UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended June 30, 2005.
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

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

For the Quarterly Period Ended March 31, 2007.

¨ 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: 0-497

Lipid Sciences, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 43-0433090 (I.R.S. Employer Identification No.)

Delaware		43-0433090
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

7068 Koll Center Parkway, Suite 401, Pleasanton, California 94566~~(Address of principal executive offices) (Zip Code)~~

(~~925) 249-4000 (Registrant’s telephone~~Address ~~number,~~of ~~including~~principal ~~area~~executive ~~code~~offices) (Zip Code)

~~Indicate by check mark whether the registrant~~ (1925) ~~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 ý No o249-4000

~~Indicate by check mark whether the registrant is an accelerated filer~~ (asRegistrant’s telephone ~~defined~~number, inincluding ~~Rule~~area ~~12b-2 of the Exchange Act~~code)~~. Yes o No ý~~

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non - accelerated filer x

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

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

Class		Shares ~~outstanding~~Outstanding at ~~July~~April 3130, ~~2005~~2007
Common Stock $0.001 par value		2437,~~921~~120,~~763~~139

LIPID SCIENCES, INC.

FORM 10-Q

For ~~the~~ the Period Ended ~~June~~March 3031, ~~2005~~2007

~~Table of~~TABLE ~~Contents~~OF CONTENTS

		Page No.
PART I — FINANCIAL INFORMATION		Page No.
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004	1
	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	1
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004, and cumulative period from Inception (May 21, 1999) to June 30, 2005	2
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006, and Cumulative period from Inception (May 21, 1999) to March 31, 2007	2
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004, and cumulative period from Inception (May 21, 1999) to June 30, 2005	3
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006, and Cumulative period from Inception (May 21, 1999) to March 31, 2007	3
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	910
Item 3.	Quantitative and Qualitative Disclosures ~~about~~About Market Risk	1914
Item 4.	Controls and Procedures	1914
PART II – OTHER INFORMATION
Item 4T.	Controls and Procedures	14
Item 1.	Legal Proceedings	20
PART II — OTHER INFORMATION		15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 1.	Legal Proceedings	15
Item 3.	Defaults Upon Senior Securities	20
Item 1A.	Risk Factors	15
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 5.	Other Information	20
Item 3.	Defaults Upon Senior Securities	15
Item 6.	Exhibits	20
Item 4.	Submission of Matters to a Vote of Security Holders	15
SIGNATURES		21
Item 5.	Other Information	15
INDEX TO EXHIBITS FOR FORM 10-Q		22
Item 6.	Exhibits	15
SIGNATURES		16
INDEX TO EXHIBITS FOR FORM 10-Q		17

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Lipid Sciences, Inc.

(A Development Stage Company)

Condensed Consolidated Balance ~~Sheet~~Sheets (Unaudited) (In thousands, except share amounts)

(In thousands, except share amounts)	June 30, 2005			December 31, 2004
	March 31, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	314,~~881~~459		$	416,~~640~~691
Short-term investments	9,918			12,414
Accounts receivable	72			—
Prepaid expenses	~~177~~288			~~313~~273
Restricted cash	—			105
Other current assets	71			79
Other current assets	10			11
Total current assets	14,890			17,043
Assets held for sale	—			1,167
Property and equipment	347			374
Total current assets	13,986			18,650
Long-term lease deposits	19			19
Property and equipment	448			436
Total assets	$	15,256		$	17,436
Long-term lease deposits	19			—
Total assets	$	14,453		$	19,086
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	1,~~505~~592		$	~~863~~1,511
Accrued related party royalties	~~500~~375			~~750~~250
Accrued compensation	~~372~~509			~~542~~680
Income taxes payable	4			—
Taxes payable	2			—
Other current liabilities	—			20
Deferred revenue	20			—
Total current liabilities	2,~~381~~498			2,~~175~~441
Deferred rent	317			—16
Total liabilities	2,~~384~~515			2,~~175~~457
Commitments and contingencies (Note 5)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized and issuable; no shares outstanding	—			—
Common stock, $0.001 par value; 75,000,000 shares authorized; 24,921,763 and 24,912,263 shares issued and outstanding at June 30, 2005 and December 31, 2004, respectively	25			25
Common stock, $0.001 par value; 75,000,000 shares authorized; 37,120,139 and 37,120,139 shares issued and outstanding at March 31, 2007 and December 31, 2006, respectively	37			37
Additional paid-in capital	7089,~~125~~618			6989,~~953~~400
Deficit accumulated in the development stage	(5876,~~081~~914		)	(5374,~~067~~458		)
Total stockholders’ equity	12,~~069~~741			1614,~~911~~979
Total liabilities and stockholders’ equity	$	1415,~~453~~256		$	1917,~~086~~436

See accompanying Notes to Condensed Consolidated Financial Statements

Lipid Sciences, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,						Period from Inception (May 21, 1999) to June 30,
	Three Months Ended March 31,						Period from Inception (May 21, 1999) to March 31,
(In thousands, except per share amounts)	~~2005~~2007			~~2004~~2006			~~2005~~2007			~~2004~~			~~2005~~
Grant Revenue	$	1		$	—		$	1		$	—		$	33
Revenue:
Operating expenses:
Collaboration agreement revenue	$	59		$	—		$	59
Research and development	1,872			2,655			3,495			4,482			48,574
Grant revenue	—			22			100
Selling, general and administrative	861			854			1,709			1,921			21,264
Total revenue	59			22			159
Total operating expenses	2,733			3,509			5,204			6,403			69,838
Operating expenses:
Operating loss	(2,732		)	(3,509		)	(5,203		)	(6,403		)	(69,805		)
Research and development(1)	1,813			1,950			61,620
Interest and other income	102			23			189			211			3,317
Selling, general and administrative(2)	906			1,209			28,224
Loss from continuing operations	(2,630		)	(3,486		)	(5,014		)	(6,192		)	(66,488		)
Total operating expenses	2,719			3,159			89,844
Income tax benefit	—			—			—			—			8,004
Operating loss	(2,660		)	(3,137		)	(89,685		)
Net loss from continuing operations	(2,630		)	(3,486		)	(5,014		)	(6,192		)	(58,484		)
Interest and other income	204			140			4,364
Discontinued operations:
Loss from continuing operations	(2,456		)	(2,997		)	(85,321		)
Income/(loss) from discontinued operations	—			(76		)	—			(14		)	582
Income tax benefit	—			—			8,004
Income tax expense	—			—			—			—			(179		)
Net loss from continuing operations	(2,456		)	(2,997		)	(77,317		)
Income/(loss) from discontinued operations - net	—			(76		)	—			(14		)	403
Discontinued operations:
Net loss	$	(2,630	)	$	(3,562	)	$	(5,014	)	$	(6,206	)	$	(58,081	)
Income from discontinued operations	—			—			582
Loss per share — basic and diluted:
Income tax expense	—			—			(179		)
Net loss per share continuing operations	$	(0.11	)	$	(0.14	)	$	(0.20	)	$	(0.25	)
Income from discontinued operations - net	—			—			403
Net loss per share discontinued operations	$	0.00		$	0.00		$	0.00		$	0.00
Net loss	$	(2,456	)	$	(2,997	)	$	(76,914	)
Net loss per share	$	(0.11	)	$	(0.14	)	$	(0.20	)	$	(0.25	)
Loss per share — basic and diluted:
Weighted average number of common shares outstanding — basic and diluted	24,920			24,659			24,916			24,548
Net loss per share	$	(0.07	)	$	(0.11	)
Weighted average number of common shares outstanding — basic and diluted	37,120			27,361
Non-cash option compensation expense included in operating expenses:
(1) Research and development	78			222
(2) Selling, general and administrative	120			203

See accompanying Notes to Condensed Consolidated Financial Statements

Lipid Sciences, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,						Period from Inception (May 21, 1999) to June 30,
	Three Months Ended March 31,						Period from Inception (May 21, 1999) to March 31,
(In thousands)	~~2005~~2007			~~2004~~2006			~~2005~~2007
Cash flows (used in)/provided by operating activities:
Cash flows used in operating activities:
Net loss from continuing operations	$	(52,~~014~~456	)	$	(62,~~192~~997	)	$	(5877,~~485~~317	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization	~~114~~46			~~162~~53			1,~~074~~430
Loss on disposal of assets	—			—			~~203~~206
Accretion of discount on investments	~~(136~~—		)	(51117		)	(~~418~~891		)
Stock compensation expense for options issued to consultants and advisors	162			1,448			6,140
Stock compensation expense for options issued to consultants, employees and advisors	198			425			7,224
Issuance of warrants to consultants	—			—			1,~~044~~282
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	137			146			(187		)
Accounts receivable	(72		)	—			(72		)
Notes receivable	—			5,513			6,569
Prepaid expenses and other current assets	(7		)	98			(359		)
Other assets	(19		)	—			(19		)
Notes receivable	—			—			6,569
Income taxes	4			(16		)	4
Other assets	—			—			(19		)
Accounts payable and other current liabilities	537			(723		)	(629		)
Taxes payable	2			3			2
Accrued related party royalties	(250		)	250			500
Accounts payable and other current liabilities	106			196			(452		)
Accrued compensation	(170		)	(52		)	372
Accrued related party royalties	125			125			375
Deferred rent	3			(5		)	3
Accrued compensation	(171		)	140			509
Net cash (used in)/provided by operating activities	(4,632		)	480			(43,829		)
Deferred revenue	20			—			20
Deferred rent	1			2			17
Net cash used in operating activities of continuing operations	(2,208		)	(2,072		)	(61,476		)
Cash flows provided by/(used in) investing activities:
Capital expenditures	(4144		)	(3915		)	(1,~~654~~998		)
Restricted cash	105			108			—
Proceeds from disposal of assets	—			—			17
Proceeds from disposal of assets	—			—			14
Purchases of investments	—			(2,436		)	(91,395		)
Purchases of investments	(7,368		)	(6,933		)	(48,125		)
Maturities and sales of investments	—			5,000			92,286
Maturities and sales of investments	10,000			7,000			38,625
Net cash provided by/(used in) investing activities of continuing operations	(44		)	2,549			(1,090		)
Net cash provided by/(used in) investing activities	2,696			136			(11,140		)
Cash flows provided by financing activities:
Acquisition of NZ Corporation – cash acquired	—			—			20,666
Acquisition of NZ Corporation — cash acquired	—			—			20,666
Payment of acquisition costs	—			—			(1,863		)
Payment to repurchase stock	—			—			(12,513		)
Proceeds from sale of common stock, net of issuance costs	1020			~~184~~15			1836,~~399~~581
Proceeds from issuance of warrants	—			—			40
Net cash provided by financing activities	10			184			24,729
Net cash provided by financing activities of continuing operations	20			15			42,911
Net (decrease)/increase in cash and cash equivalents from continuing operations	(1,926		)	800			(30,240		)
Net increase/(decrease) in cash and cash equivalents from continuing operations	(2,232		)	492			(19,655		)
Cash flows provided by discontinued operations:
Cash flows provided by discontinued operations
Operating activities	~~1,167~~—			~~6,395~~—			38,~~173~~185
Investing activities	—			—			10,~~856~~837
Financing activities	—			—			(14,908		)
Net cash provided by discontinued operations	~~1,167~~—			~~6,395~~—-			34,~~121~~114
Cash and cash equivalents at beginning of period	416,~~640~~691			41,~~905~~752			—
Cash and cash equivalents at end of period	$	314,~~881~~459		$	122,~~100~~244		$	314,~~881~~459

Lipid Sciences, Inc.

	Three Months Ended March 31,				Period from Inception (May 21, 1999) to March 31,
(In thousands)	2007		2006		2007
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized)	$	—	$	—	$	839
Income tax recovered	—		—		(1,473		)

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING TRANSACTIONS
Acquisition of NZ Corporation:
Current assets (other than cash)	$	—	$	—	$	1,040
Property and equipment	—		—		30,193
Commercial real estate loans	—		—		16,335
Notes and receivables	—		—		15,166
Investments in joint ventures	—		—		2,343
Current liabilities assumed	—		—		(1,947		)
Long-term debt assumed	—		—		(14,908		)
Deferred taxes associated with the acquisition	—		—		(7,936		)
Fair value of assets acquired (other than cash)	$	—	$	—	$	40,286

SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING TRANSACTIONS
Accrued financing costs	$	4	$	—	$	4

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited) — (Continued)

	Six Months Ended June 30,				Period from Inception (May 21, 1999) to June 30,
(In thousands)	2005		2004		2005
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized)	$	—	$	—	$	839
Income tax paid/(recovered)	—		—		(1,473		)
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING TRANSACTIONS
Acquisition of NZ Corporation:
Current assets (other than cash)	$	—	$	—	$	1,040
Property and equipment	—		—		30,193
Commercial real estate loans	—		—		16,335
Notes and receivables	—		—		15,166
Investments in joint ventures	—		—		2,343
Current liabilities assumed	—		—		(1,947		)
Long-term debt assumed	—		—		(14,908		)
Deferred taxes associated with the acquisition	—		—		(7,936		)
Fair value of assets acquired (other than cash)	$	—	$	—	$	40,286
SUPPLEMENTAL DISCLOSURES OF NON-CASH FINANCING TRANSACTIONS
Accrued acquisition costs	$	—	$	—	$	2,050

See accompanying Notes to Condensed Consolidated Financial Statements

Lipid Sciences, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 1: ORGANIZATION AND BASIS OF PRESENTATION

OnIn this ~~November~~Quarterly ~~29,~~Report ~~2001,~~on ~~Lipid~~Form ~~Sciences, Inc., a privately~~10-~~held corporation~~Q, ~~merged with and into NZ Corporation. NZ Corporation survived the merger and changed its name to Lipid Sciences, Inc. In this report,~~ unless the context otherwise requires, ~~the current~~ ~~company,~~ Lipid Sciences, Inc., a Delaware corporation, is referred to as “we,” “the Company” or “Lipid ~~Sciences”~~ ~~with respect to periods of time from the effective date of the merger to the date of this report; the merged company, Lipid~~ Sciences~~, Inc~~.~~, a privately-held corporation, is referred to as “we~~” or “Pre-Merger Lipid” with respect to periods prior to the effective date of the merger; and NZ Corporation is referred to as “NZ,” with respect to periods prior to the effective date of the merger.

