Helix BioMedix (HXBM) 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to            

Commission file number: 33-20897-D

HELIX BIOMEDIX, INC.

(Exact name of registrant as specified in its charter)

Delaware	91-2099117
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

22118-20^th Avenue SE, Suite 204, Bothell, Washington 98021

(Address of principal executive offices)

(425) 402-8400

(Registrant’s telephone number, including area code)

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

    Yes  ¨    No  x

As of July 22, 2008, 25,653,512 shares of the registrant’s common stock were issued and outstanding.

HELIX BIOMEDIX, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Balance Sheets (unaudited)	1
Condensed Statements of Operations (unaudited)	2
Condensed Statements of Stockholders’ Equity (Deficit) and Total Comprehensive Income (Loss) (unaudited)	3
Condensed Statements of Cash Flows (unaudited)	4
Notes to Condensed Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 4. Controls and Procedures	31
PART II - OTHER INFORMATION
Item 1A. Risk Factors	32
Item 4. Submission of Matters to a Vote of Security Holders	32
Item 6. Exhibits	33
Signatures	34

PART I - FINANCIAL INFORMATION

ITEM 1. Financial Statements.

HELIX BIOMEDIX, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	2,375,403		$	461,290
Marketable securities, current		50,000			700,000
Accounts receivable, net		40,559			83,915
Inventory		77,566			65,279
Prepaid expenses and other current assets		101,315			144,074
Total current assets		2,644,843			1,454,558
Marketable securities, non-current		137,550			—
Deposits		8,522			8,522
Property and equipment, net		122,663			126,509
Intangible assets, net		393,043			432,482
Total assets	$	3,306,621		$	2,022,071
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	107,479		$	95,071
Accrued compensation and benefits		159,129			63,813
Accrued expenses		42,045			60,269
Deferred revenue		—			130,000
Total current liabilities		308,653			349,153
Deferred rent		2,216			2,205
Convertible note payable, related party		3,000,000			—
Accrued interest on convertible note payable, related party		92,712			—
Total liabilities		3,403,581			351,358
Commitments and contingencies
Stockholders’ equity (deficit):
Preferred stock, $0.001 par value, 25,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value, 100,000,000 shares authorized; 25,653,512 shares outstanding at June 30, 2008, and December 31, 2007		25,654			25,654
Additional paid-in capital		30,150,042			29,211,972
Accumulated deficit		(30,290,206	)		(27,566,913	)
Accumulated other comprehensive income (loss)		17,550			—
Total stockholders’ equity (deficit)		(96,960	)		1,670,713
Total liabilities and stockholders’ equity (deficit)	$	3,306,621		$	2,022,071

The accompanying notes are an integral part of the financial statements.

1

HELIX BIOMEDIX, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended June 30,						Six months ended June 30,
	2008			2007			2008			2007
Revenue:
Licensing and development fees	$	59,330		$	16,747		$	206,392		$	46,241
Peptide sales		6,143			59,507			99,451			88,435
Peptide sales, related party		—			64,400			—			64,400
Administrative services revenue, related party		21,772			—			21,772			—
Total revenue		87,245			140,654			327,615			199,076
Operating expenses:
Cost of peptide sales		6,085			10,421			75,469			10,421
Cost of administrative services revenue, related party		21,772			—			21,772			—
Other cost of revenue		—			—			38,781			—
Research and development		198,238			202,458			393,415			407,955
Marketing and business development		89,041			105,123			203,728			209,334
General and administrative		586,650			502,004			1,020,019			892,711
Accounting, legal and professional fees		159,502			133,746			320,317			282,223
Depreciation and amortization		34,901			43,542			69,950			87,964
Total operating expenses		1,096,189			997,294			2,143,451			1,890,608
Loss from operations		(1,008,944	)		(856,640	)		(1,815,836	)		(1,691,532	)
Other income (expense):
Interest income		17,074			25,478			35,864			47,881
Interest expense on convertible note payable, related party		(63,120	)		—			(93,698	)		—
Accretion of discount on convertible note payable, related party		(546,011	)		—			(831,426	)		—
Change in value of derivative instruments, including related party		152,706			—			11,803			—
Unrealized loss on marketable securities		—			—			(30,000	)		—
Other income (expense), net		(439,351	)		25,478			(907,457	)		47,881
Net loss	$	(1,448,295	)	$	(831,162	)	$	(2,723,293	)	$	(1,643,651	)
Basic and diluted net loss per share	$	(0.06	)	$	(0.03	)	$	(0.11	)	$	(0.07	)
Weighted average shares outstanding		25,653,512			25,653,512			25,653,512			24,617,463

The accompanying notes are an integral part of the financial statements.

2

HELIX BIOMEDIX, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) AND TOTAL COMPREHENSIVE

INCOME (LOSS)

For the Year Ended December 31, 2007 and for the Six Months Ended June 30, 2008

(Unaudited)

	Common Stock			Additional Paid-in Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)		Stockholders’ Equity (Deficit)			Total Comprehensive Income (Loss)
	Number of Shares	Amount
Balance at December 31, 2006	22,788,514	$	22,788	$	26,908,198		$	(24,132,909	)	$	—	$	2,798,077		$	—
Proceeds from 2007 private placement, net	2,864,998		2,866		2,140,492			—			—		2,143,358
Stock-based compensation	—		—		163,282			—			—		163,282			—
Net loss for the year	—		—		—			(3,434,004	)		—		(3,434,004	)		(3,434,004	)
Balance at December 31, 2007	25,653,512		25,654		29,211,972			(27,566,913	)		—		1,670,713			(3,434,004	)
Stock-based compensation	—		—		122,721			—			—		122,721			—
Reclassification of warrants and options from equity to derivative liabilities	—		—		(1,255,317	)		—			—		(1,255,317	)		—
Extinguishment of convertible note payable, related party	—		—		733,317			—			—		733,317			—
Reclassification of warrants and options from derivative liabilities to equity	—		—		1,337,349			—			—		1,337,349			—
Unrealized gain (loss) on marketable securities	—		—		—			—			17,550		17,550			17,550
Net loss	—		—		—			(2,723,293	)		—		(2,723,293	)		(2,723,293	)
Balance at June 30, 2008	25,653,512	$	25,654	$	30,150,042		$	(30,290,206	)	$	17,550	$	(96,960	)	$	(2,705,743	)

The accompanying notes are an integral part of the financial statements.

3

HELIX BIOMEDIX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2008			2007
Cash flows from operating activities
Net loss	$	(2,723,293	)	$	(1,643,651	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		69,950			87,964
Stock-based compensation expense		122,721			77,544
Interest expense on convertible note payable, related party		93,698			—
Accretion of discount on convertible note payable, related party		831,426			—
Change in valuation of derivative instruments, including related party		(11,803	)		—
Unrealized loss on marketable securities		30,000			—
Changes in assets and liabilities:
Accounts receivable, net		43,356			(77,148	)
Accounts receivable from related party		—			(64,456	)
Inventory		(12,287	)		(34,799	)
Prepaid expenses and other current assets		42,759			19,274
Deposits		—			(4,311	)
Accounts payable		12,408			52,550
Accrued compensation and benefits		95,316			(81,588	)
Accrued expenses		(18,213	)		23,708
Deferred revenue		(130,000	)		(10,000	)
Net cash used in operating activities		(1,553,962	)		(1,654,913	)
Cash flows from investing activities
Purchases of marketable securities		—			(1,300,000	)
Proceeds from sales of marketable securities		500,000			525,029
Purchase of property and equipment		(26,665	)		(1,752	)
Net cash provided by (used in) investing activities		473,335			(776,723	)
Cash flows from financing activities
Proceeds from issuance of convertible note payable, related party		3,000,000			—
Financing costs related to convertible note payable, related party		(5,260	)		—
Proceeds from issuance of common stock and warrants, net		—			2,143,358
Net cash provided by financing activities		2,994,740			2,143,358
Net increase in cash and cash equivalents		1,914,113			(288,278	)
Cash and cash equivalents at beginning of period		461,290			1,276,901
Cash and cash equivalents at end of period	$	2,375,403		$	988,623
Supplemental cash flow information
Non-cash investing and financing activities:
Reclassification of warrants and options from equity to derivative liabilities	$	1,255,317			—
Extinguishment of convertible note payable, related party	$	733,317		$	—
Reclassification of warrants and options from derivative liabilities to equity	$	1,337,349		$	—

The accompanying notes are an integral part of the financial statements.

4

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Preparation

The accompanying unaudited condensed financial statements of Helix BioMedix, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted for interim financial information in accordance with the SEC rules and regulations for quarterly reporting. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company’s financial position and its results of operations and cash flows for the periods indicated. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2007, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 21, 2008.

Use of Estimates

The preparation of the Company’s financial statements in conformity with the United States generally accepted accounting principles requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. Significant items subject to such estimates and assumptions include the carrying amount of investments, property, plant and equipment, and intangibles; valuation allowances for receivables, inventories and deferred income tax assets; and valuation of stock-based compensation, notes payable and obligations related to derivative instruments. Actual results could differ from those estimates.

The results of operations for the three and six months ended June 30, 2008, are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 31, 2008.

Reclassification

Reclassifications of prior years’ balances have been made to conform to the current format.

In the Condensed Statements of Operations, the reclassifications include (1) consulting fees being included in general and administrative expenses as they were not significant for the periods presented, (2) marketing and business development expenses being separated from general and administrative expenses, and (3) fees received from a related party and associated costs being presented as administrative services revenue and cost of administrative services revenue, respectively. These reclassifications had no impact on the financial results in the periods presented.

Revenue Recognition

The Company generates revenue from technology licenses, joint development agreements, peptide sales and providing administrative services to a related party. Revenue under technology licenses may include up-front payments and royalties from product sales. Revenue associated with joint development agreements primarily consists of payments for completion of development milestones. For agreements with multiple elements, the Company follows Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” to determine whether each element can be separated into a unit of accounting based on the following criteria: (1) the delivered items have value to the customer on a stand-alone basis; (2) any undelivered items have objective and reliable evidence of fair value; and (3) delivery or performance of the undelivered items that have a right of return is probable and within the Company’s control. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the Company allocates revenue among the separate units of accounting based on their estimated fair values. If the criteria are not met, elements included in an arrangement are accounted for as a single unit of accounting and revenue is deferred until the period in which the final deliverable is provided. When the period of deferral cannot be specifically identified from the agreement, the Company estimates the period based upon other factors contained within the agreement. Management continually reviews these estimates, which could result in a change in the deferral period and the timing and the amount of revenue recognized.

5

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

• Licensing Fees. The Company recognizes up-front license payments at the point when persuasive evidence of an agreement exists, delivery has occurred or services have been performed, the price is fixed and determinable and collection is reasonably assured. Royalties from licensees are recorded as earned when royalty results are reliably measured and collection is reasonably assured. The Company relies on the licensees to provide royalty information as it cannot be reasonably estimated.

• Development Fees.The Company records revenue associated with performance milestones as earned when it has completed the specific milestones as defined in the joint development agreements and there are no uncertainties or contingencies regarding collection of the related payment. Payments received for which the earnings process is not complete are recorded as deferred revenue.

• Peptide Sales. Peptide sales are recognized when title transfers to the customer, typically upon shipment, and collection is reasonably assured. In the future, peptide sales may be transacted directly between the licensees and a third-party manufacturer, which could have an adverse effect on the Company’s revenue.

