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UNITED STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549


FORM 10-KSB


|           |  |                                                                                       
|---------- |  | --------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                       
|þ          |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31, 2005                                           
|          
|o          |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|          
|           |  | For the transition period
    from           to                                       

Commission File
No. 33-20897-D





HELIX BIOMEDIX, INC.


(Name of small business issuer in its charter)


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

22122-20th Avenue Southeast, Suite 148, Bothell,
Washington 98021


(Address of principal executive offices)


(425) 402-8400


(Registrants telephone number, including area code)






o


þ o


S-B 10-KSB 10-KSB. þ


12b-2 o þ




12b-2




DOCUMENTS INCORPORATED BY REFERENCE




o þ










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##### 










HELIX BIOMEDIX, INC.


FORM 10-KSB


TABLE OF CONTENTS


|                 |  |                                                                                                                         |  |  |    | 
|---------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I          
|Item 1.          |  | Description of Business                                                                                                 |  |  | 1  | 
|Item 2.          |  | Description of Property                                                                                                 |  |  | 18 | 
|Item 3.          |  | Legal Proceedings                                                                                                       |  |  | 18 | 
|Item 4.          |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |  | 18 | 
|                
|PART II         
|Item 5.          |  | Market for Common Equity and Related
    Stockholder Matters                                                            |  |  | 18 | 
|Item 6.          |  | Managements Discussion and Analysis
    or Plan of Operation                                                           |  |  | 19 | 
|Item 7.          |  | Financial Statements                                                                                                    |  |  | 24 | 
|Item 8.          |  | Changes In and Disagreements With
    Accountants on Accounting and Financial Disclosure                                |  |  | 52 | 
|Item 8A.         |  | Controls and Procedures                                                                                                 |  |  | 52 | 
|Item 8B.         |  | Other Information                                                                                                       |  |  | 52 | 
|                
|PART III        
|Item 9.          |  | Directors, Executive Officers, Promoters
    and Control Persons; Compliance With Section 16(a) of the
    Exchange Act |  |  | 52 | 
|Item 10.         |  | Executive Compensation                                                                                                  |  |  | 52 | 
|Item 11.         |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                      |  |  | 52 | 
|Item 12.         |  | Certain Relationships and Related
    Transactions                                                                      |  |  | 53 | 
|Item 13.         |  | Exhibits                                                                                                                |  |  | 53 | 
|Item 14.         |  | Principal Accountant Fees and Services                                                                                  |  |  | 55 | 
|EXHIBIT 10.17(A)
|EXHIBIT 10.21(A)
|EXHIBIT 31.1    
|EXHIBIT 31.2    
|EXHIBIT 32.1    
|EXHIBIT 32.2    





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PART I


Forward-Looking Statements






| |   |                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | statements concerning possible or assumed future results of
    operations, trends in financial results and business plans,
    including those relating to earnings growth and revenue growth;
|
| |  | statements about our product development schedule;                                                                                                                                             
|
| |  | statements about our future capital requirements and the
    sufficiency of our cash, cash equivalents, investments, and any
    other sources to meet these requirements;                     
|
| |  | statements about our plans, objectives, expectations and
    intentions; and                                                                                                                   
|
| |  | other statements that are not historical facts.                                                                                                                                                










|        |                        
|------- | -----------------------
|ITEM 1. | DESCRIPTION OF BUSINESS

Overview








1



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Consumer Programs




| |          
| | ---------
| | Anti-acne











| |           
| | ----------
| | Anti-aging



2



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tm 12-week








| |          
| | ---------
| | Oral care





| |           
| | ----------
| | Deodorants





| |                         
| | ------------------------
| | Therapeutic Moisturizers

in-house


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|                        |  |                        |           |                                                                                  |        |                                                                                                |  |           |                            |  |  | 
|----------------------- |  | ---------------------- | --------- | -------------------------------------------------------------------------------- | ------ | ---------------------------------------------------------------------------------------------- |  | --------- | -------------------------- |  |  | 
|                        |  |                        |           |                                                                                  |        | Approximate Existing                                                                           | 
|Application             |  | Lead Peptides          |           |                                                                                  | Status |                                                                                                |  | Market(1) |                           
|                        |  |                        |           |                                                                                  |        |                                                                                                |  |           |                           
|Anti-acne               |  |                        | HB 64     |                                                                                  |        | Currently licensed in two products                                                             |  |           | $1.2 billion Global Market | 
|                        |  |                        | HB 802    |                                                                                  |        | In formulation development for acne and other conditions resulting in redness and inflammation |  |           |                            | 
|Anti-aging              |  |                        | HB 168pal |                                                                                  |        | Formulation studies completed and actively pursuing out-licensing opportunities                |  |           | $1.8 billion US Market     | 
|                        |  | Replikines, Combikines |           | These peptides are expected to enter formulation and product development in 2006 |        |                                                                                                |  |          
|Oral care products      |  |                        | HB 64     |                                                                                  |        | Formulation studies have been initiated and actively pursuing out-licensing opportunities      |  |           | $3.1 billion US Market     | 
|Deodorant               |  |                        | HB 64     |                                                                                  |        | Formulation studies have been initiated and actively pursuing out-licensing opportunities      |  |           | $2 billion US Market       | 
|Therapeutic moisturizer |  |                        | HB 64     |                                                                                  |        | Studies combining HB 64 with currently marketed moisturizers underway                          |  |           | $180 million US Market     | 






|    |                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Current market estimates based on market data sources including
    Euromonitor and public company disclosures by industry
    participants.



Pharmaceutical Programs


Staphylococcus aureus in vivo tm S.
aureus Pseudomonas aeruginosa




4



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|                       |  |               |                |  |        |                      |             |           |  |  |                            | 
|---------------------- |  | ------------- | -------------- |  | ------ | -------------------- | ----------- | --------- |  |  | -------------------------- | 
|                       |  |               |                |  |        | Approximate Existing |            
|Application            |  | Lead Peptides |                |  | Status |                      |             | Market(1) | 
|                       |  |               |                |  |        |                      |             |           | 
|Topical Anti-Infective |  |               | HB 50          |  |        |                      | Preclinical |           |  |  | $1.5 billion Global Market | 
|Rx acne                |  |               | Small molecule |  |        |                      | Preclinical |           |  |  | $2.0 billion Global Market | 
|Topical Rx anti-fungal |  |               | Small molecule |  |        |                      | Research    |           |  |  | $665 million US Market     | 
|Wound healing          |  |               | HB107 analogs  |  |        |                      | Preclinical |           |  |  | $370 million Global Market | 
|Systemic-antibacterial |  |               | Small molecule |  |        |                      | Research    |           |  |  | $12 billion US Market      | 






|    |                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Current market estimates based on market data sources including
    Kalorama Information, Decision Resources and public company
    disclosures by industry participants.



