As filed with the Securities and Exchange Commission on December 17, 2010

Registration No. 333-169584

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

 

Amendment No. 2
To
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

QUARK PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

California		2834		94-3192416
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(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.
Michael E. Tenta, Esq.
Cooley LLP
3175 Hanover Street
Palo Alto, CA 94304-1130
(650) 843-5000

 

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

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer x		Smaller reporting company o

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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.

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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 DECEMBER 17, 2010

PRELIMINARY PROSPECTUS

QUARK PHARMACEUTICALS, INC.

Minimum Offering of       Units
Maximum Offering of       Units
Each Unit consisting of       Shares of Common Stock and       Warrants

Quark Pharmaceuticals, Inc. is offering on a best efforts basis a maximum of       units and a minimum of       units, with each unit consisting of       shares of common stock, par value $0.001 per share, and       warrants. This is our initial public offering, and no public market currently exists for our units or our common stock or our warrants.

We estimate the offering price of each unit will be between    New Israeli Shekels (NIS) and NIS          per unit. The offering price will be determined in an auction process and shall not be lower than NIS (approximately $        ), the minimum price for the purpose of this offering. Unless the offering is fully subscribed at a price higher than the minimum price, the offering will be priced at the minimum offering price. For further details regarding the auction process, see under the heading “Plan of Distribution” beginning on page 127 of this prospectus.

Each warrant shall be exercisable into one share of our common stock at an exercise price of       per share. The warrants will be exercisable for       years from the date on which they are issued. Upon the closing of the offering, the shares of our common stock and the warrants comprising the units will be issued and will trade separately on the Tel Aviv Stock Exchange, or TASE.

The offering price per unit will be determined in an auction process on the TASE and shall not be lower than NIS (approximately $        ), the minimum price for the purpose of this offering. Unless the offering is fully subscribed at a price higher than the minimum price, the offering will be priced at the minimum offering price, and if the offering is not subscribed at the minimum offering price, the offering will be cancelled. For further details regarding the auction process, see under the heading “Plan of Distribution” beginning on page 120 of this prospectus. We have appointed a member of the TASE to act as our offering coordinator to administrate the offering. This offering is not underwritten.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 11.

Per Share

Minimum Total

Maximum Total

Public minimum offering price

$

$

$

Distribution commissions

$

$

$

Minimum proceeds, before expenses, to Quark Pharmaceuticals, 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.

The date of this prospectus is       , 2010

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QUARK PHARMACEUTICALS, INC.
  
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		Page
Summary			1
Risk Factors			11
Forward-Looking Statements			32
Use of Proceeds			33
Dividend Policy			35
Capitalization			36
Dilution			38
Selected Financial Data			40
Management’s Discussion and Analysis of Financial Condition and Results of Operations			42
Business			57
Management			86
Compensation Discussion and Analysis			93
Certain Relationships and Related Party Transactions			114
Principal Shareholders			116
Description of Capital Stock			119
Shares Eligible for Future Sale			122
Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders			124
Plan of Distribution			127
Legal Matters			132
Experts			132
Where You Can Find Additional Information			132
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 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.

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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 pharmaceutical company engaged in discovering and developing novel RNAi interference or RNAi-based therapeutics. We have a fully integrated drug development platform that spans therapeutic target identification based on our proprietary gene discovery science and technology, to clinical drug development. We have initially been focusing on RNAi-based therapeutics for the treatment of diseases associated with oxidative stress and ischemic injury. We believe that our insight into the molecular mechanisms underlying these diseases, combined with our ability to design, chemically modify and successfully deliver synthetic small-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 three product candidates in clinical development in five different indications: PF-655 (previously RTP801i-14) for the treatment of diabetic macular edema and for wet age-related macular degeneration; QPI-1002 (previously I5NP or AKIi-5) for the prevention of acute kidney injury and for the prevention of delayed graft function in kidney transplant patients; and QPI-1007 for ocular neuroprotection. We have licensed PF-655 to Pfizer on an exclusive worldwide basis and we granted an option for an exclusive license to QPI-1002 to Novartis. We have a broad pipeline based on our internally developed and proprietary chemically modified siRNA structures. Several of our product candidates are based on novel targets and therapeutic concepts discovered using our BiFAR^TM target gene discovery platform. We believe that our platform technologies, siRNA capabilities and intellectual property combined with expertise of our regulatory, medical, preclinical and clinical development group will enable us to continue to advance new product candidates into clinical development, either directly or through collaborations with major pharmaceuticals companies.

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 challenges in the development of RNAi-based therapeutics have been delivery of siRNA molecules to the organ and cells relevant to a particular disease as well as siRNA drug specificity, nuclease stability and pro-inflammatory properties associated with innate immune response.

Our Approach

Our insight into the pathogenesis of diseases, combined with our proprietary targets and concepts and our siRNA delivery strategies, led us to select siRNA as the modality for our clinical programs. We believe that our integrated discovery and development approach, our siRNA technology platform and intellectual property are particularly well-suited to RNAi-based therapeutics and are based on the following main capabilities:

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

In addition, our BiFAR^TM target discovery platform directly identifies clinically relevant critical genes and proteins that are responsible for certain disease traits, has historically been important to us. We have applied this platform in several disease programs. The application of the BiFAR^TM 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^TM platform allowed us to generate cash for our operations as well as rights to potential products through agreements with several pharmaceutical companies.

Our Product Candidates

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

Product Candidate		Indication		Status		Commercialization Rights
PF-655		Diabetic Macular Edema		Phase II DEGAS study completed. Interim data received in November 2010.		Pfizer (Worldwide)
PF-655		Wet Age-related Macular Degeneration		Phase II MONET study ongoing, enrollment completed. Interim data received in November 2010.		Pfizer (Worldwide)
QPI-1002		Acute Kidney Injury		Phase II expected to initiate dosing in the second half of 2011		Option granted to Novartis for Worldwide rights
QPI-1002		Delayed Graft Function in Kidney Transplant patients		Phase II ongoing (Interim analysis expected by mid 2012)		Option granted to Novartis for Worldwide rights

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Product Candidate		Indication		Status		Commercialization Rights
QPI-1007		Non Arteritic Anterior Ischemic Optic Neuropathy		Phase I (Dosing and preliminary review of data expected to be completed during the second half of 2011)		Quark (Worldwide)
QPI-1007		Glaucoma indication		Preclinical toxicity studies initiated to enable Phase 2 multiple dosing		Quark (Worldwide)
Program for pipeline siRNAs for neuro protection and neural regeneration		Diseases of the central nervous system, eyes, ears, spinal cord injury, peripheral nerve injuries, neuropathic pain, hearing loss conditions, vestibular diseases.		In vivo proof-of-concept was accomplished in spinal cord injury with a drug candidate with endpoints of post-injury recovery and reduction of neuropathic pain. Further in vivo studies are ongoing in several indications, including glaucoma, hearing loss and others		Quark (Worldwide)
Program for respiratory system conditions		Acute Lung Injury, Lung Transplantation		In vivo proof-of-concept studies were accomplished in lung transplantation models. Further in vivo studies are ongoing		Quark (Worldwide)
Program for chronic conditions by systemic administration of siRNA		Chronic Kidney Disease Cancer		Delivery studies and in vivo proof-of-concept studies at various stages.		Quark (Worldwide)
Fibrotic diseases in collaboration with Nitto Denko		Fibrotic conditions in the liver and other organs		Preliminary proof of concept was successfully performed by Nitto Denko. We are currently performing siRNA design and delivery studies.		Nitto Denko (Worldwide)

PF-655 Phase II for Diabetic Macular Edema and for Wet Age-Related Macular Degeneration. PF-655 has been studied in two Phase II clinical trials for the treatment of diabetic macular edema and for the treatment of wet age-related macular degeneration, from both of which Pfizer received interim results in November 2010. PF-655 is a stabilized, synthetic, chemically modified siRNA that inhibits our proprietary target RTP801, a gene we believe plays a significant role in wet age-related macular degeneration and diabetic macular edema. Wet age-related macular degeneration 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. Diabetic macular edema is the result of retinal microvascular changes that occur in patients with diabetes and is the major cause of visual impairment in diabetic patients. We have licensed PF-655 to Pfizer on an exclusive worldwide basis. We have successfully completed our Phase I clinical trial in age-related macular degeneration patients. No drug-related adverse events were observed. Approximately 80% of subjects showed stable or improved vision two weeks after a single injection of the siRNA. Patients in this study showed a mean improvement of 4 letters (about one line gain) on a visual acuity test at 28 days after a single injection of PF-655. These changes were presented as clinically meaningful at the ARVO conference in 2009 by a lead investigator of the study, Dr. Quan Nguyen from the Wilmer Ophthalmological Institute of the Johns Hopkins University School of Medicine. Pfizer is conducting the Phase II clinical trials in collaboration with us. Enrollment in both Phase II trials was completed. In the Phase II DEGAS trial for diabetic macular edema we expect to complete dosing and one year follow-up on all patients by the end of 2010. Depending

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on the results, Pfizer may decide to initiate preparations for Phase III clinical trial or to initiate a Phase IIb trial or may stop trials. In the Phase II MONET trial for age-related macular degeneration we expect to completed dosing and initial follow-up by the end of 2010. Depending on the results, Pfizer may initiate a dose-ranging Phase IIb clinical trial in age-related macular degeneration.

QPI-1002 for Acute Kidney Injury and Delayed Graft Function.  We completed two Phase I trials for the prevention of acute kidney injury in patients undergoing major cardiac surgery and for prevention of delayed graft function in kidney transplant patients. In both trials, QPI-1002 was administered systemically via intravenous injection with no dose-limiting toxicities observed. Based on publicly available information, we believe that this was the first siRNA administered systemically in a human clinical trial. QPI-1002 is a synthetic, chemically modified siRNA molecule designed to temporarily inhibit the expression of p53, a gene we believe plays a significant role in ischemic injury related conditions in the kidney. Acute kidney injury is a syndrome characterized by a rapid decline of kidney function leading to death in a high percentage of cases. Major cardiovascular surgery is one of the many causes of acute kidney injury. Currently, there are no effective drug therapies to prevent acute kidney injury. Delayed graft function results most often from ischemia-reperfusion injury that can occur during the transplantation process and is particularly common in kidneys from deceased donors. Delayed graft function is associated with poorer long-term outcome for the kidney transplant patient, with increased incidence of acute rejection, increased hospital stays and increased consumption of peri-transplant resources. We have recently initiated dosing in a Phase II trial for delayed graft function and expect to initiate dosing in a Phase II clinical trial for AKI within the second half of 2011. In August 2010 we granted to Novartis an option for a worldwide exclusive license to QPI-1002 for all indications.

QPI-1007 for Non arteritic Anterior Ischemic Optic Neuropathy.  QPI-1007 is being developed as a neuroprotective agent for the treatment of sudden vision loss associated with non-arteritic anterior ischemic optic neuropathy. We are conducting a Phase I trial to evaluate the safety and tolerability of OPI-1007 in patients suffering from of non-arteritic anterior ischemic optic neuropathy. QPI-1007 is a chemically modified siRNA and it is our first drug candidate based on novel siRNA structures developed internally by Quark. QPI-1007 is designed to inhibit the expression of the pro-apoptotic gene, caspase 2, via the RNAi pathway. Apoptosis (programmed cell death) is thought to be the main cause of the death of retinal ganglion cells in non-arteritic anterior ischemic optic neuropathy and glaucoma. In preclinical studies, QPI-1007 was effective in preserving retinal ganglion cell integrity in three different ocular disease models of retinal ganglion cell damage. If OPI 1007 is determined to be safe and effective in non-arteritic anterior ischemic optic neuropathy we may develop QPI-1007 also for glaucoma. We expect to complete dosing and have preliminary results in our Phase I clinical trial in the second half of 2011. In addition to safety data, we have designed the study to identify a potential trend in biological activity compared to historical data. Depending on the results, we may initiate Phase II trials in a glaucoma condition, in non-arteritic anterior ischemic optic neuropathy, in both indications or none of them.

Pipeline Programs:  We have three broad programs that aim to design and develop siRNA molecules based on our internally developed siRNA structures to treat diseases that are unmet medical needs. Most of the programs are in proof of concept studies in animal models, a subset of these is in lead candidate optimization stage, some are at the stage of delivery studies in vivo. We expect to file at least one IND application in 2012 based on research in these programs. We also expect to file an IND application in the research program we perform in collaboration with Nitto Denko. Our major internal research and development programs comprise:

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Fibrotic diseases in collaboration with Nitto Denko.  No effective treatments are available for most of the serious fibrotic diseases and our objective is to develop potential therapies within our fully-funded collaboration with Nitto Denko. The collaboration aims to develop one or more new siRNA drugs that may offer an effective treatment to fibrotic diseases. The collaboration utilizes Quark’s technology and intellectual property in RNAi, potentially combined with Nitto Denko’s delivery technology to identify, select, optimize and develop a new siRNA drug based on a therapeutic concept and target gene identified by Nitto Denko and its collaborating scientists. While the initial disease indication for development is yet to be determined by joint teams of Quark and Nitto Denko, potential diseases include liver fibrosis, lung fibrosis, bone marrow fibrosis and kidney fibrosis, all major unmet medical needs. Quark successfully performed a feasibility study funded by Nitto Denko confirming the validity of the concept of treating fibrotic disease with an siRNA drug inhibiting the Nitto Denko target gene. The collaboration was initiated in July 2010. We expect to file a first IND application in 2012.

siRNA Technology Development

We have an ongoing program that aims to develop new siRNA-related technologies and to improve our current technology platform and our intellectual property position in the RNAi space. This program has two arms:

Israeli National siRNA Project Consortium

The Israeli Chief Scientist and the head of the research and development national projects conditionally approved the establishment of a consortium headed by the wholly owned subsidiary of Quark, QBI Enterprises Ltd (QBI), together with several leading members of the industry and prominent scientists in academia in Israel, to develop novel generic technologies in the field of RNAi. We believe that the approval of a national project for siRNA is recognition of the government of Israel to financially support a project of national importance that can potentially create jobs and generate revenues for the state of Israel.

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

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exclusive right to develop and commercialize drugs for both ophthalmic and non-ophthalmic indications. Pfizer is responsible for all future preclinical and clinical development costs of the licensed drug candidates, as well as all regulatory filings and approvals. Pfizer is currently performing two Phase II clinical trials in collaboration with us. Israel has been a major source of patients in these two studies. Through September 30, 2010, Pfizer had paid us an aggregate of approximately $52 million in up-front fees, cost reimbursements and milestone payments. The agreement provides for up to $314 million in 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.

Our Option Agreement with Novartis

In August 2010, we granted Novartis an option for an exclusive worldwide license to develop and commercialize QPI-1002 and any other p53-directed siRNAs controlled by us for any indication. Under the agreement, Novartis paid us a non-refundable option grant fee of $10 million and has the right to exercise the option during the Phase II trials of QPI-1002. This right will expire on different dates depending on whether interim and/or final results of these trials meet pre-defined criteria. If Novartis exercises the option, Novartis will be responsible for further development following the current Phase II trials and Quark will be entitled to option exercise fees and development, product approval, and sales-based milestone payments of up to $670 million as well as to royalties on sales.

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. In June 2007, we changed our name to Quark Pharmaceuticals, Inc. 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 www.quarkpharma.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 Pharmaceuticals, Inc. and all of its subsidiaries unless the context requires otherwise.

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THE OFFERING

The number of shares of common stock that will be outstanding immediately after this offering is based on 21,384,630 shares of common stock outstanding as of October 31, 2010 and excludes:

Currently, there is no public market for our common stock in the United States or anywhere else in the world and no assurances can be given that a public market will develop the United States or, if developed, that it will be sustained. We have applied to have our common stock is listed on the TASE. The shares of our common stock and Warrants which are being offered under this prospectus are expected to be listed for trading on TASE promptly after the registration statement filed with the SEC of which this prospectus is a part is declared effective.

Concurrently with the effectiveness of the registration statement of which this prospectus forms a part, we are publishing a Supplemental Notice to an Incomplete Prospectus published by us in Israel which is intended for non-U.S. investors based in Israel. Such investors should refer to the Incomplete Prospectus and the Supplemental Notice, which together form the Israeli prospectus that we filed with the Israel Securities Authority, or ISA, and which will be available at http://www.magna.isa.gov.il.

The Auction Process

We plan to conduct this offering using an auction process for all investors, both individual and institutional. To participate in the auction, investors will submit bids to purchase units that specify the number of units the investor would be interested in purchasing and the price the investor would be willing to pay. Bids must be submitted to TASE members. We intend to use the auction to determine the offering price per unit for the offering. All valid bids to purchase units at or above the determined offering price per unit will receive an allocation of units at the offering price. If the number of units represented by successful bids

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exceeds the number of units we are offering, then all bidders making bids above the offering price per unit will receive all the units for which they bid, all bidders making bids at the offering price per unit will receive some of the units for which they bid, on a pro-rata basis, and all bidders making bids below the offering price per unit will receive no units. During the period in which the TASE members collect bids by potential investors, potential investors can withdraw or amend their bids. However, shortly before the termination of the period in which bids can be submitted, TASE members will stop accepting any amendments to placed bids or withdrawals thereof, at which point, the bids will become irrevocable. We will publish a press release announcing the commencement of the bidding process a few hours prior to the commencement including a detailed timetable of the auction day. See the section entitled Plan of Distribution for a description of how this process will work.

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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,												For the nine month ended September 30
		Audited												Unaudited
		2007				2008				2009				2009				2010
		(in thousands, except share and per share data)
Statements of Operations Data:
Revenues		$	27,878			$	17,276			$	2,655			$	2,065			$	2,810
Cost of development services			—				1,719				1,712				1,339				869
Gross profit			27,878				15,557				943				726				1,941
Operating costs and expenses:
Research and development			20,774				18,726				15,744				13,024				13,659
General and administrative			7,055				5,018				5,087				3,823				4,820
Total operating costs and expenses			27,829				23,744				20,831				16,847				18,479
Operating income (loss)			49				(8,187	)			(19,888	)			(16,121	)			(16,538	)
Financial income (expenses), net			940				722				87				61				(538	)
Income (loss) before income taxes			989				(7,465	)			(19,801	)			(16,060	)			(17,076	)
Income taxes			—				(1,667	)			160				62				(210	)
Net income (loss)			989				(9,132	)			(19,641	)			(15,998	)			(17,286	)
Changes of redemption value of Series F and H Preferred Stock			(336	)			—				—				—				(1,368	)
Deemed dividend as a result of warrants modification			(117	)			—				—				—				—
Income attributable to preferred shareholders			536				—				—				—				—
Net loss to common Stockholders		$	(—)			$	(9,132	)		$	(19,641	)		$	(15,998	)		$	(18,654	)
Net loss per share of common stock: Basic and diluted income (loss) per share			—			$	(2.76	)		$	(5.80	)		$	(4.72	)		$	(5.51	)
Weighted average number of shares used in computing basic and diluted net loss per share:			2,970,351				3,307,871				3,388,119				3,387,988				3,388,530
Proforma net loss per share of common stock:
Basic and diluted net loss per share pro forma (unaudited)											(1.03	)							(0.86	)
Weighted average number of shares used in computing basic net loss per share pro forma (unaudited):											19,084,219								20,092,037

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		As of June 30, 2010
		Actual				As adjusted(1)
		(in thousands)
Balance Sheet Data:
Cash and cash equivalents		$	8,728			$
Working capital			3,034
Total assets			12,373
Deferred revenues			1,479
Redeemable convertible preferred stock			37,000
Total stockholders’ equity (deficiency)			(34,003	)

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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, PF-655, QPI-1002 and QPI-1007, and we cannot be certain that they will achieve success in clinical trials, that they will receive regulatory approval or be successfully commercialized.

We have three drug candidates in clinical studies in five disease indications. PF-655, is currently being evaluated in two Phase II clinical trials for the treatment of wet age-related macular degeneration and diabetic macular edema, QPI-1002 is being evaluated in a Phase II clinical trial for the prevention of delayed graft function in kidney transplant patients and enrollment in a Phase II study in cardiovascular surgery patients for the prevention of acute kidney injury will be initiated in 2011, and QPI-1007 is being evaluated in a Phase I clinical study for the treatment of non-arteritic anterior ischemic retinopathy. These drug candidates will require the successful completion of these and other 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 PF-655 to Pfizer on an exclusive worldwide basis. As a result, we will not control the development of PF-655. Clinical trials required for FDA approval of PF-655, QPI-1002 and QPI-1007 may not be successfully completed. If these clinical trials fail to demonstrate that PF-655, QPI-1002 and QPI-1007 are safe and effective, these drug candidates will not receive approval for marketing. Even if PF-655, QPI-1002 and QPI-1007 receive regulatory approval for marketing, they may never be successfully commercialized. If PF-655, QPI-1002 and QPI-1007 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 PF-655, QPI-1002 and QPI-1007, all of our other programs are in preclinical studies or early stage research. If we are unable to develop and commercialize our early stage product candidates, our business will be adversely affected.

In addition to our PF-655, QPI-1002 and QPI-2007 drug candidates, a key element of our strategy is to discover, develop and commercialize a portfolio of new products. 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:

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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:

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. As of September 30, 2010 we had accumulated net losses of approximately $111.3 million. 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 preclinical 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 preclinical testing and clinical trials of any product candidates, and to manufacture and market any products that are approved for commercial 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. We anticipate that our current resources, as supplemented by proceeds from this offering and expected research and development funding and milestone payments from our collaborators, will sustain our business through the first half of 2013. We expect our research and development expenses for this period to be between $26 million and $39 million.

