Liquidity and Capital Resources

Since our inception, we have generated significant losses and expect to continue to generate losses for the foreseeable future. As of June 30, 2006, we had an accumulated deficit of $16.4 million. We have funded our operations primarily through the proceeds from the sales of our equity securities in an aggregate gross of $30.5 million, including $14.0 million from our sale of 1,822,422 series C preferred shares in a private placement at a purchase price of $7.68 per share in April 2006.

As of June 30, 2006, we had cash and cash equivalents and short-term bank deposits of $15.5 million. Net cash used in operating activities was $2.8 million for the six months ended June 30, 2006, compared to $1.9 million for the six months ended June 30, 2005, an increase of $956,000, or 51%. This increase resulted primarily from a decrease in non-cash net working capital (defined as marketable securities and accounts receivable – less trade payables, deferred revenue, deferred issuance costs and other accounts payable and accruals) for the six months ended June 30, 2006 of $15,000, compared to a decrease in non-cash net working capital for the six months ended June 30, 2005 of $285,000, due to timing differences in certain cash receipts and payments. In addition, operating expenses for the six months ended June 30, 2006 increased $1.2 million, compared to the six months ended June 30, 2005, as a result of an increase in research and development activities, business development and marketing expenses and general and administration expenses. Net cash used in investing activities was $7.2 million for the six months ended June 30, 2006, compared to $39,000 for the six months ended June 30, 2005, an increase of $7.1 million. This increase was due to an increase of $7.0 million in short-term bank deposits and an increase of $129,000 in purchasing of research and general equipment. Net cash provided by financing activities was $13.6 million for the six months ended June 30, 2006, compared to $6.0 million for the six months ended June 30, 2005, an increase of $7.6 million, or 128%. Net cash provided by financing activities for the six months ended June 30, 2006 consisted of net proceeds of $13.8 million from the sale and issuance of series C preferred shares in April 2006 and the issuance of series B preferred shares upon the exercise of warrants in April 2006, offset in part by $181,000 used to repay short-term bank loans and a shareholder loan. Net cash provided by financing activities for the six months ended June 30, 2005 consisted of proceeds of $4.3 million from convertible loans and net proceeds of $1.7 million from the sale and issuance of series B preferred shares.

Net cash used in operating activities was $4.2 million in 2005, compared to $1.2 million in 2004, an increase of $3.0 million, or 261%. This increase was primarily the result of an increase in research and development activities and the hiring of certain senior managers, offset in part by an increase in net working capital. Net cash used in investing activities was $155,000 in 2005, compared to $144,000 in 2004, an increase of $11,000, or 7%. Net cash provided by financing activities was $7.7 million in 2005, compared to $1.8 million in 2004, an increase of $6.0 million, or 339%. This increase was the result of our receipt of gross proceeds of $6.1 million from the issuance of a convertible loan in the third quarter of 2005.

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.

Contractual Obligations and Commitments

Set forth below is a description of our contractual cash obligations as of December 31, 2005. Operating lease obligations consist of rent payable under our existing facility leases and lease payments for company automobiles.

In addition, subsequent to December 31, 2005, we entered into license agreements which include cash obligations. These obligations are set forth below as other long-term obligations:

37

*

Under our current license agreements, we are obligated to pay an aggregate amount of $165,000 annually after 2010. Each of these agreements terminate upon the expiration of all patents relating to such agreement, including patents to be filed and potentially issued at an indeterminable date in the future, and, thus, such termination dates cannot be determined at this time. Accordingly, we are also unable to determine the aggregate amount of such payments due after 2010 at this time. However, based on current facts and circumstances, we estimate that our obligations under these agreements will be through at least 2032. For a more detailed description of the termination provisions of our license agreements, see “Business — Strategic Alliances and Research and License Collaborations” beginning on page 58.

Funding Requirements

We expect to incur continuing and increasing losses from operations for at least the next several years. In particular, as described above, we expect to incur increasing research and development expenses, marketing and business development expenses and general and administrative expenses in the future as we expand our operations and product development efforts. We believe that the net proceeds from this offering, our existing cash and cash equivalents, and funding we expect to receive under our current collaboration and license agreements will be sufficient to fund our operations for at least the next 18 months. However, our funding requirements may change and will depend upon numerous factors, including but not limited to:

·

progress in our research and development programs;

·

the resources, time and costs required to initiate and complete development and any required preclinical studies and clinical trials, and obtain regulatory approvals for our product candidates;

·

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

·

costs necessary to protect our intellectual property; and

·

the timing, receipt and amount of sales, if any, by us of any approved products.

We anticipate that we will require substantial additional funding and expect to augment our cash balance through financing transactions, including the issuance of debt or equity securities and further strategic collaborations. No arrangements have been entered into for any future financing, and there can be no assurance that we will be able to obtain adequate levels of additional funding on favorable terms, if at all. If adequate funds are not available, we may be required to:

·

delay, reduce the scope of or eliminate certain research and development programs;

·

obtain funds through arrangements with collaborators or others on terms unfavorable to us or that may require us to relinquish rights to certain technologies or product candidates that we might otherwise seek to develop or commercialize independently; or

·

pursue merger or acquisition strategies.

Recently Issued Accounting Pronouncements

On December 16, 2004, FASB issued Statement No. 123 (revised 2004), Share-Based Payment , or SFAS 123(R), which is a revision of SFAS 123. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However, SFAS 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while SFAS 123(R) requires all share-based payments to employees to be recognized based on their fair values. SFAS 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. SFAS 123(R) will be applicable to us in the first fiscal year beginning after January 1, 2006. The adoption of SFAS 123(R) is not expected to have a significant effect on our results of operations. We plan to adopt

38

SFAS 123(R) using the prospective-transition method as required for nonpublic entities that use the minimum value method to account for their pro forma share-based payments disclosures under SFAS 123. As such, we will continue to apply APB 25 in future periods to equity awards outstanding at the date of SFAS 123(R) adoption. All awards granted, modified, or settled after the date of adoption should be accounted for using the measurement, recognition, and attribution provisions of SFAS 123(R).

In March 2005, the SEC released Staff Accounting Bulletin No. 107, Share-Based Payment , or SAB 107. SAB 107 states the SEC staff’s position regarding the application of SFAS 123(R) and contains interpretive guidance related to the interaction between SFAS 123(R) and certain SEC rules and regulations. SAB 107 also provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. SAB 107 highlights the importance of disclosures made relating to the accounting for share-based payment transactions. We are currently reviewing the effect of SAB 107, however, we do not believe that SAB 107 will have a material effect on our financial position, results of operations or cash flows.

In May 2005, FASB issued Statement No. 154, Accounting Changes and Error Corrections , or SFAS 154, a replacement of APB No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements . SFAS 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. APB No. 20, previously required that most voluntary changes in accounting principles be recognized by including in net income, for the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retroactive application to prior periods’ financial statements of a voluntary change in accounting principles unless it is impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.

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 U.S., primarily in money market funds as of June 30, 2006.While our cash and investment balances will increase upon completion of the offering described by this prospectus, we will maintain an investment portfolio consisting mainly of U.S. money markets 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, foreign currency exchange rates, commodity prices, equity prices or other market changes that affect market risk sensitive instruments.

Exchange Rate Risk

Our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, against the NIS. We are exposed to the risk of fluctuation in the U.S. dollar/NIS exchange rate. We expect to derive substantially all of our revenues in U.S. dollars. However, the substantial majority of our expenses are denominated in NIS, and we anticipate that a material portion of our 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 profit margins.

39

BUSINESS

Overview

We are seeking to develop and commercialize new diagnostic and therapeutic products based on a recently discovered group of genes known as microRNAs. MicroRNAs are naturally expressed, or produced, using instructions encoded in DNA and are believed to play an important role in regulating protein production. Because proteins control most biological processes, we believe that microRNAs have the potential to form the basis of a novel class of diagnostic tests and therapies for many serious illnesses, including cancer and infectious diseases. We have decided to focus our initial efforts on cancer, as research has indicated that microRNAs play a role in various types of tumors. We developed a discovery process that integrates proprietary computer-based algorithms and customized biological techniques in order to discover and biologically validate microRNAs. To date, we have filed patent applications with claims potentially covering approximately 350 biologically validated human microRNAs and 35 biologically validated viral microRNAs, which constitute more than half of all biologically validated human and viral microRNAs of which we are aware. In addition, our patent applications cover thousands of genomic sequences that we have identified using our discovery process and believe are potential microRNA candidates.

We believe that we are the first commercial enterprise to focus on the emerging microRNA field, and as a result, we have developed an early and strong intellectual property position related to the development and commercialization of research, diagnostic and therapeutic products and other applications based on microRNAs. Using our intellectual property, collaborative relationships with leading commercial enterprises and academic and medical institutions, and expertise in the field of microRNAs, we have initiated programs to develop microRNA-based diagnostic and therapeutic products for various cancers and infectious diseases. Our current programs to develop microRNA-based diagnostic tests are focused on prostate, lung, colorectal, breast and bladder cancers. We are also developing a diagnostic test to identify the origin of the primary tumor in metastatic cancers of unknown primary site, or CUP. In addition, we are collaborating with others on the development of microRNA-based therapeutic products for the treatment of liver cancer and infectious diseases, such as HIV and HCV.

Background

The MicroRNA Opportunity

The Human Genome Project, which began formally in 1990, was a 13-year project coordinated by the U.S. Department of Energy and the National Institutes of Health to identify all genes in human DNA and determine the sequence of the approximately 3 billion chemical base pairs of which it is comprised. The Human Genome Project identified and mapped approximately 25,000 protein-coding genes, a mere 1.9% of human DNA. The remaining DNA has come to be known as “dark” or “junk” DNA and was presumed to serve no particular purpose because it does not hold instructions for the production of proteins, a process referred to as coding.

