of grant as is permitted by Section 260.140.41 of Title 10 of the California Code of Regulations at the time of the grant of the Stock Award.  The Fair Market Value of the Common Stock shall be determined by the Board in a manner consistent with Section 260.140.50 of Title 10 of the California Code of Regulations.

2.             Term.  No Stock Award shall have an exercise period of more than 120 months from the date such Stock Award is granted.

3.             Minimum Vesting.  To the extent that the following restrictions on vesting are required by Section 260.140.41(f) of Title 10 of the California Code of Regulations at the time of the grant of the Stock Award, then:

                (a)           Stock Awards granted to a Participant who is not an officer, director, manager or consultant of the Company or its Affiliates shall provide for vesting of the total number of shares of Common Stock at a rate of at least twenty percent (20%) per year over five (5) years from the date the Stock Award was granted, subject to reasonable conditions such as continued employment; and

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                (b)           Stock Awards granted to officers, directors, managers or consultants of the Company or its Affiliates may be made fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company.

4.             Extended Exercise.  A Participant who ceases to be an employee or service provider to the Company or of an Affiliate for any reason other than for Cause may exercise any Stock Award, to the extent that the Stock Award is exercisable on the date of such termination:

                (a)           at least 6 months from the date of termination if termination was caused by death or disability;

                (b)           at least 30 days from the date of termination if termination was caused by other than death or disability.

5.             Repurchase Limitation.  The repurchase price for any shares subject to a Stock Award to be repurchased pursuant to Section 5(l) or Section 6 of the Plan may be either the Fair Market Value of such Common Stock on the date of the Participant’s termination of Continuous Service or the lower of (i) the Fair Market Value of the Common Stock on the date of repurchase, or (ii) the original purchase price of the Common Stock.  Notwithstanding anything in the Plan or herein to the contrary, to the extent required by Section 260.140.41 and Section 260.140.42 of Title 10 of the California Code of Regulations at the time a Stock Award is granted, any repurchase right contained in a Stock Award Agreement granted to a person who is not an officer, director, manager or consultant of the Company or its Affiliates shall be upon the terms described below:

                (a)           Fair Market Value.  If the repurchase right gives the Company the right to repurchase the Common Stock upon termination of service at not less than the Fair Market Value of the Common Stock to be purchased on the date of termination of service, then (i) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the Common Stock within ninety (90) days of termination of service (or in the case of Common Stock issued upon exercise of Stock Awards after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant, and (ii) the right terminates when the Company’s securities become publicly traded.

                (b)           Original Purchase Price.  If the repurchase right gives the Company the right to repurchase the Common Stock upon termination of service at the lower of (i) the Fair Market Value of the Common Stock on the date of repurchase or (ii) their original purchase price, then (x) the right to repurchase at the original purchase price shall lapse at the rate of at least twenty percent (20%) of the Common Stock per year over five (5) years from the date the Stock Award is granted (without respect to the date the Stock Award was exercised or became exercisable) and (y) the right to repurchase shall be exercised for cash or cancellation of purchase money indebtedness for the Common Stock within ninety (90) days of termination of service (or in the case of Common Stock issued upon exercise of Stock Awards after such date of termination, within ninety (90) days after the date of the exercise) or such longer period as may be agreed to by the Company and the Participant.

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6.             Information Obligation.  To the extent required by Section 260.140.46 of Title 10 of the California Code of Regulations, the Company shall deliver financial statements to Participants covered by this Exhibit A at least annually.  This Section shall not apply to key employees whose duties in connection with the Company assure them access to equivalent information.

7.             Restriction on Transfer.  A Stock Award granted to a California resident shall not be transferable, other than by will or the laws of descent and distribution, or as permitted by rule 701 of the Securities Act of 1933, as amended.

8.             Voting Rights.  The Common Stock subject to Stock Awards under the Plan will carry equal voting rights on all matters where such vote is permitted by applicable law.

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EXHIBIT B

ISRAELI SUB-PLAN

1.             General Terms.

(a)           This Exhibit B to the Quark Biotech, Inc. 2007 Equity Incentive Plan (the “Plan”) shall apply only to Participants who are residents of the state of Israel upon the date of grant of the Stock Award by the Employing Corporation, or those who are deemed to be residents of the state of Israel for tax purposes upon the date of grant of the Stock Award by the Employing Corporation (collectively, “Israeli Participants”). The provisions specified hereunder shall form an integral part of the Plan.

(b)           This Exhibit B is effective with respect to Stock Awards to be granted to Israeli Participants according to the resolutions of the Board.

(c)           This Exhibit B is to be read as a continuation of the Plan and modifies Stock Awards granted to Israeli Participants to the extent necessary to comply with the requirements set by the Israeli law in general, and in particular with the provisions of the Ordinance and Section 102 thereof and any regulations, rules, orders or procedures promulgated thereunder, as may be amended or replaced from time to time. For the avoidance of doubt, this Exhibit B does not add to or modify the Plan in respect of any other category of Participants.

(d)           The Plan and this Exhibit B are complementary to each other and shall be deemed as one.  In any case of contradiction, whether express or implied, between the provisions of this Exhibit B and the Plan, the provisions set out in this Exhibit B shall prevail.

(e) Any capitalized term used herein but not specifically defined in this Exhibit B shall be construed according to the interpretation given to it in the Plan and any capitalized term defined in the Ordinance and used herein but not specifically defined in the Plan or in this Exhibit B shall be construed according to the interpretation given to it in the Ordinance.

2.             Definitions.

(a)           “Approved 102 Stock Award” means a Stock Award granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the Participant. Approved 102 Stock Awards may either be classified as Capital Gain Stock Awards (“CGA”) or Ordinary Income Stock Award (“OIA”).

(b)           “Capital Gain Stock Award” or “CGA” means an Approved 102 Stock Award elected and designated by the Company to qualify under the capital gain tax treatment in accordance with the provisions of Section 102(b)(2) of the Ordinance.

(c)           “Approved 102 Option” means an Option granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the Participant.

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(d)           “Controlling Shareholder” shall have the meaning ascribed to it in Section 32(9) of the Ordinance.

(e)           “Employee”, as defined in the Plan, but shall also include an individual who is serving as an Officer Holder, and shall exclude a Controlling Shareholder.

(f)            “Employing Corporation” means Q.B.I. Enterprises Ltd., the Company and any Affiliate all within the meaning of Section 102(a) of the Ordinance.

(g)           “ITA” means the Israeli Tax Authorities.

(h)           “Non-Employee” means an Israeli Participant that is not an Employee (as defined herein) and includes a Controlling Shareholder, or Consultant.

(i)            “Ordinary Income Stock Award” or “OIA”, which means an Approved 102 Stock Award elected and designated by the Company to qualify under the ordinary income tax treatment in accordance with the provisions of Section 102(b)(1) of the Ordinance.

(j)            “102 Stock Award” means a Stock Award that the Board intends to be a “102 Stock Award” and which shall only be granted to Employees of the Company or any Affiliate who are not Controlling Shareholders, and shall be subject to and construed consistently with the requirements of Section 102.

(k)           “3(i) Stock Award” means Stock Awards issued to Israeli Participants that do not contain such terms as will qualify under Section 102.

(l)            “Office Holders” (“Nose Misra”) - as such term is defined in the Companies Law, 5759-1999, including, inter alia, any person who is part of the upper management of the Company or an Affiliate and who grants managerial services to the Company, or to an Affiliate.

(m)          “Ordinance” means the 1961 Israeli Income Tax Ordinance (New Version), as now in effect or as hereafter amended.

(n)           “Section 102” means Section 102 of the Ordinance, as now in effect or as hereafter amended.

(o)           “Trustee” means a trustee to be approved by the ITA pursuant to Section 102.

(p)           “Unapproved 102 Stock Award” means a Stock Award granted pursuant to Section 102(c) of the Ordinance and not held in trust by a Trustee.

3.             Eligibility; Issuance of Stock Awards.

(a)           The persons eligible for participation in the Plan as Israeli Participants shall include any Employees, Office Holders and/or Non-Employees of the Company and its Affiliates

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(as such term is defined in thePlan); provided, however, that (i) Employees may only be granted 102 Stock Awards and Office Holders may be granted 102 Stock Awards; and (ii) Non-Employees and/or Controlling Shareholders may only be granted 3(i) Stock Awards.

(b)           The Company may designate Stock Awards granted to Israeli Employees pursuant to Section 102 as Unapproved 102 Stock Awards or Approved 102 Stock Awards.

(c)           The grant of Approved 102 Stock Awards shall be made under this Exhibit B adopted by the Board, and shall be conditioned upon the approval of this Exhibit B by the ITA.

(d)           Approved 102 Stock Awards may either be classified as Capital Gain Stock Awards or Ordinary Income Awards.

(e)           The Company’s election of the type of Approved 102 Stock Awards as CGAs or OIAs granted to Israeli Employees (the “Election”), shall be appropriately filed with the ITA before the date of grant of an Approved 102 Option under such Election. Such Election shall become effective beginning the first date of grant of an Approved 102 Stock Award under such Election and shall remain in effect until the end of the year following the year during which the Company first granted Approved 102 Stock Awards under such Election. For the avoidance of doubt, such Election shall not prevent the Company from granting Unapproved 102 Stock Awards simultaneously.

(f)            The Company shall have no liability to an Israeli Participant or to any other party, if a Stock Award (or any part thereof), which is intended to be a 102 Stock Award, is not a 102 Stock Award.

(g)           All Approved 102 Stock Awards, must be held in trust by a Trustee as described in Section 4 below.

(h)           For the avoidance of any doubt, the designation of Unapproved 102 Stock Awards and Approved 102 Stock Awards shall be subject to the terms and conditions set forth in Section 102 of the Ordinance and the regulations promulgated thereunder.

(i)            Anything in the Plan to the contrary notwithstanding, all grants of Stock Awards to directors and Office Holders shall be authorized and implemented in accordance with the provisions of the Companies Law, 5759-1999, or any successor act or regulation, as in effect from time to time, to the extent that these provisions are applicable.

(j)            Shares issued upon exercise of a Stock Award shall be issued in the name of the Trustee (if issued on exercise of Stock Awards held by the Trustee at the time of exercise) or in the name of the Israeli Participant or; if requested by the Israeli Participant, in the name of the Israeli Participant and his or her spouse.

(k)           Subject to the provision of Section 102, the Board may at any time offer to buy out for a payment in cash or shares of Common Stock, a  Stock Award previously granted, based

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on such terms and conditions as the Board shall establish and communicate to the Israeli Participant at the time that such offer is made.

(l)            The grant of a Stock Award hereunder shall neither entitle an Israeli Participant to participate, nor disqualify an Israeli Participant from participating in any other grant of Stock Awards pursuant to the Plan, or any other option or share plan of the Company or any Affiliate.

4.Trustee

(a)           Approved 102 Stock Awards which shall be granted under the Plan and/or any shares allocated or issued upon exercise of such Approved 102 Stock Awards and/or other shares received subsequently following any realization of rights including, without limitation, bonus shares, shall be allocated or issued to the Trustee (and registered in the Trustee’s name in the register of members of the Company) and held for the benefit of the Israeli Participants for such period of time as required by Section 102 (the “Restricted Period Per Section 102”). All certificates representing shares issued to the Trustee under the Plan shall be deposited with the Trustee, and shall be held by the Trustee until such time that such shares are released from the aforesaid trust as herein provided. In the event that the requirements for Approved 102 Stock Awards are not met, then the Approved 102 Stock Awards may be treated as Unapproved 102 Stock Awards, all in accordance with the provisions of Section 102.

(b)           Notwithstanding anything to the contrary, the Trustee shall not release any shares allocated or issued upon exercise of Approved 102 Stock Awards prior to the full payment of the Israeli Participant’s tax liabilities arising from the Approved 102 Stock Awards that were granted to such Israeli Participant, and/or any shares allocated or issued upon exercise of such Stock Awards.

(c)           With respect to any Approved 102 Stock Award, subject to the provisions of Section 102, a Participant shall not be entitled to sell or release from trust any Share received upon the exercise of an Approved 102 Stock Award and/or any share received subsequently following any realization of rights, including without limitation, bonus shares, until the lapse of the Restricted Period Per Section 102. Notwithstanding the foregoing, in the event that any such sale or release from trust occurs during the Restricted Period Per Section 102, then the sanctions under Section 102 shall apply and shall be borne by the Israeli Participant.

(d)           Upon receipt of Approved 102 Stock Award, the Participant will sign an undertaking to release the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the Plan and this Exhibit B, or any Approved 102 Stock Award or share granted, or issued, to him thereunder.

5.             Fair Market Value for Tax Purposes.  Without derogating from the above, solely for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance, if at the date of grant the Company’s shares are listed on any established stock exchange or a national market system or if the Company’s shares will be registered for trading within ninety (90) days following the date of grant, the Fair Market Value of a Share at the date of grant shall be determined in accordance with the average value of the Company’s shares in the thirty (30)

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trading days preceding the date of grant or in the thirty (30) trading days following the date of registration for trading, as the case may be.

6.             Integration of Section 102 and Tax Commissioner’s Permit

(a)           With regards to Approved 102 Stock Awards, the provisions of the Plan and/or any Stock Award Agreement shall be subject to the provisions of Section 102 and the Income Tax Commissioner’s permit, and the said provisions and permit shall be deemed an integral part of the Plan and of the Stock Award Agreement.

(b)           Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to maintain any tax benefit pursuant to Section 102, which is not expressly specified in the Plan or the Stock Award Agreement, shall be considered binding upon the Company and the Israeli Participants.

7.             Tax Consequences

(a)           To the extent permitted by Applicable Laws, any tax consequences arising from the grant or exercise of any Stock Award, from the payment for shares covered thereby or from any other event or act (of the Company, and/or its Affiliates, and/or the Trustee or the Participant), hereunder, shall be borne solely by the Israeli Participant. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Israeli Participants agrees to indemnify the Company and/or its Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Israeli Participant.

(b)           The Company and/or the Trustee shall not be required to release any Share certificate to an Israeli Participant until all required payments have been fully made by the Israeli Participant.

8.             Restricted Period Per Section 102.  The following provisions shall apply for the purpose of the tax benefits under Section 102 of the ordinance:

(a)           In accordance with the requirements of Section 102 as now in place and as may be amended in the future, the Stock Awards to be issued shall be issued to the Israeli Participant and held in trust by the Trustee for the benefit of Israeli Participant for a period of no less than twenty four (24) months for CGAs and no less than twelve (12) months for OIAs, from the date of which the Stock Awards were granted and placed with the Trustee (during the Restricted Period Per Section 102 the Participant will not be allowed to order the Trustee to sell the Stock Awards held by him/her on behalf of the Participant or to transfer the Stock Awards from Trustee’s trust).

(b)           As long as the Stock Awards are held by the Trustee on behalf of an Israeli Participant, all rights of the Israeli Participant over the Stock Awards and the shares that may

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derive on the exercise of the Stock Awards are personal and can not be transferred, assigned, pledged, or mortgaged other than by testament or pursuant to the laws of descent and distribution.

(c)           In order to receive the tax benefits of Section 102, the Stock Awards may not be sold or transferred (other than through a transfer by testament or by operation of law), and no power of attorney or transfer deed shall be given in respect thereof (other than a power of attorney for the purpose of participation in general meetings of shareholders).

(c)           End of Restricted Period Per Section 102. Upon the termination of the Restricted Period Per Section 102, as now in place and as may be amended in the future, an Israeli Participant shall be entitled to receive from the Trustee the Stock Awards, or the shares acquired in the exercise thereof, which have vested, subject to the provisions of the Plan concerning the continued employment of the Israeli Participant by the Company or any Affiliate, and subject to any other provisions set forth herein or in the Plan, and the Israeli Participant shall be entitled to exercise the Stock Awards and/or to sell the Stock Awards or shares thereby obtained subject to the other terms and conditions of the Stock Award Agreement and the Plan, including the provisions relating to the payment of taxes as set forth below.

9.             Israeli Participant’s Representations.  The following representations will be included in the Stock Award Agreement with Israeli Participants who are Employees, or if not included, shall be deemed to have been given by any Israeli Participant Employees to the extent that any such Israeli Participant Employee accepts any Stock Award issued under the Plan:

(a)           The Israeli Participant hereby agrees that the terms of Section 102 shall apply regarding the Stock Awards granted.

(b)           The Israeli Participant is obliged not to sell or remove from the Trustee the Stock Awards granted to the Israeli Participant prior to the end of Restricted Period Per Section 102.

(c)           The Israeli Participant is aware of the directives set forth in Section 102, and of the tax track that was chosen by the Company pursuant to Section 102 and its implications.

(d)           The Israeli Participant hereby accepts the terms of the Trust Agreement signed between the Company and the Trustee.

(e)           The Israeli Participant acknowledges that during the period in which Stock Awards are held by the Trustee (including any shares issued to the Trustee on behalf of the Israeli Participant upon exercise of an Approved 102 Stock Award), in the event that dividends payable in securities are declared on Approved 102 Stock Awards held by the Trustee, such securities shall also be subject to the provisions of Section 102 and the provision of the Stock Award Agreement and shall be held in trust by the Trustee. Notwithstanding anything to the contrary, in the event that an Israeli Participant that holds Approved 102 Stock Awards is entitled to receive a dividend in cash, the proceeds of such dividend may be wired to the Israeli Participant, after deduction of all applicable taxes.

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10.          Governing Law & Jurisdiction

(a)           The Plan, and the granting and exercise of Stock Awards hereunder, and the obligation of the Company to sell and deliver shares of Common Stock under such Stock Awards, shall be subject to all Applicable Laws, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Israeli Participant, including the registration of the shares of Common Stock under the Securities Act and the Ordinance and to such approvals by any governmental agencies or national securities exchanges as may be required. Nothing herein shall be deemed to require the Company to register the shares of Common Stock under the securities laws of any jurisdiction.

(b)           This Exhibit B shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to this Exhibit B.

(c)           The adoption of the Plan (including this Exhibit B) by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of options otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. For the avoidance of doubt, prior grant of Stock Awards to Israeli Participants of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this Exhibit B.

(d)           Exhibit B may be amended from time to time by the Company and the Trustee provided however that any amendment that adversely effects the rights of the holders of Stock Awards, shall not be made without the approval of the holders of a majority in interest of the then issued and outstanding Stock Awards.

Q.B.I. Enterprises , Ltd.

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EX-10.19

Exhibit 10.19

LEASE AGREEMENT

THIS “LEASE”, made this 8th day of September, 2006, between JOHN ARRILLAGA, Trustee, or his Successor Trustee, UTA dated 7/20/77 (JOHN ARRILLAGA SURVIVOR’S TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee, UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, hereinafter called Landlord, and QUARK BIOTECH, INC., a California corporation, hereinafter called Tenant.

WITNESSETH:

Landlord hereby leases to Tenant and Tenant hereby hires and takes from Landlord those certain Premises (the “Premises”) outlined in Red on Exhibit A, attached hereto and incorporated herein by this reference thereto more particularly described as follows:

A portion of that certain 51,443± square foot, one-story building (“Building”) located at 6503 Dumbarton Circle, Fremont, California 94555 (with a mailing address to be determined), consisting of approximately 5,540± square feet of space (including Tenant’s Proportionate Share of the Common Area of the Building) and the Personal Property of Landlord pursuant to Paragraph 46 (“Personal Property of Landlord”).  Tenant’s leased portion of the Building is more particularly shown within the area outlined in Red on Exhibit A attached hereto.  The entire parcel, of which the Premises is a part, is shown within the area outlined in Green on Exhibit A attached (“Parcel”).  The Premises, subject to Paragraph 9 (“As-Is Basis”), is leased on an “as-is” basis, in its present condition, and in the configuration as shown in Red on Exhibit B attached hereto.

As used herein the term “Complex” shall mean and include all of the land outlined in Green in Exhibit A attached hereto, and all of the buildings, improvements, fixtures and equipment now or hereafter situated on said land.  The gross leasable area of the Building shall be measured from outside of exterior walls to outside of exterior walls, and shall include any atriums, covered entrances or egresses and covered Building loading areas.

Said letting and hiring is upon and subject to the terms, covenants and conditions hereinafter set forth and Tenant covenants as a material part of the consideration for this Lease to perform and observe each and all of said terms, covenants and conditions.  This Lease is made upon the conditions of such performance and observance.

1.             USE.  Tenant shall use the Premises only in conformance with applicable governmental laws, regulations, rules and ordinances for the purpose of general office, microbiology and chemical laboratory and storage uses necessary for Tenant to conduct Tenant’s business, provided that such approved uses shall be in accordance with all current and future applicable governmental laws and ordinances and zoning restrictions, and for no other purpose.  Notwithstanding anything to the contrary herein, in no event shall any or all of the Premises be allowed, authorized and/or used for daycare and/or any other child care purpose and Tenant shall not do or permit to be done in or about the Premises or the Complex nor bring or keep or permit to be brought or kept in or about the Premises or the Complex anything which is prohibited by or

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will in any way increase the existing rate of (or otherwise affect) fire or any insurance covering the Complex or any part thereof, or any of its contents, or will cause a cancellation of any insurance covering the Complex or any part thereof, or any of its contents.  Tenant shall not do or permit to be done anything in, on or about the Premises or the Complex which will in any way obstruct or interfere with the rights of other tenants or occupants of the Complex or injure or unreasonably annoy them, or use or allow the Premises to be used for any immoral or unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises or the Complex.  No sale by auction shall be permitted on the Premises.  Tenant shall not place any loads upon the floors, walls, or ceiling which endanger the structure, or place any harmful fluids or other materials in the drainage system of the Building, or overload existing electrical or other mechanical systems.  No waste materials or refuse shall be dumped upon or permitted to remain upon any part of the Premises or outside of the Building in which the Premises are a part, except in trash containers placed inside exterior enclosures designated by Landlord for that purpose or inside of the Building proper where designated by Landlord.  No materials, supplies, equipment, finished products or semi-finished products, raw materials or articles of any nature shall be stored upon or permitted to remain outside the Premises or on any portion of the common area of the Complex.  Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises.  No loudspeaker or other device, system or apparatus which can be heard outside the Premises shall be used in or at the Premises without the prior written consent of Landlord.  Tenant shall not commit or suffer to be committed any waste in or upon the Premises.  Tenant shall indemnify, defend and hold Landlord harmless against any loss, expense, damage, reasonable attorneys’ fees, or liability arising out of failure of Tenant to comply with any applicable law for which Tenant is obligated to comply under the terms of this Lease.  Tenant shall comply with any covenant, condition, or restriction (“CC&R’s”) affecting the Premises.  Tenant acknowledges that Landlord has provided a copy of said CC&R’s to Tenant.  The provisions of this Paragraph are for the benefit of Landlord only and shall not be construed to be for the benefit of any Tenant or occupant of the Complex.

2.             TERM.

A.            Scheduled Lease Term.  Subject to Paragraph 48 (“Tenant’s Option to Terminate”), the “Term” of this Lease shall be for a period of Three (3) years (unless sooner terminated as hereinafter provided) and, subject to Paragraphs 2.B and 3, shall commence on the 1^st day of November, 2006 (the “Commencement Date”) and end on the 31st day of October, 2009 (the “Termination Date”).