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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:

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 shareholders. For example, if we raise additional funds by issuing equity securities, our shareholders 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, Nitto Denko, Novartis 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 RTP-801 for both ophthalmic indications and non-ophthalmic indications. We had acquired some of these rights from Silence Therapeutics, or Silence, formerly known as Atugen AG, under a December 2004 collaboration agreement. We expect that a substantial amount of the funding for our operations could come from our license agreements with Pfizer and Nitto Denko, our option and license agreements with Novartis 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. Substantially all of our revenues for 2007, 2008 and 2009 were attributable to our Pfizer agreement.

Under the Silence agreement, Silence may terminate our license if we fail to achieve development milestones, but these milestones are considered to be satisfied as long as the Pfizer agreement remains in effect. 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 or those of other licensors. Additionally, if Pfizer terminates its agreement with us, we would be required under the Silence agreement to achieve a pre-agreed development milestone within a defined time period following the termination. Pfizer has significantly greater financial resources than we do and has far more experience in developing and marketing

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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 Silence patents. Although our agreement with Pfizer grants us the option to take an exclusive license to Pfizer intellectual property relating to RTP-801, if any, 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 may have used in conjunction with developing RTP-801.

In addition, our execution of the option agreement with Novartis created a question regarding the amounts that may be due under our license agreement with Silence as a result of payments that we receive from Novartis. Following negotiations with Silence, we have agreed in principle on a sharing ratio for the payments we may receive. This agreement in principle will be reflected in an amendment to our license agreement with Silence, which is currently being prepared.

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.

We are also at risk that these collaborations or other arrangements may not be successful. Factors that may affect the success of our collaborations include the following:

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 or maintain 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

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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 or options to license 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 Mitsubishi Pharma Corporation, Sankyo Co., Ltd., Astellas Pharma Inc., AstraZeneca, Taisho Pharmaceutical Co., Ltd. and Shionogi & Co and Nitto Denko Corp. Except for our collaboration with Pfizer and Nitto Denko, the research funding under each of these agreements has ended. While we may at some point receive payments from certain of these collaboration partners upon the achievement of development milestones by these partners, except for our collaboration with Pfizer and Nitto Denko, none of the agreements are expected to be material to our business in the future. We may not, however, be able to enter into additional collaborations, and the terms of 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 III 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 preclinical studies and clinical trials as a condition to regulatory approval. Preclinical 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, PF-655, QPI-1002 and QPI-1007, 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:

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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 preclinical 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 preclinical 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 preclinical 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.

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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. If the FDA decides to regulate our product candidates as biologists, oversight for such candidates would shift from the FDA’s Center for Drug Evaluation and Research (CDER) to its Center for Biologics Evaluation and Research (CBER), and we would apply for marketing via a Biologics Licensing Application (BLA) rather than an New Drug Application (NDA). Either pathway relies on sound scientific evaluation of product safety and efficacy for determining approvals, and would not significantly change our development approach. 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 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:

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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 operations 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.

If PF-655 is approved for wet age-related macular degeneration and/or for diabetic macular edema, we anticipate that it would compete with other marketed therapeutics, particularly vascular endothelial growth factor inhibitor drugs, primarily Genentech’s Lucentis, approved by the FDA for wet age-related macular degeneration and which has become the standard-of-care for the treatment of wet age-related macular degeneration and recently approved for diabetic macular edema by the EMEA in Europe. PF-655 may also face competition from off-label use of Genentech’s Avastin, currently approved for the treatment of various cancers. Additional wet age-related macular degeneration therapeutics that are in development could also compete with PF-655. These include further anti-vascular endothelial growth factor angiogenesis inhibitors drugs. Among these, Alcon Research is evaluating Anecortave Acetate (Retaane), an antiangiogenic synthetic steroid drug, Allergan is developing its siRNA drug candidate AGN211745, Regeneron’s intravitreal formulation of soluble decoy receptor vascular endothelial growth factor VEGF Trap-Eye (aflibercept) is in Phase III clinical trials for wet age related macular degeneration in collaboration with Bayer, CoMentis, Inc. is developing ATG3, a topical eye drop therapy, MacuSight and Santen are developing Perceiva (sirolimus, rapamycin) for age related macular degeneration and diabetic macular edema, Ophthotech is developing E10030, a pegylated aptamer that binds and inhibits PDGF in combination with Lucentis, Alimera is developing pSivida’s Iluvien® and intravitreal insert, to deliver fluocinolone acetonide, a corticosteroid, to the retina for up to three years as a treatment for diabetic macular edema and age related macular degeneration.

We are not aware of specific drugs marketed for the prevention of acute renal failure or of delayed graft function in renal transplant patients that would compete with QPI-1002 if it is approved. However, in response to the unmet medical need, new products could be developed for the prevention of acute renal failure, such as Action Pharma’s AP214 for acute kidney injury, or existing products could be used off-label, such as Nesiritide, a recombinant form of human B-type natriuretic peptide (hBNP) therapy approved for the treatment of acute congestive heart failure.

Many of our competitors have:

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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 age-related macular degeneration. 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:

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 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 drugs based on an alternative mechanism of the body to suppress the activity of specific genes, known as antisense. Antisense molecules are strands of nucleic acids, deoxyribonucleic acid (DNA) or ribonucleic acid (RNA), complex biomolecules found in all living cells. Antisense molecules interact with complementary strands of nucleic acids to inhibit expression 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 inhibit expression of 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

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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.

Despite our efforts and the efforts of our patent associates and consultants in the US and foreign jurisdictions, our pending patent applications may not result in issued patents. The patent position of pharmaceutical and biotechnology companies, including ours, is generally uncertain and involves complex legal, ethical and factual considerations.

There is no uniform, global policy regarding the subject matter and scope of claims allowable in pharmaceutical or biotechnology patents. The criteria applied by the United States Patent and Trademark Office and other patent offices throughout the world to grant patents are not always predictable or uniform. The United States Patent and Trademark Office and its foreign counterparts have upheld stringent standards for RNAi patents that have been prosecuted thus far.

The current international standard for patentability requires that an invention be a) novel; b) non-obvious or have an inventive step; and c) have utility or industrial applicability. However, each national patent office implements the standard differently and each national court interprets the claims independently.

In the US, various District Courts, the Court of Appeals of the Federal Circuit (CAFC) and the Supreme Court (SC) have ruled in cases that set forth new interpretations for the above three requirements, thereby amending the standards for what is considered patentable.

For example, in September 2010 the USPTO published a 15-page notice updating the 2007 KSR (from the Supreme Court case KSR International Co. v. Teleflex Inc., et al.) Guidelines for Examiners. The update reviews more than 20 of the most relevant Federal Circuit case law dealing with obviousness since KSR. Since the 2007 KSR case the threshold for meeting the non-obviousness requirement has risen. In a recent case heard in the Southern District of New York, the American Civil Liberties Union (ACLU) and other public organizations successfully challenged the validity of patents to human genes. The case has been appealed to the CAFC for review and decision.

In Europe, a ten-year debate led to the 1998 adoption of EU Directive 98/44/EC on the legal protection of biotechnological inventions, known as the “Biotech Patent Directive”. Its purpose is to clarify the distinction between what is patentable and what is not. For example, the directive rules out the patenting of methods of treatment and surgery in a human subject but allows patenting of individual human, animal or plant genes and gene sequences, and their functions, as long as the patentability criteria are fulfilled. Case law continues to evolve in Europe, as in the US. For example, Article 123 of the European Patent Convention is being interpreted very strictly resulting in many patents being found invalid.

In light of the history outlined above, we do not know the degree of future protection for our proprietary rights or the scope of claims that will be allowed in any patents issued to us or to third parties.

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:

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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 Merck & Co., Inc., Alnylam Pharmaceuticals, Thermo Fisher Scientific, Isis Pharmaceuticals, Marina Biotech, Sylentis and others. 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

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required license and are unable to design around a patent, we may be unable to 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 Silence and Alnylam Pharmaceuticals, Inc. relating to RNAi technology, and from University of Illinois Chicago, or UIC, and Dharmacon that are important for the development of our drug candidates. All licensors have the right to terminate their license agreements with us if we default under them. Maintaining our licenses with Silence, Alnylam, UIC and Dharmacon 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. Our licenses from Alnylam relating to p53 and RTP-801 are limited to products for the treatment of specific diseases. 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 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

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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 preclinical 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 BioSpring 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:

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,

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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 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.

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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:

Although we currently have product liability insurance coverage for our global clinical trials for expenses or losses up to an aggregate limit of $10 million, 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:

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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 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.

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 the Units, Our Common Stock and this Offering

We are selling this offering without an underwriter and may be unable to sell any units. Unless we are successful in selling the units and receiving the proceeds from this offering, we may have to seek alternative financing to implement our business plans.

This offering is not-underwritten on a firm commitment basis. In the event we do not sell at least            units the offering will be cancelled. In such event we may have to seek alternative financing to implement our business plans.

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 price you paid for them in this offering.

We have applied to list our common stock on the Tel Aviv Stock Exchange. We have not, however, applied to list or have our stock quoted on any stock exchange or quotation system in the United States. 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 in Israel following this offering, and we do not expect that any active public trading market for our common stock will develop in the United States.

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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 trading price of our common stock on the Tel Aviv Stock Exchange 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:

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.

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The TASE members accepting orders in the auction process will not be bound by suitability protections for customers purchasing the units akin to FINRA Rule 2310.

The commercial banks or members of TASE in Israel that will be authorized to receive bids from customers wishing to purchase units in this offering are not member firms or registered representatives of the Financial Industry Regulatory Authority, Inc. (“FINRA”). As such, TASE member will not be subject to FINRA Rule 2310 (Recommendations to Customers (Suitability)) that requires that registered representatives take into account several factors such as the customer’s financial status before recommending investments to individual investors (non-institutional). Notwithstanding the foregoing, investment advisors in Israel are subject to the Israeli Law for the Regulation of Investment Advice, Investment Marketing and Investment Management, 1995 that contains, among others, several provisions aimed at protecting the interest of investors, including a requirement to accommodate the service to the needs and instructions of the client.

Following the offering, we shall be subject to certain provisions of the Israel Securities Law — 1968, which deal mainly with disclosure issues, and to certain provisions of Israel Companies Law — 1999, which deal mainly with corporate governance issues. Both provisions differ from US securities laws and the default provisions generally applicable to California corporations, respectively. Certain of these provisions may be unenforceable and stockholder rights may be adversely affected.

As a result of the offering of securities in Israel, we are subject to certain provisions of the Israel Securities Law — 1968. Pursuant to Section 39A of the Israel Securities Law — 1968, rules and regulations of the Israeli Companies Law — 1999 listed in the Fourth Schedule to the Israel Securities Law apply to issuers incorporated in jurisdictions outside Israel which offer securities to the public in Israel.

In addition, pursuant to Section 39A of the Israel Securities Law, we are subject to a number of other provisions of the Israeli Companies Law, including provisions applicable to:

The foregoing provisions of Israeli law are only applicable to the extent permitted by California law. In the event of a conflict between these provisions and California law, California law will prevail.

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

As of October 31, 2010, our executive officers, directors and largest shareholder, together with their respective affiliates, beneficially owned approximately 79.9% 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 shareholders will be able to exert a significant degree of influence over our management and affairs and over matters requiring shareholder approval, including the election of our board of directors and approval of significant corporate transactions. This concentration of ownership could have the effect of

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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 implemented by the Securities and Exchange Commission and Israel Securities Authority, imposes 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. As a reporting corporation under the Israel Securities Law, we will also be required to file periodic and immediate reports according to the Israel Securities Law and regulations, resulting in significant additional legal, accounting and other expenses. We expect these expenses will be increased by our need to reconcile the requirements of U.S. and Israeli laws, and the fact that the Israel Securities Law and regulations are designed mainly for companies incorporated under the Israel Companies Act, as opposed to under U.S. law, as we are.

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 up to            shares of common stock outstanding.

Under the rules of the Tel Aviv stock exchange, certain of our stockholders will be restricted from selling our securities for between three and 18 months following this offering. These restrictions, together with additional restrictions under U.S. securities laws are 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 and warrants 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. 21,384,630 shares of common stock outstanding as of October 31, 2010, plus an additional 2,632,919 shares issuable upon the exercise of outstanding options will be available for sale, subject to volume limitations under Rule 144 under the Securities Act of 1933, as amended and the restrictions imposed by the Tel Aviv Stock Exchange.

After this offering, the holders of approximately 17,996,100 shares of common stock based on shares outstanding as of October 31, 2010, 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.

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

Provisions in our articles of incorporation and our bylaws may delay or prevent an acquisition of us that would be beneficial to shareholders or a change in our management. In addition, these provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders 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 shareholders to replace current members of our management team. These provisions include:

In addition, as a California corporation, we are subject to the provisions of Section 1203 of the California Corporations Code, which requires us to provide a fairness opinion to our shareholders in connection with their consideration of any proposed “interested party” reorganization transaction. These provisions could make it more difficult for a third party to acquire a majority of our outstanding voting stock by discouraging a hostile bid, or delaying, preventing or deterring a merger, acquisition or tender offer in which our shareholders could receive a premium for their shares, or effect a proxy contest for control of Quark or other changes in our management, even if the proposed acquisition or change in management could be considered beneficial by some shareholders.

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 most of 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 shareholders 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 shareholders.

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 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,

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and investors will be dependent on the appreciation of our common stock to earn a return on their investment. Additionally, our ability to pay future dividends may be restricted by the terms of any debt financing and tax considerations.

Risks Related to the Auction Process for Our Offering

The auction process may result in a phenomenon known as the “winner’s curse,” and, as a result, investors may experience significant losses.

The auction process may result in a phenomenon known as the “winner’s curse.” At the conclusion of the auction, bidders that receive allocations of units in this offering (successful bidders) may infer that there is little incremental demand for our shares above or equal to the public trading price. As a result, successful bidders may conclude that they paid too much for our units and could seek to immediately sell their shares to limit their losses should our stock price decline. In this situation, other investors that did not submit successful bids may wait for this selling to be completed, resulting in reduced demand for our common stock in the public market and a significant decline in our stock price. Therefore, we caution investors that submitting successful bids and receiving allocations may be followed by a significant decline in the value of their investment in our common stock shortly after our offering.

Successful bidders may receive the full number of units subject to their bids, so potential investors should not make bids for more units than they are prepared to purchase.

Successful bidders may be allocated all or almost all of the units that they bid for in the auction. Therefore, we caution investors against submitting a bid that does not accurately represent the number of units that they are willing and prepared to purchase.

If research analysts publish or establish target prices for our common stock that are below the offering price for our units or the then current trading market price of our shares, the price of our shares of common stock may fall.

Although the offering price of our units may have little or no relationship to the price determined using traditional valuation methods, research analysts may rely on these methods to establish target prices for our common stock. If research analysts publish target prices for our common stock that are below the offering price of our units or the then current trading market price of our shares, our stock price may decline.

The mechanics of our bid process make it difficult for persons not having an account with a TASE member at the time of the bid process to place a bid for our units.

We are conducting our bid process in compliance with the rules of the TASE and the Israeli Securities Authority. As a result of the manner in which we are conducting the offering and while the bidding process is open to everyone, bids must be submitted through TASE members. For description of the offering mechanism, see “Plan of Distribution.” The need to submit a bid through a TASE member makes it potentially difficult and costly for persons not having an account with a TASE member to bid on our units.

The amount of proceeds from this offering is dependent upon the outcome of the auction process.

The amounts set forth in the “Use of Proceeds” section indicate our proposed use of proceeds from this offering. Due to the nature of the auction process, the outcome of the auction will determine the proceeds of the offering and there is no assurance that we will be able to sell any units in this offering. The offering will not be completed, and bids submitted will be cancelled, if the minimal amount indicated in the “Use of Proceeds” section shall not be achieved as a result of the offering.

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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:

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.

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USE OF PROCEEDS

We estimate that the net proceeds from the sale of units comprised of ___ shares of our common stock and ___ warrants in this offering will be a maximum of approximately $    million, and a minimum of approximately $   , based upon an assumed initial public offering price of $    per unit (the mid-point of our anticipated range of offering prices), after deducting estimated distribution commissions and offering expenses payable by us, excluding proceeds received from the exercise of the warrants. The offering price will be determined in an auction process, as detailed in the Plan of Distribution, and shall not be lower than NIS      (approximately $    ), the minimum price for the purpose of this offering. There is no assurance that we will sell the maximum number of units or that we will sell any units at all. Each $1.00 increase (decrease) in the assumed initial public offering price of $    per unit, would increase (decrease) net proceeds to us from this offering by approximately $    million, assuming the number of units offered by us is at the minimum level, as set forth on the cover page of this prospectus. We may also increase or decrease the number of units we are offering. Each increase (decrease) of one million units in the number of units offered by us would increase (decrease) the net proceeds to us from this offering by approximately $    million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated discounts and commissions and offering expenses payable by us, excluding proceeds received from the exercise of the warrants. We do not expect that a change in the offering price or the number of units by these amounts would have a material effect on our uses of the net proceeds from this offering, although it may impact the amount of time prior to which we will need to seek additional capital. We will not receive any proceeds from the exercise of the warrants unless and to the extent that the warrants are exercised. In general, our top priority is the completion of development of clinical and preclinical stage products that are subject to agreements with third parties (including option, license and collaboration). Should our future financial position not be sufficient to complete all such programs, we will assess the best resource allocation at that time. We currently expect to use our net proceeds from this offering, together with existing cash resources and anticipated funding from existing collaborators, to conduct two Phase II clinical trials of our product candidate QPI-1002, a Phase I clinical trial of QPI-1007, a Phase II trial of QPI-1007 following the Phase I trial and continuation of the development of our product candidates in preclinical stage, all subject to the receipt of necessary regulatory approvals and achievement of other milestones, as follows:

We may also seek to obtain debt or other non-equity financing to cover a portion of the costs to complete development and commercialize any or all of our drug candidates, to fund development of our other preclinical and early-stage product candidates and/or for the acquisition or in-licensing of, or investment in, products, product candidates, or companies that complement our business. However, we have no current understandings, commitments or agreements with respect to any such potential financing.

The expected use of the net proceeds of this offering represents our current intentions based upon our present plans and business conditions. We anticipate that the net proceeds we receive in this offering, together with our existing cash resources and anticipated research and development funding and milestone payments from existing collaborators, will be sufficient to fund our operations through the first half of 2013 and, subject to the receipt of necessary regulatory approvals and achievement of other necessary milestones, to complete Phase II clinical trials of QPI-1002 and to complete Phase I clinical trial and prepare and conduct Phase II clinical trial of our product candidate QPI-1007. 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. The use of proceeds as specified above are our estimates as of the date of this prospectus, however, we cannot be certain of all of the particular uses for the net proceeds to be received upon the closing of this offering. 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.

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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.

The offering coordinator, Clal Finance Betucha Investment Management Ltd., will hold the offering proceeds in trust after the pricing of the offering and before the issuance of the units. Prior to the public tender, as described in the Plan of Distribution, the offering coordinator will open a special trust account at a banking corporation in the name of Quark, bearing interest, and will provide the TASE members with the details of the trust account, which will be used for the monies received from persons ordering units in the offering. The trust account will be managed exclusively by the offering coordinator for and on behalf of Quark, in accordance with section 28 of the Israel Securities Law. Monies accrued to the trust account are expected to be invested by the offering coordinator in unlinked, liquid deposits bearing daily interest, to the extent possible. If, at the end of the public tender, all the units on offer have been purchased and TASE approval has been obtained to list the units for trading, the offering coordinator will pay the monies and interest accrued in the trust account to Quark.

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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.

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CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2010:

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 September 30, 2010 (Unaudited)
		Actual				Pro-forma				Pro-forma as adjusted
		(in thousands, except share and per share data)
Series H Redeemable Convertible Preferred stock $0.001 par value:
7,700,000 shares authorized at September 30, 2010, 7,400,000 issued and outstanding at September 30, 2010; Aggregate liquidation preference of $44,400 at September 30, 2010; No shares authorized or issued and outstanding proforma		$	37,000			$	—
Stockholders’ equity:
Common stock $0.001 par value:
Authorized: 74,800,000 shares at September 30, 2010; Issued and outstanding: 3,388,530 shares at September 30, 2010; 74,800,000 shares authorized and 21,084,630 shares, issued and outstanding proforma			3				21
Series A – G Convertible Preferred stock $0.001 par value:
Authorized: 25,882,410 shares at September 30, 2010; Issued and outstanding: 25,879,611 shares issued at September 30, 2010; Aggregate liquidation preference of $86,443 at September 30, 2010; none issued and outstanding proforma			26				—
Additional paid in capital			77,263				114,271
Accumulated deficit			(111,295	)			(111,295	)
Total stockholders’ equity			(34,003	)			2,997
Total capitalization			(34,003	)		$	2,997

Each $1.00 increase (decrease) in the assumed initial public offering price of $     per unit, would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by approximately $     million, assuming that the number of units offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and offering expenses payable by us, excluding proceeds received from the exercise of the warrants. We may also increase or decrease the number of units we are offering. Each increase (decrease) of one million units in the number of units offered by us would increase (decrease) each of additional paid-in capital, total shareholders’ equity and total capitalization by approximately $    million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated distribution commissions and estimated offering expenses payable by us, excluding proceeds received from the exercise of the warrants. The pro forma as adjusted

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information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The outstanding share information in the table above is as of September 30, 2010 and excludes:

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DILUTION

If you invest in our units in this offering, your ownership interest in our common stock will be diluted to the extent of the difference between the initial public offering price per share and the proforma 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 (including redeemable preferred stock). As of September 30, 2010, we had a historical net tangible book value of our common stock of $34 million, or approximately $(10.03) per share, not taking into account the conversion of our outstanding convertible preferred stock. The proforma net tangible book value of our common stock as of September 30, 2010 was approximately $     million, or approximately 0.14 per share, based on the number of shares outstanding as of September 30, 2010, after giving effect to the conversion of the redeemable preferred stock and all outstanding convertible preferred stock into shares of common stock prior to completion of this offering.