• Administrative Services Revenue, Related Party.Administrative services revenue consists of fees received from DermaVentures, LLC, a related party, for marketing campaign costs associated with DermaVentures’ product line and other out-of-pocket expenses the Company incurs on DermaVentures’ behalf. Administrative services revenue is typically invoiced to DermaVentures at cost and is recorded as earned when services have been rendered, no obligations remain outstanding and collection is reasonably assured. In accordance with EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” fees received from DermaVentures are reported as administrative services revenue, while related costs are included in operating expenses in the statements of operations.

Derivative Instruments

The Company accounts for its derivative instruments in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), and Emerging Issues Task Force Issue (EITF) No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (EITF 00-19), which require derivative instruments to be classified as permanent equity, temporary equity or as assets or liabilities. In general, the Company’s derivative instruments that either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair value and its derivative instruments that require settlement in shares are recorded as equity instruments.

Valuation of Warrants and Stock Options Unrelated to the Issuance of Convertible Note Payable

In connection with the issuance of the convertible note payable on February 14, 2008 to a related party and the potential contractual obligation to grant the associated warrant, the Company classified the fair value of warrants and non-employee stock options (Other Warrant Liabilities) as derivative liabilities as there was a potential that the Company would not have a sufficient number of authorized common shares available to settle these instruments (See Note 2). The Company valued these warrants and options using a Black-Scholes model and used estimates for an expected dividend yield, a risk-free interest rate, and expected volatility (see Note 6). At each reporting period, as long as the warrants and non-employee stock options were outstanding and there was the potential for an insufficient number of authorized shares available to settle these instruments, the warrants and options were revalued and any difference from the previous valuation date was recognized as a change in fair value in the Company’s statement of operations.

On June 27, 2008, the Company entered into an amendment to the convertible note payable (See Note 2) which effectively extinguished the original note payable and related derivative instruments, including the potential contractual obligation to grant the associated warrant. In accordance to the guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,” the Company accounted for this modification as an extinguishment of the original note payable and recorded the amended note payable as new debt. Among other changes, the amended note limits the number of shares issuable under it and therefore eliminates the net-cash settlement requirement for Other Warrant Liabilities. As a result, the Company is no longer required to account for Other Warrant Liabilities as derivative liabilities. The June 27, 2008 fair value of the Other Warrant Liabilities was therefore reclassified to additional paid-in capital.

6

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Valuation of Warrant Related to Convertible Note Payable, Related Party

In accordance with SFAS 133 and EITF 00-19, the Company classified the fair value of the warrant that may have been granted in connection with the convertible note payable issued on February 14, 2008 (See Note 2) as a derivative liability as there was a potential that the Company would not have a sufficient number of authorized common shares available to settle this instrument. The Company valued this warrant using a Black-Scholes model and used estimates for an expected dividend yield, a risk-free interest rate, and expected volatility together with management’s estimate of the probability of issuance of the warrant. At each reporting period, as long as the warrant was potentially issuable and there was a potential for an insufficient number of authorized shares available to settle the warrant, the warrant was revalued and any difference from the previous valuation date was recognized as a change in fair value in the Company’s statement of operations.

On June 27, 2008, the Company entered into an amendment to the convertible note payable (See Note 2) which effectively extinguished the original note payable and related derivative instruments, including the potential contractual obligation to grant the associated warrant. The June 27, 2008 fair value of the warrant was reclassified to additional paid-in capital.

In connection with the issuance of the amended note payable, the Company issued to the related party a warrant to purchase up to 750,000 shares of the Company’s common stock at an exercise price of $1.00 per share. Pursuant to the guidance in EITF 00-19, this warrant is accounted for as an equity instrument.

Valuation of Conversion Rights Related to Convertible Note Payable, Related Party

In connection with the issuance of the convertible note payable on February 14, 2008 and under the guidance of SFAS 133, the Company was required to separately account for the fair value of the Company’s right to automatically convert the note payable to equity at the price of equity securities issued in the sale of shares of its equity securities that raises an aggregate amount of at least $5,000,000 on or before June 29, 2008 (See Note 2).

On June 27, 2008, the Company entered into an amendment to the convertible note payable (See Note 2) which effectively extinguished the original note payable, including its embedded derivative instruments. The June 27, 2008 fair value of the separately-accounted-for embedded derivative instruments was credited to additional paid-in capital as part of recording the capital transaction resulting from the extinguishment of the original note payable.

Pursuant to the guidance in SFAS 133, EITF 00-19 and other relevant literature, the conversion rights of the amended convertible note payable are not required to be accounted for separately.

Valuation of Call Option Related to Convertible Note Payable, Related Party

The convertible note payable issued on February 14, 2008 and subsequently amended on June 27, 2008 includes a call option which gives the holder the right to demand repayment in the case of default. Under the guidance of SFAS 133, the Company is required to separately account for the fair value of the call option. The Company determined that the call option had no value at February 14, 2008, March 31, 2008 or June 30, 2008, based on an analysis of the rights this feature contained and the likelihood of its exercise.

Valuation of Prepayment Right Related to Convertible Note Payable, Related Party

The convertible note payable issued on February 14, 2008 and subsequently amended on June 27, 2008 allows the Company to prepay the unpaid balance of the convertible note and accrued interest at any time and without penalty. Under the guidance of SFAS 133, the Company is required to separately account for the fair value of the prepayment right. The Company determined that this right had no value at February 14, 2008, March 31, 2008 or June 30, 2008, based on an analysis of the right and the likelihood of its exercise.

7

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Recent Accounting Pronouncements

With the exception of those discussed below and in Note 4, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2008 that have a material impact on the Company’s results of operations and financial position from those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The Company implemented SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115,” and EITF No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” effective January 1, 2008, the implementation of which did not have an impact on the Company’s financial statements.

In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The Company is currently evaluating the impact, if any, SFAS No. 161 will have on its financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3), which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company is currently evaluating the impact of FSP 142-3 on its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS 162 will become effective 60 days following approval by the Securities and Exchange Commission of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The Company does not expect the adoption of SFAS 162 will have an effect on its financial position, results of operations or cash flows.

Note 2. Related Party Transaction

Convertible Note Payable Issued on February 14, 2008

On February 14, 2008, the Company issued to RBFSC, Inc. (RBFSC), a related party, a convertible promissory note (the Note) in the principal amount of $3.0 million with an interest rate of 8% per annum, which Note was subsequently amended on June 27, 2008 (see below). Prior to such amendment, the principal balance and accrued interest of the Note were due on the earlier of February 14, 2010, or upon an event of default under the Note, including in the event that the Company files for bankruptcy. In the event that the Company closed an equity financing on or before June 29, 2008, in which the Company sold shares of its equity securities for an aggregate amount of at least $5,000,000, the unpaid balance of the Note and related accrued interest would have automatically converted into the equity securities issued in the equity financing, at the price of such equity securities issued in the equity financing. In the event the Company did not consummate an equity financing on or before June 29, 2008, the unpaid balance of the Note and related accrued interest could be converted, at the option of the holder, into common shares at a price equal to 80% of the average per share closing price of the Company’s common stock during the

8

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

preceding 90-day period, and the Company would have been obligated to issue to RBFSC a warrant (Warrant) to purchase that number of shares of its common stock equal to $750,000 divided by the per share closing sale price of the Company’s common stock on the date of issuance. The president and director of RBFSC is Frank T. Nickell, who beneficially owned approximately 26.1% of the Company’s outstanding common stock as of March 19, 2008.

Due to the indeterminate number of common shares which might have been issued under the embedded conversion feature and the Warrant, the Company recorded the value of the Warrant as a derivative liability at its fair value in accordance with SFAS 133 and EITF 00-19, as there was a potential that the Company would not have a sufficient number of authorized shares to settle these obligations. In addition, the Company re-measured the fair value of this derivative liability at the end of each reporting period. The Company estimated the fair value of the Warrant to be $280,347 at February 14, 2008. At March 31, 2008, the Company estimated the fair value of this derivative liability had increased to $503,122 and, as a result, recognized the change in value of $222,775 in its statement of operations. At June 27, 2008, the Company estimated the fair value of this derivative liability to be $555,674, and as a result, recognized the change in value of $52,552 in its statement of operations. The fair value of the Warrant was determined by applying management’s estimate of the probability of issuance of the Warrant together with the Black-Scholes option pricing model with the following key assumptions:

	February 14, 2008		March 31, 2008		June 27, 2008
Risk-free interest rate	2.81	%	2.46	%	3.36	%
Expected dividend yield	0		0		0
Expected term in years	5.00		5.00		4.75
Expected volatility	98	%	98	%	99	%

The Note also included embedded features in the form of a call option and put option that were required to be separately accounted for at fair value on the balance sheet with changes in value recognized in the statement of operations under SFAS 133 as the features were not clearly and closely related to the convertible note debt instrument. The embedded call option, which gave the holder the right to demand repayment in the case of default, was determined by management to have no value at February 14, 2008 or March 31, 2008, based on an analysis of the rights this feature contains and the likelihood of its exercise. The embedded put option gave the Company the right to automatically convert the Note into the equity securities issued in the equity financing. The Company estimated the fair value of the put option associated with the Note to be $186,512 at February 14, 2008. At March 31, 2008, the Company estimated the fair value of this derivative asset had decreased to $24,170 and, as a result, recognized the change in value of $162,342 in its statement of operations. At June 27, 2008, the Company estimated the fair value of this put option to be $0 as the Company was not intending to exercise the option and, as a result, recognized the change in value of $24,170 in its statement of operations. The fair value of this derivative asset was determined by applying management’s estimate of the probability of the Company’s exercising the put option together with the Black-Scholes option pricing model with the following key assumptions:

	February 14, 2008		March 31, 2008
Risk-free interest rate	2.26	%	1.32	%
Expected dividend yield	0		0
Expected term in years	0.37		0.25
Expected volatility	79	%	79	%

The Company accounted for the Note in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (SFAS 150), as the conversion feature embedded in the Note resulted in the holder receiving a fixed monetary value through the receipt of a variable number of the Company’s common shares. The Company determined the value of the Note at February 14, 2008 to be $2,906,165, which represented the gross proceeds from the debt financing less the fair value of the Warrant, offset by the fair value of the put option held by the Company. The Note was being accreted from its carrying value of $2,906,165 at February 14, 2008 to its settlement amount of $3,750,000 at June 29, 2008, the first possible settlement date, through the statement of operations using the effective interest method. As of June 27, 2008, an expense of $831,426 has been recorded as accretion of discount on convertible note payable, related party, thereby increasing the carrying value of the Note to $3,737,591.

9

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

For the three and six months ended June 30, 2008, interest expense resulting from the stated interest rate related to the Note was $63,120 and $93,698, respectively. The effective interest rate related to the Note for the period from the issuance date through June 30, 2008, including accretion of discount, was 24.9%.

