0001104659-06-072645.txt : 20061108 0001104659-06-072645.hdr.sgml : 20061108 20061108133732 ACCESSION NUMBER: 0001104659-06-072645 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061108 DATE AS OF CHANGE: 20061108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIPID SCIENCES INC/ CENTRAL INDEX KEY: 0000071478 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 430433090 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00497 FILM NUMBER: 061196601 BUSINESS ADDRESS: STREET 1: 7068 KOLL CENTER PARKWAY STREET 2: SUITE 401 CITY: PLEASANTON STATE: CA ZIP: 94566 BUSINESS PHONE: 925-249-4000 MAIL ADDRESS: STREET 1: 7068 KOLL CENTER PARKWAY STREET 2: SUITE 401 CITY: PLEASANTON STATE: CA ZIP: 94566 FORMER COMPANY: FORMER CONFORMED NAME: NZ CORP DATE OF NAME CHANGE: 20000810 FORMER COMPANY: FORMER CONFORMED NAME: NEW MEXICO & ARIZONA LAND CO DATE OF NAME CHANGE: 19920703 10-Q 1 a06-21819_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2006.

o 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		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 number, including area code)

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

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 x

Non - accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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 at October 31, 2006
Common Stock
$0.001 par value		32,366,548

LIPID SCIENCES, INC.

FORM 10-Q

For the Period Ended September 30, 2006

Table of Contents

		Page No.
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	1
	Condensed Consolidated Balance Sheets as of September 30, 2006 and December 31, 2005	1
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and 2005, and cumulative period from Inception (May 21, 1999) to September 30, 2006	2
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005, and cumulative period from Inception (May 21, 1999) to September 30, 2006	3
	Notes to Condensed Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	16

Item 4.	Controls and Procedures	16

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	17

Item 1A.	Risk Factors	17

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17

Item 3.	Defaults upon Senior Securities	17

Item 4.	Submission of Matters to a Vote of Security Holders	17

Item 5.	Other Information	17

Item 6.	Exhibits	17

SIGNATURES		18

INDEX TO EXHIBITS FOR FORM 10-Q		19

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Lipid Sciences, Inc.

(A Development Stage Company)

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

	September 30, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	11,149		$	1,752
Short-term investments	1,992			12,836
Prepaid expenses	169			355
Other current assets	54			18
Total current assets	13,364			14,961
Property and equipment	389			419
Long-term lease deposits	19			19
Total assets	$	13,772		$	15,399

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	1,537		$	1,292
Accrued related party royalties	125			250
Accrued compensation	411			390
Total current liabilities	2,073			1,932
Deferred rent	14			9
Total liabilities	2,087			1,941

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; 32,366,548 and 27,359,267 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively	32			27
Additional paid-in capital	83,427			76,712
Deficit accumulated in the development stage	(71,774		)	(63,281		)
Total stockholders’ equity	11,685			13,458
Total liabilities and stockholders’ equity	$	13,772		$	15,399

See accompanying Notes to Condensed Consolidated Financial Statements

Lipid Sciences, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,						Period from Inception (May 21, 1999) to September 30,
(In thousands, except per share amounts)	2006			2005			2006			2005			2006
Grant revenue	$	10		$	—		$	37		$	1		$	79
Operating expenses:
Research and development(1)	2,033			1,787			5,733			5,282			57,980
Selling, general and administrative(2)	1,038			908			3,211			2,617			26,276
Total operating expenses	3,071			2,695			8,944			7,899			84,256
Operating loss	(3,061		)	(2,695		)	(8,907		)	(7,898		)	(84,177		)
Interest and other income	149			101			414			290			3,996
Loss from continuing operations	(2,912		)	(2,594		)	(8,493		)	(7,608		)	(80,181		)
Income tax benefit	—			—			—			—			8,004
Net loss from continuing operations	(2,912		)	(2,594		)	(8,493		)	(7,608		)	(72,177		)
Discontinued operations:
Income from discontinued operations	—			—			—			—			582
Income tax expense	—			—			—			—			(179		)
Income from discontinued operations - net	—			—			—			—			403

Net loss	$	(2,912	)	$	(2,594	)	$	(8,493	)	$	(7,608	)	$	(71,774	)

Loss per share – basic and diluted:
Net loss per share	$	(0.10	)	$	(0.10	)	$	(0.30	)	$	(0.31	)

Weighted average number of common shares outstanding – basic and diluted	30,250			24,925			28,328			24,919

Non-cash stock option compensation expense/(income) included in operating expenses:
(1) Research and development	77	(41	)	278	100
(2) Selling, general and administrative	112	(21	)	451	—

See accompanying Notes to Condensed Consolidated Financial Statements

Lipid Sciences, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Nine Months Ended September 30,						Period from Inception (May 21, 1999) to September 30,
(In thousands)	2006			2005			2006
Cash flows used in operating activities:
Net loss from continuing operations	$	(8,493	)	$	(7,608	)	$	(72,177	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Depreciation and amortization	162			168			1,340
Loss on disposal of assets	—			2			206
Accretion of discount on investments	(265		)	(206		)	(883		)
Stock compensation expense for options issued to consultants, employees and advisors	729			100			6,893
Issuance of warrants to consultants	—			—			1,044
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	150			178			(224		)
Notes receivable	—			—			6,569
Other assets	—			(19		)	(19		)
Accounts payable and other current liabilities	157			1,468			(593		)
Accrued related party royalties	(125		)	(625		)	125
Accrued compensation	21			(180		)	411
Deferred rent	5			6			14
Net cash used in operating activities of continuing operations	(7,659		)	(6,716		)	(57,294		)

Cash flows provided by/(used in) investing activities:
Capital expenditures	(132		)	(165		)	(1,952		)
Proceeds from disposal of assets	—			3			17
Restricted cash	—			105			—
Purchases of investments	(4,391		)	(10,305		)	(91,395		)
Maturities and sales of investments	15,500			16,000			90,286
Net cash provided by/(used in) investing activities of continuing operations	10,977			5,638			(3,044		)

Cash flows provided by financing activities:
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	6,079			6,625			31,043
Proceeds from issuance of warrants	—			—			40
Net cash provided by financing activities of continuing operations	6,079			6,625			37,373
Net increase/(decrease) in cash and cash equivalents from continuing operations	9,397			5,547			(22,965		)
Cash flows provided by discontinued operations
Operating activities	—			1,167			38,185
Investing activities	—			—			10,837
Financing activities	—			—			(14,908		)
Net cash provided by discontinued operations	—			1,167			34,114
Cash and cash equivalents at beginning of period	1,752			4,640			—
Cash and cash equivalents at end of period	$	11,149		$	11,354		$	11,149

	Nine Months Ended September 30,				Period from Inception (May 21, 1999) to September 30,
(In thousands)	2006		2005		2006
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	$	88	$	603	$	88

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

On November 29, 2001, Lipid Sciences, Inc., a privately-held corporation, 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., 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 Company is engaged in the research and development of products and processes intended to treat major medical indications such as cardiovascular disease and viral infections in which lipids, or fat components, play a key role. Our primary activities since incorporation have been conducting research and development, clinical and pre-clinical studies; performing business, strategic and financial planning; and raising capital. Accordingly, the Company is considered to be in the development stage.

Historically, NZ engaged in various real estate and commercial real estate lending activities. On March 22, 2002, the Company formalized a plan to discontinue the operations of its real estate and real estate lending business, including commercial real estate loans, to fund the ongoing operations of Lipid Sciences’ biotechnology business. As a result, we have reclassified the results of operations and the assets and liabilities of the discontinued operations for all periods presented. The last remaining real estate asset was sold in February 2005.

In the course of our research and development activities, the Company has sustained continued operating losses and expects those 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 September 30, 2006, we had cash and cash equivalents and short-term investments equal to approximately $13.1 million. We anticipate that these assets will provide sufficient working capital for our operations, including our current development projects, through the fourth quarter of 2007. We expect additional capital will be required in the future. We intend to seek capital needed to fund our operations through public or private financings, new collaborations, such as licensing or other arrangements or through research and development grants. 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.

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 have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission, or SEC, and do not contain all of the information and footnotes required by GAAP and the SEC for annual financial statements. The results for interim periods are not necessarily indicative of the results to be expected for the full year. The December 31, 2005 balance sheet, as presented, was derived from the audited Consolidated Financial Statements as of December 31, 2005. 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, 2006.

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.

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 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:

	At September 30,
	2006	2005
Stock options	6,859,128	6,846,377
Warrants to purchase common stock	3,076,552	2,839,565
	9,935,680	9,685,942

NOTE 3: STOCK-BASED COMPENSATION

Effective January 1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment,” “FAS 123(R)”, which requires that compensation cost relating to share-based payment transactions be recognized in our financial statements. We have adopted FAS 123(R) on a modified prospective basis, which requires that compensation cost relating to all new awards and to awards modified, repurchased, or cancelled is recognized in our financial statements beginning January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are 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, “Accounting for Stock-Based Compensation,” “FAS 123” are no longer an alternative to financial statement recognition.

Stock Option Plans

Prior to the merger, we maintained stock-based compensation plans for our employees, consultants and Directors. The 2000 Stock Option Plan (the “2000 Plan”), adopted by the Board of Directors in May 2000 and approved by stockholders on March 20, 2001, allows for the granting of options for up to 3,118,040 shares of common stock. Stock options granted under the 2000 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 2000 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, but generally over four years (but not less than 20% of the total number of shares granted per 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 increases on January 1, in each of the calendar years 2002, 2003, 2004, 2005 and 2006 by an amount equal to 3% of the shares of common stock outstanding on December 31 of the immediately preceding calendar year, if the 2001 Plan is then in effect, but in no event shall any annual increase exceed 500,000 shares of common stock as reflected on the stock ledger of the Company. 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, but generally over four years (but not less than 20% of the total number of shares granted per year).

At September 30, 2006, options to purchase an aggregate of 5,241,140 shares of common stock remain available for grant under all the plans.

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 that is provided herein has been similarly restated.

Other Required FAS 123(R) Disclosures

The following table represents stock option activity for the three months ended September 30, 2006:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life	Aggregate Intrinsic Value
Outstanding options at beginning of period	6,637,800		$	3.61
Granted	21,000		1.62
Exercised	—		—
Forfeited	(10,209	)	3.60
Expired	(530,000	)	3.28
Outstanding options at end of period	6,118,591		$	3.63	5.94	$	1,312,252
Exercisable options at end of period	5,093,754		$	3.74	5.38	$	1,296,019

The following table represents stock option activity for the nine months ended September 30, 2006:

	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life	Aggregate Intrinsic Value
Outstanding options at beginning of period	6,058,556		$	3.72
Granted	613,744		2.45
Exercised	(13,500	)	1.00
Forfeited	(10,209	)	3.60
Expired	(530,000	)	3.28
Outstanding options at end of period	6,118,591		$	3.63	5.94	$	1,312,252
Exercisable options at end of period	5,093,754		$	3.74	5.38	$	1,296,019

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 September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Risk-free interest rate	4.56		%	4.06		%	4.72		%	3.66		%
Expected life of options (in years)	5.00			5.00			3.92			3.04
Expected volatility	94.75		%	87.30		%	95.20		%	81.40		%
Expected dividend yield	—			—			—			—
Weighted-average grant-date fair value	$	1.20		$	2.72		$	1.68		$	2.09

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 in prior quarters, and the withdrawal of options on our common stock in the current quarter, 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. In the Company’s pro-forma information required under FAS 123 for the periods prior to fiscal 2006, we accounted for forfeitures as they occurred.

Had compensation expense for the Company’s employee stock option awards been determined based on the Black-Scholes fair value at the grant dates for awards under those plans consistent with the fair value method of FAS 123, the Company would have recorded additional compensation expense and its net loss and loss per share would have been reduced to the pro forma amounts presented in the following table:

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Reported net loss	$	(2,594	)	$	(7,608	)
Add stock-based compensation included in net loss	(21		)	—
Compensation expense for stock options	(313		)	(1,075		)
Pro forma net loss	$	(2,928	)	$	(8,683	)

Net loss per share – basic and diluted:
As reported	$	(0.10	)	$	(0.31	)
Pro forma	$	(0.12	)	$	(0.35	)

Total compensation cost for share-based payment arrangements recognized in income for the three and nine month periods ended September 30, 2006 was approximately $189,000 and $729,000, respectively. The compensation cost for share-based payment arrangements for the three month period ended September 30, 2006 was comprised of approximately $145,000 and $44,000 in employee related and non-employee related compensation expense, respectively. The compensation cost for share-based payment arrangements for the nine month period ended September 30, 2006 was comprised of approximately $712,000 and $17,000 in employee related and non-employee related compensation expense, respectively. The total compensation cost related to nonvested awards not yet recognized as of September 30, 2006 was approximately $1,504,000 and the weighted average expected remaining recognition period as of September 30, 2006 was approximately 2 years. We received $13,500 in gross proceeds as a result of the 13,500 stock options that were exercised in the nine month period ended September 30, 2006. 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 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The pro forma disclosures previously permitted under FAS 123 are no longer an alternative to financial statement recognition. This statement is effective beginning with our first quarter of fiscal 2006. We have adopted FAS 123(R) on a modified prospective basis and recognized approximately $189,000 and $729,000 in compensation cost for our share-based payment arrangements, for the three and nine month periods ended September 30, 2006, respectively (See Note 3).