Investors participating in this offering will incur immediate, substantial dilution. After giving effect to the sale of the maximum number of units offered in this offering at an assumed initial public offering price of $     per unit, after deducting estimated distribution commissions and offering expenses payable by us, our pro forma as adjusted net tangible book value as of June 30, 2010, would have been approximately $     million, or approximately $     per share of common stock, excluding proceeds received from the exercise of the warrants. This represents an immediate increase in pro forma as adjusted net tangible book value of $     per share to existing shareholders, 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 unit
Historical net tangible book value per share as of September 30, 2010
Pro forma decrease 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

Each $1.00 increase (decrease) in the assumed initial public offering price of $    per unit, with each shares of common stock comprising the units to be offered at a price between $___ and $___ per share, and each warrant comprising the units to be offered at a price between $____ and $____, would increase (decrease) our pro forma as adjusted net tangible book value by approximately $    million, or approximately $    per share, and the pro forma dilution per share to investors in this offering would be approximately $    per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us, excluding proceeds received from the exercise of the warrants. We may also increase or decrease the number of shares we are offering. An increase of one million units in the number of units offered by us, over and above the maximum number of shares specified on the cover of this prospectus, would increase our pro forma as adjusted net tangible book value by approximately $    million, or $    per share, and the pro forma dilution per share to investors in this offering would be $    per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated distribution commissions and estimated offering expenses payable by us, excluding proceeds received from the exercise of the warrants. Similarly, a decrease of one million units in the number of units offered by us would decrease our pro forma as adjusted net tangible book value by approximately $    million, or $    per share, and the pro forma dilution per share to investors in this offering would be $    per share, assuming that the assumed initial public offering price remains the same, and after deducting the estimated distribution and commissions and offering expenses payable by us, excluding proceeds received from the exercise of the warrants. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

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The following table summarizes, on a pro forma basis as of September 30, 2010, 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 shareholders and by investors participating in this offering at an assumed initial public offering price of $     per unit, and before deducting estimated distribution commissions and offering expenses payable by us:

Total consideration

Weighted average price per share

Number

Percent

Amount

Percent

(in thousands)

Existing shareholders before this offering

Investors participating in this offering

Total

The above discussion and tables are as of September 30, 2010 and exclude:

The following table summarizes, on a pro forma basis as of September 30, 2010, after giving effect to the exercise of all stock options and warrants outstanding as of September 30, 2010, 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 shareholders and by investors participating in this offering at an assumed initial public offering price of $     per share, before deducting estimated distribution commissions and offering expenses payable by us:

Total consideration

Weighted average price per share

Number

Percent

Amount

Percent

(in thousands)

Existing shareholders before this offering

Investors participating in this offering

Total

The number of shares of common stock outstanding in the table above is based on the pro forma number of shares outstanding as of September 30, 2010.

Effective upon the closing of this offering, an aggregate of       shares of our common stock will be reserved for future issuance under our 2007 Equity Incentive Plan and 2010 Employee Stock Purchase Plan. To the extent that any options or warrants are exercised or new options or shares 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.

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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.

We derived the statements of operations data for the years ended December 31, 2007, 2008 and 2009 and the balance sheet data as of December 31, 2008 and 2009 from our audited financial statements appearing elsewhere in this prospectus. The statement of operations data for the years ended December 31, 2005 and 2006 and the balance sheet data as of December 31, 2005, 2006 and 2007 are derived from our audited financial statements, which are not included in this prospectus.

The following financial data for the nine months ended September 30, 2009 and 2010, and as of September 30, 2010 have been derived from our unaudited financial statements which are included elsewhere in this prospectus. Our historical results are not necessarily indicative of our future results and results for the nine months ended September 30, 2010 are not necessarily indicative of results to be expected for the full year.

		Years ended December 31,																				Nine months ended September 30,
		2005				2006				2007				2008				2009				2009				2010
		(in thousands, except share and per share data)
		(audited)																				(unaudited)
Statements of Operations Data:
Revenues		$	3,438			$	4,252			$	27,878			$	17,276			$	2,655			$	2,065			$	2,810
Cost of development services			—				—				—				1,719				1,712				1,339				869
Gross profit			3,438				4,252				27,878				15,557				943				726				1,941
Operating costs and expenses:
Research and development			9,049				18,881				20,774				18,726				15,744				13,024				13,659
General and administrative			2,224				2,986				7,055				5,018				5,087				3,823				4,820
Total operating costs and expenses			11,273				21,867				27,829				23,744				20,831				16,847				18,479
Operating income (loss)			(7,835	)			(17,615	)			49				(8,187	)			(19,888	)			(16,121	)			(16,538	)
Financial income (expenses), net			377				656				940				722				87				61				(538	)
Income (loss) before income taxes			(7,458	)			(16,959	)			989				(7,465	)			(19,801	)			(16,060	)			(17,076	)
Income taxes			—				—				—				(1,667	)			160				62				(210	)
Net income (loss)			(7,458	)			(16,959	)			989				(9,132	)			(19,641	)			(15,998	)			(17,286	)
Changes of Redemption Value of Series F and H Preferred Stock			(118	)			638				(336	)			—				—				—				(1,368	)
Deemed dividend as a result of warrants modification			—				—				(117	)			—				—				—				—
Income attributable to preferred shareholders			—				—				536				—				—				—				—
Net income (loss) to common shareholders		$	(7,576	)		$	(16,321	)			—				(9,132	)			(19,641	)			(15,998	)			(18,654	)
Net income (loss) per share of common stock:
Basic and diluted net loss per share		$	(2.91	)		$	(6.21	)			—			$	(2.76	)		$	(5.80	)		$	(4.72	)		$	(5.51	)
Weighted average number of shares used in computing basic and diluted net loss per share			2,599,781				2,628,784				2,970,351				3,307,871				3,388,119				3,387,988				3,388,530
Proforma net loss per share of common stock:
Basic and diluted net loss per share pro forma (unaudited)																			(1.03	)							(0.86	)
Weighted average number of shares used in computing basic and diluted net loss per share pro forma (unaudited)																			19,084,219								20,092,037

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		As of December 31,																				September 30, 2010
		2005				2006				2007				2008				2009
		(in thousands)
		(audited)																				(unaudited)
Balance Sheet Data:
Cash and cash equivalents		$	18,326			$	19,842			$	12,234			$	32,734			$	12,842			$	8,728
Working capital			15,537				4,637				8,611				27,412				8,792				3,034
Total assets			21,430				22,892				16,105				36,374				15,690				12,373
Deferred revenues			53				11,677				698				16				81				1,479
Redeemable convertible preferred stock			874				236				0				27,000				27,000				37,000
Total shareholders’ equity (deficiency)			17,185				5,410				9,391				1,576				(17,132	)			(34,003	)

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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 pharmaceutical company engaged in discovering and developing novel RNA interference or RNAi-based therapeutics. We have a fully integrated drug development platform that spans therapeutic target identification based on our proprietary gene discovery science and technology, to clinical drug development. We initially focus on RNAi-based therapeutics for the treatment of diseases associated with oxidative stress and ischemic injury. We believe that our insight into the molecular mechanisms underlying these diseases, combined with our ability to design, chemically modify and successfully deliver synthetic small-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 three product candidates in clinical development in five different indications: PF-655 (previously RTP801i-14) for the treatment of diabetic macular edema or DME and for wet age-related macular degeneration, or wet AMD; QPI-1002 (previously AKIi-5) for the prevention of acute kidney injury, or AKI (known also as acute renal failure or ARF) and for treatment of delayed graft function or DGF in kidney transplant patients; and QPI-1007 for ocular neuroprotection. We have licensed PF-655 to Pfizer on an exclusive worldwide basis and we granted an option for an exclusive license to QPI-1002 to Novartis. We have a broad pipeline based on our internally developed and chemically modified siRNA structures, protected by intellectual property rights. Several of our product candidates are based on novel targets and therapeutic concepts discovered using our BiFAR^TM target gene discovery platform. We believe that our platform technologies, siRNA capabilities and intellectual property combined with expertise of our regulatory, medical, preclinical and clinical development group 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 September 30, 2010, we have funded our operations primarily through gross proceed $120 million from the sale of equity securities and $128 million pursuant to our license and collaboration agreements with pharmaceutical companies. Through 2005, a substantial portion of our revenues were from our BiFAR^TM 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 RTP-801 to Pfizer. In June 2010 we entered into a collaboration and license agreement with Nitto Denko pursuant to which Nitto Denko will fund certain of our research program efforts. In August 2010 we granted an option to Novartis for an exclusive license on our QPI-1002 drug candidate for all indications and we recognized a non-refundable option grant fee. Our execution of the option agreement with Novartis created a question regarding the amounts that may be due under our license agreement with Silence as a result of payments that we receive from Novartis. Following negotiations with Silence, we have agreed in principle on a sharing ratio for the payments we may receive. This agreement in principle will be reflected in an amendment to our license agreement with Silence, which is currently being prepared. 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, Novartis if the option is exercised, Nitto Denko 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.

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Financial Operations Overview

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

Revenues.  We generate revenues mainly from research and development services under our collaborations with pharmaceutical companies, from research and development cost reimbursements and up-front and milestone payments under other collaboration and license agreements and to a lesser extent from certain short-term research service agreements and grants.

Revenues under Pfizer agreement,

In connection with the Pfizer agreement, during the year ended December 31, 2006 Pfizer paid us approximately $14.9 million in upfront fees and reimbursement of on-going research and development expenses incurred after effectiveness of the agreement. Of this, during 2006 we recognized $1.7 million related to reimbursement of on-going research and development expenses and $1.5 million related to the amortization of the deferred upfront payment.

During 2007 we recognized $10.3 million related to the first milestone payment from Pfizer as a result of the start of Phase I study for the first licensed product for the first ophthalmic use, $6.4 million related to reimbursement of on-going research and development expenses and $11.2 million related to the amortization of the deferred upfront payment.

During 2008, we recognized revenues revenue under the Pfizer agreement in the total amount of $17.2 million, of which $12.9 million was a milestone payment following the achievement of the second clinical development milestone for our siRNA drug PF-655 in development for the treatment of ocular diseases. A portion of the milestone payment from Pfizer is payable by us to Silence Therapeutics (formerly; Atugen AG) and Alnylam as technology license milestone payments, $1.9 million and $0.4 million, respectively, both of which were recorded by us as research and development expenses. In addition, during the year ended December 31, 2008, $0.7 million was recorded as a result of amortization of deferred revenues and $3.7 million was recorded as revenues from reimbursement of on-going research and development expenses related to the agreement with Pfizer.

During the year ended December 31, 2009, we recognized total revenue under the Pfizer agreement of $2.6 million which was recorded as revenues from development services.

During the nine month periods ended September 30, 2010, the Company recognized total revenue under the Pfizer agreement of $1.4 million from research and development services.

Cost of revenues.  Cost of revenues include direct and allocated expenses that are associated with the clinical development-related services provided to 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 mainly include the following:

At any given time, we have multiple ongoing research and development projects. Our internal resources, employees and infrastructure are not directly tied to any individual project and are typically deployed across multiple projects. We group projects into two major categories: “research” and “preclinical and clinical development.” Through our clinical development programs we are developing each of our product candidates in parallel for multiple disease indications, and through our basic research activities are seeking to design potential drug candidates for multiple new disease indications. We have not therefore maintained complete cost information for each of our projects.

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We only commence tracking cost by project when we begin preclinical studies with respect to a particular product candidate and we start development, rather than keeping cost information from the onset of each project. The approximate costs associated with our (a) basic research programs and (b) preclinical and clinical development activities were as follows:

		Cost from proof of concept through September 30, 2010				Year ended December 31,												Period ended September 30,
																		Unaudited
						2007				2008				2009				2009				2010
		(in thousands)
Pre-clinical and clinical development
PF-655*			16,770	(2)			5,824				3,256				14				11				11
QPI-1002 for AKI			18,444	(2)			4,927				2,592				2,624				2,217				1,938
QPI-1002 for DGF			9,447				—				1,961				3,922				2,748				4,459
QPI-1007			7,354				—				750				3,709				3,287				2,895
Other							2,536				578				98				136				—
Total pre-clinical and clinical development							13,287				9,137				10,367				8,399				9,303
Research(1)							7,487				9,589				5,377				4,625				4,356
Total research and development						$	20,774			$	18,726			$	15,744			$	13,024			$	13,659

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. Phase I clinical trials generally are expected to last between 12 and 18 months, Phase 2 clinical trials are expected to last between 18 and 24 months and Phase 3 clinical trials are expected to last between 24 and 42 months. The length of clinical development depends on the specific disease, patient population, time required for recruitment of patients and other factors. For product candidates that are in preclinical development, the timing of an IND filing varies significantly and is difficult to predict. 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.

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 future clinical trials or, if not already substantially underway, current clinical trials 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,

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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:

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

Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”) and Accounting Standards Codification No. 605-25, “Revenue Arrangements with Multiple Deliverables” (“ASC 605-25”) and Accounting Standards Codification No. 605-45, “Reporting Revenue Gross Versus Net As an Agent” (“ASC 605-45”).

Agreement with Pfizer

Under our agreement with Pfizer, Pfizer is responsible for all preclinical and clinical development costs of the licensed products, as well as all regulatory filings and approvals. The parties share oversight of development through product-specific committees, but Pfizer has ultimate decision-making authority.

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This multiple element arrangement was analyzed to determine whether the deliverables, which include a license and performance obligations such as research and steering committee services, can be separated or whether they must be accounted for as a single unit of accounting in accordance with ASC 605-25. According to ASC 605-25 we considered if (i) the license has stand-alone value and (ii) whether a fair value of any of the undelivered performance obligations can be determined. Because we could not determine fair value of the undelivered performance obligations the arrangement is being accounted for as a single unit of accounting and the upfront front payments 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, it must determine the period over which the performance obligations will be performed and revenue will be recognized.

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 its performance obligations.

Significant management judgment is required in determining the period over which we expect 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, we assess whether its involvement constitutes a performance obligation or a right to participate. Because Pfizer has acknowledged that the Company can be released from its joint steering and research committees anytime upon request and without 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:

Reimbursement of costs is recognized as revenue on a gross basis as costs are being incurred in accordance with the provisions of ASC 605-45 provided the amounts are determinable, and collection of the related receivable is reasonably assured.

In 2008, we amended our agreement with Pfizer and started to generate revenue by providing professional services and assistance to Pfizer on a time-and-materials basis. Under the agreement terms, we are paid for services provided by company personnel based on per employee rates and actual hours the employee contributed towards Pfizer projects as well as for costs paid by us to third parties in performing the service.

Revenue is recognized as services are performed, provided that evidence of an arrangement has been obtained, fees are fixed and determinable and collectability 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

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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.

Other short term service agreements:

Under certain short term fixed-price service contracts, we agree 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 milestone performance obligations.

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 preclinical 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 accruals for the following:

We record accruals for these research and development contracts based upon progression and percentage of completion of work done. Determination of progress of each contract is based on reports and deliverables but also on estimates such as time for completion and others. All such costs are included in research and development expenses. Costs of setting up a preclinical study or clinical trial are expensed immediately. Costs related to patient enrollment in clinical trials are rerecorded and accrued for as patients are enrolled in the trial.

Stock-Based Compensation

We account for stock-based compensation in accordance with Accounting Standards Codification No. 718-10, “Compensation — Stock Compensation” (“ASC 718-10”). ASC 718-10 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated income statements.

We recognize compensation costs net of a forfeiture rate for only those shares expected to vest on straight-line basis over the requisite service period of the award, which is generally the option vesting term of four years. ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

We selected the Black-Scholes option pricing model as the most appropriate fair value method for its stock-options awards. The option-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and the expected option term.

The computation of expected volatility is based on realized historical stock price volatility of competitive Companies. The interest rate for period within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. The expected term is calculated based on the “simplified method” as defined in Staff Accounting Bulletin No. 107 or SAB 107, “Share Based Payments” and Staff Accounting Bulletin No. 110, or SAB 110, as the average between the vesting period and the contractual life of the

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options. The Company adopted SAB 110 effective January 1, 2008 and will continue to apply the simplified method until sufficient historical experience is available to provide a reasonable estimate of the expected term for stock option grants.

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. As further discussed in fair value of equity instruments and derivatives section below there are significant judgments and estimates inherent in the determination of the reassessed fair values.

For non-employees, 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.

Fair value of our common stock

The fair value of the common stock underlying stock options granted during the periods presented were 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:

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 since 2009 to the present. We did not use a contemporaneous valuation from an unrelated valuation specialist at the time of the option grants during 2009, 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.

Significant Factors, Assumptions and Methodologies Used in Determining Fair Value

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 H preferred stock was issued by us to outside investors in arms-length transactions in 2008 and 2010, 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,

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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 during the second quarter of 2010, 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 2009. In reassessing the fair value of our common stock, we considered numerous objective and subjective factors, including:

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

Discounted Future Cash Flow Method (DCF).  To reach enterprise value as of September 30, 2009, and September 1, 2010 we performed a valuation using DCF methodology at each valuation date. Under the DCF method, the fair value of the business is estimated based on the stream of benefits investors expect to receive, the timing of such benefits and the risk borne by investors.

Option Pricing Model.  Once the enterprise value was estimated pursuant to the foregoing analyses, the value was allocated among the company’s debt and its various classes of equity based on the characteristics of each such class and its claim on the company’s assets. Stock characteristics that were factored into the analyses included liquidation preferences, participation features, convertibility features and value sharing between classes of stock. Because the proceeds of any liquidation event are to be divided among the holders of our preferred stock prior to any distribution to the holders of our common stock, 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 stock. Accordingly, an option pricing model was used to estimate the value of our common stock. The common stock value was derived from the value for the company based upon the DCF method at the valuation date. This approach also took into account the relative seniority, rights, liquidation preferences and conversion ratios of the convertible preferred securities, common stock and warrants as of the valuation date under scenarios of both liquidation and initial public offering.

Based on the foregoing, we determined that the fair value of our common stock in September 2009 was $1.10 per share. The fair market value of our common stock was estimated using the option pricing method utilizing the binomial model described above, with the following assumptions for September 30, 2009: a risk-free interest rate of 0.40% – 0.95%, dividend yield of 0%, volatility of the expected market value of our total invested capital of approximately 75% and an expected term of 2.3 years.

Between September 30, 2009 and August 31, 2010, we did not grant any stock options. The valuation analysis of our common stock as of September 1, 2010 utilized the DCF methodology and was also based on estimates provided by underwriters utilizing the market prices. The factors considered in the valuation of our common stock included a third party independent valuation report prepared by Variance Economic Consulting, Ltd. In this report, the fair market value of our common stock was estimated using the option pricing model describing above, with the following assumptions for August 30, 2010: a risk-free interest rate of 0.25% –  0.5%, dividend yield of 0%, volatility of the expected market value of our total invested capital of approximately 75% and an expected term of 1.3 years.

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In our valuation, we considered both the possibility of a successful initial public offering and the possibility that a public offering would not be accomplished. Based on the expected probability of the occurrence of the initial public offering and the non- initial public offering scenarios, the fair value of our common stock was determined. As of September 1, 2010 we estimated a 40% likelihood of a successful initial public offering.

The most significant factors contributing to the increased value of our common stock between September 2009 and September 2010 were our entry into an option license agreement in August 2010 with Novartis and the progress in the development of our product candidates. During this period we filed and received FDA approval for an IND of QPI-1007 and started the Phase I trial for this product. Our partner Pfizer, in collaboration with us, completed the enrollment of the Phase II clinical trials of our product candidate for PF-655, for both age related macular degeneration and diabetic macular edema indications. We completed enrollment of the two phase I studies with QPI-1002, for acute kidney injury and delayed graft function. Finally, we started the Phase II clinical trials of our product candidate for QPI-1002 for delayed graft function in kidney transplant patients.

Based on the above, our board of directors determined the fair value of our common stock to be $4.55 per share in September 1, 2010, of which $2.56 was attributable to the successful initial public offering scenario as of that date.

Since September 2010, the following events occurred that may impact the value of our comment stock. We have continued to make progress in our Phase II and Phase I clinical trails and we have made further progress towards the completion of this offering.

We have not granted any stock options following September 1, 2010.

Aggregate Intrinsic Value of Outstanding Stock Options

Based upon an assumed initial public offering price of $       per share, the aggregate intrinsic value of outstanding stock options vested and unvested as of October 31, 2010 was $       million, of which $         million related to vested stock options and $      million related to unvested stock options expected to vest.

		September 30, 2010				Weighted Average Exercise Price				Assumed IPO Price				Aggregate Intrinsic Value
Vested			1,429,779			$	2.21			$				$
Unvested			1,253,678				1.69
Total outstanding			2,683,457				1.97							$

Preferred Stock Warrant Liability

We account for our preferred stock warrant in accordance with Accounting Standards Codification 480-10, “Distinguishing Liabilities from Equity” (“ASC 480-10”), which requires that a financial instrument, other than an outstanding share, that, at inception, is indexed to an obligation to repurchase the issuer’s equity shares, regardless of the timing or likelihood of the redemption shall be classified as a liability. We measure the fair value of our warrant liability using an option-pricing model with changes in fair value recognized in earnings. Any modifications to the warrant liability are recorded in earnings during the period of the modification.