Licensing Activities






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stage 1  Preliminary Marketing Package:
    Initially, our scientific team generates only the minimum
    in vitro/in vivo data sufficient to provoke further
    evaluation of our peptides for a specific application or
    therapy. We disseminate these application-specific, preliminary
    data packages to relevant pharmaceutical and consumer product
    companies with potential interest. The objective of distributing
    these semi-customized, proof-of-concept data packages is to
    identify partners interested in either: (i) licensing the
    subject peptide for their own further research; or
    (ii) entering a
    co-development process
    with us to further advance our peptide for its targeted product
    or therapy.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The quantity, quality, and detail of the data required to
    attract preliminary licensing interest will differ for each
    industry and application. For example, a commercial partner
    facing the evaluation process mandated by the FDA for
    pharmaceutical applications may have preliminary data
    requirements that differ significantly in form and emphasis from
    the data required by a potential partner exploring an
    agricultural application or the enhancement of a cosmetic
    product.



| |   |                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Stage 2  Collaborative License
    Development: Once a prospective licensing partner
    demonstrates serious interest in evaluating our peptides for use
    in their products or therapies, we essentially become
    co-developers in
    advancing the opportunity to licensure.

co-development


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Competition








| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | other companies developing therapies based upon peptide
    technology; and                         
|
| |  | companies using other technologies to address the same disease
    conditions that we are targeting.





Suppliers




Intellectual Property Rights


composition-of




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Regulation






7



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8



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9



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Personnel




Certain Factors That May Affect Our Business and Future
Results


10-KSB,




| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We will need to raise additional capital to fund our
    operations, and our failure to obtain funding when needed may
    force us to delay, reduce or eliminate our product development
    programs or collaboration efforts.



10



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| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | commercialize our product candidates;                                                          
|
| |  | fund our pre-clinical studies;                                                                 
|
| |  | continue our research and development activities;                                              
|
| |  | finance our general and administrative expenses; and                                           
|
| |  | prepare, file, prosecute, maintain, enforce and defend patent
    and other proprietary rights.





| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | our ability to enter into revenue producing agreements;                                           
|
| |  | the progress, expansion and cost of our pre-clinical and
    research and development activities; 
|
| |  | any future decisions we may make about the scope and
    prioritization of the programs we pursue;
|
| |  | the development of new product candidates or uses for our
    antimicrobial peptide technologies; 
|
| |  | changes in regulatory policies or laws that affect our
    operations; and                        
|
| |  | competing technological and market developments.                                                  





| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | We expect to continue to incur substantial losses, and we
    may never achieve profitability.

in-vitro in-vivo


11



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| |                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------
| | We are at an early stage of product development and do not
    yet have commercially marketable products to provide material
    revenue.





| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | We need to enter strategic alliances with third parties to
    develop, test and produce commercially viable products.





| |                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because of the specialized nature of our business, the
    termination of relationships with key management and scientific
    personnel or the inability to recruit and retain additional
    personnel could prevent us from developing our technologies,
    conducting clinical trials and obtaining financing.



12



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| |                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on collaborators to assist in the research and
    development activities necessary for the commercialization of
    our product candidates. If our collaborators do not perform as
    expected, we may not be able to commercialize our product
    candidates.





| |                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Clinical trials for our product candidates, and those for
    our partners and licensees, are expensive and time consuming and
    their outcome is uncertain.





| |                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our partners and licensees or we may choose to, or may be
    required to, suspend, repeat or terminate any initiated clinical
    trials if they are not conducted in accordance with regulatory
    requirements, the results are negative or inconclusive or the
    trials are not well designed.





| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We face substantial competition in our product development
    efforts from pharmaceutical and biotechnology companies,
    universities and other not-for-profit institutions.



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| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | We face product liability risks and may not be able to
    obtain adequate insurance to protect against losses.





| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | If we are unable to protect our proprietary rights, we may
    not be able to compete effectively.











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| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If the use of our technologies conflicts with the rights
    of others, we could be subject to expensive litigation or be
    required to obtain licenses from others to develop or market
    antimicrobial peptides.







| |                                                                          
| | -------------------------------------------------------------------------
| | A third party may claim that we infringe upon its
    proprietary rights.





| |   |                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we may become liable for substantial damages for past
    infringement if a court decides that our technology infringes
    upon a competitors patent;                                                                                                                                         
|
| |  | a court may prohibit us from selling or licensing our product
    without a license from the patent holder, which may not be
    available on commercially acceptable terms, if at all, or which
    may require us to pay substantial royalties or grant cross
    licenses to our patents; and
|
| |  | we may have to redesign our technology or product candidate so
    that it does not infringe upon others patent rights, which
    may not be possible or could require substantial funds or time.                                                                                              





| |                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our rights to use peptides and technologies licensed to us
    by third parties are not within our control, and we may not be
    able to implement our antimicrobial peptide technology without
    these peptides and technologies.



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| |                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our principal stockholders, executive officers and
    directors choose to act together, they may be able to control
    our management and operations, acting in their own best
    interests and not necessarily those of other
    stockholders.







| |                                                                              
| | -----------------------------------------------------------------------------
| | Future sales of our common stock could negatively affect
    our stock price.







| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our common stock may experience extreme price and volume
    fluctuations, which could lead to costly litigation for us and
    make an investment in us less appealing.





| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | announcements about our collaborators or licensees;                                                 
|
| |  | results of our pre-clinical trials;                                                                 
|
| |  | announcements of technological innovations or new products or
    services by us or our competitors;
|
| |  | announcements concerning our competitors or the biotechnology
    industry in general;              
|
| |  | new regulatory pronouncements and changes in regulatory
    guidelines;                             
|
| |  | general and industry-specific economic conditions;                                                  
|
| |  | additions or departures of our key personnel;                                                       
|
| |  | changes in financial estimates or recommendations by securities
    analysts;                       
|
| |  | variations in our quarterly results; and                                                            
|
| |  | changes in accounting principles.                                                                   



16



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| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Our certificate of incorporation, bylaws and stockholder
    rights agreement may delay or prevent a change in our
    management.





| |   |                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize the issuance of preferred stock that can be created
    and issued by the board of directors without prior stockholder
    approval, commonly referred to as blank check
    preferred stock, with rights senior to those of our common stock;
|
| |  | authorize our board of directors to issue dilutive shares of
    common stock upon certain events; and                                                                                                                                                    
|
| |  | provide for a classified board of directors.                                                                                                                                                                                                              



Executive Officers


|                        |  |     |    |  |          |                                            
|----------------------- |  | --- | -- |  | -------- | -------------------------------------------
|Name                    |  | Age |    |  | Position
|                        |  |     |    |  |         
|R. Stephen Beatty       |  |     | 56 |  |          | President and Chief Executive Officer      
|Timothy J. Falla, Ph.D. |  |     | 40 |  |          | Vice President and Chief Scientific Officer
|David H. Kirske         |  |     | 52 |  |          | Vice President and Chief Financial Officer 
|David Drajeske          |  |     | 46 |  |          | Vice President of Business Development     

R. Stephen Beatty day-to


Timothy J. Falla, Ph.D.