~~The~~On November ~~Company~~29, is2001, ~~engaged~~Lipid inSciences, ~~the~~Inc., ~~research~~a ~~and~~privately-held ~~development~~corporation, merged ofwith ~~products~~ and ~~processes~~into ~~intended~~NZ toCorporation, ~~treat~~an ~~major~~Arizona ~~medical~~corporation. Immediately ~~indications~~after ~~such~~the ~~as cardiovascular~~completion ~~disease~~of ~~and~~the merger, ~~viral~~NZ ~~infections~~Corporation inchanged ~~which~~its ~~lipids,~~name orto ~~fat~~Lipid ~~components~~Sciences, ~~play~~ ~~a key role~~Inc. ~~Our~~On ~~primary~~June 26, 2002, ~~activities~~Lipid Sciences ~~since~~changed its state of incorporation ~~have~~from ~~been~~Arizona ~~conducting~~to ~~research~~Delaware. In ~~and~~this ~~development~~Quarterly ~~(including pre-clinical~~Report ~~studies);~~on ~~performing~~Form ~~business~~10-Q, ~~strategic~~we refer ~~and~~to ~~financial~~our ~~planning; and~~former ~~raising~~name, ~~capital. Accordingly~~NZ Corporation, ~~the Company~~as is“NZ,” ~~considered~~and towe berefer into the ~~development~~merged corporation, ~~stage~~Lipid Sciences, Inc., as “Pre-Merger Lipid.”

~~Historically,~~The NZCompany ~~engaged~~is engaged in ~~various~~research ~~real~~and ~~estate~~development of products and ~~commercial~~processes ~~real~~intended ~~estate~~to ~~lending~~treat major ~~activities. On~~medical ~~March~~indications ~~22,~~such ~~2002,~~as ~~the~~cardiovascular ~~Company~~disease ~~formalized~~and aviral infections ~~plan~~in towhich ~~discontinue~~lipids, ~~the~~or ~~operations~~fat ofcomponents, ~~our~~play ~~real~~a ~~estate~~key ~~and~~role. Our ~~real~~primary ~~estate~~activities ~~lending~~since incorporation ~~business,~~have ~~including~~been ~~commercial~~conducting ~~real~~research ~~estate~~and ~~loans,~~development to(including ~~fund~~pre-clinical ~~the ongoing~~studies); ~~operations~~conducting ofa ~~Lipid~~clinical ~~Sciences’~~trial; ~~biotechnology~~performing business~~. As a result~~, westrategic ~~have~~and ~~reclassified the results~~financial ofplanning; ~~operations~~ and ~~the~~raising ~~assets~~capital. Accordingly, ~~and~~the ~~liabilities~~Company ofis ~~the~~considered ~~discontinued~~to ~~operations~~be ~~for all~~in ~~periods~~the ~~presented~~development stage.

In the course of our ~~its~~ research and development activities, ~~the~~we ~~Company~~have ~~has~~incurred ~~sustained~~significant ~~continued~~ operating losses and ~~expects those~~we expect these losses to continue for the foreseeable future as we continue to invest in research and development and begin to allocate significant and increasing resources to clinical testing and other activities related to seeking approval to market our products. As of ~~June~~March 3031, ~~2005~~ 2007, we had cash and cash equivalents ~~and short-term investments~~ equal to approximately $1314.85 million. We anticipate that ~~these~~existing ~~assets~~cash and cash equivalents, in addition to any proceeds received from our current or future licensing partnerships, will provide sufficient working capital for our operations, including our current development projects, ~~through~~and atclinical ~~least~~trial, to the ~~first~~second half of ~~2006~~ 2008. We expect additional capital will be required in the future. We intend to ~~seek~~ ~~capital~~finance ~~needed to fund~~ our operations through corporate ~~new collaborations~~partnerships, ~~such~~technology as licensing ~~or other arrangements~~, ~~through~~the pursuit of research and development grants, ~~or through~~ public or private ~~equity~~financings, orand ~~debt~~cash ~~financings~~on hand. However, there can be no assurance that funds secured from any of these efforts, if obtained, will be sufficient to meet our future cash requirements.

The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. Intercompany accounts and transactions have been eliminated upon consolidation.

The accompanying interim unaudited Condensed Consolidated Financial Statements ~~presented~~have been ~~are~~prepared ~~unaudited~~in ~~and~~accordance inwith accounting principles generally accepted in the ~~opinion~~United States of ~~management~~ ~~reflect~~America, ~~all~~or ~~adjustments~~GAAP, ~~necessary~~for ~~(consisting~~interim ~~only~~financial ofinformation ~~normal~~and in ~~recurring~~accordance ~~adjustments)~~with ~~for~~the ainstructions ~~fair~~to ~~presentation~~Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the ~~financial~~Securities ~~condition~~and Exchange Commission, or SEC, and ~~results~~ ofdo ~~operations~~not contain asall of, the information and ~~for,~~footnotes required by GAAP and the ~~interim~~SEC ~~periods~~for annual ~~presented~~financial statements. The results for interim periods are not necessarily indicative of the results to be expected for the full year. The December 31, ~~2004~~ 2006 balance sheet, as presented, was derived from the audited Consolidated Financial Statements as of ~~December~~ December 31, ~~2004~~ 2006. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15 14, ~~2005~~ 2007.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 revenues and expenses during the reporting period. Actual amounts could differ from those estimates and assumptions.

Certain prior period amounts have been reclassified to conform to the current period’s presentation. Cash flows from restricted cash for the six month period ended June 30, 2004 have been reclassified from cash provided by operating activities to cash provided by investing activities to reflect the current period’s presentation.

NOTE 2: NET LOSS PER SHARE

The Company computes its net loss per share under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” Basic net loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company had securities outstanding, which could potentially dilute basic earnings per share, but because the Company incurred a net loss for all periods presented, such securities were excluded from the computation of diluted net loss per share as their effect would have been antidilutive. The securities excluded from diluted loss per share consist of the following:

	At June 30,
	2005	2004
Stock options	6,846,183	6,307,436
Warrants to purchase common stock	895,412	1,036,314
Contingently issuable shares pursuant to stock rights	—	2,600
	7,741,595	7,346,350

Diluted net loss per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company had securities outstanding, which could potentially dilute basic net earnings per share, but because the Company incurred a net loss for all periods presented, such securities were excluded from the computation of diluted net loss per share as their effect would have been antidilutive. The securities excluded from diluted loss per share consist of the following:

NOTE 3: STOCK COMPENSATION

	At March 31,
	2007	2006
Stock options	7,203,935	7,285,837
Warrants to purchase common stock	3,365,749	1,624,469
	10,569,684	8,910,306

~~The~~NOTE Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, as interpreted by Financial Accounting Standards Board (“FASB”) Interpretation No. 44, “Accounting for Transactions Involving Stock Compensation—an Interpretation of APB Opinion No. 25” (“FIN No. 44”).3: ~~The Company accounts for stock~~STOCK-~~based~~BASED awards to non-employees in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.COMPENSATION

~~Had~~Effective ~~compensation~~January ~~expense~~1, 2006, we adopted SFAS No. ~~for~~123 ~~the~~(revised ~~Company’s~~2004), ~~employee~~“Share-Based ~~stock~~Payment,” “FAS ~~option~~123(R),” ~~awards~~which ~~been~~requires ~~determined~~that we recognize compensation cost relating to share-based payment transactions in our financial statements. We have adopted FAS 123(R) on ~~the~~a modified ~~Black-Scholes~~prospective ~~fair~~basis, ~~value~~which atrequires ~~the~~that ~~grant~~we ~~dates~~recognize ~~for~~compensation cost relating to all new awards ~~under~~and ~~those~~to ~~plans~~awards modified, repurchased, or cancelled in our ~~consistent~~financial ~~with~~statements beginning January 1, 2006. Additionally, compensation cost for the portion ~~fair~~of ~~value~~awards ~~method~~for which the requisite service had not been rendered and were outstanding as of January 1, 2006 will be recognized as the requisite service is rendered on or after January 1, 2006. The pro forma disclosures previously permitted under SFAS No. 123, ~~the~~“Accounting ~~Company~~for ~~would~~Stock-Based ~~have~~Compensation,” ~~recorded~~are ~~additional~~no ~~compensation~~longer ~~expense~~an ~~and~~alternative ~~its~~to ~~net~~financial ~~loss~~statement ~~and~~recognition. To ~~loss~~calculate ~~per~~the ~~share~~excess ~~(“EPS”)~~tax benefits ~~would~~available ~~have~~for ~~been~~use ~~reduced~~in tooffsetting potential future tax shortfalls, the ~~pro~~Company follows ~~forma~~the ~~amounts~~alternative ~~presented~~method discussed in FASB staff Position No. 123(R)-3, “Transition Election Related to Accounting for the ~~following~~Tax ~~table:~~Effects of Share-Based Payment Awards.”

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Reported net loss	$	(2,630	)	$	(3,562	)	$	(5,014	)	$	(6,206	)
Add stock-based compensation included in net loss	21			—			21			—
Compensation expense for stock options	(514		)	(311		)	(762		)	(805		)
Pro forma net loss	$	(3,123	)	$	(3,873	)	$	(5,755	)	$	(7,011	)
Net loss per share — basic and diluted:
As reported	$(0.11		)	$(0.14		)	$(0.20		)	$(0.25		)
Pro forma	$(0.13		)	$(0.16		)	$(0.23		)	$(0.29		)

Stock Option Plans

~~Stock~~Prior ~~compensation expense related~~ to ~~options~~the ~~granted~~merger, towe ~~non~~maintained stock-~~employees~~based ascompensation ~~consideration~~plans for ~~services~~our ~~was $101~~employees,~~000~~ consultants and ~~$1,040,000~~Directors. The ~~for~~2000 ~~the~~Stock ~~three-months~~Option ~~ended~~Plan ~~June~~(the 30“2000 Plan”), ~~2005~~adopted by the Board of ~~and~~Directors ~~2004,~~in ~~respectively,~~May 2000 and ~~$142,000~~approved ~~and~~by $1stockholders on March 20,~~448~~ 2001,~~000~~ allows for the ~~six-months~~granting ~~ended June~~of ~~30,~~options ~~2005~~for ~~and~~up ~~2004~~to 3,118,040 ~~respectively. The~~shares ~~decrease~~of common in stock. Stock ~~compensation~~options ~~expense~~granted ~~recognized~~under ~~during~~ the ~~three~~2000 ~~and~~Plan ~~six~~may ~~month~~be ~~periods~~either ~~ended~~incentive ~~June~~stock ~~30,~~options ~~2005~~or ~~was~~nonstatutory stock ~~primarily~~options. Options ~~due~~may tobe ~~the~~granted ~~absence~~with exercise ofprices ~~stock~~not ~~compensation~~less ~~charges~~than ~~associated~~the ~~with~~fair value of the Company’s common stock at ~~modification~~the date of ~~certain~~grant, ~~existing~~as ~~non-employee~~determined ~~stock~~by the Board of Directors. All options granted pursuant to ~~extend~~the ~~their~~2000 Plan ~~expiration~~are ~~dates~~to have a term not greater than 10 years from the date of grant. ~~These~~Options ~~modifications~~vest as determined by the Board of ~~were~~Directors, ~~made~~but ingenerally over four years (but not less than 20% of the ~~three~~total number ~~months~~of ~~ended~~shares ~~June~~granted ~~30,~~per ~~2004~~year).

In October 1997, NZ’s Board of Directors approved the New Mexico and Arizona Land Company 1997 Stock Incentive Plan (the “1997 Plan”). The 1997 Plan provides that the following types of awards may be granted under the 1997 Plan: stock appreciation rights, incentive stock options, non-qualified stock options, restricted stock awards, unrestricted stock awards, and performance share awards which entitle recipients to acquire shares upon the attainment of specified performance goals. Under the 1997 Plan, awards may be granted with respect to a maximum of 900,000 shares of the Company’s common stock, subject to adjustment in connection with certain events such as a stock split, merger or other recapitalization of the Company. We assumed the 1997 Plan as a result of the merger.

In November 2001, the Company’s Board of Directors approved the 2001 Performance Equity Plan (the “2001 Plan”). The stockholders approved the Plan on November 29, 2001. The 2001 Plan allows for the granting of options for up to 5,000,000 shares of common stock to employees, officers, consultants, and Directors. The number of shares authorized automatically increased on January 1, in each of the calendar years 2002 through 2006 by 500,000 shares of common stock, which was the maximum amount allowable in each year, under the terms of the 2001 Plan. Stock options granted under the 2001 Plan may be either incentive stock options or nonstatutory stock options. Options may be granted with exercise prices not less than the fair value of the Company’s common stock at the date of grant, as determined by the Board of Directors. All options granted pursuant to the 2001 Plan are to have a term not greater than 10 years from the date of grant. Options vest as determined by the Board of Directors, generally over four years (but not less than 20% of the total number of shares granted per year).

All options in the 2000 Plan were adjusted to reflect the 1.55902 merger exchange ratio with the number of shares underlying each option multiplied by the ratio and the related exercise prices divided by the ratio. All the above disclosures reflect the share and per share amounts on a post merger equivalent basis. Additionally, all historical stock option information of Pre-Merger Lipid provided herein has been similarly restated.

At March 31, 2007, options to purchase an aggregate of 4,735,333 shares of common stock remain available for grant under all the plans.