The significant assumptions used in estimating the fair value of our warrant liability include the strike price, estimate for volatility, risk free interest rate, estimated fair value of the preferred stock, and the estimated life of the warrant. Changes to these assumptions will impact the value of the liability.

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

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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.

We accounts for income taxes in accordance with ASC 740-10, “Income Taxes” (“ASC 740-10”). ASC 740 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, to reduce deferred tax assets to their estimated realizable value.

Accounting for tax positions requires judgments, including estimating reserves for potential uncertainties. We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. While we believe the resulting tax balances as of December 31, 2009 and 2008 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. We have filed or are in the process of filing local and foreign tax returns that are subject to audit by the respective tax authorities. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.

Results of Operations

Comparison of Nine Months Ended September 30, 2010 and September 30, 2009

Revenue.  Revenue increased to $2.8 million for the nine months ended September 30, 2010 from $2 million for the nine months ended September 30, 2009. The revenue for these periods derived from services provided to Pfizer as described above and in the nine months ended September 30, 2010, the revenue also include $0.7 million from our agreement with Nitto Denko and $0.4 million from our agreement with Novartis.

Cost of development services.  Cost of development decreased from $1.3 million for the nine months ended September 30, 2009 to $0.9 million for the nine months ended September 30, 2010. The decrease results mainly from the completion of the enrollment of patients to Phase II of PFF-655 in 2010.

Research and Development Expenses.  Research and development expenses were $13.7 million for the nine months ended September 30, 2010, compared to $13.0 million for the nine months ended September 30, 2009. Most of the expenses during the nine months ended September 30, 2010 and 2009 were due to salaries, licenses and clinical studies expenses and pre clinical expenses.

General and Administrative Expenses.  General and administrative expenses increased to $4.8 million for the nine months ended September 30, 2010, compared to $3.8 million for the nine months ended September 30, 2009. This increase resulted primarily from an increase of $0.2 million in Patent fees, $0.4 million in professional services expenses due to new agreement of Novartis and Nitto Denko. $0.4 million in payroll and related expenses mainly as a result of waiver of loan to CEO.

Net Financial Income.  Net financial expenses increased to $538,000 for the nine months ended September 30, 2010, from financial income of $61,000 for the nine months ended September 30, 2009. This increase is mainly due to an increase of $565,000 as a result of a change in the fair value of warrants to purchase Series H Redeemable Convertible Preferred Stock.

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Comparison of Years Ended December 31, 2008 and 2009

Revenue.  Revenue decreased from $17.3 million in 2008 to $2.6 million in 2009. This decrease of $14.6 million was primarily due to $12.9 million in revenue recognized in 2008 in connection with a Phase II milestone payment under our agreement with Pfizer, with no corresponding milestone payment recognition in 2009.

Cost of development services.  Cost of development services was $1.7 million in each of the years 2008 and 2009.

Research and Development Expenses.  Research and development expenses decreased from $18.7 million in 2008 to $15.8 million in 2009. This decrease of $2.9 million was primarily due to $2.3 million in license expenses we paid as royalties to Atugen and Alnylam in 2008, with no corresponding payment in 2009.

General and Administrative Expenses.  General and administrative expenses were $5.0 million in each of 2008 and 2009, with no material changes.

Net Financial Income.  Net financial income decreased from $722,000 in 2008 to $87,000 in 2009. This decrease was primarily due to a decrease in our cash balances in 2009 compared to 2008, as well as decreased interest yields on cash and short-term investments.

Income taxes.  Tax expenses changed from $1.6 million tax expenses in 2008 to $160,000 tax income in 2009. The tax expenses in 2008 resulted mainly from accruals due to our tax position.

Comparison of Years Ended December 31, 2007 and 2008

Revenue.  Revenue decreased from $27.8 million in 2007 to $17.3 million in 2008. In 2007 the revenue was derived mainly from recognition of deferred revenue of upfront payment received on the Pfizer agreement in 2006 and from Phase I milestone payment while in 2008 the revenue derived mainly from Phase II milestone payment under our agreement with Pfizer

Cost of development services.  In 2008 following the agreement amendment with Pfizer from May 2008, the company had recorded cost of development services in the amount of $1.7 million. In 2007 there was no cost of development services. Costs related to the agreement with Pfizer were recorded as research and development costs.

Research and Development Expenses.  Research and development expenses decreased from $20.7 million in 2007 to $19.0 million in 2008, a decrease of $1.7 million. Most of this research and development expenditure was for outsourced activities and fluctuation in costs is typical and directly linked to the projects phases in the reported periods. In 2008 we discontinued the development of our hearing loss project which was the primary reason for savings of $3.5 million in outsourced expenses, offset by an increase in internal research and development expenses as a result of an expansion of headcount to support clinical operation activities.

General and Administrative Expenses.  General and administrative expenses decreased from $7.0 million in 2007 to $5.0 million in 2008. This decrease was primarily due to expenses for professional fees associated with our planned initial public offering in 2007 of 1.2 million and the forgiveness of a loan to a related party in 2007 in the amount of 0.7 million.

Net Financial Income.  Net financial income decreased from $0.9 million in 2007 to $0.7 million in 2008 as a result of decreased interest yields on cash and short-term investments.

Income taxes.  Tax expenses increased from $0 in 2007 to $1.6 million in 2008 mainly resulting from our accruals related to accounting for our tax position.

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Liquidity and Capital Resources

Since inception through September 30, 2010, we have financed our operations primarily through private placements of equity securities, receiving aggregate net proceeds from such sales totaling $120 million and proceeds from collaboration, service and license agreements totaling $128 million. As of September 30, 2010, we had $8.7 million in cash and cash equivalents, as compared to $12.8 million, $32.7 million and $12.2 million as of December 31, 2009, 2008 and 2007, respectively. Our cash and investment balances are held in bank deposits and money market funds.

As of September 30, 2010, we had cash and cash equivalents of $8.7 million. Net cash used for operating activities was $14 million for the nine months ended September 30, 2010, compared to $15 million net cash used in operating activities for the nine months ended September 30, 2009, an decrease of $1 million. The loss for the nine months ended September 30, 2010 was $17.3 million and the adjustment to cash was $3.3 million positive. The loss for the nine months ended September 30, 2009 was $15.9 million and the adjustment to cash was $1.0 million positive.

Net cash used in investing activities was $88,000 for the nine months ended September 30, 2010, compared to $56,000 used in investing activities for the nine months ended September 30, 2009, an increase of $32,000. This increase was due primarily to increased purchases of equipment of $45,000 offset by a decrease in other investing activities.

Net cash provided by financing activities was $10.0 million for the nine months ended September 30, 2010, compared to $0 for the nine months ended September 30, 2009. Net cash provided by financing activities for the nine months ended September 30, 2010 consisted of proceeds from the issuance of Series H redeemable preferred stock.

Net cash used in operating activities was $9.6 million, $6.7 million and $19.8 million in 2007, 2008 and 2009, 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 increase net cash used in 2009 resulted primarily from a substantial decrease in revenue. In 2009 there was no revenue from licenses, which required us to use more cash to support our operations. In 2007 our net cash used in operating activities was impacted by a decrease in the deferred revenues from previous year of approximately $11 million. In addition an increase in tax accrual of $2.5 million, which was paid in 18 monthly installments, impacted our net cash used in operating activates in that year.

Net cash used in investing activities was $305,000, $397,000 and $70,000 in 2007, 2008 and 2009, respectively. The net cash used in investing activities resulted primarily from purchase of equipment of $199,000, $293,000 and $70,000 in 2007, 2008 and 2009 respectively.

Net cash provided by financing activities was $2.3 million, $27.6 million and $0 million in 2007, 2008 and 2009, respectively. The net cash provided by financing activities resulted primarily from exercise of warrants of $2.2 million and sale of redeemable preferred stock of $27 million in 2007 and 2008, respectively.

Based on our current operating plans, we estimate that our existing capital resources, funds to be received pursuant to our agreements with Novartis, Nitto Denko and Pfizer and the net proceeds from this offering, will be sufficient to fund the research and development plans up to meet our financial obligations through the first half of 2013. However, the Series H Redeemable Preferred stock will become redeemable at any time after August 31, 2011, although the holders of a majority of the Series H Redeemable Preferred stock have agreed not to exercise their right of redemption prior to January 31, 2012. The redemption right will terminate upon the closing of a qualified Initial Public Offering. Currently, the redemption right is not at the control of the Company and as such, redemption would adversely affect the Company’s operations and liquidity.

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 shareholders 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

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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, 2009 were as follows:

		Total				<1 Year				1 – 3 Years				3 – 5 Years				Thereafter
Contractual Obligations		Payments due by period
		(in thousands)
Operating lease obligations(1)		$	587			$	495			$	92			$	—			$	—
Total		$	587			$	495			$	92			$	—			$	—

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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 October 2009, the FASB issued an update to ASC Topic 605-25, “Revenue recognition — Multiple-Element Arrangements”, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements: (i) establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis (2) eliminating the residual method of allocation — requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. (iii) Requiring expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance. The mandatory adoption is on January 1, 2011. The Company may elect to adopt the provisions prospectively to new or materially modified arrangements beginning on the effective date or retrospectively for all periods presented. The Company does not expect the adoption will have material impact on its consolidated financial statements.

In March 2010, the FASB issued an additional update to ASC 605 (ASU No. 2010-17, “Revenue Recognition — Milestone Method), which provides guidance related to revenue recognition that applies to arrangements with milestones relating to research or development deliverables. ASU 2010-17 provides criteria that must be met to recognize consideration that is contingent upon achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. ASU 2010-17 is effective for interim and annual periods beginning after June 15, 2010. Early adoption is permitted. The Company will adopt ASU 2010-17 on August 1, 2010. The adoption of ASU 2010-17 is not expected to have any material impact on the Company’s financial position, results of operations or cash flows.

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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. 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.

Exchange Rate Risk

We do not use derivative financial instruments and have no foreign exchange contracts. From time to time based on market terms, we convert Dollars to NIS to hedge our expenses denominated in NIS. We are exposed to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, mainly against the 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. Historically, the effect of fluctuations in currency exchange rates has had a low impact on our consolidated operations. We periodically assess the applicability of the U.S. dollar as our functional currency by reviewing the salient indicators. Neither a 10% increase nor decrease from current exchange rates would have a material effect on our operating results or financial condition.

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BUSINESS

Overview

We are a clinical-stage pharmaceutical company engaged in discovering and developing novel RNA interference or RNAi-based therapeutics. We have a fully integrated drug development platform that spans from therapeutic target identification based on our proprietary gene discovery science and technology, to clinical drug development. We focus on RNAi-based therapeutics for the treatment of diseases associated with oxidative stress and ischemic injury. We believe that our insight into the molecular mechanisms underlying these diseases, combined with our ability to design, chemically modify and successfully deliver synthetic small-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 three product candidates in clinical development in five different indications: PF-655 (previously RTP801i-14) for the treatment of diabetic macular edema and for wet age-related macular degeneration; QPI-1002 (previously I5NP or AKIi-5) for the prevention of acute kidney injury and for prevention of delayed graft function in kidney transplant patients; and QPI-1007 for ocular neuroprotection. We have licensed PF-655 to Pfizer on an exclusive worldwide basis and we granted an option to Novartis for an exclusive license to QPI-1002. We have a broad pipeline based on our internally developed chemically modified siRNA structures. Several of our product candidates are based on novel targets and therapeutic concepts discovered using our BiFAR^TM target gene discovery platform. We believe that our platform technologies, siRNA capabilities and intellectual property combined with the expertise of our regulatory, medical, preclinical and clinical development group will enable us to continue to advance new product candidates into clinical development, either directly or through collaborations with major pharmaceuticals companies.

PF-655 has been studied in two Phase II clinical trials for the treatment of diabetic macular edema and for the treatment of wet age-related macular degeneration. PF-655 is a stabilized, synthetic, chemically modified siRNA that inhibits our proprietary target RTP-801, a gene we believe plays a significant role in wet age related macular degeneration and diabetic macular edema. We have licensed PF-655 to Pfizer on an exclusive worldwide basis. Pfizer is 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. Pfizer has conducted the Phase II clinical trials in collaboration with us. Enrollment in both Phase II trials has been completed and Pfizer received interim results in November 2010. In the development of our drug candidate QPI-1002 we completed two Phase I trials for the prevention of acute kidney injury in patients undergoing major cardiac surgery and for prevention of delayed graft function in kidney transplant patients. In both trials QPI-1002 was administered systemically with no dose limiting toxicities observed in both AKI and DGF trails. QPI-1002 is a synthetic, chemically modified siRNA molecule designed to temporarily inhibit the expression of p53, a gene we believe plays a significant role in ischemic injury related conditions in the kidney. In August 2010 we granted to Novartis an option for a worldwide exclusive license to QPI-1002 for all indications. We are also developing QPI-1007 as a neuroprotective agent for the treatment of sudden vision loss associated with non-arteritic anterior ischemic optic neuropathy. We are conducting a Phase I trial of QPI-1007. QPI-1007, our third siRNA drug candidate is a chemically modified siRNA, designed to inhibit a gene named caspase 2, and it is our first drug candidate based on novel siRNA structure developed internally by Quark. If effective in non-arteritic anterior ischemic optic neuropathy, we plan to develop QPI-1007 also for glaucoma. In addition, we expect to initiate during 2012 formal preclinical studies towards filing IND applications in one or more of our broad pipeline programs based on the novel siRNA structures we develop.

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Our insight into the pathogenesis of diseases, combined with our proprietary targets and concepts and our solution to siRNA delivery, led us to select siRNA as the modality for our 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 main capabilities:

Some of our product candidates are based on our BiFAR^TM target gene discovery platform and our siRNA technology platform. The BiFAR^TM platform directly identifies clinically relevant critical genes and proteins that are responsible for certain disease traits. BiFAR^TM 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 traits, or disease phenotype. Our BiFAR^TM discovery platform was 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. Our siRNA technology platform includes proprietary drug delivery methods, proprietary algorithms to select the most appropriate sequence for the siRNA molecule and novel siRNA structures developed based on our deep understanding of the siRNA mechanism. Our novel siRNA structures are created with the aim to provide desirable drug-like properties to our siRNA molecules and to strengthen our intellectual property position.

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, methods of therapeutic use, delivery methodologies, target genes and our proprietary discovery technology. As of October 30, 2010, we own or control 77 issued and 2 allowed patents in the United States and elsewhere in the world and over 130 patent applications in the

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United States and elsewhere. In addition, we have in-licensed on a non-exclusive basis 32 granted patents in United States and 9 other jurisdictions and 58 patent applications pending in the United States and in 14 other jurisdictions, relating to RNAi technology.

RNAi Overview

RNA interference, or RNAi, is a process that occurs naturally within cells and selectively and temporarily silences the expression of specific genes. In addition, RNAi is a naturally-occurring part of our immune system that is helpful in silencing infectious agents. 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 (via transcription process to messenger RNA molecules) for producing proteins via a translation process of messenger RNAs. 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, or be produced in an aberrant form that has different, unwanted properties and function compared to the native one. In these circumstances, the ability to stop or reduce production of the protein by selectively silencing the expression of the gene that directs its synthesis (by destroying its messenger RNA template or interfering with the translation process) 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. In addition the RNAi approach is applicable to viral diseases by inhibiting viral replication.

The DNA molecule is double-stranded, composed of two complementary strands of building blocks called deoxyribonucleotides. DNA is found is cell nuclei and contain all genetic information of the organism. RNA is another type of nucleic acids found in the cell. Until recently, three major RNA types were known: messenger RNA (mRNA) that is transcribed from DNA and serves a substrate for translation of genetic information stored in DNA into protein; transport RNA, or tRNA, that participates in the process of translation of information encoded in mRNA into protein; and ribosomal RNA that is contained in ribosomes, protein synthesis machines, and performs structural functions. The information in DNA is translated into proteins with the help of another substance called messenger ribonucleic acid. 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 small-interfering RNA, or siRNAs, that act as guides for the sequence-specific silencing of target genes. This occurs when the guide strand siRNA aligns with a messenger RNA molecule having complementary nucleotide sequences and thereby induces its degradation, or interfere with the translation process, thus temporarily silencing expression of 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 can effectively silence expression of the gene.

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

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To date, major challenges in the development of RNAi-based therapeutics have been delivery, nuclease resistance, specificity and avoiding stimulation of innate immune responses:

Our Approach

To overcome these hurdles, our integrated siRNA discovery and development strategy is based on the following main capabilities:

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

Delivery.  In preclinical 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, proximal tubules of the kidney, lung, spinal cord and brain.

Stability, Specificity and Avoiding Innate Immune Response.  Our siRNA drug candidates have a chemically modified, stabilized structures that we believe offer significant advantages over standard siRNAs. We chemically modify our drug candidates with naturally occurring nucleotides or other nucleotides in specific proprietary combinations and structures, that significantly reduce or completely abrogate unwanted side effects. We have shown in preclinical studies that our siRNA drug candidates exhibit favorable safety profiles following either local or systemic administration at dose levels above the proposed clinical range. In addition, we believe we have demonstrated in vitro and in vivo stability of our drug candidates to elicit therapeutic responses in animal disease models.

Our method for drug candidate selections is shown schematically 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 delivery to a given organ of interest. From the potential indications, we often select those associated with oxidative stress since it is a main pathogenic feature of numerous diseases in various organs. This allows us to potentially use one siRNA for multiple indications. For example, our PF-655 has been studied in Phase II clinical trials for both wet age-related macular degeneration and diabetic macular edema. We focus on diseases that represent an unmet medical need with significant market potential. We then utilize our pool of proprietary target genes, many of which were previously identified by our BiFAR^TM platform to generate potential siRNA candidates that inhibit these specific target genes. As a next step, we synthesize stabilized siRNA molecules selected by our proprietary software utilizing our siRNA structures developed internally. We test these molecules activity in vitro in cell culture and in vivo in animal models of each disease, often in collaboration with opinion leaders in the particular indication. This process typically takes

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only a few months for each disease. At all times we verify our selection choices in view of patentability, freedom to operate, and clinical development issues for selection of the most suitable indication for clinical development. In all steps of the process our research teams work with medical, marketing and intellectual property personnel with the objective of maximizing the opportunity for future success in clinical trials and commercialization. The outputs of this process are novel siRNA drug candidates that inhibit expression of relevant target genes for the proposed disease indication.

Our Product Candidates

Our current product pipeline includes siRNA drug candidates targeting diseases associated with oxidative stress that represent significant unmet medical needs. The following table sets forth the status of our product pipeline and research programs:

Product Candidate		Indication		Status		Commercialization Rights
PF-655		Diabetic Macular Edema		Phase II DEGAS study completed. Interim data received in November 2010.		Pfizer (Worldwide)
PF-655		Wet Age-related Macular Degeneration		Phase II MONET study ongoing, enrollment completed. Interim data received in November 2010.		Pfizer (Worldwide)
QPI-1002		Acute Kidney Injury		Phase II expected to initiate dosing in the second half of 2011		Option granted to Novartis for Worldwide rights
QPI-1002		Delayed Graft Function in Kidney Transplant patients		Phase II ongoing (Interim analysis expected by mid 2012)		Option granted to Novartis for Worldwide rights
QPI-1007		Non arteritic Anterior Ischemic Optic Neuropathy		Phase I (Dosing and preliminary review of data expected to be completed during the second half of 2011)		Quark (Worldwide)
QPI-1007		Glaucoma		Preclinical toxicity studies for multiple dosing		Quark (Worldwide)
Program for pipeline siRNAs for neuron protection and neural regeneration		Diseases of the central nervous system, eyes and ears such as spinal cord injury, peripheral nerve injuries, neuropathic pain, hearing loss conditions, vestibular diseases.		In vivo proof-of-concept was accomplished in spinal cord injury with a drug candidate with endpoints of post-injury recovery and reduction of neuropathic pain. Further in vivo studies are ongoing in several indications.		Quark (Worldwide)
Program for respiratory system conditions		Acute Lung Injury, Lung Transplantation		In vivo proof-of-concept studies were accomplished in lung transplantation models. Further in vivo studies are ongoing		Quark (Worldwide)
Program for chronic conditions by systemic delivery of siRNA		Chronic Kidney Disease Cancer		Delivery studies and in vivo proof-of-concept studies at various stages.		Quark (Worldwide)
Fibrotic diseases in collaboration with Nitto Denko		Fibrotic conditions in the liver and other organs		Preliminary proof of concepts was successfully performed by Nitto Denko. We are currently performing siRNA design and delivery studies. (Filing of initial IND application expected by 2012)		Nitto Denko (Worldwide)

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Clinical portfolio

PF-655 in Phase II Clinical Trials for Diabetic Macular Edema and Wet Age-Related Macular Degeneration

The Drug Candidate.  PF-655 is a synthetic, chemically modified siRNA molecule designed to inhibit the expression of the hypoxia- inducible gene RTP-801. Using our BiFAR^TM platform, we discovered the gene RTP-801 and identified it as a likely major factor in the induction of various diseases associated with oxidative stress. In September 2006, we exclusively licensed PF-655 to Pfizer for many indications, and are collaborating with them in the development of the drug candidate for ophthalmic indications. PF-655 is being evaluated in two Phase II clinical trials, one for the treatment of diabetic macular edema and another for the treatment of wet age related macular degeneration.