B.            Tender of Possession.  Possession of the Premises shall be tendered by Landlord to Tenant and the Term of the Lease shall commence when the first of the following occurs:

(a)           Upon the occupancy of the Premises by any of Tenant’s operating personnel for the conduct of any of its business; or

(b)           When the Tenant Improvements have been substantially completed for Tenant’s use and occupancy and Landlord has delivered the Premises to Tenant, in

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accordance and compliance with Paragraph 9.B (“As Is Basis: Tenant Improvements to be Constructed by Landlord”) and Exhibit B of this Lease; or

(c)           As otherwise agreed in writing.

C.            Early Entry:  Subject to the provisions of Paragraph 9 (“As Is Basis”), upon receipt of written notice from Landlord (by U.S. Mail, facsimile or electronic mail) that the Premises is available for Tenant’s entry, Tenant and its agents and contractors shall be permitted to enter the Premises prior to the Commencement Date for the purpose of installing at Tenant’s sole cost and expense, Tenant’s trade fixtures and equipment, telephone equipment, security systems and cabling for computers (“Tenant’s Work”).  Such entry shall be subject to all of the terms and conditions of this Lease, except that Tenant shall not be required to pay any Rent on account thereof, provided none of Tenant’s operating personnel occupy said Premises.  Any entry or installation work by Tenant and its agents in the Premises pursuant to this Paragraph 2.C shall (i) be undertaken at Tenant’s sole risk, (ii) not interfere with or delay Landlord’s work in the Premises (if any), and (iii) not be deemed occupancy or possession of the Premises for purposes of the Lease.  Tenant shall indemnify, defend, and hold Landlord harmless from any and all loss, damage, liability, expense (including reasonable attorney’s fees), claim or demand of whatsoever character, direct or consequential, including, but without limiting thereby the generality of the foregoing, injury to or death of persons and damage to or loss of property arising out of the exercise by Tenant of any early entry right granted hereunder.  In the event Tenant’s Work in said Premises delays the completion of the interior improvements to be provided by Landlord, if any, or in the event Tenant has not completed Tenant’s Work by the scheduled Commencement Date, it is agreed between the parties that this Lease will commence on the earlier of (x) occupancy of any portion of the Premises by any of Tenant’s operating personnel for the conduct of any of its business pursuant to Paragraph 2.B(b) (“Term: Tender of Possession”) above, or (y) the scheduled Commencement Date of November 1, 2006 regardless of the construction status of said interior improvements completed or to be completed by Tenant or Landlord, as the case may be.  It is the intent of the parties hereto that the commencement of Tenant’s obligation to pay Rent under the Lease not be delayed by any of such causes or by any other act of Tenant (except as expressly provided herein) and, in the event it is so delayed, Tenant’s obligation to pay Rent under the Lease shall commence as of the date it would otherwise have commenced absent delay caused by Tenant.

It is agreed in the event said Lease commences on a date other than the first day of the month the Term of the Lease will be extended to account for the number of days in the partial month.  The Basic Rent during the resulting partial month will be pro-rated (for the number of days in the partial month) at the Basic Rent rate scheduled for the projected Commencement Date as shown in Paragraph 4.A.

3.             POSSESSION.  Subject to Paragraph 2.C (“Term: Early Entry”) above and the terms and conditions stated herein, if Landlord, for any reason whatsoever, cannot deliver possession of said Premises to Tenant at the scheduled Commencement Date, this Lease shall not be void or voidable; no obligation of Tenant shall be affected thereby; nor shall Landlord or Landlord’s agents be liable to Tenant for any loss or damage resulting therefrom; but in that event the commencement and termination dates of the Lease, and all other dates affected thereby

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shall be revised to conform to the date of Landlord’s delivery of possession, as specified in Paragraph 2.B above.  The above is, however, subject to the provision that the period of delay of delivery of the Premises shall not exceed forty-five (45) days from the latter of (i) the scheduled Commencement Date or (ii) the date this Lease is executed by all parties hereto (except for those delays caused by Tenant, Acts of God, strikes, war, utilities, governmental bodies, weather, unavailable materials, and delays beyond Landlord’s control (“Force Majeure Delays”) shall be excluded in calculating such period; Force Majeure Delays shall not exceed sixty (60) days) in which instance Tenant, at its option, may, by written notice to Landlord, terminate this Lease; provided Tenant submits said notice to Landlord within five (5) days of the expiration of said forty-five (45) day period as may be extended by Force Majeure Delays.

4.             RENT.

A.            Basic Rent.  Subject to Paragraphs 2.B (“Term: Tender of Possession”) and 48 (“Tenant’s Option to Terminate Lease”), Tenant agrees to pay to Landlord at such place as Landlord may designate without deduction, offset, prior notice, or demand, and Landlord agrees to accept as Basic Rent for the Leased Premises the total sum of THREE HUNDRED SEVENTY-FIVE THOUSAND ONE HUNDRED FORTY-FOUR AND 96/100 DOLLARS ($375,144.96) (the “Aggregate Basic Rent”) in lawful money of the United States of America, payable as follows:

Upon Tenant’s execution of this Lease, the sum of ONE HUNDRED SIX THOUSAND SEVEN HUNDRED TWENTY-SEVEN AND 40/100 DOLLARS ($106,727.40) shall be due, representing the Basic Rent for the period from (i) November 1, 2007 through March 31, 2008, and (ii) November 1, 2008 through March 31, 2009.

On November 1, 2006, the sum of NINE THOUSAND NINE HUNDRED SIXTEEN AND 60/100 DOLLARS ($9,916.60) shall be due, and a like sum due on the first day of each month thereafter, through and including October 1, 2007.

On the date of Lease execution, the sum of FIFTY-TWO THOUSAND SIXTY-TWO AND 15/100 DOLLARS ($52,062.15) shall be due, representing prepaid Basic Rent for the period of November 1, 2007 through March 31, 2008.

On April 1, 2008, the sum of TEN THOUSAND FOUR HUNDRED TWELVE AND 43/100 DOLLARS ($10,412.43) shall be due, and a like sum due on the first day of each month thereafter, through and including October 1, 2008.

On the date of Lease execution, the sum of FIFTY-FOUR THOUSAND SIX HUNDRED SIXTY-FIVE AND 25/100 DOLLARS ($54,665.25) shall be due, representing prepaid Basic Rent for the period of November 1, 2008 through March 31, 2009.

On April 1, 2009, the sum of TEN THOUSAND NINE HUNDRED THIRTY-THREE AND 05/100 DOLLARS ($10,933.05) shall be due, and a like sum due on the first day of each month thereafter, through and including October 1, 2009; or until the entire aggregate sum of THREE HUNDRED SEVENTY-FIVE THOUSAND ONE HUNDRED FORTY-FOUR AND

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96/100 DOLLARS ($375,144.96) has been paid (as said Aggregate Basic Rent may be decreased as noted above).

B.            Time for Payment.  Full monthly Rent is due in advance on the first day of each calendar month.  In the event that the Term of this Lease commences on a date other than the first day of a calendar month, on the date of commencement of the Term hereof Tenant shall pay to Landlord as Rent for the period from such date of commencement to the first day of the next succeeding calendar month that proportion of the monthly Rent hereunder for the number of days between such date of commencement and the first day of the next succeeding calendar month.  In the event that the Term of this Lease for any reason ends on a date other than the last day of a calendar month, on the first day of the last calendar month of the Term hereof Tenant shall pay to Landlord as Rent for the period from said first day of said last calendar month to and including the last day of the Term hereof that proportion of the monthly Rent hereunder for the number of days between said first day of said last calendar month and the last day of the Term hereof.

C.            Late Charge.  Notwithstanding any other provision of this Lease, if Landlord (or Landlord’s agent if Landlord has instructed Tenant to make any payment of Rent and/or other amounts due under the Lease directly to Landlord’s agent) does not receive any payment of Rent as set forth in this Paragraph 4 and/or other amounts due under the Lease within ten (10) days of the due date, or any part thereof, Tenant agrees to pay Landlord, in addition to the delinquent Rent and/or other amounts that may be due, a late charge for each Rent and/or other payment not received by Landlord (or Landlord’s agent if Landlord has instructed Tenant to make any payment of Rent and/or other amounts due under the Lease directly to Landlord’s agent) within ten (10) days of the due date (“Late Charge”).  Said Late Charge shall equal ten percent (10%) of each Rent payment not received by Landlord within such ten (10) day period.  Said Late Charge shall be paid by Tenant within thirty (30) days after presentation of an invoice from Landlord or Landlord’s agent setting forth the amount of said Late Charge.  Notwithstanding anything to the contrary herein, Landlord’s failure to issue a Late Charge invoice in the month of any late payment shall not be considered a waiver of Landlord’s right to collect said Late Charge.

D.            Additional Rent.  Beginning with the Commencement Date of the Term of this Lease, Tenant shall pay to Landlord or to Landlord’s designated agent in addition to the Basic Rent and as Additional Rent the following:

(a)           Tenant’s Proportionate Share of all Taxes relating to the Complex and Premises as set forth in Paragraph 13, and

(b)           Tenant’s Proportionate Share of all insurance premiums and deductibles relating to the Complex and Premises, as set forth in Paragraph 17, and

(c)           Tenant’s Proportionate Share of expenses for the operation, management, maintenance, and repair of the Building (including common areas of the Building) and Common Areas of the Complex in which the Premises are located as set forth in Paragraph 7, and

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(d)           All prorated costs and expenses related to the Ardenwood Property Owners’ Association as set forth in Paragraph 47 (“Association Dues”).

(e)           All charges, costs and expenses, which Tenant is required to pay hereunder, together with all interest and penalties, costs and expenses including reasonable attorneys’ fees and legal expenses, that may accrue thereto in the event of Tenant’s failure to pay such amounts, and all damages, reasonable costs and expenses which Landlord may incur by reason of default of Tenant or failure on Tenant’s part to comply with the terms of this Lease.  In the event of nonpayment by Tenant of Additional Rent, Landlord shall have all the rights and remedies with respect thereto as Landlord has for nonpayment of Rent.

References to “Proportionate Share” herein and throughout the Lease shall mean the Proportionate Share allocated to the Leased Premises based on (a) the total square footage of Tenant’s Premises as a percentage of the total square footage of the Building (5,540± square foot Premises divided by 51,443± square foot Building equals 10.77%) or (b) such other equitable basis as calculated by Landlord.

The Additional Rent due hereunder shall be paid to Landlord or Landlord’s agent (i) within five days for taxes and insurance and within thirty (30) days for all other Additional Rent items after presentation of invoice from Landlord or Landlord’s agent setting forth such Additional Rent and/or (ii) at the option of Landlord, Tenant shall pay to Landlord monthly, in advance, Tenant’s Proportionate Share of an amount estimated by Landlord to be Landlord’s approximate average monthly expenditure for such Additional Rent items, which estimated amount shall be reconciled (i) within one hundred twenty (120) days of the end of each calendar year and (ii) within 120 days of the Lease Termination Date (or as soon thereafter as reasonably possible if, for whatever reason, the Landlord cannot complete the reconciliation within said 120 day periods) or more frequently if Landlord elects to do so at Landlord’s sole and absolute discretion as compared to Landlord’s actual expenditure for said Additional Rent items, with Tenant paying to Landlord, upon demand.  Notwithstanding anything to the contrary herein, Landlord shall not be required to submit ongoing monthly statements to Tenant reflecting amounts owed as Additional Rent.  In the event of any underpayment by Tenant of Additional Rent items, Tenant shall pay to Landlord, within thirty (30) days of invoice, any amount of actual expenses expended by Landlord in excess of said estimated amount.  In the event of any overpayment by Tenant, Landlord shall credit any amount of estimated payments made by Tenant in excess of Landlord’s actual expenditures for said Additional Rent items to Tenant, or, if the Lease Term expires or terminates before such credit is fully utilized, refunding said credit to Tenant (provided, however, that Landlord may withhold therefrom the amount necessary to cover any amounts due on Tenant’s account) (provided Landlord may withhold any amount thereof required to cure Tenant’s default in the performance of any of the terms, covenants and conditions of this Lease).  Notwithstanding anything to the contrary above, any credit due Tenant for a reconciliation of Additional Rent expenses that has not been fully utilized by the Lease Termination Date shall be refunded to Tenant; provided however, that Landlord may withhold therefrom the amount necessary to cover any amounts due on Tenant’s account.  Within thirty (30) days after receipt of Landlord’s reconciliation, Tenant shall have the right, at Tenant’s sole expense, to audit, at a mutually convenient time at Landlord’s office, Landlord’s records specifically limited to the foregoing expenses.  Such audit must be conducted by Tenant or an

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independent nationally and/or locally recognized accounting firm that is not being compensated by Tenant or other third party on a contingency fee basis.  If Tenant desires to challenge Landlord’s reconciliation statement, Tenant shall submit to Landlord a complete copy of said audit at no expense to Landlord and a written notice stating the results of said audit, and if such notice by Tenant and the respective audit reveals that Landlord has overcharged Tenant, and the audit is not challenged by Landlord within thirty (30) days (or, if challenged, a decision is made by Landlord that the audit was correct), the amount overcharged shall be credited to Tenant’s account within thirty (30) days after completion of Landlord’s review and approval of said audit.  The audit rights of Tenant under this Paragraph 4.D are granted for Tenant’s personal benefit and may not be assigned or transferred by Tenant, either voluntarily or by operation of law, in any manner whatsoever.  In the event that Landlord consents to an assignment under Paragraph 21, the audit rights herein shall be void and of no force and effect, whether or not Tenant shall have purported to exercise its right to audit Landlord’s records prior to such assignment.  Notwithstanding the foregoing, in the event Tenant assigns this Lease to a parent or subsidiary, the audit rights hereunder shall continue to be in full force and effect; however, the audit rights shall only be applicable to the period that commences after the date of assignment.  Notwithstanding anything to the contrary herein, no subtenant shall have any right to conduct an audit of Landlord’s books and/or records.

Landlord shall, upon request by Tenant, provide Tenant with copies of individual invoices related to the foregoing actual expenses, either by facsimile or by U.S. mail; however, in no event shall Landlord be obligated to provide duplicate copies of any invoice or other Lease documentation to Tenant and/or Tenant’s representative (if any) for an audit of Tenant’s records outside of Landlord’s office.

Exclusions From Additional Rent: The following items shall be excluded from “Additional Rent”:

(a)           Leasing commissions, attorney’s fees, costs, disbursements, and other expenses incurred in connection with negotiations with other tenants, or disputes between Landlord and other third party not related to Tenant (hereinafter referred to as “Third Party”), or in connection with marketing, leasing, renovating, or improving space for other current or prospective tenants or other current or prospective occupants of the Complex; notwithstanding anything to the contrary herein, any costs and expenses Landlord is entitled to be reimbursed for as stated under Paragraph 24 (“Bankruptcy and Default”) are not excluded Additional Rent items as reflected in this Paragraph 4.D.

(b)           The cost of any service sold to any other Third Party or other occupant whose leased premises are not part of the Premises leased herein and for which Landlord is entitled to be reimbursed as an additional charge or rental over and above the basic rent and additional rent payable under the lease agreement with said other tenant (including, without limitation, after-hours HVAC costs or over-standard electrical consumption costs incurred by other tenants).

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(c)           Any costs for which Landlord is entitled to be reimbursed by any other Third Party or other occupant whose leased premises are not part of the Premises leased herein.

(d)           Any costs, fines, or penalties incurred due to violations by Landlord of any governmental rule or authority, provided Tenant is not responsible under the Lease for such costs, fines and/or penalties, and/or provided Tenant’s actions or inactions did not cause, in whole or in part, such costs, fines and/or penalties.

(e)           Wages, salaries, or other compensation paid to executive employees above the grade of Property Manager.

(f)            Repairs or other work occasioned by fire, windstorm, or other insured peril, to the extent that Landlord receives proceeds from the real property insurance policy on said Premises to cover one hundred percent of the costs to repair said perils (“Perils”) and Tenant paid its share of the premium as required under the Lease and any and all insurance deductible(s) which Tenant is responsible for paying and provided Tenant is not responsible for the damage to the Premises.  Notwithstanding anything to contrary above, Tenant shall remain responsible for paying to Landlord one hundred percent of the insurance deductible in full within thirty (30) days of written notice from Landlord.

(g)           Costs covered by a manufacturer’s, contractor’s, sub-contractor’s, vendor’s or materialman’s warranty or guaranty, if applicable.

(h)           Except as otherwise noted in this Lease, any mortgage debt, or ground rents or any other amounts payable under any ground lease for the Property.

E.             Management Fee.  Beginning with the Commencement Date of the Term of this Lease, Tenant shall pay to Landlord, in addition to the Basic Rent and Additional Rent, a monthly management fee (“Management Fee”) equal to three percent (3%) of the Basic Rent due for each month during the Term.  Tenant shall be responsible for calculating the monthly Management Fee based on the Basic Rent schedule shown in Paragraph 4.A above, and for paying said Management Fee by the first day of each month during the Term of this Lease.  Tenant’s failure to pay the monthly Management Fee by the due date will result in a Late Charge being assessed pursuant to the terms of Paragraph 4.C above.

The reference to “Rent” in this Paragraph 4 includes Basic Rent, Additional Rent, and Management Fee.  The respective obligations of Landlord and Tenant under this Paragraph shall survive the expiration or other termination of the Term of this Lease, and if the Term hereof shall expire or shall otherwise terminate on a day other than the last day of a calendar year, the actual Additional Rent incurred for the calendar year in which the Term hereof expires or otherwise terminates shall be determined and settled on the basis of the statement of actual Additional Rent for such calendar year and shall be prorated in the proportion which the number of days in such calendar year preceding such expiration or termination bears to 365.

F.             Place of Payment of Rent.  All Rent hereunder shall be paid to Landlord at the office of Landlord at: PEERY/ARRILLAGA, FILE 1504, BOX 60000, SAN FRANCISCO,

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CA 94160, or to such other person or to such other place as Landlord may from time to time designate in writing.  Invoices for Basic Rent, Additional Rent and/or Management Fees shall be mailed to Tenant at the addresses shown below.

Prior to Lease Commencement	After Lease Commencement
Attn: Joe Maurino	Attn: Controller
6536 Kaiser Drive	Premises mailing address TBD
Fremont, CA 94555	Fremont, CA 94555
(510) 402-4014 (phone)
(510) 794-8540 (fax)
jmaurino@qbius.com (email)*	dparker@qbius.com (email)*

*The inclusion of an email address does not obligate Landlord to provide a notice by electronic mail.

Tenant shall have the right, upon ten (10) days written notice to Landlord, to change the billing address as noted herein; however, Landlord shall send Tenant invoices to only one address of Tenant as identified by Tenant.

G.            Security Deposit.  Concurrently with Tenant’s execution of this Lease, Tenant shall deposit with Landlord the sum of Twenty Thousand Eight Hundred Forty-Nine and 65/100 Dollars ($20,849.65).  Said sum shall be held by Landlord as a Security Deposit for the faithful performance by Tenant of all of the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Term hereof.  If Tenant defaults, beyond the expiration of any applicable notice and cure period, with respect to any provision of this Lease, including, but not limited to, the provisions relating to the payment of Rent and any of the monetary sums due herewith, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any other amount which Landlord may spend by reason of Tenant’s default or to compensate Landlord for any other loss or damage which Landlord may suffer by reason of Tenant’s default.  If any portion of said Deposit is so used or applied, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in the amount sufficient to restore the Security Deposit to its original amount.  Tenant’s failure to do so shall be a material breach of this Lease.  Landlord shall not be required to keep this Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Deposit.  If Tenant fully and faithfully performs every provision of this Lease to be performed by it, the Security Deposit or any balance thereof shall be returned to Tenant (or at Landlord’s option, to the last assignee of Tenant’s interest hereunder) at the expiration or earlier termination of the Lease Term and after Tenant has vacated the Premises; provided, however, that Landlord may withhold therefrom the amount necessary to cover the cost of restoration of the Premises if Tenant fails to do so as required under Lease Paragraph 8 and to cure any then uncured default by Tenant under this Lease.  In the event of termination of Landlord’s interest in this Lease, Landlord shall transfer said Deposit to Landlord’s successor in interest whereupon Tenant agrees to release Landlord from liability for the return of such Deposit or the accounting therefor.  Tenant hereby waives the protection of Section 1950.7 of the California Civil Code.

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5.             RULES AND REGULATIONS AND COMMON AREA.  Subject to the terms and conditions of this Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant’s employees, invitees and customers shall, in common with other occupants of the Complex in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities provided and designated by Landlord for the general use and convenience of the occupants of the Complex in which the Premises are located, which areas and facilities are referred to herein as “Common Area”.  This right shall terminate upon the termination of this Lease.  Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area.  Landlord further reserves the right to promulgate such reasonable Rules and Regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may deem appropriate for the best interests of the occupants of the Complex (“Rules and Regulations”).  The Rules and Regulations shall be binding upon Tenant upon delivery of a copy of them to Tenant, and Tenant shall abide by them and cooperate in their observance.  Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant.  Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Complex of any of said Rules and Regulations.

Landlord shall operate, manage, and maintain the Common Area.  The manner in which the Common Area shall be maintained and the expenditures for such maintenance shall be at the discretion of Landlord.

6.             PARKING.  Tenant shall have the right to use twenty-one (21) parking spaces in the common parking areas of the Complex, which common parking area may be used by Tenant in common with other tenants or occupants of the Complex.  Tenant agrees that Tenant, Tenant’s employees, agents, representatives and/or invitees shall not use parking spaces in excess of said twenty-one (21) spaces allocated to Tenant hereunder.  Landlord shall have the right, at Landlord’s sole and reasonable discretion, to specifically designate the location of Tenant’s parking spaces within the common parking areas of the Complex, in which event Tenant agrees that Tenant, Tenant’s employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant’s use.  Said parking spaces, if specifically designated by Landlord to Tenant, may be reasonably relocated by Landlord at any time, and from time to time if necessary.  Landlord shall give Tenant written notice of any change in Tenant’s parking spaces.  Notwithstanding the foregoing, Landlord shall not intentionally discriminate against Tenant in assigning parking spaces or a parking area.  Tenant shall not, at any time, park or permit to be parked, any trucks or vehicles adjacent to the loading areas so as to interfere in any way with the use of such areas, nor shall Tenant at any time park or permit the parking of Tenant’s trucks or other vehicles or the trucks and vehicles of Tenant’s suppliers or others, in any portion of the common area not designated by Landlord for such use by Tenant.  Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Complex.  Tenant agrees to assume responsibility for compliance by its employees with the parking provisions contained herein.  If Tenant or its employees park in other than such designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant

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agrees to pay, Ten Dollars ($10.00) per day for each day or partial day each such vehicle is parked in any area other than that designated.  Tenant hereby authorizes Landlord at Tenant’s sole expense to tow away from the Complex any vehicle belonging to Tenant or Tenant’s employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles; provided, however, that unless any such vehicle is parked in a dangerous and/or designated no parking zone, Landlord will attach a twenty-four (24) hour violation notice on said vehicle prior to having the vehicle towed from the Property.  Tenant shall use the parking area for vehicle parking only and shall not use the parking areas for storage _Subject to the terms of Paragraph 7 (“Expenses of Operation, Management, and Maintenance of the Common Areas of the Complex”) and this Paragraph 6, Landlord shall not apply an additional parking charge for the right to use the parking area referenced herein.