David H. Kirske


17



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David Drajeske


Other Information


10-KSB, 10-QSB, 8-K,







|        |                        
|------- | -----------------------
|ITEM 2. | DESCRIPTION OF PROPERTY








|        |                  
|------- | -----------------
|ITEM 3. | LEGAL PROCEEDINGS








|        |                                                         
|------- | --------------------------------------------------------
|ITEM 4. | SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY
    HOLDERS






PART II







|        |                                                             
|------- | ------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
    MATTERS

Market Information




|               |  |                         |      |  |      |   |      |      |  |   |      |  |  |   |      | 
|-------------- |  | ----------------------- | ---- |  | ---- | - | ---- | ---- |  | - | ---- |  |  | - | ---- | 
|               |  | Year Ended December 31, |     
|               |  |                         |     
|               |  | 2005                    |      |  | 2004 |  
|               |  |                         |      |  |      |  
|               |  | High                    |      |  | Low  |   |      | High |  |   | Low  | 
|               |  |                         |      |  |      |   |      |      |  |   |      | 
|First Quarter  |  | $                       | 2.05 |  |      | $ | 1.45 |      |  | $ | 2.15 |  |  | $ | 1.27 | 
|Second Quarter |  | $                       | 1.75 |  |      | $ | 1.40 |      |  | $ | 2.25 |  |  | $ | 1.77 | 
|Third Quarter  |  | $                       | 1.50 |  |      | $ | 0.90 |      |  | $ | 2.10 |  |  | $ | 1.50 | 
|Fourth Quarter |  | $                       | 1.07 |  |      | $ | 0.65 |      |  | $ | 2.00 |  |  | $ | 1.10 | 



18



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Dividend Policy









|        |                                                              
|------- | -------------------------------------------------------------
|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF
    OPERATION



Management Discussion and Analysis Overview






| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | an overview of our business;                                                                                                
|
| |  | results of operations and why those results are different from
    prior years; and                                         
|
| |  | the capital resources that we currently have and possible
    sources of additional funding for future capital requirements.

Business Overview






| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | Skin care  we have developed a number of peptides
    capable of stimulating aspects of the skins innate ability
    to regenerate.
|
| |  | Pharmaceutical  our peptides have demonstrated
    promising results in the areas of topical anti-infectives and
    wound healing. 



Results of Operations




19



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| |                                                        
| | -------------------------------------------------------
| | Years Ended December 31, 2005 and December 31,
    2004

















| |                                                        
| | -------------------------------------------------------
| | Years Ended December 31, 2004 and December 31,
    2003









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Liquidity and Capital Resources


5-year


5-year


5-year






| |   |                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2001/2002 Warrants: (warrants to purchase shares of our
    common stock issued as part of the units described in our
    private placement memorandum dated May 2001) We offered to issue
    either (a) 0.82 shares for each warrant share
    tendered; or (b) 1.0 share for each warrant share
    tendered upon payment of $0.25 for each warrant share tendered.                                     
|
| |  | 2002/2003 Warrants: (warrants to purchase shares of our
    common stock issued as part of the units described in our
    private placement memorandum dated September 2002, and amended
    December 2002) We offered to issue either
    (a) 0.84 shares for each warrant share tendered; or
    (b) 1.0 share for each warrant share tendered upon
    payment of $0.25 for each warrant share tendered.
|
| |  | 2003 Warrants: (warrants to purchase shares of our common
    stock issued as part of the units described in our private
    placement memorandum dated November 2003) We offered to issue
    either (a) 0.37 shares for each warrant share
    tendered; or (b) 1.0 share for each warrant share
    tendered upon payment of $0.56 for each warrant share tendered.                                     

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| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2004 Warrants: (warrants to purchase shares of our common
    stock issued as part of the units described in our private
    placement memorandum dated March 2004) We offered to issue
    either (a) 0.60 shares for each warrant share
    tendered; or (b) 1.0 share for each warrant share
    tendered upon payment of $0.50 for each warrant share tendered.











| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | the ability to attract collaborative agreement partners;                                                                   
|
| |  | the ability to generate revenue under licensing
    agreements; and                                                        
|
| |  | the costs of filing, prosecuting, enforcing, and defending
    patents, patent applications, patent claims, and trademarks.



Critical Accounting Policies and Estimates






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Revenue Recognition. Since inception, we have generated
    limited revenue from licensing fees. Revenue is recorded as
    earned based on the performance requirements of the contract,
    generally as the services are performed. We recognize revenue
    from non-refundable, up front license fees and proceeds from the
    assignment of technology when delivery has occurred and no
    future obligations exist. Royalties from licensees are based on
    third-party sales and recorded as earned in accordance with
    contract terms, when third-party results are reliably measured
    and collection is reasonably assured. Payments received for
    which the earnings process is not complete are classified as
    deferred revenue.
|
| |  | Research and Development Costs. These items include
    personnel costs, supplies, and other indirect costs and costs
    associated with collaborative agreements, are expensed as
    incurred. In instances                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | where we enter into agreements with third parties for research
    and development activities, costs are expensed the earlier of
    when amounts are due or when services are performed.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Capitalization of Patent Costs. We capitalize the third
    party costs associated with filing patents or entering into
    licenses associated with our underlying technology. We review
    our patent portfolio to determine whether any such costs have
    been impaired and are no longer being used in our research and
    development activities. To the extent we no longer use certain
    patents, the associated costs will be written-off at that time.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Valuation of Stock Options and Warrants. We apply
    Accounting Principles Board (APB) Opinion No. 25,
    Accounting for Stock Issued to Employees, and
    related interpretations in accounting for our employee stock
    options and warrants. Accordingly, compensation expense is
    recorded on the date of grant of an option or warrant if the
    fair market value of the underlying stock at the time of grant
    exceeds the exercise price. Our non-employee options and
    warrants are accounted for under Financial Accounting Standards
    Board (FASB) No. 123, Accounting for Stock-Based
    Compensation. Estimating the fair value of stock options
    and warrants involves a number of judgments and variables that
    are subject to significant change. A change in the fair value
    estimate could have a significant effect on the amount of
    compensation expense recognized.