Preclinical results.  We have conducted pharmacology studies of PF-655 in the mouse laser-induced model of choroidal neovascularization, an accepted model of wet age-related macular degeneration. In these studies, PF-655 specifically inhibited expression of RTP-801 in the choroid and inhibited both abnormal blood vessel growth and leakage in a dose-dependent manner as well as migration of inflammatory induced cells. In a side-by-side comparison, the effects of PF-655 on blood vessel growth were superior to that produced by either Macugen® or a neutralizing antibody to mouse VEGF used as an animal analogue to Lucentis®/Avastin®. In similar studies, PF-655 was found to have an additive effect in combination with Macugen® and the mouse anti-VEGF antibody to prevent neovascularization and vessel leakage. These results indicate that PF-655 acts through a different pathway than anti-VEGF drugs. PF-655 was also shown to exhibit anti-apoptotic activity, and demonstrated superior anti-inflammatory properties compared to anti-VEGF drugs. The efficacy seen in the mouse model was further confirmed in a monkey laser-induced choroidal neovascularization model of wet age related macular degeneration.

In support of the diabetic macular edema indication, RTP-801 knockout mice showed a 70% reduction in retinal blood vessel leakage compared to either mice with an intact RTP-801 gene or wild type mice, four weeks after induction of diabetes. Compared to control siRNA, PF-655 was shown to decrease retinal blood vessel leakage in the diabetic mice by 50%.

In preclinical studies, PF-655 was found to be resistant to degradation in body fluids. Based on these studies, we believe that PF-655 delivered locally (i.e., via intravitreal injection) 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 limited systemic exposure. In preclinical toxicology studies, a low frequency of mild and reversible ocular inflammation was observed. Following intravenous administration, no systemic toxicity was observed in the rat at blood levels more than 10,000 times greater than levels observed in the blood of patients in Phase I human clinical studies.

Phase I Clinical Trial.  We submitted an Investigational New Drug Application to the FDA for this drug candidate on September 20, 2006, and have completed Phase I trial. In the Phase I clinical trials we conducted, no dose limiting toxicities were observed. The study was an open-label, dose escalation trial in patients with wet age related macular degeneration for the safety and tolerability of PF-655 administered as a single intravitreal injection. Stratum 1 of the trial included patients who, due to advanced disease, failed to respond to a prior regimen, or were judged not likely to show improvement in their visual acuity from currently available treatment options such as Lucentis®, Macugen®, PDT or steroid-based therapy, or patients who had failed at least one of these prior treatment options. Stratum 2 of the trial included patients who, in the opinion of the investigator, had the potential to show improvement in visual acuity from other treatment options. Since the trial was conducted in patients, secondary objectives included determination of the changes in visual acuity after administration of PF-655. Although change in visual acuity can indicate clinical activity of the drug candidate, the trial was not designed to measure clinical activity in a statistically significant manner. However, approximately 80% of subjects showed stable or improved vision two weeks after a single injection of the siRNA. Patients in this study showed a mean improvement of 4 letters (about one line gain) on a visual acuity test at 28 days after a single injection of PF-655. These changes were presented as clinically meaningful at the ARVO conference in 2009 by a lead investigator of the study, Dr. Quan Nguyen from the Wilmer Ophthalmological Institute of the Johns Hopkins University School of Medicine.

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This Phase I study served as the basis for further clinical development in both age related macular degeneration and diabetic macular edema. Following its completion, Pfizer initiated two Phase II trials currently being conducted in collaboration with Quark. These trials are discussed separately below.

Development of PF-655 in Diabetic Macular Edema

Disease Background and Market Opportunity.  Diabetic macular edema is swelling of the macula as a result of retinal microvascular changes that occur in patients with diabetes and is the major cause of visual impairment in diabetic patients. Diabetic macular edema is a common complication of diabetic retinopathy and is the cause of most of the functional visual loss in patients with this condition. Diabetes mellitus and its systemic and ophthalmic complications represent an enormous public health threat in the United States. The prevalence of diabetes in the United States is currently estimated at 9% or approximately 21 million, though only about 55% are estimated to be diagnosed. According to a disease review in the Digital Journal of Ophthalmology, diabetic macular edema affects up to 10% of all patients with diabetes with 75,000 new cases occurring every year.

Limitations of Current Therapy.  Laser photocoagulation is the current standard of care in the treatment of diabetic macular edema. Although laser therapy may slow visual loss, the major drawbacks are that it is rarely accompanied by vision gain, and it is not appropriate in all cases of diabetic macular edema. Furthermore photocoagulation is a late and destructive procedure that does not address the underlying etiology of the diseases. There are several classes of drugs that are being employed in the management of diabetic macular edema, including corticosteroids (triamcinolone acetonide) and the anti-VEGF drugs (mainly bevacizumab, and ranibizumab or Avastin® and Lucentis® respectively), however, none of these drugs is currently approved by the FDA for the treatment of diabetic macular edema. Lucentis has been recently approved by EMEA in Europe for this indication.

PF-655 Value proposition.  We believe, based on preclinical and clinical results to date, that PF-655 may offer the following:

Phase II Clinical trial — the DEGAS study.  PF-655 has been studied in a prospective, randomized, multi-center, comparator study evaluating efficacy and safety of PF-655 versus laser in subjects with diabetic macular edema called the DEGAS trial. This is a Phase II, randomized, single-blind, parallel-assignment safety/efficacy study conducted by Pfizer in collaboration with Quark. Enrollment was completed in the DEGAS study in October 2009 and we expect to have interim results by the end of 2010 based upon 12 month follow up on all patients. Based on the results of this study, Pfizer may decide to proceed to Phase III clinical trials, to initiate a Phase IIb trial or to stop trials.

Development of PF-655 in Age-related Macular Degeneration

Disease Background and Market Opportunity.  Age-related macular degeneration is the leading cause of central vision loss in the elderly. Age-related macular degeneration occurs when the light sensing cells in the central portion of the retina, called the macula, malfunction and over time cease to work. Wet age-related macular degeneration 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 age-related macular degeneration. Wet age-related macular degeneration 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, and damages the macula. These new blood

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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. Datamonitor estimates that age related macular degeneration affects 7.5 million people in the seven major markets US, Japan, France, Germany, Italy, Spain, and the UK. Close to 1.8 million adults 40 years and older have been diagnosed with the more rapidly progressive wet age-related macular degeneration with associated vision loss, and 200,000 new cases of wet age-related macular degeneration are diagnosed each year, according to National Eye Institute data. The National Eye Institute estimates that the number of people with wet age-related macular degeneration 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. In addition, there are non-responders to current treatments. Treatment options that attempt to control the abnormal blood vessel growth and leaking associated with wet age-related macular degeneration include laser photocoagulation and photodynamic therapy, as well as the angiogenesis inhibitor drugs Lucentis®, the standard-of-care treatment, Avastin® 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®, Avastin® 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.

PF-655 Value proposition in Age-Related Macular Degeneration.  Given the limitations of current treatments, we believe that there is a significant need for additional treatments to improve the rate of visual gain, and to permit less frequent intravitreal injections than the currently used regimen of one injection every four weeks for Lucentis® or six weeks for Macugen®. In addition, due to its different mechanism of action, PF-655 may allow potential combination therapy with current therapies and other therapies under investigation.

Current Phase II Clinical Trial — the MONET study.  PF-655 is currently being studied in a Phase II open label multicenter study, the MONET study, for age-related macular degeneration comparing PF-655 versus Lucentis® in the treatment of subjects with choroidal neovascularization. This is a safety/efficacy study conducted by Pfizer in collaboration with Quark. Enrollment of patients was completed in August 2010 and we expect that interim results upon completion of dosing and a 3 months follow up period for part of the patients could be available by the end of 2010. Depending on the results of this study, Pfizer may decide to conduct a dose-ranging Phase IIb clinical trial in age-related macular degeneration in 2011 or stop trials.

QPI-1002 in Clinical Phase II for Acute Kidney Injury and Delayed Graft Function

The Drug Candidate.  QPI-1002 is a synthetic, chemically modified siRNA molecule designed to temporarily inhibit expression of the human gene p53, that we believe plays a significant role in ischemia reperfusion induced injuries of the kidney that lead to development of acute kidney injury and delayed graft function. QPI-1002 is being developed for the prevention and treatment of acute kidney injury in patients undergoing major cardiovascular surgery and for prevention of delayed graft function in kidney transplantation patients. We have granted to Novartis an option for an exclusive worldwide license to QPI-1002 and any potential future p53-directed siRNAs controlled by us, for any indication.

Preclinical results.  We have conducted preclinical studies in rats and monkeys. Rats treated with a single bolus injection of QPI-1002 were significantly protected from ischemia/ reperfusion-induced acute kidney injury. In preclinical studies, p53-targeted siRNA was effective in protecting rat kidneys from acute kidney injury at doses 400-fold below the toxic dose. QPI-1002 was most potentially efficacious when administered within a well-determined time window of hours post injury, and significantly reduced the severity of acute kidney injury. QPI-1002 exhibited a favorable safety profile in rats and monkeys and persisted for a relatively short time in the blood and kidneys. In these studies, QPI-1002 accumulated rapidly and predominantly in the kidneys, specifically in proximal tubules, following intravenous administration, QPI-1002 was also found to be resistant to degradation in body fluids. In addition, the duration of the p53 inhibitory effect in the studies was brief in all tissues tested.

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QPI-1002 in Acute Kidney Injury

Disease Background and Market Opportunity.  Acute kidney injury is a syndrome characterized by a rapid decline of kidney function leading to death in a high percentage of cases. Acute kidney injury complicates approximately 5% of hospital admissions and up to 30% of admissions to intensive care units. During cardiovascular surgery, ischemic conditions caused by reduced blood flow to the kidneys and reperfusion upon removal of the patient from cardiopulmonary bypass and resumption of the natural blood flow can lead to induction of acute kidney injury. Based on data of the Centers for Disease Control and Prevention (CDC) and the Society of Thoracic Surgeons, Adult Cardiac Surgery Database there are approximately 650,000 patient discharges following major adult cardiac surgery procedures each year in the United States. Among cardiac surgical patients who developed acute kidney injury severe enough to require dialysis post-operatively, reported mortality rates during the past decade have remained unacceptably high, in the range of 28% – 63%.

Limitations of Current Therapy.  Currently, there are no approved drug therapies that effectively prevent or treat acute kidney injury. 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.

QPI-1002 Value proposition.  We are developing QPI-1002 as a potential new therapy to prevent acute kidney injury, an unmet medical need. In cardiovascular surgery patients, acute kidney injury results from ischemia-reperfusion injury, leading to activation of p53 and subsequent induction of apoptosis (programmed cell death) in the kidney. By temporarily inhibiting the expression of p53, we believe QPI-1002 may afford kidney cells time to repair cellular damage and avoid induction of apoptosis, thus reducing the incidence of acute kidney injury and related mortality and morbidity in cardiovascular surgery patients.

Phase I Clinical Trial.  We submitted an Investigational New Drug Application to the FDA for QPI-1002 for Acute Kidney Injury on July 14, 2006, and have completed a Phase I, randomized, double-blind, dose escalation trial in 16 patients of the safety and pharmacokinetics of a single intravenous injection of QPI-1002 in patients undergoing major cardiovascular surgery. This was a first-in-man study testing the safety and pharmacokinetics of QPI-1002 following injection. This was also the first systemic administration of an siRNA in human subjects. Enrollment was completed in November 2009. No dose-limiting toxicities were observed in this study. Three cases of “Worsening Anemia” Serious Adverse Events (SAEs) observed in patients receiving lower doses of the drug were assessed by one investigator as possibly related to study drug. Aggregate analyses by the independent (unblinded) Data Safety Monitoring Board (DSMB), revealed that these patients blood changes were similar to those observed in the other patients in this study. The safety profile observed in this study appeared to be consistent with that of other patients undergoing cardiac surgery. The DSMB which was responsible for reviewing unblinded safety data from both this study and the delayed graft function Phase I studies has recommended proceeding to Phase II investigations in both acute kidney injury and renal transplant populations, using the highest dose studied in Phase I.

Further development plan.  A Phase II clinical trial in cardiovascular surgery patients is planned to start dosing during the second half of 2011. The trial is a prospective, randomized, double-blind, placebo-controlled Phase II trial of the safety and preliminary efficacy of a single intravenous injection of QPI-1002 in the prevention of acute kidney injury following major cardiovascular surgery performed under cardiopulmonary bypass, in patients at increased risk for acute kidney injury as determined from blood and urinary biomarkers. In the first part of the trial (60 patients) we intend to test the suitability of the biomarkers for accurately selecting patients at increased risk for acute kidney injury. At that time we also expect to a make decision about the remaining part of the Phase II trial and implications, if any, on the study design. If the biomarker feasibility part of the trial is successful, we intend to enroll an additional approximately 140 patients. We estimate that completion of dosing and first interpretable results will not occur before the end of 2012. If the results meet a set of specified success criteria, we could be eligible for exercise of the license option and payment of an option exercise fee from Novartis or if already exercised we would be eligible for an additional payment from Novartis.

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QPI-1002 in Delayed Graft Function

Disease Background and Market Opportunity.  QPI-1002, is being developed to prevent delayed graft function after deceased donor kidney transplantation. Delayed graft function can result from ischemia-reperfusion injury during the transplantation process, leading to activation of p53 and subsequent induction of apoptosis in the kidney. Ischemia reperfusion injury occurs frequently in patients receiving kidneys that have spent a long time outside a living human body, and is particularly common in kidneys from deceased donors. When kidneys are deprived of blood, the lack of oxygen causes damage that triggers inflammation when blood flow is restored. Delayed graft function is often defined as need for dialysis in the first week following transplantation and is associated with poorer long-term patient outcomes. It is also associated with increased incidence of acute rejection; increased hospital stays and increased consumption of peri-transplant resources. Kidneys are the most frequently transplanted organs. According to Datamonitor, approximately 43,000 renal transplants will be performed annually by 2015 in the major countries of the western world, representing an average annual growth rate of 4%. Datamonitor also predicts a significant increase in the use of organs from deceased donors. Based on Organ Procurement and Transplantation data, over 16,600 kidney transplantations were performed in the United States in 2007, 64% from deceased donors. Over 80,000 people are currently on the waiting list for kidney transplant in the United States. The UNOS Renal Transplant Registry database kidney waiting list is currently increasing at a rate of 20% per year and was predicted to include between 100,000 and 150,000 patients in 2010.

Limitations of Current Therapy.  Currently, there are no approved drug therapies that effectively prevent delayed graft function. Delayed graft function affects 25% to 40% of deceased donor renal transplants. According to a recent study reported in Renal and Urology News, each added day of delayed graft function is associated with a 2% increased risk of death in patients surviving at least 90 days after transplantation Currently, the main management strategy is to support the patient with dialysis and to monitor for rejection.

Value Proposition.  We are developing QPI-1002 for the prevention of delayed graft function following deceased donor kidney transplantation. In animal studies, p53-targeted siRNAs were effective in protecting rat kidneys from injury due to both warm and cold ischemia that can occur during organ collection, preservation, transportation and implantation. The mechanism of action, involving temporarily inhibiting the expression of p53, is believed to afford kidney cells time to repair cellular damage and therefore avoid induction of apoptosis. Quark has been granted Orphan Drug status in the Unites States and in the European Union development of QPI-1002 for this indication.

Phase I/II clinical trial.  We submitted an Investigational New Drug Application to the FDA for QPI-1002 for Delayed Graft Function on May 15, 2008, and are currently evaluating QPI-1002 in a Phase I/II clinical study of deceased donor kidney transplantation patients. The Part A or Phase I dose escalation phase of this study was completed in November 2009. No dose-limiting toxicities were observed at the highest dose tested, which was 20-fold above the minimum effective dose in a rat model of kidney injury.

Phase II (Part B).  We have initiated dosing in the Phase II part of this trial, Part B, that aims to demonstrate biological activity of QPI-1002. The study has an adaptive design with several interim analysis points. An adaptive design allows modifications to be made to trial protocol and/or statistical procedures of an ongoing clinical trial. The study protocol includes prospectively planned opportunities for modification of one or more specified aspects of the study design based on analysis of data (usually interim data) from subjects in the study. In this trial, significant interim analysis points are upon dosing 130 and 196 of the planned 326 patients to be enrolled in the study. Interim results will be analyzed by an independent board of experts, who will recommend the course of action at that point. We expect the 196 patient interim results, the first analysis point that we believe could yield statistically meaningful results, by early 2012. If the results meet the set of criteria specified in our agreement with Novartis for this milestone, we will be eligible for option exercise and payment of an option exercise fee from Novartis or if already exercised, we would be eligible for an additional payment from Novartis.

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QPI-1007 in Non-arteritic Anterior Ischemic Optic Neuropathy

The Drug Candidate.  QPI-1007 is being developed as a neuroprotective agent for the treatment of sudden vision loss associated with non-arteritic anterior ischemic optic neuropathy. QPI-1007 is a chemically modified siRNA and it is our first drug candidate based on novel siRNA structures developed internally by Quark. If effective in non-arteritic anterior ischemic optic neuropathy, we also intend to develop QPI-1007 for glaucoma, which shares common pathological features with non-arteritic anterior ischemic optic neuropathy.

QPI-1007 is designed to inhibit the expression of the pro-apoptotic gene, caspase 2, via the RNAi pathway. Apoptosis (programmed cell death) is thought to be the main cause of the death of retinal ganglion cells in non-arteritic anterior ischemic optic neuropathy and glaucoma. Caspase 2 is activated specifically in retinal ganglion cells in rat models of retinal ischemic injury. In preclinical studies, QPI-1007 was effective in preserving retinal ganglion cell integrity in three different disease models of retinal ganglion cell damage. Diseases involving retinal ganglion cell damage are common. Loss of retinal ganglion cells results in irreversible loss of vision in neurodegenerative diseases such as glaucoma, but they are also directly affected in acute diseases characterized by retinal ischemia.

Preclinical results.  Retinal ganglion cell death in non-arteritic anterior ischemic optic neuropathy occurs primarily through apoptosis with caspases playing a major role. Caspase 2 has been shown to be activated specifically in retinal ganglion cells in rat models of retinal ischemic and retrograde trophic factor deprivation injury. Animal studies demonstrated (i) uptake of siRNA in retinal ganglion cells following intravitreal administration, (ii) RNAi-mediated mechanism of action of QPI-1007 in ocular tissues harvested after intravitreal administration and (iii) efficacy of QPI-1007 in three animal models. QPI-1007 exhibited a favorable safety profile in toxicity studies.

Disease Background and Market Opportunity.  Non-arteritic anterior ischemic optic neuropathy is a stroke in the optic nerve, leading to the death of retinal ganglion cells that transmit light signals from the retina to the brain. Since they are unable to divide, loss of retinal ganglion cells results in irreversible loss of vision. Non-arteritic anterior ischemic optic neuropathy is a potentially visually devastating disease that occurs in the middle aged and the elderly and is the most common acute optic neuropathy in older persons. This condition usually begins suddenly with little warning in one eye, but frequently occurs in the other eye over time. Vision loss often includes both the loss of visual field and visual acuity, which can vary from being nearly normal to severely impaired. The unexpected sudden visual acuity and visual field loss makes non-arteritic anterior ischemic optic neuropathy a particularly overwhelming disease for many patients. Authors of an article published in the American Journal of Opthalmology estimated that non-arteritic anterior ischemic optic neuropathy develops in approximately 8000 people each year in the United States. According to a published eMedicine article, bilateral visual loss may be seen in 12 – 19% of non-arteritic anterior ischemic optic neuropathy cases, and it usually occurs sequentially instead of simultaneously.

Limitations of Current Therapy.  No effective treatment currently is available for non-arteritic anterior ischemic optic neuropathy since neither steroids nor surgical treatment have proven to be effective. There is no evidence that optic nerve decompression and anticyclones oxygen inhalation therapy are effective, and the preventive effect of aspirin in ocular crisis is not significant.

QPI-1007 Value Proposition.  Based on our extensive preclinical studies, we believe that QPI-1007 may be an effective neuroprotective agent, with potential use in non-arteritic anterior ischemic optic neuropathy and also in major diseases involving retinal ganglion cell loss, including glaucoma.

Clinical development strategy.  Our clinical development strategy includes:

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Phase I/IIa Clinical Trial.  The Investigational New Drug Application for this indication was submitted to the FDA on September 28, 2009 and dosing in the Phase I study was initiated during the first quarter of 2010. The study is divided into two Stratums. Stratum 1 represents the dose-escalation safety component of the study and is intended to enroll 4 cohorts of patients who are legally blind secondary to chronic optic nerve atrophy or retinal degeneration, each cohort sequentially receiving increasing doses of QPI-1007. Enrollment of Stratum 1 was completed in October 2010. Stratum 2 is designed to further evaluate safety and to determine potential biological activity in non-arteritic anterior ischemic optic neuropathy patients as assessed through changes in visual acuity and visual field following drug administration compared to historical control. Stratum 2 is designed to enroll two dose cohorts of non-arteritic anterior ischemic optic neuropathy patients. We expect to complete dosing in Stratum 2 during the second half of 2011. Based on the results of the current trial, we intend to decide whether to initiate a Phase II clinical trial in glaucoma patients by multiple intravitreal injection dosing and/or a Phase II trial in non-arteritic anterior ischemic optic neuropathy patients.