7.             EXPENSES OF OPERATION, MANAGEMENT, AND MAINTENANCE OF THE COMMON AREAS OF THE COMPLEX.

A.            Maintenance of the Common Areas of the Complex.  Landlord shall operate, manage and maintain the Common Areas of the Complex.  As Additional Rent and in accordance with Paragraph 4.D of this Lease, Tenant shall pay to Landlord Tenant’s Proportionate Share of all expenses of operation, management, maintenance and repair of the Common Areas of the Complex including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance and replacement of landscaped areas, lakes, if any, parking lots and paved areas (including repair, replacement, resealing and restriping), sidewalks, driveways; maintenance, repair, and replacement of all fixtures and electrical, mechanical and plumbing systems; structural elements and exterior surfaces of the buildings; salaries and employees benefits of personnel and payroll taxes applicable thereto; supplies, materials, equipment and tools; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements together with interest at the rate of fifteen percent (15%) per annum on the unamortized balance (“Amortized Cost”) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses.

B.            Maintenance of the Common Areas of the Building.  Landlord shall operate, manage and maintain the Common Areas of the Building.  As Additional Rent and in accordance with Paragraph 4.D of this Lease, Tenant shall pay its Proportionate Share of the cost of operation (including common utilities), management, maintenance, and repair of the Building (including structural and common areas such as lobbies, restrooms, janitor’s closets, hallways, elevators, mechanical and telephone rooms, stairwells, entrances, spaces above the ceilings and janitorization of said common areas) in which the Premises are located.  The maintenance items herein referred to include, but are not limited to, all windows, window frames, plate glass, glazing, truck doors, main plumbing systems of the Building (such as water drain lines, sinks, toilets, faucets, drains, showers and water fountains), main electrical systems (such as panels and conduits), heating and air-conditioning systems (such as compressors, fans, air handlers, ducts, boilers, heaters), structural elements and exterior surfaces of the Building; store fronts, roof, downspouts, Building common area interiors (such as wall coverings, window coverings, floor

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coverings and partitioning), ceilings, Building exterior doors, skylights (if any), automatic fire extinguishing systems, and elevators (if any); license, permit and inspection fees; security, supplies, materials, equipment and tools; salaries and employees benefits of personnel and payroll taxes applicable thereto; the cost of capital expenditures which have the effect of reducing operating expenses, provided, however, that in the event Landlord makes such capital improvements, Landlord may amortize its investment in said improvements together with interest at the rate of fifteen percent (15%) per annum on the unamortized balance (“Amortized Cost”) as an operating expense in accordance with standard accounting practices, provided, that such amortization is not at a rate greater than the anticipated savings in the operating expenses.  Tenant hereby waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect.

“Additional Rent” as used herein shall not include Landlord’s debt repayments, interest on charges; expenses directly or indirectly incurred by Landlord for the benefit of any other tenant; cost for the installation of partitioning or any other tenant improvements; cost of attracting tenants; depreciation; interest, or executive salaries.

8.             ACCEPTANCE AND SURRENDER OF PREMISES.  Subject to Landlord’s obligations under Paragraph 9.A (“AS-IS Basis: Leased on “As-Is” Basis”) and completion of its obligations under Paragraph 9.B (“AS-IS Basis: Tenant Improvements to be Constructed by Landlord”), by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such Building or as to the use or occupancy which may be made thereof.  Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant.  Tenant agrees on the last day of the Lease Term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls painted, or cleaned so that they appear freshly painted, and repaired or replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or nonconforming acoustical ceiling tiles replaced; all windows washed; the air conditioning and heating systems within the non-common areas of the Premises serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been the Tenant’s responsibility during the Term of this Lease) and repair; the plumbing and electrical systems and lighting within the non-common areas of the Premises in good order and repair, including replacement of any burned out or broken light bulbs or ballasts (all lights and ballasts must be of the same type, color and wattage) (and Tenant shall pay Landlord for Tenant’s Proportionate Share of the cost to insure that all Common Area features and systems are in good operating condition and repair, including the lawn and shrubs (including the replacement of any dead or damaged plantings), the sidewalk, driveways and parking areas); together with all alterations, additions, and improvements (collectively “Alterations”) which may have been made, in, to, or on the Premises, except as referenced in Paragraph 10 (“Alterations and Additions”), Tenant shall not be required to remove those Alterations, if any, that are not subject to restoration pursuant to Landlord’s written Consent to Alterations agreement as executed by Tenant and Landlord.  Tenant shall be responsible for repairing any damage caused by the installation and/or the removal of Tenant’s

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trade fixtures by Tenant or Tenant’s employees, agents or contractors.  For all other such Alterations, Tenant shall ascertain from Landlord within thirty (30) days before the end of the Term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then at Landlord’s option and in Landlord’s sole and absolute discretion, Tenant shall either (i) pay to Landlord a fee in an amount equal to (a) Landlord’s estimated cost to restore the Premises to the configuration and condition that existed when the Premises were delivered Tenant plus (b) an amount equal to the daily prorated Basic Rent due for the last month of the Lease Term times the number of days Landlord estimates are required to complete said restoration or (ii) Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant’s sole cost and expense.  In the event Landlord requires Tenant to pay for the cost of the restoration, the fee shall be paid by Tenant to Landlord regardless of whether or not Landlord elects to restore all or part of said Premises.  In the event Tenant is required to complete the restoration and said restoration is not completed prior to the Lease Termination Date, Tenant acknowledges that Tenant shall enter into a Hold Over period pursuant to the terms of Lease Paragraph 30 (“Holding Over”) and Tenant shall automatically be liable to Landlord for the monthly Hold Over Basic Rent and all other Additional Rent until said restoration is completed by Tenant.  Prior to the Lease Termination Date, as part of the surrender of Premises procedures, Landlord will have the Building systems inspected, at Tenant’s sole cost and expense, including, but not limited to the HVAC system, plumbing systems and roof, and Tenant shall be responsible for its Proportionate Share (as reasonably determined by Landlord) of all repairs noted on said inspection reports.  Tenant, on or before the end of the Term or sooner termination of this Lease, shall remove all of Tenant’s personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the Term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant.  Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant’s sole cost, and repair any damage caused by such removal at Tenant’s sole cost.  Upon surrender of the Premises to Landlord, Tenant shall provide Landlord with keys for all interior locking doors and Tenant agrees to pay to Landlord the cost of Landlord re-keying (i) all exterior doors (including mechanical rooms) and (ii) all interior doors with locks to which Tenant is not able to provide Landlord keys.  If Tenant has installed a cardkey system, Tenant shall also be responsible for the costs Landlord incurs in replacing the doors and/or door frames in which such cardkey system was installed and removing any and all equipment and wiring related thereto, unless Landlord notifies Tenant in writing prior to the Lease Termination Date that Landlord wants the cardkey system to remain in the Premises, in which event the cardkey system shall remain on the Premises after the expiration of the Term and Tenant shall provide Landlord with the cardkeys and instructions for such system along with any other equipment that is necessary for the operation of said cardkey system.  For example, if software and/or specialized computer systems are required to operate the cardkey system, Tenant shall leave the cardkey pads, the software (hard copies and assignment of the license at no cost to Landlord should Landlord so elect), the computer and the instructions thereto in place in the Premises.  If the Premises is not surrendered at the end of the Term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding Tenant founded on such delay.  Nothing contained herein shall be construed as an extension of the Term hereof or as

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a consent of Landlord to any holding over by Tenant.  The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies.

9.             “AS-IS” BASIS.

A.            Leased on “As-Is” Basis.  Except as may be noted in this Paragraph 9 and in Paragraph 7 (“Expenses of Operation, Management, and Maintenance of the Common Areas of the Complex”) and subject to Landlord making the improvements shown on Exhibit B attached hereto, it is hereby agreed that the Premises leased hereunder is leased strictly on an “as-is” basis and in its present condition, and in the configuration as shown on Exhibit B attached hereto, and by reference made a part hereof.  Except as noted herein, it is specifically agreed between the parties that after Landlord makes the interior improvements as shown on Exhibit B, Landlord shall not be required to make, nor be responsible for any cost, in connection with any repair, restoration, and/or improvement to the Premises in order for this Lease to commence, or thereafter, throughout the Term of this Lease.  Notwithstanding anything to the contrary within this Lease except as referenced below in Paragraph 9.B (“Tenant Improvements to be Constructed by Landlord”), Landlord makes no warranty or representation of any kind or nature whatsoever as to the condition or repair of the Premises, nor as to the use or occupancy which may be made thereof.

B.            Tenant Improvements to be Constructed by Landlord.  Notwithstanding anything to the contrary in Paragraph 9.A (“Leased on “As-Is” Basis”) above, Landlord has agreed to construct and install, at Landlord’s cost and expense (net of the cost of the Tenant Improvements in the amount of $48,000.00 to be paid to Landlord by Tenant (“Tenant Improvements Contribution”) concurrently with Tenant’s execution of this Lease), the tenant improvements specifically listed below (“Tenant Improvements”); Landlord shall not be responsible for providing any additional interior improvements:

1)Install the walls and doors shown in Blue on Exhibit B attached hereto;

2)Install glass sidelite as shown in Yellow on Exhibit B attached hereto;

3)Landlord shall replace any broken or non-functioning lights and/or ballasts;

4)Landlord shall have the HVAC system within the Premises inspected and any necessary repairs completed;

5)Landlord shall have the roof membrane affecting the Premises inspected and any necessary repairs completed; and

6)Landlord shall have the plumbing system within the Premises inspected and any necessary repairs completed.

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The Tenant Improvements referenced above shall become a part of the Premises upon installation and Tenant shall not be required or allowed to remove said Tenant Improvements upon Lease Termination.  In the event this Lease is terminated early due to an uncured default by Tenant and/or a written agreement between Landlord and Tenant to terminate the Lease prior to the scheduled Termination Date, Tenant agrees to reimburse Landlord for one hundred percent (100%) of the balance of the unamortized cost of the Tenant Improvements previously paid for by Landlord (net the Tenant Improvements Contribution paid by Tenant as described above) outstanding as of the early Termination Date.  Said amount shall be paid by Tenant to Landlord by the Termination Date and/or Landlord may, at its option, deduct part or all of said unamortized Tenant Improvement cost from Tenant’s Security Deposit.

10.          ALTERATIONS AND ADDITIONS.  Tenant shall not make, or suffer to be made, any Alterations to the Premises, or any part thereof, without the written consent of Landlord first had and obtained by Tenant; such consent shall not be unreasonably withheld and such consent to Alterations shall not be valid until such time as said consent is executed by both Landlord and Tenant and a fully executed copy delivered by Landlord to Tenant (“Consent to Alterations”).  Provided Tenant requests in writing such predetermination from Landlord, said Consent to Alterations shall specify whether Landlord shall require removal of said Alterations.  Any Alteration of the Premises except moveable furniture and trade fixtures, shall at once become a part of the Premises and belong to Landlord.  Any and all such Alterations shall be paid for one hundred percent (100%) by Tenant.  Landlord reserves the right to approve all contractors and mechanics proposed by Tenant to make such Alterations.  As a pre-condition to Landlord granting its consent to any Alterations, Tenant shall deliver plans and specifications reflecting said Alterations for Landlord’s review and approval; and within five business days of completion of said Alterations, Tenant shall deliver to Landlord an original 1/8” scaled sepia or an other electronic format as solely determined by Landlord.  Tenant shall retain title to all moveable furniture and trade fixtures placed in the Premises.  All heating, lighting, electrical, air conditioning, security systems, floor to ceiling partitioning, drapery, carpeting, and floor installations made by Tenant, together with all property that has become an integral part of the Premises, shall not be deemed trade fixtures.  Tenant agrees that it will not proceed to make such Alterations, without having obtained consent from Landlord to do so, and until five (5) business days from the receipt of such consent, in order that Landlord may post appropriate notices to avoid any liability to contractors or material suppliers for payment for Tenant’s Alterations.  Tenant will at all times permit such notices to be posted and to remain posted until the completion of the Alterations.  As a condition of Landlord’s Consent to Alterations to the Premises, after Landlord provides written Consent to Alterations and prior to any work commencing on the Alterations, Landlord may, at its sole and absolute discretion, require Tenant to secure and provide to Landlord at Tenant’s own cost and expense, a completion and lien indemnity letters of credit, satisfactory to Landlord in the amount of one hundred fifty percent (150%) of the cost to fund the original construction of any alterations (“Letter of Credit A”) and, if Landlord does not agree in the Consent to Alterations that said Alterations are to remain at the end of the Lease Term, an additional letter of credit in the amount of one hundred fifty percent (150%) of the cost to fund the subsequent cost of the removal of said Alterations and the restoration of the Premises at the Lease Termination Date (“Letter of Credit B”).  Said performance Letters of Credit shall be kept in place as follows: for the Letter of Credit A, for ninety-two (92) days after the completion of the original construction of said Alterations; and for

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Letter of Credit B, the later of (a) ninety-two (92) days after the Lease Termination Date or (b) ninety-two (92) days after the completion of the restoration work and Tenant has provided Landlord with proof of payment to respective vendors and copies of recorded full unconditional lien releases related to the Alterations and/or restoration work.  Tenant further covenants and agrees that any mechanic’s lien filed against the Premises for work claimed to have been done for, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within fifteen (15) days after Tenant is given notice of filing thereof, at the cost and expense of Tenant.  As a further condition to its Consent to Alterations to the Premises, Landlord shall require Tenant to pay all expenses in connection with any and all requests for alterations and additions and Landlord’s Consent to Alterations related thereto, including but not limited to Landlord’s costs, fees and expenses for the processing and administration of the consent documentation and Landlord’s attorneys’ fees (if any).  Any exceptions to the foregoing must be made in writing and executed by both Landlord and Tenant.

11.          TENANT MAINTENANCE.  Tenant shall, at its sole cost and expense, keep and maintain the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition.  Tenant’s maintenance, repair and replacement responsibilities herein referred to include, but are not limited to, janitorization, plumbing systems within the non-common areas of the Premises (such as water and drain lines, sinks), electrical systems within the non-common areas of the Premises (such as outlets, lighting fixtures, lamps, bulbs, tubes, ballasts), heating and air-conditioning controls within the non-common areas of the Premises (such as mixing boxes, thermostats, time clocks, supply and return grills), non-common elevators (if any), and all interior improvements within the Premises including but not limited to: wall coverings, window coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches and locks), skylights (if any), automatic fire extinguishing systems, and all other interior improvements of any nature whatsoever.  Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas.  Areas of excessive wear shall be replaced at Tenant’s sole expense upon Lease termination.  Tenant hereby waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect.

12.          UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED.  As Additional Rent and in accordance with Paragraph 4.D of this Lease Tenant shall pay its Proportionate Share, (or if the Building in which the Premises is located is not one hundred percent (100%) leased, said Proportionate Share for utilities shall be calculated based on (i) Tenant’s Premises square footage as a percentage of the total square footage leased to Tenant and any other third party tenants in the Building or (ii) other equitable basis as calculated by Landlord) of the cost of all utility charges such as water, gas, electricity, (and telephone, telex and other electronic communications service, if applicable), sewer service, waste pick-up and any other utilities, materials or services furnished directly to the Building in which the Premises are located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed.  Notwithstanding anything to the contrary herein,

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in the event any utility charges apply only to the Premises leased by Tenant, Tenant shall place such utilities in Tenant’s name and shall pay the related costs directly to the utility company(ies).

Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord.

Provided that Tenant is not in monetary default or a material non-monetary default (and if in default, Tenant’s right to cure said default has not expired) in the performance or observance of any of the terms, covenants or conditions of this Lease to be performed or observed by it, Landlord shall furnish to the Premises between the hours of 8:00 am and 6:00 pm, Mondays through Fridays (holidays excepted) and subject to the Rules and Regulations of the Common Area hereinbefore referred to, reasonable quantities of water, gas and electricity suitable for the intended use of the Premises and heat and air-conditioning required in Landlord’s reasonable judgment for the comfortable use and occupation of the Premises for such purposes.  Tenant may, from time to time, have its staff and equipment operate on a twenty-four (24) hour-a-day, seven (7) day-a-week schedule, and Tenant shall pay for extra consumption of such utilities attributable to such after-hours occupancy, if any, used by Tenant.  Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the Building heating, ventilating and air-conditioning systems.  Whenever heat generating machines, equipment, or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature otherwise maintained by the air-conditioning system, Landlord shall have the right to install supplementary air-conditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord.  Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation), electronic data processing machines or machines using current in excess of 110 Volts which will in any way increase the amount of electricity, gas, water or air-conditioning usually furnished or supplied to Premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises), or with gas or water pipes any apparatus or device for the purposes of using electric current, gas, or water.  Landlord acknowledges that Tenant may use electrical current up to 220 Volts subject to the terms and conditions of this Paragraph.  If (i) Tenant shall require water, gas, or electric current in excess of that usually furnished or supplied to Premises being used as general office space, Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld, or (ii) if Tenant is found to be using water, gas and/or electrical current in excess of its Proportionate.  Share (as such excess usage is confirmed by a study conducted by Landlord’s contractor(s), Landlord may (a) adjust the Proportionate Share allocated to Tenant based on Tenant’s actual or estimated use or (b) cause an electric current, gas or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use.  In the event Landlord questions Tenant’s usage, Landlord shall employ the services of a licensed electrical or plumbing contractor to determine what Tenant’s actual use is and, if Tenant’s use is determined to be excessive, Tenant shall be responsible for paying the cost related to said investigation by the

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licensed contractor or any other qualified third party vendor that Landlord may employ to provide such service.  The cost of any such meter and of the installation, maintenance and repair thereof, all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense incurred by Landlord in keeping account of electric current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by Landlord.

13.          TAXES.

A.            Real Property Taxes.  As Additional Rent and in accordance with Paragraph 4.D of this Lease, Tenant shall pay to Landlord, monthly in advance or as they become due, pursuant to statements submitted by Landlord, Tenant’s Proportionate Share of all Real Property Taxes relating to the Premises accruing with respect to the Premises during the Term of this Lease and the Extended Term (if any).  The term “Real Property Taxes” shall also include supplemental taxes related to the period of Tenant’s Lease Term whenever levied, including any such taxes that may be levied after the Lease Term has expired.  The term “Real Property Taxes”, as used herein, shall mean (i) all taxes, assessments, levies and other charges of any kind or nature whatsoever, general and special, foreseen and unforeseen (including all installments of principal and interest required to pay any general or special assessments for public improvements and any increases resulting from reassessments caused by any change in ownership of the Premises) now or hereafter imposed by any governmental or quasi-governmental authority or special district having the direct or indirect power to tax or levy assessments, which are levied or assessed against, or with respect to the value, occupancy or use of, all or any portion of the Complex (as now constructed or as may at any time hereafter be constructed, altered, or otherwise changed) or Landlord’s interest therein; any improvements located within the Complex (regardless of ownership); the fixtures, equipment and other property of Landlord, real or personal, that are an integral part of and located in the Complex; or parking areas, public utilities, or energy within the Complex; (ii) all charges, levies or fees imposed by reason of environmental regulation or other governmental control of the Complex and (iii) all costs and fees (including reasonable attorneys’ fees) incurred by Landlord in reasonably contesting any Real Property Tax and in negotiating with public authorities as to any Real Property Tax.  If at any time during the Term of this Lease the taxation or assessment of the Complex prevailing as of the Commencement Date of this Lease shall be altered so that in lieu of or in addition to any Real Property Tax described above there shall be levied, assessed or imposed (whether by reason of a change in the method of taxation or assessment, creation of a new tax or charge, or any other cause) an alternate or additional tax or charge (i) on the value, use or occupancy of the Complex or Landlord’s interest therein or (ii) on or measured by the gross receipts, income or rentals from the Complex, on Landlord’s business of leasing the Complex, or computed in any manner with respect to the operation of the Complex, then any such tax or charge, however designated, shall be included within the meaning of the term “Real Property Taxes” for purposes of this Lease.  If any Real Property Tax is based upon property or rents unrelated to the Complex, then only that part of such Real Property Tax that is fairly allocable to the Complex shall be included within the meaning of the term “Real Property Taxes.” Notwithstanding the foregoing, the term “Real Property Taxes” shall not include estate, inheritance, gift or franchise taxes of Landlord or the federal or state net income tax imposed on Landlord’s income from all sources.

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B.            Taxes on Tenant’s Property.

(a)           Tenant shall be liable for and shall pay ten days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises.  If any such taxes on Tenant’s personal property or trade fixtures are levied against Landlord or Landlord’s property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant and if Landlord, after written notice to Tenant, pays the taxes based on such increased assessment, which Landlord shall have the right to do regardless of the validity thereof, but only under proper protest if requested by Tenant, Tenant shall upon demand, as the case may be, repay to Landlord the taxes so levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment; provided that in any such event Tenant shall have the right, in the name of Landlord and with Landlord’s full cooperation, to bring suit in any court of competent jurisdiction to recover the amount of such taxes so paid under protest, and any amount so recovered shall belong to Tenant.

(b)           If the Tenant improvements in the Premises, whether installed, and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which standard office improvements in other space in the Complex are assessed, then the real property taxes and assessments levied against the Landlord or the Complex by reason of such excess assessed valuation shall be deemed to be taxies levied against personal property of the Tenant and shall be governed by the provisions of 13B(a) above.  If the records of the County Assessor are available and sufficiently detailed to serve as a basis for determining whether said Tenant improvements are assessed at a higher valuation than standard office space improvements in other space in the Complex, such records shall be binding on both the Landlord and the Tenant.  If the records of the County Assessor are not available or sufficiently detailed to serve as a basis for making said determination, the actual cost of construction shall be used.

14.          ASSESSMENT CREDITS.  The demised property herein may be subject to a special assessment levied by the City in which the Premises are located as part of an Improvement District.  As a part of said special assessment proceedings (if any), additional bonds were or may be sold and assessments were or may be levied to provide for construction contingencies and reserve funds.  Interest shall be earned on such funds created for contingencies and on reserve funds which will be credited for the benefit of said assessment district.  To the extent surpluses are created in said district through unused contingency funds, interest earnings or reserve funds, such surpluses shall be deemed the property of Landlord.  Notwithstanding that such surpluses may be credited on assessments otherwise due against the Leased Premises, Tenant shall pay to Landlord, as Additional Rent if, and at the time of any such credit of surpluses, an amount equal to all such surpluses so credited.  For example: if (i) the property is subject to an annual assessment of $1,000.00, and (ii) a surplus of $200.00 is credited towards the current year’s assessment which reduces the assessment amount shown on the property tax bill from $1,000.00 to $800.00, Tenant shall, upon receipt of notice from Landlord, pay to Landlord said $200.00 surplus credit as Additional Rent.