Rosetta Genomics was founded six years ago with a different view regarding junk DNA. We believed that junk DNA actually contains hundreds, possibly thousands, of tiny RNA genes that encode small RNA molecules, later termed microRNAs, which play an important role in the regulation of protein production, and hence the onset and progression of disease. Prior to our formation, there was little scientific interest in microRNAs because they were not thought to exist in humans. The few academic institutions that were searching for human microRNAs were using labor-intensive, biological methods, making the discovery process costly and time consuming.

We set out to discover human microRNAs and to develop a more efficient discovery process using computer-based informatics to scan the entire genome, an approach that, to our knowledge, had not been attempted previously. To accomplish our goal, we constructed a powerful, proprietary informatics platform using state-of-the art components from leading hardware and software companies, such as Microsoft, Dell, Emulex and EMC. The database, which was developed in collaboration with Microsoft, was populated with approximately 20 billion short genomic sequences extracted from junk DNA. We then developed unique algorithms, allowing us to mine the entire human genome for potential microRNAs.

Using our discovery process, we demonstrated that the number of human microRNAs is significantly higher than what was previously believed. In 2005, a study confirming our hypothesis was published by us in Nature Genetics , the premier peer-reviewed journal in genetics. Today, six years after inception, we have discovered and filed extensive patent applications with claims potentially covering approximately 350 biologically validated human microRNAs and 35 biologically validated viral microRNAs. This constitutes more than half of all biologically

40

validated human and viral microRNAs of which we are aware. We believe these microRNAs provide us a basis for the development of diagnostic and therapeutic products and other applications for cancer and other diseases. In addition, our patent applications cover thousands of genomic sequences that we have identified using our discovery process that we believe are potential microRNA candidates.

The interest in microRNAs has grown tremendously over the past five years. In 2001, there were only four published articles in peer-reviewed journals focused on microRNAs. In 2005, there were over 350 such articles. In addition, Science , a leading scientific journal, identified short non-coding RNAs, of which microRNAs are an important subset, as the number one breakthrough in 2002. The scientific community, as well as pharmaceutical, diagnostic and biotech companies, have begun to realize the potential offered by microRNAs for new diagnostic and therapeutic products.

The growing interest in microRNAs is related to another recently developed field of RNA technology that uses synthetically produced molecules known as small interfering RNAs, or siRNAs. A siRNA is designed to bind to and degrade a messenger RNA, or mRNA, thereby decreasing the overall level of the protein produced by that messenger RNA. However, because siRNAs cannot increase protein production, they cannot be used to treat diseases in which increasing the levels of certain proteins would be beneficial. In contrast, microRNAs can potentially be used either to decrease or increase the levels of proteins. Since microRNAs are naturally produced inhibitors of protein production, a synthetic molecule designed to mimic the activity of a microRNA can decrease the level of a protein produced in abnormally high amounts. On the other hand, a synthetic molecule designed to inhibit a microRNA would cause a decrease in the level of the microRNA and, consequently, an increase in the level of a beneficial protein. In addition, since microRNAs are naturally produced by cells, they can be used as indicators, or biomarkers, of disease, whereas siRNAs cannot be used as such since they are synthetically produced molecules.

The Role of MicroRNAs in Protein Production

Proteins are the building blocks of all living cells. The type of cell, its function, and the timing of its death are determined by which proteins are produced in the cell, and at what quantities and time they are produced. However, the proteins are the end product of a complex process which begins with the genetic code present in DNA. Before a protein is expressed, or produced, relevant parts of the DNA are copied into a messenger RNA. Each messenger RNA holds a code with instructions on how to build a specific protein using a process called translation. Although one messenger RNA molecule is capable of translating hundreds of thousands of protein molecules, the number it actually produces is regulated by microRNAs.

MicroRNAs are expressed based on the instructions encoded in DNA. The following diagram describes this process:

The Process of MicroRNA Expression

(a)

The microRNA precursor is first copied, or transcribed, from DNA.

(b)

This precursor folds onto itself to form a molecule which is shaped like a hairpin.

41

(c)

The microRNA is cut out from the precursor molecule.

Once expressed, the microRNA is capable of binding to specific messenger RNAs, ultimately inhibiting the production of the specific proteins produced by these messenger RNAs. The role that microRNAs play in protein production is described in the following diagram:

The Role of MicroRNAs in Protein Production

(a)

The messenger RNA instructs the ribosome to produce its corresponding protein.

(b)

When a microRNA chemically binds to a messenger RNA, protein production is blocked.

There is strong scientific evidence indicating that microRNAs are important regulators of protein production, and as such, play a significant role in cellular processes, including the timing of cellular development, hematopoiesis (the formation of blood cellular components), fat metabolism, organogenesis (the development of internal organs), apoptosis (programmed cell death), cell proliferation and differentiation, and tumorigenesis (the formation of a tumor). As a result, although research in this area is both preliminary and limited, it is believed that microRNAs have a role in the onset and progression of many diseases, including cancer and infectious diseases. Accordingly, it is believed that microRNAs have the potential to form the basis for diagnostic and therapeutic products for such diseases, although no such products have been developed or commercialized to date. There can be no assurance that any such products will ever be successfully developed and commercialized.

Our Strategy

Our goal is to become the leader in the development and commercialization of research, diagnostic and therapeutic products and other applications based on microRNAs. Our key strategies to achieve this goal are as follows:

·

Build and maintain a strong intellectual property position. We believe we are the first commercial enterprise to focus on the emerging field of microRNAs. As a result, we believe we have developed an early and strong intellectual property position in the area of developing and commercializing microRNA-based products. Our patent strategy is to seek broad coverage on all of our identified microRNA sequences and then later file patent applications claiming composition-of-matter on microRNAs of commercial interest. We have also filed, and intend to continue to file, patent applications that claim method-of-use for specific diagnostic and therapeutic applications.

·

Pursue near-term commercial opportunities in research consumables and diagnostic products. We are pursuing near-term commercial opportunities in research consumables and diagnostic products using microRNAs. Prior to its acquisition by Applied Biosystems, we entered into a license agreement with Ambion for use of our microRNAs in commercializing a variety of research products. Ambion had incorporated our microRNAs into its line of microRNA-based research kits by the fourth quarter of 2005.

42

In addition, we are working both internally and in collaborations to develop a variety of diagnostic tests for cancer based on microRNA expression profiles. We have entered into agreements with Asuragen and U.S. Genomics to co-develop diagnostic products for prostate and lung cancer, respectively. We have also entered into collaborations with a number of academic and medical institutions to develop diagnostic products. In addition, as a complement to our own microRNA discovery capabilities, we have in-licensed approximately 130 biologically validated human microRNAs, which were discovered in collaboration with us, from Johns Hopkins University for use in any application. We have also in-licensed microRNAs and microRNA candidates, including approximately 50 biologically validated human microRNAs and approximately 30 biologically validated viral microRNAs from The Rockefeller University, as well as microRNAs and microRNA candidates, including approximately 110 biologically validated human microRNAs from Garching Innovation GmbH, the technology transfer agency of the Max Planck Society, for use in diagnostic products.

·

Pursue therapeutic product opportunities. We believe that we can take advantage of our microRNA discoveries and expertise to develop drugs, which, because of the lengthy FDA approval process, have a longer time horizon for commercial potential. We have entered into collaborations to develop a variety of therapeutic products based on microRNAs in oncology and infectious diseases, including a collaboration with Isis Pharmaceuticals to co-develop a drug for liver cancer. In addition, we believe microRNAs that are identified as biomarkers for a disease may also be used as the basis to develop therapeutic products to treat that disease.

·

Leverage our intellectual property position and microRNA expertise to continue to establish strategic collaborations. We intend to continue to establish strategic collaborations with leading pharmaceutical, biotechnology and diagnostic companies, as well as prominent academic and medical institutions, to further develop and commercialize products based on microRNAs. We believe that our strong intellectual property position and expertise in the field of microRNAs will be key in attracting additional collaboration partners.

Our Proprietary MicroRNA Discovery Process

Typically, researchers attempt to discover microRNAs using a “biology-first” approach, and have used informatics only to verify that the cloned sequences are part of a hairpin structure. This approach is relatively inefficient in detecting microRNAs that are in low concentrations or are specific to certain tissue types or stages of disease because it requires a vast amount of cloning and sequencing, which are costly and very time-consuming processes.

In contrast to the biology-first approach, our microRNA discovery process combines powerful informatics with high-throughput biological techniques. We first constructed a proprietary computer-based informatics platform in order to mine the entire human genome to identify the maximum number of likely microRNA candidates. Having identified microRNA candidates, we then test those candidates using microarrays. If they are detected by a microarray, we employ sequencing or qRT-PCR to biologically validate them. This “funnel” approach, illustrated and described in more detail below, allows us to scan many microRNA candidates, and to efficiently isolate and biologically validate the actual microRNAs.

43

Our MicroRNA Discovery Process

·

Identify hairpin structures. MicroRNAs are known to exist in hairpin structures. We mined the entire human genome, over 6 billion DNA bases, for such structures and identified approximately 11 million hairpin structures. In order to accomplish this, we had to model the two-dimensional structure of more than 7 million segments of the genome sequence.

·

Extract microRNA candidates. We developed a proprietary algorithm based on several features that we identified as being characteristics of previously biologically validated microRNAs. Using this algorithm, we selected a set of approximately 10,000 likely microRNA candidates from the 11 million hairpin structures we had previously identified.

·

Detect by microarray. In order to biologically detect the existence of the candidate microRNA, we developed a proprietary microarray technology designed to detect the expression of microRNAs in tissue or body fluid samples. Because the expression patterns of microRNAs are, in many cases, tissue-specific, we have scanned numerous tissue samples using these microarrays and have, to date, detected approximately 1,500 expressed microRNA candidates from the set of 10,000 likely microRNA candidates we had previously selected. As more experiments are performed on additional tissue samples, we believe additional microRNAs will be detected using this technology.

·

Biologically validate by sequencing or qRT-PCR. In order to further confirm their existence, the microRNA candidates that we detect by microarray are biologically validated using either our proprietary sequencing technique or Ambion’s proprietary qRT-PCR. To date, we have biologically validated approximately 320 microRNAs using these techniques.