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” 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 believe that the adoption of this statement will not have a material impact on our financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement defines fair value, established a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. 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, 10% of any External Research Funding initiated by Dr. Cham and received by us to further this technology, as defined in the agreement, and $250,000 upon commencement of our initial human clinical trial utilizing the technology under the patents. The $250,000 related to the commencement of our initial human clinical trial was paid to Aruba in July 2002. In November 2004, all rights, title, interest and obligations covered under the Intellectual Property License Agreement were assigned to Aruba International B.V., a Netherlands company controlled by Dr. Cham. For the three month periods ended September 30, 2006 and 2005, we have expensed $125,000 and $125,000, respectively, and for the nine month periods ended September 30, 2006 and 2005 we have expensed $375,000 and $375,000, respectively, related to this agreement. Amounts for 2006 and 2005 were charged to research and development expense. Accrued related party royalties under this agreement were $125,000 and $250,000 at September 30, 2006 and December 31, 2005, respectively.

On May 16, 2005 we entered into a consulting agreement 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 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 three months periods ended September 30, 2006 and 2005, approximately $99,000 and $99,000 was charged to selling, general and administrative expense for fees related to the consulting agreement. For the nine month periods ended September 30, 2006 and 2005, approximately $296,000 and $149,000 was charged to selling, general and administrative expense for fee 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 and nine month periods ended September 30, 2006, approximately $30,000 and $22,000, respectively, was recorded as non-cash compensation expense related to the stock option awarded to Dr. Brewer under the consulting agreement. For the three and nine month periods ended September 30, 2005, approximately $25,000 and $57,000, respectively, was recorded as non-cash compensation expense related to the stock option awarded to Dr. Brewer under the consulting agreement.

In connection with the Company’s August 8, 2006 private placement, the Company sold 2,714,817 shares of common stock and warrants exercisable for an additional 814,445 shares to Sterling Pacific Assets, Inc. in exchange for an investment of approximately $3,421,000. The shares and warrants held by Sterling Pacific Assets, Inc. are deemed beneficially owned by Mr. William Pope, an existing substantial shareholder of the Company and former Director of the Company. The shares of common stock and warrants were issued to Sterling Pacific Assets, Inc. on the same terms as those offered to the other participating investors.

In addition, in the 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 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 individual investments made by each Director are listed in the table below. The shares of common stock and warrants were issued on the same terms as those offered to the other participating investors.

Investor	Investment		Common Stock Issued	Warrants Issued
Directorship Services, Inc. Profit Sharing Trust(1)	$	14,999	11,904	3,571
Placenti Revocable Trust(2)	9,999		7,936	2,380
Bosko Djordjevic	100,000		79,365	23,809
Gary S. Roubin, M.D., Ph.D.	74,999		59,523	17,856
The Meyer Family Revocable Trust(3)	49,999		39,682	11,904
Washington Cardiovascular Associates, LLC(4)	74,999		59,523	17,856
	$	324,995	257,933	77,376

(1)	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.
(2)	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.
(3)	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.
(4)	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.

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, in “Item 1A. Risk Factors” in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 15, 2006. 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 Operation,” “Quantitative and Qualitative Disclosures About Market Risk” and “Financial Statements and Supplementary Data,” respectively, of our Annual Report on Form 10-K for the year ended December 31, 2005.

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 infections in which lipids, or fat components, play a key role. Our primary activities since incorporation have been conducting research and development, clinical and pre-clinical studies; performing business, strategic and financial planning; and raising capital, including, from the date of the merger, 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, and as of December 31, 2004, we had completed the disposition of substantially all of the real estate assets and our business is no longer organized into two segments. The remaining real estate asset was sold in February 2005 for $1,167,000.

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 corporate partnerships, technology licensing, the pursuit of research and development grants, public or private financings, and cash on hand. We anticipate that existing cash, cash equivalents and short-term investments will provide sufficient working capital for our operations, including our current development projects, through the fourth quarter of 2007. In addition, we may also finance our future operations through collaborations with a range of potential corporate partners and outlicensing of our proprietary delipidation technology for specific application opportunities in both animal and human health. 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 December 2005, the Company filed an Investigational Device Exemption (“IDE”) application with the Center for Devices and Radiological Health of the Food and Drug Administration (“FDA”) for their review. In January 2006, the FDA granted conditional approval of the IDE to allow the Company to begin a human clinical trial with the Company’s Plasma Delipidation System-2 (“PDS-2”). The Company was granted this approval subject to the condition that within 45 days it would submit a response to the questions and observations made by the FDA. The Company submitted its response on February 22, 2006, which was within 45 days of receiving conditional approval from the FDA. In addition, the FDA required the Company to obtain approval from the Institutional Review Board (“IRB”) of the MedStar Research Institute in Washington, D.C. to begin the trial.

On April 20, 2006, we announced that we received approval from the IRB. On April 28, 2006 that approval was submitted to the FDA as required. On June 1, 2006, we announced that the first patient procedure had been completed in the Company’s human clinical trial: “A Randomized Single-Blind Placebo Controlled Study to Evaluate the Safety of the Lipid Sciences PDS-2 in Subjects with Prior Acute Coronary Syndrome.” Thirty subjects between the ages of 18 and 85 with angiographic evidence of Coronary Artery Disease in the target artery, as defined by at least one lesion with an occlusion between 20-50%, are being recruited for the trial. Each potential participant undergoes an initial screening, which includes a blood panel and intravascular ultrasound (“IVUS”) assessment to

determine eligibility for enrollment and randomization into the study. The trial consists of a total of seven weekly delipidation/re-infusion procedures. The treatment subjects receive infusions of plasma that has been delipidated by the PDS-2 system; 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 each participant is approximately ten weeks. We expect to present a qualitative assessment about the primary endpoint of the trial, which is safety, by the end of the first quarter of 2007.

On 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 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 terms of the agreement, Elanco will pay for all the associated research and development expenses for each targeted product. In exchange for the license, subject to completion of Elanco’s due diligence and sales of products meeting various thresholds, we may receive a technology access fee, milestone payments and royalties.

Effective January 1, 2006, we adopted Statement SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires that compensation cost relating to share-based payment transactions be recognized in our financial statements. We have adopted FAS 123(R) on a modified prospective basis, which requires that compensation cost relating to all new awards and to awards modified, repurchased, or cancelled is recognized in our financial statements beginning January 1, 2006. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are 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, “Accounting for Stock-Based Compensation,” are no longer an alternative to financial statement recognition.

Results of Continuing Operations – Three Months Ended September 30, 2006 and 2005

Revenue. We recognized $10,000 in grant revenue in the three months ended September 30, 2006. 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 increased approximately $246,000, or 14%, to $2,033,000 in the three months ended September 30, 2006 from $1,787,000 for the same period in 2005. The increase was due primarily to an increase in stock compensation expense, an increase in costs associated with our non-human primate study being conducted at the Yerkes National Primate Research Center at Emory University, legal fees associated with securing and expanding our patent portfolio and employee related costs. This non-cash stock compensation expense includes approximately $33,000 and $44,000 in employee and non-employee stock option expense, respectively. As described above, we have implemented FAS 123(R) in the first quarter of 2006 which requires us to recognize the fair value of employee stock options in the income statement, rather than as a pro-forma disclosure, which was allowed in prior periods. Offsetting this increase was a decrease in costs related to the human clinical trial of our HDL Therapy platform at the Washington Hospital Center in Washington, D.C. The decrease was attributed to the fact that the human clinical trial start-up costs incurred in the three months ended September 30, 2005 exceeded the recruitment and implementation costs incurred in the three months ended September 30, 2006.

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. However, for the three months ended September 30, 2006, we estimate that the majority of our research and development expense was associated with our two primary platforms: HDL Therapy and Viral Immunotherapy.

Selling, General and Administrative Expenses. General and administrative expenses include costs associated with our business operations, inclusive of management, legal and finance, and accounting expenses. General and administrative expenses increased approximately $130,000, or 14%, to $1,038,000 in the three months ended September 30, 2006 from $908,000 for the same period in 2005. The increase was due primarily to an increase in stock compensation expense, legal fees and employee related expenses. This non-cash stock compensation expense includes approximately $112,000 related to employee stock option expense resulting from the implementation of FAS 123(R).

Interest and Other Income. Interest and other income for the three months ended September 30, 2006 increased approximately $48,000 or 48%, to $149,000 from $101,000 for the same period in 2005. The increase was due to higher yields earned on both our cash and short-term investment assets during the three months ended September 30, 2006.

Results of Continuing Operations – Nine Months Ended September 30, 2006 and 2005

Revenue. We recognized $37,000 in grant revenue in the nine months ended September 30, 2006. This grant revenue relates to the STTR grant awarded in the second quarter of 2004 by the NIH, for a Virion Solvent Treatment for Severe Acute Respiratory Syndrome. The term of the grant expires March 31, 2007.

Research and Development Expenses. Research and development expenses include applied and scientific research, regulatory and business development expenses. Research and development expenses increased approximately $451,000, or 9%, to $5,733,000 in the nine months ended September 30, 2006 from $5,282,000 for the same period in 2005. The increase was due primarily to an increase in costs related to the preparation and commencement of the ongoing human clinical trial of our HDL Therapy platform at the Washington Hospital Center in Washington, D.C., legal fees associated with securing and expanding our patent portfolio and employee related costs. Contributing to the increase was an increase in stock compensation expense. This non-cash stock compensation expense includes approximately $261,000 and $17,000 related to employee and non-employee stock option expense, respectively. As described above, we have implemented FAS 123(R) in the first quarter of 2006 which requires us to recognize the fair value of employee stock options in the income statement, rather than as a pro-forma disclosure, which was allowed in prior periods. This increase was partially offset by a decrease in outside research and development costs related to our non-human primate study at Wake Forest University Baptist Medical Center in Winston-Salem, North Carolina, which concluded in the second quarter of 2005. Research and development expense accounted for approximately 64% of total operating expenses for the nine months ended September 30, 2006.

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. However, for the nine months ended September 30, 2006, we estimate that the majority of our research and development expense was associated with our two primary platforms: HDL Therapy and Viral Immunotherapy.

Selling, General and Administrative Expenses. General and administrative expenses include costs associated with our business operations, inclusive of management, legal and finance, and accounting expenses. General and administrative expenses increased approximately $594,000, or 23%, to $3,211,000 in the nine months ended September 30, 2006 from $2,617,000 for the same period in 2005. The increase was due primarily to an increase in stock compensation expense, employee related expenses, legal fees and consulting expenses related to a consulting agreement entered into on May 16, 2005. The non-cash stock compensation expense includes approximately $451,000 related to employee stock option expense resulting from the implementation of FAS 123(R). Partially offsetting this increase were decreases in Board of Directors related costs and expenses associated with our ongoing compliance with Section 404 of the Sarbanes-Oxley Act of 2002.

Interest and Other Income. Interest and other income for the nine months ended September 30, 2006 increased approximately $124,000, or 43%, to $414,000 from $290,000 for the same period in 2005. The increase was due to higher yields earned on both our cash and short-term investment assets during the nine months ended September 30, 2006.

Liquidity and Capital Resources

The net cash used in operating activities was approximately $7,659,000 for the nine months ended September 30, 2006, resulting primarily from operating losses incurred as adjusted for non-cash compensation charges. The net cash used in operating activities for the nine months ended September 30, 2005, was approximately $6,716,000 resulting primarily from operating losses incurred as adjusted for non-cash compensation charges and partially offset by an increase in accounts payable primarily related to accrued costs and invoices received for various pre-clinical studies.

The net cash provided by investing activities was approximately $10,977,000 and $5,638,000 for the nine months ended September 30, 2006 and September 30, 2005, respectively. The net cash provided by investing activities for these periods was primarily attributable to the purchase and subsequent maturities of short-term investments.

The net cash provided by financing activities was approximately $6,079,000 and $6,625,000 for the nine month periods ended September 30, 2006 and September 30, 2005, respectively. The net cash provided by financing activities for these periods was primarily attributable to the proceeds, net of issuance costs paid, received from the private placement of our common stock on August 8, 2006 and September 30, 2005.

Net cash provided by discontinued operations was approximately $1,167,000 for the nine month period ended September 30, 2005 and was primarily attributable to the sale of royalty credits in February 2005, representing the disposition of our last remaining real estate asset.