Other Required FAS 123(R) Disclosures

The following table represents stock option activity for the three months ended March 31, 2007:

	Number of Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life	Aggregate Intrinsic Value
Outstanding options at beginning of period	5,799,398	$	3.68
Granted	664,000	1.37
Exercised	—	—
Forfeited	—	—
Expired	—	—
Outstanding options at end of period	6,463,398	$	3.45	5.91	$	754,342
Options expected to vest at end of period	6,211,446	$	3.51	5.78	$	742,460
Exercisable options at end of period	4,976,895	$	3.77	5.02	$	703,862

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods:

	Three Months Ended March 31,
	2007			2006
Risk-free interest rate	4.84		%	4.67		%
Expected life of options (in years)	5.00			4.00
Expected volatility	93.9		%	97.0		%
Expected dividend yield	—			—
Weighted-average grant-date fair value	$	1.02		$	1.84

The assumptions above are based on multiple factors, including historical exercise patterns of employees and post-vesting employment termination behaviors. We use historical data to estimate the options’ expected term, which represents the period of time that options granted are expected to be outstanding. Due to the relatively low trading volume of options on our common stock, we do not use implied volatility to determine the expected volatility of our common stock. Rather, the historical volatility that is commensurate with the expected life of the option on the date that it is measured is used as our estimate of future expected volatility. Since we have never paid any dividends and do not anticipate paying any dividends at least through the expected life of our stock options outstanding, we use an expected dividend yield of zero when calculating the fair value of stock options. The risk-free interest rate for periods within the contracutal life of the option is based on the U.S. Treasury yield curve in effect at the measurement date of the option.

FAS 123(R) requires that we estimate forfeitures, or the number of shares that are expected to be cancelled prior to vesting, at the time of grant, and adjust for actual forfeitures in subsequent periods if they differ from our original estimates. Based on our historical experience of options that have been cancelled prior to vesting, we have assumed an annualized forfeiture rate of 12% for all new option grants.

Total compensation cost for share-based payment arrangements recognized in income for the three month periods ended March 31, 2007 and 2006 is presented in the following table:

	Three Months Ended March 31,
(In thousands)	2007		2006
Employee related compensation cost	$	166	$	392
Non-employee related compensation cost	32		33
Total compensation cost recognized in income	$	198	$	425

The total compensation cost related to nonvested awards not yet recognized as of March 31, 2007 was approximately $1,801,000 and the weighted average expected remaining recognition period as of March 31, 2007 was approximately 2.4 years.

We did not receive any gross proceeds in the current quarter since no stock options were exercised. The intrinsic value of options exercised in the three month periods ended March 31, 2006, was approximately $18,000. We did not recognize any tax benefit related to these share-based arrangements as we are in a loss position and have a full valuation allowance against our tax benefits.

NOTE 4: RECENTLY ISSUED ACCOUNTING STANDARDS

In ~~December~~September ~~2004~~2006, the FASB issued SFAS No. ~~123 (revised 2004)~~157, “~~Share-Based~~Fair ~~Payment”~~Value ~~(“SFAS No~~Measurements. ~~123(R)~~”~~), which~~ This ~~replaces~~statement ~~SFAS~~defines ~~No.~~fair ~~123~~value, ~~“Accounting for Stock-Based~~ ~~Compensation,”~~established ~~(“SFAS~~a ~~No.~~framework ~~123”)~~for ~~and~~measuring ~~supersedes~~fair ~~APB~~value ~~Opinion~~under ~~No. 25~~GAAP, ~~“Accounting~~and ~~for Stock Issued to Employees.” This statement~~expands ~~requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The pro forma~~ disclosures ~~previously~~about ~~permitted~~fair ~~under~~value ~~SFAS No~~measurements. ~~123 will no longer be~~ anThe ~~alternative to financial~~ statement ~~recognition. This statement~~ is effective ~~beginning~~for ~~with our~~financial ~~first~~statements ~~quarter~~issued offor fiscal ~~2006. We are~~ ~~currently~~years ~~evaluating~~beginning ~~the~~after ~~requirements~~November of15, ~~SFAS No~~2007. We ~~123(R)~~believe ~~and expect~~ that the adoption of ~~SFAS~~this ~~No.~~statement ~~123(R)~~will ~~may~~not have a material impact on our ~~consolidated~~ financial position, results of operations ~~and~~or ~~earnings~~cash ~~per share~~flows.

In ~~May~~February ~~2005~~2007, the FASB issued SFAS No. ~~154~~159, “~~Accounting~~The ~~Changes~~Fair ~~and~~Value ~~Error~~Option ~~Corrections — a replacement of APB Opinion~~for ~~No.~~Financial 20Assets and ~~FASB~~Financial ~~Statement No~~Liabilities. 3.” This statement ~~changes~~establishes ~~the~~a ~~requirement~~fair ~~for the accounting for and~~value ~~reporting~~option ~~of a change~~ in ~~accounting~~which ~~principle~~entities bycan ~~requiring~~elect ~~retroactive application~~to ofreport acertain ~~voluntary~~financial ~~change~~assets inand liabilities ~~accounting~~at ~~principle~~fair tovalue, ~~prior~~with ~~period financial~~changes ~~statements~~in ~~unless~~fair itvalue isrecognized ~~impracticable~~in earnings. ~~This~~The statement is effective ~~beginning with~~for ~~our~~fiscal ~~first~~years ~~quarter~~beginning ofafter ~~fiscal~~November ~~2006~~15, 2007. We We believe that the adoption of this statement will not have a material impact on our financial position, results of operations or cash flows.

NOTE 5: RELATED PARTY TRANSACTIONS

In December 1999, we entered into an Intellectual Property License Agreement to obtain the exclusive worldwide rights to certain patents, trademarks, and technology with Aruba International Pty. Ltd. ~~(“Aruba”)~~, an Australian company, controlled by Bill E. Cham, Ph.D., a founding stockholder of Pre-Merger Lipid and one of our former Directors. As consideration for the license, we issued Aruba 4,677,060 shares of our common stock valued at $250,000. Under this agreement, we are obligated to pay Aruba a continuing royalty on revenue in future years, subject to a minimum annual royalty amount of $500,000, and 10% of any External Research ~~Funding~~ Funding initiated by Dr. Cham and received by us to further this technology, as ~~defined~~ defined in the agreement. In November 2004, ~~and~~all ~~$250~~rights,~~000~~ ~~upon~~title, ~~commencement~~interest ofand ~~our~~obligations ~~initial~~covered ~~human clinical trial utilizing the technology~~ under the ~~patents. The $250,000 related to the commencement of~~ ~~our~~Intellectual ~~initial~~Property ~~human~~License ~~clinical~~Agreement ~~trial~~were ~~was~~assigned ~~paid~~ to Aruba ~~in July 2002~~International B. ~~For~~V., ~~the~~a ~~three~~Netherlands ~~month~~company ~~periods~~controlled ~~ended~~by ~~June~~Dr. ~~30, 2005~~Cham. We ~~and June 30, 2004 we~~ have expensed ~~$125,000~~to research and development approximately $125,000, ~~respectively, and~~in ~~for~~both ~~the~~three ~~six~~ month periods ended ~~June~~March 3031, ~~2005~~2007 and ~~June 30, 2004 we have~~ ~~expensed~~2006 ~~$250,000 and $250,000, respectively,~~ related to this agreement. Accrued ~~Amounts~~related ~~for~~party ~~2005~~royalties ~~and~~under ~~2004~~this agreement were ~~charged~~$375,000 ~~to research~~ and ~~development expense. In November 2004~~$250,000 ~~all~~at March ~~rights~~31, ~~title,~~ ~~interest~~2007 and ~~obligations~~December ~~covered~~31, ~~under the Intellectual Property License Agreement were assigned to Aruba International B.V.~~2006, ~~a Netherlands company controlled by Dr~~respectively. ~~Cham.~~

On May 16, 2005 we entered into a consulting agreement ~~with~~ with H. Bryan Brewer, Jr., M.D., a Director of the Company, and Washington Cardiovascular Associates, LLC (“WCA”), an entity beneficially owned by Dr. Brewer, pursuant to which WCA will provide the services of Dr. Brewer as the Company’s Chief Scientific Director. Dr. ~~Brewer~~ Brewer was also appointed Vice Chairman of the Company’s Board of Directors on May 16, 2005, and serves as Chairman of the Company’s Scientific Advisory Board. The consulting agreement is for a three year term. As consideration for Dr. Brewer’s services as Chief Scientific Director, we are required to pay WCA annual fees of $395,000. For ~~the~~both three months periods ended ~~June~~ 30March 31, ~~2005~~2007 and 2006, approximately $4999,000 was charged to selling, general and administrative expense for fees related to the consulting agreement. In addition to the annual fee, we ~~have~~ granted Dr. Brewer an option award of 100,000 shares of our common stock to vest in three equal annual installments on the first, second and third anniversaries of the consulting agreement. For the three ~~months~~ month periods ended ~~June~~March 3031, 2007 ~~2005~~and 2006, approximately $329,000 and $28,000 was recorded as non-cash compensation charges related to the stock option awarded to Dr. Brewer under the consulting agreement.

~~During~~In ~~the~~connection ~~three~~with ~~month~~the ~~period~~Company’s ~~ended~~August ~~June 30~~8, ~~2005~~2006 private placement, the Company ~~cancelled~~sold ~~and~~2,714,817 ~~re-granted~~shares ~~411,927~~of ~~options~~common ~~which~~stock ~~had~~and ~~been~~warrants exercisable ~~issued~~for an additional 814,445 shares to DrSterling Pacific Assets, Inc. ~~Brewer~~ in ~~his~~exchange ~~capacity~~for asan ainvestment ~~member~~ of ~~the~~approximately ~~Company’s~~$3,421,000. The ~~Board~~shares ofand ~~Directors~~warrants ~~and~~held asby aSterling ~~member~~Pacific ofAssets, ~~the~~Inc. ~~Company’s~~are ~~Scientific~~deemed ~~Advisory~~beneficially ~~Board~~owned by Mr. As aWilliam ~~result~~Pope, ofan existing ~~this~~substantial ~~transaction~~shareholder, ~~the~~and ~~Company recognized~~former ~~$21~~Director,~~000~~ inof ~~compensation~~the ~~expense~~Company. The ~~charged~~shares toof ~~selling,~~common ~~general~~stock and ~~administrative~~ ~~expense.~~warrants

NOTE 6: DISCONTINUED OPERATIONS

As a result of the merger between Pre-Merger Lipid and NZ on November 29, 2001, certain real estate assets, including commercial real estate loans, were acquired. As part of the merger, we announced our intent to conduct an orderly disposition of those assets to fund the ongoing operations of our biotechnology business. On March 22, 2002, we formalized a plan to discontinue the operations of our real estate business, including commercial real estate loans. All of those assets were included in the Real Estate

segment. The plan identified the major assets to be disposed of, the method of disposal, and the period required for completion of the disposal. As a result, we have reclassified the results of operations and the assets and liabilities of the discontinued operations for all periods presented. The carrying amounts of the major classes of assets and liabilities included as part of the disposal group as of June 30, 2005 and December 31, 2004, are as follows:

(In thousands)	June 30, 2005		December 31, 2004
Current assets	$	—	$	2
Royalty credits	—		1,165
Total assets held for sale	—		1,167
Net assets held for disposal	$	—	$	1,167

In October 2004, the United States Department of the Interior, Minerals Management Service, issued the Company royalty credits in exchange for our remaining mineral rights in New Mexico. Royalty credits are used by the United States Department of the Interior for payment of royalties due under oil and gas leases located on the outer continental shelf. Based on a valuation performed at the time of the merger with NZ, zero value was recorded for these mineral rights and therefore prior to the exchange they had no carrying value. As a result of this exchange the Company recognized a gain of $1,165,000 in 2004, representing the estimated fair value of the royalty credits less the costs to sell the credits. As of December 31, 2004 the fair value of the credits was recorded in assets held for sale. In February 2005, the Company sold the royalty credits and received cash of $1,165,000. The sale of the royalty credits in February 2005 represented the final disposition of the Company’s real estate related assets.

were issued to Sterling Pacific Assets, Inc. on the same terms as those offered to the other participating investors. Pursuant to the completion of an additional sale of our common stock in December 2006, and the applicable anti-dilution provisions contained in its warrant agreement, Sterling Pacific Assets, Inc. was issued an additional 16,509 warrant shares.

Also in connection with our August 2006 private placement, the Company sold 257,933 shares of common stock for an aggregate investment of approximately $325,000 and warrants exercisable for an additional 77,376 shares of common stock to five members of our Board of Directors: Frank M. Placenti, Bosko Djordjevic, Gary S. Roubin, M.D., Ph.D., S. Lewis Meyer, Ph.D., and H. Bryan Brewer, Jr., M.D. The shares of common stock and warrants were issued on the same terms as those offered to the other participating investors. Pursuant to the completion of an additional sale of our common stock in December 2006, and the applicable anti-dilution provisions contained in the warrant agreements, an additional 1,565 warrant shares were issued to Messrs. Placenti, Djordjevic and Drs. Roubin, Meyer and Brewer. The individual investments made by each Director are listed in the table below.

Investor	Investment		Common Stock Issued	Warrants Issued(1)
Directorship Services, Inc. Profit Sharing Trust(2)	$	14,999	11,904	3,643
Placenti Revocable Trust(3)	9,999		7,936	2,428
Bosko Djordjevic	100,000		79,365	24,291
Gary S. Roubin, M.D., Ph.D.	74,999		59,523	18,217
The Meyer Family Revocable Trust(4)	49,999		39,682	12,145
Washington Cardiovascular Associates, LLC(5)	74,999		59,523	18,217
	$	324,995	257,933	78,941

(1) Warrant shares include anti-dilution adjustments pursuant to the completion of the Company’s private placement transactions in December 2006.