We use these approximately 320 biologically validated microRNAs and approximately an additional 30 microRNAs to which we have intellectual property claims, as well as microRNAs that we have in-licensed from third parties, as the basis for launching our efforts in developing diagnostic and therapeutic products. All of our programs to develop diagnostic and therapeutic products based on microRNAs are in the early stages of development, and there can be no assurance that we will successfully develop, receive regulatory approval for or commercialize any products based on this technology.

44

MicroRNAs and Diagnostic Products

Ideally, diagnostic tests provide physicians and their patients with information relating to one or more of the following:

·

the existence or the probability of developing disease;

·

the rate at which the disease will progress;

·

the severity of the disease;

·

the potential efficacy of specific therapies, such as different drugs or therapeutic procedures;

·

the monitoring of success of a chosen therapy; and

·

the likelihood of disease recurrence.

The Role of MicroRNAs in Diagnostic Products

We believe that using microRNAs as diagnostic biomarkers will enable us to develop diagnostic products that can provide more accurate and comprehensive information to doctors and patients. Currently, many diagnostic tests are designed to detect abnormal levels of messenger RNAs or proteins. MicroRNA-based tests may prove superior to these tests because it is believed that microRNAs are closer to the biological origin of disease. A change in the expression level of a single microRNA may affect the activity of dozens of messenger RNA genes, which in turn may affect the concentration of hundreds of proteins. Thus, we expect that by focusing our efforts on microRNAs, we can develop a less complex biomarker panel, resulting in a more specific and sensitive test. Furthermore, extracting microRNAs from tissue and body fluid samples is easier than extracting messenger RNAs because of the greater stability of microRNAs. In addition, amplification technologies, such as PCR, can potentially increase the sensitivity of a microRNA-based diagnostic test by generating millions of copies of a particular microRNA and thereby making it easier for the test to detect the presence of the microRNA. Since amplification technologies cannot be used with proteins, we believe microRNA-based diagnostic tests have the potential to be more sensitive than protein-based diagnostic tests.

The Potential of MicroRNAs in Cancer Diagnostic Products

Cancer is a disease of the genes and can occur when mutated or abnormally regulated genes inappropriately activate or block molecular pathways that are important for normal biological function. The ability to detect a mutation or abnormal regulation, and to understand the process by which it contributes to cancer, is important to understanding the nature of the disease and to developing diagnostic and therapeutic products.

A common form of genomic analysis is the measurement of gene expression, or the presence and amount of one or more RNA sequences in a particular cell or tissue. Mutated or abnormally regulated genes may change the gene expression pattern of a cell. Quantifying the differences in the expression of a single gene or multiple genes has become a common way to study the behavior of altered cells. These expression levels can be correlated with disease and clinical outcomes.

Expression studies comparing healthy and diseased samples have revealed specific differences in microRNA levels between the two in various tumor types, including, prostate, breast, lung, colon, liver, thyroid, stomach and pancreas, as well as leukemia and lymphoma. In addition, several microRNAs have been identified as oncogenes, or microRNAs whose expression above normal levels contributes to cancer development. Several other microRNAs have been indicated as tumor suppressors by virtue of the decrease in the level of their expression in cancer cells. The Broad Institute, a research institute affiliated with MIT and Harvard, has recently demonstrated that microRNA expression profiles reveal more information about the origin of a metastatic tumor than any set of messenger RNAs.

As researchers continue to study the role of genetics in disease processes, it has become increasingly apparent that future diagnostic tests will go beyond correlating a single protein or gene to disease, and instead will look at characteristic gene patterns, or signatures, to diagnose disease and provide information on disease parameters, such as tumor aggressiveness, response to treatment and risk of recurrence. A key to utilizing genomics in cancer is to identify specific sets of genes and gene interactions that are important for diagnosing different subsets of cancers.

In order to develop a test to detect the presence of cancer, we measure the expression levels of all biologically validated microRNAs in samples taken from patients suffering from that type of cancer and compare them to the

45

expression profiles of samples taken from healthy people. We then identify a subset of microRNAs that are differentially expressed between the two groups and develop a biomarker panel based on those specific microRNAs. Once an appropriate biomarker panel is selected, we believe it is possible to develop a test that can measure the expression levels of the chosen panel in a person to determine his or her condition.

The figures below show illustrations of (1) a hypothetical biomarker panel for a cancer consisting of three differentially expressed microRNAs and (2) hypothetical test results using this biomarker panel. The figures below are for illustrative purposes only. All of our diagnostic product programs are in the early stages of development. To date, no one has applied for or been granted approval to market a diagnostic product based on microRNAs. There can be no assurance that we or anyone else will ever be successful in developing, receiving regulatory approval for and commercializing a diagnostic product based on microRNAs.

Hypothetical Cancer Biomarker Panel

Hypothetical Test Results Using a Cancer Biomarker Panel

·

The first figure illustrates how a biomarker panel would be developed for a specific cancer type. After analyzing the expression profiles of microRNAs in both healthy and diseased samples, we would identify microRNAs that are differentially expressed. In this illustration, there are three microRNAs that are differentially expressed. The light gray bars in the graph depict the mean expression levels, together with their respective standard error bars, in healthy samples (the non-cancer baseline), while the dark bars reflect these metrics in diseased samples (the cancer signature).

·

The second figure illustrates how this biomarker panel would be used in a diagnostic application. When a patient is tested for the presence of cancer, the levels of the three differentially expressed microRNAs are measured and compared to the cancer signature and the non-cancer baseline, and a score between zero and one is calculated based on the similarity of the tested levels to the cancer signature. If the patient’s expression profile is similar to the cancer signature, the patient has a high score, and thus a high probability

46

of having cancer, as in the case of patient B. Patient A, on the other hand, has a low score, and thus a low probability of having cancer, based on the expression pattern of his or her sample. Panels which would measure disease parameters, such as tumor aggressiveness, sensitivity to a specific treatment or the risk of recurrence, could be developed in a similar fashion.

We believe that the use of a panel of biomarkers rather than a single biomarker can improve diagnostic results by overcoming noise that may arise from the measurement of a single biomarker.

Our Diagnostic Product Development Process

We are currently developing several diagnostic products in the field of oncology. Our development process for diagnostic products consists of the following important steps:

·

Access to samples. As a prerequisite for clinical validation of diagnostic products, evaluation of clinical samples is critical. Accordingly, we have entered into collaborations with several institutions, including the Sloan-Kettering Institute for Cancer Research, the Medical Research, Infrastructure, and Health Services Fund of the Tel Aviv Medical Center, and the Sheba medical center in Tel Hashomer, and have established relationships with commercial companies focused on obtaining high quality clinical samples. These relationships provide us the opportunity to study thousands of well-characterized samples of prostate, breast, lung, colorectal, liver and bladder cancers. The sample collections include solid tumor samples, healthy tissue samples, and various body fluids such as blood, urine and sputum, as well as high quality tissue samples from archival pathology banks. Samples are accompanied by a database of medical history and clinical information, such as diagnosis, treatment and response to treatment, recurrence and survival, which for the samples from the archival pathology banks can be as long as 20 years.

·

RNA extraction. We utilize both commercial and proprietary technologies to extract relevant RNA from both tissue and body fluid samples.

·

Expression profiling. The identification of microRNA biomarkers requires sensitive measurements of the levels of the microRNAs extracted from the tissue or body fluid samples. We have developed proprietary methods to rapidly perform these measurements. Our methods allow us to perform simultaneous profiling of multiple samples, and we believe result in more accurate measurements of expression levels for each of the analyzed samples.

·

Analysis. We analyze expression profiles to identify microRNA signatures which detect the existence of disease and provide information on certain disease parameters, such as tumor aggressiveness, response to treatment and risk of recurrence. Identifying microRNA signatures is a complex task, and we believe our algorithmic expertise is one of our key advantages.

MicroRNAs and Therapeutic Products

MicroRNAs are important regulators of protein production, and as such, they represent potential targets for the development of drugs. Important information about the role of a microRNA in disease can be deduced by mimicking or inhibiting its activity and examining the impact this has on the behavior of the cell or organism. If mimicking or inhibiting a microRNA leads to improvement in disease symptoms, this implies that the target microRNA plays an important role in the disease.

The pharmaceutical industry has traditionally focused on the development of drugs that inhibit specific protein activity because of the difficulties in developing drugs that enhance protein activity or increase protein levels. Even siRNAs, a novel class of drugs, are limited to the inhibition of protein production. In contrast, because microRNAs are natural regulators of protein production, we believe it is possible to develop microRNA-based therapeutic products which can either increase or decrease the levels of proteins. A drug that mimics a microRNA should result in decreased levels of the proteins naturally regulated by that microRNA, while a drug that inhibits the microRNA should result in increased levels of those proteins. As an example, our expression analysis indicated one of our microRNAs is a possible oncogene in prostate cancer. We have demonstrated in vitro that when this microRNA is inhibited, the growth rate of prostate cancer cells is greatly decreased.

We believe microRNA-based therapeutic products for infectious disease also represent an area of potential development. Since some viruses also encode microRNAs, silencing a viral microRNA may form the basis for a new class of drugs to treat infectious diseases. As an example, we have discovered microRNAs encoded in Epstein-

47

Barr virus, or EBV, and have proven their expression in EBV infected cell lines. As proof of concept, we have demonstrated in vitro that the inhibition of these EBV microRNAs inhibits viral replication. Using our proprietary discovery process, we have predicted, and filed patents on, hundreds of microRNA candidates in dozens of different virus types, most of them pathogenic viruses. To date we have filed patent applications with claims potentially covering approximately 35 biologically validated viral microRNAs, which constitute more than half of all biologically validated viral microRNAs of which we are aware. We believe this gives us additional commercial opportunities in the infectious disease therapeutic market.

Our Commercial Applications

Our commercial strategy is to utilize our position as a leader in the microRNA field to develop and commercialize research consumables, cancer diagnostic products and therapeutic products in a three-pronged approach.