QPI-1007 Additional indications — Glaucoma

Disease Background  Glaucoma is a chronic progressive disease of the optic nerve with a gradual loss of retinal ganglion cells. According to Research to Prevent Blindness, glaucoma is the second most common cause of legal blindness in the United States. According to the National Eye Institute and Prevent Blindness America, glaucoma affects almost 2.3 million people in the United States over 40 years of age. Vision loss from glaucoma is asymptomatic and irreversible. Clinically, glaucoma is an optic neuropathy that is characterized by progressive loss of retinal ganglion cells. It is often associated with elevated intraocular pressure and characterized by optic disc cupping — an anatomical change of the eye structure — and visual field loss. The central role of raised intraocular pressure is being questioned as many patients continue to demonstrate a disease progression despite control of intraocular pressure. Glaucoma is a collection of diseases and is a final common pathway of many disorders that affect the eye.

Open-angle Glaucoma is a chronic, bilateral, often asymmetrical disease in adults, featuring acquired loss of optic nerve fibers and abnormality in the visual field with an open anterior chamber angle and progressive death of retinal ganglion cells and usually elevated intraocular pressure. According to the National Eye Institute, the disease affects 2.5 to 3 million persons in the United States.

Limitations of the current therapy.  Anti-glaucoma medications have the largest share of the ophthalmic pharmaceutical market. Nevertheless, glaucoma is a disease that currently cannot be cured; instead, current therapies focus on managing it and slowing its progression. Lowering intraocular pressure is currently the only clinical therapy available in the treatment of glaucoma. Unfortunately, many patients continue to lose vision despite successful intraocular pressure control.

QPI-1007 Value proposition.  We believe neuroprotective agents will be a key development in the ophthalmic pharmaceutical market in general and specifically the glaucoma market. The ability to protect retinal ganglion cells from cell death and thereby slow progression of glaucoma, we believe, will represent a major breakthrough in glaucoma treatment and provide opportunity for considerable growth in this segment of the market.

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Preclinical pipeline and Other Research Programs

We are developing additional siRNA drug candidates, several of which have completed proof-of-concept in vivo animal testing. A subset of these is in lead candidate optimization stage. Additional siRNA molecules are currently in proof of concept studies in several indications. In these proof of concept studies we work with leading scientists and physicians at major universities and institutions. Our medical, regulatory and commercial teams evaluate the most suitable indications for future clinical trials and development. Our objective is to complete the preclinical studies necessary to support filing at least one IND application in 2012 for a molecule developed in these programs. We also have a research and development program in fibrotic disease in collaboration with, and fully funded by, Nitto Denko. The objective of this program also is to complete all studies necessary for filing an IND application within 2012. Our additional research programs are directed to developing our technology, in particular novel and proprietary siRNA structures and stabilization chemistry and proprietary specific cell type-targeted siRNA delivery systems.

We have three broad internal programs in which we design and develop siRNA molecules based on our internally proprietary siRNA structures to treat diseases that are unmet medical needs, each of which is briefly described below.

Neuroprotection and regeneration program.  We include in this category our pipeline programs in diseases of the central nervous system (spinal cord and brain), and diseases of the eye and ear, in particular those diseases where neuroprotection and/or axon regeneration is important.

There are numerous severe diseases characterized by acute or progressive death of neurons. In many of the diseases this process begins with injury to the nerve, the long projection of the neuron that conducts electrical nerve impulses away from the neuron’s cell body. Axon loss contributes to neurological symptoms in disorders as diverse as stroke, traumatic brain and spinal cord injury, peripheral neuropathies and chronic neurodegenerative diseases and glaucoma in which the optic nerve is affected. The overall objective of this program is to develop a drug that is able to protect against loss of neurological function and/or improve functional recovery.

We have demonstrated in preclinical models siRNA delivery to the target neurons in several disease conditions listed below and we are developing a novel non-invasive siRNA delivery to the back of the eye, inner ear and brain. Our primary siRNA drug candidate in this category is an siRNA molecule inhibiting the target gene called RhoA. RhoA is a small GTPase that controls cellular functions including motility, growth, differentiation, and apoptosis and is a key intracellular effector of inhibitory signals for outgrowth of neuronal processes. For this molecule we have shown proof of concept in spinal cord injury, demonstrating the capability of the RhoA siRNA molecule to improve neurologic functions and reduce neuropathic pain in a rat spinal cord injury model. We are now optimizing RhoA siRNA with the purpose of generating the lead siRNA for formal preclinical development. In line with our strategy of developing a drug candidate in several diseases based on common pathological mechanism, we are testing RhoA siRNA and siRNAs targeting further genes, in additional disease models including spinal cord injury, neuropathic pain due to peripheral nerve injury, optic nerve regeneration following crush injury and Meniere’s disease. Other pipeline siRNAs are also being tested in these and other models involving neurological pathologies. We are exploring both invasive and non-invasive siRNA delivery to the back of the eye, inner ear and brain.

Respiratory and inflammatory disease program.  We have established that our synthetic siRNAs can be delivered by inhalation efficiently to monkeys and rodent lungs. We have tested activity of several different siRNA molecules in rat and mouse models of lung injury and lung transplantation and have developed a combination of siRNAs inhibiting genes from the family of toll-like receptors (TLRs), a class of proteins that play a key role in the innate immune system and have important function in inflammatory processes. We have demonstrated potential efficacy in preventing primary graft dysfunction in a mouse model of lung transplantation. Primary graft dysfunction is caused by ischemia-reperfusion injury to the lung in the first 72 hours following lung transplantation and is a major cause of early morbidity, chronic graft rejection and mortality. In our preclinical studies our dual siRNA drug candidate effectively reduced infiltration of inflammatory cells, pulmonary edema and intra-graft hemorrhages and prevented impairment of pulmonary function when locally administered shortly after transplantation. We believe that our drug candidate also may

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be useful for treatment of acute lung injury in conditions other than lung transplantation since the pathological mechanisms of response to ischemic injury is similar.

Currently we are completing the proof of concept studies in the rodent model of lung transplantation. Due to the pivotal role of our selected targets in inflammatory processes induced in tissues in response to injury, we are also studying additional indications in which our dual siRNA drug candidate can be used.

Chronic disease by systemic administration.  This category includes our development efforts to treat chronic kidney disease and cancer.

Cancer.  Our programs in cancer include the following areas:

Chronic kidney disease.  We are currently performing siRNA drug delivery studies with the aim to deliver our siRNA drug candidates to the appropriate cells in the kidneys to treat chronic kidney disease. Chronic kidney disease is the gradual and usually permanent loss of kidney function over time. Chronic kidney disease is a major health problem in the United States. According to the National Kidney Foundation, 26 million adults in the United States have chronic kidney disease and millions of others are at increased risk. Currently there is no specific treatment shown to slow the progression of chronic kidney disease.

Fibrotic diseases.  No effective treatment is available for most of the serious fibrotic diseases and our objective is to develop potential therapies within our fully-funded collaboration with Nitto Denko. Specifically, our goal is to develop one or more new siRNA drugs that may offer an effective treatment to fibrotic diseases. The collaboration utilizes our technology and intellectual property in RNAi to identify, select, optimize and develop a new drug based on a therapeutic concept and target gene identified by Nitto Denko and its collaborating scientists, which drug may potentially be combined with Nitto Denko’s delivery technology. While the initial disease indication for development is yet to be determined by joint teams of Quark and Nitto Denko, potential diseases include liver fibrosis, lung fibrosis, bone marrow fibrosis and kidney fibrosis, all of which are major unmet medical needs. Quark successfully performed a feasibility study funded by Nitto Denko confirming the validity of the concept of treating fibrotic disease with an siRNA drug inhibiting a Nitto Denko target. The collaboration research and development was initiated in July 2010. Our objective is to file a first IND application based on our joint efforts in this collaboration in 2012.

We believe the Nitto Denko collaboration is a validation of our siRNA platform and intellectual property and may assist us in potentially securing additional platform collaboration agreements.

siRNA Technology Development.  We have an ongoing program that aims to develop new siRNA-related technologies and to continuously improve our current technology platform and our intellectual property position in the RNAi intellectual property space. To date, we have filed six patent applications

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claiming novel structures and six patent applications claiming novel delivery methods. QPI-1007 is our first product in clinical trials that has an internally developed novel structure. This program has two arms:

Israeli National siRNA Project Consortium

In July 2010, the Israeli Chief Scientist and the head of the research and development national projects conditionally approved the establishment of a consortium headed by the wholly owned subsidiary of Quark, QBI Enterprises Ltd., or QBI. QBI, together with several leading members of the industry and prominent scientists in academia in Israel to develop novel generic technologies in the field of RNAi. We believe that the approval of a national project for siRNA is recognition by the government of Israel to financially support a project of national importance that can potentially create more jobs and general revenues for the state of Israel. In broad terms the generic technologies are planned to be developed in the following three categories:

In accordance with the rules of the Chief Scientist and as approved by our Board of Directors, the intellectual property and technologies developed by QBI in the Consortium shall remain with QBI at all times.

Our Strategy

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

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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 RTP-801 through RNAi. The lead product candidate under the agreement is our drug candidate, PF-655, previously RTP801i-14, for treating wet age-related macular degeneration and diabetic macular edema, currently in a Phase II clinical trial. Under the agreement, Pfizer has the exclusive right to develop drugs for ophthalmic and non-ophthalmic indications.

Pursuant to the agreement, Pfizer is responsible for all future preclinical 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.

Pfizer will be responsible for manufacturing all product candidates for preclinical 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 September 30, 2010 Pfizer had paid us an aggregate of approximately $52 million in up-front fees, cost reimbursements and milestone payments. The agreement provides for up to approximately $173 million in additional development and other non-sales based milestone payments in connection with a first ophthalmic indication, of which between 40% to 50% is linked to events up to the receipt of marketing approval and the remainder of which is linked to events following marketing approval. To the extent a second ophthalmic indication is pursued, we would be entitled to receive up to $49 million in development and other non-sales based milestone payments, the majority of which is linked to events following marketing approval. In addition, to the extent that clinical trials for a non-ophthalmic indication are successfully completed, we would be entitled to receive additional tens of millions of dollars. Pfizer is required to pay us royalties on any sales of licensed products at rates higher than 5% and lower than 15%, subject to potential reductions depending upon, for example, the degree of exclusivity of the licensed product in the marketplace and the extent of Pfizer’s third party royalty obligations in connection with the commercialization of our drug. Further Pfizer is required to pay us up to an additional $309 million in 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. In addition, Pfizer may grant sublicenses for PF-655, provided, however, that our consent will be required for sublicenses in the United States, the largest countries of the EU, or Japan (which consent may not be unreasonably withheld, conditioned or delayed).

Our Option Agreement with Novartis

On August 17, 2010, we entered into an Option Agreement with Novartis International Pharmaceutical Limited (the “Option Agreement”) under which we granted to Novartis an option to license QPI-1002, our siRNA therapeutic directed against the p53 gene. In the event that Novartis exercises this option, we will automatically grant to Novartis an exclusive, worldwide license to develop and commercialize QPI-1002 and any other p53-directed siRNAs controlled by us, pursuant to a separate, pre-negotiated license agreement (the “License Agreement”). During the term of the Option Agreement and License Agreement, we are prohibited from entering into a collaboration or license agreement with any third party in connection with the development or commercialization of any p53-directed siRNA.

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Prior to exercise of the option, we will conduct at our expense Phase II trials on QPI-1002 for two indications: delayed graft function following renal transplantation and acute kidney injury following cardiovascular surgery. Novartis’ option will expire a few months following receipt by Novartis of the final results of the first Phase II clinical trial that meets the pre-defined success criteria, or a few months following receipt of the final results of both Phase II clinical trials, if neither meets the pre-defined success criteria. In the event that Novartis does not exercise the option prior to its expiration, the License Agreement will not come into effect, and in most cases we will be free to enter into agreements with third parties relating to QPI-1002 without further obligation to Novartis. However, under certain circumstances of failure in both Phase II trials, Novartis will have a right of first negotiation for a pre-set period of time in the event that we determine to license QPI-1002 or another p53-directed siRNA to a third party.

Following exercise of the option, Novartis will be solely responsible for all development, manufacturing, and commercialization of the licensed products, except that we will remain obliged to complete at our own expense the remaining portions, if any, of the Phase 2 trials for QPI-1002 that we initiated. Additionally, Quark will have the right to conduct a portion of the phase III clinical trials in Israel and to act as Novartis’ distributor of products in Israel, in accordance with agreements that will be negotiated by the parties. Novartis’ development and commercialization will be overseen by a joint steering committee with members appointed by both us and Novartis, but Novartis will have the deciding vote in the event of any disputes.

Upon execution of the Option Agreement, Novartis paid us a $10 million option grant fee. Assuming that the option is exercised, we could potentially receive up to $480 million in option exercise fees and development and regulatory milestone payments and up to $190 million in sales-based milestone payments. The majority of the development and regulatory milestone payments are linked to events relating to the acute kidney injury indication, and the remainder of the development and regulatory milestone payments are split, in roughly equal parts, between the delayed graft function indication and an unspecified third indication. In addition, we would be entitled to receive royalties on net sales of licensed products at a rates higher than 10% and lower than 20%, subject to potential reductions depending upon, for example, the degree of exclusivity of the licensed product in the marketplace and the extent of Novartis’ third party royalty obligations in connection with the commercialization of our drug.

Either we or Novartis may terminate the License Agreement in the event of an uncured material breach or insolvency of the other party, and Novartis may terminate the License Agreement without cause at any time upon prior written notice. Following termination of the License Agreement by Novartis for our material breach or insolvency, all licenses granted to Novartis will remain in effect, and Novartis’ payment obligations will continue, subject to significant reduction in the event of certain material breaches. If not terminated, the License Agreement will remain in effect, for a particular licensed product in a given country, until the expiration of all relevant patents and regulatory exclusivity with respect to such licensed product and such country, or ten years from the first commercial sale of such licensed product in such country, whichever is later.

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^TM 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^TM discovery platform yielded target genes potentially suitable for development of therapies to treat the diseases of interest. Most of these collaborators selected a 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

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and to pay royalties on sales of any licensed products. In most cases these collaborators have granted us certain commercialization rights in North America and major European countries.

The Silence Therapeutics (formerly Atugen) Agreements

In December 2004, we entered into a collaboration agreement with Silence. Pursuant to this agreement, Silence granted us an exclusive worldwide license under its RNAi technology to develop and commercialize our RNAi product candidates based on our target gene RTP-801.

In September 2006, we amended the Silence collaboration agreement in connection with the Pfizer license agreement, under which we sublicensed to Pfizer our rights under the license from Silence. This amendment clarified payments among the parties, terminated a license we granted to Silence in 2004, and provided for a direct license from Silence to Pfizer in the event of termination of the Pfizer agreement. Under the amended Silence collaboration agreement, we pay Silence a mid teens range 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. The percentage we are required to pay may be reduced if we are required to pay royalties to third parties for additional intellectual property.

Unless earlier terminated, the Silence collaboration agreement will continue in force until the expiration of the royalty term, which will occur upon expiration of all relevant patents or ten years from first commercial sale of a licensed product, whichever occurs last. Either party may terminate the Silence collaboration agreement upon advance notice for the other party’s bankruptcy or uncured material breach.

In April 2005, we entered into a second agreement with Silence, the option and license agreement, pursuant to which Silence granted us options to non-exclusive licenses to Silence’s RNAi-related intellectual property to develop and commercialize siRNA product candidates based on five additional proprietary target genes, including p53. We exercised our option with respect to p53 and paid an option fee of €50,000 and an exercise fee of €500,000. Through September 30, 2010, we have paid $6.3 million in option fee payments and development milestone payments to Silence. Under the agreement we are required to make further 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. If we elect to sublicense our rights under this Silence agreement we are required to pay, in lieu of any other payments, a fixed percentage of all payments we receive from the sublicensee, the percentage being dependent on the clinical stage of the drug at the time of sublicense. We have not granted any sublicenses at this time but in August 2010 we granted an option to Novartis to obtain a sublicense under our rights under this Silence agreement.

Silence advised us that it believed our option agreement with Novartis should be treated, under our 2005 agreement with Silence, as a sublicense which triggers our payment obligations to Silence. We disputed Silence’s interpretation of our agreement. Following negotiations, we have agreed in principle on a sharing ratio for the payments from Novartis. This agreement in principle will be reflected in an amendment to our license agreement with Silence, which is currently being prepared.

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 RTP-801 and to certain therapeutic fields, including all indications we contemplate for these target genes. We sublicensed our rights under the RTP-801 Alnylam agreements to Pfizer in the September 2006 license agreement. We have not granted any sublicenses at this time under the p53 Alnylam agreements, but in August 2010 we granted an option to Novartis to obtain a sublicense under our rights under these agreement.

Pursuant to the terms of the license agreements, through September 30, 2010, we paid Alnylam fees totaling $2.0 million. The agreements provide for annual maintenance fees and up to $6.5 million in additional development and product approval milestone payments. We are also required to pay low single digit royalties on our sales or sales by our sublicensee. The royalty rates vary based on which patent families cover the

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products sold on a country by country basis. Under the Pfizer agreement, Pfizer will partially reimburse our payments to Alnylam under the RTP-801 agreement.

Unless earlier terminated, the Alnylam license agreements will continue until the expiration or abandonment of all relevant patents and patent applications. Alnylam may terminate the Alnylam license agreements upon advance notice for our uncured material breach. In addition, we can terminate the Alnylam license agreements at will upon advance notice at any time.

Our Agreement with the University of Illinois at Chicago

In September 1999, the University of Illinois at Chicago 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 the University of Illinois at Chicago a low single digit royalty on sales of products incorporating intellectual property licensed from the University of Illinois at Chicago or a percentage share in the low teens range of any payments we receive from sublicensees, including milestone and royalty payments subject to certain exclusions. Payments to the University of Illinois at Chicago may be reduced in the event we are required to pay additional royalties to third parties for licenses of intellectual property required to develop, manufacture, or commercialize the licensed products. We are also required to pay the University of Illinois at Chicago certain lump-sum payments upon the achievement of certain events. To date, we have not granted any sublicenses under our license from the University of Illinois at Chicago, but we have granted Novartis an option to obtain an exclusive sublicense through our option agreement with Novartis.

Unless earlier terminated, the agreement will continue until the expiration of all relevant patents. Either party may terminate the agreement upon advance notice for the other party’s bankruptcy or uncured material breach, and we can terminate the agreement at will upon advance notice at any time. In addition, the University of Illinois at Chicago 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 by agreed-upon deadlines, which we may extend for a limited time period by paying an extension fee.

Our Agreement with Dharmacon

In January 2010, Dharmacon, Inc., a wholly owned subsidiary of Thermo Fisher Scientific Inc. (“Dharmacon”), granted us an exclusive worldwide license under its patents and patent applications related to specific siRNA molecule(s) and their use for the inhibition of p53 for all uses and indications in humans. Dharmacon has retained certain rights with respect to products covered by the licensed patents for uses outside our exclusive field. Under the agreement, we are required to pay up to $11.6 million in milestone payments upon achievement of development and commercialization milestones as well as low single digit royalties on future sales of licensed product. We are also required to pay a low single digit share of any payments we receive from sublicensees, including upfront and milestones payments but excluding royalties on sales by sublicense and certain other payments. To date, we have not granted any sublicenses under our license from the Dharmacon, but we have granted Novartis an option to obtain an exclusive sublicense through our option agreement with Novartis. As of September 30, 2010, the Company paid or accrued $450,000 under the agreement with Dharmacon.

Unless earlier terminated, the Dharmacon agreement will continue until the expiration of all relevant patents. Either party may terminate the agreement upon advance notice for the other party’s bankruptcy or uncured material breach, and in particular, Dharmacon may terminate the agreement if we do not use commercially reasonable efforts to develop and commercialize at least one licensed product. In addition, we can terminate the agreement with advance notice if we discontinue our development program for licensed products.

Our Agreement with Nitto Denko

In June 2010, we entered into a license and collaboration agreement with Nitto Denko Corporation for the development of siRNA therapeutics for the treatment of fibrotic diseases, pursuant to which we granted a license to Nitto Denko to use our siRNA-related intellectual property to develop, manufacture, and

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commercialize siRNA therapeutics directed against specific target genes. We are obligated to perform certain initial research activities for development of these therapeutics through the submission of the first IND application in the United States. Nitto Denko will be responsible for the remaining development, and for the worldwide commercialization of any resulting product. During the term of the agreement, we are prohibited from researching, developing, or commercializing siRNA compounds directed against the target genes that are the subject of the collaboration. The agreement does not restrict our ability to use, or license others to use, our siRNA-related intellectual property in connection with other target genes.

Nitto Denko will fully fund our initial research, and we are entitled to receive low single digit royalties on future sales of licensed products, as well as certain additional payments that will be negotiated by the parties in the future.

Unless earlier terminated, the Nitto Denko agreement will continue until the expiration of the royalty term, which is the later of ten years from the first commercial sale or the expiration of all relevant patents. Either party may terminate the agreement upon advance notice for the other party’s uncured material breach. Nitto Denko may terminate the agreement in the event of the bankruptcy or insolvency of Quark.

In addition, Nitto Denko has the right to terminate the agreement at the end of certain stages of the initial research or at any time after the submission of the first IND application in the United States. Following such a termination of the Agreement, Nitto Denko may retain its license rights under our intellectual property by paying a lump sum payment, which payment will be in lieu of any further payments to us.

As of September 15, 2010, we have received research and development funding of $2.2 million under the above-mentioned agreement with Nitto Denko.

Our Collaboration With BioSpring GmbH

BioSpring GmbH is a manufacturer of siRNA molecules which has been a supplier to us for many years. For the past four years, we have collaborated with BioSpring to identify novel molecules which may be a basis for future drug candidates. BioSpring has assigned to us its ownership interest, if any, in the patents arising from this collaborative work. However, the exact terms and conditions associated with this assignment have not been reduced to a definitive agreement. We recently reached agreement in principle with BioSpring regarding these terms and conditions and are currently in the process of preparing a definitive agreement.