(2) Frank M. Placenti serves as a Director pursuant to an arrangement between the Company and Directorship Services, Inc. (“DSI”). Directorship Services, Inc. Profit Sharing Trust was established by DSI as a retirement planning vehicle for DSI’s employees. Mr. Placenti is the sole trustee of the trust and, in such capacity, has sole beneficial ownership of all Company shares owned by the Trust.

(3) The Placenti Revocable Trust is an estate planning trust of which Mr. Placenti is a trustee. In his capacity as a trustee of such trust, Mr. Placenti is deemed to have beneficial ownership of all Company shares held by the Placenti Revocable Trust.

(4) The Meyer Family Revocable Trust is an estate planning trust of which S. Lewis Meyer, Ph.D. is a trustee. In his capacity as a trustee of such trust, Mr. Meyer is deemed to have beneficial ownership of all Company shares held by The Meyer Family Revocable Trust.

(5) H. Bryan Brewer, Jr., M.D. serves as a Director pursuant to an arrangement between the Company and Washington Cardiovascular Associates, LLC, an entity owned by Dr. Brewer. Dr. Brewer is deemed a 100% beneficial owner of Washington Cardiovascular Associates, LLC.

NOTE 6: INCOME TAX

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). This interpretation prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 on January 1, 2007, and have not recorded any adjustments as a result of our adoption of the new interpretation.

We have elected to record any potential penalties and interest related to uncertain tax positions as income tax expense. For the three month period ended March 31, 2007, we did not record any penalties or interest related to uncertain tax positions. As of March 31, 2007, we did not have any amounts accrued for interest and penalties related to uncertain tax positions.

We are subject to U.S. federal income tax and California state income tax. For the tax years 2000 through 2006, we are subject to examination at the U.S. federal level and multiple state jurisdiction level.

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

This Form 10-Q contains forward-looking statements concerning plans, objectives, goals, strategies, future events or performance as well as all other statements which are not statements of historical fact. These statements contain words such as, but not limited to, “believes,” “anticipates,” “expects,” “estimates,” “projects,” “will,” “may” and “might.” The forward-looking statements contained in this Form 10-Q reflect our current beliefs and expectations on the date of this Form 10-Q. Actual results, performance or outcomes may differ materially from what is expressed in the forward-looking statements. We have discussed the important factors, which we believe could cause actual results, performance or outcomes to differ materially from what is expressed in the forward-looking statements, ~~under~~in ~~the~~“Item ~~caption~~1A. “Risk Factors” ~~That~~in ~~May~~our ~~Affect~~Annual ~~Future~~Report ~~Results~~on ~~and~~Form 10-K, filed ~~Financial~~with ~~Condition~~the Securities and Exchange Commission on March 14, 2007.” We are not obligated to publicly announce any revisions to these forward-looking statements to reflect a change in facts or circumstances.

You should read the discussion below in conjunction with Part I, Item 1, “Financial Statements,” of this Form 10-Q and Part II, Items 7, 7A and 8, “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~Operation,” “Quantitative and Qualitative Disclosures About Market Risk” and “Financial Statements and ~~Supplementary~~ Supplementary Data,” respectively, of our Annual Report on Form 10-K for the year ended December 31, ~~2004~~2006.

Overview

We are a development-stage biotechnology company engaged in research and development of products and processes intended to treat major medical indications such as cardiovascular disease and ~~viral~~ viral infections in which lipids, or fat components, play a key role. Our primary activities since incorporation have been : conducting research and development (including pre-clinical studies); conducting a clinical trial; performing business, strategic and financial planning; and raising capital~~, including, from the date of the merger between NZ and Pre-Merger Lipid, disposing of Company real estate assets~~. Accordingly, the Company is considered to be in the development stage.

On November 29, 2001, the merger between NZ and Pre-Merger Lipid was completed. The merger with NZ was accounted for under the purchase method of accounting and was treated as a reverse acquisition because the stockholders of Pre-Merger Lipid owned the majority of the Company’s common stock immediately after the merger. Pre-Merger Lipid was considered the acquiror for accounting and financial reporting purposes. Accordingly, all financial information prior to November 29, 2001 included in this report reflects Pre-Merger Lipid results. As a result of the merger, certain real estate assets were acquired, and thus our business was organized into two segments: Biotechnology and Real Estate. On March 22, 2002, we formalized a plan to discontinue the operations of our Real Estate segment. In the first quarter of 2005, we completed the disposition of these real estate assets.

In the course of our research and development activities, we have incurred significant operating losses and we expect these losses to continue for the foreseeable future as we continue to invest in research and development and begin to allocate significant and increasing resources to clinical testing and other activities related to seeking approval to market our products.

We intend to finance our operations through ~~public or~~corporate ~~private~~partnerships, ~~equity~~technology ~~or debt financings~~licensing, the pursuit of research and development grants, public or private financings, and cash on hand. We anticipate that existing cash, and cash equivalents, ~~and~~in ~~short-term~~addition ~~investments~~to any ~~will~~proceeds ~~provide~~received from our current or future licensing partnerships, will provide sufficient working capital for our operations, including our current development projects, ~~through~~and atclinical ~~least~~trial, to the ~~first~~second half of ~~2006~~2008. In the longer term, we expect to additionally finance our operations through revenues from product sales and licenses~~, including out-licensing opportunities of our proprietary delipidation process for non-human health applications such as the field of animal health, upon receiving all relevant approvals~~. If adequate funds are not available to satisfy our requirements we may have to substantially reduce, or eliminate, certain areas of our product development activities, significantly limit our operations, or otherwise modify our business strategy.

In ~~April~~December 2005, we ~~received~~ filed an ~~extension~~Investigational ofDevice ~~our~~Exemption ~~Small Business Technology Transfer~~ (“~~STTR~~IDE”) ~~grant~~application ~~from~~with the ~~National~~Center ~~Institutes~~for ofDevices and Radiological Health of the Food and Drug Administration (“~~NIH~~FDA”) for their review. ~~This~~ In ~~$100~~January 2006,~~000~~ ~~grant~~the ~~was~~FDA ~~extended~~granted ~~for~~conditional aapproval ~~term~~ of ~~one~~the ~~year~~IDE ~~and~~to ~~will~~allow ~~expire~~us to begin a inclinical ~~March~~trial ~~2006~~with the Company’s Plasma Delipidation System-2 (“PDS-2”). ~~The~~We ~~overall~~were ~~goal~~granted of this ~~STTR~~ ~~grant~~approval issubject to ~~use~~the condition ~~our~~that ~~proprietary~~within ~~delipidation~~45 ~~technology~~days we would submit a response to ~~provide~~the ~~proof~~questions and ofobservations ~~principle~~made ofby ~~viral~~the ~~particle~~FDA. We submitted ~~modification~~a toresponse ~~prepare~~on aFebruary ~~preventative~~22, ~~vaccine against~~2006, ~~the~~which ~~Severe~~was ~~Acute~~within ~~Respiratory~~45 ~~Syndrome~~days ~~(“SARS”)~~of receiving ~~coronavirus~~conditional approval from the FDA. No In ~~significant~~addition, ~~costs~~the ~~related~~FDA required us to ~~the~~obtain ~~grant~~approval from the ~~were~~Institutional ~~incurred~~Review ~~during~~Board (“IRB”) of the ~~three~~MedStar orResearch ~~six~~Institute ~~months~~in Washington, ~~ended~~D.C. ~~June~~to ~~30,~~begin ~~2005~~the trial.

InOn April ~~2005~~20, 2006, we ~~presented~~announced that we received approval from the IRB. On April 28, 2006 we submitted that approval to the ~~results~~FDA ofas anrequired. On June 1, 2006, we announced that the first patient procedure had been completed in ~~vivo~~the ~~study~~Company’s clinical ~~supporting~~trial: ~~our~~“A ~~Viral~~Randomized ~~Immunotherapy~~Single-Blind ~~Platform~~Placebo atControlled Study to Evaluate the ~~Keystone~~Safety ~~Symposium~~of the Lipid Sciences’ PDS-2 in Subjects with Prior Acute Coronary Syndrome.” ~~The~~We inare ~~vivo~~recruiting thirty ~~study~~subjects ~~was~~between ~~designed~~the toages ~~demonstrate~~of ~~whether~~18 ~~there~~and ~~was~~85 awith ~~measurable~~angiographic ~~response~~evidence toof Coronary ~~delipidated~~Artery ~~Simian~~Disease ~~Immunodeficiency~~in ~~Virus~~the target artery, as defined by at least one lesion with an occlusion between 20-50%. Each potential participant undergoes an initial screening, which includes a blood panel and intravascular ultrasound (“~~SIV~~IVUS”) inassessment ~~severely~~to ~~SIV~~determine eligibility for enrollment and randomization into the study. The trial consists of a total of seven weekly delipidation/re-~~infected~~infusion ~~monkeys~~procedures. ~~SIV~~The istreatment asubjects receive ~~widely~~infusions of their own plasma that has been delipidated by the PDS-~~accepted~~2 ~~primate~~system; ~~model~~the control subjects receive infusions of their own untreated plasma that has not been delipidated. An IVUS assessment of the participants will also be made at the conclusion of the trial. The study duration for ~~viral~~each participant ~~diseases~~is ~~like~~approximately ten weeks. The Company expects to complete the safety/feasibility trial during the second half of 2007 and start the effectiveness trial in early 2008.

9On November 8, 2006, we announced that we entered into a collaborative research and license agreement with Elanco Animal Health (“Elanco”), a division of Eli Lilly and Company, to develop one or more immunological products for animal health applications beginning with a vaccine directed against certain lipid-enveloped organisms. Under the agreement, the Company granted to Elanco a

HIV. This preliminary study demonstrated that the autologous SIV virus delipidated by Lipid Sciences’ proprietary delipidation process was efficiently recognized by the animals’ immune systems and has resulted in a measurable improvement in the conventional indicators of overall health in the study animals. The results included a viral load reduction of 90+%, weight gain, and extended post-infection survival. The ability to use small amounts of a patient’s autologous circulating viral antigen to generate a virus-specific immune response could potentially lead to the control of viral replication and provide a unique approach to the development of an effective treatment for chronic HIV infection. By year-end 2005 we plan to launch a pre-clinical non-human primate study in a group of SIV-infected non-human primates. The purpose of this study will be to gather sufficient information to begin our dialogue with the Food and Drug Administration (“FDA”) about a human clinical trial for the treatment of HIV-infected patients.

On May 16, 2005, we announced the appointment of Dr. H. Bryan Brewer to the position of Vice Chairman of our Board of Directors. We also engaged Dr. Brewer as a consultant to serve in the newly-created position of Chief Scientific Director. Dr. Brewer has been a member of our Board of Directors since October 2002 and a member of our Scientific Advisory Board since March 2001. We expect Dr. Brewer to expand the scope and breadth of our scientific development program and participate in the planning and support of a human clinical trial of our proprietary HDL Therapy Platform.

On July 13, 2005, we announced the completion of the data analysis phase of our HDL Therapy non-human primate study. The data showed the HDL Therapy process to be safe and well-tolerated within the study population of 12 African green monkeys. The study animals were monitored before, during and after each of 12 weekly infusions of plasma delipidated using our proprietary process and device. The data included over 3,000 assays of blood chemistry and physiological variables, such as blood pressure, heart rate, temperature, and respiration rate, collected throughout the study. No significant changes in any of the monitored variables were noted during the course of the study. The study was conducted at the Wake Forest University Baptist Medical Center in Winston-Salem, North Carolina in collaboration with Dr. Lawrence L. Rudel, Professor of Pathology, Section of Comparative Medicine (Department of Pathology) and Professor of Biochemistry at Wake Forest University. The animals were evaluated with intravascular ultrasound (“IVUS”) to establish a baseline of atheroma volume (plaque buildup) at the beginning of this study. A second IVUS was conducted at the conclusion of the sequence of 12 weekly infusions of delipidated plasma. The data was then analyzed at the Cleveland Clinic Foundation under the direction of Dr. Steven Nissen and his colleagues. Although statistical significance was not achieved for measurement of effectiveness of the therapy, the primary objective of demonstrating the safety of our product and process was achieved. The safety data gathered from this study will be a critical component of our Investigational Device Exemption (“IDE”) submission to the FDA for review and approval, prior to the planned initiation of a human clinical trial of our HDL Therapy Platform. We anticipate that the submission of our IDE to the FDA, the approval of the IDE submission and the initiation of a planned human clinical trial of our HDL Therapy Platform should occur during the fourth quarter of 2005 and the first quarter of 2006.

Results of Continuing Operations — Three Months Ended June 30, 2005 and 2004

Revenue. We recognized $1,000 in grant revenue in the three months ended June 30, 2005. This grant revenue relates to the Small Business Technology Transfer (“STTR”) grant awarded in the second quarter of 2004 by the National Institutes of Health (“NIH”), for a Virion Solvent Treatment for Severe Acute Respiratory Syndrome.

We have had no product revenues since our Inception (May 21, 1999). Future product revenues will depend on our ability to develop and commercialize our two primary platforms: HDL Therapy and Viral Immunotherapy.

Research and Development Expenses. Research and development expenses include applied and scientific research, regulatory and business development expenses. Research and development expenses decreased approximately $783,000, or 29%, to $1,872,000 in the three months ended June 30, 2005 from $2,655,000 for the same period in 2004. The decrease was due primarily to an $847,000 decrease in stock compensation expense and decreases in costs associated with our non-human primate study at Wake Forest University Baptist Medical Center in Winstom-Salem, North Carolina, which concluded in the second quarter of 2005. During the three months ended June 30, 2004, $855,000 was charged to research and development as a result of the modification of our Scientific Advisory Board members’ option agreements in 2004. This decrease was partially offset by an increase in costs related to the preparation of a human clinical trial of our HDL Therapy Platform, including costs associated with the selection of key development partners for device and disposable manufacture, regulatory compliance, and clinical trial support.