Research Consumables

The discovery of microRNAs has generated interest in a new area of research by academic and medical institutions and pharmaceutical companies. As more research programs focusing on microRNAs are initiated, we believe the need for profiling and manipulation technologies, such as arrays and microRNA vectors, will increase. In addition, since microRNAs are naturally produced inhibitors of proteins, we believe they may be viewed as favorable alternatives to siRNAs in research studies involving the selective inhibition of protein production.

In April 2005, we entered into a license agreement with Ambion, which was acquired by Applied Biosystems in March 2006. Under this agreement, Applied Biosystems has a non-exclusive license to all of our microRNA sequences, both validated and non-validated, for use in products to be used either as research reagents or in the performance of research services. We received upfront payments and are entitled to receive royalties on products sold that incorporate our microRNAs. Prior to the acquisition by Applied Biosystems, Ambion had incorporated our microRNAs into its research products by the fourth quarter of 2005. The research consumables currently offered by Applied Biosystems include assays focused on identifying and measuring concentrations of microRNAs as well as analyzing the impact of changes in their concentrations on cellular processes.

Cancer Diagnostic Products

Our diagnostic development efforts are focused on the unmet needs of the cancer diagnostic market. Although various cancer diagnostic tests exist, they suffer from significant drawbacks, including high false positive and false negative rates, and do not provide sufficient information to guide treatment decisions. We believe that this is due in part to the fact that many existing tests are based on a single biomarker, or on proteins or messenger RNAs.

There are two primary diagnostic objectives in oncology. The first objective is to increase survival rate by enabling physicians to identify high-risk patients and to detect new or recurring cancers at an early stage. The second objective is to optimize treatment for each patient by providing physicians and patients information on disease parameters, such as tumor aggressiveness, risk of recurrence and likely responses to specific therapies, including different types of surgery, radiotherapy, chemotherapy and ablation.

We are currently developing diagnostic products that address both of these objectives, including tests for the early detection of cancer based on non-invasive body fluid tests and tests designed to help physicians and patients make more informed treatment decisions based on the analysis of tumor samples obtained either through biopsies or resections. We are currently focusing on developing such diagnostic products for prostate, lung, breast, colorectal and bladder cancers. We are also developing a diagnostic test to identify the origin of the primary tumor in metastatic cancers of unknown primary site, or CUP. In addition, we expect that our diagnostic tests will be based on a panel of microRNAs, which we believe will provide enhanced sensitivity and specificity relative to currently available tests.

Prostate cancer

Market opportunity . According to the 2006 ACS Report, prostate cancer is the most common cancer in American men and the third leading cause of cancer-related death among men in the U.S. The report estimates that in 2006, approximately 235,000 new cases of prostate cancer will be diagnosed in the U.S., and about 27,000 men will die of this disease.

48

Current diagnostic tests. The current standard for prostate cancer screening is the Prostate Specific Antigen, or PSA, test. The PSA test, however, suffers from an extremely high false positive rate. In the initial screening round of the Prostate, Lung, Colorectal and Ovarian Cancer Screening Trial, as reported in the Journal of the National Cancer Institute in March 2005, less than 20% of the PSA-positive men were subsequently diagnosed with prostate cancer. In addition to the psychological implications associated with these testing errors, invasive, painful and costly biopsy procedures are required for patients that receive positive PSA test results to determine whether cancer is present. This trial also found that between 55% and 70% of prostate biopsies performed had no pathological results. Thus, as a result of the high false positive rate of the PSA test, an estimated 600,000 biopsies are performed annually, most of which have no pathological findings. In fact, the U.S. Preventive Services Task Force of the U.S. Department of Health has found insufficient evidence to recommend routine screening of prostate cancer using PSA or any other currently available test. Despite these limitations, the 2000 National Health Interview Survey published in the February 2004 issue of Preventive Medicine found that approximately 34% of men aged 50 and older with no history of prostate cancer reported having had a screening PSA test during the previous year.

Once a patient is diagnosed with prostate cancer, difficult decisions must be made regarding the appropriate treatment. Since prostate cancer is, in many cases, a slowly progressing, non-aggressive cancer, a prostatectomy may be unnecessary. However, it is not currently possible to determine with sufficient accuracy the aggressiveness of the cancer based on a pathological test of a biopsy and, thus, whether a prostatectomy is necessary. A clinical trial documented in the May 2005 issue of the New England Journal of Medicine found that more than 94% of prostatectomies do not provide a survival benefit as measured after 10 years post-diagnosis. When considering the possible adverse side effects of a prostatectomy, such as erectile dysfunction and urinary incontinence, together with the added economic cost of unnecessary operations, we believe that there is a significant unmet need in the prostate cancer market.

Our strategy. We have entered into an exclusive collaboration with Asuragen to co-develop prostate cancer diagnostic tests based on analysis of a panel of microRNA biomarkers. We have obtained samples of healthy and tumorous prostate tissue and have measured and analyzed the microRNA expression profiles of those samples. The comparison between the expression of microRNAs in 87 samples of healthy and tumorous prostate tissue revealed four microRNAs which have differential expression as illustrated below (PRC1 through PRC4), and can potentially serve as biomarkers of the disease. The dark gray bars in the graph below depict the mean expression level in the tumorous prostate tissue samples, together with their respective standard error bars, while the light gray bars reflect these metrics in the healthy prostate tissue samples.

MicroRNA Expression Profiles of Healthy vs. Tumorous Prostate Tissue Samples

The p-value of this panel of biomarkers is less than 0.002. A p-value indicates the probability that the results obtained in a statistical test are due to chance rather than a true relationship between measures. A small p-value, generally less than 0.05, indicates that it is very unlikely that the results are due to chance. We are currently working on further validating our results and on correlating the microRNA expression levels with more specific disease parameters, such as tumor aggressiveness. This program is still in the early stages of development, and we can provide no assurance that we will be successful in developing, receiving regulatory approval for and commercializing a microRNA-based prostate cancer diagnostic product.

49

Lung cancer

Market opportunity. According to the 2006 ACS Report, lung cancer is the leading cause of cancer-related death in the U.S. The report estimates that in 2006, approximately 174,000 new cases of lung cancer will be diagnosed in the U.S. and about 162,000 people will die of the disease. Lung cancer often spreads before it can be detected by currently available methods. As such, lung cancer has a poor prognosis; the average 5-year survival rate is only 15%, but is higher than 50% for patients with early-stage localized disease. Unfortunately, less than 20% of lung cancers are diagnosed at this early stage, according to the 2006 ACS Report, and these are often diagnosed by chance as part of a test for an unrelated matter. According to “Lung Cancer Screening” in the New England Journal of Medicine , almost 50% of the adults in the U.S. are present or former smokers and are at a significantly higher risk of developing lung cancer. As such, there is an urgent need for early detection tests.

Current diagnostic tests. Several techniques and modalities have been tested in recent decades for their potential to function as early detection screening tests for lung cancer, including chest X-ray, sputum cytology and low-dose helical CT scan. Despite the ability of these tests to detect some cases of early lung cancer, large-scale clinical trials have so far failed to show a health benefit of screening. At this time, no organization in the U.S. recommends routine screening for lung cancer either among the general adult population or in individuals who are at higher risk because of tobacco use or occupational exposure.

Our strategy. We plan to develop a test for the early detection of lung cancer based on sputum or blood samples. Since tumors often shed cancer cells, we believe that microRNA biomarkers can be detected in sputum or blood samples. We have obtained access to hundreds of clinical samples from cancer and cancer-free patients, and are examining these samples to identify an appropriate set of microRNAs that may be best suited as a biomarker panel to detect lung cancer. To date, we have examined 59 samples and have identified four microRNAs which are differentially expressed in tumorous and healthy lung tissue samples as illustrated below (LUC1 through LUC4), and can potentially serve as biomarkers of disease. The dark gray bars in the graph below depict the mean expression level in the tumorous lung tissue samples, together with their respective standard error bars, while the light gray bars reflect these metrics in healthy lung tissue samples.

MicroRNA Expression Profiles of Healthy vs. Tumorous Lung Tissue Samples

The p-value of this panel of biomarkers is less than 0.002. We are currently working on further validating these results in tissue and body fluid samples. This program is still in the early stages of development, and we can provide no assurance that we will be successful in developing, receiving regulatory approval for and commercializing a microRNA-based lung cancer diagnostic product.

We have recently entered into a collaboration with U.S. Genomics for the development of an early detection test for lung cancer. U.S. Genomics has developed a specialized platform for profiling microRNAs that is potentially more sensitive than current platforms and may be particularly useful for samples that are expected to contain few cancer cells, such as sputum. This collaboration allows us to incorporate this platform for developing the test, without limiting our ability to evaluate or use alternative platforms.

50

Colorectal cancer

Market opportunity. According to the 2006 ACS Report, colorectal cancer is the second leading cause of cancer mortality in the U.S. The report estimates that in 2006, approximately 107,000 new cases of colon cancer and 42,000 new cases of rectal cancer will be diagnosed in the U.S., and about 55,000 people will die of these diseases. Evidence from several studies indicates that screening for, detecting and removing colorectal cancers and pre-cancerous adenomatous polyps can significantly reduce colon cancer incidence and colon cancer-related mortality as reviewed by the U.S. Preventative Services Task Force in their publication in the Annals of Internal Medicine in 2002 . In the U.S., routine tests for the early detection of colon cancer are recommended for every person aged 50 and older according to the 2006 ACS Report.

Current diagnostic tests. The current standard screening methods for colorectal cancer include colonoscopy and the fecal occult blood tests. Both tests, however, suffer from serious disadvantages. The colonoscopy test is highly effective, but many people are hesitant to have this procedure due to its high cost, high discomfort and its potential for more significant side effects. The fecal occult blood test, on the other hand, is a simple and cheap test, but is relatively inaccurate.

Currently the standard of care for colorectal cancer includes adjuvant chemotherapy, although only a minor percentage of patients benefit from this treatment. Early-stage colorectal cancer patients are faced with the decision of whether or not to use chemotherapy after surgery as well as which chemotherapy to use. There is currently no effective test that can help these patients and their doctors make this important decision. Therefore, there is also a significant unmet need to identify patients who will benefit from chemotherapy.