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:

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.

If PF-655 is approved for wet age-related macular degeneration and/or for diabetic macular edema, we anticipate that it would compete with other marketed therapeutics, particularly vascular endothelial growth

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factor inhibitor drugs, primarily Genentech’s Lucentis®, recently approved by the FDA for wet age-related macular degeneration and which has become the standard-of-care for the treatment of wet age-related macular degeneration and is under investigation for diabetic macular edema. PF-655 may also face competition from off-label use of Genentech’s Avastin®, currently approved for the treatment of various cancers. Additional wet age-related macular degeneration therapeutics that are in development could also compete with PF-655. These include further anti-vascular endothelial growth factor angiogenesis inhibitors drugs. Among these, Alcon Research is evaluating Anacortave Acetate (Retaane), an antiangiogenic synthetic steroid drug. Allergan is developing its siRNA drug candidate AGN211745, Regeneron’s intravitreal formulation of soluble decoy receptor vascular endothelial growth factor VEGF Trap-Eve (aflibercept) TRAP is in Phase III clinical trials for wet age related macular degeneration in collaboration with Bayer, CoMentis, Inc. is developing ATG3, a topical eye drop therapy, MacuSight and Santen are developing Perceiva (sirolimus, rapamycin) for diabetic macular edema and age-related macular degeneration, Ophthotech is developing E10030, a pegylated aptamer that binds and inhibits PDGF in combination with Lucentis, Alimera is developing pSivida’s Iluvien® and intravitreal insert, to deliver fluocinolone acetonide, a corticosteroid, to the retina for up to three years as a treatment for diabetic macular edema and age-related macular degeneration.

QPI-1002.  We are not aware of specific drugs marketed for the prevention of acute renal failure. However, in response to the unmet medical need, new products could be developed, such as Action Pharma’s AP214 for acute kidney injury, or existing products could be used off-label, such as Nesiritide, a recombinant form of human B-type natriuretic peptide (hBNP) therapy approved for the treatment of acute congestive heart failure. A phase III trial is ongoing for the use of Nesiritide in thoracic aneurysm repair to prevent acute renal failure.

QPI-1007.  We are not aware of specific drugs approved or marketed as an ocular neuroprotective agent. Recent significant advances in understanding the mechanisms for death of retinal neurons prompted renewed interest in development of neuroprotective agents, in particular focusing on neuroprotection for glaucoma. For example, Pfizer Inc. and NicOx SA were developing PF-03187207 for glaucoma. Following completion of phase II clinical trials, NicOx reacquired the rights to the product from Pfizer.

Manufacturing and Supply

All of our current good manufacturing practices manufacturing is outsourced to third parties with oversight by our internal managers. We have limited non-current good manufacturing practices manufacturing capacity in-house. We rely on third-party manufacturers to produce sufficient quantities of material for use in preclinical 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 BioSpring 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 formulated products for human testing 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 preclinical 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 develop new technologies, siRNA compounds, uses, methods and compositions and to pursue patent protection for these inventions to enhance our intellectual property position in the areas that are important to the development of our business.

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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 October 2010, we own or control through exclusive licenses 77 issued and 2 allowed patents in the United States and elsewhere in the world and approximately 130 patent applications filed as PCT international patent applications, applications in the United States and in 29 other jurisdictions. In addition, we hold non-exclusive licenses to 32 patents that were granted in United States and in 9 other jurisdictions and to 58 patent applications that are pending in the United States and in 14 other jurisdictions (including patents and patent applications relating to RNAi technology that may be relevant to some of our Clinical Products). Our patents for PF-655 and QPI-1002 drug candidates (some of which were already granted and some if which are still pending) will expire in 2025 or later if the patent term is adjusted (in the United States) or extended in jurisdictions that grant patent term extension (such as the United States, Israel, Japan and others). Most of our siRNA technology patents and pending patent applications (if and when granted) will expire after 2027. Our patents for the QPI-1007 drug candidate (if and when granted) will expire in 2029 or later. The patents and pending patent applications, if and when granted, on siRNA technology in-licensed from Atugen AG (now Silence Therapeutics) will expire in 2023. The expiration dates discussed in this paragraph, relate to the United States and other major countries. The patent expiration dates provided do not take into consideration any patent term extensions that may be granted under the Patent Term Restoration Act in the United States or the Supplementary Protection Certificate in the European Union, or in other countries including Australia, Japan, Korea and Israel, which would extend patent term taking into consideration time lost during the regulatory approval process.

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 review by government authorities 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 and since publication of patent applications occur only after 18 months from the date of filing of the priority application, 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 limit the scope of our patent claims or even 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 our siRNA drug 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 the claims of these patent applications are still subject to change.

We have pending patent applications claiming all our siRNA clinical stage drug candidates as composition of matter and for methods of therapeutic use. We have licenses from Silence under their patent family related to specific modifications to general siRNA structures for the PF-655 and QPI-1002 drug candidates. Silence’s Australian patent, European patent and US patent have been granted. In relation to our QPI-1002 drug candidate we have, in addition, exclusive licenses from Dharmacon and from the Board of

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Trustees of the University of Illinois (UIC) related to siRNA sequences and temporary inhibition of p53 gene respectively. One of the patents that relates to temporary inhibition of p53 gene and was licensed on exclusively basis from UIC’s, namely European Patent EP1143943, was opposed by Eleos Inc (in September, 2008). The claims of the EP1143943 patent are directed to use of reversible p53 inhibitors for reducing or eliminating side effects associated with cancer therapy. As such the EP1143943 patent does not cover any of our current therapeutic indications of interest. Our response to Eleos’ arguments and Auxliary request claims were filed at the EPO in June 2009. EPO issued summons to oral proceedings on December 8, 2010. Final resolution of the opposition proceedings will likely take a number of years. We cannot assure you the breadth of the claims that will remain in the EP1143943 patent or that the patent will not be revoked in its entirety.

Further, we are pursuing intellectual property rights 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 certain patents in the siRNA space on a non-exclusive basis, including:

RNA interference is a relatively new field that has generated much technology and accompanying Intellectual Property, including numerous patents and patent applications, which are held by third parties. These third party patents and patent applications claim many different compounds, compositions and methods relating to the development and commercialization of RNAi therapeutics. Since the majority of these patent applications are still pending in Patent Offices around the world, there is a great deal of uncertainty about which patents will be granted, where and when, and with which claims. These third party patents could make it difficult or impossible for us to develop products based on our Intellectual Property or based on patents that we have licensed in. We routinely screen the patent literature and, when we believe appropriate, enter into discussions with academic and commercial entities that hold patents or are pursuing patent applications 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 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 Merck & Co., Inc. Alnylam Pharmaceuticals, Isis Pharmaceuticals, Silence Therapeutics, Dharmacon, Sylentis S.A and others.

To protect our rights in any of our patents, if issued, or to protect other 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 we will undertake to participate in such proceedings or 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 (if and when they become commercial products), production methods of commercial products 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

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pre-commercialization activities related to seeking regulatory approval for a product candidate. However, the precise scope of protection for pre-commercialization activities is uncertain in some jurisdictions 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 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 for various 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 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, consultants, 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 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 commercialization of products, withdrawal of approval for commercialized 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 drugs under the jurisdiction of the FDA’s Center for Drug Evaluation and Research. 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,

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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:

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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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 an NDA, including payment of a user fee. The FDA reviews all NDAs submitted before it accepts them for filing and may request additional information rather than accepting an NDA for filing. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. 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 NDA and respond to the applicant, and six months to complete its review of a priority NDA. The FDA does not always meet its PDUFA goal dates for standard and priority NDAs. The review process and the PDUFA goal date may be extended by three months if the FDA requests or the NDA 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 NDA and the clinical and manufacturing procedures and facilities are favorable, the FDA will issue an approval letter. If there are certain issues or concerns that need to be addressed prior to the agency’s ability to approve the NDA, the FDA’s response to the applicant will take the form of a Complete Response letter, which contains the conditions that must be met in order to secure final approval of the NDA. 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. Sponsors that receive a complete response letter may submit to the FDA information that represents a 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 of surrogate endpoints. 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

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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.

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 or compliance with a Risk Evaluation and Mitigation Strategy, or REMS. If such post-approval conditions are not satisfied, the FDA may withdraw its approval of the drug. In addition, holders of an approved NDA are required to:

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

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.

Employees

As of October 31, 2010, we had 96 employees, 70 of whom were engaged directly in research and development, 22 in general administrative and marketing activities, and 4 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 $95,000, and the fixed-term lease expires May 31, 2011. Our research and development facility is located in Ness Ziona, Israel, where we occupy approximately 23,110 square feet of office and laboratory space. The annual lease payments for this space are approximately $412,000. The fixed-term lease expired June 13, 2010, after which we may extend the term for an additional year. We also have a small office in

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Boulder, Colorado, where we occupy approximately 9,494 square feet. The annual lease payments are approximately $150,000 and the fixed terms lease expire on August 30, 2011.

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 October 31, 2010:

Name		Age		Position(s)
Daniel Zurr, Ph.D.		67		President, Chief Executive Officer and Director
Sagit Reich, CPA (Isr)		36		Chief Financial Officer
Rami Skaliter, Ph.D.		52		Chief Operating Officer
Shai S. Erlich, Ph.D.		44		Chief Medical Officer
Elena Feinstein, M.D., Ph.D.		51		Chief Scientific Officer
Juliana Friedmann, M.Sc.		59		Senior Vice President, Strategy & Planning
Smadar Shakked, CPA (Isr)		43		Senior Vice President of Business Development, Finance
Philip B. Simon, Chairman		58		Chairman of the Board of Directors
Philip M. Hahn		68		Director
Yoshitaka Kitao		59		Director
Toshihiro Toyoshima		48		Director
Robert Takeuchi		54		Director

Daniel Zurr, Ph.D. has served as our President, Chief Executive Officer and a member of our Board of Directors since he founded Quark in 1993. Prior to joining Quark, from 1984 to 1993, 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. Dr. Zurr’s experience in prior pharmaceutical companies as well as his experience as a founder of Quark and his tenure with Quark brings industry experience, historic company knowledge as well as continuity to the Board of Directors.

Sagit Reich, CPA (Isr) has served as our Chief Financial Officer since she joined Quark in August 2010. Prior to joining Quark, Ms. Reich worked at the accountancy firm of Ernst &Young, Israel, as Senior manager of public and private companies specializing in the hi-tech industry from 2000 until July 2010. Ms. Reich is licensed Israeli CPA and holds a B.A. in Accounting and Psychology from Tel Aviv University.

Rami Skaliter, Ph.D. has served as our Chief Operating Officer since January 2007. 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. has served as our Chief Medical Officer since January 2008.Dr. Erlich joined Quark in 1999. He has served in various executive positions, including Senior Vice President of Pharmaceutical Development, from May 2004 to January 2007, Senior Director of Portfolio Management from May 2002 to May 2004 and Director of Product Development Strategic Planning from April 2000 to May 2002. Dr. Erlich obtained his B.Sc. in the medical sciences at the Ben-Gurion University of the Negev, and holds an M.Sc. in Human Genetics in the field of 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. has served as our Chief Scientific Officer since June 2007. Dr. Feinstein joined Quark in 1998 and has served in various executive positions, including Senior Vice President of Research, Vice President of Technology Development 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.

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Juliana Friedmann, M.Sc. has served as our Senior Vice President of Strategy and Planning since 2007.Ms. Friedmann joined Quark in 1998. Ms. Friedmann served as our Vice President of Marketing and Business from February 1998 until May 2007. 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.

Smadar Shakked, CPA (Isr) has served as our Senior Vice President of Business Development, Finance since August 2010. Ms. Shakked served as our Senior Vice President, Finance heading the finance department from 1997 until August 2010. Before joining Quark in 1997, Ms. Shakked worked at the accountancy firm of PWC Kesselman and Kesselman, Israel, as Senior Auditor of private and public companies (specializing in the hi-tech industry) trading in Israel and on NASDAQ, managing financial reports, initial public offerings, tax returns, economic consulting. Ms. Shakked holds a degree in Accounting and Economics from the Hebrew University of Jerusalem, Israel, and in 1994 obtained her Certified Public Accountant (CPA) license. Ms. Shakked also holds an Executive M.B.A. degree from Tel Aviv University.

Philip B. Simon, CPA has served as a member of our Board of Directors since August 1997. Mr. Simon is a partner of Howson & Simon LLP and the president of Lawrence Investments, LLC, one of Quark’s major investors. Mr. Simon serves on the boards of directors of LeapFrog Enterprises, Inc., as well as on the boards of several private companies affiliated with Lawrence Investments, and formerly served on the board of directors of Spring Group plc, a publicly traded United Kingdom company. Mr. Simon joined Lawrence Investments in 1997. Mr. Simon has worked for 29 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. Mr. Simon’s executive and finance experience and his tenure as a director of Quark brings executive and finance experience, historic company knowledge as well as continuity to the Board of Directors.

Philip M. Hahn has served as a member of our Board of Directors since August 2008. He retired from Pfizer, Inc. in 2008 as Vice President and Assistant General Counsel and worked continuously at Pfizer in various positions from 1978 to 2008. Mr. Hahn has extensive experience in structuring, negotiating and drafting major licenses and collaborations with U.S. pharmaceutical and biotech companies, as well as European and Japanese companies and broad experience in pharmaceutical and medical device businesses, including research, development, manufacturing and commercialization of products in U.S. and in foreign markets. Mr. Hahn is also knowledgeable in the areas of commercial, patent, anti-trust, bankruptcy, food and drug, and licensing law. Mr. Hahn is a member of the Bar of the City of New York, New York State Bar Association and has been a lecturer and panel expert at various programs conducted by the American Conference Institute and the New York City Bar Association. He is also a member of the Board and Executive Committee of the New York Region of the Anti-Defamation League. Mr. Hahn holds an A.B. magna cum laude from Brown University, an L.L.B. from Yale Law School and is fluent in French. Mr. Hahn’s experience with other pharmaceutical and biotech companies in the development and commercialization of products in the U.S. and foreign markets brings industry experience and knowledge to the Board of Directors.

Yoshitaka Kitao has served as a member of our Board of Directors since June 2010.He has served as the Chief Executive Officer and Representative Director of SBI Holdings, Inc., SBI Investment Co., Ltd., SBI Capital Co., Ltd. and SBI Card Co., Ltd., and the Chief Executive Officer and Director of SBI VeriTrans Co., Ltd. and Morningstar Japan K.K. He is the Chairman and Director of SBI Mortgage Co., Ltd., Gomez Consulting Co., Ltd. and SBI Securities Co., Ltd. He is the Representative Director of Wall Street Journal Japan K.K. and Director of SBI Benefit Systems Co., Ltd. He was Executive Vice President and Chief Financial Officer of SOFTBANK Corp. from 1995 to 2000 and a Director of SOFTBANK Corp. from 2000 to 2005. He was the Chief Executive Officer and Representative Director of SOFTBANK Finance Corporation from 1999 to 2005. Previously, Mr. Kitao was also the Director of Nomura Wasserstein Perella Co., Ltd. from 1991 to 1992, Managing Director of Wasserstein Perella & Co. International, Limited from 1989 to 1992 and was the General Manager for the Nomura Securities Co., Ltd.’s Corporate Finance and Services Dept. III from 1992 to 1995. Mr. Kitao obtained degrees in Economics from Keio University in 1974 and Cambridge University in 1978. Mr. Kitao’s experience brings management and finance knowledge and expertise to the Board of Directors.

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Toshihiro Toyoshima has served as a member of our Board of Directors since August 2010. Mr. Toyoshima is Chief Executive Officer of Asuka DBJ Partners Co., Ltd., an investment management company with approximately $860 million in assets under management, formed in 2005 as a joint venture between Development Bank of Japan, Inc. and Asuka Asset Management Co., Ltd. Before joining Asuka DBJ Partners, Mr. Toyoshima was the director-general of the Planning Department for Investment Banking of the Development Bank of Japan from October 2004 after working as a senior specialist in charge of the private sector at the World Bank and working in the Planning Department and the Project Finance Department of the Development Bank of Japan. Mr. Toyoshima introduced the concept of project finance and DIP finance to Japan, and arranged a wide range of notable transactions such as Nakayama Joint Power Generation, Universal Studio Japan, Shinko Kobe Power Station of Kobe Steel, Ltd., Kazusa Clean System, and Fukuoka Clean Energy, each of which won the Asia Pacific Deal of the Year Award of the International Project Finance magazine. At the World Bank, Mr. Toyoshima was responsible for the privatization of state-owned enterprises in Botswana, Gambia, Lesotho, and Ethiopia. Mr. Toyoshima supervised the bidding for the privatization of Lesotho Electric Company, the foundation of Gambia Utility Regulatory Agency, and the coordination of the Asian-African trade and investment strategy (part of the Afro-Asian Conference). Since 2005, Mr. Toyoshima has engaged in equity investments of over $1 billion, focusing on unique growth opportunities, businesses with cross-border potentials and with disruptive concepts, part of which investments are listed on eight stock markets across five countries. Mr. Toyoshima holds a B.A. in law from the University of Tokyo and master’s degrees in real estate and urban planning from the Massachusetts Institute of Technology. Mr. Toyoshima’s investment and finance experience with respect to corporate development and growth opportunities brings investment and finance experience and knowledge to the Board of Directors.

Robert Takeuchi has served as a member of our Board of Directors since July 2010. He is currently a director of SBI Investment Co., Ltd. a private equity investment company. From 2004 until the present, Mr. Takeuchi served as president of RT Consulting, Inc. From 1996 to 2004 he was President of SOFTBANK Finance, America Corporation and from 1988 to 1996 he was a Director of CS First Boston. Mr. Takeuchi obtained a B.A. in Economics from the University of California, Los Angeles in 1979. Mr. Takeuchi’s private equity investment and finance experience brings private equity and finance experience and knowledge to the Board of Directors.

Board Composition

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

Director Independence

We are not listed as an issuer, nor have we applied to be listed as an issuer, on any U.S. national securities exchange or inter-dealer quotation system. For purposes of compliance with applicable securities rules, the independence standards required by the Nasdaq Stock Market, Inc. are described below.

Under Nasdaq’s rules, an independent director is a person other than an executive officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. Under Nasdaq Rule 5605(a)(2), a director is not considered independent if: (i) the director was employed by the company or its subsidiaries or parent company during the preceding three years; (ii) the director received, or had a family member that received, compensation in excess of $120,000 from the company during any twelve month period during the preceding three years (other than for board or committee services, benefits under a retirement plan or payments to a family member who is a non-executive employee of the company); (iii) the director had a family member that was an executive officer of the company during the preceding three years; (iv) the director received from, either directly or through family members or entities under his control, or the company received from any such person, during the current and three preceding years, any property or services totaling the greater of $200,000 or 5% of the recipient’s gross revenues for that year, unless the payments arose from investments in the company’s securities or a non-discretionary charitable contribution matching program; (v) the director was employed, or has a family member who was employed, during the last three years, as an executive officer of another company where any of the issuer’s executive

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officers serve on the compensation committee; or (vi) the director is, or has a family member who is, a partner at the company’s outside auditor or was a partner or employee of the company’s outside auditor who worked on the company’s audit at any time during the preceding three years. Ownership in a company does not by itself disqualify a director from being independent.

Under Nasdaq rules, at least a majority of the members of a listed company’s board of directors must be independent. We have determined that              are independent under Nasdaq rules and, as a result, we currently              with the Nasdaq director independence standards.

Nasdaq requires listed companies to appoint an audit committee of at least three members and adopt an audit committee charter describing the committee’s responsibilities. All directors on the audit committee must be independent, determined in accordance with the definition described above and under Rule 10A-3(b)(1) of the Exchange Act, subject to the exemptions set forth therein. Under an exemption to Rule 10A-3(b)(1), at least one member of Quark’s audit committee must be independent during the 90-day period beginning on the effective date of the registration statement, and during the one-year period beginning on the effective date of the registration statement, a minority of the audit committee is exempt from the requirements of Rule 10A-3(b)(i). Quark’s audit committee is currently comprised of    independent directors and directors who do not meet the independence requirements under the Nasdaq rules and the Exchange Act.

Nasdaq does not require listed companies to have either a compensation committee or nominating and corporate governance committee. If the board chooses to constitute any such committee, however, the committee must be comprised of independent directors.

Director Independence Under Israeli Law

To list our securities on TASE, we will need to comply with certain director independence requirements under Israeli law. Pursuant to Sections 239 through 249A of the Israel Companies Law — 1999, or the Israeli Companies Law, our board of directors will need to include at all times at least two directors who are elected by shareholders where at least one of the following is true: (i) the majority of the votes represented at the shareholders’ meeting includes at least one-third of all of the votes of the shareholders who are not holders of control in the corporation and who participate in the voting (with abstentions not being included in the total votes of the foregoing shareholders); or (ii) the total of opposing votes from among the shareholders referenced in subsection (i) does not exceed 1% of all of the voting rights in the corporation. Directors elected in accordance with this provision are deemed to be “outside directors.”

For purposes of this provision, “control” is defined in the Israeli Companies Law as the ability to direct the activity of the corporation, excluding an ability deriving merely from holding an office of director or another office in the corporation, and a person shall be presumed to control a corporation if he holds 50% or more of the means of control of the corporation such as the right to vote at a general meeting or a corresponding body of the corporation or the right to appoint directors or the chief executive officer of the corporation. If at the time of the appointment of an outside director, all of the members of the board of directors are of one gender, the second outside director shall be of the other gender.