While we allocate and track resources when required pursuant to the terms of development arrangements, our research team typically works on different platforms concurrently, and our equipment and intellectual property resources often are deployed over a range of products with a view to maximize the benefit of our investment. Accordingly, we have not, and do not intend to, separately track the costs for each of our research projects on a product-by-product basis. For the three months ended June 30, 2005, we estimate

~~that~~worldwide exclusive license to research, develop, manufacture, and sell certain immunological products for animal health, which will be developed using its delipidation immunological technology. Pursuant to the ~~majority~~terms of ~~our~~the agreement, Elanco will pay for all the associated research and development ~~expense~~expenses ~~was associated~~for ~~with~~each ~~our~~targeted ~~two~~product. In ~~primary~~exchange ~~platforms~~for the license, ~~HDL~~subject ~~Therapy~~to completion of Elanco’s due diligence and ~~Viral~~sales ~~Immunotherapy~~of products meeting various thresholds, we may receive a technology access fee, milestone payments and royalties.

~~Selling,~~Results ~~General and Administrative Expenses. General and administrative expenses include costs associated with our business operations, inclusive~~ of ~~management,~~Continuing ~~legal~~Operations ~~and~~— ~~finance,~~Three ~~and~~Months ~~accounting~~Ended ~~expenses. General~~March ~~and administrative expenses increased approximately $7~~31,~~000,~~ or2007 1%, to $861,000 in the three months ended June 30, 2005 from $854,000 for the same period in 2004. The increase was due primarily to an increase in expenses related to our ongoing efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002. This increase was partially offset by a reduction in stock compensation expense as a result of the full amortization in 2004 of stock options issued to certain consultants and ~~reduced facility related expenses as a result of the renegotiation and extension of our facility lease in Pleasanton, CA.~~2006

~~Interest and Other Income~~Revenue. ~~Interest~~We ~~and~~recognized ~~other income for the three months ended June 30, 2005 increased approximately~~ $7959,000, orin ~~343%, to $102,000~~collaboration ~~from~~agreement ~~$23,000~~revenue ~~for~~in the ~~same~~three ~~period~~months inended ~~2004. The~~March ~~increase~~31, ~~was~~2007. This ~~due~~collaboration ~~primarily~~agreement torevenue ~~the absence of a discount recognized~~relates onto ~~the~~our ~~early~~collaborative ~~payoff~~research ofagreement ~~two~~entered ~~notes~~into ~~receivable~~with Elanco in ~~the three months ended June 30,~~November ~~2004~~2006 and ~~higher~~is ~~average~~composed ~~investment~~of ~~balances~~reimbursable ~~coupled with higher investment yields during the three months ended June 30, 2005~~expenses.

~~Results~~We ofhave ~~Continuing~~had ~~Operations~~no ~~— Six~~product ~~Months~~revenues ~~Ended~~since ~~June~~our 30Inception (May 21, ~~2005~~1999). Future product revenues will depend on our ability to develop and ~~2004~~commercialize our HDL Therapy and Viral Immunotherapy platforms.

~~Revenue~~Research and Development Expenses. WeResearch ~~recognized~~and development expenses include applied and scientific research, regulatory and business development expenses. Research and development expenses decreased approximately $1137,000, inor ~~grant~~7%, ~~revenue~~to $1,813,000 in the ~~six~~three months ended ~~June~~March 3031, ~~2005~~2007 from $1,950,000 for the same period in 2006. This ~~grant~~decrease was primarily related to a ~~revenue~~decrease ~~relates~~in stock compensation expense, a decrease in costs related to the clinical ~~Small~~trial ~~Business~~of ~~Technology~~our ~~Transfer~~HDL ~~(“STTR”)~~Therapy ~~grant~~platform ~~awarded~~at the Washington Hospital Center in Washington, D.C. and a decrease in non-project specific research and development materials purchases due to our focus on our HDL Therapy and Viral Immunotherapy platforms. The decrease in our clinical trial expenses was attributed to the ~~second~~fact ~~quarter~~that ofthe ~~2004~~set-up bycosts incurred in the ~~National~~three ~~Institutes~~months ended March 31, 2006 exceeded the ongoing recruitment and implementation costs incurred in the three months ended March 31, 2007. Partially offsetting this decrease was an increase in costs associated with the progression of ~~Health~~our non-human ~~(“NIH”)~~primate study being conducted at Yerkes National Primate Research Center at Emory University, ~~for~~costs related to our mimetic peptide program and acosts ~~Virion~~related ~~Solvent~~to ~~Treatment~~the ~~for~~initiation ~~Severe~~of ~~Acute~~our ~~Respiratory~~animal ~~Syndrome~~health research in collaboration with Elanco.

WeWhile ~~have~~we ~~had no~~allocate ~~product~~and ~~revenues~~track ~~since~~resources ~~our~~when ~~Inception~~required ~~(May~~pursuant 21to the terms of development arrangements, ~~1999). Future~~our ~~product~~research ~~revenues~~team ~~will~~typically ~~depend~~works on different platforms concurrently, and our equipment and intellectual property resources often are ~~ability~~deployed over a range of products with a view to ~~develop~~maximize ~~and~~the ~~commercialize~~benefit of our investment. Accordingly, ~~two~~we ~~primary~~have ~~platforms~~not, and do not intend to, separately track the costs for each of our research projects on a product-by-product basis. For the three months ended March 31, 2007, we estimate that ~~treatment~~the majority of ~~cardiovascular~~our ~~disease~~research (and development expense was associated with our two primary platforms, HDL Therapy) and ~~viral infections (~~Viral Immunotherapy).

~~Research~~Selling, General and ~~Development~~ Administrative Expenses. ~~Research~~General and ~~development~~ administrative expenses ~~decreased~~include costs ~~approximately~~associated ~~$987,000,~~with orour ~~22%,~~business ~~to $3~~operations,~~495,000~~ ~~for~~inclusive ~~the~~of ~~six~~management, ~~month~~legal ~~period~~and ~~ended June 30~~finance, ~~2005~~and ~~from~~accounting ~~$4,482,000 for the same period in 2004~~expenses. ~~The~~ General ~~decrease~~and ~~was~~administrative ~~due~~expenses ~~primarily~~decreased toapproximately a $1303,~~033,~~000 ~~decrease~~, ~~in stock compensation expense and reduced facility related expenses as~~or a25%, ~~result~~to of$906,000 ~~the renegotiation and extension of our facility lease~~ in ~~Pleasanton,~~ ~~CA. During~~ the ~~six~~three months ended ~~June~~March 3031, ~~2004,~~2007 from $~~855~~1,209,000 ~~was charged to research and development as a~~for ~~result of~~ the ~~modification~~same ofperiod ~~our Scientific Advisory Board members’ option agreements~~ in ~~2004~~2006. This decrease ~~was~~ ~~partially~~was ~~offset by an increase in costs~~ related primarily to ~~the preparation of~~ a ~~human clinical~~decrease ~~trial~~in ofemployee-related ~~our HDL Therapy Platform~~expenses, ~~including costs associated with the~~stock ~~selection~~compensation ofexpense ~~key development partners for device~~ and ~~disposable~~legal ~~manufacture, regulatory compliance, and clinical trial support. Research and development~~ expenses ~~accounted for approximately 67% of total operating expenses for the six months ended June 30, 2005~~.

~~Selling, General~~Interest and ~~Administrative~~Other ~~Expenses~~Income. ~~General~~Interest and other income for the three ~~administrative~~months ~~expenses~~ended ~~decreased~~March 31, 2007 increased approximately $~~212~~64,000, or 1146%, to $1204,~~709,~~000 ~~for the six month period ended June 30, 2005~~ from $1140,~~921,~~000 for the same period in ~~2004~~2006. The ~~decrease~~increase was due ~~primarily~~ to ahigher ~~reduction~~average incash ~~stock~~and ~~compensation~~investment ~~expense as a result of the full~~balances ~~amortization~~coupled inwith ~~2004~~higher ofinvestment ~~stock~~yields ~~options~~during ~~issued to certain consultants and reduced facility related expenses as a result of~~ the ~~renegotiation~~three ~~and~~months ~~extension~~ended ofMarch ~~our facility lease in Pleasanton~~31, ~~CA. This~~ ~~decrease was partially offset by an increase in expenses related to our ongoing efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002~~2007.

Interest and Other Income. Interest and other income for the six month period ended June 30, 2005 decreased approximately $22,000, or 10%, to $189,000 from $211,000 for the same period in 2004. The decrease was due primarily to the absence of interest income generated from two notes receivable, which were paid off in May 2004. This decrease was partially offset by the absence of a discount recognized on the early payoff of two notes receivable in the three months ended June 30, 2004 and higher average investment balances coupled with higher investment yields during the six months ended June 30, 2005.

Results of Discontinued Operations — Three and Six Months Ended June 30, 2005 and 2004

During the three and six months ended June 30, 2005, the Company recorded no income or loss from discontinued operations. This compares with a loss of $76,000 and $14,000 recorded in the three and six month periods ended June 30, 2004, respectively. As of December 31, 2004, all real estate assets acquired in the merger between NZ and Pre-Merger Lipid had been disposed of, and

therefore we did not have any income or loss to report for discontinued operations for the three or six month periods ended June 30, 2005.

Liquidity and Capital Resources

~~Pre-Merger~~Net ~~Lipid~~cash ~~financed~~used ~~its~~in operating ~~operations~~activities ~~principally~~was ~~through~~approximately ~~two private placements of equity securities~~$2,208,000 ~~which~~and ~~yielded net proceeds of approximately~~ $162,~~900~~072,000, ~~and~~for the ~~sale~~three months ofended ~~common~~March 31, 2007 ~~stock~~and to2006, ~~one~~respectively, ofresulting primarily ~~its~~from ~~founders. The~~operating ~~merger~~losses ~~with~~incurred NZas ~~resulted~~adjusted infor ~~the~~non-cash ~~acquisition~~compensation charges ofand ~~net~~partially ~~assets~~offset ofby ~~approximately~~the ~~$45,000,000,~~payment ~~net~~or ofaccrual ~~repurchase~~ of ~~stock and acquisition costs~~compensation expenses.

~~The~~Net ~~net~~ cash used inby investing ~~operating~~ activities was approximately $444,~~632,~~000 for the ~~six~~three months ended ~~June 30~~March 31, ~~2005,~~2007 ~~resulting primarily~~and ~~from operating losses incurred as adjusted for non-cash compensation charges. Partially offsetting the operating loss~~ was ~~a net increase in accounts payable, primarily~~ related to ~~accrued costs~~purchases ~~and~~of ~~invoices~~capital ~~received for various pre-clinical studies~~equipment. The net cash provided by ~~operating~~investing activities infor the ~~six~~three months ended ~~June~~March 3031, ~~2004,~~2006 was approximately $~~480~~2,~~000~~549,000 ~~resulting~~and was ~~from~~primarily ~~operating~~attributable ~~losses~~to ~~incurred,~~the asmaturity ~~adjusted~~of ~~for non~~short-~~cash~~term ~~stock compensation charges~~investments, ~~and~~ partially offset by the ~~early~~purchases ~~payoff~~ of ~~two~~short-term ~~notes receivable~~investments.

~~The~~Net ~~net~~ cash provided by ~~investing~~financing activities was approximately $220,~~696,~~000 and $~~136~~15,000 for the ~~six~~ three month periods ended ~~June 30~~March 31, ~~2005~~ 2007 and ~~June~~March 3031, ~~2004~~2006, respectively. The net cash provided by financing ~~investing~~ activities for ~~these~~the ~~periods~~three months ended March 31, 2007 was attributable to an adjustment to offering costs related to the December 2006 private placement of our common stock. The net cash provided by financing activities for the three months ended March 31, 2006 was primarily attributable to the ~~purchase~~proceeds ~~and~~received ~~subsequent~~from ~~maturities~~the ofexercise ~~short-term~~of ~~investments~~options of our common stock.

The net cash provided by financing activities was approximately $10,000 and $184,000 for the six month periods ended June 30, 2005 and June 30, 2004, respectively. The net cash provided by financing activities for these periods was attributable to the proceeds collected from the exercise of options and warrants of our common stock.11

~~Net~~On ~~cash~~August ~~provided~~8, by2006, we ~~discontinued~~completed ~~operations~~the ~~was~~private placement of 4,993,781 shares of the Company’s common ~~approximately~~stock at a price of $1.26 per share,~~167,000~~ ~~and~~for an aggregate offering price of approximately $6.3 million,~~395~~ to institutional and accredited investors,~~000~~ ~~for~~which included several Directors of the ~~six~~Company. In ~~month~~connection ~~periods~~with ~~ended~~the ~~June~~private placement, we also issued warrants to the 30investors. The warrants became exercisable on February 9, ~~2005~~2007 and ~~June~~expire ~~30,~~on ~~2004~~February 9, ~~respectively~~2012. The ~~net~~warrants ~~cash~~contain ~~provided~~a byredemption ~~discontinued~~feature where ~~operations~~the inCompany has the ~~six~~option ~~months~~to ~~ended~~repurchase the warrants for $0.01 per share ~~June~~if our common stock trades at $2.52 for a period of 30, ~~2005~~consecutive trading days. The issuance of the shares of common stock and warrants was ~~primarily~~exempt ~~attributable~~from tothe registration requirements of the Securities ~~sale~~Act of ~~royalty~~1933, ~~credits~~as ~~in February~~amended, ~~2005~~pursuant to Section 4(2) thereof, ~~representing~~since the issuance ~~final~~constituted ~~real~~a ~~estate~~sale ~~related~~not ~~transaction~~involving a public offering. ~~The~~Following ~~net~~the ~~cash~~offering, ~~provided~~we byfiled ~~discontinued~~a ~~operations~~Registration inStatement ~~the~~on ~~six~~Form ~~months~~S-3 ~~ended~~with ~~June~~the ~~30,~~SEC ~~2004~~on ~~was~~August ~~primarily~~23, ~~due~~2006 to register for resale by the ~~sale~~ investors the shares of ~~real~~common ~~estate~~stock ~~assets~~issued in the offering and ~~collection~~issuable upon exercise of ~~principal~~the ~~payments~~warrants. The registration statement became effective on ~~notes~~September ~~receivable~~8, 2006.