Recent Accounting Pronouncements




23



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|        |                     
|------- | --------------------
|ITEM 7. | FINANCIAL STATEMENTS

|                                                                                                                                                                           |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Index to Financial Statements                                                                                                                                              |  | Page |   
|                                                                                                                                                                           |  |      |   
|Report of KPMG LLP, Independent Registered
    Public Accounting Firm                                                                                                      |  |      | 25 | 
|Report of Prior Independent Registered
    Public Accounting Firm                                                                                                          |  |      | 26 | 
|Balance Sheets as of December 31, 2005
    and 2004                                                                                                                        |  |      | 27 | 
|Statements of Operations for the years
    ended December 31, 2005 and December 31, 2004 and for
    the period from inception (November 7, 1988) to
    December 31, 2005 |  |      | 28 | 
|Statements of Stockholders Equity
    (Deficit) for the period from inception (November 7, 1988)
    to December 31, 2005                                                 |  |      | 29 | 
|Statements of Cash Flows for the years
    ended December 31, 2005 and December 31, 2004 and for
    the period from inception (November 7, 1988) to
    December 31, 2005 |  |      | 34 | 
|Notes to Financial Statements                                                                                                                                              |  |      | 35 | 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














| |             
| | ------------
| | /s/ KPMG LLP





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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















| |                         
| | ------------------------
| | /s/ COMISKEY & COMPANY  
| | PROFESSIONAL CORPORATION





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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)





BALANCE SHEETS


|                                                                                                                                                                                  |                                           |                            |             |           |           |   |             |           |           | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------- | ----------- | --------- | --------- | - | ----------- | --------- | --------- | 
|                                                                                                                                                                                  |                                           | December 31,               |            
|                                                                                                                                                                                  |                                           |                            |            
|                                                                                                                                                                                  |                                           | 2005                       |             |           | 2004      |  
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|ASSETS                                                                                                                                                                           
|Current assets:                                                                                                                                                                   |                                           |                            |             |           |           |   |             |          
|                                                                                                                                                                                  | Cash and cash equivalents                 |                            | $           | 2,827,959 |           |   | $           | 1,908,028 |          
|                                                                                                                                                                                  | Accounts receivable                       |                            |             | 18,988    |           |   |             | 10,200    |          
|                                                                                                                                                                                  | Inventory                                 |                            |             | 35,316    |           |   |             |          |          
|                                                                                                                                                                                  | Prepaid expenses and other current assets |                            |             | 101,363   |           |   |             | 91,071    |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                  |                                           | Total current assets       |             |           | 2,983,626 |   |             |           | 2,009,299 | 
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|Property and equipment:                                                                                                                                                           |                                           |                            |             |           |           |   |             |          
|                                                                                                                                                                                  | Machinery and equipment                   |                            |             | 448,883   |           |   |             | 395,739   |          
|                                                                                                                                                                                  | Furniture and fixtures                    |                            |             | 14,627    |           |   |             | 14,627    |          
|                                                                                                                                                                                  | Leasehold improvements                    |                            |             | 28,215    |           |   |             | 28,215    |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                  |                                           |                            | 491,725     |           |           |   | 438,581     |          
|                                                                                                                                                                                  | Less: accumulated depreciation            |                            |             | (323,662  | )         |   |             | (226,865  | )        
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                  | Property and equipment, net               |                            |             | 168,063   |           |   |             | 211,716   |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|Other assets:                                                                                                                                                                     |                                           |                            |             |           |           |   |             |          
|                                                                                                                                                                                  | Deposits                                  |                            |             | 10        |           |   |             | 10        |          
|                                                                                                                                                                                  | Antimicrobial technology, net             |                            |             | 37,322    |           |   |             | 48,431    |          
|                                                                                                                                                                                  | Licensing agreements, net                 |                            |             | 47,011    |           |   |             | 50,606    |          
|                                                                                                                                                                                  | Patents pending and approved, net         |                            |             | 505,908   |           |   |             | 547,018   |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                  |                                           |                            | 590,251     |           |           |   | 646,065     |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|Total assets                                                                                                                                                                      |                                           | $                          | 3,741,940   |           |           | $ | 2,867,080   |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                 
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                             
|Current liabilities:                                                                                                                                                              |                                           |                            |             |           |           |   |             |          
|                                                                                                                                                                                  | Accounts payable                          |                            | $           | 57,993    |           |   | $           | 62,053    |          
|                                                                                                                                                                                  | Accrued expenses                          |                            |             | 166,366   |           |   |             | 125,993   |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                  |                                           | Total current liabilities  |             |           | 224,359   |   |             |           | 188,046   | 
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|Commitments and contingencies                                                                                                                                                     |                                           |                            |             |           |           |   |             |          
|Stockholders equity:                                                                                                                                                             |                                           |                            |             |           |           |   |             |          
|Preferred stock, $0.001 par value, 25,000,000 shares
    authorized; no shares issued or outstanding                                                                              |                                           |                            |            |           |           |   |            |          
|Common stock, $0.001 par value, 100,000,000 shares
    authorized; 20,190,514 shares outstanding at
    December 31, 2005: 13,533,370 shares outstanding at
    December 31, 2004 |                                           |                            | 20,190      |           |           |   | 13,533      |          
|Additional paid-in capital                                                                                                                                                        |                                           |                            | 23,906,974  |           |           |   | 20,007,845  |          
|Deferred stock compensation                                                                                                                                                       |                                           |                            | (105,000    | )         |           |   | (315,000    | )        
|Deficit accumulated during the development stage                                                                                                                                  |                                           |                            | (20,304,583 | )         |           |   | (17,027,344 | )        
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|                                                                                                                                                                                  |                                           | Total stockholders equity |             |           | 3,517,581 |   |             |           | 2,679,034 | 
|                                                                                                                                                                                  |                                           |                            |             |           |           |  
|Total liabilities and stockholders equity                                                                                                                                        |                                           | $                          | 3,741,940   |           |           | $ | 2,867,080   |          
|                                                                                                                                                                                  |                                           |                            |             |           |           |  



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)