In September 2005, we completed the private placement of 2,430,198 shares of the Company’s common stock at a price of $2.98 per share, for gross proceeds of approximately $7.2 million, to institutional accredited investors (the “Investors”). Pursuant to the terms of the private placement, we issued to the Investors warrants to purchase 729,057 shares of common stock at $4.20 per share and Additional Investment Rights (“AIRs”) in the form of warrants to purchase 1,215,096 shares of common stock at $3.73 per share. The AIRs expired March 29, 2006, and the warrants will expire September 30, 2010. As a result of the private placement completed on August 8, 2006, we issued an additional 109,858 warrant shares to the September 2005 Investors and adjusted the price of the total 838,915 warrant shares to $3.65 per share. A maximum of 497,651 additional warrant shares are issuable as a result of potential future adjustments to the exercise price of the warrants. In connection with the private placement, approximately $490,000 was paid to A.G. Edwards who acted as the placement agent for the transaction.

On August 8, 2006, we completed the sale of 4,993,781 shares of common stock at $1.26 per share and warrants to purchase an additional 1,498,127 shares of common stock at $1.51 per share in a private placement to institutional and accredited investors, which included several directors of the Company, for gross proceeds of approximately $6,300,000. The purchase price for the shares was equal to the average of the volume weighted closing prices of the Company’s common stock over the ten trading days preceding the closing of the transaction. The warrants are exercisable for a period of five years commencing on February 9, 2007 and terminating on February 9, 2012. The exercise price of the warrants was equal to 120% of the average of the volume weighted closing prices of the Company’s common stock over the ten trading days preceding the closing of the transaction. A maximum of 387,016 warrant shares are issuable as a result of potential future adjustments to the exercise price of the warrants. However, the exercise price may never adjust to less than $1.20 per share. The issuance of the shares of common stock and warrants was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, since the issuance constituted a sale not involving a public offering. Following the offering, we filed a Registration Statement on Form S-3 with the SEC on August 23, 2006 to register for resale by the investors the shares of common stock issued in the offering and issuable upon exercise of the warrants. The registration statement became effective on September 8, 2006. No placement agent was used in 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 conducting our human clinical trial. The expected use of our funds related to our Viral Immunotherapy platform includes costs associated with our non-human primate study. The results of this study could lead to the initiation of a human clinical trial for the treatment of HIV-infected patients, with approval from the FDA, or to an offshore human study in collaboration with a partner. We expect our principal sources of funds to be cash on hand. As of September 30, 2006 we had cash and cash equivalents and short-term investments equal to approximately $13,141,000. We anticipate that these assets will provide sufficient working capital for our operations, including our current development projects, through the fourth quarter of 2007. We expect additional capital will be required in the future. The Company continues to consider public or private financings, the formation of strategic development or licensing partnerships, and explore strategic initiatives. 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)	2006		2007		2008		2009		2010		2011		Total
Operating Leases	$	206	$	211	$	217	$	223	$	56	$	—	$	913
Purchase Obligations	36		—		—		—		—		—		36
Royalty Payments*	500		500		500		500		500		500		3,000
Total	$	742	$	711	$	717	$	723	$	556	$	500	$	3,949

*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

In December 2001, the Securities and Exchange Commission (“SEC”), required that all registrants disclose and describe their “critical 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 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 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 based on our historical experience, terms of existing contracts, our observance of trends in the industry and information available from other outside sources, as appropriate. Except for the following accounting policy which changed during the nine month period ended September 30, 2006, our critical accounting policies as described in our annual report on our most recent form 10-K remain unchanged:

Stock-Based Compensation

The Company accounts for all stock options in accordance with the provisions SFAS No. 123 (revised 2004), “Share-Based Payment,” which requires that compensation cost relating to share-based payment transactions be recognized in our financial statements. The Company accounts for stock-based awards to non-employees in accordance with FAS 123(R) and 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.” Significant judgment is required on the part of management in determining the proper assumptions to use in the computation of the amounts to be recorded pursuant to the provisions of FAS 123(R). The fair value of each option granted to an employee is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used in the Black-Scholes option valuation model include the risk free interest rate, expected life, volatility and dividend yield of the option. Management bases its assumptions on historical data where available. However, these assumptions consist of estimates of future market conditions, which are inherently uncertain, and therefore are subject to management’s judgment.

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, 2005, which appear in the Company’s Annual Report on Form 10-K filed with the SEC on March 15, 2006.

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 an investment portfolio consisting of government issued securities. These investments are classified as held-to-maturity and are accounted for at their amortized cost.

As of September 30, 2006, the amortized cost of our investment portfolio, which equaled approximately $1,992,000 was exceeded by the market value of the investments contained in the portfolio by approximately $300. 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. No individual security is in an unrealized loss position; therefore we have no unrealized losses that are considered “other than temporary”, as defined by FASB Staff Position No. 115-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”. 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.

Our management, including our President and Chief Executive Officer and Chief Financial Officer, do 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.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are from time to time, a party to legal proceedings. Any legal proceeding we may be currently involved in is ordinary and routine. Outcomes of the legal proceedings are uncertain until they are completed. We believe that the results of any current proceedings will not have a material adverse effect on our business or financial condition or results of operations.

Please refer to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2006, which discloses legal proceedings involving the Company.

ITEM 1A. RISK FACTORS

Our 2005 Form 10-K, filed on March 15, 2006, includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in that Form 10-K.

Our business exposes us to product liability claims.

Our design, testing, development, manufacture and marketing of products involve an inherent risk of exposure to product liability claims and related adverse publicity. Insurance coverage is expensive and difficult to obtain, and we may be unable to obtain coverage in the future on acceptable terms, if at all. Although we currently maintain product liability insurance for our products in the amounts we believe to be commercially reasonable, we cannot be certain that the coverage limits of our insurance policies or those of our strategic partners will be adequate. If we are unable to obtain sufficient insurance at an acceptable cost or if a successful product liability claim is made against us, whether fully covered by insurance or not, our business could be harmed.

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits - See Exhibit Index, which is incorporated by reference.

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: November 8, 2006	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 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.

4.1		Form of Warrant issued by Registrant to various investors. Previously filed as Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 10, 2006 and incorporated herein by reference.

4.2		Registration Rights Agreement dated as of August 8, 2006, by and among Registrant and various investors. Previously filed as Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed with the Commission on August 10, 2006 and incorporated herein by reference.

10.1		Securities Purchase Agreement dated as of August 8, 2006, by and among Registrant and various investors. Previously filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 10, 2006 and incorporated herein by reference.

10.2		Representation Letter dated as of August 7, 2006. Previously filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on August 10, 2006 and incorporated herein by reference.

10.3		Collaborative Research and License Agreement with Elanco Animal Health dated November 7, 2006.*

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.

*Confidential Treatment Requested

EX-10.3 2 a06-21819_1ex10d3.htm EX-10

Exhibit 10.3

Portions of this agreement, marked by asterisks (***), have been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with the Securities and Exchange Commission

COLLABORATIVE RESEARCH & LICENSE AGREEMENT

between

LIPID SCIENCES, INC.

and

ELANCO ANIMAL HEALTH

This COLLABORATIVE RESEARCH & LICENSE AGREEMENT (the “Agreement”) is effective from the Effective Date by and between:

LIPID SCIENCES, INC. (“Lipid Sciences”), a publicly-traded Delaware corporation, having a place of business at 7068 Koll Center Parkway - Suite 401, Pleasanton, CA 94566;

and

ELI LILLY AND COMPANY, an Indiana corporation, operating through its Elanco Animal Health division and having a principal place of business at 2001 W. Main Street, Greenfield, Indiana 46140 (“Elanco”).

INTRODUCTION

A. WHEREAS, Lipid Sciences and/or its Affiliate(s) have developed proprietary technology for, and are the owners and/or exclusive licensees of patents claiming, delipidation-based methods and systems for the production of treatments for viral or bacterial infections, among other ailments (“Immunological Products”).

B. WHEREAS, Lipid Sciences and/or its Affiliate(s) have facilities and personnel that enable it to design and develop various kinds of Immunological Products.

C. WHEREAS, Lipid Sciences and/or its Affiliate(s) possess know-how, expertise and intellectual property rights pertaining to the design and development of these Immunological Products.

D. WHEREAS, Elanco is engaged in the research, development, marketing, manufacturing and distribution of animal health products for use in, on or near live animals.

E. WHEREAS, Elanco desires to design, develop and manufacture certain Immunological Products for use in, on or near live animals.

F. WHEREAS, Lipid Sciences and/or its Affiliate(s) desire to collaborate with Elanco in the development of one or more Immunological Products for animal health applications, subject to the terms and conditions set forth herein.

NOW THEREFORE, in consideration of the foregoing premises and the following mutual covenants and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows:

ARTICLE I

1.1 Interpretation. In this Agreement, unless the context otherwise requires, a reference to:

(a) a paragraph, section, exhibit or schedule is a reference to a paragraph, section, exhibit or schedule to this Agreement;

(b) any document includes a reference to that document (and, where applicable, any of its provisions) as amended, novated, supplemented or replaced from time to time;

(c) a statute or other law includes regulations and other instruments under it and consolidations, amendments, re-enactments or replacements of any of them;

(d) the singular includes the plural and vice versa, except as it regards the definitions in Sections 1.27 and 1.28 of this Agreement;

(e) a Party, person or entity includes:

(i) an individual, firm, company, corporation, association, trust, estate, state or agency of a state, government or government department or agency, municipal or local authority and any other entity, whether or not incorporated and whether or not having a separate legal personality; and

(ii) an employee, agent, successor, permitted assign, executor, administrator and other representative of such party, person or entity;

(f) one gender includes the other;

(g) “written” and “in writing” include any means of reproducing words, figures or symbols in a tangible and visible form;

(h) a month or year is a reference to a calendar month or calendar year, as the case may be; and

(i) individuals or persons include companies and other corporations and vice versa.

1.2 “Affiliate” means any corporation or other entity that controls, is controlled by, or is under common control with a Party to the Agreement. A corporation or other entity will be regarded as in control of another corporation or entity if the latter corporation or entity owns or directly or indirectly controls more than fifty percent (50%) of the voting stock or other ownership interest of the former corporation or other entity, or if the latter corporation or entity possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the former corporation or other entity or the power to elect or appoint fifty percent (50%) or more of the members of the governing body of the former corporation or other entity. An Affiliate will be bound under this Agreement in the same manner as if it were a party hereto.

1.3 “Agreement” means this formal legal document if ultimately signed by both Parties, effective as of the Effective Date.

1.4 “Confidential Information” means all know-how, trade secrets, technical information, specifications, data, formulae, intellectual property or software of a Party relating to or arising out of this Agreement including, without limitation:

(a) all communications between the Parties or information of whatever kind whether recorded or not and, if recorded, in whatever medium, relating to or arising out of the Product Development Plan, the Design & Development Program, the Improvements, the Lipid Sciences Patent Rights, the Elanco Patent Rights, the Elanco Inventions, Lipid Sciences Inventions, Lipid Sciences Technology, Elanco Technology or the Agreement, whether disclosed prior to or after entering into the Agreement;

(b) any information that the Party indicates in writing is information of a confidential nature or which is marked “confidential”; and

(c) all copies of the communications, information, notes, reports and documents in whatever form referred to in paragraph (a) or (b) of this definition.

1.5 “Design & Development Program” means the work performed by Lipid Sciences and Elanco and/or their respective Affiliate(s) in accordance with the Product Development Plan as revised from time to time as provided in the Agreement.

1.6 “ECI” or “Employment Cost Index” means the “Private Industry, Compensation, 12-Month Percent Change, Not Seasonally Adjusted - ECU10002A” with respect to Total Compensation in Private Industry for All Workers (annual rate or average of the relevant year’s four calendar quarters if not annual), Series Id ECU10002A; using 2007 as the base year for purposes of indexing within the context of this Agreement, as published by the U.S. Bureau of Labor Statistics and available at the following URL: http://data.bls.gov/cgi-bin/surveymost?ec, or its successor site.

1.7 “Effective Date” means the last date of signature on the Agreement.

1.8 “Elanco Compound” means one or more active ingredients directly resulting from Lipid Sciences Technology that is selected by Elanco for development and commercialization of Product(s) and/or New Product(s).

1.9 “Elanco Invention” means any Invention by Elanco and/or its Affiliates (other than a joint invention) that is discovered, made, or conceived and reduced to practice during or as a result of the Design & Development Program. For clarity, any invention by Elanco and/or its Affiliates outside the Design & Development Program will be solely owned by Elanco and/or its Affiliates.

1.10 “Elanco Patent Rights” means any and all Patent Rights owned and/or controlled by Elanco during the term of the Agreement.

1.11 “Elanco Technology” means Technology, including know-how and trade secrets, owned and/or controlled by Elanco as of the Effective Date of the Agreement and/or developed during the term of the Agreement.