InOn December ~~1999~~19, 2006, we ~~entered~~completed ~~into~~the anprivate ~~Intellectual Property~~placement ~~License~~of ~~Agreement~~4,592,591 toshares ~~obtain~~of the ~~exclusive worldwide rights to certain~~Company’s ~~patents,~~common ~~trademarks,~~stock ~~and~~at ~~technology~~a ~~with~~price ~~Aruba~~of ~~International Pty~~$1.35 ~~Ltd.~~per share, for an ~~Australian~~ ~~company,~~aggregate ~~controlled~~offering byprice ~~Bill~~of approximately E$6.2 ~~Cham~~million, ~~Ph.D.,~~to ainstitutional ~~founding stockholder of Pre-Merger Lipid and one of our former Directors~~investors. AsIn ~~consideration~~connection ~~for~~with the ~~license~~private placement, we also issued ~~Aruba~~ ~~4,677,060~~warrants ~~shares~~to ofOppenheimer ~~our~~& ~~common stock valued at $250,000~~Co. ~~Under~~ ~~this agreement~~Inc., wethe ~~are~~placement ~~obligated~~agent toin ~~pay~~the ~~Aruba~~transaction. The aissuance ~~continuing~~of ~~royalty~~the onshares of ~~revenue~~common instock ~~future~~and ~~years,~~warrants ~~subject~~was toexempt afrom ~~minimum annual~~the ~~royalty~~registration ~~amount~~requirements of the ~~$500,000,~~Securities ~~10%~~Act of ~~any~~1933, ~~External~~as ~~Research~~amended, ~~Funding initiated~~pursuant byto ~~Dr.~~Section4(2) ~~Cham~~thereof, ~~and~~since the ~~received~~issuance byconstituted usa tosale ~~further~~not ~~this~~involving ~~technology,~~a aspublic ~~defined in~~offering. Following the ~~agreement~~offering, ~~and~~we ~~$250,000~~filed ~~upon~~a Registration ~~commencement~~Statement ofon ~~our~~Form ~~initial~~S-3 ~~human~~with ~~clinical trial utilizing~~ the ~~technology~~SEC ~~under~~on ~~the~~January ~~patents. The $250~~5,~~000~~ ~~related~~2007 to ~~the commencement of~~register ~~our~~for ~~initial~~resale ~~human~~by ~~clinical~~the ~~trial~~investors ~~was~~and ~~paid~~the toplacement ~~Aruba~~agent inthe ~~July~~shares ~~2002. In~~of ~~November~~common ~~2004,~~stock issued ~~all~~in ~~rights,~~the ~~title,~~offering ~~interest~~ and ~~obligations~~issuable ~~covered~~upon ~~under~~exercise of the ~~Intellectual~~warrants. The ~~Property~~registration ~~License~~statement ~~Agreement~~became ~~were~~effective ~~assigned~~on toJanuary ~~Aruba International B.V.~~19, ~~a Netherlands company, controlled by Dr~~2007. ~~Cham.~~

InOur ~~May~~principal ~~2000,~~uses of wefunds ~~sold~~are aexpected ~~total~~to be the payment of 4operating expenses and continued research and development funding to support our HDL Therapy and Viral Immunotherapy platforms. The expected use of funds related to our HDL Therapy platform includes costs associated with conducting our current clinical trial of our PDS-2 device and preparing for future clinical trials of our PDS-2 device,~~925~~ and further development of our HDL Mimetic Peptide program,~~300~~ ~~shares~~inclusive of pre-clinical testing. The expected use of our funds related to our ~~common~~Viral ~~stock~~Immunotherapy atplatform $2includes costs associated with our non-human primate study.25 The ~~per~~results ~~share~~of inthis study could lead to the initiation of a ~~private~~clinical ~~placement~~trial for the treatment of HIV-infected patients, with approval from the FDA, or to ~~accredited~~an offshore human study in ~~investors~~collaboration with a partner. ~~Net~~We expect our principal sources of funds to be cash on hand, proceeds received from public or private financings and any proceeds received from our current or future licensing partnerships. As of March 31, 2007 ~~after~~we had cash and cash equivalents equal to ~~expenses~~approximately $14.5 million. We anticipate that these assets will provide sufficient working capital for our operations, including our current development projects and clinical trial, to the second half of 2008. We expect additional capital will be required in the ~~placement~~future. The Company continues to consider public or private financings, ~~were~~to ~~approximately~~plan the ~~$11~~formation of strategic development or licensing partnerships,~~000~~ and to explore strategic initiatives. However,~~000~~ there can be no assurance that funds secured from any of these efforts, if obtained, will be sufficient to meet the Company’s future cash requirements.

In March 2001, we closed a private placement of 1,375,282 shares of common stock at $4.49 per share for gross proceeds of $6,175,000. In connection with the private placement, we paid a commission to MDB Capital Group, LLC of approximately 7% of the gross proceeds, payable in shares of common stock, for services rendered in the private placement. Accordingly, 95,491 shares of common stock at $4.49 per share were issued as commission for the transaction.

Our principal uses of funds are expected to be the payment of operating expenses and continued research and development funding to support our HDL Therapy and Viral Immunotherapy Platforms. The expected use of funds related to our HDL Therapy Platform includes costs associated with the preparation and initiation of a human clinical trial. The expected use of funds related to our Viral Immunotherapy Platform includes costs associated with the launch of a pre-clinical non-human primate study by year-end 2005, which, with approval from the FDA, could lead to the initiation of a human clinical trial for the treatment of HIV-infected patients. We expect our principal sources of funds to be cash on hand. As of June 30, 2005, we had cash and cash equivalents and short-term investments equal to approximately $13,799,000. We anticipate that these assets will provide sufficient working capital for our operations, including our current development projects, through at least the first half of 2006. We expect additional capital will be

needed in the future. Our Board of Directors continues to consider third-party inquiries and explore strategic initiatives, public or private equity or debt financings, the formation of strategic development or licensing partnerships, and strategic business combinations. However, there can be no assurance that funds secured from any of these efforts, if obtained, will be sufficient to meet the Company’s future cash requirements.

Contractual Obligations

Future estimated contractual obligations are:

(In thousands)	~~2005~~2007		~~2006~~2008		~~2007~~2009		~~2008~~2010		~~2009~~2011		~~2010~~Total		~~Total~~
Long-Term Debt Obligations	$	—	$	—	$	—-	$	—	$	—	$	—	$	—
Operating Leases	$	211	$	217	$	223	$	56	$	—	$	707
Capital Lease Obligations	—		—		—		—		—		—		—
Royalty Payments*	500		500		500		500		500		2,500
Operating Leases*	156		206		211		217		223		56		1,069
Total	$	711	$	717	$	723	$	556	$	500	$	3,207
Purchase Obligations**	—		—		—		—		—		—		—
Royalty Payments***	500		500		500		500		500		500		3,000
Other Long-Term Liabilities Reflected on the Company’s Consolidated Balance Sheet	—		—		—		—		—		—		—
Total	$	656	$	706	$	711	$	717	$	723	$	556	$	4,069

*We ~~extended~~have ~~our~~agreed ~~operating~~to pay ~~lease~~annual ~~effective~~royalties ~~April~~in the amount of $500,000 to Aruba International B.V. in ~~2005~~exchange for the exclusive worldwide rights to certain patents, trademarks, and technology. ~~The~~Under ~~lease~~certain ~~will~~circumstances, additional ~~terminate~~payments related to this agreement could be required in ~~March~~the ~~2010~~future. The amounts presented in the above table reflect the minimum annual royalty amount payable through the next five years.

**While the Company does have various consulting agreements, these agreements are cancelable without penalty, generally with thirty days prior written notice.

***We have agreed to pay annual royalties in the amount of $500,000 to Aruba International B.V. in exchange for the exclusive worldwide rights to certain patents, trademarks, and technology. Under certain circumstances, additional payments related to this agreement could be required in the future. The amounts presented in the above table reflect the minimum annual royalty amount payable through the next six years.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities of financial partnerships, such as entities often referred to as structured finance or Special Purpose Entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies

InThe ~~December 2001, the Securities and Exchange Commission (“~~SEC~~”),~~ ~~required that all registrants disclose and describe their “critical~~has ~~accounting policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The SEC~~ indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results of ~~operations~~ operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of ~~matters~~ matters that are inherently uncertain. ~~In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates.~~ ~~Those estimates are~~We ~~based~~consider ~~on our historical experience, terms of existing contracts, our observance of trends in~~ the ~~industry and information available from other outside sources, as appropriate. We believe that our following~~ accounting policies ~~fit this definition:~~

~~Stock Compensation~~12

~~The~~described ~~Company~~below ~~accounts~~to ~~for~~be ~~stock options granted to~~our ~~employees~~most ~~using~~critical ~~the~~accounting ~~intrinsic~~policies ~~value~~because ~~method~~they inare ~~accordance~~impacted ~~with~~significantly ~~the provisions of~~by ~~Accounting~~estimates ~~Principles~~we ~~Board (“APB”) Opinion No~~make. Those ~~25,~~estimates ~~“Accounting~~are based ~~for~~on ~~Stock~~our ~~Issued~~historical ~~to Employees~~experience,” ~~and,~~terms ~~thus, recognizes~~of noexisting ~~compensation~~contracts, ~~expense~~our ~~for those options granted with exercise~~observance ~~prices~~of ~~equal~~trends toin the ~~fair~~industry ~~market~~and ~~value~~information ofavailable ~~the~~from ~~Company’s~~other ~~common~~outside ~~stock on the date~~sources, ofas ~~grant~~appropriate. AsExcept ~~permitted,~~for the ~~Company has~~following ~~elected~~accounting topolicies ~~adopt~~which ~~only~~changed during the ~~disclosure~~three ~~provisions~~month ofperiod ~~Statement~~ended ofMarch ~~Financial~~31, ~~Accounting Standards No. 123~~2007, ~~“Accounting for~~our ~~Stock-Based~~critical ~~Compensation”~~accounting ~~(“SFAS No.~~policies ~~123”). The~~as ~~Company~~described ~~accounts for stock-based awards to non-employees~~ in ~~accordance~~our ~~with~~annual ~~SFAS~~report ~~No.~~on ~~123~~our most ~~and~~recent ~~Emerging~~form ~~Issues~~10-K ~~Task~~remain ~~Force (“EITF”) Issue No. 96-~~unchanged:

13Revenue Recognition

~~18,~~Our ~~Accounting~~revenues ~~for Equity~~are ~~Instruments~~currently ~~That~~attributed ~~Are Issued~~ to ~~Other~~a ~~Than~~collaborative ~~Employees~~research ~~for~~and ~~Acquiring,~~licensing oragreement ~~in Conjunction~~ with ~~Selling, Goods or Services~~ Elanco. ~~Significant~~The ~~judgment~~agreement iswas ~~required~~entered ~~on the part~~into ofduring ~~management in determining~~ the ~~proper~~fourth ~~assumptions~~quarter ~~to use in the computation~~ of ~~the~~2006 ~~amounts~~and toin beexchange ~~disclosed~~for ~~or recorded pursuant to~~ the ~~provisions~~license, ofsubject ~~SFAS~~to ~~No.~~Elanco’s ~~123. The~~due ~~fair~~diligence ~~value~~and ofsales ~~each option granted is estimated on the date~~ of ~~grant~~products ~~using~~meeting ~~the~~various ~~Black-Scholes~~thresholds, ~~option valuation~~we ~~model. The assumptions used in~~may ~~the~~receive ~~Black-Scholes~~a ~~option~~technology ~~valuation~~access ~~model include the risk free interest rate~~fee, ~~expected~~ ~~life,~~milestone ~~volatility~~payments and ~~dividend~~royalties, ~~yield~~all of ~~the option. Management bases its assumptions on~~which ~~historical~~would ~~data~~be ~~where~~recorded ~~available. However,~~as ~~these~~revenue ~~assumptions~~in ~~consist of estimates of~~ future ~~market conditions, which are inherently uncertain, and are therefore subject to management’s judgment~~periods.

We recognize cost reimbursement revenue under our current collaborative agreement as the related research and development costs are incurred, as provided for under the terms of the agreement. Any amounts received in advance are recorded as deferred revenue until the related reimbursable research and development costs are incurred. Our revenue recognition policies related to the Elanco agreement are in accordance with the guidance provided in the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” as amended by SAB No. 104, “Revenue Recognition.”

Income Taxes

~~The~~As ~~Company~~a ~~follows~~result ~~SFAS~~of our ~~No.109,~~adoption ~~“Accounting~~of ~~for~~FIN ~~Income~~48 ~~Taxes.” Under~~on ~~the~~January ~~asset~~1, ~~and~~2007, ~~liability~~we ~~method~~are ofrequired ~~SFAS No.109,~~to ~~deferred~~analyze tax ~~assets~~positions that ~~and~~we ~~liabilities~~have ~~are~~taken ~~recognized~~on ~~for~~multiple ~~the~~federal ~~future~~and state income tax returns every ~~consequences~~reporting ~~attributable~~period. Part toof ~~differences~~this ~~between~~analysis requires ~~the~~that ~~financial~~we ~~statement carrying~~anticipate ~~amounts~~the ofpotential ~~existing~~judgment ~~assets~~of federal and ~~liabilities~~state ~~and~~taxing authorities ~~their~~of ~~respective~~our uncertain tax positions, if challenged upon ~~bases~~examination. The ~~and~~potential ~~operating~~judgment ~~loss~~of various federal and ~~tax~~state ~~credit~~taxing ~~carryforwards. Deferred~~authorities ~~tax~~can ~~assets~~be subjective and ~~liabilities~~can ~~are measured~~differ ~~using~~from ~~enacted~~our ~~tax~~expectations ~~rates~~and ~~expected~~precedent toset, ~~apply~~if toany, ~~taxable~~in ~~income~~similar insituations. Additionally, FIN 48 prescribes the ~~years~~use inof a ~~which~~measurement ~~those~~technique ~~temporary~~that ~~differences~~incorporates ~~are~~the ~~expected~~use toof becumulative-probability assessments ~~recovered~~rather orthan ~~settled. The~~a ~~effect~~“best onestimate” ~~deferred~~approach ~~tax~~to ~~assets~~measuring and recording ~~liabilities~~uncertain oftax apositions. The ~~change~~results inof these ~~tax~~measurements ~~rates~~are islikely ~~recognized~~to indiffer ~~income~~from inamounts ~~the~~ultimately ~~period~~determined ~~that~~by ~~includes~~federal ~~the~~and ~~enactment~~state ~~date~~taxing authorities, if challenged upon examination.