STATEMENTS OF OPERATIONS


For the Years ended December 31, 2005 and 2004 and


for the Period from Inception (November 7, 1988) to
December 31, 2005


|                        |                                      |                          |           |             |                     |   |         |            |           |   |         |            |           | 
|----------------------- | ------------------------------------ | ------------------------ | --------- | ----------- | ------------------- | - | ------- | ---------- | --------- | - | ------- | ---------- | --------- | 
|                        |                                      | Inception                |           |             | For the Years Ended |  
|                        |                                      | (November 7, 1988)       |           |             | December 31,        |  
|                        |                                      | to December 31,          |           |             |                     |  
|                        |                                      | 2005                     |           |             | 2005                |   |         | 2004       |          
|                        |                                      |                          |           |             |                     |   |         |            |          
|Revenue                 |                                      | $                        | 380,034   |             |                     | $ | 108,408 |            |           | $ | 93,661  |           
|                        |                                      |                          |           |             |                     |   |         |            |          
|Operating expenses:     |                                      |                          |           |             |                     |   |         |            |           |   |         |           
|                        | Cost of peptide sales                |                          |           | 84,338      |                     |   |         | 84,338     |           |   |         |           |          
|                        | Research and development             |                          |           | 5,530,246   |                     |   |         | 834,231    |           |   |         | 915,157    |          
|                        | Depreciation and amortization        |                          |           | 900,558     |                     |   |         | 175,136    |           |   |         | 160,578    |          
|                        | Accounting, legal and professional   |                          |           | 2,174,024   |                     |   |         | 300,895    |           |   |         | 312,561    |          
|                        | Consulting fees                      |                          |           | 2,864,379   |                     |   |         | 133,518    |           |   |         | 128,006    |          
|                        | General and administrative           |                          |           | 7,896,853   |                     |   |         | 1,903,615  |           |   |         | 1,715,196  |          
|                        |                                      |                          |           |             |                     |   |         |            |          
|                        |                                      | Total operating expenses |           |             | 19,450,398          |   |         |            | 3,431,733 |   |         |            | 3,231,498 | 
|                        |                                      |                          |           |             |                     |   |         |            |          
|                        | Loss from operations                 |                          |           | (19,070,364 | )                   |   |         | (3,323,325 | )         |   |         | (3,137,837 | )        
|                        |                                      |                          |           |             |                     |   |         |            |          
|Other (income) expense: |                                      |                          |           |             |                     |   |         |            |           |   |         |           
|                        | Gain on settlement of lawsuit        |                          |           | (48,574     | )                   |   |         |           |           |   |         |           |          
|                        | Gain on sale of equipment            |                          |           | (6,453      | )                   |   |         |           |           |   |         | (6,453     | )        
|                        | Interest expense                     |                          |           | 1,459,442   |                     |   |         |           |           |   |         |           |          
|                        | Interest income                      |                          |           | (170,196    | )                   |   |         | (46,086    | )         |   |         | (22,110    | )        
|                        |                                      |                          |           |             |                     |   |         |            |          
|                        |                                      |                          | 1,234,219 |             |                     |   | (46,086 | )          |           |   | (28,563 | )         
|                        |                                      |                          |           |             |                     |   |         |            |          
|                        | Net loss                             |                          | $         | (20,304,583 | )                   |   | $       | (3,277,239 | )         |   | $       | (3,109,274 | )        
|                        |                                      |                          |           |             |                     |   |         |            |          
|                        | Basic and diluted net loss per share |                          |           |             |                     |   | $       | (0.18      | )         |   | $       | (0.23      | )        
|                        |                                      |                          |           |             |                     |   |         |            |          
|                        | Weighted average shares outstanding  |                          |           |             |                     |   |         | 17,858,807 |           |   |         | 13,290,408 |          
|                        |                                      |                          |           |             |                     |   |         |            |          



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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)





STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)


For the Years ended December 31, 2005 and 2004 and


for the Period from Inception (November 7, 1988) to
December 31, 2005


|                                                                                               |  |  |           |              |  |   |            |  |         |         |          |              |              |            |               |         |        |           |   |  |  |   |   |  |  |   |         |  |  |  |  | 
|---------------------------------------------------------------------------------------------- |  |  | --------- | ------------ |  | - | ---------- |  | ------- | ------- | -------- | ------------ | ------------ | ---------- | ------------- | ------- | ------ | --------- | - |  |  | - | - |  |  | - | ------- |  |  |  |  | 
|                                                                                               |  |  |           | Common Stock |  |   |            |  |         |         |          |              |              |            |              
|                                                                                               |  |  |           |              |  |   | Additional |  |         |         | Stock    |              |              |            | Stockholders |        
|                                                                                               |  |  |           | Number of    |  |   |            |  | Paid-In |         | Deferred |              | Subscription |            | Accumulated   |         | Equity |          
|                                                                                               |  |  |           | Shares       |  |   | Amount     |  |         | Capital |          | Compensation |              | Receivable |               | Deficit |        | (Deficit) |  
|                                                                                               |  |  |           |              |  |   |            |  |         |         |          |              |              |            |               |         |        |           |  
|Initial capitalization on November 7, 1988                                                     |  |  | 1,000,000 |              |  | $ | 66,486     |  |         | $       |         |              |              | $          |              |         |        | $         |  |  |  | $ |  |  |  | $ | 66,486  | 
|Restated for recapitalization of the private company                                           |  |  | (370,000  | )            |  |   |           |  |         |         |         |              |              |            |              |         |        |           |  |  |  |   |  |  |  |   |        | 
|Reverse acquisition of Helix BioMedix, Inc. by Cartel
    Acquisitions, Inc. on March 20, 1989 |  |  | 151,262   |              |  |   | 855,292    |  |         |         |         |              |              |            |              |         |        |           |  |  |  |   |  |  |  |   | 855,292 | 



|               |  |           |       |  |  |  |         |  |  |  |         |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |         | 
|-------------- |  | --------- | ----- |  |  |  | ------- |  |  |  | ------- |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | ------- | 
|               |  | Per Share |       |  |  |  |         |  |  |  |         |  |  |  |   |  | 
|Period         |  | Amount    |       |  |  |  |         |  |  |  |         |  |  |  |   |  | 
|               |  |           |       |  |  |  |         |  |  |  |         |  |  |  |   |  | 
|December 1992  |  |           | $2.50 |  |  |  | 5,600   |  |  |  | 14,000  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 14,000  | 
|May 1993       |  |           | $5.00 |  |  |  | 8,000   |  |  |  | 40,000  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 40,000  | 
|December 1993  |  |           | $2.50 |  |  |  | 9,490   |  |  |  | 23,724  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 23,724  | 
|March 1998     |  |           | $1.00 |  |  |  | 4,900   |  |  |  | 4,900   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 4,900   | 
|December 1998  |  |           | $1.00 |  |  |  | 3,100   |  |  |  | 3,100   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3,100   | 
|September 1999 |  |           | $0.70 |  |  |  | 40,000  |  |  |  | 28,000  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 28,000  | 
|September 1999 |  |           | $1.25 |  |  |  | 73,215  |  |  |  | 91,519  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 91,519  | 
|               |  |           |       |  |  |  |         |  |  |  |         |  |  |  |   |  |  |  |   |  |  |  |   | 
|               |  |           |       |  |  |  | 144,305 |  |  |  | 205,243 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 205,243 | 