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15.          LIABILITY INSURANCE.  Tenant, at Tenant’s expense, agrees to keep in force during the Term of this Lease a policy of commercial general liability insurance with combined single limit coverage of not less than Two Million Dollars ($2,000,000) per occurrence for injuries to or death of persons occurring in, on, or about the Premises or the Complex and property damage.  Such insurance shall be primary and noncontributory as respects any insurance carried by Landlord.  The policy or policies affecting such insurance, certificates of insurance of which shall be furnished to Landlord, shall name Landlord, Richard T. Peery, as Trustee of the Richard T. Peery Separate Property Trust dated July 20, 1977, as amended; the Richard T. Peery Separate Property Trust; Richard T. Peery as an individual; John Arrillaga, as Trustee under the John Arrillaga Survivor’s Trust dated July 20, 1977, as amended; the John Arrillaga Survivor’s Trust; John Arrillaga, as an individual; and any beneficiaries, trustees and successor trustees, other partners or co-venturers of Landlord or said trusts as additional insureds (collectively “Landlord Entities”), and shall insure any liability of the Landlord Entities, contingent or otherwise, as respects acts or omissions of Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the Premises, including any failure of Tenant to observe or perform any of its obligations hereunder; shall be issued by an insurance company admitted to transact business in the State of California; and shall provide that the insurance effected thereby shall not be canceled, except upon thirty (30) days’ prior written notice to Landlord.  Tenant’s insurance shall be primary as respects to the Landlord Entities, or if excess, shall stand in an unbroken chain of coverage.  In either event, any other insurance maintained by the Landlord Entities shall be in excess of Tenant’s insurance and shall not be called upon to contribute with any insurance required to be provided by Tenant.  The required insurance shall be reflected on a certificate of insurance of said policy, which certificate shall be delivered to Landlord concurrently with Tenant’s return of this executed Lease to Landlord.  If, during the Term of this Lease, in the reasonable considered opinion of Landlord’s Lender, insurance advisor, or counsel, the amount of insurance described in this Paragraph 15 is not adequate, Tenant agrees to increase said coverage to such reasonable amount as Landlord’s Lender, insurance advisor, or counsel shall deem adequate.

16.          TENANT’S PERSONAL PROPERTY INSURANCE AND WORKMAN’S COMPENSATION INSURANCE.  Tenant shall maintain a policy or policies of fire and property damage insurance in “all risk” form with a sprinkler leakage endorsement insuring the personal property, inventory, trade fixtures (and leasehold improvements paid for by Tenant) within the Leased Premises for the full replacement value thereof.  The proceeds from any of such policies shall be used for the repair or replacement of such items so insured.

Tenant shall also maintain a policy or policies of workman’s compensation insurance and any other employee benefit insurance sufficient to comply with all laws.

17.          PROPERTY INSURANCE.  Landlord shall purchase and keep in force, and as Additional Rent and in accordance with Paragraph 4.D of this Lease, Tenant shall pay to Landlord (or Landlord’s agent if so directed by Landlord) Tenant’s Proportionate Share (of the deductibles on insurance claims and the cost of, policy or policies of insurance covering loss or damage to the Premises and Complex (excluding routine maintenance and repairs and incidental damage or destruction caused by accidents or vandalism for which Tenant is responsible under Paragraph 11) in the amount of the full replacement value thereof, providing protection against

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those perils included within the classification of “all risks” “special form” insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plus sums paid as Additional Rent and any deductibles related thereto; provided however, that during the last twenty-four months of the Lease Term, Tenant shall only be responsible for paying fifty percent (50%) of Tenant’s Proportionate Share of any earthquake deductibles.  If such insurance cost is increased due to Tenant’s use of the Premises or the Complex, Tenant agrees to pay to Landlord, in addition to its Proportionate Share of the deductibles, the full cost of such increase within five (5) days of receipt of the related invoice.  Tenant shall have no interest in nor any right to the proceeds of any insurance procured by Landlord for the Complex.

In addition and notwithstanding anything to the contrary in this Paragraph 17, each party to this Lease hereby waives all rights of recovery against the other party or its officer, employees, agents and representatives for loss or damage to its property or the property of others under its control, arising from any cause insured against under the fire and extended “special form” property coverage (excluding, however, any loss resulting from Hazardous Material contamination of the Property) required to be maintained by the terms of this Lease to the extent full reimbursement of the loss/claim is received by the insured party.  Each party required to carry property insurance hereunder shall cause the policy evidencing such insurance to include a provision permitting such release of liability (“waiver of subrogation endorsement”); provided, however, that if the insurance policy of either releasing party prohibits such waiver, then this waiver shall not take effect until consent to such waiver is obtained.  If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof.  In the event the waivers are issued to the parties and are not valid under current policies and/or subsequent insurance policies, the non-complying party will provide, to the other party, thirty (30) days’ advance notification of the cancellation of the subrogation waiver, in which case neither party will provide such subrogation waiver thereafter and this Paragraph will be null and void.  Notwithstanding anything to the contrary herein, the foregoing waiver of subrogation shall not include any loss resulting from Hazardous Material contamination of the Property or any insurance coverage relating thereto.

18.          INDEMNIFICATION.  Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or death of any person or damage to or destruction of property in or about the Premises or the Complex by or from any cause whatsoever, including, without limitation, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the Premises or the Complex but excluding, however, the willful misconduct or negligence of Landlord, its agents, servants, employees, invitees or contractors of which negligence Landlord has knowledge and reasonable time to correct.  Except as to injury to persons or damage to property to the extent arising from the willful misconduct or the negligence of Landlord, its agents, servants, employees, invitees, or contractors, Tenant shall hold Landlord harmless from and defend Landlord against any and all expenses, including reasonable attorneys’ fees, in connection therewith, arising out of any injury to or death of any person or damage to or destruction of property occurring in, on or about the Premises, or any part thereof, from any cause whatsoever, accruing and/or occurring during the Term of this Lease.  The provisions of this Paragraph 18 shall survive the expiration or termination of this Lease.

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19.          COMPLIANCE.  Tenant, at its sole cost and expense, shall promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now or hereafter in effect governing use or occupancy of the Premises; with the requirements of any board of fire underwriters or other similar body now or hereafter constituted; and with any direction or occupancy certificate issued pursuant to law by any public officer; provided, however, that no such failure shall be deemed a breach of the provisions if Tenant, immediately upon notification, commences to remedy or rectify said failure.  The judgment of any court of competent jurisdiction or the admission of Tenant in any action against Tenant, whether Landlord be a party thereto or not, that Tenant has violated any such law, statute, ordinance or governmental rule, regulation, requirement, direction or provision, shall be conclusive of that fact as between Landlord and Tenant.  Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to said Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance covering requirements pertaining to said Premises.  The provisions of this Paragraph 19 shall survive the expiration or termination of this Lease.

If a governmental agency requires any non-conformance of the Premises as set forth on Exhibit B to be corrected, such non-compliance shall be corrected at the cost and expense of Landlord; provided such non-conformance exists as of the Commencement Date of the Lease and further provided that such governing agency’s requirement to correct the non-conformance is not initiated as a result of: (i) any future improvements made by or for Tenant; or (ii) any permit request made to a governing agency by or for Tenant.  Except as noted above, any non-conformance of the Premises occurring after the Commencement Date of this Lease shall be the responsibility of Tenant to correct at Tenant’s sole cost and expense.

20.          LIENS.  Tenant shall keep the Premises free from any liens arising out of any work performed, materials furnished or obligation incurred by Tenant.  In the event that Tenant shall not, within fifteen (15) days following notice of the imposition of such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedies provided herein and by law, the right, but no obligation, to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien.  All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith, shall be payable to Landlord by Tenant on demand with interest at the higher of the (i) prime rate of interest as quoted by the Bank of America or (ii) Landlord’s borrowing rate (the “Interest Rate”).

21.          ASSIGNMENT AND SUBLETTING.

A.            Requirements.  Tenant shall not assign, transfer, or hypothecate the leasehold estate under this Lease, or any interest therein, and shall not sublet the Premises, or any part thereof, or any right or privilege appurtenant thereto, or suffer any other person or entity to occupy or use the Premises, or any portion thereof, without, in each case, the prior written consent of Landlord which consent will not be unreasonably withheld.  Landlord shall make reasonable efforts to respond within thirty (30) days to any request from Tenant to sublease the Premises.  Notwithstanding the above, in the event Tenant enters into a merger and/or acquisition agreement whereby fifty percent (50%) or more of Tenant’s stock and/or assets are transferred to a third party entity, not including any offering of Tenant’s stock on any nationally recognized

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public stock market and any subsequent purchases and sales of such stock thereon (“Change in Control”), said Change in Control will require Landlord’s consent pursuant to the terms of this Paragraph 21.A, and Landlord may, at Landlord’s option, require that said acquiring entity also be named as a Tenant under this Lease.  Tenant shall not sublet the Premises, or any part thereof, to more than two subtenants at any one point in time without Landlord’s prior written consent, which consent may be withheld at Landlord’s sole and absolute discretion.  Tenant’s failure to obtain Landlord’s prior written consent before entering into any such assignment, transfer and/or subletting shall be considered a default under this Lease and Landlord shall retain all of its rights under the Lease, including the right to elect, at Landlord’s sole and absolute discretion, to terminate either the Lease and/or the related sublease.  As a condition for granting its consent to any assignment, transfer, or subletting, Landlord shall require that: (i) the sublease be a triple net sublease and that the basic rent due under any such sublease be no less than the then current market rent for subleases with annual increases at the then prevailing market rent for subleases; (ii) the sublease shall require that the security deposit clue under the sublease be in the form of a letter of credit drawn upon an institutional lender acceptable and accessible to Landlord in form and content reasonably satisfactory to Landlord, with the letter of credit being assignable to Landlord, at no cost to Landlord, upon notice to said financial institution of a default by Tenant under the Lease; (iii) the sublease shall not provide for subtenant to have an option to extend the term of the sublease or an option to expand the sublet space; and (iv) the Tenant shall pay to Landlord, monthly throughout the term of any approved sublease, fifty percent (50%) of all rents and/or additional consideration due Tenant from its assignees, transferees, or subtenants in excess of the Rent payable by Tenant to Landlord hereunder for the assigned, transferred and/or subleased space (“Excess Rent”) (with said Excess Rent subject to the terms of Lease Paragraph 4.C (“Late Charge”) and Lease Paragraph 24 (“Bankruptcy and Default”); provided, however, that before sharing such Excess Rent, Tenant shall first be entitled to recover from such Excess Rent (a) the amount of the reasonable leasing commission related to said transaction paid by Tenant to a third party broker not affiliated with Tenant, and (b) the amount of any reasonable outside costs incurred by Tenant to construct improvements to the assigned, transferred or sublet premises which improvements are required to be made by Tenant under the assignment or transfer agreement or a sublease agreement.  Tenant shall, by thirty (30) days written notice, advise Landlord of its intent to assign or transfer Tenant’s interest in the Lease or sublet the Premises or any portion thereof for any part of the Term hereof.  Within thirty (30) days after receipt of said written notice, provided Tenant intends to sublease fifty percent (50%) or more of the Premises, Landlord may, in its sole discretion, elect to terminate this Lease as to the portion of the Premises described in Tenant’s notice on the date specified in Tenant’s notice by giving written notice of such election to terminate.  If no such notice to terminate is given to Tenant within said thirty (30) day period, Tenant may proceed to locate an acceptable sublessee, assignee, or other transferee for presentment to Landlord for Landlord’s approval of Tenant’s request to sublease and/or assign, all in accordance with the terms, covenants, and conditions of this Paragraph 21.  Tenant shall provide Landlord with (a) a copy of the assignment and/or other transfer agreement and a copy of the certification of the change in corporate identity from the Secretary of State in the case of an assignment, or (b) a copy of the sublease in the case of a sublease for Landlord’s review, and upon Landlord’s approval, Tenant and the assignee, transferee or subtenant shall execute Landlord’s standard written consent.  If Tenant intends to sublet the entire Premises and Landlord elects to terminate this Lease, this Lease shall be terminated on the date specified in Tenant’s notice.  If, however, this Lease shall terminate

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pursuant to the foregoing with respect to less than all the Premises, the Rent, as defined and reserved hereinabove shall be adjusted on a pro rata basis to the number of square feet retained by Tenant, and this Lease as so amended shall continue in full force and effect and Landlord, at its cost and expense, shall separately demise the remaining portion of the Premises leased to Tenant.  In the event Tenant is allowed to assign, transfer or sublet the whole or any part of the Premises, with the prior written consent of Landlord, no assignee, transferee or subtenant shall assign or transfer this Lease, either in whole or in part, or sublet the whole or any part of the Premises, without also having obtained the prior written consent of Landlord.  Notwithstanding the above, in no event shall Landlord consent to a sub-sublease.  A consent of Landlord to one assignment, transfer, hypothecation, subletting, occupation or use by any other person shall not release Tenant from any of Tenant’s obligations hereunder or be deemed to be a consent to any subsequent similar or dissimilar assignment, transfer, hypothecation, subletting, occupation or use by any other person.  Any such assignment, transfer, hypothecation, subletting, occupation or use without such consent shall be void and shall constitute a breach of this Lease by Tenant and shall, at the option of Landlord exercised by written notice to Tenant, terminate this Lease.  The leasehold estate under this Lease shall not, nor shall any interest therein, be assignable for any purpose by operation of law without the written consent of Landlord.  As a condition to its consent, Landlord shall require Tenant to pay all expenses in connection with any and all subleases and/or assignments and/or any amendments related thereto, including but not limited to Landlord’s fees for the processing and administration of the consent documentation and Landlord’s attorneys’ fees (if any), and Landlord shall require Tenant’s subtenant, assignee or transferee (or other assignees or transferees) to assume in writing all of the obligations under this Lease and for Tenant to remain liable to Landlord under the Lease.

B.            Grounds to Refuse Proposed Transfer.  Notwithstanding the foregoing, Landlord and Tenant agree that it shall not be unreasonable for Landlord to refuse to consent to a proposed assignment, sublease or other transfer (“Proposed Transfer”) if the Premises or any other portion of the Property would become subject to additional or different Government Requirements as a direct or indirect consequence of the Proposed Transfer and/or the Proposed Transferee’s use and occupancy of the Premises and the Property.  However, Landlord may, in its sole discretion, consent to such a Proposed Transfer where Landlord is indemnified by Tenant and (i) the subtenant or (ii) the assignee, in form and substance satisfactory to Landlord and/or to Landlord’s counsel, from and against any and all costs, expenses, obligations and liability arising out of the Proposed Transfer and/or the Proposed Transferee’s use and occupancy of the Premises and the Property.

C.            Voluntary Termination of Lease — Required Sublease Language.  Any and all sublease agreement(s) between Tenant and any and all subtenant(s) (“Subtenant”) (which agreements must be consented to by Landlord, pursuant to the requirements of this Lease) shall contain the following language:

“If Landlord and Tenant jointly and voluntarily elect, for any reason whatsoever, to terminate the Master Lease prior to the scheduled Master Lease termination date, then, if Landlord so elects, this Sublease (if then still in effect) shall terminate concurrently with the termination of the Master Lease.  Subtenant expressly acknowledges and agrees that (1)

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the voluntary termination of the Master Lease by Landlord and Tenant and the resulting termination of this Sublease shall not give Subtenant any right or power to make any legal or equitable claim against Landlord, including without limitation any claim for interference with contract or interference with prospective economic advantage, and (2) Subtenant hereby waives any and all rights it may have under law or at equity against Landlord to challenge such an early termination of the Sublease, and unconditionally releases and relieves Landlord, and its officers, directors, employees and agents, from any and all claims, demands, and/or causes of action whatsoever (collectively, “Claims”), whether such matters are known or unknown, latent or apparent, suspected or unsuspected, foreseeable or unforeseeable, which Subtenant may have arising out of or in connection with any such early termination of this Sublease.  Subtenant knowingly and intentionally waives any and all protection which is or may be given by Section 1542 of the California Civil Code which provides as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with debtor.

The term of this Sublease is therefore subject to early termination.  Subtenant’s initials here below evidence (a) Subtenant’s consideration of and agreement to this early termination provision, (b) Subtenant’s acknowledgment that, in determining the net benefits to be derived by Subtenant under the terms of this Sublease, Subtenant has anticipated the potential for early termination, and (c) Subtenant’s agreement to the general waiver and release of Claims above.

Initials:		Initials:		”
	Subtenant		Tenant

D.            State of Incorporation Change; Name Change.  Notwithstanding anything to the contrary above, Tenant’s re-incorporation in another jurisdiction and/or the act of Tenant changing Tenant’s legal name shall not be considered an assignment; however, (i) Tenant shall provide Landlord with notice of such change in Tenant’s name and/or state of incorporation, which notice shall include a copy of the certification from the Secretary of State and (ii) Tenant and Landlord shall execute Landlord’s standard acknowledgement for any such change in Tenant’s name and/or state of incorporation.

E.             Permitted Transfers.  In addition to and notwithstanding anything to the contrary in Paragraph 21.A above, and provided Tenant is not in default of this Lease beyond the applicable cure period, Landlord hereby agrees that: (1) Landlord shall consent to Tenant’s assigning or subletting said Lease to: (i) any parent or subsidiary corporation, or corporation with which Tenant merges or consolidates provided said entities use of the Premises is the same as Tenant’s use and that (a) said affiliate or successor owns all or substantially all of the assets of Tenant and becomes jointly and severally liable with Tenant for the Term of the Lease from the

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Lease Commencement Date through the scheduled Lease Termination Date (or the extended Lease Termination Date if said date is extended), (b) the net worth of said parent or subsidiary corporation, or said corporation has a net worth equal to or greater than Tenant’s net worth (x) at the time of Lease execution or (y) at the time of such assignment, merger, or consolidation, whichever is greater (collectively “Permitted Transfers”), and (c) Tenant shall give Landlord written notice at least thirty (30) days prior to the effective date of the proposed purchase, merger, consolidation or reorganization; or (ii) any third party or entity to whom Tenant, as an ongoing concern, sells all or substantially all of its assets; provided that (a) said affiliate or successor owns all or substantially all of the assets of Tenant, (b) the net worth of the resulting or acquiring corporation has a net worth after the merger, consolidation or acquisition equal to or greater than the net worth of Tenant (x) at the time of Lease execution or (y) at the time of such merger, consolidation or acquisition, whichever is greater ((i) and (ii) above collectively referred to as “Permitted Transfers”), and (c) Tenant shall give Landlord written notice at least thirty (30) days prior to the effective date of the proposed purchase, merger, consolidation or reorganization; and (2) Landlord shall waive its right to terminate the Lease due to a Permitted Transfer.

In the event Tenant transfers fifty percent (50%) or more of Tenant’s stock to a third party entity and such transfer does not include the sale of Tenant’s assets, said transfer of stock shall not require Landlord’s approval provided that (a) the net worth of said third party entity following such stock transfer is equal to or greater than the net worth of Tenant (x) at the time of Lease execution or Lease Commencement Date or (y) immediately before the stock transfer and any such transfer does not leave the Tenant as a shell organization and (b) Tenant provides Landlord written notice at least thirty (30) days prior to the effective date of the proposed stock transfer.

No such assignment or subletting or sale of stock will release the Tenant from its liabilities, obligations, and responsibilities under this Lease.  Notwithstanding the above, Tenant shall be required to (a) give Landlord written notice prior to such assignment or subletting or sale of stock to any party as described above, (b) execute Landlord’s consent document prepared by Landlord reflecting the assignment or subletting and (c) pay Landlord’s costs for processing said Consent prior to the effective date of said assignment or sublease.  Nothing herein shall be deemed to permit (i) any assignee to further assign this Lease or sublet all or any portion of the Premises or (ii) any subtenant to assign its interest in the sublease to any other party without Landlord’s prior written consent.

22.          SUBORDINATION AND MORTGAGES.  In the event Landlord’s title or leasehold interest is now or hereafter encumbered by a deed of trust, upon the interest of Landlord in the land and Building in which the demised Premises are located, to secure a loan from a lender (hereinafter referred to as “Lender”) to Landlord, Tenant shall, at the request of Landlord or Lender, execute in writing an agreement (in form reasonably acceptable to Tenant), subordinating its rights under this Lease to the lien of such deed of trust, or, if so requested, agreeing that the lien of Lender’s deed of trust shall be or remain subject and subordinate to the rights of Tenant under this Lease.  Notwithstanding any such subordination, Tenant’s possession under this Lease shall not be disturbed if Tenant is not in default (and if in default, Tenant’s right to cure said default has not expired) and so long as Tenant shall pay all Rent and observe and perform all of the provisions set forth in this Lease and any subordination agreement shall reflect

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the agreement of the Lender to the same.  As of the date of this Lease, there are no mortgages or loans encumbering the Premises.

23.          ENTRY BY LANDLORD.  Landlord reserves, and shall at all reasonable times after at least twenty four (24) hours notice (except in emergencies) have the right to enter the Premises to inspect them; to perform any services to be provided by Landlord hereunder; to make repairs or provide any services to a contiguous tenant(s) (if any); to submit the Premises to prospective purchasers, mortgagers or tenants; to post notices of non-responsibility; and to alter, improve or repair the Premises and any portion of the Complex, all without abatement of Rent, and may erect scaffolding and other necessary structures in or through the Premises where reasonably required by the character of the work to be performed; provided, however that the business of Tenant shall be interfered with to the least extent that is reasonably practical.  Landlord shall also have the right at any time to change the arrangement or location of entrances or passageways, doors and doorways, and corridors, elevators, stairs, toilets or other public parts of the Complex and to change the name, number or designation by which the Complex is commonly known, and none of the foregoing shall be deemed an actual or constructive eviction of Tenant, or shall entitle Tenant to any reduction of Rent hereunder.  Any entry to the Premises by Landlord for the purposes provided for herein shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the Premises or an eviction, actual or constructive, of Tenant from the Premises or any portion thereof.

24.          BANKRUPTCY AND DEFAULT.  The commencement of a bankruptcy action or liquidation action or reorganization action or insolvency action or an assignment of or by Tenant for the benefit of creditors, or any similar action undertaken by Tenant, or the insolvency of Tenant, shall, at Landlord’s option, constitute a breach of this Lease by Tenant.  If the trustee or receiver appointed to serve during a bankruptcy, liquidation, reorganization, insolvency or similar action elects to reject Tenant’s unexpired Lease, the trustee or receiver shall notify Landlord in writing of its election within thirty (30) days after an order for relief in a liquidation action or within thirty (30) days after the commencement of any action.

Within thirty (30) days after the court approval of the assumption of this Lease, the trustee or receiver shall cure (or provide adequate assurance to the reasonable satisfaction of Landlord that the trustee or receiver shall cure) any and all previous defaults under the unexpired Lease and shall compensate Landlord for all actual pecuniary loss and shall provide adequate assurance of future performance under said Lease to the reasonable satisfaction of Landlord.  Adequate assurance of future performance, as used herein, includes, but shall not be limited to: (i) assurance of source and payment of Rent, and other consideration due under this Lease; (ii) assurance that the assumption or assignment of this Lease will not breach substantially any provision, such as radius, location, use, or exclusivity provision, in any agreement relating to the above described Premises.

Nothing contained in this section shall affect the existing right of Landlord to refuse to accept an assignment upon commencement of or in connection with a bankruptcy, liquidation, reorganization or insolvency action or an assignment of Tenant for the benefit of creditors or other similar act.  Nothing contained in this Lease shall be construed as giving or granting or creating an equity in the demised Premises to Tenant.  In no event shall the leasehold estate

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under this Lease, or any interest therein, be assigned by voluntary or involuntary bankruptcy proceeding without the prior written consent of Landlord.  In no event shall this Lease or any rights or privileges hereunder be an asset of Tenant under any bankruptcy, insolvency or reorganization proceedings.