InThe ~~assessing~~above ~~the~~listing is ~~realizability~~not ofintended ~~deferred~~to ~~tax~~be ~~assets to~~a ~~determine~~comprehensive ~~the~~list ~~need~~of ~~for~~all ~~any~~of ~~valuation~~our ~~allowance,~~accounting policies. In ~~management~~many ~~considers~~cases, ~~whether~~the accounting ittreatment isof ~~more~~a ~~likely~~particular ~~than~~transaction ~~not~~is ~~that~~specifically ~~some~~dictated ~~portion~~by orgenerally accepted ~~all~~accounting ofprinciples, ~~the~~with ~~deferred~~no ~~tax~~need ~~assets will~~for ~~not~~management’s bejudgment ~~realized~~in their application. ~~The~~There ~~ultimate~~are also areas in ~~realization~~which ofmanagement’s ~~deferred~~judgment ~~tax~~in ~~assets~~selecting isany ~~dependent~~available ~~upon~~alternative ~~the~~would ~~generation~~not produce ofa ~~future~~materially different result. ~~taxable~~Our ~~income~~significant ~~during~~accounting ~~the~~policies ~~periods~~are more fully described in ~~which~~our audited ~~those~~Consolidated ~~temporary~~Financial ~~differences~~Statements ~~become deductible. Management~~and ~~considers~~notes thereto for the year ended ~~scheduled~~December ~~reversal~~31, of2006, ~~deferred~~which ~~tax~~appear ~~liabilities,~~in ~~projected~~the ~~future~~Company’s ~~taxable income,~~Annual ~~and~~Report ~~tax~~on ~~planning~~Form ~~strategies~~10-K infiled with ~~making~~the ~~this~~SEC ~~assessment~~on March 14, 2007.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. Our significant accounting policies are more fully described in our audited Consolidated Financial Statements and notes thereto for the year ended December 31, 2004, which appear in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2005.13

~~Factors~~ITEM ~~That~~3. ~~May~~QUANTITATIVE ~~Affect~~AND ~~Future~~QUALITATIVE ~~Results~~DISCLOSURES ~~and~~ABOUT ~~Financial~~MARKET ~~Condition~~RISK

IfOur weexposure ~~are~~to ~~unable~~market risk associated with changes in interest rates relates to ~~obtain~~our ~~adequate~~investment portfolio. We ~~funds~~maintain an investment portfolio consisting typically of government issued securities, although at March 31, 2007, we ~~may~~do not behave ~~able~~any toinvestments ~~develop~~on our balance sheet. When we carry an investment balance, these investments are classified as held-to-maturity and ~~market~~are ~~our~~accounted for at their ~~potential~~amortized ~~products~~cost, as per Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

As of ~~June~~March 3031, ~~2005~~ 2007, we ~~had~~did ~~cash, cash~~not ~~equivalents~~have ~~and~~any ~~short-term~~ investments ~~equal~~on toour ~~approximately~~balance ~~$13,799,000~~sheet. WeEvery ~~believe~~quarter ~~that~~ we ~~have~~evaluate at our ~~disposal~~investment ~~sufficient~~portfolio ~~capital~~and tofollow ~~fund~~the ~~our~~guidance ~~operations~~of FASB Staff Position No. 115-1, ~~including~~“The ~~our~~Meaning ~~current~~of ~~development~~Other-Than-Temporary Impairment and its Application to ~~projects~~Certain Investments,” ~~through~~to atdetermine ~~least~~if ~~the~~any ~~first~~of ~~half~~our ofinvestments ~~2006~~are impaired. ByWe ~~the~~have ~~first~~not ~~quarter~~booked ofany impairment ~~2005,~~charges weduring ~~had~~2007 ~~disposed of~~and ~~all~~have ofconcluded ~~our~~that ~~real~~an ~~estate~~impairment ~~and~~analysis was ~~other~~not ~~assets~~necessary. Since we held byno investments ~~the~~at ~~Company~~March 31, 2007, ~~before~~a ~~the~~sensitivity analysis of a 10% change ~~merger~~in ~~with~~market NZinterest rates was not performed.

~~For~~ITEM ~~the six months ended June 30, 2005, we incurred a net loss of approximately $5,014,000 and since Inception through June 30, 2005, we have accumulated a deficit of approximately $58,081,000~~4. We ~~expect~~CONTROLS toAND continue to incur losses for the foreseeable future as we continue funding for clinical testing and other activities related to seeking approval to market our products. Conducting clinical trials necessary to apply for regulatory approval to sell our products will take a number of years and will require significant amounts of capital.PROCEDURES

In(a) Evaluation ~~the~~of ~~near~~Disclosure ~~future,~~Controls and weProcedures. Our ~~will~~President ~~require~~and ~~additional~~Chief ~~capital~~Executive Officer and inour ~~amounts~~Chief ~~that~~Financial ~~cannot~~Officer behave ~~quantified,~~performed ~~but~~an ~~are~~evaluation, ~~expected~~required pursuant to Rule be13a-15(b) ~~significant. We~~or ~~intend~~15d-15(b) toof ~~seek~~the ~~capital~~Securities ~~needed~~Exchange toAct ~~fund~~of ~~our operations~~1934, ~~through~~as ~~new~~amended (the ~~collaborations~~“Exchange Act”), ~~through~~of ~~pursuit~~the effectiveness of ~~research~~the design and operation of our ~~development~~disclosure ~~grants,~~controls orand ~~through~~procedures ~~public~~(as orsuch ~~private~~term ~~equity~~is ordefined ~~debt~~in Rules 13a-15(e) ~~financings~~and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). ~~Additional~~Based ~~financing~~on ~~may~~such ~~not~~evaluation, such officers have beconcluded ~~available~~that, onas ~~terms~~of ~~favorable~~the toEvaluation usDate, orour atdisclosure ~~all. If~~controls weand procedures are ~~unable~~effective toin ~~obtain~~alerting ~~financing~~them, on ~~acceptable~~ ~~terms~~a ortimely ~~at all~~basis, ~~our~~to ~~ability~~material information relating to ~~continue~~the ~~our~~Company ~~business~~(including asits ~~planned~~consolidated subsidiaries) ~~will~~required to be ~~significantly~~included ~~impaired~~in ~~and~~our weperiodic ~~may~~filings beunder ~~forced~~the toExchange ~~cease operations~~Act.

~~Our~~(b) Changes in Internal Controls Over ~~technology~~Financial isReporting. There ~~only~~have not been any significant changes in ~~the~~our ~~clinical~~internal ~~development~~controls ~~stage,~~over ~~may~~financial ~~not~~reporting ~~prove~~(as tosuch beItem ~~safe~~is defined in orRules ~~effective,~~13a-15(f) and ~~may~~15d-15(f) ~~never~~under ~~receive~~the ~~regulatory~~Exchange ~~approval~~Act) orduring ~~achieve~~the ~~widespread~~period covered ~~use~~by this Quarterly Report on Form 10-Q that have materially affected, ~~which~~or ~~would~~are reasonably ~~significantly~~likely ~~harm~~to materially affect, our ~~business~~internal ~~prospects~~controls over financial reporting.

14Our management, including our President and Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met due to numerous factors, ranging from errors to conscious acts of an individual, or individuals acting together. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error and/or fraud may occur and not be detected.

~~Before~~ITEM obtaining required regulatory approvals for the commercial sale of any of our potential products, we must demonstrate, through pre-clinical studies and clinical trials, that our technology is safe and effective for use in at least one medical indication4T. ~~These~~ ~~studies~~CONTROLS ~~and~~AND clinical trials are expected to take a number of years and may fail to show that our technology is sufficiently safe and effective, in which case our technology will not receive regulatory approval, and we will not be able to develop and commercialize our products.PROCEDURES

~~Our~~Not technology, and hence, our business, at present is limited to addressing two medical applications: cardiovascular disease, using our HDL Therapy Platform, and viral infections, using our Viral Immunotherapy Platformapplicable. HDL Therapy is aimed at developing treatments for the reversal of atherosclerosis, while the Viral Immunotherapy Platform is focused on treatments for people suffering from conditions associated with infection from lipid-enveloped viruses such as HIV, Hepatitis B and C, SARS coronavirus, influenza and West Nile. If our technology does not prove to be safe or effective, if we otherwise fail to receive regulatory approval for our potential product indications, or if we fail to successfully commercialize any product that may receive regulatory approval, our business prospects would be significantly harmed and we may even be forced to cease operations.

~~Our future clinical studies may be delayed or unsuccessful.~~14

~~Our~~PART ~~future~~II ~~success~~— ~~depends in large part upon the~~OTHER results of clinical trials designed to assess the safety and effectiveness of our potential product indications. The ultimate results of clinical studies cannot be predicted with accuracy and can be impacted by many variables. We cannot be sure whether planned clinical trials will begin on time or will be completed on schedule or at all. Delay or failure to complete clinical studies may delay or prevent us from bringing products to market, which would materially harm our business. For example, any of our future clinical studies might be delayed in their initiation or performance, or even halted after initiation because:INFORMATION

~~• extensive~~ITEM ~~pre-clinical~~1. ~~animal~~LEGAL ~~studies are required by the regulatory authorities to demonstrate the safety of the process technology;~~PROCEEDINGS

• On June 14, 2006, we received a subpoena from the Office ~~data~~of ~~generated~~Inspector byGeneral (“OIG”) of the ~~pre~~United States Department of Health and Human Services, requesting that we produce certain documents related to H. Bryan Brewer, Jr., M.D., the Vice-~~clinical~~Chairman ~~animal~~of ~~studies~~our Board of Directors and our ~~does~~Chief ~~not~~Scientific ~~indicate~~Director. We understand that the inquiry by the OIG relates to limitations on outside activities by the National ~~regulatory~~Institutes ~~authorities~~of Health (“NIH”) personnel, including Dr. Brewer’s work for the Company during and after his employment by the NIH. To date, we have produced the requested documents and we will continue to cooperate fully with the investigation. We do not believe that ~~there~~Dr. isBrewer’s awork ~~sufficient~~on ~~margin~~our behalf violated any of ~~safety;~~the conflict of interest laws applicable to NIH personnel. As the investigation is ongoing, we can not predict its outcome or its effect on our business or operations.

• In addition to the ~~potential~~Item ~~clinical~~mentioned ~~benefit~~above, we are from time ~~the~~to ~~delipidation~~time, a party to legal proceedings, which are ordinary and routine to ~~process~~our ~~cannot~~business. The beoutcome ~~effectively~~of ~~demonstrated~~any ~~through~~legal proceeding ~~the~~is ~~pre-clinical~~uncertain ~~animal~~until ~~studies;~~it is completed.

~~• the~~ITEM ~~relevant~~1A. ~~regulatory~~RISK ~~requirements for initiating and maintaining an application for a clinical study cannot be met;~~FACTORS

~~• the~~There ~~product~~have orbeen ~~process~~no material ischanges ~~not~~to ~~effective,~~the orrisk ~~physicians perceive~~factors ~~that~~previously ~~the~~disclosed ~~product~~in isour ~~not~~2006 ~~effective;~~Form 10-K, filed on March 14, 2007.

~~• patients~~ITEM ~~experience~~2. ~~severe~~UNREGISTERED ~~side~~SALES ~~effects~~OF ~~during treatment~~EQUITY orSECURITIES ~~possibly~~AND ~~even~~USE ~~death~~OF ~~as a result of the treatment;~~PROCEEDS

• patients die during a clinical study because their disease is too advanced or because they experience medical problems that are not related to the product being studied;None.

~~• patients~~ITEM do3. ~~not~~DEFAULTS ~~enroll~~UPON inSENIOR ~~the studies at the rate we expect; or~~SECURITIES

• the discovery by the sponsor, during the course of the study, of deficiencies in the way the study is being conducted by the study investigators that raise questions as to whether the study is being conducted in conformity with the relevant regulatory authorities’ regulations or Good Clinical PracticeNone.

WeITEM ~~depend on our license agreement with Aruba International B~~4.V. ~~that~~SUBMISSION ~~may,~~OF ifMATTERS ~~terminated, significantly~~TO ~~harm~~A ~~our~~VOTE ~~business~~OF ~~and~~SECURITY ~~may cause us to cease operations.~~HOLDERS

We have entered into an agreement for an exclusive license to patents, know-how and other intellectual property relating to our foundation technology for removal of lipids from proteins and our continued operations at present are dependent upon such intellectual property. The licensor is Aruba International B.V., a company controlled by Dr. Bill E. Cham, a founding stockholder of Pre-Merger Lipid and one of our former Directors. Dr. Cham also controls KAI International, LLC, our largest stockholder. The technology licensed from Aruba International B.V. currently represents an important part of the technology owned or licensed by us. Aruba International B.V. may terminate the license agreement if we fail to perform and fail to remedy, following written notice, any default with respect to our material obligations under the agreement, including our obligations to make royalty payments, or if we cease, without intention to resume, all efforts to commercialize the subject matter of the licensed intellectual property. If our license with Aruba International B.V. terminates, our business would be significantly harmed and may cause us to cease operations.None

15ITEM 5. OTHER INFORMATION

~~We intend to rely on collaborations in order to further develop our products and processes~~None. ~~If these collaborations are unsuccessful, the development of our products could be adversely affected and we may incur significant unexpected costs.~~

WeITEM ~~intend to enter into collaborations with strategic partners, licensors, licensees and others~~6. We may be unable to maintain or expand our existing collaborations on favorable terms, or at all, or establish additional collaborations or licensing arrangements necessary to develop our technology on favorable terms, or at all. Any current or future collaborations or licensing arrangements may not be successful. In addition, parties we collaborate with may develop products or processes that compete with ours, and we cannot be certain that they will perform their contractual obligations or that any revenues will be derived from such arrangements. If one or more of these parties fails to achieve product development objectives, this failure could harm our ability to fund related programs and develop or commercialize products.EXHIBITS

~~Our~~(a) Exhibits - See Exhibit ~~industry~~Index, which is ~~intensely~~incorporated ~~competitive~~by reference.