Amended Convertible Note Payable Issued on June 27, 2008

On June 27, 2008, the Company entered into a First Amendment to Note and Warrant Purchase Agreement and Convertible Promissory Note with RBFSC pursuant to which (1) the Note was amended (the Amended Note) as follows: (i) the maturity date of the Amended Note is July 1, 2011 and (ii) the Amended Note is convertible (a) upon the consummation by the Company of an equity financing with proceeds to the Company of at least $7,500,000, whereupon the Amended Note shall be converted automatically into shares of the Company’s capital stock issued in the equity financing at a price equal to the lesser of the per share price of the securities issued and sold in the equity financing and $1.00, (b) upon the consummation of a sale of substantially all of the Company’s assets or a merger of consolidation of the Company in which the Company’s stockholders will hold, in the aggregate, less than 50% of the voting power of the combined entity, whereupon the Amended Note shall be converted automatically into shares of the Company’s common stock at a price equal to the lesser of the per share price attributed to the Company’s common stock in connection with such transaction and $1.00, or (c) voluntarily by RBFSC at and as of the maturity date into shares of the Company’s common stock at a price equal to $1.00; and (2) the Warrant was amended and restated in its entirety such that RBFSC shall be entitled to purchase up to 750,000 shares of the Company’s common stock at an exercise price of $1.00 per share (the Restated Warrant), which Restated Warrant was issuable by the Company immediately.

Under the guidance of EITF 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,” the Company determined that the terms of the Amended Note reflect a substantial modification to the Note based on an analysis of cash flows for the Amended Note compared to the Note and, as a result, accounted for this modification as an extinguishment of the Note. As the Note was a debt to a related party, the Company recorded the debt extinguishment as a capital transaction under Accounting Principles Board (APB) Opinion 26, “Early Extinguishment of Debt.” The Amended Note was accounted for as new debt and was recorded at its $3,000,000 face value because the estimated June 27, 2008 fair value of the Amended Note exceeded its face value.

Note 3. Marketable Securities

At December 31, 2007, the Company had $700,000 of investment in auction rate securities (ARS), classified as current available-for-sale marketable securities. These securities are structured to allow for interest rate resets at approximately every 28 days, but with contractual maturities that are well in excess of ten years. Historically, the carrying value of ARS approximated fair value due to the frequent interest rate resets. Until early February 2008, the ARS market was fairly liquid and the Company was able to auction to sell these securities at par at the end of each reset period or continue to hold them. During the first two months of 2008, the Company liquidated $500,000 of its investment in ARS at par and held the proceeds in cash and cash equivalents. Of the remaining ARS held by the Company, an aggregate of $100,000 (par value) was issued by state agencies and is supported by student loans for which repayment is substantially guaranteed by the U.S. government under the Federal Family Education Loan Program (FFELP). The remaining $100,000 (par value) of the Company’s ARS was issued by municipalities and repayment is insured by MBIA Insurance Corporation, a bond insurance company. The Company’s ARS are rated by the major independent rating agencies as AAA and AA investments.

During February 2008, ARS increasingly failed at auction due to sell orders exceeding buy orders. Since March 2008, the Company’s ARS have continued to experience failed auctions. At March 31, 2008, the Company estimated that the fair value of these ARS was $170,000, a decline of $30,000 from par value. The Company considered this decline in fair value as other than temporary and, accordingly, recorded an unrealized loss on marketable securities of $30,000 in other non-operating expense in the first quarter of 2008. At June 30, 2008, the Company estimated that the fair value of its ARS was $187,550 based on a valuation of other investments carrying similar interest rates and expected maturities and, accordingly, recorded a change in fair value of $17,550 in accumulated other comprehensive income (loss). In July 2008, one of the Company’s ARS in the amount of $50,000 was called by the issuer at par. In the event that the Company needs to liquidate the remainder of its investments in ARS, the Company may not be able to do so without a loss of principal until (1) a future auction of these securities is successful, (2) the Company is able to sell the securities in a secondary market, or (3) the issuer calls the securities pursuant to a mandatory tender or redemption prior to maturity. As such, with the exception of $50,000 of ARS that was called by the issuer in July

10

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

2008 and converted to cash, the Company’s investment in ARS currently lacks short-term liquidity and is therefore classified as non-current marketable securities as of June 30, 2008. The Company will continue to monitor and evaluate these investments as there is no assurance as to when the market for this investment class will stabilize.

Note 4. Fair Value of Financial Instruments

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), except with respect to non-financial assets and liabilities that are subject to a one-year deferral allowed by FSP 157-2, “Effective Date of FASB Statement No. 157.” This statement defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. The standard applies to assets and liabilities that are carried at fair value on a recurring basis. On February 12, 2008, FSP 157-2 was issued delaying the effective date of SFAS 157 until fiscal years beginning after November 15, 2008 for non-financial assets and liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis at least annually. In accordance with SFAS 157, these inputs are summarized in the three broad levels listed below:

• Level 1 – Quoted prices in active markets for identical securities;

• Level 2 – Other significant observable inputs (including quoted prices in active markets for similar securities); and

• Level 3 – Significant unobservable inputs (including the Company’s own assumptions in determining fair value of investments).

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following table provides the fair value measurements of applicable Company assets and liabilities by level within the fair value hierarchy as of June 30, 2008. These assets and liabilities are measured on a recurring basis.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3) June 30, 2008
Assets
Marketable securities (Note 3)	$	187,550

At June 30, 2008, there was insufficient observable ARS market information available for the Company to determine the fair value of its investment using level 1 or level 2 inputs. Therefore, management estimated fair value by incorporating assumptions that market participants would use in their estimates of fair value. These assumptions included credit quality, estimates on the probability of the issue being called prior to final maturity and the liquidity of the securities.

The following is a reconciliation of the activities of the ARS during the six months ended June 30, 2008:

Fair value estimates for ARS using significant unobservable inputs (Level 3)

	Six Months Ended June 30, 2008
Beginning balance at January 1, 2008	$	700,000
Sales of ARS at par value		(500,000	)
Unrealized loss recorded in condensed statements of operations		(30,000	)
Unrealized gain recorded in accumulated other comprehensive income (loss)		17,550
Ending balance at June 30, 2008	$	187,550

11

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The Company estimated the fair value of its derivative instruments using the Black-Scholes pricing model with the key assumptions summarized in Notes 2 and 6. The following is a reconciliation of the activities of the derivative liabilities during the six months ended June 30, 2008:

Fair value estimates for derivative liabilities using significant unobservable inputs (Level 3)

	Six Months Ended June 30, 2008
Balance at January 1, 2008	$	—
Reclassification of outstanding warrants and options from equity to derivative liabilities at February 14, 2008		1,255,317
Derivative liabilities related to issuance of convertible note payable, related party		280,347
Change in fair value recorded in condensed statements of operations		(198,315	)
Reclassification of outstanding warrants and options from derivative liabilities to equity due to amendment of convertible note payable on June 27, 2008		(1,337,349	)
Ending balance at June 30, 2008	$	—

The following is a reconciliation of the activities of the derivative asset during the six months ended June 30, 2008:

Fair value estimates for derivative asset using significant unobservable inputs (Level 3)

	Six Months Ended June 30, 2008
Beginning balance at January 1, 2008	$	—
Derivative asset related to issuance of convertible note payable, related party		186,512
Change in fair value recorded in condensed statements of operations		(186,512	)
Ending balance at June 30, 2008	$	—

Note 5. Stock-Based Compensation

Stock-Based Compensation

The amount of stock-based compensation expense recognized in the three months ended June 30, 2008 and 2007 related to stock options was approximately $96,300 and $56,100, respectively. For the six months ended June 30, 2008 and 2007, stock-based compensation expense was approximately $122,700 and $77,500, respectively. Stock-based compensation for the three and six months ended June 30, 2008 included approximately $65,400 of expense resulting from modification of two option grants.

A summary of the Company’s stock compensation expense for the three and six months ended June 30, 2008 and 2007 is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Research and development	$	—	$	3,024	$	—	$	6,014
Marketing and business development		10,348		16,775		15,408		31,717
General and administrative		85,944		36,287		107,313		39,813
Total stock-based compensation	$	96,292	$	56,086	$	122,721	$	77,544

There were no stock options granted during the three months ended June 30, 2008 or 2007. In determining the fair value of stock option modifications during the three months ended June 30, 2008 and of stock options granted during the six months ended June 30, 2008 and 2007, the following key assumptions were used in the Black-Scholes option pricing model:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Risk-free interest rate	3.10% -3.27%	—	2.89% -3.27%	4.58	%
Expected dividend yield	0	—	0	0
Expected term in years	3.00 – 5.50	—	3.00 – 5.50	6.25
Expected volatility	99% –107%	—	99% – 107%	100	%

12

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The risk-free rate is based on the implied yield available on U.S. Treasury zero–coupon issues with an equivalent remaining term. The Company does not anticipate declaring dividends in the foreseeable future. For the three and six months ended June 30, 2008 and 2007, expected volatility is based on the annualized daily historical volatility of the Company’s stock price commensurate with the expected term of the option and other factors, including peer company data. The Company determines the expected term by using the simplified method in accordance with Staff Accounting Bulletin (SAB) 107, as amended by SAB 110, as the average of the vesting period and the contractual term. The Company will continue to use the simplified method until it has sufficient historical data to provide reasonable estimates of expected lives of stock options. The Company’s stock price volatility and option term involves management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes methodology and, ultimately, the expense that will be recognized over the life of the option. SFAS 123R, “Share-Based Payment,” also requires that the Company recognize compensation expense for only the portion of options or stock units that are expected to vest. Therefore, the Company applies an estimated forfeiture rate that is derived from historical employee termination behavior.

Stock Option Plan

The Helix BioMedix 2000 Stock Option Plan (the 2000 Plan) provides for the issuance of incentive and non-qualified stock options to employees, directors, officers, and consultants and is administered by non-employee directors. The 2000 Plan specifically provides the Company with the ability to repurchase, upon termination of an optionee’s employment, up to 10,000 shares acquired by the optionee through the exercise of options granted thereunder at the then-current fair market value of such shares.

Stock options to purchase the Company’s common stock are granted at the fair market value on the date of grant. Options generally become exercisable beginning one year from the date of grant and expire 10 years from the date of grant. Options granted to non-employee directors are typically non-qualified stock options with a vesting period ranging from immediately upon grant to quarterly over one year. Stock options granted to employees are typically incentive stock options and vest at the rate of 33.33% after one year and 2.78% per month thereafter.

During each of the three months ended June 30, 2008 and 2007, the Company granted no options. During each of the six months ended June 30, 2008 and 2007, the Company granted to non-employee directors an aggregate of 120,000 options with an average fair value of $0.62 per share for both periods.

A summary of the Company’s stock option activity for the six months ended June 30, 2008 is presented in the following table:

	Shares Subject to Options		Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding, December 31, 2007	2,978,528		$	1.22	5.27	$	—
Granted	120,000		$	0.80	—		—
Exercised	—			—	—		—
Forfeited	—			—	—		—
Expired	(83,334	)	$	0.75	—		—
Outstanding, June 30, 2008	3,015,194		$	1.22	4.86	$	20,000
Exercisable, June 30, 2008	2,625,194		$	1.31	4.18	$	—

The aggregate intrinsic value in the table above is based on the Company’s closing stock price of $0.58 on June 30, 2008, which would have been received by the optionees had all of the options with exercise prices less than $0.58 been exercised on that date. As of June 30, 2008, total unrecognized stock-based compensation related to non-vested stock options was approximately $119,257, which is expected to be recognized over a weighted-average period of approximately 1.45 years.

The Company has a policy of issuing new shares to satisfy share option exercises.