Our strategy. We are currently seeking to address these market needs by identifying a panel of biomarkers based on microRNAs. We have obtained samples of healthy and tumorous colon tissue and have measured and analyzed the microRNA expression profiles of those samples. The comparison between the expression of microRNAs in 47 samples of healthy and tumorous colon tissue revealed four microRNAs which have differential expression as illustrated below (CRC1 through CRC4), and can potentially serve as biomarkers of the disease. The dark gray bars in the graph below depict the mean expression level in the tumorous colon tissue samples, together with their respective standard error bars, while the light gray bars reflect these metrics in the healthy colon tissue samples.

MicroRNA Expression Profiles of Healthy vs. Tumorous Colon Tissue Samples

The p-value of this panel of biomarkers is less than 0.006 We are currently working on further validating these results and on correlating the microRNA expression levels with more specific disease parameters, such as survival. This program is still in the early stages of development, and we can provide no assurance that we will be successful in developing, receiving regulatory approval for and commercializing a microRNA-based colorectal cancer diagnostic product.

Breast cancer

Market opportunity. According to the 2006 ACS Report, breast cancer is the most common cancer in women in the U.S., with an estimated 215,000 new cases and 41,000 deaths in 2006. Breast cancer is a curable disease when detected at an early stage. Nevertheless, physicians and patients are required to make difficult therapeutic decisions during the course of treatment, which would be facilitated by advanced diagnostic techniques.

51

Current diagnostic tests. A mammogram is the standard of care for screening for breast cancer. In the U.S., an annual mammogram for the early detection of breast cancer is recommended for every woman aged 40 and older. According to Breast Cancer Facts and Figures 2005-2006, approximately 54% of women in this age group actually have mammograms performed, resulting in approximately 32 million mammograms per annum in the U.S. However, mammograms have high false negative rates, especially in cases where the cancer is in an early stage and the tumor size is small. Mammograms also have a high false positive rate. In fact, according to An Informational Guide to Breast Cancer 2002 published by HCA Cancer Care, approximately 1.2 million breast biopsies, are performed every year in the U.S., of which 80% yield no form of malignancy, resulting in unnecessary cost and discomfort. Since the early stage detection of breast cancer is crucial to increasing survival rates, there is a significant need for a more sensitive and specific non-invasive diagnostic test for detecting early-stage disease.

In addition, the current standard of care for breast cancer patients also includes adjuvant chemotherapy. However, according to an article entitled “Treatment of Lymph-node-negative, Oestrogen-receptor-positive Breast Cancer” in The Lancet in 2004, only an estimated 15% of breast cancer patients benefit from such adjuvant chemotherapy. Due to the toxic side effects, required time commitment and significant economic burden associated with chemotherapy, the ability to distinguish between those patients who will benefit from the treatment and those who will not is very important. Based on the National Cancer Institute’s SEER Cancer Statistics Review , such decisions will be necessary for an estimated 135,000 patients in the U.S. in 2006.

Our strategy. In order to develop diagnostic tests for breast cancer, we have established relationships with academic and medical institutions, such as the Hadassah Medical Center, and commercial companies, such as Analytical Biological Services, Inc. to obtain access to hundreds of clinical samples and related medical and clinical data. Our initial focus is on developing diagnostic tests to determine risk of recurrence and whether a patient will benefit from adjuvant chemotherapy. We are analyzing samples of breast tumor resections from archival tissue banks to identify microRNAs that are differentially expressed in patients who had a high recurrence rate and those with a low recurrence rate, as well as patients who benefited from adjuvant chemotherapy and those who did not.

In addition, we intend to profile samples of healthy and tumorous breast tissue to identify differentially expressed microRNAs that can potentially serve as biomarkers for early detection of breast cancer. Based on these microRNAs we hope to develop a non-invasive test to diagnose breast cancer based on body fluid samples.

Cancer of unknown primary site (CUP)

Market opportunity . According to Diagnostic and Therapeutic Management of Cancer of Unknown Primary , a review published in the European Journal of Cancer , and the 2006 ACS Report, in 2006 approximately 3-5% of the 1,400,000 malignancies which will be diagnosed in the U.S. will be metastases of unknown primary site, or CUP. According to a literature review on CUP, published in Annals of Oncology, 2003, CUP patients have a very poor prognosis of 3-4 months and an overall 1-year survival rate of less than 25%. This is in part due to the fact that the prognosis and therapeutic regimens of cancer patients are dependent on the origin of the primary tumor. Thus, given the difficulty in determining the primary site, CUP presents a therapeutic dilemma.

Current diagnostic tests . A variety of classical methods are being used today to try to identify the primary tumor. These include physical examination of the patient, histopathology analysis of the biopsy, imaging methods such as chest X-ray, CT and PET scans, and procedures like gastrointestinal endoscopy. These tests are expensive and uncomfortable to the patient. Nevertheless, according to Diagnostic and Therapeutic Management of Cancer of Unknown Primary , the ability to resolve CUP is estimated to be only 20-30%.

Our strategy . We are currently seeking to address this market need by identifying a panel of biomarkers based on microRNAs. Since microRNAs are tissue specific, we believe they are promising potential biomarkers for the primary site. We have obtained 293 tumor samples from six different sites of origin and have measured and analyzed the microRNA expression profiles in those samples. The comparison between these profiles revealed that the expression of six microRNAs as illustrated below (CUP1 through CUP6) can potentially be used to differentiate between the tissues of origin. The graph below represents the mean expression level of these microRNAs in the different tumor samples, together with their respective standard error bars. Using a computer-based algorithm to analyze the expression profiles of these six microRNAs, we were able to identify the origin of the primary tumor in 80% of the tumor samples with 90% accuracy.

52

MicroRNA Expression Levels in Different Tumor Samples

We are currently working on further validating these results in primary tumors and metastasis, and on finding signatures for additional primary tumor sites. This program is still in the early stages of development, and we can provide no assurance that we will be successful in developing, receiving regulatory approval for and commercializing a microRNA-based CUP diagnostic product.

Other cancers

We are currently obtaining tissue samples and conducting expression analyses in other cancers, such as bladder cancer. In addition, we continue to evaluate the market need for microRNA-based diagnostic products in other cancers.

Therapeutic Products

We believe that microRNAs can serve as a basis for a new class of therapeutic products and that we can leverage our microRNA diagnostic capabilities to help develop drugs targeting microRNAs. We currently have a number of programs focused on the development of drugs for the treatment of various cancers and infectious diseases as described below.

Cancer Therapeutic Products

Liver cancer

Market opportunity. According to Pharmaceutical and Diagnostic Innovation, 2005, liver cancer, also known as hepatocellular carcinoma, or HCC, is the fifth most common cancer in the world. The 2006 ACS Report estimates that in 2006, approximately 18,500 new cases will be diagnosed in the U.S. and approximately 16,000 people will die of the disease. The incidence of HCC is rising principally as a result of the spread of chronic hepatitis C infection, or HCV, a chronic viral infection of the liver that can remain asymptomatic for years but can lead to liver cancer if left untreated. The World Health Organization estimates that more than 180 million people in the world, including 3.9 million in the U.S., are infected with HCV.

Current treatment. HCC patients have a very low survival rate, estimated by the 2006 ACS Report to be less than 10% at five years post-diagnosis. Aside from a liver transplant, the best available treatment for liver cancer is to surgically remove the entire tumor with a margin of healthy tissue included. However, according to the Pharmaceutical and Diagnostic Innovation 2005 , this option is available only to between approximately 5% and 10% of HCC patients. The results of the other available medical treatments, including chemotherapy, chemoembolization, ablation, and proton beam therapy, remain disappointing. Unfortunately, there have been no significant new developments in the treatment of liver cancer. As a consequence of the increasing incidence of the disease and the lack of effective treatments, the market for novel HCC drugs represents a large unmet need.

53

Our strategy. In order to develop a microRNA-based treatment for HCC, we entered into a collaboration with Isis Pharmaceuticals. Isis has significant intellectual property rights and expertise relating to technologies for inhibiting RNA molecules, including microRNAs. Isis has demonstrated its ability to inhibit microRNAs by administering to mice a synthetic molecule designed to inhibit a liver-specific microRNA. Isis showed that the synthetic molecule reached the liver and reduced the level of this microRNA with no observable toxicological effects.

The first step in our development program is to identify candidate microRNA targets for inhibition. This is done by profiling the expression levels of all microRNAs in healthy and tumorous liver tissue samples in order to identify microRNAs which are overexpressed in the tumor samples. To date, we have profiled 56 samples and have found five microRNAs which are significantly overexpressed (p-value less than 0.0001) in tumorous liver tissue as illustrated below (HCC1 through HCC5). The dark gray bars in the graph below depict the mean expression level in the tumorous liver tissue samples, together with their respective standard error bars, while the light bars reflect these metrics in the healthy liver tissue samples.

MicroRNAs Overexpressed in Tumorous Liver Tissue Samples

Such overexpressed microRNAs are potential candidate targets for a drug. We are currently performing expression profiles on more tissue samples to arrive at a comprehensive list of candidate targets, which will enter in vitro and in vivo experiments to test their effect on liver cancer. This program is still in the early stages of development, and we can provide no assurance that we will be successful in developing, receiving regulatory approval for and commercializing a microRNA-based therapeutic product for the treatment of liver cancer.

Other cancers

Our strategy is to collaborate with leading academic and medical institutions to provide us with additional research capabilities in the field of microRNAs. For example, we signed an agreement with Yeda Research and Development Company, Ltd., the technology transfer company of the Weizmann Institute of Science, to investigate at the Weizmann Institute the role of microRNAs in a variety of cancers. We have the exclusive right to commercialize the results of this research.

Therapeutic Products for Infectious Diseases

We have entered into agreements with academic and medical institutions to use our microRNAs for research in infectious diseases. Under these agreements, the academic and medical institutions have the right to conduct research and we have either the exclusive right to commercialize or the option to negotiate the rights to an exclusive or non-exclusive license to any intellectual property owned (solely or jointly with us) by such institutions.