The failure to perform or honor any covenant, condition or representation made under this Lease shall constitute a default under this Lease by Tenant upon expiration of the appropriate grace period hereinafter provided.  Tenant shall have a period of five (5) days from the effective date of written notice from Landlord within which to cure any default in the payment of Rent or adjustment thereto.  Tenant shall have a period of thirty (30) days from the effective date of written notice from Landlord within which to cure any other non-monetary default under this Lease; provided, however, that with respect to non-monetary defaults not involving Tenant’s failure to pay Basic Rent or Additional Rent, Tenant shall not be in default if (i) more than thirty (30) days is required to cure such non-monetary default and (ii) Tenant commences cure of such default as soon as reasonably practicable after receiving written notice of such default from Landlord and thereafter continuously and with due diligence prosecutes such cure to completion.  Upon an uncured default of this Lease by Tenant, Landlord shall have the following rights and remedies in addition to any other rights or remedies available to Landlord at law or in equity:

(a)           The rights and remedies provided for by California Civil Code Section 1951.2 including but not limited to, recovery of the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of rental loss for the same period that Tenant proves could be reasonably avoided, as computed pursuant to subsection (b) of said Section 1951.2.  Any proof by Tenant under subparagraphs (2) and (3) of Section 1951.2 of the California Civil Code of the amount of rental loss that could be reasonably avoided shall be made in the following manner: Landlord and Tenant shall each select a licensed real estate broker in the business of renting property of the same type and use as the Premises and in the same geographic vicinity.  Such two real estate brokers shall select a third licensed real estate broker, and the three licensed real estate brokers so selected shall determine the amount of the Rent loss that could be reasonably avoided from the balance of the Term of this Lease after the time of award.  The decision of the majority of said licensed real estate brokers shall be final and binding upon the parties hereto.  As part of such damages, Landlord shall have the right to recover that portion of any leasing commission paid by Landlord in connection with this Lease applicable to the unexpired Term of this Lease.

(b)           The rights and remedies provided by California Civil Code Section 1951.4, which allows Landlord to continue the Lease in effect and to enforce all of its rights and remedies under this Lease, including the right to recover Rent as it becomes due, for so long as Landlord does not terminate Tenant’s right to possession; acts of maintenance or preservation, efforts to relet the Premises, or the appointment of a receiver upon Landlord’s initiative to protect its interest under this Lease shall not constitute a termination of Tenant’s right to possession.

(c)           The right to terminate this Lease by giving notice to Tenant in accordance with applicable law.

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(d)           To the extent permitted by law, the right and power to enter the Premises and remove therefrom all persons and property, to store such property in a public warehouse or elsewhere at the cost of and for the account of Tenant, and to sell such property and apply such proceeds therefrom pursuant to applicable California law.  Landlord may from time to time sublet the Premises or any part thereof for such term or terms (which may extend beyond the Term of this Lease) and at such Rent and such other terms as Landlord in its reasonable sole discretion may deem advisable, with the right to make alterations and repairs to the Premises.  Upon each subletting, (i) Tenant shall be immediately liable to pay Landlord, in addition to indebtedness other than Rent due hereunder, the reasonable cost of such subletting, including, but not limited to, reasonable attorneys’ fees, and any real estate commissions actually paid, and the cost of such reasonable alterations and repairs incurred by Landlord and the amount, if any, by which the Rent hereunder for the period of such subletting (to the extent such period does not exceed the Term hereof) exceeds the amount to be paid as Rent for the Premises for such period or (ii) at the option of Landlord, rents received from such subletting shall be applied first to payment of indebtedness other than Rent due hereunder from Tenant to Landlord; second, to the payment of any costs of such subletting and of such alterations and repairs; third, to payment of Rent due and unpaid hereunder; and the residue, if any, shall be held by Landlord and applied in payment of future Rent as the same becomes due hereunder.  If Tenant has been credited with any Rent to be received by such subletting under option (i) and such Rent shall not be promptly paid to Landlord by the subtenant(s), or if such rentals received from such subletting under option (ii) during any month be less than that to be paid during the month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord.  Such deficiency shall be calculated and paid monthly.  No taking possession of the Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a written notice of such intention be given to Tenant.  Notwithstanding any such subletting without termination, Landlord may at any time hereafter elect to terminate this Lease for such previous breach.

(e)           The right to have a receiver appointed for Tenant upon application by Landlord, to take possession of the Premises and to apply any rental collected from the Premises and to exercise all other rights and remedies granted to Landlord pursuant to subparagraph (d) above.

25.          ABANDONMENT.  Tenant shall not vacate or abandon the Premises at any time during the Term of this Lease and if Tenant shall abandon, vacate or surrender said Premises, or be dispossessed by the process of law, or otherwise, any personal property belonging to Tenant and left on the Premises shall be deemed to be abandoned, at the option of Landlord, except such property as may be mortgaged to Landlord.  Notwithstanding the above, Tenant shall not be in default under the Lease if it leaves all or any part of Premises vacant so long as (i) Tenant is performing all of its other obligations under the Lease including the obligation to pay Rent (ii) Tenant provides on-site security during normal business hours for those parts of the Premises left vacant, (iii) such vacancy does not materially and adversely affect the validity or coverage of any policy of insurance carried by Landlord with respect to the Premises, and (iv) the utilities and heating and ventilation systems are operated and maintained to the extent necessary to prevent damage to the Premises or its systems.

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26.          DESTRUCTION.  In the event the Premises are destroyed in whole or in part from any cause, except for routine maintenance and repairs and incidental damage for which Tenant is responsible under Paragraph 11 (“Tenant Maintenance”), Landlord may, at its option:

(a)           Rebuild or restore the Premises to their condition prior to the damage or destruction, or

(b)           Terminate this Lease (providing that the Premises is damaged to the extent of thirty-three and one third percent (33 1/3%) or more of the replacement cost, exclusive of footings, foundations and floor slabs).

If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore them, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore them, in which event Landlord agrees, at its expense except for any deductible, which is the responsibility of the Tenant, promptly to rebuild or restore the Premises to their condition prior to the damage or destruction.  Tenant shall be entitled to a reduction in Rent from the date of such damage or destruction, provided Tenant is not using any portion of such damaged area, while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Premises.  If Landlord initially estimates that the rebuilding or restoration will exceed 180 days or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the date of destruction (such period of time to be extended for not more than sixty (60) additional days for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargoes, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord) (the “Allowed Restoration Period”), then, provided the Premises is damaged to the extent of 33 1/3% or more of the replacement cost (exclusive of footings, foundations and floor slabs) and provided the damage or destruction does not result from routine maintenance and repairs or incidental damage or destruction caused from vandalism and accidents for which Tenant is responsible under Paragraph 11 (“Tenant Maintenance”), Tenant shall have the right to terminate this Lease by giving written notice to Landlord within ten (10) days following the date Tenant receives Landlord’s written notice stating that the restoration will exceed the Allowed Restoration Period.  Regardless of whether Landlord and/or Tenant elects to terminate the Lease early as provided herein, Tenant shall remain liable for the insurance deductible as it relates to the Leased Premises.  Notwithstanding anything herein to the contrary, Landlord’s obligation to rebuild or restore shall be limited to the Building and interior improvements constructed by Landlord as they existed as of the Commencement Date of the Lease and shall not include restoration of Tenant’s trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant’s sole cost and expense provided this Lease is not canceled according to the provisions above.

Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect.  Tenant hereby expressly waives the provision of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code.

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In any event that the Building in which the Premises are situated is damaged or destroyed to the extent of not less than thirty-three and one third percent (33 1/3%) of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not.  Notwithstanding anything to the contrary herein, Landlord may terminate this Lease in the event of an uninsured event or if insurance proceeds are insufficient to cover one hundred percent of the rebuilding costs net of the deductible.

Without regard to whether this Lease is terminated pursuant to the foregoing, Tenant, upon demand by Landlord, shall pay to Landlord Tenant’s Proportionate Share of the deductibles from any casualty policy Landlord carries pursuant to Paragraph 17 (“Property Insurance”).

27.          EMINENT DOMAIN.  If all or any part of the Premises shall be taken by any public or quasi-public authority under the power of eminent domain or conveyance in lieu thereof, this Lease shall terminate as to any portion of the Premises so taken or conveyed on the date when title vests in the condemnor, and Landlord shall be entitled to any and all payment, income, rent, award, or any interest therein whatsoever which may be paid or made in connection with such taking or conveyance, and Tenant shall have no claim against Landlord or otherwise for the value of any unexpired Term of this Lease.  Notwithstanding the foregoing sentence, any compensation specifically awarded Tenant for loss of business, Tenant’s personal property, moving costs or loss of goodwill, shall be and remain the property of Tenant.  Notwithstanding anything to the contrary herein, Tenant shall not be responsible for any costs of repairs, restoration, replacements or other work occasioned by the exercise of the right (or a voluntary conveyance resulting from the threatened exercise of the right) of eminent domain or condemnation.

If (i) any action or proceeding is commenced for such taking of the Premises or any part thereof, or if Landlord is advised in writing by any entity or body having the right or power of condemnation of its intention to condemn the Premises or any part thereof, or (ii) any of the foregoing events occur with respect to the taking of any space in the Complex not leased hereby, or if any such spaces so taken or conveyed in lieu of such taking and Landlord shall decide to discontinue the use and operation of the Complex, or decide to demolish, alter or rebuild the Complex, then in any such events Landlord shall have the right to terminate this Lease by giving Tenant written notice thereof within sixty (60) days of the date of receipt of said written advice, or commencement of said action or proceeding, or taking conveyance, which termination shall take place as of the first to occur of the last day of the calendar month next following the month in which such notice is given or the date on which title to the Premises shall vest in the condemnor.

In the event of such a partial taking or conveyance of the Premises, if the portion of the Premises taken or conveyed is so substantial that the Tenant can no longer reasonably conduct its business, Tenant shall have the privilege of terminating this Lease within sixty (60) days from the date of such taking or conveyance, upon written notice to the Landlord of its intention so to do, and upon giving of such notice this Lease shall terminate on the last day of the calendar month next following the month in which such notice is given, upon payment by Tenant of the Rent from the date of such taking or conveyance to the date of termination.

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If a portion of the Premises be taken by condemnation or conveyance in lieu thereof and neither Landlord nor Tenant shall terminate this Lease as provided herein, this Lease shall continue in full force and effect as to the part of the Premises not so taken or conveyed, and the Rent herein shall be apportioned as of the date of such taking or conveyance so that thereafter the Rent to be paid by Tenant shall be in the ratio that the area of the portion of the Premises not so taken or conveyed bears to the total area of the Premises prior to such taking.

28.          SALE OR CONVEYANCE BY LANDLORD.  In the event of a sale or conveyance of the Premises or any interest therein, by any owner of the reversion then constituting Landlord, the transferor shall thereby be released from any further liability upon any of the terms, covenants or conditions (express or implied) herein contained in favor of Tenant, and in such event, insofar as such transfer is concerned, Tenant agrees to look solely to the responsibility of the successor in interest of such transferor in and to the Complex and this Lease.  This Lease shall not be affected by any such sale or conveyance, and Tenant agrees to attorn to the successor in interest of such transferor.

29.          ATTORNMENT TO LENDER OR THIRD PARTY.  In the event the interest of Landlord in the land and Building in which the Leased Premises are located (whether such interest of Landlord is a fee title interest or a leasehold interest) is encumbered by deed of trust, and such interest is acquired by the lender or any third party through judicial foreclosure or by exercise of a power of sale at private trustee’s foreclosure sale, Tenant hereby agrees to attorn to the purchaser at any such judicial foreclosure or foreclosure sale and to recognize such purchaser as the Landlord under this Lease.  In the event the lien of the deed of trust securing the loan from a Lender to Landlord is prior and paramount to the Lease, this Lease shall nonetheless continue in full force and effect for the remainder of the unexpired Term hereof, at the same rental herein reserved and upon all the other terms, conditions and covenants herein contained.

30.          HOLDING OVER.  Any holding over by Tenant after expiration or other termination of the Term of this Lease shall not constitute a renewal or extension of the Lease or give Tenant any rights in or to the Leased Premises except as expressly provided in this Lease.  Any holding over after the expiration or other termination of the Term of this Lease, with or without the consent of Landlord, shall be construed to be a tenancy from month to month, on the same terms and conditions herein specified insofar as applicable except that the monthly Basic Rent shall be increased to an amount equal to two hundred (200%) percent of the monthly Basic Rent required during the last month of the Lease Term; provided, however, that the monthly Rent shall be prorated based on the actual number of days in the month for any partial month of the holding over.  Holding over conduct within the meaning of the Lease and this Paragraph 30 shall also include the failure by Tenant to surrender the Leased Premises on the Lease Termination Date in the physical condition described in Paragraphs 8 (“Acceptance and Surrender of Premises”), 10 (“Alterations and Additions”) and 11 (“Tenant Maintenance”) and/or any Consents to Modifications/Alterations (if any) for which conduct Tenant shall be subject to the Hold Over Basic Rent under this Paragraph until the Leased Premises is restored to the condition required under this Lease.  If Tenant is responsible for paying to Landlord the cost of the restoration work pursuant to Paragraph 8 (“Acceptance and Surrender of Premises”) in lieu of Tenant completing said restoration, Tenant shall be liable to Landlord, at the Basic Rent rate for the last month of the Lease Term, for the estimated time it would take to complete said

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restoration, regardless of whether or not Landlord elects to make such restoration to the Leased Premises.

31.          CERTIFICATE OF ESTOPPEL.  Tenant shall within ten (10) days of receipt of prior written notice from Landlord execute, acknowledge and deliver to Landlord an estoppel statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the Basic Rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant’s knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, are claimed.  Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises.  Tenant’s failure to deliver such statement within such time shall be conclusive upon Tenant that this Lease is in full force and effect, without modification except as may be represented by Landlord; that there are no uncured defaults in Landlord’s performance, and that not more than ten months’ Basic Rent has been paid in advance.

32.          CONSTRUCTION CHANGES.  It is understood that the description of the Premises and the location of ductwork, plumbing and other facilities therein are subject to such minor changes as Landlord or Landlord’s architect determines to be desirable in the course of construction of the Premises, and no such changes or any changes in plans for any other portions of the Complex shall affect this Lease or entitle Tenant to any reduction of Rent hereunder or result in any liability of Landlord to Tenant.  Landlord does not guarantee the accuracy of any drawings supplied to Tenant and verification of the accuracy of such drawings rests with Tenant.

33.          RIGHT OF LANDLORD TO PERFORM.  All terms, covenants and conditions of this Lease to be performed or observed by Tenant shall be performed or observed by Tenant at Tenant’s sole cost and expense and without any reduction of rent.  If Tenant shall fail to pay any sum of money, or other Rent, required to be paid by it hereunder and such failure shall continue for five (5) days after written notice thereof by Landlord or shall fail to perform any other term or covenant hereunder on its part to be performed, and such failure shall continue for thirty (30) days after written notice thereof by Landlord (or such longer grace period as provided under Paragraph 24), Landlord, without waiving or releasing Tenant from any obligation of Tenant hereunder, may, but shall not be obliged to, make any such payment or perform any such other term or covenant on Tenant’s part to be performed.  All sums so paid by Landlord and all necessary costs of such performance by Landlord together with interest thereon at the Interest Rate (as defined in Paragraph 20 (“Liens”) above) from the date of such payment or performance by Landlord, shall be paid (and Tenant covenants to make such payment) to Landlord within five (5) business days after demand by Landlord, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of nonpayment by Tenant as in the case of failure by Tenant in the payment of Rent hereunder.

34.          ATTORNEYS’ FEES.

A.            In the event that either Landlord or Tenant should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder,

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then all costs and expenses, including reasonable attorneys’ fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment.

B.            Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant’s occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including reasonable attorneys’ fees.

C.            Any deposition of Landlord and/or its agents, whether initiated by Landlord or Tenant, shall be administered and taken at Landlord’s place of business.

35.          WAIVER.  The waiver by either party of the other party’s failure to perform or observe any term, covenant or condition herein contained to be performed or observed by such waiving party shall not be deemed to be a waiver of such term, covenant or condition or of any subsequent failure of the party failing to perform or observe the same or any other such term, covenant or condition therein contained, and no custom or practice which may develop between the parties hereto during the Term hereof shall be deemed a waiver of, or in any way affect, the right of either party to insist upon performance and observance by the other party in strict accordance with the terms hereof.

36.          NOTICES.  All notices, demands, requests, advices or designations which may be or are required to be given by either party to the other hereunder shall be in writing.  All notices, demands, requests, advices or designations by Landlord to Tenant shall be sufficiently given, made or delivered if personally served on Tenant by leaving the same at the Premises or if sent by United States certified or registered mail, postage prepaid or by a reputable commercial carrier’s same day or overnight service addressed to Tenant at the following addresses:

Prior to Lease Commencement		After Lease Commencement
Attn:	Joe Maurino	Attn:	Controller
6536 Kaiser Drive		Premises Address
Fremont, CA 94555		Fremont, CA 94555
(510) 402-4014 (phone)
(510) 794-8540 (fax)
jmaurino@qbius.com (email)*		dparker@qbius.com (email)*

*The inclusion of an email address does not obligate Landlord to provide a notice by electronic mail.

All notices, demands, requests, advices or designations by Tenant to Landlord shall be sent by United States certified or registered mail, postage prepaid, or by a reputable commercial carrier’s same day or overnight service addressed to Landlord at its offices at: PEERY/ARRILLAGA, 2560 MISSION COLLEGE BLVD., SUITE 101, SANTA CLARA, CA 95054, Attention: Company Manager.  Each notice, request, demand, advice or designation referred to in this Paragraph shall be deemed received on the date of the personal service or receipt or refusal to

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accept receipt of the mailing thereof in the manner herein provided, as the case may be.  Either party shall have the right, upon ten (10) days written notice to the other, to change the address as noted herein; however, Landlord shall send Tenant notices to only one address of Tenant as identified above.

37.          EXAMINATION OF LEASE.  Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for a lease, and this instrument is not effective as a lease or otherwise until its execution and delivery by both Landlord and Tenant.

38.          DEFAULT BY LANDLORD.  Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within a reasonable time, but in no event later than (30) days after receipt of written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises whose name and address shall have heretofore been furnished to Tenant in writing, specifying wherein Landlord has failed to perform such obligations; provided, however, that if the nature of Landlord’s obligations is such that more than thirty (30) days are required for performance, then Landlord shall not be in default if Landlord commences performance within such thirty (30) day period and thereafter diligently prosecutes the same to completion.  Landlord shall, however, make a reasonable effort to take immediate action on its obligations on an emergency situation that impairs (i) the safety of the Building and/or (ii) the occupancy of the Building.

39.          CORPORATE AUTHORITY.  If Tenant is a corporation (or a partnership), each individual executing this Lease on behalf of said corporation (or partnership) represents and warrants that he is duly authorized to execute and deliver this Lease on behalf of said corporation (or partnership) in accordance with the by-laws of said corporation (or partnership in accordance with the partnership agreement) and that this Lease is binding upon said corporation (or partnership) in accordance with its terms.  If Tenant is a corporation, Tenant shall, within thirty (30) days after execution of this Lease, deliver to Landlord a certified copy of the resolution of the Board of Directors of said corporation authorizing or ratifying the specific execution of this Lease by the individual executing said Lease.  In lieu of said corporate resolution, Tenant may provide Landlord with an outside legal opinion stating that the party executing this Lease on behalf of Tenant is authorized to do so by the Board of Directors.

40.          LIMITATION OF LIABILITY.  In consideration of the benefits accruing hereunder, Tenant and all successors and assigns covenant and agree that, in the event of any actual or alleged failure, breach or default hereunder by Landlord:

(a)           the sole and exclusive remedy shall be against Landlord’s interest in the Premises leased herein;

(b)           no partner of Landlord shall be sued or named as a party in any suit or action (except as may be necessary to secure jurisdiction of the partnership);

(c)           no service of process shall be made against any partner of Landlord (except as may be necessary to secure jurisdiction of the partnership);

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(d)           no partner of Landlord shall be required to answer or otherwise plead to any service of process;

(e)           no judgment will be taken against any partner of Landlord;

(f)            any judgment taken against any partner of Landlord may be vacated and set aside at any time without hearing;

(g)           no writ of execution will ever be levied against the assets of any partner of Landlord;

(h)           these covenants and agreements are enforceable both by Landlord and also by any partner of Landlord.

Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by statute or at common law.

41.          SIGNS.  No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside of the Building or any exterior windows of the Building without the written consent of Landlord first had and obtained and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name or notice without notice to Tenant and at the expense of Tenant.  If Tenant is allowed to print or affix or in any way place a sign in, on, or about the Premises, upon expiration or other sooner termination of this Lease, Tenant at Tenant’s sole cost and expense shall both remove such sign and repair all damage in such a manner as to restore all aspects of the appearance of the Premises to the condition prior to the placement of said sign.

All approved signs and/or lettering on sign monuments and/or interior Common Area sign directories, if any, shall be printed, painted, affixed or inscribed at the sole cost and expense of Tenant by a licensed contractor approved of by Landlord.

Tenant shall not place anything or allow anything to be placed near the glass of any window, door partition or wall which may appear unsightly from outside the Premises.

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Notwithstanding anything to the contrary in this Paragraph 41 and subject to (i) Tenant complying with the Design Guidelines of the Ardenwood Corporate Commons, a copy of which has been provided to Tenant and (ii) Landlord’s approval of Tenant’s signage (which approval shall not be unreasonably withheld), Tenant shall be entitled to install, at Tenant’s sole cost and expense, Tenant’s name on (x) Tenant’s Proportionate Share of the existing monument sign for the Building in which the Premises are located (the exact placement and size of Tenant’s sign is to be approved by Landlord), (y) on the exterior glass adjacent to the entrance to the main lobby of the Building (the exact placement and size of Tenant’s sign is to be approved by Landlord), and (z) on the entrance door to Tenant’s Leased Premises, with the understanding that Tenant shall be liable for repairing any damage to said monument and door resulting from the installation and or removal of said signs upon Lease Termination.

42.          CONSENT.  Whenever the consent of one party to the other is required hereunder, such consent shall not be unreasonably withheld.

43.          AUTHORITY TO EXECUTE.  The parties executing this Lease hereby warrant and represent that they are properly authorized to execute this Lease and bind the parties on behalf of whom they execute this Lease and to all of the terms, covenants and conditions of this Lease as they relate to the respective parties hereto.

44.          HAZARDOUS MATERIALS:  Landlord and Tenant agree as follows with respect to the existence or use of “Hazardous Materials” (as defined herein) on, in, under or about the Premises and real property located beneath said Premises and the Common Areas of the Complex (hereinafter collectively referred to as the “Property”):

A.            As used herein, the term “Hazardous Materials” shall mean any material, waste, chemical, mixture or byproduct which is or hereafter is defined, listed or designated under Environmental Laws (defined below) as a pollutant, or as a contaminant, or as a toxic or hazardous substance, waste or material, or any other unwholesome, hazardous, toxic, biohazardous, or radioactive material, waste, chemical, mixture or byproduct, or which is listed, regulated or restricted by any Environmental Law (including, without limitation, petroleum hydrocarbons or any distillates or derivatives or fractions thereof, polychlorinated biphenyls, or asbestos).  As used herein, the term “Environmental Laws” shall mean any applicable Federal, State of California or local government law (including common law), statute, regulation, rule, ordinance, permit, license, order, requirement, agreement, or approval, or any determination, judgment, directive, or order of any executive or judicial authority at any level of Federal, State of California or local government (whether now existing or subsequently adopted or promulgated) relating to pollution or the protection of the environment, ecology, natural resources, or public health and safety.