13

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

The Company has reserved 5,355,000 shares of common stock for issuance pursuant to the 2000 Plan. As of June 30, 2008, 2,339,806 shares remained available for grants. Additional information regarding options outstanding as of June 30, 2008, is as follows:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Shares	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Shares	Weighted Average Exercise Price
$0.50 - $0.85	815,500	7.59	$	0.68	425,500	$	0.76
$1.00 - $1.00	799,000	4.66	$	1.00	799,000	$	1.00
$1.20 - $1.80	1,241,250	3.27	$	1.63	1,241,250	$	1.63
$1.85 - $2.00	159,444	4.17	$	1.89	159,444	$	1.89
$0.50 - $2.00	3,015,194	4.86	$	1.22	2,625,194	$	1.31

Note 6. Stockholders’ Equity

Warrants and Non-Employee Options

As of December 31, 2007, the Company had outstanding warrants to purchase up to 2,700,544 shares of the Company’s common stock with per share exercise prices ranging from $0.25 to $6.00 and non-employee stock options to purchase up to 330,000 shares of the Company’s common stock with per share exercise prices ranging from $1.50 to $2.00. During the three months ended June 30, 2008, the Company issued to RBFSC a warrant to purchase up to 750,000 shares of its common stock in connection with the Amended Note discussed in Note 2.

Reclassification of Warrants and Non-Employee Stock Options

The Company’s convertible note payable issued on February 14, 2008, as discussed in Note 2, included a conversion feature and issuable warrant which created the potential for the Company to have an insufficient number of authorized common shares available to settle these instruments. As a result, the Company was required to reclassify, at fair value on February 14, 2008, all outstanding warrants and options subject to the provisions of EITF 00-19 from equity to derivative liabilities at fair value. Awards not subject to EITF 00-19 include grants to employees, officers and non-employee directors for board service as long as these grants have not been modified. The Company estimated the fair value of the outstanding warrants and options subject to EITF 00-19 to be $1,255,317, $1,011,103 and $781,677 at February 14, 2008, March 31, 2008 and June 27, 2008, respectively.

In determining the fair value of these warrants and non-employee stock options, the following key assumptions were used in the Black-Scholes option pricing model:

	February 14, 2008	March 31, 2008	June 27, 2008
Warrants
Risk-free interest rate	1.93% – 2.81%	1.55% – 2.46%	2.35 – 3.36%
Expected dividend yield	0	0	0
Expected term in years	1.14 – 5.29	1.02 – 5.25	0.77 – 5.00
Expected volatility	98% – 115%	98% – 115%	99% – 107%
Non-Employee Stock Options
Risk-free interest rate	2.05% – 2.34%	1.55% – 1.96%	2.35% – 2.92%
Expected dividend yield	0	0	0
Expected term in years	1.50 – 3.63	1.37 – 3.50	0.70 – 3.25
Expected volatility	102% – 115%	103% – 115%	106% – 107%

At each reporting period, as long as the warrants and non-employee options were outstanding and there was a potential for an insufficient number of authorized shares available to settle these instruments, the outstanding warrants and non-employee options were revalued and any difference from the previous valuation date was recognized as a change in fair value of derivative liabilities and charged or credited to the statement of operations in accordance with SFAS 133 and EITF 00-19. The fair value of these derivative liabilities decreased by $244,214 from February 14, 2008 to March 31, 2008, and further decreased by $229,426 from March 31, 2008 to June 27, 2008.

14

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

On June 27, 2008, the Company entered into an amendment to the convertible note payable (See Note 2) which effectively extinguished the original note payable and related derivative instruments. In accordance to the guidance of EITF No. 96-19, the Company accounts for this modification as an extinguishment of the original note payable. As a result of the modification, outstanding warrants and non-employee options were no longer considered to include a “net cash settlement” provision within the meaning of EITF 00-19, and, therefore, the Company reclassified their fair value from derivative liabilities to equity.

Equity Financing

On March 5, 2007, the Company closed a private equity financing, receiving cash of approximately $2.0 million in exchange for 2,666,666 shares of common stock. In a second closing held on March 26, 2007, the Company received cash of $148,750 in exchange for 198,332 shares of common stock.

The net proceeds of these offerings were used to continue research and development efforts, to fund the out-licensing initiatives for the Company’s peptides and for general corporate purposes.

Note 7. Loss per Share

Loss per share has been computed by dividing net loss by the weighted-average number of shares outstanding during the period. Diluted per share amounts reflect potential dilution from the exercise or conversion of securities into common stock. The Company’s capital structure includes common stock options and common stock warrants, all of which have been excluded from net loss per share calculations as they are antidilutive, as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2008	2007	2008	2007
Weighted average outstanding options	3,015,194	2,856,362	2,991,513	2,894,289
Weighted average outstanding warrants	2,725,269	2,700,544	2,712,907	2,700,544

Note 8. Property and Equipment

Property and equipment consisted of the following as of June 30, 2008 and December 31, 2007:

	June 30, 2008			December 31, 2007
Machinery and equipment	$	547,483		$	546,496
Website		17,000			—
Furniture and fixtures		54,546			48,486
Leasehold improvements		43,993			43,993
		663,022			638,975
Less accumulated depreciation		(540,359	)		(512,466	)
Property and equipment, net	$	122,663		$	126,509

Aggregate depreciation expense for property and equipment during the three months ended June 30, 2008 and 2007 was $15,181 and $23,820, respectively. Aggregate depreciation expense for property and equipment during the six months ended June 30, 2008 and 2007 was $30,511 and $48,522, respectively.

Note 9. Intangible Assets

Identifiable intangible assets consisted of the following as of June 30, 2008 and December 31, 2007:

	June 30, 2008			December 31, 2007
Antimicrobial technology	$	222,187		$	222,187
Licensing agreements		61,391			61,391
Patents, pending and approved		834,301			834,301
Total intangible assets		1,117,879			1,117,879
Less accumulated amortization		(724,836	)		(685,397	)
Intangible assets, net	$	393,043		$	432,482

15

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Amortization expense for intangible assets during the three months ended June 30, 2008 and 2007 was $19,720 and $19,722, respectively. Amortization expense for intangible assets during the six months ended June 30, 2008 and 2007 was $39,439 and $39,442, respectively.

Note 10. Total Comprehensive Income (Loss)

Total comprehensive loss for the three months ended June 30, 2008 was $1,430,745 compared to $831,162 for the same period in 2007. For the six months ended June 30, 2008, total comprehensive loss was $2,705,743 compared to $1,643,651 for the six months ended June 30, 2007. The difference between net loss as reported and total comprehensive loss is the unrealized gain on our marketable securities.

Note 11. Liquidity and Capital Resources

For the six months ended June 30, 2008, the Company incurred a net loss of $2,723,293 and cash used in operations was $1,553,962. Cash provided by investing activities of $473,335 for the six months ended June 30, 2008, primarily represented the proceeds from sales of auction rate securities, partially offset by the acquisition of assets. Cash flow from financing activities was $2,994,740 for the six months ended June 30, 2008, which reflects the net proceeds from the Company’s issuance of a convertible note (See Note 2).

At June 30, 2008, the Company had $2,375,403 in cash and cash equivalents and $187,550 in marketable securities, as discussed in Note 3. The Company estimates that its cash and cash equivalents will be sufficient to fund its operations at planned levels for the remainder of 2008.

The Company plans to raise substantial additional capital in order to maintain the current level of operations beyond 2008, continue commercialization of its technology and advance its pharmaceutical programs. The Company may raise additional capital through equity or debt financing. However, there is no assurance that additional funding will be available on favorable terms, if at all. If adequate funds are not available, the Company would be required to significantly reduce the scope of operations, which would significantly impede its ability to proceed with current operational plans and could lead to the curtailment of its business.

Note 12. Concentration of Risks

The Company maintains its cash balances in one financial institution, which at times may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash.

A significant portion of the Company’s revenue is concentrated with a limited number of customers. The following individual customers accounted for 10% or more of revenue for the three and six months ended June 30, 2008 and 2007:

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Customer A	40	%	17	%	23	%	35	%
Customer B	23	%	30	%	18	%	22	%
Customer C	25	%	46	%	—		32	%
Customer D	—		—		40	%	—
Customer F	11	%	—		—		—

Note 13. Agreements

Separation Agreement

David H. Kirske resigned as the Company’s Vice President and Chief Financial Officer on June 23, 2008. In connection therewith and in consideration of a release by Mr. Kirske of the Company and its affiliates and contingent on the expiration of the revocation period thereunder, the Company agreed to pay Mr. Kirske following

16

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

his resignation an aggregate amount of $90,000, payable in accordance with the Company’s customary payroll schedule, together with a $17,500 cash payment. In addition, the Company agreed to extend the period during which Mr. Kirske may exercise his vested options from 90 days to three years from the date of his resignation.

Amendment to Employment Agreement

On June 30, 2008, the Company amended its employment agreement with Robin L. Carmichael, the Company’s Vice President, Marketing and Business Development, pursuant to which Ms. Carmichael’s annual base salary was increased from $200,000 to $225,000 effective May 15, 2008 and the vesting schedule of Ms. Carmichael’s performance stock options was amended as follows: (i) if the Company recognizes net revenue (as defined in the employment agreement) of at least $1.0 million but less than $1.25 million in 2008, an aggregate of 25,000 shares shall vest and become exercisable; (ii) if the Company recognizes net revenue of at least $1.25 million but less than $1.5 million in 2008, an aggregate of 75,000 shares shall vest and become exercisable; and (iii) if the Company recognizes net revenue of at least $1.5 million in 2008, an aggregate of 100,000 shares shall vest and become exercisable.

Note 14. Commitments and Contingencies

Purchase Commitment

In August 2007, the Company entered into an agreement with Peptisyntha, Inc. for the purchase of a certain peptide over a period of eighteen months from the agreement date. The aggregate purchase requirement under this agreement over the eighteen-month period is $234,000. As of June 30, 2008, the Company had placed orders totaling approximately $109,400 under this agreement.

17

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Our disclosure and analysis in this Quarterly Report contain forward-looking statements, which provide our current expectations or forecasts of future events. Forward-looking statements include, without limitation:

• statements concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth;

• statements about our product development schedule;

• statements about our future capital requirements and the sufficiency of our cash, cash equivalents, investments, and any other sources to meet these requirements;

• statements about our plans, objectives, expectations, and intentions; and

• other statements that are not historical facts.

Words such as “may,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “future,” “target,” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in Part II, Item 1A, “Risk Factors” in this Quarterly Report and in Part I, Item 1A, “Risk Factors” in our most recent Annual Report on Form 10-K for the year ended December 31, 2007. You should carefully consider these factors in evaluating our forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (SEC) after the date of this Quarterly Report.

Business Overview

Helix BioMedix, Inc. is a biopharmaceutical company with an extensive library of structurally diverse bioactive peptides and a portfolio of patents covering hundreds of thousands of peptide sequences. Our mission is to enrich clinical practice and the patient/consumer experience by developing and commercializing topically-applied products which offer the benefits of our advanced bioactive small molecule peptide technology. Our vision is to be recognized as the world leader in the identification, qualification and commercialization of natural and synthetic peptides.

We have developed short, small-chain peptides with anti-infective, anti-inflammatory and modulatory properties such as the stimulation of cell proliferation and migration. These peptides are targeted for use as ingredients in cosmetics and as new topical therapeutics. Possible applications include anti-aging skin care, acne treatment, wound healing, and the treatment of fungal dermatoses.

During our initial commercialization efforts, we successfully identified and characterized bioactivities exhibited by natural innate-immunity peptide sequences that have potential cosmetic and therapeutic applications. By re-engineering these peptides, we created small, cost-effective bioactive molecules that not only are capable of delivering demonstrable benefits in skin care products but also have the potential to deliver therapeutic benefits as topically applied dermatological products. Subsequently, we have leveraged our knowledge of peptide sequences to expand the application of such molecules to multiple areas within dermatology.