54

HIV

Human immunodeficiency virus, commonly known as HIV, is a retrovirus that primarily infects the vital components of the human immune system. Many of the problems faced by people infected with HIV result from failure of the immune system to protect from opportunistic infections and cancers. HIV is a major cause of death worldwide. We are working with the CBR Institute for Biomedical Research, an academic affiliate of the Harvard Medical Center, in a collaboration to identify HIV microRNAs and human microRNAs whose levels are affected by HIV infection. The CBR Institute has provided us the option to acquire an exclusive license to inventions arising out of the collaboration.

HCV

Hepatitis C virus, or HCV, is an RNA virus that can cause liver inflammation, fibrosis, cirrhosis and liver cancer. Many people with HCV infection have no initial symptoms and are unaware of the need to seek treatment. According to data published by the World Health Organization, HCV infects an estimated 180 million people worldwide and is the leading cause of liver transplantation in the developed world. The current standard of care for HCV infection is treatment with interferon alpha (INFα) and ribavirin and is not effective in approximately 50% of the patients, according to the American Journal of Managed Care 2004 . We are collaborating with Hadassah Medical Organization to develop a microRNA-based drug for HCV infection through the discovery of HCV microRNAs and human microRNAs whose levels are affected by HCV infection. We have the exclusive right to commercialize the results of this research.

Other viruses

We are collaborating with Ben-Gurion University of the Negev to find the role of human and viral microRNAs in several infectious diseases for therapeutic uses. The research encompasses FluA, HSV1/2, RSV, EBV and several strains of HPV. All of these viruses are major health concerns worldwide.

Our Intellectual Property Strategy and Position

Our success will depend significantly on our ability to:

·

obtain and maintain patent and other proprietary protection for the technology, inventions and improvements we consider important to our business;

·

defend our patents;

·

preserve the confidentiality of our trade secrets; and

·

operate without infringing the patents and proprietary rights of third parties.

We believe that we were the first commercial enterprise to focus on the emerging microRNA field, and as a result, we have developed an early and strong intellectual property position related to the development and commercialization of research, diagnostic and therapeutic products and other applications based on microRNAs. Our patent strategy is to seek broad coverage on all of our identified microRNA sequences and then later file patent applications claiming composition-of-matter on individual microRNAs of commercial interest. We will also file applications which claim groups of microRNAs which are grouped for example by common functional features, chromosomal locations of the microRNA genes. We have filed, and will continue to file, patent applications that claim method-of-use for specific diagnostic and therapeutic applications as we or our collaborators develop them. We believe this approach will provide strong and broad patent protection for a large number of microRNAs that we have discovered and may provide us with a competitive advantage over new entrants to the field.

As of August 31, 2006, we had 49 pending patent applications in the microRNA field: 42 U.S. applications, five PCT applications, and two European applications. Of these patent applications, 27 claim human microRNAs, 13 claim viral microRNAs, three claim bacterial applications of microRNAs and six contain claims related to our discovery process. Five of these applications contain claims directed to prostate, lung, liver and bladder cancer diagnostic applications and prostate cancer therapeutic applications.

55

Genes and related nucleic acids are patentable under U.S. and international patent law. To date, patent protection for numerous human genes has been obtained in the U.S. and elsewhere. MicroRNAs are derived from naturally occurring genes, and as such, we believe, are similarly patentable under U.S. and international patent law. However, since the field of microRNAs is relatively new, to date, only one patent related to plant microRNAs has been issued to a third party, and none yet have been issued with respect to human microRNAs or microRNAs of other organisms.  

The requirements of the PTO for obtaining patent protection on a gene were significantly tightened in 2001. In order to obtain patent protection for microRNAs, it is necessary that our patent applications, among other requirements:

·

provide for utility and function for each microRNA sequence;

·

claim specific microRNA sequences as opposed to general mechanism or concept; and

·

identify the functional fragment of each microRNA sequence.

Our patent applications attempt to address these issues by identifying disease targets for each of our microRNA sequences, claiming specific microRNA sequences and identifying and claiming minimal functional portions of microRNAs. We believe this approach avoids common mistakes made by others in the past with respect to attempts to patent genes and, if patents are issued, will make it more difficult for competitors to design around our patents.

Our intellectual property strategy is closely coordinated with our research and development plan and we have an ongoing three-tier approach to obtaining patent protection, which is illustrated and described below:

Our Discovery Process and Related Intellectual Property Strategy

First Tier: Composition-of-Matter Patents on Informatically Identified MicroRNAs

We have filed a first tier of “master” patent applications claiming composition-of-matter for microRNAs that we have predicted and identified by nucleotide sequences using our discovery process. Our patent applications claim approximately 10,000 microRNAs that were identified using this approach and that we believe are likely microRNA candidates. For each of the potential microRNAs claimed in these patent applications, a specific function and utility are described based on informatically identified targets of these potential microRNAs that are known to be associated with a disease. Based on our understanding of their sequences and identified targets, we have applied for patent protection on each of the predicted microRNAs and their variants. We have filed 38 patent applications with composition-of-matter claims related to informatically predicted microRNAs and we expect to file additional first tier applications in the future.

56

Second Tier: Composition-of-Matter Patents on Biologically Validated MicroRNAs

We have filed a second tier of patent applications claiming patent coverage for the composition-of-matter of microRNAs that we have either detected by microarray or biologically validated by sequencing or qRT-PCR. In addition to the function and utility based on informatically calculated targets, microRNAs claimed in these patent applications are further described as potential markers of a disease, as supported by differential expression of these microRNAs in healthy versus diseased tissue. We have filed 13 patent applications with composition-of-matter claims related to validated microRNAs and we expect to file additional second tier applications in the future.

Third Tier: Method-of-Use Patents

We have filed a third tier of patent applications claiming patent coverage for the method-of-use of microRNAs, including diagnostic and therapeutic uses for specific diseases. In the future, we expect that this tier of patent applications will include applications which we will file ourselves and those that we will file jointly with academic, medical and commercial partners with whom we collaborate. We have filed five patent applications with method of use claims related to diagnostic and therapeutic uses of microRNAs.

Individual patents extend for varying periods depending on the effective date of filing of the patent application or the date of patent issuance, and the legal term of the patents in the countries in which they are obtained. Generally, patents issued in the U.S. are effective for:

·

the longer of 17 years from the issue date or 20 years from the earliest effective filing date, if the patent application was filed prior to June 8, 1995; and

·

20 years from the earliest effective filing date, if the patent application was filed on or after June 8, 1995.

All of our current patent applications were filed after June 8, 1995.

The term of foreign patents varies in accordance with provisions of applicable local law, but typically is 20 years from the earliest effective filing date. In addition, in some instances, a patent term in the U.S. and outside of the U.S. can be extended to recapture a portion of the term effectively lost as a result of the health authority regulatory review period. These extensions, which may be as long as five years, are directed to the approved product and its approved indications. We intend to seek such extensions as appropriate. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that a related patent may remain in force for a short period following commercialization, thereby reducing the advantage of the patent to our business and products.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications will result in the issuance of any patents or if issued will assist our business. Any patents that may issue in the future may be challenged, invalidated or circumvented. This could limit our ability to stop competitors from marketing related products and reduce the length of term of patent protection that we may have for any products. In addition, the rights granted under any patents which may issue may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Our competitors may develop similar technologies, duplicate any technology developed by us, or use their patent rights to block us from taking full advantage of the market.

In addition to patents, we may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect the trade secrets in our proprietary technology and processes, in part, by entering into confidentiality agreements with commercial partners, collaborators, employees, consultants, scientific advisors and other contractors and into invention assignment agreements with our employees and some of our commercial partners and consultants. These agreements are designed to protect our proprietary information and, in the case of the invention assignment agreements, to grant us ownership of the technologies that are developed. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors.

57

Strategic Alliances and Research and License Collaborations

License Agreement with Applied Biosystems

In April 2005, we entered into a license agreement with Ambion, Inc., which was acquired by Applied Biosystems Group of Applera Corporation in March 2006. Under this agreement, we have granted Applied Biosystems a non-exclusive license to all of our microRNA sequences, both validated and unvalidated, for use in products to be used either as research reagents or in the performance of research services. The license expressly excludes any right to sell for diagnostic use any products or services containing our microRNAs or designed to detect or affect any of our microRNAs. We are obligated to provide Applied Biosystems all microRNA sequences developed or predicted by us for use in research products or services. Applied Biosystems may also carry out validation research on our microRNA sequences, and if it does so, it must provide us with the results.

Under this agreement, we received upfront payments deductible against future royalties. We are also entitled to receive royalty payments based on net sales of products and services in the research field that incorporate or are designed to detect or otherwise affect, one of our microRNAs, for the life of any patent or patent application covering such microRNA in the product or service. If the product or service uses both our microRNAs and non-Rosetta microRNAs, the royalty payable will be reduced by being multiplied by the ratio of our microRNAs to all of the microRNAs in the product or service. To date, we have received $228,000 under this agreement.

Should Applied Biosystems request that we file additional patent applications or expedited applications on certain of our microRNA sequences, we are obligated to do so; however, Applied Biosystems must cover the resulting costs. We have the right, but not the obligation, to enforce our patents relating to our microRNA sequences. Applied Biosystems may request that we take such action with respect to third-party products competing with Applied Biosystems products. If we decline to do so within three months of receiving such a request, Applied Biosystems may undertake such action at its own expense. We are required to indemnify Applied Biosystems for damages payable to third parties in the event that one of our microRNA sequences is determined to infringe a valid patent claim of a third party.

In addition, if we grant a license to a third party in the research field on terms more favorable than those currently in effect with Applied Biosystems, it would have the right to modify the terms of the license to adopt the more favorable terms. Applied Biosystems may terminate the agreement without cause, and we may terminate the agreement for non-payment of amounts due if the non-payment is not cured within sixty days after notice.