1.12 “Field” means all applications and uses of the Lipid Sciences Technology and Lipid Sciences Patent Rights for Products. For clarity, “Field” does not include any human applications or uses.

1.13 “First Commercial Sale” of any Product(s) and/or New Product(s) means the first sale for use by an end-user customer of such Product(s) and/or New Product(s) in a country.

1.14 “First Payment” means the first payment, e.g., a technology access fee or a payment made due to a first Regulatory Agency submission, made by Elanco to Lipid Sciences pursuant to the payment terms of Article V for any Product(s) and/or New Product(s).

1.15 “GxP” means compliance with all relevant Regulatory Agency requirements for Good Clinical Practices, Good Laboratory Practices, and Good Manufacturing Practices.

1.16 “Immunological Products” means: proprietary delipidation-based methods and systems for the production of treatments for viral or bacterial infections, among other ailments, of which Lipid Sciences and/or its Affiliate(s) are the owners and/or exclusive licensees having the right to enforce and sublicense.

1.17 “Improvements” means: (a) any modification of Lipid Sciences Technology, Elanco Technology or an Elanco Compound, provided such modification, if unlicensed, would infringe one or more Valid Claims of Lipid Sciences Patent Rights or Elanco Patent Rights; and (b) any beneficial modification of a component or material useful in a Product(s) and/or New Product(s); in each of (a) and/or (b) for use in the Field or New Field, which is reduced to practice within the term of the Agreement.

1.18 “Invention” means patentable ideas and/or discoveries conceived by one or more employee(s) or agent(s) of Lipid Sciences or Elanco, which arise under and during the term of this Agreement. “Sole Invention” means an Invention discovered, made, or conceived and reduced to practice solely by Lipid Sciences employee(s) or agent(s) or solely by Elanco employee(s) or agent(s). “Joint Invention” means an Invention discovered, made, or conceived and reduced to practice jointly by Lipid Sciences employee(s) or agent(s) and Elanco employee(s) or agent(s).

1.19 “Joint Patent Rights” means Patent Rights to a Joint Invention.

1.20 “Lipid Sciences Invention” means any Invention by Lipid Sciences and/or its Affiliates (other than a joint invention) that is discovered, made, or conceived and reduced to practice during or as a result of the Design & Development Program. For clarity, any invention by Lipid Sciences and/or its Affiliates outside the Design & Development Program will be solely owned by Lipid Sciences and/or its Affiliates.

1.21 “Lipid Sciences Patent Rights” means any and all Patent Rights owned and/or controlled by Lipid Sciences and/or its Affiliates in the Field or New Field during the term of the Agreement.

1.22 “Lipid Sciences Technology” means Technology, including know how and trade secrets, owned and/or controlled by Lipid Sciences as of the Effective Date of the Agreement and/or developed during the term of the Agreement, and includes, without limitation, Immunological Products and delipidation-based immunological technology for use in, on or for animals.

1.23 “Net Sales” means, with respect to a Product(s) and/or New Product(s), the gross amount invoiced by Elanco (including an Elanco Affiliate) or any sublicensee thereof to unrelated Third Parties, excluding any sublicensee, for Product(s) and/or New Product(s) in the Territory, less the following:

(a) Customary trade, quantity and cash discounts allowed;

(b) Third Party Agent commissions, discounts, refunds, rebates, chargebacks, retroactive price adjustments and similar allowances, limited to reasonable adjustments and allowances which effectively reduce the net selling price;

(d) Any tax imposed on the sale, delivery or use of the Product(s) and/or New Product(s), including, without limitation, sales, use, excise or value added taxes, but excluding any tax on income; and

(e) Any other similar and customary deductions.

Such amounts will be determined from the books and records of Elanco, Elanco Affiliates and/or sublicensee(s) (as applicable), maintained in accordance with U.S. Generally Accepted Accounting Principles (also known as “GAAP”) or, in the case of sublicenses, such similar accounting principles, consistently applied. Elanco further agrees in determining such amounts, it will use Elanco’s then-current standard procedures and methodology, including Elanco’s then current standard exchange rate methodology for the translation of foreign currency sales into U.S. Dollars or, in the case of sublicensees, such similar methodology, consistently applied.

1.24 “New Field” means all applications and uses of the Lipid Sciences Technology and Lipid Sciences Patent Rights for New Products. For clarity, “New Field” does not include any human applications or uses.

1.25 “New Product(s)” means any *** that incorporates, uses or implements Lipid Sciences Technology and/or Lipid Sciences Patent Rights and that is ultimately sold by or for Elanco inside the New Field in the Territory, whether such embodiment was in existence prior to the effective date of a collaborative research and commercialization agreement, or is developed or improved under that agreement. ***

1.26 “Notice” means the definition provided in Section 11.7.

1.27 “Parties” means Lipid Sciences and Elanco.

1.28 “Party” means Lipid Sciences or Elanco.

1.29 “Patent Rights” means rights under all patents, provisional and non-provisional, owned or controlled by the Parties (including all reissues, extensions, substitutions, confirmations, re-registrations, re-examinations, re-validations, patents of addition, supplementary protection certificates or the equivalents thereof) and under all provisional and non-provisional patent applications (including, without limitation, all continuations, continuations-in-part and divisionals thereof), in each case, claiming an Invention which is necessary or useful for the design, development, testing, use, manufacture or sale of a Product(s) and/or New Product(s) that results from the Agreement.

1.30 “POC Study” means the initial proof-of-concept study that Elanco will conduct at its expense as consideration for the rights granted under this Agreement. The criteria for establishing this POC Study are described in Exhibit A of this Agreement. As additional consideration to Lipid Sciences for entering into this Agreement, Elanco will also provide technical advice regarding the detailed design and scope of this POC Study, at no charge to Lipid Sciences.

1.31 “Primary Contact Person” will be the respective individuals designated by Lipid Sciences and Elanco, as noted in Exhibit C, who will be responsible for the day-to-day interactions between the Parties related to the Design & Development Program and the management of the day-to-day operations of the Design & Development Program. Each Party may change its Primary Contact Person upon Notice to the other Party.

1.32 “Product” means any *** that incorporates, uses or implements Lipid Sciences Technology and/or Lipid Sciences Patent Rights, whether such embodiment was in existence prior to the Effective Date, or is developed or improved under the Agreement. ***

1.33 “Product Development Plan” means the written development plan for Product(s) and/or New Product(s) (including a corresponding budget), as amended from time to time by the Parties.

1.34 “Program Year” means each twelve (12) calendar month period during the term of the Design & Development Program, except in the first Program Year in which case the Program Year will not be twelve (12) calendar months in length, but will be the period from the Effective Date to 31-December-2007.

1.35 “Reasonable Commercial Efforts” means effort, expertise and resources normally used by the Party in the development and/or commercialization of a compound or product owned or controlled by such Party which is of similar market potential at a similar stage in its development or product life, taking into account issues of safety and efficacy, product profile, the competitiveness of the marketplace, the proprietary position of the compound or product, the regulatory structure involved, the profitability of the applicable products, and other relevant factors.

1.36 “Regulatory Agency” means any one of the U.S. Department of Agriculture (USDA); Environmental Protection Agency (EPA); Food and Drug Administration (FDA); Food Safety and Inspection Service (FSIS); or any counterparts thereof in jurisdictions outside of the USA.

1.37 “Steering Committee” means the joint committee composed of representatives of Lipid Sciences and Elanco, as described in the Agreement.

1.38 “Technology” means written specifications, sketches, drawings, schematics, prototypes, methods, protocols, know-how, trade secrets, all proprietary data, information, inventions, regulatory submissions or other intellectual property of any kind, excluding Patent Rights, to the extent necessary or useful for the research, development and commercialization of Product(s) and/or New Product(s) in the Field or New Field, and any other information or tangible material and any data related thereto that is useful in the Field or New Field.

1.39 “Territory” means worldwide.

1.40 “Third Party” means any entity, including any natural person, other than Lipid Sciences or Elanco and their respective Affiliates.

1.41 “Valid Claim” means either (a) a claim of an issued and unexpired patent which has not been held permanently revoked, unenforceable or invalid by a decision of a court or other governmental agency of competent jurisdiction, unappealable or unappealed within the time allowed for appeal, and which has not been admitted to be invalid or unenforceable through re-examination, reissue or disclaimer or otherwise; or (b) a claim of a pending patent application, which claim was filed in good faith and has not been abandoned or finally disallowed without the possibility of appeal or refiling of said application.

ARTICLE II

2.1 License Grant. Subject to the terms of the Agreement, Lipid Sciences and its Affiliates hereby grant to Elanco and its Affiliates the sole and exclusive license under Lipid Sciences Technology, Lipid Sciences Patent Rights, Lipid Sciences Inventions and Lipid Sciences Improvements in the Field and Territory to research, develop, make, have made, use, sell, offer for sale, import and sub-license, Product(s).

2.2 Rights Retained by Lipid Sciences. Lipid Sciences retains the sole and exclusive right outside the Field in the Territory to use for any purpose any Lipid Sciences Technology, Lipid Sciences Patent Rights, Lipid Sciences Inventions and Lipid Sciences Improvements (including, without limitation, to research, develop, make, have made, use, sell, offer for sale, import and license products). For clarity, Elanco and its Affiliates cannot research, develop, make, have made, use, sell, offer for sale, import or sublicense any Lipid Sciences Technology, Lipid Sciences Inventions, Lipid Sciences Improvements or Lipid Sciences Patent Rights outside the Field, unless Elanco and/or its Affiliates enter into a separate agreement with Lipid Sciences and/or its Affiliates. Furthermore:

(a) no license or other rights are granted to Lipid Sciences to Elanco Technology, Elanco Patent Rights or Elanco Inventions, except solely for the benefit of Elanco and its Affiliates;

(b) no license or other rights are granted to Elanco to Lipid Sciences Technology, Lipid Sciences Patent Rights or Lipid Sciences Inventions, except as provided in this Agreement;

(c) Elanco and its Affiliates acknowledge that, as of the Effective Date, no license or other rights are necessary to be granted, or are granted, to Lipid Sciences by Elanco and its Affiliates for the purposes of the Agreement, except to the extent disclosed in writing by Elanco to Lipid Sciences prior to work commencing under the Product Development Plan or under the Design & Development Program for the development of the Product in the Field; and

(d) Lipid Sciences and its Affiliates acknowledge that, as of the Effective Date, no license or other rights are necessary to be granted, or are granted, to Lipid Sciences by Third Parties for the purposes of the Agreement, except to the extent disclosed in writing by Lipid Sciences to Elanco prior to work commencing under the Product Development Plan or under the Design & Development Program for the development of the Product in the Field.

2.3 Rights Reverting to Lipid Sciences. If any Product(s) and/or New Product(s) or indication reverts to Lipid Sciences pursuant to Section 5.1, then Lipid Sciences will have the exclusive right inside the Field or New Field and within the Territory to use any Lipid Sciences Technology, Lipid Sciences Patent Rights, Lipid Sciences Improvements and Lipid Sciences Inventions to develop, make, have made, use, sell, import or sub-license Product(s) and/or, as applicable, New Product(s).

2.4 Sublicenses. Subject to the other provisions of the Agreement, Elanco shall have the sole right to sublicense any and all rights licensed to Elanco under Section 2.1. Any such sublicense by Elanco shall be consistent with the terms of the Agreement, and shall include an obligation for each such sublicensee to comply with the applicable obligations of Elanco set forth in the Agreement.

2.5 Trademarks. Elanco will be free to use and to register in any trademark office any trademark for use with a Product(s) and/or New Product(s) in its sole discretion, except for trademarks proprietary to Lipid Sciences and its Affiliates. Elanco will own all right, title and interest in and to any such trademark in its own name during and after the term of the Agreement, except for trademarks proprietary to Lipid Sciences and its Affiliates.

ARTICLE III

3.1 Formation and Composition. A joint committee comprised of four (4) members, two (2) named representatives of each of Elanco and Lipid Sciences (the “Steering Committee”) is being appointed pursuant to this Agreement. Each Party has provided the other Party in writing with the name, title, e-mail address, telephone number and facsimile number of their respective Steering Committee members and such information is set forth in Exhibit C. The Steering Committee will meet as needed, but not less than once each quarter during the term of the Design & Development Program. Such meetings will be at such times agreed to by Lipid Sciences and Elanco, and will alternate between the offices of the Parties unless the Parties otherwise agree, or will be in such other form (e.g., telephone or video conference) as the members of the Steering Committee will agree.

3.2 Steering Committee Functions and Powers. The Steering Committee will be responsible for the direction and overall supervision and management of the Design &

Development Program consistent with each Party’s internal policies and procedures. The principal functions of the Steering Committee will be to:

(a) create Design & Development Program(s) and Product Development Plan(s);

(b) monitor the progress and results achieved under the Design & Development Program and to revise, as necessary, the Product Development Plan;

(d) facilitate the transfer, development and commercialization of technology in accordance with the Agreement;

(e) determine potential New Products, identify and approve the development of New Products; and

(f) such other functions as agreed by the Parties.