The biotechnology and medical device industries are intensely competitive and we may not be able to develop, perfect or acquire rights to new products with commercial potential. We compete with biotechnology, medical device and pharmaceutical companies that have been established longer than we have, have more experience in commercializing their technology, have a greater number of products on the market, have greater financial and other resources and have other technological or competitive advantages. We also have competition in the development of technologies and processes and in acquiring personnel and technology from academic institutions, governmental agencies, and other private and public research organizations. We cannot be certain that one or more of our competitors will not receive patent protection that dominates, blocks or adversely affects our clinical studies, product development or business; will not benefit from significantly greater sales and marketing capabilities; or will not develop products that are more clinically effective or cost-effective or that are otherwise accepted more widely than ours.15

If we fail to secure and then enforce patents and other intellectual property rights underlying our technologies, or if the use of our technology is determined to infringe on the intellectual property rights of others, our business could be harmed.SIGNATURES

~~Our~~Pursuant ~~future success will depend in part on our ability~~ to ~~obtain patent protection, enforce patents once obtained, maintain trade~~the ~~secrets~~requirements ~~and~~of ~~operate without infringing upon~~ the ~~patents~~Securities ~~and~~Exchange ~~proprietary~~Act ~~rights~~ of ~~others~~1934, ~~and if needed, obtain appropriate licenses to patents or proprietary rights held by third parties with respect to their technology, both in~~ the ~~United~~ ~~States~~registrant ~~and~~has ~~in foreign countries.~~ duly Wecaused ~~currently~~this ~~have~~report ~~an exclusive license from Aruba International B.V. with respect~~ to ~~three~~be ~~issued~~signed ~~U.S.~~on ~~patents,~~its ~~three~~behalf ~~issued~~by Australian counterpart patents, one issued Japanese counterpart patent, one issued European counterpart patent and counterpart applications as well as independent pending patent applications. The issued U.S. patents will expire in January 2008, January 2016 and June 2017. There are additional pending applications assigned to us and we are constantly strengthening our intellectual property portfolio in accordance with our technological advancements. Each of the ~~patents~~undersigned ~~and~~thereunto ~~pending applications~~duly ~~relates to different aspects of our technology platforms~~authorized. However, these patent applications may not be approved and, even if approved, our patent rights may not be upheld in a court of law or may be narrowed if challenged. The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions. Our patent rights may not provide competitive advantages for our products and may be challenged, infringed upon or circumvented by our competitors.

In addition to patents, we rely on trade secrets, know-how, continuing technological innovations, and licensing opportunities to develop and maintain our competitive position. It is our policy to require our employees, certain contractors, consultants, members of our Scientific and Viral Advisory Boards and parties to collaborative agreements to execute confidentiality agreements upon the commencement of a business relationship with us. We cannot assure you that these agreements will not be breached, that these agreements will provide meaningful protection of our trade secrets or know-how or adequate remedies if there is unauthorized use or disclosure of this information, or that our trade secrets or know-how will not otherwise become known or be independently discovered by our competitors.

Date: May 10, 2007	Lipid Sciences, Inc.

	By:	/s/ Sandra Gardiner
	Sandra Gardiner
	Chief Financial Officer*

If*Signing ~~it were ultimately determined that our intellectual property rights are unenforceable, or that our use of our technology infringes~~ on ~~the~~behalf ~~intellectual property rights~~ of ~~others, we may be required or may desire~~the toRegistrant ~~obtain~~as ~~licenses~~a toduly ~~patents~~authorized ~~and~~officer ~~other intellectual property held by third parties to develop, manufacture~~ and ~~market~~as products using our technology. We may not be able to obtain these licenses on commercially reasonable terms, if at all, and any licensed patents or intellectual property that we may obtain may not be valid or enforceable. In addition, the ~~scope~~Principal ofFinancial ~~intellectual~~Officer property protection is subject to scrutiny and challenge by courts and other governmental bodies. Litigation and other proceedings concerning patents and proprietary technologies can be protracted, expensive and distracting to management and companies may sue competitors as a way of ~~delaying~~ the ~~introduction of competitors’~~Registrant

~~products. Any litigation, including any interference~~EXHIBIT ~~proceedings to determine priority of inventions, oppositions to patents or litigation against our partners, may be costly and time-consuming and could significantly harm our business.~~INDEX

Because of the large number of patent filings in the biopharmaceutical field, our competitors may have filed applications or been issued patents and may obtain additional patents and proprietary intellectual property rights relating to products or processes competitive with or similar to ours. We cannot be certain that U.S. or foreign patents do not exist or will not be issued that would preempt or otherwise harm our ability to commercialize our products and product candidates.

Exhibit Number		Description
3.1		Certificate of Incorporation. Previously filed as Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2002 and incorporated herein by reference.

3.2		Bylaws, as amended. Previously filed as Exhibit 3.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 10, 2005 and incorporated herein by reference.

10.1		Amended and Restated Employment Agreement, by and between Lipid Sciences, Inc. and S. Lewis Meyer, Ph.D. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on April 20, 2007 and incorporated herein by reference.

10.2		Second Amended and Restated Employment Agreement, by and between Lipid Sciences, Inc. and Sandra Gardiner. Previously filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on April 20, 2007 and incorporated herein by reference.

10.3		Second Amended and Restated Employment Agreement, by and between Lipid Sciences, Inc. and Dale Richardson. Previously filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on April 20, 2007 and incorporated herein by reference.

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~If we use biological and hazardous materials in a manner that causes injury, we may be liable for damages.~~17

Our research and development activities involve the controlled use of potentially harmful biological materials, such as blood products, organic solvents and other hazardous materials. We cannot completely eliminate the risk of accidental contamination or injury from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for damages that result, and any liability could be significant. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations could be significant.

We depend on key personnel and will need to hire additional key personnel in the future.

Our ability to operate successfully depends in significant part upon the experience, abilities and continued service of certain key scientific, technical and managerial personnel. If we lose the services of any of these personnel and we are unable to hire qualified replacements, our business could be harmed. Our future success also depends upon our ability to attract and retain additional highly qualified personnel in these areas and our ability to develop and maintain relationships with qualified clinical researchers. There can be no assurance that we can retain such personnel or that we can attract or retain other highly qualified scientific, technical and managerial personnel or develop and maintain relationships with clinical researchers in the future.

Our stock price may be volatile and there may not be an active trading market for our common stock.

There can be no assurance that there will be an active trading market for our common stock or that the market price of the common stock will not decline below its present market price. The market prices for securities of biotechnology companies have been, and are likely to continue to be, highly volatile. Factors that have had, and are expected to continue to have, a significant impact on the market price of our common stock include:

• material public announcements;

• actual or potential clinical results with respect to our products under development or those of our competitors;

• the announcement and timing of any new product introductions by us or others;

• technical innovations or product development by us or our competitors;

• regulatory approvals or regulatory issues;

• developments relating to patents and proprietary rights;

• political developments or proposed legislation in the biotechnology, medical device or healthcare industries;

• economic and other external factors, disaster or crisis;

• changes to our management;

• period-to-period fluctuations in our financial results or results which do not meet or exceed analyst expectations; and

• market trends relating to or affecting stock prices throughout our industry, whether or not related to results or news regarding us or our competitors.

In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may, in the future, be the target of similar litigation. Regardless of its outcome, securities litigation

may result in substantial costs and divert management’s attention and resources, which could harm our business and results of operations.

Existing stockholders may experience future dilution.

As of June 30, 2005, 6,846,183 stock options and 895,412 warrants to purchase common stock were outstanding, which if exercised, would result in the issuance of our common stock. Moreover, in the near future, we anticipate the need for additional capital to fund our operations. Such capital could be obtained be selling additional common stock or other equity instruments. Any future issuance of our common stock will have the effect of diluting ownership of existing stockholders.

We have adopted several anti-takeover measures.

We have taken a number of actions that could discourage a takeover attempt that might be beneficial to stockholders who wish to receive a premium for their shares from a potential bidder. For example:

• our Board of Directors has the authority to issue, without vote or action of stockholders, up to 10,000,000 shares of preferred stock and to fix the price, rights, preferences and privileges of those shares. Any series of preferred stock could contain dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences or other rights superior to the rights of holders of common stock;

• our Directors are elected to staggered terms, which prevents the entire Board from being replaced in any single year;

• our Certificate of Incorporation and Bylaws require the affirmative vote of the holders of sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares entitled to vote generally in the election of Directors, voting together as a single class, to make, alter, amend or repeal our Bylaws;

• our Certificate of Incorporation does not permit stockholders to take an action by written consent;

• our Certificate of Incorporation and the Bylaws provide that special meetings of the stockholders may be called only by the Chairman of the Board, the President, or the Board of Directors by a resolution approved by a majority of the total number of Directors we would have if there were no vacancies; and

• under our Bylaws, notice regarding stockholder proposals and Director nominations must have been delivered not less than 45 days nor more than 75 days prior to the first anniversary of the date on which we first mailed our proxy materials for the preceding year’s annual meeting.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and the Nasdaq National Market rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue generating activities to compliance activities. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, we might be subject to sanctions or investigations by regulatory authorities, such as the SEC or the Nasdaq National Market, and our reputation may be harmed. Any such action could adversely affect our financial results and the market price of our common stock.

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). We are evaluating our internal controls systems in order to allow management to report on, and our independent registered public

accountants to attest to, our internal controls, as required by Section 404. We are performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. As a result, we are incurring additional expenses and a diversion of management’s time. While we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 by December 31, 2005, our fiscal year-end, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is currently only limited precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the Nasdaq National Market. Any such action could adversely affect our financial results and the market price of our common stock.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk associated with changes in interest rates relates to our investment portfolio. We maintain a non-trading investment portfolio consisting of government issued securities. These investments are classified as held-to-maturity and are accounted for at their amortized cost, as per FASB Statement No. 115.

As of June 30, 2005, the amortized cost of our investment portfolio, which equaled approximately $9,918,000, exceeded the market value of the investments contained in the portfolio by approximately $5,000. We have both the ability and intent to hold the securities contained in the investment portfolio until their respective maturity dates. Additionally, all securities contained in the investment portfolio have maturity dates of less than one year. Therefore, we have concluded that this unrealized loss is not considered “other than temporary”, as defined by the Emerging Issues Task Force (“EITF”) Issue 03-1-1 “The Meaning of Other-Than-Temporary Impairments and its Applications to Certain Investments”, and we have not booked any impairment charges related to this unrealized loss. Due to the short duration of our investment portfolio, an immediate 10% change in market interest rates would not have a material impact on the value of our investment portfolio.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. Our President and Chief Executive Officer and our Chief Financial Officer have performed an evaluation, required pursuant to Rule 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q (the “Evaluation Date”). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are effective in alerting them, on a timely basis, to material information relating to the Company (including its consolidated subsidiaries) required to be included in our periodic filings under the Exchange Act.

(b) Changes in Internal Controls Over Financial Reporting. There have not been any significant changes in our internal controls over financial reporting (as such item is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are from time to time a party to legal proceedings. All of the legal proceedings we are currently involved in are ordinary and routine. The outcomes of the legal proceedings are uncertain until they are completed. We believe that the results of the current proceedings will not have a material adverse effect on our business or financial condition or results of operations.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On June 9, 2005, the Company held its annual meeting of stockholders. As of April 12, 2005, the record date for the annual meeting, there were 24,917,263 shares of common stock of the Company issued and outstanding and entitled to vote at the annual meeting. The following item was submitted to a vote of the stockholders:

To elect two Class III members currently serving on the Board of Directors to three-year terms.

Election of Directors	Votes for	Votes Withheld
Richard G. Babbitt.	18,693,295	39,652
Gary S. Roubin, M.D., Ph.D.	18,693,395	39,552

As a result, Richard G. Babbitt and Gary S. Roubin, M.D., Ph.D. were elected as Directors of the Company. The following incumbent members continue to serve on the Board of Directors: S. Lewis Meyer, Ph.D., H. Bryan Brewer Jr., M.D., William A. Pope, Bosko Djordjevic and Frank M. Placenti.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits - See Exhibit Index.

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.

Date: August 10, 2005	Lipid Sciences, Inc.
	By:	/s/ Sandra Gardiner
	Sandra Gardiner
	Chief Financial Officer*

*Signing on behalf of the Registrant as a duly authorized officer and as the Principal Financial Officer of the Registrant

EXHIBIT INDEX

Exhibit Number		Description
3.1		Certificate of Incorporation. Previously filed as Exhibit 3.1 to registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 13, 2002.
3.2		Bylaws, as amended
10.1		Lease Agreement, dated May 3, 2005, between Lipid Sciences, Inc. and 7-L NorthCreek, LLC.
10.2		Consulting Agreement, effective May 16, 2005, between Washington Cardiovascular Associates, LLC, H. Bryan Brewer Jr., M.D. and Lipid Sciences, Inc.
31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Filing Compare · LIPID SCIENCES INC/