B.            Tenant shall obtain Landlord’s written consent, which may be withheld in Landlord’s discretion, prior to the occurrence of any Tenant’s Hazardous Materials Activities (defined below) (and Tenant shall first provide Landlord with a list of said materials used and specify the location in the Premises where said materials are used and stored, the method of storage and disposal of the same, and a copy of the related permits); provided, however, that Landlord’s consent shall not be required for normal use in compliance with applicable

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Environmental Laws of customary household and office supplies, such as mild cleaners, lubricants and copier toner.  As used herein, the term “Tenant’s Hazardous Materials Activities” shall mean any and all use, handling, generation, storage, disposal, treatment, transportation, discharge, or emission of any Hazardous Materials on, in, beneath, to, from, at or about the Property, in connection with Tenant’s use of the Property, or by Tenant or by any of Tenant’s agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees.  Tenant agrees that any and all Tenant’s Hazardous Materials Activities shall be conducted in strict, full compliance with applicable Environmental Laws at Tenant’s expense, and shall not result in any contamination of the Property or the environment.  Tenant shall not discharge any Hazardous Materials in the plumbing, sewer and/or storm drains in the Premises and/or Complex.  Tenant agrees to provide Landlord with prompt written notice of any spill or release of Hazardous Materials at the Property during the term of the Lease of which Tenant becomes aware, and further agrees to provide Landlord with prompt written notice of any violation of Environmental Laws in connection with Tenant’s Hazardous Materials Activities of which Tenant becomes aware.  If Tenant’s Hazardous Materials Activities involve Hazardous Materials other than normal use of customary household and office supplies, Tenant also agrees that Tenant shall at Tenant’s cost and expense: (i) install such Hazardous Materials monitoring, storage and containment devices as required by applicable Environmental Law and/or the governing agencies (however, in no event shall Tenant discard any Hazardous Materials in the Building plumbing system and/or the Building sewer system) and (ii) deliver to Landlord by April 1, 2008 and on April 1 of each year thereafter during the Term of this Lease and any extended Term thereof, a written report prepared by a licensed, qualified environmental consultant, reasonably acceptable to Landlord, which confirms that Tenant is in compliance with all applicable Environmental Laws with respect to Tenant’s Hazardous Materials Activities at the Premises or if not in compliance, the corrective action required; said report shall include a list of the Hazardous Materials used, stored and/or disposed at the Premises and the location(s) within the Premises of such Hazardous Materials use, storage and/or disposal.  Tenant, at its expense, shall promptly undertake and complete any and all steps necessary to be in full compliance with applicable Environmental Laws and to fully correct any and all problems or deficiencies addressed in said report; and Tenant shall promptly provide Landlord with documentation of all such corrective action taken.

C.            Prior to termination or expiration of the Lease, Tenant, at its expense, shall (i) properly remove from the Property all Hazardous Materials which come to be located at the Property in connection with Tenant’s Hazardous Materials Activities, and (ii) fully comply with and complete all facility closure requirements of applicable Environmental Laws regarding Tenant’s Hazardous Materials Activities, including but not limited to (x) properly restoring and repairing the Property to the extent damaged by such closure activities, and (y) obtaining from the local Fire Department or other appropriate governmental authority with jurisdiction a written concurrence that closure has been completed in compliance with applicable Environmental Laws.  Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any such closure activities.

D.            If Landlord, in its sole discretion, believes that the Property has become contaminated as a result of Tenant’s Hazardous Materials Activities, Landlord in addition to any other rights it may have under this Lease or under Environmental Laws or other laws, may enter

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upon the Property and conduct inspection, sampling and analysis, including but not limited to obtaining and analyzing samples of soil and groundwater, for the purpose of determining the nature and extent of such contamination.  Tenant shall promptly reimburse Landlord for the costs of such an investigation, including but not limited to reasonable attorneys’ fees Landlord incurs with respect to such investigation, that discloses Hazardous Materials contamination for which Tenant is liable under this Lease.  Notwithstanding the above, Landlord may, at its option and in its sole and absolute discretion, choose to perform remediation and obtain reimbursement for cleanup costs as set forth herein from Tenant.  Any cleanup costs incurred by Landlord as the result of Tenant’s Hazardous Materials Activities shall be reimbursed by Tenant within thirty (30) days of presentation of written documentation of the expense to Tenant by Landlord.  Such reimbursable costs shall include, but not be limited to, any reasonable consultants’ and attorneys’ fees incurred by Landlord.  Tenant shall take all actions necessary to preserve any claims it has against third parties, including, but not limited to, its insurers, for claims related to its operation, management of Hazardous Materials or contamination of the Property.  Except as may be required of Tenant by applicable Environmental Laws, Tenant shall not perform any sampling, testing, or drilling to identify the presence of any Hazardous Materials at the Property, without Landlord’s prior written consent which may be withheld in Landlord’s discretion.  Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any sampling, testing or drilling performed pursuant to the preceding sentence.

E.             Tenant shall indemnify, defend (with legal counsel acceptable to Landlord, whose consent shall not unreasonably be withheld) and hold harmless Landlord, its employees, assigns, successors, successors-in-interest, agents and representatives from and against any and all claims (including but not limited to third party claims from a private party or a government authority), liabilities, obligations, losses, causes of action, demands, governmental proceedings or directives, fines, penalties, expenses, costs (including but not limited to reasonable attorneys’, consultants’ and other experts’ fees and costs), and damages, which arise from or relate to: (i) Tenant’s Hazardous Materials Activities; (ii) releases or discharges of Hazardous Materials at the Premises and/or on the Property if released and/or discharged by Tenant, Tenant’s agents, employees, contractors, vendors, invitees, visitors or its future subtenants or assignees, which occur during the Term of this Lease, (iii) any Hazardous Materials contamination caused by Tenant prior to the Commencement Date of the Lease; or (iv) the breach of any obligation of Tenant under this Paragraph 44 (collectively, “Tenant’s Environmental Indemnification”).  Tenant’s Environmental Indemnification shall include but is not limited to the obligation to promptly and fully reimburse Landlord for losses in or reductions to rental income, and diminution in fair market value of the Property.  Tenant’s Environmental Indemnification shall further include but is not limited to the obligation to diligently and properly implement to completion, at Tenant’s expense, any and all environmental investigation, removal, remediation, monitoring, reporting, closure activities, or other environmental response action (collectively, “Response Actions”).  Tenant shall promptly provide Landlord with copies of any claims, notices, work plans, data and reports prepared, received or submitted in connection with any Response Actions.

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As evidenced by their initials set forth immediately below, Tenant acknowledges that Landlord has provided Tenant with copies of the environmental reports listed on Exhibit C (“Reports”), and Tenant acknowledges that Tenant and Tenant’s experts (if any) have had ample opportunity to review such reports and that Tenant has satisfied itself as to the environmental conditions of the Property and the suitability of such conditions for Tenant’s intended use of the Property.  To the best of Landlord’s actual knowledge as of the date of this Lease, except as noted in said Reports, no additional on site Hazardous Materials contamination exist on the Property; however, Landlord shall have no obligation to further investigate.

Initial:		Initial:		”
	Tenant		Landlord

It is agreed that the Tenant’s responsibilities related to Hazardous Materials will survive the expiration or termination of this Lease and that Landlord may obtain specific performance of Tenant’s responsibilities under this Paragraph 44.

45.          BROKERS.  Landlord and Tenant each represent and warrant to the other that they have not dealt with any real estate brokers, agents, or finders in connection with the original Term of this Lease, and knows of no real estate broker, agent or finder who is entitled to a commission in connection with this Lease (“Lease Commission”).  Each party agrees to defend, protect, indemnify and hold the other party harmless from and against all claims for Lease Commissions, finder’s fees, and other compensation made by any broker, agent, or finder as consequence of the indemnifying party’s actions or dealings with such broker, agent or finder.  The parties hereto acknowledge that Landlord will not pay a Lease Commission to any broker secured by Tenant related to the original Term of this Lease, or in the event this Lease is extended or the square footage leased hereunder is increased for any reason whatsoever.

46.          PERSONAL PROPERTY OF LANDLORD:  Tenant acknowledges that the Furniture within the Premises (as detailed on Exhibit D attached hereto) (“Furniture”), is the personal property of Landlord and is being leased hereunder by Tenant (hereinafter referred to as “Personal Property of Landlord”) free of Additional Rent.  Tenant agrees, at its sole cost and expense, to maintain, repair and replace the Personal Property of Landlord as needed, normal wear and tear excepted.  Tenant shall not replace, remove, or encumber in any way, any of the Personal Property of Landlord without Landlord’s prior written consent

47.          ASSOCIATION DUES:  The Premises is part of the Ardenwood Property Owner’s Association, and is subject to dues to fund the cost of the Association’s obligations and expenses as authorized under the By-Laws of said Association (“Association Dues”).  As of the date of this Lease, Tenant’s current Proportionate Share of the Association Dues is currently estimated at Three and 51/100 Dollars ($3.51) per month and is subject to adjustment as provided for by said Association.  Said Association Dues are payable by Tenant to Landlord as Additional Rent on a monthly basis throughout the Term of this Lease.  Tenant understands that it will not be a direct member of the Association.

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48.          TENANT’S OPTION TO TERMINATE LEASE:  Provided Tenant is not in default in any of the terms, covenants and conditions of this Lease and any amendments thereto, and in exchange for the payment to Landlord of a Termination Fee as referenced below, Landlord hereby grants to Tenant Two (2) Options to Terminate this Lease, subject to the following terms and conditions:

A.            Tenant’s First Option to Terminate:  Provided Tenant is not in default in any of the terms, covenants and conditions of this Lease and any amendments thereto, Tenant shall have the right to terminate this Lease effective October 31, 2007, by giving Landlord notice of Tenant’s exercise of said First Option to Terminate this Lease, which written notice must be received by Landlord not later than March 31, 2007.

1.             In the event Tenant fails to timely exercise Tenant’s First Option to Terminate as set forth herein in writing, this Lease shall, subject to the terms of this Lease, continue in full force and effect for the full remaining Term hereof, absent this Paragraph 48.A but subject to Tenant’s Second Option to Terminate pursuant to Paragraph 48.B (“Tenant’s Second Option to Terminate”) below.

2.             In the event Tenant timely exercises Tenant’s First Option to Terminate as set forth in this Paragraph 48.A, this Lease shall be amended and executed by the parties hereto to memorialize the exercise by Tenant of said Option to Terminate this Lease and the revised Termination Date of October 31, 2007, with each party being responsible for the full performance of all terms, covenants, and conditions of said Lease through the effective date of termination as set forth above and thereafter for those terms and conditions of the Lease that survive the termination of the Lease.

3.             As consideration to Landlord for Tenant’s exercise of the privilege of the early termination of this Lease under this First Option to Terminate, Landlord shall retain one hundred percent (100%) of the Prepaid Termination Fee of $106,727.40 as referenced in Paragraph 49 (“Prepaid Termination Fee”) below.

B.            Tenant’s Second Option to Terminate.  Provided Tenant is not in default in any of the terms, covenants and conditions of this Lease and any amendments thereto, Tenant shall have the right to terminate this Lease effective October 31, 2008, by giving Landlord notice of Tenant’s exercise of said Second Option to Terminate this Lease, which written notice must be received by Landlord not later than March 31, 2008.

1.             In the event Tenant fails to timely exercise Tenant’s Second Option to Terminate as set forth herein in writing, Tenant shall have no further Option to Terminate this Lease, and this Lease shall, subject to the terms of this Lease, continue in full force and effect for the full remaining Term hereof, absent this Paragraph 48.

2.             In the event Tenant timely exercises Tenant’s Second Option to Terminate as set forth in this Paragraph 48.B, this Lease shall be amended and executed by the parties hereto to memorialize the exercise by Tenant of said Option to Terminate this Lease and the revised Termination Date of October 31, 2008, with each party being

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responsible for the full performance of all terms, covenants, and conditions of said Lease through the effective date of termination as set forth above and thereafter for those terms and conditions of the Lease that survive the termination of the Lease.

3.             As consideration to Landlord for Tenant’s exercise of the privilege of the early termination of this Lease under this Second Option to Terminate, Landlord shall retain one hundred percent (100%) of the Adjusted Prepaid Termination Fee ($54,665.25) as referenced in Paragraph 49 (“Prepaid Termination Fee”) below.

C.            Surrender of Premises.  In the event Tenant timely exercises Tenant’s Option to Terminate as set forth in Paragraph 48.A (“Tenant’s First Option to Terminate”) or 48.B (“Tenant’s Second Option to Terminate”) above, Tenant agrees to surrender the Leased Premises to Landlord, free and clear of Tenant’s occupancy or the occupancy of any subtenants, as of the early Termination Date, and shall comply with all surrender requirements as outlined in Paragraphs 8 (“Acceptance and Surrender of Premises”), 10 (“Alterations and Additions”) and 44 (“Hazardous Materials”) of this Lease.

D.            Option to Terminate Not Transferable.  The Option to Terminate rights of Tenant under this Paragraph 48 are granted for Tenant’s personal benefit and may not be assigned or transferred by Tenant, either voluntarily or by operation of law, in any manner whatsoever, except under a Permitted Transfer pursuant to Paragraph 21.E (“Assignment and Subletting: Permitted Transfers”).  In the event that Landlord consents to an assignment under Paragraph 21.A (“Assignment and Subletting”), excluding a Permitted Transfer, the Option to Terminate granted herein shall be void and of no force and effect, whether or not Tenant shall have purported to exercise such Option to Terminate prior to such assignment, and (i) the then current balance of the Prepaid Termination Fee shall first be applied to Tenant’s account to offset any amounts due as of the effective date of the assignment and (ii) the balance (if any) shall be refunded to Tenant.

E.             Default — Forfeiture of Option to Terminate.  Notwithstanding anything to the contrary in this Paragraph 48 (“Tenant’s Option to Terminate Lease”), the Option to Terminate is automatically forfeited by Tenant (without notice from Landlord) in the event Tenant is, at any time during the Term of this Lease, in default of said Lease and if Tenant does not completely cure said default within five days for a monetary default and thirty days for a non-monetary default; provided, however that with respect to non-monetary defaults not involving Tenant’s failure to pay Basic Rent or Additional Rent, Tenant shall not be in default of any non-monetary obligation if (i) more than thirty (30) days is required to cure such non-monetary default, and (ii) Tenant commences cure of such default as soon as reasonably practicable after receiving written notice of such default from Landlord and thereafter continuously and with due diligence prosecutes such cure to completion.

49.          PREPAID TERMINATION FEE:  Landlord has agreed to allow Tenant to Terminate this Lease as referenced in Paragraph 48 (“Tenant’s Option to Termination Lease”) above in exchange for a Termination Fee equal to (i) $106,727.40 in the event Tenant exercises Tenant’s First Option to Terminate as referenced in Paragraph 48.A (“Tenant’s First Option to Terminate”) or (ii) $54,665.25 in the event Tenant exercises Tenant’s Second Option to

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Terminate as referenced in Paragraph 48.B (“Tenant’s Second Option to Terminate”).  Concurrently with the execution of this Lease, Tenant shall pay to Landlord the prepaid Termination Fee of $106,727.40 (“Prepaid Termination Fee”).  Said Prepaid Termination Fee shall be either retained by Landlord or Tenant shall be given credit against the Basic Rent due as referenced below:

A.            Lease Terminates on or before October 31, 2007:  In the event the Lease Terminates on or before October 31, 2007 by an exercise by Tenant of Tenant’s First Option to Terminate pursuant to Paragraph 48.A (“Tenant’s First Option to Terminate”) above, the entire Prepaid Termination Fee of $106,727.40 shall be retained by Landlord as a Termination Fee.

B.            Lease Does Not Terminate by October 31, 2007:  In the event Landlord does not receive notice by January 31, 2007 of Tenant’s exercise of its First Option to Terminate this Lease effective October 31, 2007, (i) Landlord shall apply $52,062.15 of said Prepaid Termination Fee, as a credit against the Basic Rent due for the months of November 2007, December 2007, January 2008, February 2008 and March 2008 and (ii) Landlord shall hold the remaining balance ($54,665.25) of said Prepaid Termination Fee (“Adjusted Prepaid Termination Fee”) as a potential Termination Fee to be retained by Landlord and/or to be given as a credit against Tenant’s Basic Rent subject to Paragraphs 49.0 (“Lease Terminates on or before October 31, 2008”) and 49.D (“Lease Does Not Terminate by October 31, 2008”) below.

C.            Lease Terminates on or before October 31, 2008.  In the event the Lease Terminates on or before October 31, 2008 by an exercise of Tenant’s Second Option to Terminate pursuant to Paragraph 48.B above, the Adjusted Prepaid Termination Fee of $54,665.25 shall be retained by Landlord as a Termination Fee.

D.            Lease Does Not Terminate by October 31, 2008.  In the event Landlord does not receive notice by January 31, 2008 of Tenant’s exercise of its Second Option to Terminate this Lease effective October 31, 2008, Landlord shall apply said Adjusted Prepaid Termination Fee ($54,665.25) as a credit against the Basic Rent due for the months of November 2008, December 2008, January 2009, February 2009 and March 2009.

50.          MISCELLANEOUS AND GENERAL PROVISIONS.

A.            Use of Building Name.  Tenant shall not, without the written consent of Landlord, use the name of the Building for any purpose other than as the address of the business conducted by Tenant in the Premises.

B.            Premises Address.  It is understood that (i) the current address for the Premises is shown on page 1 of this Lease, and that (ii) the address for the Premises is subject to change at any time by the City in which the Premises are located (the “City”).  In the event the address assigned to the Premises is changed by the City, this Lease shall thereafter be amended to reflect the assigned address for the Premises leased hereunder and Landlord shall not be liable to Tenant for any costs or expenses incurred by Tenant as a result of said address change.

C.            Choice of Law/Venue; Severability.  This Lease shall in all respects be governed by and construed in accordance with the laws of the County of Santa Clara in the State

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of California and each party specifically stipulates to venue in Santa Clara County.  If any provision of this Lease shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect.

D.            Definition of Terms.  The term “Premises” includes the space leased hereby and any improvements now or hereafter installed therein or attached thereto.  The term “Landlord” or any pronoun used in place thereof includes the plural as well as the singular and the successors and assigns of Landlord.  The term “Tenant” or any pronoun used in place thereof includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations, and their and each of their respective heirs, executors, administrators, successors and permitted assigns, according to the context hereof, and the provisions of this Lease shall inure to the benefit of and bind such heirs, executors, administrators, successors and permitted assigns.

The term “person” includes the plural as well as the singular and individuals, firms, associations, partnerships and corporations.  Words used in any gender include other genders.  If there be more than one Tenant the obligations of Tenant hereunder are joint and several.  The paragraph headings of this Lease are for convenience of reference only and shall have no effect upon the construction or interpretation of any provisions hereof.

E.             Time Of Essence.  Time is of the essence of this Lease and of each and all of its provisions.

F.             Quitclaim.  At the expiration or earlier termination of this Lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten (10) days after written demand from Landlord to Tenant, any quitclaim deed or other document required by any reputable title company, licensed to operate in the State of California, to remove the cloud or encumbrance created by this Lease from the real property of which Tenant’s Premises are a part.

G.            Incorporation of Prior Agreements; Amendments.  This instrument along with any exhibits and attachments hereto constitutes the entire agreement between Landlord and Tenant relative to the Premises and this agreement and the exhibits and attachments may be altered, amended or revoked only by an instrument in writing signed by both Landlord and Tenant.  Landlord and Tenant agree hereby that all prior or contemporaneous oral agreements between and among themselves and their agents or representatives relative to the leasing of the Premises are merged in or revoked by this agreement.

H.            Recording.  Neither Landlord nor Tenant shall record this Lease or a short form memorandum hereof without the consent of the other.

I.              Amendments for Financing.  Tenant further agrees to execute any reasonable amendments required by a lender to enable Landlord to obtain financing, so long as Tenant’s rights hereunder are not substantially affected.

J.             Clauses, Plats and Riders.  Clauses, plats and riders, if any, signed by Landlord and Tenant and endorsed on or affixed to this Lease are a part hereof.

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K.            Diminution of Light, Air or View.  Tenant covenants and agrees that no diminution or shutting off of light, air or view by any structure which may be hereafter erected (whether or not by Landlord) shall in any way affect this Lease, entitle Tenant to any reduction of Rent hereunder or result in any liability of Landlord to Tenant.

[SIGNATURES ON NEXT PAGE]

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IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the day and year last written below.

LANDLORD:		TENANT:
JOHN ARRILLAGA SURVIVOR’S TRUST		QUARK BIOTECH, INC. a California corporation
By:	/s/ JASON PEERY	By:	/s/ DANIAL ZURR
	Jason Peery, as his Attorney in Fact		Danial Zurr, President and Chief Executive Officer
Date:	9/14/06	Date:	9/13/06
RICHARD T. PEERY SEPARATE PROPERTY TRUST
By:	/s/ JASON PERRY
	Jason Peery, as Special Trustee
Date:	9/14/06

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EXHIBIT C TO LEASE AGREEMENT DATED SEPTEMBER 8, 2006 BETWEEN THE JOHN ARRILLAGA SURVIVOR’S TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD, AND QUARK BIOTECH, INC., AS TENANT

HAZARDOUS MATERIALS REPORTS

PROVIDED TO TENANT

1)Preliminary Environmental Assessment and Soil Testing for Ardenwood Corporate Commons: prepared for Bedford Properties on August 10, 1988 by Kaldveer Associates;

2)Preliminary Environmental Assessment and Soil Testing for Ardenwood Corporate Commons Lots 1 through 27: prepared for Bedford Properties on June 13, 1989 by Kaldveer Associates;

3)Phase I Site Assessment for Ardenwood Corporate Commons: prepared for Bedford Properties in July 1991 by Mittelhauser Corporation.

EXHIBIT D TO LEASE AGREEMENT DATED SEPTEMBER 8, 2006, BY AND BETWEEN THE JOHN ARRILLAGA SURVIVOR’S TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD, AND QUARK BIOTECH, INC., AS TENANT.

PERSONAL PROPERTY OF LANDLORD TO BE LEASED BY TENANT:

Landlord shall lease to Tenant the following furniture, which items are currently installed in the Premises and which shall be leased by Tenant pursuant to Lease Paragraph 46 (“Personal Property of Landlord”):

Quantity	Description
10	Pre-owned 8’ x 8’ cubicles

EX-10.20

Exhibit 10.20

Lease Contract

Made and executed on the 15th day of December, 1995

Between

Kiryat Weizmann Science Park Ltd.
Of 13 Ahad Ha’am St., Tel Aviv
(hereinafter: the “Lessor”)

Of the First Part;

And

QBA Enterprises Ltd.
Private Company No. 51-178878-8
38 Tamar St.
Omer 84965
(hereinafter: the “Lessee”)

Of the Second Part;

Whereas:The Lessor has rights in the Premises as defined below, under which it is entitled to lease the Premises to the Lessee;  and

Whereas:The Lessee wishes to lease the Premises from the Lessor and the Lessor agrees to such subject to the provisions of this contract;

Therefore, it is declared, stipulated and agreed between the Parties as follows:

1.The Preamble above forms an integral part of this contract.

2.Interpretation

2.1The following expressions shall have the meanings set out alongside them, as follows:

The “Park”that area of land at Nes Ziona known as Kiryat Weizmann – Science Park

The “Building” – the building in the Park on which the Premises are included, as set out in the Schedule, and as market with a red border in Annex B.

The “Premises” – part of the Building, including all of the fixtures thereon, marked in green on Annex C, and as set out in the Schedule, as may be increased or decreased with the consent of the Parties.

The “Institute” – the Weizmann Institute of Science.

The “Schedule” – the schedule to this Contract.