Collaboration and License Agreement with Asuragen

In January 2006, we entered into a collaboration and license agreement with Ambion Diagnostics, Inc., now Asuragen, Inc. Under the agreement, Asuragen and we agreed to work together to develop products and services for the diagnosis of prostate cancer using microRNAs. We have granted to Asuragen, a worldwide, exclusive license to commercialize products and services for the diagnosis of prostate cancer using our microRNAs. Under the agreement, “diagnosis” includes determination of the presence of disease, determination of the stage, progression or severity of the disease, determination of the effect of a particular treatment on the disease and the selection of patients for a particular treatment.

Asuragen and we have agreed to initially work independently during a discovery stage to identify prostate-specific diagnostic opportunities and potential markers for use in the diagnosis of prostate cancer. Each of the parties will also work independently on the development of platform technologies that could be used in the creation of diagnostic assays that can be incorporated into potential products for the diagnosis of prostate cancer. After the discovery stage is completed, we will meet to exchange materials and data resulting from their independent activities during the discovery stage and to determine the indications to be pursued for clinical development of products and services for the diagnosis of prostate cancer. We will then agree upon a development plan reflecting these matters and setting forth the specific responsibilities of each party. Each party will bear its own expenses in both the independent discovery stage activities and in performing its responsibilities under the development plan.

After the discovery stage, we will work together with Asuragen to discover and validate markers that we both believe will be appropriate for a diagnostic assay. Asuragen will then be responsible for developing a diagnostic assay to measure these markers and for obtaining any required regulatory approvals. Asuragen will have the right to commercialize any assay developed, and will pay us royalties at the amount based on net sales of certain products and services. We bear the responsibility for performing certain market development activities in support of the

58

products and services. Under this agreement we are entitled to royalty payments based on net sales of products developed in this collaboration.

Each party is responsible for prosecution and maintenance of its own patent rights. Both parties will cooperate in the prosecution and maintenance of joint patent rights. With regard to third-party infringement of patent rights, we have the first right and option to take action to eliminate such infringement with respect to our patent rights, and Asuragen has first rights and option to take action with respect to its patent rights and with respect to joint patent rights. If Asuragen does not take steps to enforce joint patent rights within three months of notification of infringement, we have the right and option to do so at our expense. Asuragen bears primary responsibility for defense against infringement claims by third parties. The parties have agreed to mutually indemnify one another against liabilities incurred as a result of actions by third parties. Asuragen is obligated to maintain comprehensive insurance coverage and to name us as an additional covered party on all plans.

This agreement will remain in effect for as long as Asuragen continues its development of products and services for the diagnosis of prostate cancer using our microRNAs or if Asuragen is commercializing one or more of such products at the time it ceases development, until the last patent rights associated with such products expire. Either party may terminate the agreement in the event of an uncured material breach by the other party or upon specified bankruptcy or insolvency events involving the other party. Upon termination by us for an uncured material breach by Asuragen, all rights granted by us to Asuragen shall cease. In that event, Asuragen would be required to transfer to us all applicable regulatory filings and will be deemed to have granted to us a worldwide, exclusive license under Asuragen’s patent rights and interests in any joint patent rights to develop and commercialize prostate cancer diagnostic products and services, subject to the payment of royalties to Asuragen. If the agreement is terminated by Asuragen upon our uncured material breach, Asuragen shall continue to have the licenses and rights contained in the agreement to develop and commercialize products and services for the diagnosis of prostate cancer, subject to continued payment of royalties as required by the agreement.

Research Collaboration Agreement with Isis Pharmaceuticals

In January 2006, we entered into a research collaboration agreement with Isis Pharmaceuticals, Inc., under which we agreed to work together for an initial period of two years to perform specified experiments to discover and develop drugs that regulate microRNAs involved in HCC, the most prevalent type of liver cancer. Each party will fund its own efforts during the initial period. Either party may terminate the agreement during the initial period on 60 days’ notice to the other party for any reason. At the end of the initial period, we will either agree to jointly develop any resulting products and share the resulting expenses and revenues, or, if one of us does not wish to jointly develop any of those products, that party will grant an exclusive license to the other party to develop those products on pre-agreed financial terms, which shall include development milestone payments up to a maximum aggregate of $27 million and the payment of royalties based on net sales of collaboration products. If neither party wishes to develop a product, we will jointly seek to license it to a third party.

Each party bears expenses for the prosecution and maintenance of its own patents and the parties have agreed to designate primary responsibility to one or other of the parties, for the prosecution and maintenance of any products that the parties have developed through their collaboration and have agreed to pursue. The parties have agreed to mutually indemnify one another for liabilities incurred as a result of actions brought by third parties.

Funding of the HCC Project by BIRD Foundation Grant

In June 2006, a conditional grant of $1.0 million from the Israel-U.S. Binational Industrial Research and Development Foundation, or BIRD Foundation, was approved for the HCC joint research project with Isis Pharmaceuticals. The BIRD Foundation promotes strategic partnerships between Israeli and American companies without receiving any rights in the participating companies or in the project itself. The BIRD foundation works in cooperation with the Chief Scientist’s Office at the Ministry of Trade, Industry and Employment in Israel, and with the U.S. Commerce Department’s National Institute of Standards and Technology. Under the terms of the grant, each party will receive $500,000, but is obligated to repay this amount if there is a submission of an investigational new drug application, or IND, to the FDA within 36 months. Since the foundation shares the risk, if the project fails to reach the IND submission phase during this period, the grant does not need to be repaid. The receipt of the grant is subject to the execution of a definitive funding agreement between us, Isis Pharmaceuticals and the BIRD Foundation.

59

HCV Collaboration with Hadassah Medical Organization

In May 2005, we entered into an agreement with Hadasit Medical Research Services and Development Ltd., a subsidiary of Hadassah Medical Organization, to collaborate on research on the suppression of HCV using microRNAs. Under the agreement, we were granted a perpetual, worldwide, royalty bearing exclusive license to exploit, commercialize and sublicense any newly discovered microRNAs and other research data resulting from this collaboration. Hadasit bears primary responsibility for conducting the research contemplated under the agreement and for certain other tasks. We are responsible for certain specific research tasks and will bear all expenses associated with these tasks. As an example of the parties’ collaborative responsibilities, currently, the principal investigator from Hadasit working on the collaboration provides us with HCV infected liver cells and tissues from different species. We extract RNA from these samples and perform expression analysis in order to identify HCV-encoded microRNAs and host microRNAs which interact with the virus. The parties retain full rights to their own intellectual property; however, any newly discovered microRNAs and other research data resulting from this collaboration will be jointly owned by us and Hadasit. We have the right, but not the obligation, to commercialize discoveries made pursuant to the agreement.

We are responsible for all expenses related to patent prosecution, maintenance and enforcement of jointly owned intellectual property. To the extent we chose not to pay the costs of such patent prosecution, maintenance and enforcement, Hadasit will have the right to do so at its own expense upon reasonable written notice to us and, we will be required to assign all our rights, title and interest in the joint patent to Hadasit. We have first right, but not the obligation, to enforce joint patent rights against third-party infringement. We are obligated to indemnify Hadasit against any liabilities arising because of our use of the joint patents; excluding patent infringement claims brought by third parties.

We are obligated to pay Hadasit license fees and royalties in amounts based on a percentage of any net revenues arising from the commercialization of any resulting research data covered by a joint patent, and a percentage of any net revenues arising from the commercialization of all other resulting research data. The agreement terminates upon the expiration of any and all related joint patents resulting from the collaboration, or if no patent ever issues, ten years after the first commercial sale of the first licensed product developed under the agreement.  At this stage, the agreement has an indeterminate length, since no joint patents have been issued yet. If the collaboration does not generate joint patents or other research data with commercial value, we may terminate the agreement with 60 days’ prior written notice.

Research Collaboration Agreement with Hadassah Medical Organization

In June 2006, we entered into a research collaboration agreement with Hadasit Medical Research Services and Development Ltd., a subsidiary of Hadassah Medical Organization, to collaborate with Hadasit on research in the field of microRNAs. The research project is to include multiple trials, the terms of which will be agreed upon from time to time by us and Hadasit. Under the agreement, we were granted an exclusive license to all research results and patents generated from the research. In consideration for such license we are obligated to pay Hadasit royalties, and a percentage of any fees and royalties we receive from sublicenses. We have the right, but not the obligation, to commercialize discoveries made pursuant to the agreement.

Intellectual property rights resulting from the research will be jointly owned by us and Hadasit. We are responsible, at our sole expense, for the preparation, filing, prosecution and maintenance of all patent rights subject to the agreement. However, if we wish to cease prosecution or maintenance of the patent rights, we must notify Hadasit, and it may continue prosecution and maintenance at its own expense. In the event that Hadasit chooses to do so, we will lose all rights to any such patent rights and any license we have been granted to such patent rights shall terminate.

We have an obligation to indemnify Hadasit and the Hadassah Medical Organization for any liabilities related to the research or the commercialization of new products based on the research results and to maintain comprehensive insurance. Each trial under the agreement will be terminable as determined by the parties on a trial by trial basis.

Collaboration and License Agreement with U.S. Genomics

In May 2006, we entered into a collaboration and license agreement with U.S. Genomics Inc. for the development of a non-invasive microRNA-based early detection test for lung cancer combining Rosetta Genomics’ proprietary microRNAs and U.S. Genomics’ proprietary microRNA expression profiling platform. Under the

60

agreement’s development plan, each party has agreed to undertake a portion of the experimental work required at various phases, to bear the costs associated with the work and to supply the other party with proprietary materials that party needs to complete its work. Specifically, we are responsible for obtaining all clinical samples required, for undertaking the experimental work in certain early stages of the collaboration as determined by the development plan of the agreement, for providing U.S. Genomics with purified RNA for its work in the early stages of the development plan and for funding and performing Phase III of the development plan. U.S. Genomics is responsible for conducting all experimental work during the clinical phases of the development plan, for funding and supporting any required placement of instruments and reagents during the development plan and for funding and performing any commercially reasonable platform development work necessary for the development of the project. We will bear the costs associated with regulatory compliance and trademark procurement. Under the agreement, any new intellectual property rights generated by the collaboration and solely related to microRNAs will be owned by us, whereas new intellectual property rights generated by the collaboration solely related to the microRNA expression profiling platform will be owned by U.S. Genomics. New intellectual property rights that combine microRNAs and the expression profiling platform will be jointly owned. Intellectual property rights not falling under the previous definitions will be owned by the inventor of such rights, and will be licensed to the other party royalty free for use related to its original intellectual property.