A Party may change one or more of its representatives to the Steering Committee at any time. Members of the Steering Committee may be represented at any meeting by another member of the Steering Committee, or by a deputy. Either Party may permit additional employees and consultants to attend and participate (on a non-voting basis) in the Steering Committee meetings, subject to the confidentiality provisions of the Agreement.

3.3 Decisions of the Steering Committee. A quorum of the Steering Committee will be present at any meeting of the Steering Committee if at least two (2) representatives of each Party are present at such meeting in person or by telephone or videoconference. If a quorum exists at any meeting, a unanimous vote of the members of the Steering Committee present at such meeting is required to take any action on behalf of the Steering Committee, with the exception of any actions taken pursuant to Section 3.4.

3.4 Elanco’s Right to Control Commercialization. Notwithstanding the responsibilities and duties of the Steering Committee, Elanco will have the right to choose Product(s) and/or New Product(s) for development and commercialization, including formulation, means of administration and other factors that appear most promising for further development. Promptly upon making a selection, Elanco will notify the Steering Committee in writing.

3.5 New Products. Elanco has the first option right to commercialize all applications and uses of the Lipid Sciences Technology and Lipid Sciences Patent Rights for New Products (“Option Right”). Therefore, if Elanco determines that, pursuant to the results obtained by the Design & Development Program, Product(s) and/or New Product(s) are commercially viable, upon the payment of relevant payments described in Article V of this Agreement, Elanco and its Affiliates will have the sole and exclusive license under Lipid Sciences Technology, Lipid Sciences Patent Rights, Lipid Sciences Inventions and Lipid Sciences Improvements in the New Field and Territory to research, develop, make, have made, use, sell, offer for sale, import and sub-license the New Product(s) in accordance with the following terms:

3.5.1. Exercise of Option Right by Elanco. To exercise the Option Right, Elanco shall propose to the Steering Committee, in writing, the commercialization of any New Product(s); within three (3) months, the Steering Committee shall complete a Product Development Plan for said New Product(s). Provided Elanco pays the additional payments described in Article V of this

Agreement, the Option Right shall be deemed to have been exercised by Elanco, the Option Right shall be deemed to have been granted to Elanco by Lipid Sciences, and the New Product(s shall be deemed to have been approved for development by the Steering Committee.

3.5.2. Termination of Option Right by Elanco. The Option Right for any New Product terminates sixty (60) days after Elanco receives Notice from Lipid Sciences that any payment due under Article V has not been received, provided that, during that sixty (60) day period, Elanco has not made such payment to Lipid Sciences. After the Option Right terminates for any New Product, Lipid Sciences has full right and authority to pursue, or have others pursue, the research and/or commercialization of the relevant New Product.

3.5.3. Limitations on Option Right. In order to effectively manage the development pipeline, if, after exercising its Option Right(s), Elanco has not made a First Payment for three (3) New Product(s), Elanco must first obtain the written approval of the Steering Committee before exercising its Option Right to commercialize any additional New Product(s).

Notwithstanding Sections 2.1 and 3.5, this Agreement does not serve to grant to Elanco or its Affiliates a license under Lipid Sciences Technology, Lipid Sciences Patent Rights, Lipid Sciences Inventions and Lipid Sciences Improvements to generally use Lipid Sciences Technology in a field outside the Field or New Field or to research, develop, make, have made, sell, offer for sale, import and sub-license products other than Product(s) or New Product(s).

3.6 Chair. The Steering Committee will be chaired by one Elanco representative appointed by Elanco for the first Program Year, then one Lipid Sciences representative (or Elanco representative at Lipid Sciences’s request) appointed by Lipid Sciences for the second Program Year and alternating accordingly thereafter. The chair does not have a second or casting vote.

3.7 Minutes and Reports. The Steering Committee will be responsible for keeping accurate minutes of its deliberations that record all proposed decisions and all actions recommended or taken. Within ten (10) business days of each meeting, the chair will provide the Parties with draft minutes of such meeting and a draft of a written accompanying report describing in reasonable detail the status of the Design & Development Program, a summary of the work and progress to date, any issues requiring resolution and any proposed decisions and actions recommended or taken to all members of the Steering Committee. Within thirty (30) days of each meeting, the Steering Committee will approve final versions of the meeting minutes and the accompanying report and such minutes and accompanying report will thereafter be recognized as duly accepted by the Parties. All records of the Steering Committee will be available to both Parties.

3.8 Information and Results. Except as otherwise provided, the Parties will make available and disclose to one another all results of the work conducted pursuant to the Design & Development Program prior to and in preparation for the Steering Committee meetings, by the deadline and in the form and format to be designated by the Steering Committee.

3.9 Subcontracts. Subject to the provisions of the Agreement, the Parties may subcontract to Affiliates and Third Parties portions of the Design & Development Program to be performed, provided the subcontracting Party has obtained the prior consent of the Steering Committee; and provided, however, that such Affiliates and Third Party subcontractors will be required to enter into appropriate confidentiality agreements (said agreements of which signed copies will be submitted to the Steering Committee) unless such subcontracting would not require the transfer

of Confidential Information to the Affiliate or Third Party subcontractor, and further provided that the Parties’ rights under the Agreement are not adversely affected.

ARTICLE IV

4.1 Performance of Design & Development Program. The Steering Committee will establish a program under which the Parties will use Reasonable Commercial Efforts to collaboratively develop Product(s) and/or New Product(s), with the initial goal of ***. The Parties will use Reasonable Commercial Efforts to perform the design and development tasks as described in the initial Product Development Plan subsequently attached as Exhibit A. The Design & Development Program will be conducted by the Parties in good scientific manner, and where necessary, in compliance with all applicable GxP and ISO9001 design requirements.

4.2 Product Development Plan. The Design & Development Program will be conducted in accordance with the Product Development Plan that describes the work to be pursued by the Parties during each Program Year. Except for the first Program Year, the Product Development Plan will be updated and approved by the Steering Committee no later than sixty (60) days prior to the start of each Program Year. The Product Development Plan in effect at any time may not be amended except as agreed in writing by the Steering Committee. If at any time during the Program Year, either Party determines that a change to the Product Development Plan would benefit the Design & Development Program, such Party will prepare and submit to the Steering Committee a written proposal detailing its proposed changes to the Product Development Plan. Any budget for Lipid Sciences’ costs under a modified Product Development Plan that are to be reimbursed by Elanco will be approved by the Steering Committee before Lipid Sciences commences any work on such modified Product Development Plan.

4.3 Sharing of Testing, Marketing, Manufacturing and Regulatory Data. Parties will provide to each other, at no charge, access to testing, pilot manufacturing and regulatory data relevant to Product(s) and/or New Product(s) in the Field or New Field, or if required for regulatory purposes.

4.4 Results and Records. The Parties will make available and disclose to one another all results of the work conducted pursuant to the Design & Development Program, and will keep such records as described herein; provided that each Party will maintain such results and records of the other Party in confidence in accordance with the confidentiality provisions in the Agreement, and will not use such results or records except to the extent otherwise permitted by the Agreement. The Parties will maintain records of the results in sufficient detail and in good scientific manner appropriate for patent purposes, and in a manner that properly reflects all work done and results achieved in the performance of the Design & Development Program (including all data in the form required to be maintained under any applicable governmental regulations). Such records will include reports, research notes, charts, graphs, computations, analyses, recordings, photographs, and other graphic or written data specifically relevant to the Design & Development Program.

4.5 Availability of Employees. Each Party agrees to make its employees and non-employee consultants reasonably available at their respective places of employment to consult with the other Party on issues arising during the Design & Development Program and in connection with any request related to a Product(s) and/or New Product(s) or the Design & Development Program from any Regulatory Agency, including regulatory, scientific, technical and clinical testing issues.

4.6 Visit of Facilities. Representatives of the Parties may, upon reasonable advance notice and at times reasonably acceptable to the other Party, visit the other Party’s facilities where the Design & Development Program is being conducted, and consult informally, during such visits and by telephone, facsimile and e-mail, with the other Party’s personnel performing work on the Design & Development Program.

4.7 Product(s) and/or New Product(s) Development by Elanco. Elanco will conduct all related Product(s) and/or New Product(s) development activities in the Field or New Field and Territory at its expense from the Effective Date, including the preparation and submission of the appropriate regulatory documents required for commercialization within the Field or New Field and Territory.

4.8 Product(s) and/or New Product(s) Development Conducted by Lipid Sciences.

(a) Elanco will pay Lipid Sciences as described in “(b)” and “(c)” of this Section, for any development activities associated with the Product Development Plan or the Design & Development Program that are approved in writing in advance by the Steering Committee. If Steering Committee approval is not granted, Lipid Sciences will not commence any work or incur such costs or expenses on behalf of Elanco or the Steering Committee. With respect to the activities to be undertaken by Lipid Sciences under the Agreement, Elanco will reimburse Lipid Sciences for these activities. Elanco will reimburse Lipid Sciences for reasonable costs incurred due to Lipid Sciences’ personnel, or approved third party personnel, working directly on Product(s) and/or New Product(s) development. The total annual rate per full-time equivalent employee (“FTE”) of Lipid Sciences to be paid by Elanco will be *** for any FTE in the first Program Year, said rate to include overhead costs of Lipid Sciences for said FTE. Beginning in 2008, this rate will be adjusted annually to reflect changes, if any, in the ECI. Elanco will also reimburse Lipid Sciences for expenses incurred due to Lipid Sciences’ personnel, or approved third party personnel, working directly on Product(s) and/or New Product(s) development, such as transportation, travel, or lodging costs subject to pre-approval by the Steering Committee.

(b) Notwithstanding section (a), Elanco recognizes that the Design & Development Program may require the services of Third Parties, including consultants, laboratories, or scientific advisors. Elanco further recognizes that the services of Third Parties may exceed ***, and therefore agrees that the *** sum in section (a) does not apply to services from Third Parties. Lipid Sciences agrees to submit all such Third Party expenses to the Steering Committee, for approval, prior to commencing any work with any Third Party(ies).

(c) For budgeted expenses in “(a)” of this Section that are to be incurred by or on behalf of Lipid Sciences under the Product Development Plan and/or the Design & Development Program, Elanco will pay Lipid Sciences within sixty (60) days of Elanco’s receipt of invoice from Lipid Sciences for any such expenses.

(d) In addition to expenses covered in “(b)” of this Section, should additional expenses be approved in writing in advance by the Steering Committee that were not initially budgeted and paid for under “(b)” of this Section, Elanco will reimburse Lipid

Sciences within sixty (60) days of Elanco’s receipt of invoice from Lipid Sciences for any such expenses.

4.9 Regulatory / Quality Assurance / Quality Control / Legal. Parties will allow Regulatory, Quality Assurance, Quality Control, Accounting and Legal personnel from either Party or its attorneys, advisors, accountants and contractors, on a “need to know” basis, timely and reasonable access to audit financial records, trial protocols, pilot scale manufacturing documents, procedures manuals, patent documents and other Product(s) and/or New Product(s)-related items relating to the license granted pursuant to the Agreement or relating to the Product Development Plan or the Design & Development Program.

4.10 Performance. Elanco will use Reasonable Commercial Efforts to identify, research, and develop and commercialize Product(s) and/or New Product(s) in the Field or New Field in the Territory, but will be under no obligation to commercialize and market a Product or New Product if it determines, in its sole and reasonable business judgment, that such an effort is not commercially viable for Elanco.

4.11 Quality. Elanco will determine, in its sole judgment, quality standards for Product(s) and/or New Product(s) including, but not limited to: stability; process validation and pre-approval inspection preparation; common specifications; assay methodology and storage conditions. Elanco will also determine, in its sole business judgment, manufacturing standards and requirements for Product(s) and/or New Product(s).

4.12 Out-Of-Pocket Expense Reimbursements. Elanco agrees to pay Lipid Sciences, within sixty (60) days of Elanco’s receipt of invoice from Lipid Sciences, for all out-of-pocket expenses approved in advance by Elanco, that are paid by Lipid Sciences to Third Parties, or pay the Third Parties directly at Elanco’s sole election.

4.13 Regulatory Approvals. Elanco will assume all responsibility and related expense for Regulatory Agency approvals of Product(s) and/or New Product(s) in the Field or New Field and Territory.

4.14 Manufacturing. Elanco will have the exclusive right and obligation to manufacture, or have manufactured, Product(s) and/or New Product(s) for all development, Regulatory Agency approval, and commercialization purposes. Elanco will assume all responsibility and related expense for manufacturing and supply of Product(s) and/or New Product(s) to Elanco customers.

4.15 Marketing and Sales. Elanco will assume all responsibility and related expense for marketing and sales of Product(s) and/or New Product(s) to Elanco customers.