Any vacancy in the office of an outside director may be filled only by the shareholders and may not be filled by the remaining directors. If at any time there are fewer than two outside directors, the board of directors must call a special shareholders’ meeting for the election of outside directors. An outside director may not be removed from office without cause. An outside director is required to be a resident of the State of Israel, provided that an Israeli public company, the shares of which have been offered to the public outside of Israel, or any public company listed on a stock exchange outside of Israel, may appoint an outside director who is not an Israeli resident.

An outside director must have professional qualifications or accounting and financial expertise, and at least one of the outside directors must have accounting and financial expertise.

No individual may be appointed as an outside director if, at the time of appointment or at any time during the preceding two years, he, his relative, partner, employer or a corporate body of which he is a controlling party had a connection to the corporation, to a person who was a controlling party of the corporation at the time of the appointment, or to another corporate body. For the purposes of this provision, (i) “connection” means an employment relationship, commercial or professional ties in general or control, as

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well as service as an officer, other than service as a director who was appointed as an independent director in a corporation that is due to offer shares to the public for the first time, and (ii) “other corporate body” means a corporate body in which the corporation or controlling member of it is a controlling member at the time of the appointment or during the two years before the time of appointment.

A director in a corporation cannot be appointed as an outside director in another corporation if at that time a director of the other corporation serves as an outside director of the first corporation. An outside director may not receive any compensation from the corporation, except as determined by applicable law and except for insurance coverage and indemnification by the corporation’s bylaws or as determined by other applicable law. An individual cannot be appointed as an outside director if he holds any other position or owns any business which might give rise to a conflict of interest with his role as a director, or if such circumstances might harm his ability to act as a director. An individual cannot be appointed as an outside director if he is a member of the Israel Securities Authority or an employee thereof, or if he is a member of the board of directors or an employee of an Israeli stock exchange.

A general meeting of our shareholders at which the appointment of an outside director is on the agenda may only be convened if the nominee has declared that he fulfills the conditions required for being appointed as an outside director.

Each committee of our board of directors authorized to exercise any of the powers of our board of directors must include at least one outside director.

Under the TASE requirements, the term of office of an outside director is to be three years, and a company may appoint an incumbent independent director for one additional term of three years. If our board of directors learns of a suspicion that an outside director no longer meets the condition required under the applicable law for his appointment, or that he has violated his fiduciary duty , the board of directors shall discuss the matter at the meeting first convened after it learned of the matter. If our board of directors determines that the outside director no longer meets a condition required under applicable law for his appointment or that he has violated his fiduciary duty, then the board of directors must call a special meeting of our shareholders for the removal of that outside director. The reasons of our board of directors must be presented at the meeting of our shareholders, and the outside director must be given a reasonable opportunity to present his position; the decision of our shareholders to terminate an outside directors’ term of office must be adopted with the same majority that was necessary for his appointment.

An Israeli court may, pursuant to the application of a director or shareholder, order the removal of an outside director if it determines that the director has ceased to fulfill one of the conditions required under the Israeli Companies Law for his appointment, or that he has committed a breach of a fiduciary duty to the corporation.

For a period of two years following the termination of an outside director, a corporation may not directly or indirectly enter into any employment, consulting or other arrangement for fees with such person, and such person may not serve as a director or officer of the corporation, including a corporation controlled by such person.

Pursuant to Sections 95 and 121(c) of the Israeli Companies Law, we will be subject to certain other procedural and board composition requirements. A director that holds the office of chairman of the board of directors may not also hold the office, or be granted the powers of, the chief executive officer, unless authorized in accordance with Section 121(c) of the Israeli Companies Law. Section 121(c) provides that the shareholders at a meeting of shareholders of a public company may resolve that for a period of no more than three years the chairman of the board of directors may be authorized to fulfill the duties of the chief executive officer, provided that, in counting the votes at the meeting at least one of the following is true: (i) the majority must include at least two-thirds of the shareholders who are not holders of control in the corporation present at the vote and abstaining votes must not be taken into account in counting the votes of such shareholders; or (ii) the total of opposing votes from among the shareholders referenced in subsection (i) does not exceed 1% of all of the voting rights in the corporation.

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Board Committees

Audit Committee

Our audit committee consists of Messrs. Philip B. Simon and Robert Takeuchi. Mr. Simon serves as the chair of our audit committee. The functions of this committee include, among other things:

Our board of directors has determined that each of Messrs.            qualifies as an audit committee financial expert within the meaning of SEC regulations. In making this determination, our board of directors has considered the nature and scope of each member’s education and business experience. Our board of directors also has determined that meet the independence requirements of Rule 10A-3 of the Exchange Act, subject to the exemptions set forth therein. Both our independent registered public accounting firm and management are expected to periodically meet privately with our audit committee.

Nominating and Corporate Governance Committee

Our nominating and corporate governance committee consists of Messrs.          . Mr.        serves as the chair of our nominating and corporate governance committee. The functions of this committee include, among other things:

Compensation Committee

Our compensation committee consists of Messrs.          . Mr.            serves as the chair of our compensation committee. The functions of this committee include, among other things:

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

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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 independent members 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 shareholders 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 shareholders’ expectations.

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

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 board of directors takes such factors as company performance in prior years, individual performance, general economic factors and compensation equity among our executive officers, into consideration.

Bonuses.  During 2009 we did not have a bonus plan or management incentive plan in place to offer incentive compensation to executive management and other key employees. Decisions regarding bonus payments to our executive management and other key employees are made by majority approval of the independent members of our board of directors. Dr. Zurr, our President and Chief Executive Officer, makes recommendations regarding executive compensation, however, Dr. Zurr does not participate in discussions regarding his own compensation.

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.

Our board of directors does not have any formal policies for allocating compensation among salary, bonus awards and stock option grants.

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Role of the Board of Directors in Setting Executive Compensation

As we did not have a Compensation Committee in place during our 2009 fiscal year, the independent members of our board of directors determined the salary, bonus awards and stock option grants for our executive officers. Dr. Zurr, our President and Chief Executive Officer, 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 discussions of our board of directors regarding executive compensation. Our board of directors has also delegated to Mr. Simon the authority to make compensation determinations, in consultation with Dr. Zurr, for executive officers other than the chief executive officer. Our board of directors has not historically engaged third-party consultants with respect to executive compensation matters, or relied on compensation data or surveys of peer companies. We do not believe that our compensation policies and practices, for either our executive or our non-executive employees, are reasonably likely to give rise to risks that would have a material adverse effect on us.

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

Our board of directors did not grant discretionary cash bonuses to our executive officers in 2009. In 2009, we did not have a bonus plan or management incentive compensation plan in place. Decisions regarding bonus payments, if any, to our executive management and other key employees are made by majority approval of our board of directors, except that Dr. Zurr does not participate in discussions regarding his own compensation.

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 shareholders. 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. 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 provide 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 board 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

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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 board of directors has the authority to determine the vesting schedule and may at times to 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 under the heading “— Tax Considerations.”

Our prior equity plan, the 1997 Stock Plan, was terminated in March 2007 when our board of directors adopted its replacement plan, the Quark Pharmaceuticals, Inc. 2007 Equity Incentive Plan. In May 2007, the plan was approved by our shareholders. The plan provides a mechanism to continue our practice of making equity awards to attract and retain talented employees. As of October 31, 2010, our board has approved option grants which are currently outstanding to purchase 2,632,919 shares of our common stock to certain of our employees, including our named executive officers. The plan is described in detail under “2007 Equity Incentive Plan” below. Our board is expected to continue to grant options to our employees to continue our philosophy of incentivizing long-term performance and aligning our executives’ interests with that of our shareholders.

The exercise price of each stock option granted under our 2007 Equity Incentive 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 results of third-party independent valuation reports, 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.

Additionally, we made a personal loan to our Chief Executive Officer in the principal amount of $157,000 in January 2008. 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 September 2010 in recognition of Dr. Zurr’s service to Quark.

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 2009, we matched 100% of participant contributions up to four percent of eligible compensation. We plan to match participant contributions at this same level in 2010.

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 2009, we provided an allowance to our executive officers for automobile and gasoline expenses, cell phone use, internet and telephone connections for home office use 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. Our board of directors may revise, amend or add to our officers’ executive benefits and perquisites if deemed advisable.

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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 two years following the date of grant of the options. 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%.

Under ASC 718-10, 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. For the foreseeable future, our stock option program comprises the sole component of our long-term compensation program, and, therefore, we record the expense for each stock option award on an ongoing basis according to ASC 718-10. In the future we may consider the grant of restricted stock to our executive officers in lieu of stock option grants in light of the accounting impact of ASC 718-10 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.” Our board of directors 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, our board of directors has not adopted a policy that requires all compensation to be deductible. However, our board of directors intends to evaluate the effects of the compensation limits of Section 162(m) on any compensation it proposes to grant, and our board of directors intends to provide future compensation in a manner consistent with our best interests and those of our shareholders.

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Summary Compensation Table

The following table provides information regarding the compensation earned during the year ended December 31, 2009 by our Chief Executive Officer, principal financial officers, and three other most highly compensated executive officers at December 31, 2009 whose combined salary and bonus awards exceeded $100,000 during 2009. We refer to our Chief Executive Officer, principal financial officers, and these other executive officers as our “named executive officers” elsewhere in this prospectus.

Summary Compensation Table for Fiscal Year 2009

Name and Principal Position		Salary ($)				Bonus ($)				Stock Awards ($)				Option Awards ($)				Non-Equity Incentive Plan Compensation ($)				Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)				All Other Compensation ($)				Total ($)
Daniel Zurr Chief Executive Officer		$	298,328				—				—			$	93,091				—				—			$	110,822	(1)		$	502,241
Sagit Reich Chief Financial Officer(2)			—				—				—				—				—				—				—				—
Smadar Samira Shakked Senior Vice President,   Business Development,   Finance		$	136,484				—				—			$	47,772				—				—			$	60,519	(3)		$	244,775
Shai Erlich Chief Medical Officer		$	251,333				—				—			$	91,482				—				—			$	40,191	(4)		$	383,006
Elena Feinstein, Chief Scientific Officer		$	186,568				—				—			$	67,060				—				—			$	63,580	(5)		$	317,208
Rami Skaliter Chief Operating Officer		$	203,913				—				—			$	70,080				—				—			$	77,593	(6)		$	351,586
Juliana Friedmann, Senior Vice President, Strategy and Planning		$	114,800				—				—			$	57,425				—				—			$	62,447	(7)		$	234,672

The amounts listed above were paid to the named executive officers in NIS, and the amounts above were converted from NIS to U.S. dollars, based on the annual average exchange rate.

In August 2009, our Board of Directors adopted a cost reduction plan that includes reduction of a certain percentage of each employee’s salary, up to 20%, beginning on September 1, 2009, for a period of 6 months. The aggregate reduction of compensation in that period amounted to $595,000 across all employees. The amounts listed on the table above reflect compensation of our named executive officers after giving effect to the reduction in salary during the period beginning on September 1, 2009 until December 31, 2009. Our board further approved that in certain future events, the employees will be reimbursed for such reductions, and in the six months ended September 30, 2010, and aggregate of $150,000 was paid to all employees whose salaries had been reduced.

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Employment Agreements and Potential Payments Upon Termination or Change-in-Control

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 and identified on the table set forth 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. The figures on the table set forth below assume that the termination occurred on December 31, 2009.

Name		Acceleration of Vesting of Stock Options(1)				Continuation of Benefits During Notice Period(2) ($)				Severance Payment(3) ($)				Total ($)
Daniel Zurr
Termination without cause(4)											325,000				325,000
Change-in-Control															0
Sagit Reich
Termination without cause(5)							74,172				—				74,172
Change-in-Control(6)											—				0
Smadar Samira Shakked
Termination without cause(7)							70,337								70,337
Change-in-Control															0
Shai Erlich
Termination without cause(8)							105,000								105,000

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Name		Acceleration of Vesting of Stock Options(1)				Continuation of Benefits During Notice Period(2) ($)				Severance Payment(3) ($)				Total ($)
Change-in-Control															0
Elena Feinstein, M.D., Ph.D.
Termination without cause(9)							90,286								90,286
Change-in-Control															0
Rami Skaliter
Termination without cause(10)							99,020								99,020
Change-in-Control															0
Juliana Friedmann
Termination without cause(11)							60,000								60,000
Change-in-Control															0

In addition to the payments set forth in the table above, employees of the company’s subsidiary are generally entitled to certain severance payments under the Israeli Severance Pay Law, which requires the company’s subsidiary to deposit in a severance payment fund an amount equal to one month of salary for each year of employment or a portion thereof for each employee, based on the employee’s most recent salary. Upon termination, the employees are entitled to severance in an amount equal to one month’s salary for each year of employment or a portion thereof, which is payable by the company’s subsidiary from the severance payment fund. This arrangement does not discriminate in scope, terms or operation in favor of executive officers of the company’s subsidiary and is available generally to salaried employees of the company’s subsidiary.

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Daniel Zurr, Ph.D.

In January 2008, we entered into an employment agreement with Daniel Zurr, our President and Chief Executive Officer. The agreement provides that Dr. Zurr will receive an aggregate annual base salary of $325,000. In addition, Dr. Zurr is eligible to participate in the Company’s standard employee benefit plans, as in effect from time to time, which include group insurance plans (such as health, life and disability) and a retirement savings plan. Dr. Zurr is also entitled to the use of a company automobile and reimbursement for expenses associated with its use, including maintenance and all taxes. Dr. Zurr’s employment may be terminated under the agreement, with or without cause, at any time. Upon a termination without cause or Dr. Zurr’s resignation for good reason, including a material reduction in his compensation (except if the compensation of similarly situated officers is similarly reduced) or if the company materially breaches its obligations under any agreement with Dr. Zurr and the company does not remedy such reduction or breach during a period following Dr. Zurr’s notice to the Chairman of the Board, Dr. Zurr would be entitled to a lump sum payment equal to twelve months of his then current base salary as severance; provided, however, that if Dr. Zurr remains a member of the board following the termination of his employment, or serves as a consultant to the company following the termination of his employment, then this severance payment shall be offset by any compensation paid to Dr. Zurr by the company in connection with such role(s). Assuming that Dr. Zurr’s employment was terminated other than for cause, or Dr. Zurr resigned for good reason, at December 31, 2009, he would have been entitled to a lump sum payment of $325,000.

Sagit Reich

In August 2010, QBI entered into an employment agreement with Sagit Reich, our Chief Financial Officer. Under the terms of the agreement, Ms. Reich is entitled to an annual salary of approximately $158,000. Ms. Reich was also awarded options to purchase an aggregate of 120,000 shares of our Common Stock under our 2007 Equity Incentive plan. 40% of the options granted to Ms. Reich shall vest on the company’s “Qualified IPO,” as such term is defined in the company’s amended and restated articles of incorporation, as amended from time to time, and 100% of the options granted to Ms. Reich shall vest on a change-in-control of the company. In addition, upon a successful Qualified IPO, Ms. Reich is entitled to a bonus, at the discretion of the CEO of the Company. Any such bonus shall be paid within 60 days of the Qualified IPO, provided Ms. Reich’s employment with the QBI has not terminated. QBI is obligated to pay a certain percentage of Ms. Reich’s salary to a manager’s insurance policy which would cover payments made towards severance, pension, disability and an education fund. Ms. Reich is also entitled to the use of a company automobile and reimbursement for expenses associated with its use and maintenance, including all taxes, and reimbursement for a company cell phone. Ms. Reich’s employment is terminable at any time for cause and otherwise terminable by either party upon 90 days advance written notice.

Smadar Samira Shakked

In September 1997, QBI entered into an employment agreement with Smadar Samira Shakked, our Senior Vice President of Business Development, Finance. Under the terms of the agreement, as last amended July 2008, Ms. Shakked is entitled to an annual salary of approximately $151,000. 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. Ms. Shakked is also entitled to the use of a company automobile and reimbursement for expenses associated with its use and maintenance, including all taxes. Ms. Shakked’s employment is terminable without notice at any time for cause and otherwise terminable by either party upon 120 days advance written notice. Assuming Ms. Shakked’s employment was terminated, other than for cause, at December 31, 2009, she would have been entitled to $70,337.

Shai Erlich, Ph.D.

In March 2003, we entered into an employment agreement with Shai Erlich, Ph.D., our Chief Medical Officer. Under the agreement, as amended, Dr. Erlich is entitled to an annual salary of $315,000 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

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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. Upon a termination without cause, Dr. Erlich would be entitled to severance equal to four months of his base salary. Assuming Dr. Erlich’s employment was terminated, other than for cause, at December 31, 2009, he would have been entitled to $105,000.

Elena Feinstein, M.D., Ph.D.

In June 2007, QBI entered into an employment agreement with Elena Feinstein, M.D., Ph.D., our Chief Scientific Officer. The agreement, as amended, provides that Dr. Feinstein will receive an annual salary of $200,000. Pursuant to the agreement, QBI is obligated to establish and pay a certain percentage of Dr. Feinstein’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. Feinstein’s base salary. Dr. Feinstein is entitled to the use of a company automobile and reimbursement for expenses associated with its use and maintenance, including all taxes, and reimbursement for a company cell phone. Under the agreement, upon a termination without cause, Dr. Feinstein would be entitled to notice of 120 days, with continuation of salary and benefits during that period. Assuming Dr. Feinstein’s employment was terminated, other than for cause, at December 31, 2009, she would have been entitled to $90,286.

Rami Skaliter, Ph.D.

In May 2007, QBI entered into an employment agreement with Rami Skaliter, Ph.D., our Chief Operating Officer. Under the terms of the agreement, as amended, Dr. Skaliter is entitled to an annual salary of approximately $220,000. 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. Dr. Skaliter is entitled to the use of a company automobile and reimbursement for expenses associated with its use and maintenance, including all taxes, and reimbursement for a company cell phone. Upon a termination without cause, Dr. Skaliter would be entitled to notice of 120 days, with continuation of salary and benefits during that period. Assuming Dr. Skaliter’s employment was terminated, other than for cause, at December 31, 2009, he would have been entitled to $99,020.

Juliana Friedmann, M.Sc.

In February 1998, QBI entered into an employment agreement with Juliana Friedmann, our Senior Vice President of Strategy and Planning. Under the agreement, as last amended July 2008, Ms. Friedmann is entitled to an annual salary of approximately $126,300. Additionally, QBI is obligated to pay a certain percentage of Ms. Friedmann’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. Friedmann’s base salary. Ms. Friedmann is also entitled to the use of a company automobile and reimbursement for expenses associated with its use and maintenance, including all taxes, and reimbursement for a company cell phone. Ms. Friedmann’s employment is terminable without notice at any time for cause and otherwise terminable by either party upon 120 days advance written notice. Assuming Ms. Friedmann’s employment was terminated, other than for cause, at December 31, 2009, she would have been entitled to $60,000.

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, 2009 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.

In March 2009 and September 2009, our board of directors approved option grants to certain of our employees and executive officers, including our named executive officers. Dr. Zurr was granted an option to purchase 48,965 shares of our common stock; Ms. Samira Shakked was granted an option to purchase 40,000 shares of our common stock; Dr. Erlich was granted an option to purchase 45,000 shares of our common

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stock; Dr. Feinstein was granted an option to purchase 55,000 shares of our common stock; and Dr. Skaliter was granted an option to purchase 65,000 shares of our common stock. The exercise price of these options is $1.10 per share, which is equal to the fair market value per share of our common stock on the grant date for such options, as determined by our board of directors. These stock options vest in equal monthly installments over a period of four years beginning on the date of grant.

On March 30, 2009, our board of directors repriced the stock option grant to purchase 48,965 shares of our common stock held by Dr. Zurr from an exercise price of $2.75 per share to $1.10 per share, in order to reflect the fair market value of the company’s common stock as of March 30, 2009 and as a means of incentivizing long-term performance. As a result of the repricing, using the Black-Scholes option valuation model, the incremental fair value of the repriced options, as of March 30, 2009, is equal to $0.38 per share of common stock underlying the stock option, for an aggregate amount of $18,607.

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Grants of Plan-Based Awards

Name (a)		Grant Date (b)				Estimated Future Payouts Under Non-Equity Incentive Plan Awards												Estimated Future Payouts Under Equity Incentive Plan Awards												All Other Stock Awards: Number of Shares of Stock or Units (#) (i)				All Other Option Awards: Number of Securities Underlying Options (#) (j)				Exercise or Base Price of Option Awards ($/Sh) (k)				Grant Date Fair Value of Stock and Option Awards (l)
						Threshold ($) (c)				Target ($) (d)				Maximum ($) (e)				Threshold ($) (f)				Target ($) (g)				Maximum ($) (h)
Daniel Zurr Chief Executive   Officer			3/30/2009																																48,965	(1)		$	1.10			$	0.66
Smadar Samira Shakked Senior Vice   President of   Business   Development,   Finance			3/30/2009																																15,000			$	1.10			$	0.66
			9/16/2009																																25,000			$	1.10			$	0.68
Shai Erlich Chief Medical   Officer			9/16/2009																																45,000			$	1.10			$	0.68
Elena Feinstein, M.D., Ph.D. Chief Scientific   Officer			9/16/2009																																55,000			$	1.10			$	0.68
Rami Skaliter Chief Operating   Officer			9/16/2009																																65,000			$	1.10			$	0.68
Juliana Friedmann Senior Vice President, Strategy and Planning			3/30/2009																																15,000			$	1.10			$	0.66
			9/16/2009																																60,000			$	1.10			$	0.68