In addition to our focus on peptides for use in cosmetic skin care and dermatological therapies, we believe our peptide library also promises new opportunities in certain therapeutic areas such as the prevention of Methicillin ResistantS. aureus (MRSA) infection.

Our business was incorporated on February 2, 1988, and until 2000, we operated primarily as a technology development company, generating a portfolio of intellectual property focused on identifying and developing synthetic bioactive peptides. In 2000, we started to place more emphasis on applying and commercializing the extensive library of patented bioactive peptides that we have developed. During 2007, we began commercializing our peptide technology through license agreements with skin care product manufacturers and consistently generated more than insignificant revenue, which we believe is key evidence that our technology has been accepted in the marketplace. During the third quarter of 2007, we moved from the development stage to the commercialization stage of our business.

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Our goal is to increase our focus on our pharmaceutical programs, and one of our objectives for 2008 is to initiate clinical development of our lead drug candidates. To that end we are exploring both potential partnership opportunities with pharmaceutical companies and potential sources of funding to support in-house clinical development work. We currently believe that in-house clinical development will be required to advance these programs prior to partnering with a pharmaceutical company.

Our website is located atwww.helixbiomedix.com. Information contained on our website is not part of, and is not incorporated into, this Quarterly Report. Our filings with the SEC are available without charge on our website.

Consumer Programs

In 2004, we initiated license agreements with skin care contract manufacturers and materials suppliers for inclusion of certain of our proprietary cosmetics peptides in anti-acne and anti-aging skin care products. We rely on these industry supplier licensees to develop new product opportunities that incorporate our peptides and to create both awareness and demand for our technology among their skin care customer companies.

We believe our peptide technology further holds potential as a technology platform for skin care industry leaders. We collaborate directly with leading skin care companies to identify opportunities for strengthening their brand position with proprietary products featuring our peptide technology.

In 2006, we initiated our first efforts to directly participate in the development of private label products containing our peptide technology. The first such product was developed through a license agreement with DermaVentures, LLC (DermaVentures), a related party, and was launched in late 2007. We plan to introduce additional new products into the marketplace through partnerships with skin care and personal care marketing companies.

Anti-Acne Programs

Acne is the most common skin disorder in the United States, affecting 40 to 50 million Americans. Nearly 85 percent of all people have acne at some point in their lives. By the mid-teens, more than 40 percent of adolescents have acne or acne scarring which requires treatment by a dermatologist. In 2004, the total direct cost associated with the treatment of acne exceeded $2.2 billion in the United States, including substantial costs for prescription and over-the-counter products.

We believe one of our lead peptides promises significant advantages for skin care companies in the over-the-counter acne treatment market. This proprietary peptide may be formulated into products with certain over-the-counter anti-acne ingredients for improvement in blemish-clearing benefits. The skin care benefits of this peptide derive from its ability to bind to a pro-inflammatory substance on the cell wall of the acne-causing bacteria. This pro-inflammatory substance is known to cause much of the redness associated with acne breakouts but, when bound to our peptide, is rendered inactive. Laboratory and clinical testing confirm the additional treatment benefits and higher level of consumer satisfaction associated with formulations that contain our peptide.

A number of companies have formulated and launched anti-acne products incorporating this peptide under license from us. We believe the use of this peptide is advantageous for globally marketed anti-acne products, not only because it supports more favorable outcomes with salicylic acid–based treatment products, but also because it offers a favorable alternative to benzyol peroxide, an ingredient that is limited in application due to regulatory restrictions in certain markets as well as its potential harshness on sensitive skin. We anticipate further anti-acne product introductions in 2008.

Anti-Aging Programs

We have identified and qualified a number of peptides that target changes in the appearance of skin associated with the aging process. Because there are anti-aging skin benefits that derive from the skin’s natural healing process, much of the anti-aging aspect of our peptide library has been derived from the screening processes associated with our pharmaceutical wound healing programs.

Peptides that target improvement in the appearance of aging skin may affect one or more of the age-related skin characteristics: lines and wrinkles, loss of elasticity, loss of firmness and definition, appearance of darkened areas or general unevenness of skin tone, rough texture, and thinning of the skin.

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One of our lead anti-aging peptides targets several aspects of support for the skin’s structural matrix. This peptide has been demonstrated to accelerate the migration of cells from the skin’s uppermost layer to strengthen areas prone to lines and wrinkles and to impart a smoother, firmer appearance. This peptide has been clinically demonstrated to provide benefits equivalent to those of the leading prescription anti-aging products, but without the risk of irritation associated with aggressive retinoids. This peptide has been formulated into various cosmetic skin care products that are currently in the marketplace, and we anticipate further anti-aging product introductions in 2008.

We believe that, through the isolation of peptides derived from naturally recurring sequences that we call Replikines™, and specific combinations of those Replikines™ that we call Combikines™, we can increase the benefits derived from peptide applications in cosmetic anti-aging skin products. In August 2007, we entered into a license agreement with Goldschmidt GmbH, a wholly owned subsidiary of Evonik GmbH, a leading supplier of cosmetic ingredients. The agreement provides exclusive rights to certain of our peptides targeted towards skin care and personal care applications.

Recently identified peptide opportunities for our anti-aging portfolio include a group of synthetic peptides that we have branded as Modukines™. These peptides work to interrupt processes that accelerate the undesirable changes in skin associated with aging, including the accelerated breakdown of collagen and elastin, the skin’s key structural components. We believe several of these Modukines™ hold commercial promise beyond the area of anti-aging skin care as they support the skin’s resiliency.

We are also working to identify opportunities for peptides to interrupt the pathways that lead to undesirable discoloring and mottled skin tone. This effort is timely as hydroquinone, one of the key ingredients used for such cosmetic benefits in the United States, has been under scrutiny by the Food and Drug Administration (FDA), creating a need that we believe may be safely and effectively addressed with peptides that we are currently developing. We have identified numerous opportunities for the addition of peptides into therapeutic moisturizers and shampoos in support of the healthy appearance and comfort of skin and scalp. Potential benefits of adding certain peptides to cosmetically therapeutic moisturizers and hair care products include resistance to secondary infection associated with compromised skin, restoration of healthy appearance to cracked, flaky feet that do not respond to ordinary moisturizers, reduced flaking, and improved comfort associated with conditions of the scalp.

Pharmaceutical Programs

We are developing a novel, broad-spectrum, topical anti-infective for the treatment of skin and wound infections and the prevention ofStaphylococcus aureus (S. aureus) infections including those caused by MRSA. These programs are based upon a first-in-class family of molecules known as lipohexapeptides (or small molecule peptides) that we developed to specifically combine the attributes of small molecule natural products with the advantages of antimicrobial peptides. This new class of anti-infective peptide has demonstrated significant improvement in activity, bothin vitro andin vivo, over traditional antimicrobial peptides.

As with traditional antimicrobial peptides, our lead lipohexapeptides are rapidly cidal, fail to engender resistancein vitro, are readily synthesized and do not exhibit cross-resistance with other antibiotics. However, these molecules also have the advantage of being more stable, safer and more cost-effective to manufacture than traditional antimicrobial peptides. In addition, primarily due to acylation (addition of a lipid), these molecules are significantly more active in complex biological environments such as serum or wound fluid. As a result, lipohexapeptides exhibit potent activity in animal infection models.

In pre-clinical testing our lead molecules exhibited broad-spectrum antimicrobial activity against significant bacterial pathogens such asS. aureus,Streptococcus pyogenes, andPseudomonas aeruginosa,and also pathogenic fungi such as Candida and Trichophyton species. This activity was maintained against antibiotic-resistant organisms such as MRSA and Vancomycin Resistant Enterococci. Our lead molecules have demonstrated significant activity in both bacterial and fungal animal infection models. In aS. aureus abraded skin infection model, our lead lipohexapeptides significantly reduced the number of bacteria following three days of once-daily dosing, and in many cases, our peptide eradicated the pathogen. In a guinea pig dermatophytosis model, our lead peptide candidates significantly reduced pathogen count and delivered clinical benefits comparable to Terbinafine, a drug approved by the FDA for onchomycosis. In both animal models, toxicity was not significantly different from that without peptides.

Acne Anti-infective

The National Institute of Arthritis, Musculoskeletal and Skin Disorders estimate that 17 million people are affected by acne in the United States every year. Acne is the most common skin disorder of adolescence and early adulthood (ages 11-30), affecting 80% of that demographic. Generally, mild to moderate cases are treated with topical medications, with more severe cases being treated with systemic or a combination of topical and systemic therapies. The global market for prescription anti-acne products is currently estimated to be $2.0 billion, and the largest segment of this is attributed to topical medications. While topical antibiotics such as Clindamycin make up a large part of this market, providing significant clinical benefit, the emergence of resistance to antibiotics such as Clindamycin occurred as early as 1979.

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Our lipohexapeptide program is specifically directed at developing small, stable, and highly potent antimicrobial peptides capable of delivering therapeutic benefit within the clinical environment. These molecules overcome the specific challenges typically associated with acne such as the ability to work in an oil and serum environment and the ability to kill organisms deep within a pore. The efficacy observed in the dermatophytosis model described above demonstrates the penetration and antimicrobial effects of these molecules in the hair follicle of the host.

MRSA

There is an ever-increasing global problem of antimicrobial resistance. This phenomenon has been well documented by the Centers for Disease Control and Prevention, which recently identified a 28.5% increase in S. aureus oxacillin (methicillin) resistance in hospitals taking part in the National Nosocomial Infections Surveillance system from 1992-2003. Their report concludes that action is necessary to control the spread of this organism, and, to this end, several European countries have been successful in identifying and treating colonized patients quickly. The ability of lipohexapeptides to safely and effectively killS. aureus in an abraded skin infection model, and the fact that this class of molecule exhibits potent activity against both methicillin and mupirocin (current therapy) resistant strains, support its development potential. The broad spectrum of activity exhibited by lipohexapeptides also enables possible application to chronic wounds, burn wounds, and trauma wounds in which multiple pathogens can cause significant morbidity and mortality. The market for such topical anti-infectives is currently estimated to be $1.5 billion per year.

Topical fungal infections

Trichophyton species are the major cause of a significant number of fungal skin infections including, athlete’s foot, tinea capitis (scalp ringworm) and onychomycosis (nail fungus). Up to 70% of Americans have athlete’s foot at any given time, 13% of United States school children (85% of children in many other countries) test positive for tinea capitis, and 22-40% of Americans 51-100 years of age have onychomycosis. Worldwide sales for prescription topical antifungals consequently exceeded $1.0 billion in 2006, with a similar level of sales for over-the-counter products addressing these conditions. Our pre-clinical data have shown that our lead molecules are capable of treating Trichophyton infections and hold great promise for multiple dermatological indications.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, our management evaluates its estimates and judgments, including those related to revenue recognition, research and development costs, capitalized patent costs and valuation of stock options and warrants. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition.We generate revenue from technology licenses, joint development agreements, peptide sales and administrative services revenue from a related party. Revenue under technology licenses may include up-front payments and royalties from product sales. Revenue associated with joint development agreements primarily consists of payments for completion of development milestones. For agreements with multiple elements, we follow the Emerging Issues Task Force (EITF) Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” to determine whether each element can be separated into a unit of accounting based on the following criteria: (1) the delivered items have value to the customer on a stand-alone basis; (2) any undelivered items have objective and reliable evidence of fair value; and (3) delivery or performance of the undelivered items that have a right of return is probable and within our control. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, we allocate revenue among the separate units of accounting based on their estimated fair values. If the criteria are not met, elements included in an arrangement are accounted for as a single unit of accounting and revenue is deferred until the period in which the final deliverable is provided. When the period of deferral cannot be specifically identified from the agreement, we estimate the period based upon other factors contained within the agreement. Our management continually reviews these estimates, which could result in a change in the deferral period and the timing and the amount of revenue recognized.