2.2It is agreed between the Parties that any amendment to this Contract made by the Parties with respect to the description of the Premises, the term of the Lease, the Rental and the method of payment thereof, or any other matter may only be done and shall only be valid if done in writing and signed by all of the Parties to this Contract.

2.3Headings of clauses in this Contract shall not constitute part of the Contract and shall not be taken into account in the interpretation hereof.

2.4The annexes to this Contract form an integral part of it.

2.5This Contract is exhaustive of all of the agreements between the Parties and no negotiations which preceded the execution of it or which took place contemporaneous with it or any declarations, representations, undertakings or agreements which preceded or which were a condition of execution of this Contract shall be taken into account, and all such are hereby null and void. Oral declarations and notices by the directors, officers or employees of the Lessor shall not bind the Lessor and the Lessor shall only be bound by this document when lawfully signed by its authorized signatories.

2.6Should the Lessee comprise a number of individuals, they shall be bound jointly and severally by all of its undertakings under this Contract, and under any documents and deeds signed by it and drafted at its instruction.

3.Delivery

(Delete whichever is inapplicable)

3.1[Deleted]

3.2Delivery

(Delete whichever is inapplicable)

The Premises shall be made available to the Lessee on the date set out in the Schedule as being the commencement of the Lease Term (hereinafter: the “Date of Delivery”), all of the systems in it being in good order.

For the avoidance of doubt, it is hereby declared and agreed that failure by the Lessee to be present on the Date of Delivery for the purpose of receipt of possession of the Premises shall not harm any of the Lessee’s undertakings under this Contract.

3.3[Deleted]

3.3.1[Deleted]

3.3.2[Deleted]

3.3.3“Date of Delivery” shall mean the date on which the Lessor is ready to deliver the Premises to the Lessee in accordance with the provisions above and in accordance with notice as follows even if such readiness is subject to a reservation, whether in the notice or thereafter, that the Lessee fulfill undertakings that it is required to fulfill as at such date as a precondition to delivery, whether delivery actually takes place or otherwise.

Notice in writing from the Lessor to the Lessee to the effect that the Lessor is prepared to deliver the Premises to the Lessee as aforesaid shall be deemed to be an integral part of this Contract and the Date of Delivery set out in the notice shall be deemed for the purposes of this Contract to be the commencement of the Term of the Lease.

3.4The Premises shall be delivered to the Lessee on the date set out in the Schedule (hereinafter: the “Date of Delivery”) and the Term of the Lease shall commence on such date, whether the Lessee is present to receive the Premises on the Date of Delivery or otherwise.

3.5On the Date of Delivery, the Lessor and the Lessee shall draft a protocol in writing, to be signed by the Parties, setting out the state of the Premises and any defects or deficiencies in them, if any (hereinafter: the “Protocol of Delivery”). The Lessee shall be estopped from making any claim against the Lessor regarding any defect and/or deficiency and/or incompatibility not noted in the Protocol of Delivery.

4.Lease and Term of Lease

4.1The Lessor hereby leases the Premises to the Lessee and the Lessee hereby leases the Premises from the Lessor for the period set out in the Schedule (hereinafter: the “Term of the Lease”), as of the Date of Delivery. The Lessee shall have an option to extend the Term of the Lease in the event so prescribed in the Schedule.

4.2The Lessee shall not be entitled to bring the Lease to an end prior to the end of the Lease Term. No termination of use of the Premises and/or vacation of the Premises by the Lessee prior to the end of the Term of the Lease shall release the Lessee from its undertakings under this Contract, including, but without derogation from the generality of the aforesaid, the Lessee’s undertaking to pay the Rental to the Lessor.

4.3The Lease under this Contract is a net lease, and the Lessee shall bear all of the payments for the Premises for the Term of the Lease, whether such apply to owners or persons in possession, whether imposed at the time of execution of this Contract or in the future.

4.4The provisions of this clause constitute a fundamental condition of this Contract and breach of them shall constitute a fundamental breach of this Contract.

5.Knowledge of Premises

(Built-up Premises)

The Lessee declares that it has inspected the Park, the Building and the Premises, has seen and inspected them and their surrounds, knows and is aware of all of the plans and details relating thereto, which might affect its entry into this Contract, and has found all of the above to be appropriate for all of its purposes, and subject to delivery of the Premises into its possession in accordance with the provisions of this Contract, and it hereby waives any claim of incompatibility and any other claim regarding the Park, the Building, the Premises, the ability to use them and his entry into this Contract.

For the avoidance of doubt, the Lessee hereby declares that it is taking possession of the Premises as is, without any alteration and/or change whatsoever, and it confirms that the Premises in their present condition are indeed suitable to it in all aspects, and that it shall not require or be entitled to require that the Lessor perform any alteration and/or change to the Premises.

[Deleted]

6.Delivery of the Premises

The Lessee undertakes not to use the Premises for any purpose whatsoever, in any manner whatsoever, other than for the purpose of the Lease as set out in the Schedule. The provisions of this clause constitute a fundamental condition of this Contract, and breach thereof constitutes a fundamental breach of this Contract.

7.Rental

7.1The Lessee undertakes to pay the Lessor the Rental in the following installments, on the following dates and in the following manner:

7.1.1The base rental during the Term of the Lease is linked to the Index and shall be paid by the Lessee to the Lessor in advance, on the dates set out in the Schedule.

7.1.2Payments of the base rental shall be linked to the Index in accordance with the following provisions:

“Index” – The index known as the consumer price index (including fruit and vegetables) published by the Central Bureau of

Statistics and General Research, and any such index even if published by a different official institute or body, and any official index which might stand in lieu of such, whether constructed on the same data or not.

If another index stands in lieu of such and the bureau, body or institute as aforesaid has not set out the relationship between it and the index that it replaces [such ratio shall be prescribed] by the chairman of the board of directors of Bank Leumi Le-Israel Ltd. or the person in fact acting as such at any time, at the Lessor’s demand.

“Base Index” – as set out in the Schedule

“New Index” – shall mean, for any payment of Rental, the Index known on the date prescribed for the making of such payment or the date of actual payment, whichever is the higher.

If, on the date of actual payment of any of the payments of the base rental, the New Index is higher than the Base Index, then the payment shall increase by the appropriate rate of increase of the New Index over the Base Index. If on the date of actual payment of any of the payments of the rental, the New Index is equal or less than the Base Index, the payment shall remain unchanged.

7.2In order to facilitate the collection of rental payments and the linkage differentials thereupon, and any other sum owing to the Lessor from the Lessee, the Lessee undertakes to provide the Lessor, on such date as may be prescribed by the Lessor and in any event within 7 days of the date of execution of this Contract or 7 days before the Date of Delivery, whichever is the earlier, permission to debit its account in the form acceptable at Bank Leumi Le-Israel Ltd. It is hereby declared, for the avoidance of doubt, that receipt of such permission and any use thereof made by the Lessor shall not be deemed to be payment unless all of the payments are indeed made in full and on time.

7.3Where any two consecutive payments of rental and/or any other sum owing to the Lesssor by the Lessee are not paid on time in respect of the above amounts, within 7 days of the giving of notice in writing of such by the Lessor to the Lessee, then all of the rest of the payments of rental shall become immediately payable and the Lessee shall be required to pay the entire rental for the entire Term of the Lease not yet paid as at such date, within two business days of the Lessor’s first demand, without derogating from the Lessor’s right to view non-payment on time as breach of the Contract and of its rights deriving therefrom. It is hereby declared, for the avoidance of doubt, that collection of the rental in such a case shall not be deemed to be a waiver of or consent by the Lessor to breach of the Contract by the Lessee.

7.4Notwithstanding the aforesaid, the rental shall be increased at the beginning of each year, as of the second year of the Term of the Lease, by the rate set out in the Schedule, and the provisions of clause 7.1 above shall apply to such increased rental sums mutatis mutandis.

7.5For the avoidance of doubt, the obligation to pay rental and other payments owing to the Lessor from the Lessee shall pertain to the Lessee absolutely, and failure to submit a rental account by the Lessor shall not derogate from or cause harm to the Lessee’s duty.

7.6The Lessor shall accredit any sum received from the Lessee at its absolute discretion on account of sums that the Lessee owes the Lessor at such time.

7.7The provisions of this clause constitute a fundamental condition of the Contract and breach of them or of any part of them shall constitute a fundamental breach of the Contract.

8.Taxes, Commissions and Other Payments

8.1In addition to the rental and without derogating from the generality of the aforesaid in section 4.3 above, the Lessee undertakes to make the following payments during the Term of the Lease (hereinafter: the “Lessee’s Payments”).

8.1.1All taxes, commissions, rates, levies, mandatory payments and expenses (hereinafter jointly: “taxes”) whether municipal or governmental, paid at present and/or to be paid in the future, whether currently existing or to be imposed in the future, for the Premises and the business being conducted thereupon, whether such taxes apply by law to owners, lessees or persons in possession of property, or whether they apply to owners.

The taxes applicable to a lessee or person in possession shall be paid by the Lessee directly to the competent authorities, and the taxes owed by owners shall be paid by the Lessee to the Lessor on the date of presentation of a document demanding payment of such taxes to the competent authority.

8.1.2The commissions and payments for a water meter and an electricity meter.

8.1.3Value added tax on the rental and any other payment owed by the Lessee under this Contract, which shall be paid together with any other payment in respect of which it is owed.

8.1.4Stamp duty owing on this Contract, the documents and other deeds under or on account of this.

8.1.5All fees and payments made for the consumption of water and electricity on the Premises, and applying to use of telephone if installed during the Term of the Lease.

8.1.6Any expense that may be incurred as a result of unreasonable and/or extraordinary use of the Premises and their environs, including, but without derogating from the generality of the aforesaid, expenses for the removal of waste caused by the Lessee, repair of the sewage system, etc.

8.1.7Expenses regarding insurance to be taken out by the Lessor to cover the Premises (separately or as part of the insurance covering the

Building), against all such risks as the Lessor may see fit, and at such insurance sum and other conditions that the Lessor may prescribe from time to time.

In the event that any of the above payments stem from obligations imposed on the Building in full, the Lessee shall pay a proportionate share of such payments owing on the Building, in accordance with the ratio of the area of the Premises to the area of the Building, gross.

8.1.8Other obligations under any law and/or if set out in the Schedule.

8.2In the even that the Lessee does not make any of the Lessee’s Payments immediately in accordance with the demand of the competent authority or of the Lessor, then without derogating from such duty, the Lessor shall be entitled, after giving prior notice to the Lessee of two business days in advance, to pay such accounts in lieu of the Lessee, and the Lessee shall be required to refund all moneys paid by the Lessor to cover any of the Lessee’s Payments as aforesaid, within 7 days of the Lessor’s first demand.

8.3The provisions of this section constitute a fundamental condition of this Contract and breach of such or of any part thereof shall constitute a fundamental breach of this Contract.

9.Non-Application of Tenants Protection Law

The Lessee declares and agrees that the construction of the Premises was completed after August 20, 1968, and that the provisions of the Tenants Protection Law (Consolidated Version), 5732-1972 or any other law that might replace it shall not apply to the Premises or to the Lease. The Lessee also declares that apart from the rental set out in the Schedule and its undertakings to pay the Lessee’s Payments as set out in clause 8 above, it has not paid and is not paying any sum whatsoever to the Lessor for the lease and use of the Premises either as key money or in any other manner whatsoever, and that it shall not be entitled to key payment or any payment whatsoever upon vacation by it of the Premises.

10.Repairs, Maintenance and Service

10.110.1.1The Lessor undertakes to provide cleaning and maintenance services for the common property in the Building to such extent and at such quality as it may prescribe, provided that the common property shall be maintained in a good and reasonable condition. In consideration for such services, the Lessor shall be entitled to collect a service fee from the tenants of the Building including the Lessee, which shall be equal to the sum of all of the expenses and outgoings that the Lessor shall incur in providing the services as set out in the Schedule, plus 15% (hereinafter – the “Building Service Fee”).

The Service Fee which the Lessee shall be required to pay the Lessor, shall be the same proportion of the Building Service Fee as the gross area of the Premises is to the total gross area held by tenants of the Premises [sic], except for the Lessor, so long as it does not make real use of the area possessed by it, or such other ratio as may be prescribed by the Lessor taking into account the purpose of the Lease.

10.1.2Supplementary Maintenance Fee for Buildings with Central Cooling System

In any building in which there is a central air conditioning system that relies on a central cooling tower, the Lessee shall, in addition to the maintenance fee set out above, pay a sum out of the cost of operation, maintenance and service of the central cooling system of the Building, equal to the proportionate part of the Premises out of the entire area of the Building.

10.2Apart from the aforesaid in this clause, the Lessor shall not be under any obligation or liability for repairs and/or maintenance and/or inspection and/or services whatsoever (hereinafter: the “Services”) on the Premises and/or the Building, and the Lessor shall also be under no obligation or liability whether under this Contract or under any law, for any damage and/or fault and/or defect of any kind or type whatsoever in the Premises or any equipment on the Premises, including airconditioning equipment, but with the exception of the manufacturer’s warranty period, whether such flow from faulty work, faulty materials, inappropriate materials, or incompatibility with specifications, or otherwise, whether patent or discoverable, and whether at the beginning of the Term of the Lease or thereafter, all whether caused by work on the Premises planned or done by the Lessor, or planned and/or initiated and/or at the request of the Lessee.

10.3In the event that the Lessor decides, at its discretion and/or is required by the Institute and/or by any competent, municipal, government or other authority whatsoever, to perform maintenance and inspection works of any kind or type whatsoever in any public areas and/or in any private open areas within the bounds of the Park and/or in any Buildings and/or installations intended to serve or be used by residents of the Park, or any part thereof, the Lessee shall be required to pay the Lessor the Service Fee as set out below.

The Service Fee that is to be paid by all of the persons in possession of Buildings at the Park shall be equal to the sum of all of the expenses and outgoings which the Lessor shall bear in providing the aforesaid maintenance services, plus 15% (hereinafter: the “Total Service Fee”). The Service Fee which the Lessee shall be required to pay the Lessor shall be proportionate to the Total Rental as the gross area of the Premises is proportionate to the total gross built-up area of all of the Buildings (including all of the floors) at the Park, held in fact by tenants or owners, apart from the Lessor, so long as it does not make actual use of the areas in its possession.

Notwithstanding the aforesaid, the Lessor shall be entitled to charge the Lessee to pay additional or larger service fees than those that it is required to pay under the above calculations in the event that the services required as a result of use of the Premises by the Lessee require greater than usual work or expense than in the case of other tenants of the Park, or whether the services provided to the Premises enable greater use of the Premises than that available to other tenants of the Park. The aforesaid shall apply mutatis mutandis in the event that the Lessor decides to provide maintenance and inspection services to the Building.

The aforesaid shall not impose any obligation upon the Lessor to perform any services within the grounds of the Park or with respect thereto.

10.4In the event that the Lessor is required or decides to effect maintenance and/or inspection services as set out in clause 10.3 above, the Lessor shall be entitled to do such via such other body that it may prescribe, and shall be entitled to require that the Lessee, at any time, enters into a service contract with such body in the form prescribed by it, provided that the maintenance and/or inspection fee that the Lessee is required to pay shall be set in accordance with the principles set out in clause 10.3 above.

10.5It is hereby agreed that the cost of any repair done by the Lessor as part of the services to be given by it under this clause which is covered by insurance that the Lessee has participated in paying for shall not be included in the expenses for the purpose of calculating the Service Fee.

11.Use of the Premises

11.1The Lessee shall be responsible for obtaining all of the licenses required to run its business on the Premises from the competent authorities, within the context of the purpose of the Lease, and it undertakes to run such only in accordance with the aforesaid licenses and the requirements of the law and any competent authority.

The Lessee declares that it has checked and knows that it is possible to obtain all of the licenses as set out in this clause, and that the Lessor shall not be under any liability in the event that the Lessee does not succeed in obtaining such.

11.2The Lessee shall not keep any materials, tools, equipment, produce, inventory or any other chattels whatsoever (hereinafter termed generally – the “chattels”) outside of the Premises without the Lessor’s consent. In the event that any chattels are found outside of the Premises without the Lessor’s consent having been given to such, the Lessor shall be entitled to remove them from such place at the Lessee’s expense, and it shall not be responsible for the integrity of such chattels.

11.3The Lessee shall fulfill all of the laws, regulations and by-laws applying to the Premises, the use thereof and the business, the work and operations done therein.

11.4The Premises or any part of them must not be used in such a way that might result in the causing of noises, odors, shocks, pollution, smoke, dust or any other nuisances outside the realm of what is reasonable, taking into account the nature of the Park in general and the nature of the immediate surrounds of the Premises in particular.

11.5The Lessee shall not throw waste of a quality or quantity that might harm the sewage system into such system, or that might harm the proper operation thereof, or that might endanger ordinary use of water sources, rivers, lakes, the sea or any other source.

For the purposes of this paragraph – the “sewage system” - central sewage or absorbent pits and channel and drainage systems and water purification plants, if and to the extent in existence.

The Lessee shall be required to ensure that the waste water does not contain solid substances that might damage pipes or channels, or that might harm sewage piping, control boxes, measuring equipment, purification plant, or that might block such.

11.6The Lessee undertakes not to hang, install or paint and signs, symbols or other advertisements on any part of the Building in which the Premises are situated without the consent of the Lessor in advance. The Lessee shall have the right to receive signage at the entrance to the Park, on the Building and on the floor where the Premises are situated, at its expense.

11.7Places outside of the Premises may only be used in the manner and way prescribed by the Lessor from time to time.

11.8The Lessee undertakes not to use the Premises or any materials or instruments on them, nor to do any acts on the Premises which involve risks that deviate from the insured risks as set out in section 8.1.7 above, unless the Lessor’s consent to such is given in writing and in advance. Where such consent is given, the Lessee undertakes to maintain such insurance to the satisfaction of the Lessor, against any damage to person or property which might be caused as a result of such risks, without derogating from the Lessor’s right to take out the additional insurance as above itself, and from the Lessee’s obligation to refund any sum expended by the Lessor with respect thereto immediately upon its first demand.

11.9The Lessee shall use the Premises and their surrounds so as not to cause any disturbance to the other tenants of the Building, to their welfare or enjoyment of their premises, and maintaining the common property and facilities in the Building and keeping those clean.

11.10Without derogating from the provisions of this clause above, the Lessee undertakes that no use will be made of the property which might cause noise and/or nuisance and/or pollution and/or any auxiliary result which contravenes the provisions of any law, and without derogating from the generality of the aforesaid, use shall not be made of the Premises which involves and/or creates, directly and/or indirectly, any chemical compounds and/or smoke and/or gases and/or bad odors and/or other active substances which might and/or are likely to cause harm to the environment in any manner whatsoever.

11.11The provisions of this clause constitute a fundamental condition of the Contract and breach thereof or of any part thereof shall constitute a fundamental breach of the Contract.

12.No alterations

12.1The Lessee undertakes not to effect or perform any alterations, repairs, improvements, additions or any building works whatsoever of any significance whatsoever, to the Premises (all such to be known hereinafter as the “Works”), without receiving the Lessor’s prior written consent to such.

It is particularly emphasized hereby that no bars or airconditioning units shall be installed without the prior written consent of the Lessor, and in the manner that the Lessor shall prescribe.

Should Works be done without the Lessor’s consent, then without derogating from its right to view such as a breach of the Contract, the Lessor shall be entitled:

12.1.1To require that the Lessee demolish and/or dismantle and/or remove the Works from the Premises and in such a case, the Lessee shall be required to make such repairs to the Premises as may be required as a result, in order to return the Premises to their state prior to the performance of the Works, and to complete all of the above within 14 days of the Lessor’s demand. In the event that the Lessee does not do so, the Lessor shall be entitled to do so at the Lessee’s expense; or

12.1.2To keep the Works as its own property and the Lessee agrees that such works shall be the Lessee’s exclusive property without the Lessee being owed anything in return for such.

12.2Where Works are done with the Lessor’s consent, then upon vacation of the Premises by the Lessee, the Lessee shall have the following choice:

12.2.1To demolish and/or dismantle and/or remove the Works from the Premises in which case the Lessee shall be required to effect such alterations to the Premises as may be required as a result of such, in order to restore such part of the Premises where the Works were performed, to their prior state before performance of the Works, and to conclude all such no later than the end of the Term of the Lease under this Contract. Should the Lessee not do so, the Lessor shall be entitled to do so at the Lessee’s expense;  or

12.2.2To keep the Works on the Premises in which case, they shall become the Lessor’s property without the Lessee being owned anything in return for such.

12.3The provisions of this section constitute a fundamental condition of the Contract and breach thereof or of any part thereof shall constitute a fundamental breach of the Contract.

13.Furniture and equipment

The Lessee shall be entitled to furnish the Premises and to install equipment thereupon provided that the installation of furniture and equipment shall not harm the Premises. The equipment which the Lessee shall be entitled to install and operate on the Premises shall be subject to clause 12 above.

14.Preservation of Premises

14.1The Lessee undertakes to use the Premises in a careful and reasonable manner, to keep the surrounds of the Premises clean, and to prevent any damage or fault to the Premises, including all of the facilities used in the Premises themselves or jointly with other premises.

14.2The Lessee shall be required to remedy any damage and/or fault caused to the Premises and the facilities as set out in clause 14.1 above immediately, and to replace any accessory installed on the Premises which may have been lost or broken with another similar accessory immediately.

14.3Should the Lessee not effect any repair that it is required to make as aforesaid, or not replace any unit that it is required to replace as aforesaid, the Lessor shall be entitled but not required to do so at the Lessee’s expense, and in any event, the Lessee shall be required to compensate the Lessor in full for any damage, fault, loss or defacement as aforesaid.

14.4The provisions of this section constitute a fundamental condition of this Contract and breach of them or of any part of them shall constitute a fundamental breach of the Contract.

15.Liability to Third Party

15.1The Lessee shall be liable to the Lessor and to any third party for all damage of any kind or type whatsoever, which may be caused to any person or property, including, but without derogating from the generality of the aforesaid, visitors on the Premises, the employees of the Lessee and any other person who may be on the Premises, stemming from the condition of the Premises and/or the equipment installed on them and/or the work, business or act or omission which may occur on the Premises and/or the conduct of the Lessee and/or its employees and/or invitees and/or suppliers and/or service providers who are on the Premises or in their surrounds, in the Lessee’s service and/or with the Lessee’s permission and/or by any other person or entity, whether on the Premises with permission or otherwise, whether randomly or otherwise.

15.2Without derogating from the provisions of clause 15.1 above, the Lessee undertakes to take all steps to cancel any demand and/or suit that may be filed against the Lessor for any damage as set out in clause 15.1 above, and to indemnify the Lessor for the sum of all moneys that the Lessor may be required to pay by virtue of such demand and/or suit as aforesaid, and for all of the other results thereof, immediately upon the Lessor’s first demand for such.

15.3The provisions of this clause constitute a fundamental condition of the Contract and breach thereof or of any part thereof shall constitute a fundamental breach of the Contract.

16.Insurance

16.1Without derogating from the Lessee’s undertakings under section 15 above, the Lessee undertakes to take out, at its expense, and keep throughout the entire Term of the Lease, third party insurance, including coverage of its employees, against any bodily injury or damage to property, flowing in any way from the Premises or relating to the Premises and anything done thereupon, in the sum appropriate for the risk.

The Lessee shall ensure that the insurance policy is kept in full force throughout the entire Term of the Lease, and shall pay all premiums in full and on time. Should the Lessee not take out the insurance contract under the provisions of this clause, or not pay the premiums, or part thereof, then without derogating from the Lessee’s liability, the Lessor shall be entitled to do so at the Lessee’s expense, and the Lessee shall be required to refund the Lessor any expenses incurred with respect to such, immediately upon its first demand.