Each party is responsible for the prosecution, maintenance and enforcement of its own patent rights and the parties have agreed to share the expenses of and cooperate in the prosecution, maintenance and enforcement of joint patent rights. The parties have agreed to mutually indemnify one another against liabilities arising from actions brought by third parties. Both parties are obligated to maintain comprehensive product liability insurance.

Under the agreement we were granted a worldwide, non-exclusive license to exploit, use, develop and commercialize any intellectual property rights owned by U.S. Genomics and related to the microRNA expression profiling platform, in the field of early detection of lung cancer, including the right to sublicense. In return U.S. Genomics is entitled to royalty payments based on net sales and a percentage of any sublicense revenues we receive. In addition, U.S. Genomics will provide us with the technological platforms and reagents necessary for the research, development and validation of the early detection test for Lung Cancer.

License Agreement with The Rockefeller University

In May 2006, we signed a royalty-bearing, co-exclusive, worldwide license agreement with The Rockefeller University. Under this agreement, we were granted the right to make, use and sell Rockefeller’s proprietary microRNAs for diagnostic purposes including a limited right to sublicense. Our right to sublicense is limited to sublicenses we grant as part of a license that includes other technology or patent rights of ours. The agreement covers microRNAs and microRNA candidates, including approximately 50 biologically validated human microRNAs and approximately 30 biologically validated viral microRNAs discovered by researchers at The Rockefeller University and for which it has filed patent applications. These microRNAs can be licensed by Rockefeller in the diagnostics field to three additional parties. In consideration for this license, we paid an initiation fee and will pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of our revenues from any sublicenses. To date, we have paid Rockefeller an aggregate of $70,000 under this agreement, which includes reimbursement of our pro rata share of certain patent-related expenses. Rockefeller is obligated to notify us of any license it grants to a third party at a lower royalty rate and we will have the right to modify the terms of our license to adopt all of the material terms and conditions of that license.

Rockefeller controls prosecution, maintenance and enforcement of all the licensed patent rights; however, we are responsible for a pro rata share of associated costs. Also, if Rockefeller elects not to take action against a claim of infringement of the licensed patent rights, we may undertake such action at our own expense. We are obligated to indemnify Rockefeller against any liabilities arising from our development and use of the licensed microRNAs and any actions brought by third parties or related to clinical trials or studies. We are also required to maintain comprehensive insurance coverage.

The agreement will terminate upon the later of the expiration or abandonment of the last patent to expire or become abandoned. If no patent ever issues, the agreement will terminate ten years after the first commercial sale of the first licensed product. Based on an estimate of the date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $920,000 in aggregate annual license maintenance fees over the term of this agreement. Rockefeller has the right to terminate the agreement if we are more than thirty days late in meeting our payment obligations and do not pay in full within ten days of Rockefeller’s written demand; or upon our uncured

61

material breach. We can terminate the agreement by providing sixty days written notice to Rockefeller, ceasing all use of the licensed products, terminating any sublicenses granted under the agreement and paying all amounts owed to Rockefeller through the date of termination.

License Agreement with Garching Innovation GmbH (Max Planck)

In June 2006, we entered into a royalty-bearing, co-exclusive, worldwide license agreement with Garching Innovation GmbH, the technology transfer agency of the Max Planck Society. Under this agreement, we licensed from Garching the rights to its proprietary microRNAs for diagnostics purposes. The agreement covers microRNAs and microRNA candidates, including approximately 110 biologically validated human microRNAs, discovered by the researchers of the Max-Planck-Institute for Biophysical Chemistry in Goettingen. In consideration for this license, we paid an initiation fee, and are required to pay a fixed annual license maintenance fee, royalties based on net sales and a percentage of our revenues from any sublicenses. To date, we have paid Garching an aggregate of $215,000 under this agreement.

These microRNAs can be licensed by Garching for diagnostics purposes to three other parties. Garching is obligated to notify us of any more favorable license in the diagnostics field it grants for these microRNAs, in which event we shall have the right to adopt all material terms of such license. We have the right to enter sublicenses, only in the event that the granted sublicense includes a license to microRNAs owned by us as well, is reasonably necessary for us in order to further develop and/or commercialize a specific product, and Garching has given its prior consent to such sublicense.

Garching is responsible, in its sole discretion, to apply for, seek issuance of, maintain and prosecute the licensed patent rights, and we have the right to comment on the documents to be filed by the patent office. We are required, however, to pay a pro rata share of associated costs. We are obligated to indemnify Garching against any liabilities arising from any use by us, our affiliates, sublicensees and sales partners of the patent rights, the development and use of any product, process or service under the agreement, and the use by third parties of any products, processes or services sold by us. We are also required to maintain comprehensive insurance coverage.

The agreement terminates upon the expiration or abandonment of all issued and filed licensed patents. Based on an estimate of the date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $694,000 in aggregate annual license maintenance fees over the term of this agreement. We have the right to terminate the agreement with three months’ prior written notice. We have the obligation to use commercially reasonable efforts to develop and commercialize the products and services based on the licensed patents in the field of diagnostics. In the event we cease carrying out our business related to the agreement we must notify Garching and then both parties have the right to terminate the agreement with three months’ prior notice. Garching also has the right to terminate the agreement if we challenge one of the licensed patents; if we fail to cure a breach within sixty days of receiving notice of such breach; or if we fail to pay within 30 days of a notice requiring a payment. The agreement will terminate automatically upon filing of bankruptcy or insolvency proceedings by or against us, or upon the assignment of all or a substantial portion of our assets for the benefit of creditors.

License Agreement with Johns Hopkins University

In August 2006, we signed a royalty-bearing, exclusive, worldwide license agreement with Johns Hopkins University. Under this agreement, we have exclusively licensed from Johns Hopkins the rights to its proprietary microRNAs for all fields and applications. The agreement covers approximately 130 biologically validated microRNAs. We also have the right to further sublicense these rights, provided that such sublicense is consistent with the terms of our license agreement. In consideration for this license we paid an initiation fee, and are required to pay minimum annual royalties, royalties based on net sales and a percentage of our revenues from any sublicense. To date, we have paid Johns Hopkins an aggregate of $125,000 under this agreement.

We are obligated to perform commercially reasonable diligent efforts in the development of products including or using the licensed microRNAs. In the event that Johns Hopkins has clinical evidence demonstrating the feasibility of a certain use of the microRNAs, and a commercially reasonable offer from a third party for a license for such use, then upon notice from Johns Hopkins, we are obligated to either initiate development of such use, or sublicense such use to a third party. If within six months of the notice, we have neither initiated development nor sublicensed or been working diligently to sublicense such use, Johns Hopkins may terminate the license for such use.

62

Johns Hopkins is responsible to file, prosecute and maintain the licensed patent rights, and we have the right to comment on and advise Johns Hopkins with respect to such matters. We are required to pay all expenses related to filing, prosecution and maintenance of the licensed patent rights, unless we provide Johns Hopkins notice that we elect not to do so. If we so elect, Johns Hopkins may file, prosecute or maintain such patent rights at its own expense and any license we have with respect to such patent rights shall terminate. We have the right but not the obligation to enforce the patent rights against infringement. No patent applications covering these microRNAs have been filed yet.

We are obligated to indemnify Johns Hopkins against any liabilities arising out of use by us, our affiliates or sublicensees of the licensed microRNAs. We are also obligated to establish and maintain product liability or other appropriate insurance prior to initial human testing or first commercial sale of any product incorporating the licensed microRNAs.

The agreement terminates with respect to each country in which a patent has issued upon the expiration of the last to expire patent covered by the terms of the agreement in such country. If no patents ever issue in a country but patent applications are filed in such country, the agreement will expire with respect to such country upon the cancellation, abandonment, withdrawal or disallowance of all claims under all patent applications in that country or at such time as there is no claim that has been pending in such country for less than six years from the date such claim was filed in a non-provisional patent application in that country. Based on an estimate of the date of expiration of the last patent to expire, we estimate that we will pay a minimum of approximately $2,275,000 in aggregate annual royalties over the term of the agreement. In addition, either party may terminate the agreement (1) upon the filing of bankruptcy or insolvency proceedings with respect to the other party or (2) if the other party is in material breach of the agreement and such breach is not cured within 30 days of notice. We also have the right to terminate the agreement for any reason upon 90 days notice.

Research Collaboration Agreement with Tel Hashomer Medical Research Infrastructure and Services, Ltd.

In May 2006, we entered into a research collaboration with Tel Hashomer Medical Research Infrastructure and Services, Ltd., or THM. Under this agreement, THM will provide us with patient samples and related clinical data so that we may research microRNA expression in lung cancer patients. This collaboration will consist of multiple trials and we will oversee the conduct of the trials. The term of each trial and the parties’ rights to terminate the trial will be specified by the parties on a trial-by-trial basis. We will own all intellectual property rights resulting from the collaboration, and we have the sole discretion to prosecute, maintain and enforce these patient rights. THM shall be permitted to use the results of this research collaboration for research and academic purposes. We have agreed to bear a portion of the costs related to the research.

We are obligated to pay THM a percentage of royalties on net sales of any products we sell based upon or using the results from this research collaboration. Furthermore, we must pay THM a percentage of license fees or milestone payments and royalties that we receive from the grant of any licenses for the use of information, data, technology, or products directly resulting from this research collaboration.

We bear sole responsibility for payment of all costs associated with liabilities to third parties arising as a result of the performance of the trials or the actions of any of our personnel. We are obligated to indemnify THM against liabilities to third parties and to maintain adequate and appropriate insurance coverage.