4.16 Regulatory Issues and Obligations, Ownership and Survival Rights. Elanco will own the regulatory registrations for Product(s) and/or New Product(s) developed and commercialized by Elanco, at its sole expense, but will assign to Lipid Sciences, in perpetuity and free of royalties to Elanco, manufacturing, use, and sale rights back to Lipid Sciences if Elanco elects to terminate the License during the Term, or if Lipid Sciences terminates the License for Elanco’s material breach.

ARTICLE V

5.1 Consideration. In each instance for the milestone payments described below, if Elanco fails to pay or elects not to pay the relevant owed milestone payment within sixty (60) days of Elanco’s receipt of Notice from Lipid Sciences that the relevant milestone event has occurred, the rights for that(those) relevant Product(s) and/or New Product(s) or indication (as described below) will revert to Lipid Sciences:

5.2 License Fee(s). Elanco agrees to pay Lipid Sciences development and commercialization license fees in accordance with the schedule provided in Exhibit E.

5.3 ***.

5.4 Payments under Sub-License. If Elanco sub-licenses the Lipid Sciences Technology, the Lipid Sciences Patent Rights, the Lipid Sciences Inventions or the Lipid Sciences Improvements in the Field or New Field, Elanco will pay Lipid Sciences *** percent (***) of all payments (including signing fees, milestones and supply margins if Elanco produces Product(s) and/or New Product(s) under said sub-license) received from the Third Party to whom it has granted the sub-license.

5.5 Audits. Upon the written request of Lipid Sciences, Elanco will permit an independent certified public accountant selected by Lipid Sciences and acceptable to Elanco, which acceptance will not be unreasonably withheld or delayed, to have access during normal business hours to such of the records of Elanco as may be reasonably necessary to verify the accuracy of the payment reports hereunder in respect of any calendar year ending not more than thirty-six (36) months prior to the date of such request. Except as described in the next paragraph, all such verifications will be conducted at the expense of Lipid Sciences and not more than once in each calendar year.

In the event such accountant concludes that additional payments of any kind as required by this Agreement were owed during such period, the additional amounts will be paid within 90 (ninety) days of the date Lipid Sciences delivers to Elanco such accountant’s written report so concluding. The fees charged by such accountant will be paid by Lipid Sciences, unless the audit discloses that the amounts payable by Elanco for the audited period are more than one hundred and ten percent (110%) of the amounts actually paid for such period, in which case Elanco will pay the reasonable fees and expenses charged by the accountant.

Elanco will include in each sublicense granted by it pursuant to the Agreement a provision requiring the sublicensee to make reports to Elanco, to keep and maintain records of sales pursuant to such sublicense and to grant access to such records by Lipid Sciences’s independent accountant to the same extent required of Elanco under the Agreement.

Upon the written request of Elanco, Lipid Sciences will permit an independent certified public accountant selected by Elanco and acceptable to Lipid Sciences, which acceptance will not be unreasonably withheld or delayed, to have access during normal business hours to such of the records of Lipid Sciences as may be reasonably necessary to verify the accuracy of the financial records hereunder in respect of any calendar year ending not more than thirty-six (36) months prior to the date of such request. Except as described in the next paragraph, all such verifications will be conducted at the expense of Elanco and not more than once in each calendar year.

In the event such accountant concludes that amounts reimbursed to Lipid Sciences by Elanco during such period exceeded the amounts approved in writing in advance by Elanco pursuant to Section 4.8 and out-of-pocket expenses approved by Elanco pursuant to Section 4.12, the amount of the excess expenses will be paid to Elanco within ninety (90) days of the date Elanco delivers to Lipid Sciences such accountant’s written report so concluding. The fees charged by such accountant will be paid by Elanco, unless the audit discloses that the amounts paid by Elanco to Lipid Sciences for the audited period are more than one hundred and ten percent (110%) of the amount of the expenses approved by Elanco for such period, in which case Lipid Sciences will pay the reasonable fees and expenses charged by such accountant.

The Parties agree that all information subject to review under this Section or under any sublicense agreement is confidential and that it will cause its accountant to retain all such information in confidence.

5.6 Royalty Payment Terms. Royalties shown to have accrued by each royalty report provided for under the Agreement will be due and payable on the date such royalty report is due. Payment of royalties in whole or in part may be made in advance of such due date. Royalties determined to be owing, and any overpayments to be credited with respect to any prior period, will be added together with interest thereon accruing under the Agreement from the date of the report for the period for which such amounts are owing, or credited, as the case may be, to the next annual payment hereunder.

5.7 Royalty Reports. Royalty reports are due for each calendar quarter 90 (ninety) days after the end of the quarter. The royalty report must set out the Net Sales for Product(s) and/or New Product(s) for the period to which the report relates.

5.8 Withholding of Taxes. Any withholding of taxes levied by tax authorities outside the United States on the payments hereunder will be deducted by Elanco from the sums otherwise payable by it hereunder for payment to the proper tax authorities on behalf of Lipid Sciences and will be borne by Lipid Sciences. Elanco agrees to cooperate with Lipid Sciences in the event Lipid Sciences claims exemption from such withholding or seeks deductions under any double taxation or other similar treaty or agreement from time to time in force, such cooperation to consist of providing receipts of payment of such withheld tax or other documents reasonably available to Elanco.

5.9 Exchange Controls. Except as otherwise provided in the Agreement, all payments to be made pursuant to the Agreement will be paid in U.S. Dollars. If at any time legal restrictions prevent the prompt remittance of part or all royalties with respect to any country where Product(s) and/or New Product(s) is(are) sold, payment will be made through such lawful means or methods as Elanco may determine. When in any country the law or regulations prohibit both the transmittal and deposit of royalties on sales or any other payments due under this Agreement in such a country, royalty payments due by Elanco to Lipid Sciences in respect of sales in such country will be suspended for as long as such prohibition is in effect, and as soon as such prohibition ceases to be in effect, all payments that Elanco would have been obligated to transmit or deposit, but for the prohibition, will forthwith be deposited or transmitted promptly to the extent allowable, as the case may be. If the royalty rate specified in the Agreement should exceed the permissible rate established in any country, the royalty rate for sales in such country will be adjusted to the highest legally permissible or government-approved rate.

5.10 Interest on Late Payments. If either Party fails to pay any payment due under this Agreement on or before the date such payment is due, as provided in this Agreement, such late payment shall bear interest, to the extent permitted by applicable law, at the prime rate as of the date of U.S. Mail postmark of the relevant payment if sent by U.S. Mail, or otherwise on the date of receipt of payment, as published in The Wall Street Journal and found on the wsj.com website at the following link or its successor site:

http://online.wsj.com/page/mdc/2_0500-rates-10.html?mod=2_0031

plus five percentage points (5.0 p.p.), as calculated on the number of days the relevant payment is delinquent from and including the date payment is due through and including the date upon which the owed Party has collected immediately available funds in its own account.

ARTICLE VI

6.1 Disclosure of Inventions. During the term of the Design & Development Program, each Party will promptly disclose to the other Party the Inventions arising under the Design & Development Program made by its employees or agents, provided that such Inventions are related to Product(s) and/or New Product(s).

6.2 Lipid Sciences Inventions and Patent Rights. All right, title and interest in all Lipid Sciences Inventions, Lipid Sciences Improvements, Lipid Sciences Technology and Lipid Sciences Patent Rights will be owned by Lipid Sciences.

6.3 Elanco Inventions and Patent Rights. All right, title and interest in all Elanco Inventions, Elanco Improvements, Elanco Technology and Elanco Patent Rights will be owned by Elanco.

6.4 Joint Inventions and Joint Patent Rights. Subject to Section 6.8, all right, title and interest in all Joint Inventions and Joint Patent Rights will be owned jointly by Elanco and Lipid Sciences; provided however, responsibility for patent filing with respect to Joint Inventions will be as set forth in Section 6.8; and provided further that, except in connection with a permitted assignment of the Agreement pursuant to Section 11.6, neither Party may transfer its interest in any Joint Invention or Joint Patent Right unless Notice of such transfer has been first given to the other Party and the transferee agrees in writing to be bound by the terms of the Agreement with respect to the interest so transferred, and the right of first refusal having been extended to the other Party. In the event either Party decides to commercially exploit or license to any Third Party any rights or interests in Joint Inventions or Joint Patent Rights inside the Field or New Field in any jurisdiction in which the consent of joint owners is required for such exploitation or grant of such license, the other Party agrees that it will not unreasonably withhold its consent, nor require payment in connection with granting such consent.

The Parties acknowledge Lipid Sciences may develop, make, have made, use, sell, license or commercially exploit (either by itself or to or with any Third Party) any rights in Joint Inventions or Joint Patent Rights outside the Field or New Field in any jurisdiction. Elanco will not develop, make, have made, use, sell, license or commercially exploit (either by itself or with or to any Third Party) any rights in Joint Inventions or Joint Patent Rights outside the Field or New Field in any jurisdiction, nor prevent Lipid Sciences from so doing. To the extent that any law requires the consent of Elanco for Lipid Sciences to develop, make, have made, use, sell, offer for sale, import, license, practice or commercially exploit (either by itself or to or with any Third Party) any rights in

Joint Inventions or Joint Patent Rights outside the Field or New Field in any jurisdiction, the execution of the Agreement is deemed to be the giving of such consent by Elanco.

The Parties acknowledge Elanco may (and only Elanco may) develop, make, have made, use, sell, license or commercially exploit (either by itself or to or with any Third Party) any rights in Joint Inventions or Joint Patent Rights inside the Field or New Field in any jurisdiction. Lipid Sciences will not develop, make, have made, use, sell, offer for sale, import, license, practice or commercially exploit (either by itself or with or to any Third Party) any Product(s) and/or New Product(s) under Joint Inventions or Joint Patent Rights inside the Field or New Field in any jurisdiction, nor prevent Elanco from so doing. To the extent that any law requires the consent of Lipid Sciences for Elanco to develop, make, have made, use, sell, license or commercially exploit (either by itself or to or with any Third Party) any rights in Joint Inventions or Joint Patent Rights inside the Field or New Field in any jurisdiction, the execution of this Agreement is deemed to be the giving of such consent by Lipid Sciences.

6.5 Cooperation of Employees. Each Party represents and agrees that all its employee(s) or agent(s) will be obligated under a binding written agreement to assign to such Party, or as such Party will direct, all Inventions made or conceived by such employee(s) or other agent(s) in connection with this Agreement.

6.6 Lipid Sciences Patent Rights. Lipid Sciences will have sole responsibility for and control over the filing, prosecution, maintenance and enforcement of the Lipid Sciences Patent Rights, at Lipid Sciences’ expense. Lipid Sciences will keep Elanco informed regarding the status and prosecution of all patent applications and patents included in such Lipid Sciences Patent Rights licensed to Elanco pursuant to Section 2.1. No later than March 1st of each year during the term of the Agreement, Lipid Sciences will provide Elanco with a report describing the status of the Lipid Sciences Patent Rights licensed to Elanco pursuant to Section 2.1. Such report will include, at a minimum, the patent application and patent number, country(ies), filing date, issue date, expiration date and any other relevant information.

If Lipid Sciences determines it will not seek patent rights with respect to any potentially patentable Lipid Sciences Invention or Lipid Sciences files Lipid Sciences Patent Rights in one or more countries but subsequently determines, on a country-by-country basis, that it will not file, prosecute or maintain any patent or patent application within the Lipid Sciences Patent Rights licensed to Elanco pursuant to Section 2.1 (except for abandonment of a patent application in favor of a patent application subsequently filed for purposes of continuing the prosecution of Lipid Sciences Patent Rights claiming the inventions included in the abandoned patent application), then Lipid Sciences will give Elanco the timely opportunity to direct Lipid Sciences to continue to prosecute or maintain the patent application or patent in Lipid Sciences’ name and at Elanco’s expense.

6.7 Elanco Patent Rights. Elanco will have sole responsibility for and control over the filing, prosecution, maintenance and enforcement of the Elanco Patent Rights, at Elanco’s expense.

6.8 Joint Patent Rights. Elanco will have the first right to assume responsibility for the preparation, filing, prosecution and maintenance of any Joint Patent Rights in each country or region of the Territory where the Parties mutually determine that it is commercially reasonable to do so, using outside patent counsel reasonably acceptable to Lipid Sciences. Elanco will share equally with Lipid Sciences the reasonable out-of-pocket expenses incurred in connection with

such preparation, filing, prosecution and maintenance of Joint Patent Rights. Lipid Sciences will reimburse Elanco for Lipid Sciences’ share of such expenses within ninety (90) days after receipt of invoice from Elanco (including supporting documentation, upon written request of Lipid Sciences); if Lipid Sciences fails or declines to pay its one-half share of expenses within the ninety (90) day period, Elanco may deduct from amounts due and owing to Lipid Sciences such share of unpaid expense. Elanco will keep Lipid Sciences reasonably informed of, and consult with Lipid Sciences with respect to, all significant actions relating thereto. If Elanco elects not to assume such responsibility, Lipid Sciences will have the right but not the obligation to do so, and will keep Elanco reasonably informed of, and consult with Elanco with respect to, all significant actions relating thereto; and in such event, Elanco will bear one-half the reasonable out-of-pocket expenses of preparation, filing, prosecution and maintenance thereof. If Lipid Sciences assumes such responsibility but Elanco fails or declines to pay its one-half share of expenses within the ninety (90) day period, Lipid Sciences may add to amounts due and owing to Lipid Sciences such share of unpaid expense.