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• Licensing Fees. We recognize up-front license payments at the point when persuasive evidence of an agreement exists, delivery has occurred or services have been performed, the price is fixed and determinable and collection is reasonably assured. Royalties from licensees are recorded as earned when royalty results are reliably measured and collection is reasonably assured. We rely on the licensees to provide royalty information as it cannot be reasonably estimated.

• Development Fees.We record revenue associated with performance milestones as earned when we have completed the specific milestones as defined in the joint development agreements and there are no uncertainties or contingencies regarding collection of the related payment. Payments received for which the earnings process is not complete are recorded as deferred revenue.

• Peptide Sales. Peptide sales are recognized when title transfers to the customer, typically upon shipment, and collection is reasonably assured. In the future, peptide sales may be transacted directly between the licensees and a third-party manufacturer, which could have an adverse effect on our revenue.

• Administrative Services Revenue.Administrative services revenue consists of fees received from DermaVentures, a related party, for marketing campaign costs associated with DermaVentures’ product line and other out-of-pocket expenses we incur on DermaVentures’ behalf. Administrative services revenue is typically invoiced to DermaVentures at cost and is recorded as earned when services have been rendered, no obligations remain outstanding and collection is reasonably assured. In accordance with EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and EITF 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” fees received from DermaVentures are reported as administrative services revenue, while related costs are included in operating expenses in the statements of operations.

Marketable Securities. Marketable securities, consisting of auction rate securities (ARS), are reported at fair value with the related unrealized gains and losses included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains, losses, and declines in value of securities judged to be other than temporary are included in other non-operating income (expense). We estimate fair value based on valuation techniques defined by Financial Accounting Standards Board Statement (SFAS) No. 157, “Fair Value Measurements” (SFAS 157), including using observable inputs such as quoted prices in active market for identical or similar investments. When observable inputs are not sufficiently available, we estimate fair value by incorporating assumptions that market participants would use in their estimates of fair value, which may include credit quality, estimates on the probability of the securities being called prior to final maturity, the liquidity of the securities and indications of value from reports of developing secondary markets for ARS.

Research and Development Costs.Our research and development costs are expensed as incurred. Research and development expenses include, but are not limited to, payroll and benefit expenses, lab supplies and expenses, and external trials and studies. In instances where we enter into agreements with third parties for research and development activities, which may include personnel costs, supplies and other costs associated with such collaborative agreements, we expense these items as incurred.

Capitalization of Patent Costs. We capitalize the third-party costs associated with patents that have been issued or entering into licenses associated with our underlying technology. Our policy for the capitalization of patent costs is to begin amortization of these costs at the time they are incurred. We review our patent portfolio to determine whether any such costs have been impaired and are no longer being used in our research and development activities. To the extent we no longer use certain patents, the associated costs will be written-off at that time.

Valuation of Stock Options Granted to Employees, Officers and Non-Employee Directors for Board Service.The fair value of each option granted to employees, officers and non-employee directors for board service is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. Options granted are valued using the single option valuation approach, and the resulting expense is recognized using the cliff, straight-line attribution method, consistent with the single option valuation approach. Compensation expense is recognized only for those options expected to vest.

Valuation of Warrants and Non-Employee Stock Options.We account for our warrants and non-employee stock options in accordance with the provisions of SFAS 133 and EITF 00-19, which require these instruments to be classified as permanent equity, temporary equity or as assets or liabilities. In general, warrants and non-employee stock options that either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair value, and warrants that require settlement in shares are recorded as equity instruments.

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We estimate the fair value of these derivative liabilities and equity instruments using a Black-Scholes model and use estimates for an expected dividend yield, a risk-free interest rate, and expected volatility. At each reporting period, as long as the derivative liabilities were outstanding and there was a potential for an insufficient number of authorized shares available to settle these instruments, they were revalued and any difference from the previous valuation date would be recognized as a change in fair value in our statement of operations.

Valuation of Conversion Features Related to Convertible Note Payable, Related Party.In accordance with SFAS 133, we were required to separately account for the fair value of our right to automatically convert the note payable to equity pursuant to the terms of the convertible note payable issued on February 14, 2008 (See Note 2 of our Notes to Condensed Financial Statements). We estimated the fair value of this right using a Black-Scholes model and used estimates for an expected dividend yield, a risk-free interest rate, and expected asset-based volatility, together with management’s estimate of the probability of exercise of the puts.

On June 27, 2008, we entered into an amendment to the convertible note payable which effectively extinguished the original note payable, including its embedded derivative instruments. The June 27, 2008 fair value of the separately-accounted-for embedded derivative instruments was credited to additional paid-in capital as part of recording the capital transaction resulting from the extinguishment of the original note payable.

Valuation of Call Option Related to Convertible Note Payable, Related Party.The convertible note payable issued on February 14, 2008 and subsequently amended on June 27, 2008 includes a call option which gives the holder the right to demand repayment in the case of default. Under the guidance of SFAS 133, we are required to separately account for the fair value of the call option. We determined that the call option had no value at February 14, 2008, March 31, 2008 or June 30, 2008, based on an analysis of the rights this feature contained and the likelihood of its exercise.

Valuation of Prepayment Right Related to Convertible Note Payable, Related Party.The convertible note payable issued on February 14, 2008 and subsequently amended on June 27, 2008 allows us to prepay the unpaid balance of the convertible note and accrued interest at any time and without penalty. Under the guidance of SFAS 133, we are required to separately account for the fair value of the prepayment right. We determined that this right had no value at February 14, 2008, March 31, 2008 or June 30, 2008, based on an analysis of the right and the likelihood of its exercise.

Results of Operations

As of June 30, 2008, our accumulated deficit was approximately $30,290,200. We may continue to incur substantial operating losses over the next several years, due principally to the costs associated with our current level of operations, continued commercialization of our technology, and initiation of our pharmaceutical programs. Our net loss for the three months ended June 30, 2008 was approximately $1,448,300, or $0.06 per share, reflecting an increase of approximately $617,100 compared to $831,200, or $0.03 per share, for the same period in 2007. Excluding administrative services revenue from a related party and related costs, the increase in net loss for the second quarter of 2008 compared to the same period in 2007 was primarily due to a decrease in peptide sales of approximately $117,800, an increase in operating expenses of $77,100 and an increase in interest expense and other non-operating expenses related to the convertible note payable of $456,400, partially offset by an increase in royalty revenue of approximately $42,600. Net loss for the six months ended June 30, 2008 was approximately $2,723,300, or $0.11 per share, representing an increase of $1,079,600 compared to $1,643,700, or $0.07 per share, for the six months ended June 30, 2007. Excluding administrative services revenue from a related party and related costs, the increase in net loss for the first six months of 2008 compared to the same period in 2007 was primarily due to a decrease in peptide sales of approximately $53,400, an increase in operating expenses of approximately $231,100 and an increase in interest expense and other non-operating expenses relating to the convertible note payable of $913,300, partially offset by an increase in development fees and royalty revenue of approximately $160,200.

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Revenue

Revenue in the three months ended June 30, 2008 and 2007 consisted primarily of license fees, development fees, peptide sales and administrative services revenue as summarized in the table below.

	Three Months Ended June 30,				Change		Six Months Ended June 30,				Change
	2008		2007				2008		2007
License and development fees	$	59,330	$	16,747	254.3	%	$	206,392	$	46,241	346.3	%
Peptide sales		6,143		59,507	(89.6	)%		99,451		88,435	12.5	%
Peptide sales, related party		—		64,400	*			—		64,400	*
Administrative services revenue, related party		21,772		—	*			21,772		—	*
Total revenue	$	87,245	$	140,654	(38.0	)%	$	327,615	$	199,076	64.6	%

* Percentage not meaningful

Revenue for the three months ended June 30, 2008, excluding administrative services revenue from DermaVentures, a related party, compared to the same period last year decreased by approximately $75,200 or 53.5%. The revenue decrease was comprised of a decrease in peptide sales of approximately $117,800, partially offset by an increase in licensing fees of approximately $42,600. Peptide sales to DermaVentures in the second quarter of 2008 were $0 compared to $64,400 for the same period in 2007.

Revenue for the six months ended June 30, 2008, excluding administrative services revenue from DermaVentures, compared to the same period last year increased by approximately $106,800, or 53.6%, due primarily to an increase in licensing and development fees of $160,200, partially offset by a decrease of $53,400 in peptide sales. Development fees increased by $130,000 during the first six months of 2008 compared to the same period in 2007, due to the timing of the achievement of certain milestones. Licensing fees increased by approximately $30,200 during the six months ended June 30, 2008, reflecting royalty earned from peptide sales in 2007.

Revenue for the three and six months ended June 30, 2008 included $21,800 of administrative services revenue received from DermaVentures, a related party, for marketing costs associated with DermaVentures’ product line and other out-of-pocket expenses we incurred on DermaVentures’ behalf. Administrative services revenue is typically invoiced to DermaVentures at cost and therefore has no net effect on net income (loss).

Cost of Revenue

Cost of revenue consists of (1) cost of peptides sold, (2) cost of administrative services revenue from DermaVentures, a related party, which includes primarily marketing campaign costs associated with DermaVentures’ product line and other out-of pocket expenses we incur on DermaVentures’ behalf, and (3) other cost of revenue, which may include the cost of materials used in development activities and professional fees incurred related to development agreements. The following table provides cost of revenue data for the three and six months ended June 30, 2008. There was no other cost of revenue or cost of administrative services revenue for the three and six months ended June 30, 2007.

	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2008			2007					2008			2007
Cost of peptides	$	6,085		$	10,421		(41.6	)%	$	75,469		$	10,421		624.2	%
Percentage of total revenue		7.0	%		7.4	%				23.0	%		5.2	%
Percentage of related revenue		99.1	%		8.4	%				75.9	%		11.8	%
Cost of administrative services revenue, related party	$	21,772			—		*		$	21,772			—		*
Percentage of total revenue		25.0	%		—					6.6	%		—
Percentage of related revenue		100.0	%		—					100.0	%		—
Other cost of revenue		—			—		*		$	38,781			—		*
Percentage of total revenue		—			—					11.8	%		—
Percentage of related revenue		—			—					18.8	%		—

* Percentage not meaningful

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Cost of peptide sales for the three months ended June 30, 2008, excluding cost of administrative services revenue, was approximately $6,100, a decrease of $4,300, or 41.6%, compared to the same period in 2007. Cost of peptide sales for the six months ended June 30, 2008, excluding cost of administrative services revenue, was approximately $75,500, an increase of $65,000, or 624.2%, compared to the same period in 2007. Peptide sales in the first six months of 2008 resulted in a positive margin because peptides are sold at cost only to certain customers based on the terms of respective licensing agreements. Peptide sales in the three and six months ended June 30, 2007 resulted in a large margin because the peptides sold in those periods had been written down to their net estimated realizable value in 2006.