|                                                                        |  |           |             |  |  |  |         |  |  |  |           |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |           | 
|----------------------------------------------------------------------- |  | --------- | ----------- |  |  |  | ------- |  |  |  | --------- |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | --------- | 
|                                                                        |  | Per Share |             |  |  |  |         |  |  |  |           |  |  |  |   |  | 
|Period                                                                  |  | Amount    |             |  |  |  |         |  |  |  |           |  |  |  |   |  | 
|                                                                        |  |           |             |  |  |  |         |  |  |  |           |  |  |  |   |  | 
|May 1993                                                                |  |           | $5.00       |  |  |  | 4,000   |  |  |  | 20,000    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 20,000    | 
|September 1993                                                          |  |           | $2.50       |  |  |  | 184,000 |  |  |  | 460,000   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 460,000   | 
|April 1995                                                              |  |           | $2.50       |  |  |  | 41,732  |  |  |  | 104,331   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 104,331   | 
|April 1995                                                              |  |           | $2.41       |  |  |  | 80,000  |  |  |  | 192,943   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 192,943   | 
|September 1995                                                          |  |           | $2.50       |  |  |  | 14,731  |  |  |  | 36,828    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 36,828    | 
|September 1997                                                          |  |           | $1.00       |  |  |  | 110,976 |  |  |  | 110,976   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 110,976   | 
|December 1997                                                           |  |           | $2.50 $1.00 |  |  |  | 326,785 |  |  |  | 780,025   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 780,025   | 
|March 1998                                                              |  |           | $1.00       |  |  |  | 3,100   |  |  |  | 3,100     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3,100     | 
|June 1998                                                               |  |           | $1.00       |  |  |  | 1,395   |  |  |  | 1,395     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,395     | 
|September 1998                                                          |  |           | $1.00       |  |  |  | 2,500   |  |  |  | 2,500     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,500     | 
|September 1999                                                          |  |           | $1.25       |  |  |  | 2,000   |  |  |  | 2,500     |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2,500     | 
|                                                                        |  |           |             |  |  |  |         |  |  |  |           |  |  |  |   |  |  |  |   |  |  |  |   | 
|                                                                        |  |           |             |  |  |  | 771,219 |  |  |  | 1,714,598 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 1,714,598 | 
|Fractional shares issued in connection with 1 for 500 reverse
    split |  |           | 29          |  |  |  |        |  |  |  |          |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 

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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)  (Continued)




|                                                                                                                                           |  |           |           |              |           |  |            |        |  |         |         |       |          |              |         |              |               |  |             |         |  |        |           |  |  |  |           |   |  |  |        | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | --------- | ------------ | --------- |  | ---------- | ------ |  | ------- | ------- | ----- | -------- | ------------ | ------- | ------------ | ------------- |  | ----------- | ------- |  | ------ | --------- |  |  |  | --------- | - |  |  | ------ | 
|                                                                                                                                           |  |           |           | Common Stock |           |  |            |        |  |         |         |       |          |              |        
|                                                                                                                                           |  |           |           |              |           |  | Additional |        |  |         |         | Stock |          |              |         |              | Stockholders | 
|                                                                                                                                           |  | Per Share |           |              | Number of |  |            |        |  | Paid-In |         |       | Deferred |              |         | Subscription |               |  | Accumulated |         |  | Equity |          
|Period                                                                                                                                     |  | Amount    |           |              | Shares    |  |            | Amount |  |         | Capital |       |          | Compensation |         |              | Receivable    |  |             | Deficit |  |        | (Deficit) | 
|                                                                                                                                           |  |           |           |              |           |  |            |        |  |         |         |       |          |              |         |              |               |  |             |         |  |        |           | 
|March & December 1994                                                                                                                      |  |           | $2.50     |              |           |  | 16,000     |        |  |         | 40,000  |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  |          |   |  |  | 40,000 | 
|April 1995                                                                                                                                 |  |           | $2.50     |              |           |  | 4,800      |        |  |         | 12,000  |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  |          |   |  |  | 12,000 | 
|March 1998                                                                                                                                 |  |           | $1.00     |              |           |  | 10,000     |        |  |         | 10,000  |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  |          |   |  |  | 10,000 | 
|                                                                                                                                           |  |           |           |              |           |  |            |        |  |         |         |       |          |              |         |              |               |  |             |         |  |        |           | 
|                                                                                                                                           |  |           |           |              |           |  | 30,800     |        |  |         | 62,000  |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  |          |   |  |  | 62,000 | 
|Issuance of common stock as consideration in cooperative
    endeavor agreement, in November 1995                                          |  |           | 10,000    |              |           |  | 25,000     |        |  |         |        |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  | 25,000    |  
|Issuance of stock options in 1995                                                                                                          |  |           |          |              |           |  |           |        |  |         | 137,400 |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  | 137,400   |  
|Issuance of stock for cash in private placement, during
    July-September 1999, at $0.70 per share, net of offering
    costs of $107,195 |  |           | 2,890,643 |              |           |  | 1,916,255  |        |  |         |        |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  | 1,916,255 |  
|Escrow of stock for consulting agreement, in September 1999, at
    $0.70 per share                                                        |  |           |          |              |           |  | 42,000     |        |  |         |        |       |          |              | (42,000 | )            |               |  |            |         |  |        |          |  |  |  |          |  
|Compensation and deferred compensation recorded for options
    granted, in December 1999                                                  |  |           |          |              |           |  |           |        |  |         | 50,875  |       |          |              | (44,000 | )            |               |  |            |         |  |        |          |  |  |  | 6,875     |  
|Deferred compensation for stock awards in December 1999                                                                                    |  |           |          |              |           |  | 87,225     |        |  |         |        |       |          |              | (87,225 | )            |               |  |            |         |  |        |          |  |  |  |          |  
|Stock and options issued for services in January 2000                                                                                      |  |           | 1,250     |              |           |  | 3,125      |        |  |         | 4,500   |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  | 7,625     |  
|Amortization of deferred compensation costs                                                                                                |  |           |          |              |           |  |           |        |  |         |        |       |          |              | 21,000  |              |               |  |            |         |  |        |          |  |  |  | 21,000    |  
|Retirement of share issued in December 1999                                                                                                |  |           | (250      | )            |           |  | (313       | )      |  |         |        |       |          |              |        |              |               |  |            |         |  |        |          |  |  |  | (313      | )
|Shares issued and options vested in connection with employment
    agreements, March 2000                                                  |  |           | 267,445   |              |           |  | 700,000    |        |  |         |        |       |          |              | 41,306  |              |               |  |            |         |  |        |          |  |  |  | 741,306   |  