For the avoidance of doubt, it is expressly declared that the aforesaid shall not require that the Lessor arrange any insurance whatsoever, and the Lessee hereby releases the Lessor in advance from any liability, and in the event that the Lessor does not arrange the insurance policies or any of them, in general, or in the event that the Lessor does not arrange them on time, or in the correct manner, or in the event that the insurance company does not pay for the damage or the loss, due to a defect in the form of the insurance or due to a failure of demand, or for some other reason.

16.2The following provisions shall apply to the above insurance:

16.2.1At the Lessor’s demand from time to time, the Lessee shall increase the sum of the insurance so as to comply with the size of the risk at such time, as prescribed by the Lessor.

16.2.2The insurance shall be taken out at an insurance company or companies with of appropriate standing as prescribed by the Lessor and the Lessee.

16.2.3Any amendment to the conditions of the policy and any warning, demand, suit, claim, settlement, negotiations, or any other action shall require the consent of the Lessor and the Lessee.

16.2.4The policy shall be in the joint names of the Lessor and the Lessee insured under the policy. The policy shall include a provision that despite any contrary provision in the policy, for the purposes of insurance thereunder, the world “insured” shall be deemed to apply to any of the entities included in the insured, as if the policy were taken out separately for each of them, and that the insurer waives any right of subrogation against any and all of the insured parties. A third party insurance policy shall also include a cross-liability clause.

16.2.5The Lessee must deposit a copy of the policy and all of the appendixes thereto and/or certificates with similar consequences from the insurers with the Lessor and any amendment, addition and/or new policies as may be in existence from time to time, within 30 days of the date of their coming into being, and shall deposit with the Lessor the receipts for payment of the premiums from time to time.

16.2.6Should the Lessor decide to file a claim under the policy, the Lessee undertakes, at the Lessor’s demand, to cooperate with it in any way that the Lessor may instruct.

16.3The provisions of this clause constitute a fundamental condition of the Contract and breach thereof or of any part thereof shall constitute a fundamental breach of the Contract.

17.Lessor’s Access to the Premises

17.1The right of the Lessor or the Institute or persons acting on their behalf to build additional levels and/or do other construction work in or around the Building and/or pass pipes, channels and other conduits for water, sewage, wiring, gas, electricity, telephone or for any other purpose through (or over) the Premises, and to do any other work or installation on the Premises, for the purpose of use of the property near the Premises or for any other similar purpose, provided that the use of such powers as aforesaid is in such a manner as reasonably reduces the possibility of discomfort and interference caused as a result, and on condition that the Lessor or the Institute do such or cause persons acting on their behalf or working for them to make all necessary repairs to those parts of the Premises as may be damaged as a result of the doing of such works, in order to restore them to their previous condition.

17.2The Lessor or persons acting on its behalf shall have the right, upon coordination with the Lessee:

17.2.1To enter the Premises at any acceptable time in order to check whether the conditions of this Contract are being performed.

17.2.2To enter the Premises at any acceptable time and to make such repairs as may be required to be made to the Premises for the purpose of the Building or any part thereof.

17.2.3In the last six months of the Lease, to enter the Premises during ordinary working hours, with visitors.

17.2.4To instruct the Lessee to permit the performance on the Premises of any repairs that it may be necessary to make within the Premises, whether such relate to the Premises or to other parts of the Building.

17.3The Lessee undertakes not to prevent the Lessor from accessing the Premises as set out in clauses 17.1 and 17.2 above, and to enable it or the Institute to perform such works as set out in the above clauses.

18.Non Transfer of Rights

18.1The Lessee undertakes not to transfer the lease of the Premises or any part thereof to any other person, not to deliver, transfer, or lease the Premises or any part thereof to any other person, not to permit any other person to use the Premises or any part thereof, not to share in possession and/or use and/or enjoyment of the Premises or any part thereof or the business being run on the Premises with any other person, and not to grant any other person any easement or right whatsoever in the Premises or any part thereof, whether for valuable consideration or otherwise, and not to transfer, charge or mortgage its rights under this Contract.

18.2For the purpose of clause 18.1 above, in the event that the Lessee is a corporation, then any action of any kind or type whatsoever which might cause a change in the control of the Lessee shall be deemed to be transfer which requires the Company’s consent.

18.3The provisions of this clause constitute a fundamental condition of this Contract and breach thereof or of any part thereof shall constitute a fundamental breach of the Contract.

19.Vacation

19.1The Lessee undertakes that no later than the date of termination of the Term of the Lease and/or if the Lease is rescinded by the Lessor as a result of breach of it by the Lessee as set out in clause 23.1 below, it shall vacate the Premises and deliver them to the Lessor. The Lessee undertakes that on the date of vacation of the Premises and return of them to the Lessor, the Premises shall be vacant and free of any person or object, the Premises being in good condition, fit and orderly, as it received them, subject to the provisions of clauses 3.2 and 12 above,

and subject to wear and tear flowing from reasonable and cautious use by the Lessee of the Premises, in accordance with the provisions of this Contract. For the avoidance of doubt, it is hereby agreed that the Premises shall be returned to the Lessor newly painted or whitewashed by the Lessee and at its expense, using paint or whitewash of such color, substance and quality as it received the Premises from the Lessor.

19.2Should the Lessee not perform any of its undertakings as set out in clause 19.1 above, then without derogating from the right of the Lessor to exercise its rights in such manner as it may see fit and without derogating from any other right that may be available to the Lessor under any law and/or contract under the circumstances of the case, the Lessee shall be required to pay the Company, so long as it has not performed the above undertakings, an appropriate usage fee in the sum set out in the Schedule, plus VAT, for each day, by way of liquidated damages.

Likewise, the Lessee shall be required to pay the Service Fee for the Building and the total Service Fee, plus VAT, for the period of delay in vacating, and it is hereby agreed that with respect to payment of the Service Fee as aforesaid, delay of any part of a month in vacating shall be deemed to be delay of one whole month.

The appropriate Service Fee shall be linked to the Index, and the provisions of clause 7.1 above shall apply mutatis mutandis.

The date of payment of the liquidated damages with respect to each day of delay in vacating shall be the beginning of each such day of delay.

It is expressly agreed and declared between the Parties that the sum of liquidated damages has been set after a careful and considered assessment with reasonable relation to the damages that might be foreseen at the time of entry into this Contract, which may be incurred by the Lessor as a result of non-vacation of the Premises by the Lessee at such time. The Lessee shall not make any claim that the aforesaid sum amounts to a fine, and the Lessee shall be estopped from making such a claim.

19.3It is hereby expressly agreed and declared between the Parties that the provisions of clause 19.2 above shall not release the Lessor from its undertakings under clause 19.1 above and/or grant the Lessee any right whatsoever of any kind or type whatsoever, including, but without derogating from the generality of the aforesaid, any lease right anchored in any law and/or amount to consent by the Lessor to extension of the Term of the Lease of the Premises by the Lessee and/or amount to any waiver whatsoever by the Lessor to the Lessee and/or derogate or detract from its rights and/or harm the Lessor’s right to receive any other remedy or relief under this Contract and under any

law, including eviction of the Lessee from the Premises and other compensation for any damage that might be caused to the Lessor due to failure by the Lessee to vacate the Premises on time.

19.4In the event that during vacation of the Premises and return of the Premises to the Lessor the Premises are not in the condition set out in clause 19.1 above, then the Lessee shall be required to repay the Lessor, immediately upon its first demand, any expense that the Lessor may incur in order to bring the Premises to the condition in which the Lessee was required to restore the Premises to the Lessor and any expenses incurred in respect thereof, and to compensate it for any damage, loss or prevention of profits flowing from the condition of the Premises and/or the need to bring them into a good and proper state, and from performance of the works required for doing so.

19.5Vacation of the Premises and return of them to the Lessor shall be in the presence of the Lessor and the Lessee who shall draft a protocol of vacation reflecting the condition of the Premises. In the event that vacation is not in the presence of the Lessee, due to the Lessee’s fault, then the protocol shall be drafted by the Lessor alone, and the contents of it shall bind the Lessee.

19.6In addition to any right that the Lessor may have under any law and this Contract, in the event that the Lessee does not vacate the Premises on time, the Lessor or a person appointed by it shall be authorized and entitled, and the Lessee hereby gives its consent and permission to such, to enter the Premises by breaking and changing the locks, and by use of reasonable force, to take exclusive possession thereof, and to eject the Lessee’s objects from it and put them in storage at the Lessee’s expense and liability wherever it may see fit, and the Lessee shall be required to refund the Lessor any expenses that the Lessor may incur in respect thereof. The Lessor shall not be liable for any damage of any kind whatsoever which may be caused to the Lessee and/or its property, if caused, when doing the aforesaid acts by the Lessor and the Lessee shall not have, and hereby waives, any right or claim against the Lessor for doing any of the above acts.

19.7The provisions of this clause constitute a fundamental clause of the Contract and the breach thereof or of any part thereof shall constitute a fundamental breach of the Contract.

20.Securities

20.120.1.1In assurance of the fulfillment of the Lessee’s undertakings under this Contract, the Lessee shall, within 48 hours of the date of execution of this Contract, provide the Lessor with a bank guarantee in the form acceptable by the Lessor, in the sum equal to the rental for 9 months of the Lease plus VAT, and a maintenance fee of 9 months of the Lease in accordance with

the last known rate prior to the giving of the guarantee as aforesaid, plus VAT. The sum of the guarantee shall be linked to the Index and the provisions of clause 7.1 above shall apply to the linkage of the sum of the guarantee, mutatis mutandis.

20.1.2Where the rental and/or maintenance fee and/or VAT rates are updated and/or amended, the Lessee shall, within 14 days, give the Lessor a substitute or additional bank guarantee which shall ensure payment of the rental for the period of nine months in accordance with the new payment rates.

20.1.3The Lessee undertakes to renew the guarantee or guarantees from time to time, no more than seven days after the date on which such are going to expire. Should the Lessee not do so, the Company shall be entitled to exercise such, without releasing the Lessee from its undertaking to issue a new guarantee or guarantees to the Company and without releasing the Lessee from any of its undertakings under this Contract. Should the sum exercised under the guarantee be greater than the sum owing to the Lessor from the Lessee at such time, the balance shall be deposited with the Lessor in a deposit under such conditions as the Company may prescribe at such time. The Lessee shall not be entitled to any compensation and/or other payment for direct or indirect damage or any other payment whatsoever for exercise of the guarantee or guarantees by the Lessor under this section.

20.2In the event that any money is owing from the Lessee to the Lessor, if owing, under the provisions of this Contract and/or for breach hereof, the Lessor shall be entitled to exercise the bank guarantee deposited with it in the total sum equal to the amounts owing to the Lessor from the Lessee in the event so owing.

20.3It is agreed and declared between the Parties that the delivery of the bank guarantee by the Lessee to the Lessor and/or presentation of it for payment by the Lessee shall not derogate from the Lessor’s right to collect the damages caused to it as a result of breach of any of the Lessee’s undertakings under this Contract from the Lessee in any way possible, and shall not release the Lessee from any of its undertakings under this Contract and/or grant the Lessee any right whatsoever that may be protected by law and/or restrict the Lessor in exercising the aforesaid rights and/or restrict the sum of compensation and/or damages that the Lessor shall be entitled to receive from the Lessee due to breach of any of its undertakings under this Contract.

20.4The Lessor shall be entitled to make use of the bank guarantee and/or guarantees under clause 20.2 above at its absolute discretion and such use of the guarantees or any of them shall not harm any of the Lessor’s rights under any contract and/or law.

20.5Where the Lessor is not owed any sum from the Lessee under this Contract, the Lessor shall be required, at the end of 90 days after the date of return of the Premises to the Lessor by the Lessee, to return the bank guarantee to the Lessee subject to presentation of all of the receipts and consents of performance of the various payments by the Lessee.

20.6The provisions of this clause constitute a fundamental condition of the Contract and the breach thereof shall constitute a fundamental breach of the Contract.

21.Indemnification of Lessor

In the event that the Lessee does not perform any of its undertakings under this Contract, the Lessor shall be entitled (but not required), in addition to and without derogating from its rights and powers under this Contract and under the law, to pay for, do and perform whatever the Lessee ought to have done, and the Lessee shall be required to refund and pay the Lessor, immediately upon its demand, any sum and any expense that the Lessor shall incur with respect to the above.

22.Interest

Without derogating from any of the Lessor’s rights under the provisions of this Contract or under any law, in the even that the Lessee delays on any payment which it is required to make to the Lessor under this Contract, the Lessee shall be required to pay the Lessor interest on the sum in delay plus VAT at law. The rate of the interest shall be the maximum rate permitted by law at such time, and if there is no legal limitation on the rate of interest – then interest at the maximum rate that Bank Leumi Le-Israel Ltd. collects at such time for unauthorized overdrafts on current accounts and the certificate of the manager of the central branch of that bank shall be binding in that regard;  or interest in the sum of 5% per month (not linked) or linkage differentials from the increase of the CPI from the date on which the Lessee was to make the payment to the Lessor, until the date of actual payment, plus interest at a rate of 48% per year, whichever is the highest.

23.Breach

23.1Should either party breach or fail to perform any of its undertakings under this Contract, it shall be required to compensate the performing party for any damage and loss incurred to the performing party as a result, without derogating from the right of the performing party to any remedy or other and/or additional relief including specific performance or an eviction order.

	23.2	Should the Lessee commit a fundamental breach as defined in this Contract and/or as defined in any law, and/or should the Lessee commit a non-fundamental breach and not remedy such breach despite 15 days having passed since receipt of a warning from the Lessor, the Lessor shall be entitled to give notice to the Lessee that the Lease under this Contract is null and void, and the Lessee shall be required to vacate the Premises as set out in clause 19 above, within 10 days of the date of the notice as aforesaid, without harming the Lessor’s rights under this Contract, including but without derogating from the generality of the aforesaid, the right to receive all of the rental and other sums to which it would have been entitled had the lease remained in force, and without derogating from its right to receive any relief or other remedy including compensation for any damage that might be caused to the Lessor as a result of the breach or non-performance as aforesaid.
		It is agreed between the Parties that the above 10 year period has been prescribed by them as a reasonable time fro the purposes of the Contracts (Remedies for Breach of Contract) Law, 5731-1970.
24.	Transfer of Rights by the Lessor
	The Lessor shall be entitled to lease and/or sell its rights in the Park and/or the Building and/or the Premises to any person and for any purpose (including a purpose similar to the purpose of the Lease) which it may see fit, and to do all construction works on the Building in which the Premises and their surrounds are situated, even if such might constitute a structural change to the Building, without needing any consent from the Lessee, without harming the Lessee’s rights in the Premises under this Contract.
	The Lessee declares that it is aware that the Lessor does not undertake that no business identical to or in competition with the business that the Lessee is running on the Premises will be conducted in other units in the Building or anywhere else in the Park.
25.	Miscellaneous
	25.1	25.1.1	No conduct by either of the Parties shall be deemed to be a waiver of any of its rights under this Contract, or under any law, or as a waiver or consent by such Party to any breach or non-performance of a condition of this Contract by the other Party, or as granting delay or an extension to do any act which the other Party is required to do or as any change, cancellation or addition to any condition whatsoever, unless such waiver, consent, delay, change, cancellation or addition are made expressly and in writing.
		25.1.2	It is hereby expressly agreed that performance of all and each of the Lessor’s undertakings under this Contract shall be

conditional upon the Lessee’s first performing its undertakings under this Contract, as the case may be, and the Lessor is entitled, without derogating from any other provision of this Contract, to delay performance of any of its undertakings, until the Lessee performs its undertakings.

25.1.3It is agreed and declared that the provisions of this Lease Contract act as a stipulation on the Leasing and Borrowing Law, 5731-1971, and that the provisions of Chapter A of that Law shall not apply to the Lease under this Contract.

25.2In the event that the Lesssee is a foreign resident, the Lessee undertakes to perform its undertakings under this Contract in accordance with the Supervision of Currency Law, 5738-1978 and the regulations, orders and permits made thereunder.

25.3The Lessor’s accounts shall be prima facie evidence of any charge and any accounting contained in them, and any claim by the Lessor of the Lessee the sum and details of which are approved by an accountant shall bind the Lessee and the Lessee agrees that a written reference shall be sufficient for submission of it to court in summary proceedings.

25.4The Parties agree that the competent Court in the city of Tel Aviv shall have sole and exclusive jurisdiction with respect to this Contract and the contents of it.

25.5The addresses of the Parties shall be as set out alongside their names at the beginning of this Contract and any notice sent to either Party at the address appearing alongside their name shall be deemed to have been received by it within 72 hours of being sent by registered mail.

Should the Lessee be a number of individuals, notice shall be deemed to have been sent to all of the individuals in the Lessee if sent to one of the individuals of the Lessee to the above address.

In witness whereof, the Parties have hereunto set their hands on the above date:

[ILLEGIBLE]	/s/ Daniel Zurr
The Lessor	The Lessee

List of Annexes

Annex A – the Schedule

Annex B – Location of the Building in the Park

Annex C – Plan of the Premises

Annex A

Schedule to QBA Enterprises Ltd. Contract of December 15, 1995

For clauses 2, 3, 4, 7

No.	The Building multi- purpose building no., 3	Gross area in sqm	Date of delivery and commencement of Term of Lease	Date of termination of Term of Lease	Base Rental per Month	Linked to base insterest
	Level 4 - North wing	393	November 1995	October 31, 1998	12,993	Novemeber 1994 (118.7 points) Base – 1994

For clause 5	1.	The Lessor as, at its expense, adjusted the Premises for the Lessee’s needs in accordance with an architectural plan submitted to the Lessor and approved by the Lessor. The adjustments to include: demolition and construction of plaster partitions, acoustic ceiling, carpet, lighting, PVC, telephone point and electrical socket (x 3) for every 15 sqm gross, lighting, air con via split air conditioners, construction of toilets and kitchenette on Premises.
		Work standards - $135 per sqm gross not including airconditioning. Work beyond above standard to be financed by the Lessee. Payment for additional work to be done no later than the date of delivery and as condition of delivery.
	2.	The Lessor shall itself and at its expense install signage setting out the Lessee’s name, at the entrance to Kiryat Weizmann, and on the Building in which the Premises are situated (at the entrance and on the floor).
For clause 6	Purpose of the Lease: development, manufacture and marketing of biotechnological products.
For clause 7.1	The base rental, plus maintenance fee and VAT at law, to be paid in the following installments, on the following dates and in the following manner:

1.Prior to execution of this Contract, the rental and maintenance fee shall be paid for the first three months of the Lease. From this sum, the sum of the downpayment already paid by the Lessee, linked to the Index, shall be deducted.

2.As of the 1st day of the fourth month of the Lease, the rental and maintenance fee for three months shall be paid in advance, on the 1st day of the month every third month for the coming three months – payment being by way of permission to debit account.

3.Rental for the lease of part of a month shall be paid in accordance with the relative portion of such at the end of the month.

For clause 10.1The total maintenance fee shall be NIS 3.07 per sqm gross per month, linked to the Index for October 1994 (117.2 points). The maintenance fee might change in the future.

For clause 10.2The Lessee shall have a 12 month warranty from the Lessor for construction and lease of the Premises for the Lessee’s purpose done by it, in accordance with the plan submitted by the Lessee and including the air conditioning.

For clause 11.8Subject to the provisions of clause 11, and subject to the receipt of all of the permits and consents from the authorities required under any law, the Lessee shall be entitled use chemical substances and radioactive substances on the premises as is usual in the biotechnological industry.

For clause 19.2Appropriate usage fee per day: double the monthly rental divided by 30.

For clause 20In assurance of the Lease agreement, the Lessee shall provide the Lessor, no more than 7 days after the date of execution of this Agreement and as a condition of delivery of the Premises, a bank guarantee the total sum of which shall be equal to the rental and maintenance fee plus VAT at law for 9 months of th lease.

Special conditions

1.The Lessor shall provide the Lessee with 7 marked parking spaces in the parking lots of multi-purpose buildings 1-3.

2.Due to delay in delivery of plans and due to the continued transfer of building requirements after completion of works, the period of the works extended beyond what was planned.

The compensation to be paid by the Lessee to the Lessor on account of the above shall be agreed upon separately before delivery of the Premises to the Lessee.

Annex C

[Plant of Multi-Purpose Building – Kiryat Weizmann]

Annex B

[Plan of Location of Buildings in Park]

Annex D

Date:                          

To:

QBA Enterprises Ltd.

P.O. Box. 741

Nes Ziona

Dear Sir / Madam,

Re:Use of the Premises

In response to your request to permit                           (hereinafter: the “invitee”) make use of the premises leased to you, or part thereof, at Building 3, Kiryat Weizmann Science Park, we hereby inform you that we shall agree to such subject to the performance of all of the conditions below:

1.The invitee declares that he has read the Lease Contract of December 15, 1995 between Kiryat Weizmann Science Park Ltd. and QBA Enterprises Ltd. (hereinafter: the “Lessee”) and the annexes and schedules thereto (hereinafter: the “Lease Contract”), has understood the contents of it and agrees and undertakes to fulfill all of the Lessee’s obligations as are set out in the Lease Contract. That is without derogating from the Lessee’s undertakings towards the Lessor under the Lease Contract.

2.Without derogating from the provisions of clause 1 above, the invitee undertakes that he agrees:

(a)To vacate the Premises in the event that the Lessee is required to vacate the Premises under the Lease Contract (hereinafter: the “Effective Date”).

(b)That after the Effective Date he shall be deemed to be in unlawful possession of the Premises and that the Lessor shall be entitled to enter the Premises, seize possession of them and remove any object or accessory belonging to the invitee at the invitee’s expense.

(c)That he shall not take any steps, legal or otherwise, which might prevent the Lessor from effecting the provisions set out in sub-clause (b) above, and that he agrees that he provisions of the clauses in the Contract regarding vacating the Premises shall apply, mutatis mutandis, to him as well.

(d)That all remedies available to the Lessor under the Lease Contract as against the Lessee, including the option to exercise the securities held by the Lessor, shall also apply to him.

(e)That his status is as invitee only and he must vacate the Premises or any part thereof in the event that the Lease Contract with the Lessee terminates for any reason.

3.Without derogating from any of the above, the Lessee and the invitee agree and undertake jointly and severally that this permission may be revoked at any time, at the exclusive discretion of the Lessor, without the need to give any explanation or reason, by notice from the Lessor to the Lessee and/or the invitee, and the invitee undertakes to vacate the Premises from any person or object within 14 days of the date of the notice.

	Sincerely
	Kiryat Weizmann Science Park Ltd.
Date

We the undersigned have read the contents of this letter above and we agree and undertake, jointly and severally, to perform all of the conditions set out herein

                 Lessee              Invitee

EX-21.1

Exhibit 21.1

Subsidiaries of the Registrant

Subsidiary	Jurisdiction of Incorporation
QBI Enterprises, Ltd.	Israel
Quark Metabolix Inc.	Delaware

EX-23.1

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Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 29, 2007 in the Registration Statement on Form S-1 and related Prospectus of Quark Biotech, Inc. dated March 30, 2007.

	/S/ KOST FORER GABBAY & KASIERER
Tel-Aviv, Israel March 30, 2007	KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global

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Consent of Independent Registered Public Accounting Firm