6.9 Patent Term Extension. Lipid Sciences will cooperate with Elanco in obtaining patent term extension or supplemental protection certificates and the like with respect to the Lipid Sciences Patent Rights and Joint Patent Rights in the Field or New Field as to which Elanco is licensed under the Agreement, in each country and region where it is possible to do so. Elanco will make the election and Lipid Sciences agrees to abide by such election. Lipid Sciences may elect to be reimbursed by Elanco for its fully burdened FTE and legal costs for accomplishing such patent term extension or supplemental protection certificates requested by Elanco.

6.10 Data and Intellectual Property. Technology and patents owned by either Party at the beginning of the Agreement for Product(s) and/or New Product(s) and Technology, and that developed and owned during the Term will remain the sole property of the owning Party to exploit in any manner it chooses at its sole discretion, except to the extent otherwise provided in this Agreement. New Invention(s) made by Lipid Sciences and/or Elanco in connection with Product(s) and/or New Product(s) and/or Technology during the term of the Agreement, and any patents, copyrights or other intellectual property based on such Invention(s), will be owned by the Party(ies) of which the inventor(s) is an employee or agent.

ARTICLE VII

7.1 Infringement Claims. If the manufacture, sale or use of Product(s) and/or New Product(s) pursuant to the Agreement results in, or may result in, any claim, suit or proceeding by a Third Party alleging patent infringement by Lipid Sciences or Elanco (or its licensees or sublicensees), or by an Affiliate of Lipid Sciences or Elanco, such Party will promptly notify the other Party hereto in writing. The Party subject to such Third-Party claim will have the exclusive right to defend and control the defense of any such claim, suit or proceeding, at its own expense, using counsel of its own choice; provided, however, that Elanco will not enter into any settlement which admits or concedes that any aspect of the Lipid Sciences Patent Rights is invalid or unenforceable without the prior written consent of Lipid Sciences, and Lipid Sciences will not enter into any settlement which admits or concedes that any aspect of the Elanco Patent Rights is invalid or unenforceable without the prior written consent of Elanco. The Party subject to the Third-Party claim will keep the other Party hereto reasonably informed of all material developments in connection with any such claim, suit or proceeding. Should Elanco decide not to actively defend or fail to defend any such claim, suit, or proceedings by a Third Party relating to

Lipid Sciences Patent Rights, then Lipid Sciences will be entitled to take over, at its option, the right to defend such infringement proceedings and the control of any such defence, at its cost.

7.2 Enforcement of Joint Patent Rights. Lipid Sciences and Elanco will each promptly notify the other in writing of any alleged or threatened infringement of the Joint Patent Rights of which they become aware. Lipid Sciences and Elanco will then confer and may agree jointly to prosecute any such infringement. If the Parties do not agree on whether or how to proceed with enforcement activity (a) within ninety (90) days following the notice of alleged infringement or (b) ten (10) business days before the time limit, if any, set forth in the appropriate laws and regulations for the filing of such actions, whichever comes first, then Elanco may commence litigation with respect to the alleged or threatened infringement at its own expense. In the event that Elanco does not commence litigation within five (5) business days of the above-specified date, Lipid Sciences may do so, at Lipid Sciences’ expense. In the event a Party brings an infringement action against a Third Party, the other Party will cooperate fully, provided that there is a mutual agreement as to the purpose and goal of the enforcement action.

Except as otherwise agreed to by the Parties as part of a cost-sharing arrangement, any recovery realized as a result of such litigation (whether by way of settlement or otherwise) will be first allocated to reimbursement of unreimbursed legal fees and expenses incurred by the Party initiating the proceeding, then toward reimbursement of any unreimbursed legal fees and expenses of the other Party, and then the remainder will be divided between the Parties as follows: (y) if the award is based on lost profits, Elanco will receive an amount equal to the damages the court determines Elanco has suffered as a result of the infringement less the amount of any royalties that would have been due to Lipid Sciences on sales of Product(s) and/or New Product(s) lost by Elanco or any Affiliate or sublicensee of Elanco as a result of the infringement had Elanco or any Affiliate or sublicensee of Elanco made such sales, and Lipid Sciences will receive an amount equal to the royalties and other payments it would have received under Article VI if such sales had been made by Elanco or any Affiliate or sublicensee of Elanco; and (z) as to awards other than those based on lost profits, sixty percent (60%) to the Party initiating such proceedings and forty percent (40%) to the other Party.

7.3 Enforcement Action in the Field or New Field. Lipid Sciences shall have the sole right, but not the obligation, to commence and control any legal action or proceeding, or the filing of any counterclaim, related to any alleged infringement of the Lipid Sciences Patent Rights (“Action”) in the Field or New Field in the Territory. In the event that Lipid Sciences elects, in its sole discretion, to undertake such an Action, Elanco agrees to reasonably cooperate with Lipid Sciences, including providing access to all necessary documents, executing all papers and performing such other acts as may be reasonably required for such Action, including, but not limited to, consenting to be joined as a Party plaintiff in such Action. Lipid Sciences shall control such Action, and Lipid Sciences may enter into settlements, stipulated judgments or other arrangements respecting such infringement; provided, however, Lipid Sciences shall not settle or make any agreement that would have an adverse effect on Elanco’s rights under this Agreement, without the prior written consent of Elanco. Lipid Sciences shall keep Elanco reasonably apprised of the progress of any such Action. Elanco may, at its option and sole expense, be represented by counsel of its choice, but all other costs associated with any such Action shall be at the sole expense of Lipid Sciences. In any Action, any damages or other recovery, including compensatory and other non-compensatory damages or recovery actually received from a Third Party, shall first be used to reimburse Lipid Sciences for its respective costs and expenses incurred in connection with such Action and Elanco for its respective costs and expenses incurred in connection with such

Action, provided that Lipid Sciences requested Elanco support Lipid Sciences or otherwise participate in such Action and Elanco provided such requested support and participation. To the extent that such damages were calculated based upon the loss suffered by Elanco as a result of such Third Party infringement, said remaining damages or other recovery shall be treated as Net Sales and Elanco shall pay Lipid Sciences the applicable Royalty on such Net Sales and retain the balance.

ARTICLE VIII

8.1 Confidentiality Agreement. The Parties are bound by a Mutual Confidentiality Agreement effective as of January 20, 2006, with the ability to exchange information under the Confidentiality Agreement through January 20, 2007, and with obligations to maintain such information for *** years after the expiration or termination of the Agreement. The Parties’ rights and obligations under the Mutual Confidentiality Agreement are incorporated herein by reference and now extended for the term of this Agreement; should there be any conflict, the provisions of this Agreement shall prevail.

8.2 Nondisclosure; Exceptions. Neither Lipid Sciences nor Elanco shall publish or disclose to any Third Party, including its independent contractors, any or all Confidential Information of the other Party without the advance execution of a binding confidentiality agreement between the Third Party and the disclosing Party and advance approval of the Steering Committee. Neither Lipid Sciences nor Elanco shall disclose to any Third Party or use for any purpose besides this Agreement Confidential Information of the other Party, unless such Party can demonstrate that such information:

(a) Was known to the receiving Party or to the public prior to disclosure by the disclosing Party under this Agreement, as shown by written records;

(b) Becomes known to the public from a source other than the receiving Party;

(c) Is disclosed to the receiving Party on a non-confidential basis by a Third Party having a legal right to make such disclosure;

(d) Is required to be disclosed by law or judicial order; provided, however, the receiving Party shall promptly notify the disclosing Party and shall not disclose any information without the disclosing Party’s prior written consent or until the disclosing Party has exhausted any legal actions it may take to prevent or limit the requested disclosure; or

(e) Is independently developed by an employee of the receiving Party not having access to the disclosing Party’s information.

The provisions of this Section do not prevent Lipid Sciences from disclosing or using Confidential Information about Lipid Sciences Technology, Lipid Sciences Patent Rights, Improvements, and Lipid Sciences Inventions outside the Field or New Field and Territory. The provisions of this Section do not prevent Lipid Sciences from disclosing or using Confidential Information about Joint inventions or Joint Patent Rights outside the Field or New Field and Territory, subject to the recipient having first entered into a binding confidentiality agreement with Lipid Sciences.

8.3 Such obligations of confidentiality and non-use shall survive expiration or termination of this Agreement for a period of *** years from the effective date of such termination or expiration.

8.4 The Parties expressly agree that Elanco may submit Confidential Information of Lipid Sciences to any Regulatory Agency for the purpose of obtaining marketing approvals in the Field or New Field.

ARTICLE IX

9.1 Liabilities; Indemnification by Elanco. Except for liability caused by the gross negligence or willful misconduct of Lipid Sciences, Elanco will bear all liabilities arising from the development, regulatory approval, manufacture, marketing and sales of Product(s) and/or New Product(s) to Elanco customers in the Field or New Field. Elanco will at all times during and after the term of the Agreement be responsible for, and will defend, indemnify and hold Lipid Sciences and its directors, officers, employees and contractors harmless from and against any and all losses, claims, suits, proceedings, expenses, recoveries and damages, including reasonable legal expenses and costs including attorneys’ fees, arising out of any claim by any Third Party relating to Product(s) and/or New Product(s) or Elanco Technology or Elanco Patent Rights or any aspect of Elanco’s performance in connection with the Agreement, to the extent such liability results or arises from (a) Elanco’s uncured breach of its obligations under the Agreement; (b) the gross negligence or willful misconduct of Elanco or its Affiliates, directors, officers, employees or contractors in their performance hereunder; (c) attributes of the Product(s) and/or New Product(s); or (d) any breach by Elanco of any of its covenants, representations or warranties set forth in the Agreement. Lipid Sciences will give Elanco prompt Notice of any such claim or lawsuit and, without limiting the foregoing indemnity, Elanco will have the right to compromise, settle or defend such claim or lawsuit; provided that no offer of settlement, settlement or compromise by Elanco shall be binding on Lipid Sciences without its prior written consent (which consent shall not be unreasonably withheld or delayed), unless such settlement fully releases Lipid Sciences without any liability, loss, cost or obligation incurred by Lipid Sciences.

9.2 Indemnification by Lipid Sciences. Except to the extent caused by the gross negligence or willful misconduct of Elanco, Lipid Sciences agrees to indemnify, defend and hold Elanco and its directors, officers, employees and contractors harmless from and against any and all losses, claims, suits, proceedings, expenses, recoveries and damages, including attorneys’ fees, arising out of any claim by any Third Party in connection with the Agreement relating to Lipid Sciences Technology or Lipid Sciences Patent Rights, to the extent arising out of (a) Lipid Sciences’s uncured breach of its obligations under the Agreement; (b) the gross negligence or willful misconduct of Lipid Sciences or its Affiliates, directors, officers, employees or contractors in their performance hereunder; or (c) any breach by Lipid Sciences of any of its covenants, representations or warranties set forth in the Agreement. Elanco will give Lipid Sciences prompt Notice of any such claim or lawsuit and, without limiting the foregoing indemnity, Lipid Sciences will have the right to compromise, settle or defend such claim or lawsuit; provided that no offer of settlement, settlement or compromise by Lipid Sciences shall be binding on Elanco without its prior written consent (which consent shall not be unreasonably withheld or delayed), unless such settlement fully releases Elanco without any liability, loss, cost or obligation incurred by Elanco.

9.3 Lipid Sciences Representations & Warranties to Elanco. As of the Effective Date,

Lipid Sciences represents and warrants that it owns all right and title to, or owns the exclusive rights to, the Lipid Sciences Patent Rights listed in Exhibit D and the Lipid Sciences Technology licensed by Elanco hereunder; that it has the right to enter into the Agreement; and that to the best of its knowledge, its patents are valid and its Technology has merit.

9.4 Representations & Warranties of the Parties to Each Other. Lipid Sciences and Elanco each represent and warrant that execution, delivery and performance of the Agreement have been duly authorized by all necessary action on the part of such Party, its officers and directors and does not conflict with, violate, or breach any agreement to which either Elanco or Lipid Sciences is a party, or either Party’s articles of incorporation or bylaws.

ARTICLE X

10.1 Term. Except as otherwise provided in the Agreement, the term of the Agreement will commence on the Effective Date and end on the later of: (a) the *** year anniversary of the expiration, lapse, or invalidation of the last remaining Valid Claim of Lipid Sciences Patent Rights used in Product(s) and/or New Product(s), or (b), in the absence of any Valid Claims of Lipid Sciences Patent Rights used in Product(s) and/or New Product(s), the *** year anniversary of first Product launch, unless extended by mutual agreement of the Parties.