Cost of administrative services revenue for the three and six months ended June 30, 2008 consisted of approximately $18,700 related to marketing services and $3,100 of out-of-pocket expenses. Cost of administrative services revenue for the three and six months ended June 30, 2007 was not material.

Other cost of revenue for the six months ended June 30, 2008 consisted primarily of professional fees for services performed in connection with a joint development agreement. We did not incur any other cost of revenue for the three months ended June 30, 2008 or for the three and six months ended June 30, 2007.

Research and Development Expenses

Research and development (R&D) expenses consist primarily of salaries and benefit expenses, stock-based compensation, cost of external studies and trials, and contract and other outside service fees related to our R&D efforts. R&D expenses for the three and six months ended June 30, 2008 and 2007 are summarized in the table below.

	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2008			2007					2008			2007
Research and development	$	198,238		$	202,458		(2.1	)%	$	393,415		$	407,955		(3.6	)%
Percentage of total revenue		227.2	%		143.9	%				120.1	%		204.9	%

R&D expenses for the three months ended June 30, 2008 compared to the same period last year decreased by approximately $4,200, or 2.1%, due primarily to lower spending in lab consumables and external studies of approximately $12,100 and a decrease of approximately $3,000 in stock-based compensation, partially offset by an increase of approximately $10,900 in employee-related expenses.

R&D expenses for the six months ended June 30, 2008 compared to the same period last year decreased by approximately $14,500, or 3.6%, due primarily to lower spending in lab consumables and external studies of approximately $38,400 and a decrease of approximately $6,000 in stock-based compensation, partially offset by an increase of approximately $28,000 in employee-related expenses and $1,900 of other R&D expenses.

Employee-related expenses for the three and six months ended June 30, 2008 included approximately $7,400 and $18,000, respectively, of employee benefits that were recorded in general and administrative expenses in previous years. For the remainder of 2008, we expect R&D expenses to remain relatively consistent with the level experienced during the first six months of 2008.

Marketing and Business Development Expenses

Marketing and business development (M&BD) expenses consist primarily of salaries and benefit expenses, stock-based compensation, consulting fees and various marketing costs. M&BD expenses for the three and six months ended June 30, 2008 and 2007 are summarized in the table below.

	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2008			2007					2008			2007
Marketing and business development	$	89,041		$	105,123		(15.3	)%	$	203,728		$	209,334		(2.7	)%
Percentage of total revenue		102.1	%		74.7	%				62.2	%		105.2	%

M&BD expenses for the three months ended June 30, 2008, decreased by approximately $16,100, or 15.3%, compared to the same period in 2007. The decrease was primarily attributable to decreases of approximately $15,300 in consulting fees, $5,200 in employee-related expenses and $6,400 in stock-based compensation, partially offset by an increase of approximately $10,800 in marketing expenses.

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M&BD expenses for the six months ended June 30, 2008, decreased by approximately $5,600, or 2.7%, compared to the same period in 2007. The decrease was primarily attributable to decreases of approximately $18,100 in employee-related expenses and $16,300 in stock-based compensation, partially offset by increases of approximately $12,000 in consulting fees and $16,800 in marketing expenses.

Employee-related expenses for the three and six months ended June 30, 2008 included approximately $2,300 and $4,600, respectively, of employee benefits that were recorded in general and administrative expenses in previous years. For the remainder of 2008, we expect M&BD expenses to increase slightly from the level experienced during the first six months of 2008 due to anticipated increased activities in product marketing and business development efforts.

General and Administrative Expenses

General and administrative (G&A) expenses consist primarily of salaries and benefit expenses, stock-based compensation, consulting fees and general corporate expenditures. G&A expenses for the three and six months ended June 30, 2008 and 2007 are summarized in the table below.

	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2008			2007					2008			2007
General and administrative	$	586,650		$	502,004		16.9	%	$	1,020,019		$	892,711		14.3	%
Percentage of total revenue		672.4	%		356.9	%				311.3	%		448.4	%

G&A expenses for the three months ended June 30, 2008, increased by approximately $84,600, or 16.9%, compared to the same period in 2007. The increase was primarily due to increases of approximately $76,500 in employee-related expenses and $49,700 in stock-based compensation, partially offset by a decrease of approximately $41,600 in general corporate expenses.

G&A expenses for the six months ended June 30, 2008, increased by approximately $127,300, or 14.3%, compared to the same period in 2007. The increase was primarily due to increases of approximately $65,300 in employee-related expenses and $67,500 in stock-based compensation, partially offset by a decrease of approximately $5,500 in general corporate expenses.

For the three and six months ended June 30, 2008, the increase in employee-rated expenses included an aggregate of $107,500 of severance and other cash payments, and the increase in stock-based compensation included approximately $60,000 of expense related to the modification of an option grant, all related to the departure of the Company’s Chief Financial Officer in June 2008. The decrease in other G&A expenses was primarily due to lower spending in compliance costs associated with the Sarbanes-Oxley Act of 2002 and consulting fees. For the remainder of 2008, we expect G&A expenses to be consistent with the level experienced during the first six months of 2008, net of severance expenses.

Accounting, Legal and Professional Fees Expenses

Accounting, legal and professional fees expenses for the three and six months ended June 30, 2008 and 2007 are summarized in the table below.

	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2008			2007					2008			2007
Accounting, legal and professional fees	$	159,502		$	133,746		19.3	%	$	320,317		$	282,223		13.5	%
Percentage of total revenue		182.8	%		95.1	%				97.8	%		141.8	%

Accounting, legal and professional fees expenses for the three months ended June 30, 2008 increased by approximately $25,800, or 19.3%, compared to the same period in 2007. The increase was primarily due to an increase in accounting fees of approximately $43,900, partially offset by a $18,100 decrease in legal and other professional fees associated with patent applications, license agreement negotiations and other corporate matters.

Accounting, legal and professional fees expenses for the six months ended June 30, 2008 increased by approximately $38,100, or 13.5%, compared to the same period in 2007. The increase was primarily due to an increase in accounting fees of approximately $52,200, partially offset by a $14,100 decrease in legal and other professional fees.

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For the remainder of 2008, we expect accounting, legal and professional fees to increase from the level experienced during the first six months of 2008 due to increased activities associated with our capital raising efforts.

Depreciation and Amortization Expenses

Depreciation and amortization expenses for the three and six months ended June 30, 2008 and 2007 are summarized in the table below.

	Three Months Ended June 30,						Change		Six Months Ended June 30,						Change
	2008			2007					2008			2007
Depreciation and amortization	$	34,901		$	43,542		(19.8	)%	$	69,950		$	87,964		20.5	%
Percentage of total revenue		40.0	%		31.0	%				21.4	%		44.2	%

Depreciation and amortization expenses for the three months ended June 30, 2008, decreased by approximately $8,600, or 19.8%, compared to the same period last year and for the six months ended June 30, 2008, decreased by approximately $18,000, or 20.5%, compared to the same period last year. The decrease for the three and six months ended June 30, 2008 was primarily due to incremental depreciation expenses from assets purchased being offset by reduced depreciation from other assets becoming fully depreciated. For the remainder of 2008, we expect depreciation and amortization expenses to be consistent with the levels experienced in the first six months of 2008.

Other Income (Expense)

Other income (expense) consists of interest income, interest expense related to the convertible note payable, accretion of discount on the convertible note payable, change in valuation of derivative instruments and unrealized loss related to ARS deemed to be other than temporary. Other income (expense), net for the three and six months ended June 30, 2008 and 2007 are summarized in the table below.

	Three Months Ended June 30,					Change		Six Months Ended June 30,					Change
	2008			2007				2008			2007
Interest income	$	17,074		$	25,478	(33.0	)%	$	35,864		$	47,881	(25.1	)%
Interest expense on convertible note payable, related party		(63,120	)		—	*			(93,698	)		—	*
Accretion of discount on convertible note payable, related party		(546,011	)		—	*			(831,426	)		—	*
Change in value of derivative instruments, including related party		152,706			—	*			11,803			—	*
Unrealized loss of marketable securities		—			—	*			(30,000	)		—	*
Other income (expense), net	$	(439,351	)	$	25,478	(1824.4	)%	$	(907,457	)	$	47,881	(1995.2	)%

* percentage not meaningful

Interest Income.Interest income for the three and six months ended June 30, 2008 decreased by approximately $8,400, or 33.0%, and $12,000, or 25.1%, compared to the respective periods in 2007, due primarily to lower average cash and investment balances and lower interest rates. For the remainder of 2008, we expect interest income to decrease gradually as our balance in cash and cash equivalents decreases.

Interest Expense.For the three and six months ended June 30, 2008, interest expense related to the convertible note payable issued to a related party was approximately $63,100 and $93,700, respectively. We anticipate future quarterly interest expense to be consistent with the levels experienced with the three months ended June 30, 2008 until the note is repaid or converted.

Accretion of Discount on Convertible Note Payable, Related Party.For the three and six months ended June 30, 2008, accretion of discount on convertible note payable issued on February 14, 2008 was approximately $546,000 and $831,400, respectively, which represented the increase in carrying value of the convertible note from the issuance date through June 27, 2008. At June 27, 2008, this convertible note payable was effectively extinguished and replaced by an amended note payable (see Note 2 of the Notes to our Condensed Financial Statements). As a result, we expect no further accretion of discount on the convertible note payable.

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Change in Value of Derivative Instruments. For the period from April 1, 2008 to June 27, 2008, the change in fair value of derivative instruments resulted in a net gain of approximately $152,700, comprised of a decrease of approximately $229,500 in the fair value of outstanding warrants and non-employee stock options, partially offset by a decrease of approximately $24,200 in the fair value of the put option and an increase of $52,600 in the fair value of the warrant related to the original convertible note payable. For the period from February 14, 2008 to June 27, 2008, the change in fair value of the derivative instruments resulted in a net gain of approximately $11,800, comprised of a decrease of approximately $473,700 in the fair value of outstanding warrants and non-employee stock options, partially offset by a decrease of $186,500 in the fair value of the put option and an increase of approximately $275,400 in the fair value of the warrant related to the original convertible note payable. The change in fair value of these derivative instruments depends on a number of factors, including risk-free interest rates, stock price volatility and estimated expected terms for these instruments, and, for the warrant and put option related to the convertible note payable, the probability of exercise. In accordance with EITF 96-19, at the amendment of the convertible note payable on June 27, 2008, we recorded an extinguishment of the original convertible note payable and reclassified the fair value of the then outstanding derivative instruments to equity.

Unrealized Loss on Marketable Securities.For the three and six months ended June 30, 2008, we recognized an unrealized loss of $30,000 on our investment in ARS due to the current lack of liquidity associated with these investments. At June 30, 2008, we estimated that the fair value of our ARS was approximately $187,600, an increase of $17,600 from March 31, 2008, based on a valuation of other investments carrying similar interest rates and expected maturities and, accordingly, recorded a change in fair value of $17,600 in accumulated other comprehensive income (loss). We will continue to monitor and evaluate these investments as there is no assurance as to when the market for this investment class will stabilize.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the private sale of debt and equity securities. Our principal sources of liquidity are cash, cash equivalents and available-for-sale marketable securities. As of June 30, 2008, we had approximately $2,375,400 in cash and cash equivalents and $187,600 in available-for-sale marketable securities, compared to approximately $461,300 in cash and cash equivalents and $700,000 in available-for-sale marketable securities at December 31, 2007. The increase in cash and cash equivalents from December 31, 2007, was primarily attributable to the net proceeds of approximately $3,000,000 from our issuance of a convertible note payable and $500,000 from sales of marketable securities, partially offset by cash used in operations of approximately $1,554,000 during the first six months of 2008.