|               |  |           |       |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |   |  |  |  |   |  |  |  |   |  |  |  |        | 
|-------------- |  | --------- | ----- |  |  |  | ------ |  |  |  | ------ |  |  |  | ------ |  |  |  | - |  |  |  | - |  |  |  | - |  |  |  | ------ | 
|               |  | Per Share |       |  |  |  |        |  |  |  |        |  |  |  |        |  | 
|Period         |  | Amount    |       |  |  |  |        |  |  |  |        |  |  |  |        |  | 
|               |  |           |       |  |  |  |        |  |  |  |        |  |  |  |        |  | 
|March 2000     |  |           | $4.05 |  |  |  | 7,747  |  |  |  | 18,399 |  |  |  | 12,976 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 31,375 | 
|June 2000      |  |           | $3.17 |  |  |  | 8,750  |  |  |  | 16,953 |  |  |  | 10,828 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 27,781 | 
|September 2000 |  |           | $4.61 |  |  |  | 8,750  |  |  |  | 24,063 |  |  |  | 16,297 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 40,360 | 
|               |  |           |       |  |  |  |        |  |  |  |        |  |  |  |        |  |  |  |   |  |  |  |   | 
|               |  |           |       |  |  |  | 25,247 |  |  |  | 59,415 |  |  |  | 40,101 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 99,516 | 

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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)  (Continued)


|                                                                                                                                                                             |  |              |        |  |            |  |            |         |  |          |              |   |              |            |               |             |         |  |        |           |  |  |   |  |  |  |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ |  | ---------- |  | ---------- | ------- |  | -------- | ------------ | - | ------------ | ---------- | ------------- | ----------- | ------- |  | ------ | --------- |  |  | - |  |  |  | ------- | -
|                                                                                                                                                                             |  | Common Stock |        |  |            |  |            |         |  |          |              |   |             
|                                                                                                                                                                             |  |              |        |  | Additional |  |            |         |  | Stock    |              |   |              |            | Stockholders |            
|                                                                                                                                                                             |  | Number of    |        |  |            |  | Paid-In    |         |  | Deferred |              |   | Subscription |            |               | Accumulated |         |  | Equity |          
|                                                                                                                                                                             |  | Shares       |        |  | Amount     |  |            | Capital |  |          | Compensation |   |              | Receivable |               |             | Deficit |  |        | (Deficit) | 
|                                                                                                                                                                             |  |              |        |  |            |  |            |         |  |          |              |   |              |            |               |             |         |  |        |           | 
|Revaluation of deferred compensation and options vested in
    connection with employment agreement in June 2000                                                             |  |              |       |  |            |  | (27,919    | )       |  |          | 33,784       |   |              |            | 16,396        |             |         |  |       |           |  |  |  |  |  |  | 22,261  |  
|Options vested in connection with employment agreement, shares
    issued for services, and revaluation of options due to
    suspension of exercise date, in September 2000 |  |              | 41,000 |  |            |  | 2,313      |         |  |          | 85,000       |   |              |            | 51,012        |             |         |  |       |           |  |  |  |  |  |  | 138,325 |  
|Options issued in connection with two consulting agreements, in
    October 2000                                                                                             |  |              |       |  |            |  |           |         |  |          | 100,000      |   |              |            | (75,000       | )           |         |  |       |           |  |  |  |  |  |  | 25,000  |  
|Directors shares and options issued in September 2000, at
    $2.36 per share                                                                                                |  |              | 8,659  |  |            |  | 13,259     |         |  |          | 7,197        |   |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 20,456  |  
|Options vested in connection with employment agreements, and
    shares issued for services, in September 2000                                                               |  |              | 4,987  |  |            |  | 8,104      |         |  |          | 4,613        |   |              |            | 43,511        |             |         |  |       |           |  |  |  |  |  |  | 56,228  |  
|Compensation adjustment to variable plan options in December 2000                                                                                                            |  |              |       |  |            |  |           |         |  |          | (83,828      | ) |              |            |              |             |         |  |       |           |  |  |  |  |  |  | (83,828 | )
|Exercise of options at $1.00 per share                                                                                                                                       |  |              | 45,000 |  |            |  | 112,500    |         |  |          | (67,500      | ) |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 45,000  |  
|Exercise of option at $0.50 per share                                                                                                                                        |  |              | 600    |  |            |  | 1,500      |         |  |          | (1,200       | ) |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 300     |  
|Adjustment to par value stock for Delaware re-incorporation                                                                                                                  |  |              |       |  |            |  | (5,841,061 | )       |  |          | 5,841,061    |   |              |            |              |             |         |  |       |           |  |  |  |  |  |  |        |  
|Amortization of deferred compensation                                                                                                                                        |  |              |       |  |            |  |           |         |  |          |             |   |              |            | 75,000        |             |         |  |       |           |  |  |  |  |  |  | 75,000  |  
|Issuance of stock for services, in October 2001, at
    $2.00 per share                                                                                                      |  |              | 25,000 |  |            |  | 25         |         |  |          | 49,975       |   |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 50,000  |  
|Issuance of stock for licensing arrangement October 2001, at
    $0.75 per share                                                                                             |  |              | 97,500 |  |            |  | 98         |         |  |          | 73,027       |   |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 73,125  |  
|Compensation adjustment for options and warrants in 2001                                                                                                                     |  |              |       |  |            |  |           |         |  |          | 328,310      |   |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 328,310 |  
|Value of detachable warrants issued with convertible notes
    payable                                                                                                       |  |              |       |  |            |  |           |         |  |          | 216,100      |   |              |            |              |             |         |  |       |           |  |  |  |  |  |  | 216,100 |  

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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)  (Continued)