10.2 Expiration of License. The license for the Territory and Field or New Field granted by Lipid Sciences to Elanco pursuant to Section 2.1 and all other rights granted to Elanco (other than those expressly stated to continue after expiration or termination of the Agreement), will cease upon the earlier of:

(a) expiry of the term of this Agreement pursuant to Section 10.1; or

(b) termination of the Agreement pursuant to Section 10.7; or

Subject to the foregoing, expiration of any particular Lipid Sciences Patent Rights will not preclude Elanco from continuing to market and sell Product(s) and/or New Product(s) or to use Product(s) and/or New Product(s) after the term of the Agreement.

10.3 Lipid Sciences Termination For Cause and Consideration. If Lipid Sciences terminates the Agreement pursuant to Section 10.7 or 10.10, Lipid Sciences will retain all sums earned and paid by Elanco and Elanco will promptly pay all sums accrued which are then due and payable to Lipid Sciences.

10.4 Elanco Termination For Cause and Consideration. If Elanco terminates the Agreement pursuant to Section 10.9, Lipid Sciences will return all sums earned and paid by Elanco under Section 3.10 that have not been expensed or committed against the budget in the Product Development Plan.

10.5 Surviving Obligations. Upon expiration or termination of the Agreement, the obligations which by their nature are intended to survive expiration or termination of the Agreement, will survive.

10.6 Existing Obligations. Expiration pursuant to Sections 10.1 or 10.2 above, or termination pursuant to Section 10.3, 10.4 or 10.7 of the Agreement for any reason, will not relieve the Parties of any obligation that accrued prior to such expiration or termination.

10.7 Mutual Termination Privilege. Subject to the provisions of the Agreement, either Party may terminate the Agreement upon thirty (30) days’ Notice to the other Party.

10.8 Accrued Obligations. The expiration or termination of the Agreement or the Design & Development Program will not relieve the Parties of any obligation that accrued prior to such expiration or termination.

10.9 Events of Default. An event of default (“Event of Default”) will have occurred and the Agreement may be terminated by the Party first named in each paragraph below in the following circumstances:

(a) Material Breach. By the non-breaching Party, if the breaching Party fails to remedy a material breach of the Agreement within sixty (60) days after Notice thereof detailing the breach has been given to the breaching Party by the non-breaching Party.

(b) Failure of Elanco to Pay. By Lipid Sciences, if Elanco fails to make any payment as required under the Agreement within the period(s) identified in this Agreement after such payment becomes payable, and such failure is not remedied within thirty (30) business days after subsequent Notice thereof from Lipid Sciences.

10.10 Default Remedies.

(a) Default Remedies Available to Elanco. In the event that an Event of Default occurs that is caused by Lipid Sciences, and Lipid Sciences fails to cure such default within the applicable cure period under this Section 10.9, Elanco may elect to either (i) terminate the Agreement and/or (ii) without limiting any other legal or equitable remedies that Elanco may have, continue the Agreement in full force and effect, in accordance with its terms.

(b) Default Remedies Available to Lipid Sciences. In the event that an Event of Default occurs that is caused by Elanco, and Elanco fails to cure such default within the applicable cure period under this Section 10.9, Lipid Sciences may elect to either (i) terminate the Agreement and/or (ii) without limiting any other legal or equitable remedies that Lipid Sciences may have, continue the Agreement in full force and effect, in accordance with its terms.

ARTICLE XI

11.1 Non-Compete. Except on written consent of Elanco, during the term of the Agreement and for a period of *** thereafter, if Lipid Sciences terminates this Agreement pursuant to Section 10.7, Lipid Sciences and its Affiliates will not develop or sell Product(s) and/or New Product(s) in

the Field or New Field and Territory that were licensed to Elanco by means of the Agreement. For clarity, the provisions of this Section do not apply if the Agreement is terminated by Lipid Sciences pursuant to Section 10.9 nor to Product(s) and/or New Product(s) that has(have) reverted to Lipid Sciences pursuant to Section 2.3, nor if Elanco terminates the Agreement under Section 10.7.

11.2 Separate Entities / Disclaimer of Agency. Lipid Sciences and Elanco are and will remain separate independent entities. This Agreement will not constitute, create or otherwise imply a joint venture, partnership or formal business organization of any kind. Each Party to the Agreement will act as an independent contractor and not as an agent or legal representative of the other. Neither Party will have the right or authority to assume, create or incur any Third Party liability or obligation of any kind, express or implied, against or in the name of or on behalf of the other Party except as expressly set forth in the Agreement.

11.3 Press Releases & Disclosures. Neither Party will submit for written or oral publication any document, data, or other information generated and provided by the other Party during the Term without first obtaining the prior written consent of the other Party, which consent will not be unreasonably withheld, especially as it relates to releases required for local fiscal reporting laws, filing regulations or stock rules relating to the Party or any Affiliate of the Party. The contributions of each Party will be noted in all publications, presentations, and press releases. Notwithstanding the above, Elanco recognizes that, for Lipid Sciences, the Agreement may constitute a material agreement, as defined by Securities Exchange Commission regulations, and, if so, will be subject to public disclosure. Lipid Sciences agrees to work with Elanco to place any public disclosure of the Agreement in a mutually agreeable form by redacting, if legally permissible, certain content of the Agreement.

11.4 Publicity. Neither Party will disclose to the public, any information about the Agreement, including its existence, without the prior written consent of the other Party, which decision regarding consent will be communicated no later than twenty (20) days from the date of receipt of the request, except where required for local fiscal reporting laws, filing regulations or stock exchange rules relating to the Party or any Affiliate of the Party. Furthermore, neither Party shall use in advertising, publicity or otherwise the name or any trademark of the other Party without prior written consent.

11.5 Force Majeure. If either Party is affected by any extraordinary, unexpected and unavoidable event such as acts of God, floods, fires, riots, terrorism, war, accidents, labor disturbances, breakdown of plant or equipment, lack or failure of transportation facilities, unavailability of equipment, sources of supply or labor, raw materials, power or supplies, infectious diseases of animals, or by the reason of any law, order, proclamation, regulation, ordinance, demand or requirement of the relevant government or any sub-division, authority or representative thereof (provided that in all such cases the Party claiming relief on account of such event can demonstrate that such event was extraordinary, unexpected and unavoidable by the exercise of reasonable care) (“Force Majeure”), it will as soon as reasonably practicable notify the other Party of the nature and extent thereof and take all reasonable steps to overcome the Force Majeure and to minimize the loss occasioned to that other Party. Neither Party will be deemed to be in breach of this Agreement or otherwise be liable to the other Party by reason of any delay in performance or nonperformance of any of its obligations hereunder to the extent that such delay and nonperformance is due to any Force Majeure of which it has notified the other Party and the time for performance of that obligation will be extended accordingly. Notwithstanding the foregoing sentence, should the Force Majeure continue for more than three

(3) months, then the other Party shall have the right to terminate this Agreement immediately upon Notice of termination delivered to the affected Party.

11.6 Assignment. The Agreement may not be assigned or otherwise transferred by either Party without the prior written consent of the other Party, which consent will not be unreasonably withheld or delayed; provided, however, that each of the Parties may, without such consent, assign the Agreement and its rights and obligations hereunder to its Affiliates or in connection with the transfer or sale of all or substantially all of the portion of its business to which the Agreement relates, or in the event of its merger or consolidation or change in control or similar transaction or, in the case of Lipid Sciences, the creation of a special purpose corporation or design and development limited partnership. Any permitted assignee will assume all obligations of its assignor under the Agreement in writing prior to the assignment. Any purported assignment in violation of the preceding sentences will be void.

11.7 Notices. Any consent, notice or report required or permitted to be given or made under the Agreement by one of the Parties hereto to the other (a “Notice”) will be delivered in writing by one of the following means: delivered personally; sent via e-mail with confirmation from the addressee of its receipt; by facsimile (and promptly confirmed by personal delivery or courier); by courier; or by U.S. mail postage prepaid (where applicable), and addressed to such other Party at its address indicated below, or to such other address as the addressee will have last furnished in writing to the addressor and will be effective upon receipt by the addressee. Such notices will be effective within three (3) business days of the postmark or transmittal date or when delivered to the addressee, whichever is earlier.

If to Lipid Sciences:
	Lipid Sciences, Inc.
	7068 Koll Center Parkway - Suite 401
	Pleasanton, CA 94566

	Attention:	S. Lewis Meyer, Ph.D.
		President and CEO
	Fax:	925-249-4040
	E-mail:	***

If to Elanco:
	Elanco Animal Health
	Greenfield Laboratories
	2001 West Main Street / P.O. Box 708
	Greenfield, IN 46140

	Attention:	Legal Department
	Fax:	***
	E-mail:	***

11.8 Execution of Agreement. This Agreement may be executed by original or facsimile signature in several counterparts, all of which shall be deemed to be originals, and all of which shall constitute one and the same Agreement. Notwithstanding the foregoing, the Parties shall deliver original execution copies of this Agreement to one another as soon as practicable following execution thereof.

EXECUTED

Signed on behalf of	)
Eli Lilly and Company, operating through its Elanco Animal Health division	) )
by an authorized officer in the presence of:	)


***		*******
Signature of Witness		Signature of Authorized Officer


***		*******
Name of Witness (please print)		Name of Authorized Officer (please print)


11/07/2006
Date Signed


Signed on behalf of	)
Lipid Sciences, Inc.	)
by an authorized officer in the presence of:	)


***		/s/ S. Lewis Meyer
Signature of Witness		Signature of Authorized Officer


***		S. Lewis Meyer
Name of Witness (please print)		Name of Authorized Officer (please print)


10/26/2006
Date Signed

EXHIBIT A
PRODUCT DEVELOPMENT PLAN

(First draft to be provided by the Project Team to the Steering Committee within 60 days of the completion of Elanco due diligence, with final approval by Steering Committee within 90 days after receipt of the first draft)

[Elanco to provide first draft after completion of due diligence]

EXHIBIT B
CRITERIA TO ESTABLISH A POC STUDY

EXHIBIT C
STEERING COMMITTEE MEMBERS AND PRIMARY CONTACT PERSONS

For Elanco:
	Name:	***
	Title:	Manager - Innovation & Development
	E-mail:	***
	Phone:	***
	Fax:	***

	Name:	***
	Title:	Associate Consultant
	E-mail:	***
	Phone:	***
	Fax:	***

For Lipid Sciences:
	Name:	***
	Title:	***
	E-mail:	***
	Phone:	925-249-4000
	Fax:	925-249-4040

	Name:	Dale Richardson
	Title:	Vice President - Business Development
	E-mail:	***
	Phone:	***
	Fax:	925-249-4040

EXHIBIT D
LIPID SCIENCES PATENT RIGHTS

[Include filing/issuance dates, patent/application numbers, etc.]

NOTE: Other Lipid Sciences patents may be added to this exhibit in the future if it is determined that a non-exclusive license needs to be granted to Elanco to fully practice and exploit the rights granted to it hereunder.

EXHIBIT E:
Payment Schedule

1. Elanco agrees to pay the following fees in order to pursue the commercialization of each Product(s) or New Product(s) in the Field or New Field throughout the Territory where the Product(s) or New Product(s) ***, subjected to Lipid Sciences Technology, Lipid Sciences Patent Rights, Lipid Sciences Inventions or Lipid Sciences Improvements:

*** This Exhibit has been omitted pursuant to a request for confidential treatment. The omitted information has been filed separately with the Securities and Exchange Commission.

EX-31.1 3 a06-21819_1ex31d1.htm EX-31

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, S. Lewis Meyer, Ph.D., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lipid Sciences, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 8, 2006
	/s/ S. Lewis Meyer, Ph.D.
	S. Lewis Meyer, Ph.D.
	President and Chief Executive Officer

EX-31.2 4 a06-21819_1ex31d2.htm EX-31

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Sandra Gardiner, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lipid Sciences, Inc.

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 8, 2006
	/s/ Sandra Gardiner
	Sandra Gardiner
	Chief Financial Officer

EX-32.1 5 a06-21819_1ex32d1.htm EX-32

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

This certification is not to be deemed filed pursuant to the Securities Exchange Act of 1934, as amended, and does not constitute a part of the Quarterly Report of Lipid Sciences, Inc. (the “Company”) on Form 10-Q for the period ending September 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”).

In connection with this Report, we, S. Lewis Meyer, Ph.D., President and Chief Executive Officer of the Company and Sandra Gardiner, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: November 8, 2006


/s/ S. Lewis Meyer, Ph.D.
S. Lewis Meyer, Ph.D.
President and Chief Executive Officer


/s/ Sandra Gardiner
Sandra Gardiner
Chief Financial Officer