We use a professional investment management firm to manage a portion of our invested cash. At June 30, 2008, our available-for-sale marketable securities, comprised of ARS, were $200,000 at par value. These securities are structured to allow for interest rate resets at approximately every 28 days, but with contractual maturities that are well in excess of ten years. Historically, the carrying value of ARS approximated fair value due to the frequent interest rate resets. Of the ARS we hold, an aggregate of $100,000 (par value) was issued by state agencies and is supported by student loans for which repayment is substantially guaranteed by the U.S. government under the Federal Family Education Loan Program (FFELP) and the remaining $100,000 (par value) was issued by municipalities and repayment is insured by MBIA Insurance Corporation, a bond insurance company. Our ARS are rated by the major independent rating agencies as AAA and AA investments. Until early February 2008, the ARS market was fairly liquid and we were able to auction to sell these securities at par at the end of each reset period or continue to hold them. During February 2008, ARS increasingly failed at auction due to sell orders exceeding buy orders. Since March 2008, we have experienced failed auctions of our ARS. These failures are not believed to be a credit issue, but rather are caused by a lack of liquidity. While we continue to earn and receive interest on these investments, we deemed that the estimated fair value of these ARS no longer approximates par value. At March 31, 2008, we concluded that the fair value of these ARS was $170,000 and considered the impairment to be other-than-temporary. As a result, we recorded an unrealized loss of $30,000 in the statement of operations for the first quarter of 2008. At June 30, 2008, we estimated that the fair value of our ARS was approximately $187,600 based on the valuation of other investments carrying similar interest rates and expected maturities and, accordingly, recorded a change in fair value of approximately $17,600 in accumulated other comprehensive income (loss). In July 2008, one of our ARS in the amount of $50,000 was called by the issuer at par. In the event that we need to liquidate the remainder of our investments in ARS, we may not be able to do so without a loss of principal until (1) a future auction of these securities is successful, (2) we are able to sell the securities in a secondary market, or (3) the issuer calls the securities pursuant to a mandatory tender or redemption prior to maturity. As such, with the exception of

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$50,000 of ARS that was called by the issuer in July 2008 and converted to cash, our investment in ARS currently lacks short-term liquidity and was therefore presented as non-current marketable securities as of June 30, 2008. We will continue to monitor and evaluate these investments as there is no assurance as to when the market for this investment class will stabilize.

Cash used in operating activities for the six months ended June 30, 2008, was approximately $1,554,000, derived primarily from the net loss for the period of approximately $2,723,300, adjusted by non-cash expenses, including approximately $70,000 of depreciation and amortization of intangible assets, $122,700 of stock-based compensation, $93,700 of interest expense, $831,400 of accretion of discount on the convertible note payable issued on February 14, 2008, $11,800 of change in fair value of derivative instruments, $30,000 of unrealized loss on marketable securities and a net decrease of working capital, excluding cash, cash equivalents and available-for-sale marketable securities, of approximately $33,300. Cash used in operations for the six months ended June 30, 2007, was approximately $1,654,900, due primarily to the net loss for the period of approximately $1,643,700, adjusted by non-cash expenses, including $88,000 of depreciation and amortization and $77,500 of stock-based compensation, and a net increase in working capital, excluding cash, cash equivalents and available-for-sale marketable securities, of $176,800.

Accounts receivable increased by $43,400 during the six months ended June 30, 2008, compared to a decrease of $141,600, which included $64,500 of accounts receivable from a related party, for the same period in 2007. The fluctuations were primarily attributable to the timing of peptide orders, royalty reports received from our licensees and the achievement of certain milestones. Inventory, comprised of peptides held for resale, decreased by approximately $12,300 and $34,800 in the first six months of 2008 and 2007, respectively, due primarily to increased peptide sales. Deferred revenue decreased by $130,000 and $10,000 in the six months ended June 30, 2008 and 2007, respectively. As our deferred revenue is typically associated with license and development agreements, the decreases were due primarily to the timing of the achievement of certain milestones.

During the six months ended June 30, 2008 and 2007, our investing activities consisted primarily of purchases, sales and maturities of available-for-sale marketable securities, and acquisition of capital equipment. Cash provided by investing activities was approximately $473,300 during the first six months of 2008, consisting of sale proceeds of marketable securities of $500,000, partially offset by purchases of capital equipment of approximately $26,700. For the six months ended June 30, 2007, cash used by investing activities was approximately $776,700, consisting of net purchases of marketable securities of $775,000 and acquisition of capital equipment of approximately $1,800. For 2008, we do not expect the level of capital expenditures to be significant.

Cash provided by financing activities for the six months ended June 30, 2008 and 2007 was approximately $2,994,700 and $2,143,400, respectively. In February 2008, we issued to RBFSC, Inc., a related party, a convertible promissory note (the Note) in the principal amount of $3.0 million with an interest rate of 8% per annum, which Note was subsequently amended in June 2008 (see Note 2 of the Notes to our Condensed Financial Statements for a detailed discussion of the Note). The principal balance and accrued interest are due on the earlier of July 1, 2011, or upon an event of default under the Note, including in the event that we file for bankruptcy On March 5, 2007, we closed a private equity financing, receiving cash of approximately $2,000,000 in exchange for 2,666,666 shares of common stock. In a second closing held on March 26, 2007, we received cash of approximately $148,750 in exchange for 198,332 shares of common stock.

Based on the current status of our operating plans and product commercialization development, we estimate that our existing cash, cash equivalents and marketable securities will be sufficient to fund our operations at current levels through the remainder of 2008. We will need substantial additional capital in order to maintain the current level of operations beyond 2008, continue commercialization of our technology and advance our pharmaceutical programs. Accordingly, we are making preparations to raise additional funding, which may include debt and/or equity financing. However, there is no assurance that additional funding will be available on favorable terms, if at all. If we are unable to obtain the necessary additional funding, we would be required to significantly reduce the scope of operations, which would significantly impede our ability to proceed with current operational plans and could lead to the curtailment of our business.

The amount of capital we will need in the future will depend on many factors, including capital expenditures and hiring plans to accommodate future growth, research and development plans, future demand for our products and technology, and general economic conditions.

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Contractual Obligations and Purchase Commitments

The following table summarizes our contractual obligations and purchase commitment and the effect such obligations are expected to have on liquidity in future periods as of June 30, 2008:

Contractual Obligations and Purchase Commitments	Less than 1 year		More than 1 year		Total
Operating lease	$	76,261	$	32,165	$	108,426
Purchase obligations(1)		124,627		—		124,627
Convertible note payable, related party and related accrued interest(2)		—		3,092,712		3,092,712
Severance payments		90,000		—		90,000
Total contractual obligations and purchase commitments	$	290,888	$	3,124,877	$	3,415,765

(1) On August 2, 2007, we entered into an agreement with Peptisyntha, Inc. for the purchase of a certain peptide over a period of eighteen months from the agreement date. The aggregate purchase requirement under this agreement over the eighteen-month period is $234,000. As of June 30, 2008, we had purchased a total of approximately $109,400 under this agreement.

(2) Not included is the accretion of debt discount related to the convertible note payable, related party. Interest is accrued at the rate of 8% per annum and is due and payable on the earlier of July 1, 2011, or when called by the note holder upon an event of default, including in the event we file for bankruptcy. Assuming no principal prepayments on this convertible note payable and no conversion into equity before July 1, 2011, we would incur approximately $811,000 of total interest on the original and amended convertible note payable.

Recent Accounting Pronouncements

With the exception of those discussed below and in Note 4 of the Notes to our Condensed Financial Statements, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2008 that have a material impact on our results of operations and financial position from those described in the our Annual Report on Form 10-K for the year ended December 31, 2007.

We implemented SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115,” and EITF No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,” effective January 1, 2008, the implementation of which did not have an impact on our financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We are currently evaluating the impact, if any, this standard will have on our financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3 (FSO 142-3), “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. Early adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. We are currently evaluating the impact of FSP 142-3 on our financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162), which identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with

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generally accepted accounting principles. SFAS 162 will become effective 60 days following approval by the SEC of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of SFAS 162 will have an effect on our financial position, results of operations or cash flows.

ITEM 4. Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our senior management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC filings.

There has been no change in our internal control over financial reporting during the quarter that ended June 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1A. Risk Factors.

There are numerous factors that affect our business and results of operations, many of which are beyond our control. Please see our Annual Report on Form 10-K for the year ended December 31, 2007 and our Quarterly Report for the three months ended March 31, 2008 for a description of some of the risks and uncertainties that we face. If any of those risks were to occur, our business, operating results and financial condition could be seriously harmed.

ITEM 4. Submission of Matters to a Vote of Security Holders.

Our Annual Meeting of Stockholders was held on May 15, 2008, at which there were two matters submitted to a vote of security holders:

1. To elect four Class II directors to serve until the 2011 Annual Meeting of Stockholders or until such directors’ successors are elected and qualified:

Nominee	For	Withheld
John C. Fiddes	15,341,185	136,248
Jeffrey A. Miller	15,341,205	136,228
David M. O’Connor	15,341,231	136,202
Daniel O. Wilds	15,309,231	168,202

2. To ratify the appointment of KPMG LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008:

For	Against	Abstain
15,392,504	49,886	35,043

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ITEM 6. Exhibits.

Exhibit Number (Referenced to Item 601 of Regulation S-K)	Exhibit Description
2.1	Proposal for Approval of Reincorporation of Helix BioMedix, Inc., a Colorado corporation, from Colorado to Delaware (incorporated by reference to Exhibit 2 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 16, 2001)
3.1	Certificate of Ownership and Merger of Helix BioMedix, Inc. a Delaware corporation and Helix BioMedix, Inc., a Louisiana corporation (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 16, 2001)
3.2	Certificate of Incorporation of Helix BioMedix, Inc. (incorporated by reference to Exhibit 3-A to the Company’s Annual Report on Form 10-KSB/A filed with the Securities and Exchange Commission on April 30, 2003)
3.3	Certificate of Amendment to the Certificate of Incorporation of Helix BioMedix, Inc. (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-KSB/A filed with the Securities and Exchange Commission on April 30, 2003)
3.4	Bylaws of Helix BioMedix, Inc. (incorporated by reference to Exhibit 3-B to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on April 16, 2001)
4.1	Rights Agreement dated August 21, 2003 (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 26, 2004)
4.2	Acceptance and Acknowledgement of Appointment dated January 4, 2004 (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission on March 26, 2004)
10.5(b)	Second Amendment to Employment Letter Agreement dated effective as of June 30, 2008 between the Company and Robin L. Carmichael
10.17(c)	First Amendment to Note and Warrant Purchase Agreement and Convertible Promissory Note dated as of June 27, 2008 between the Company and RBFSC, Inc.
31.1	Certification of the Company’s Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
31.2	Certification of the Company’s Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934
32.1	Certification of the Company’s Chief Executive Officer Pursuant to 18 U.S.C. Section 1350
32.2	Certification of the Company’s Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

July 30, 2008

HELIX BIOMEDIX, INC.
(Registrant)
By:	/s/ R. Stephen Beatty
	R. Stephen Beatty
	President and Chief Executive Officer and Acting Chief Financial Officer (Principal Executive Officer and Acting Principal Financial Officer)

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