|                                                                                                                                                      |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           |  |  |             |   |  |  |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ---------- |  | ------- | ------- |  | -------- | ------------ |  | ------------ | ---------- | ------------- | ----------- | ------- |  | -------- | --------- |  |  | ----------- | - |  |  | ---------- | -
|                                                                                                                                                      |  | Common Stock |            |  |            |  |         |         |  |          |              |  |             
|                                                                                                                                                      |  |              |            |  | Additional |  |         |         |  | Stock    |              |  |              |            | Stockholders |            
|                                                                                                                                                      |  | Number of    |            |  |            |  | Paid-In |         |  | Deferred |              |  | Subscription |            |               | Accumulated |         |  | Equity   |          
|                                                                                                                                                      |  | Shares       |            |  | Amount     |  |         | Capital |  |          | Compensation |  |              | Receivable |               |             | Deficit |  |          | (Deficit) | 
|                                                                                                                                                      |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           | 
|Net loss for the period from inception on November 7, 1988
    to December 31, 2001                                                                   |  |              |           |  |            |  |        |         |  |          |             |  |              |            |              |             |         |  |         |           |  |  | (7,560,663  | ) |  |  | (7,560,663 | )
|                                                                                                                                                      |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           | 
|Balance at December 31, 2001                                                                                                                          |  |              | 5,144,696  |  |            |  | 5,145   |         |  |          | 6,819,415    |  |              |            |              |             |         |  |         |           |  |  | (7,560,663  | ) |  |  | (736,103   | )
|Issuance of common stock for services rendered, at
    $0.80 per share on November 21, 2002                                                           |  |              | 18,000     |  |            |  | 18      |         |  |          | 14,382       |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 14,400     |  
|Conversion of convertible notes payable into equity, at
    $1.00 per share Principle                                                                 |  |              | 3,082,500  |  |            |  | 3,083   |         |  |          | 3,079,417    |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 3,082,500  |  
|Accrued interest                                                                                                                                      |  |              | 231,180    |  |            |  | 231     |         |  |          | 230,949      |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 231,180    |  
|                                                                                                                                                      |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           | 
|                                                                                                                                                      |  |              | 8,476,376  |  |            |  | 8,477   |         |  |          | 10,144,163   |  |              |            |              |             |         |  |         |           |  |  | (7,560,663  | ) |  |  | 2,591,977  |  
|Private placement of common stock (with common stock warrants
    equal to 60%), at $1.00 per share, September to December
    2002                   |  |              | 1,560,000  |  |            |  | 1,560   |         |  |          | 1,558,440    |  |              |            |              |             |         |  | (135,000 | )         |  |  |            |   |  |  | 1,425,000  |  
|Compensation adjustments for warrants in 2002                                                                                                         |  |              |           |  |            |  |        |         |  |          | 440,331      |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 440,331    |  
|Value of detachable warrants issued with convertible notes
    payable                                                                                |  |              |           |  |            |  |        |         |  |          | 512,452      |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 512,452    |  
|Net loss for the year                                                                                                                                 |  |              |           |  |            |  |        |         |  |          |             |  |              |            |              |             |         |  |         |           |  |  | (3,161,904  | ) |  |  | (3,161,904 | )
|                                                                                                                                                      |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           | 
|Balance at December 31, 2002                                                                                                                          |  |              | 10,036,376 |  |            |  | 10,037  |         |  |          | 12,655,386   |  |              |            |              |             |         |  | (135,000 | )         |  |  | (10,722,567 | ) |  |  | 1,807,856  |  
|Exercise of warrants at $1.00 per share                                                                                                               |  |              | 80,500     |  |            |  | 81      |         |  |          | 80,419       |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 80,500     |  
|Private placement of common stock (with common stock warrants,
    equal to 60%) at $1.00 per share, net of issuance costs,
    January to March 2003 |  |              | 2,172,494  |  |            |  | 2,172   |         |  |          | 2,159,213    |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 2,161,385  |  
|Deferred stock compensation, net                                                                                                                      |  |              |           |  |            |  |        |         |  |          | 630,000      |  |              |            | (525,000      | )           |         |  |         |           |  |  |            |   |  |  | 105,000    |  
|Proceeds from warrant exchange at $0.50 per warrant                                                                                                   |  |              |           |  |            |  |        |         |  |          | 1,176,550    |  |              |            |              |             |         |  |         |           |  |  |            |   |  |  | 1,176,550  |  
|Repayment of subscription receivable                                                                                                                  |  |              |           |  |            |  |        |         |  |          |             |  |              |            |              |             |         |  | 135,000  |           |  |  |            |   |  |  | 135,000    |  
|Options and warrants issued for services                                                                                                              |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           |  |  | 663,407     |   |  |  | 663,407    |  
|Net loss for the year                                                                                                                                 |  |              |           |  |            |  |        |         |  |          |             |  |              |            |              |             |         |  |         |           |  |  | (3,195,503  | ) |  |  | (3,195,503 | )
|                                                                                                                                                      |  |              |            |  |            |  |         |         |  |          |              |  |              |            |               |             |         |  |          |           | 

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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


STATEMENTS OF STOCKHOLDERS EQUITY
(DEFICIT)  (Continued)


|                                                                                                                                                |  |              |            |  |            |   |         |         |  |          |              |   |              |               |             |         |  |        |           |  |  |   |             |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- |  | ---------- | - | ------- | ------- |  | -------- | ------------ | - | ------------ | ------------- | ----------- | ------- |  | ------ | --------- |  |  | - | ----------- | - |  | - | ---------- | -
|                                                                                                                                                |  | Common Stock |            |  |            |   |         |         |  |          |              |   |             
|                                                                                                                                                |  |              |            |  | Additional |   |         |         |  | Stock    |              |   |              | Stockholders |            
|                                                                                                                                                |  | Number of    |            |  |            |   | Paid-In |         |  | Deferred |              |   | Subscription |               | Accumulated |         |  | Equity |          
|                                                                                                                                                |  | Shares       |            |  | Amount     |   |         | Capital |  |          | Compensation |   |              | Receivable    |             | Deficit |  |        | (Deficit) | 
|                                                                                                                                                |  |              |            |  |            |   |         |         |  |          |              |   |              |               |             |         |  |        |           | 
|Balance at December 31, 2003                                                                                                                    |  |              | 12,289,370 |  |            |   | 12,290  |         |  |          | 17,364,975   |   |              |               | (525,000    | )       |  |        |          |  |  |   | (13,918,070 | ) |  |   | 2,934,195  |  
|Exercise of warrants at $0.25 per share                                                                                                         |  |              | 60,000     |  |            |   | 60      |         |  |          | 14,940       |   |              |               |            |         |  |        |          |  |  |   |            |   |  |   | 15,000     |  
|Private placement of common stock (with common stock warrants
    equal to 35% at $2.00 per share, net of issuance cost),
    March to May 2004 |  |              | 1,184,000  |  |            |   | 1,183   |         |  |          | 2,346,793    |   |              |               |            |         |  |        |          |  |  |   |            |   |  |   | 2,347,976  |  
|Proceeds from 2003 warrant exchange at $0.50 per warrant                                                                                        |  |              |           |  |            |   |        |         |  |          | 30,000       |   |              |               |            |         |  |        |          |  |  |   |            |   |  |   | 30,000     |  
|Deferred stock compensation                                                                                                                     |  |              |           |  |            |   |        |         |  |          |             |   |              |               | 210,000     |         |  |        |          |  |  |   |            |   |  |   | 210,000    |  
|Options issued for services                                                                                                                     |  |              |           |  |            |   |        |         |  |          | 251,137      |   |              |               |            |         |  |        |          |  |  |   |            |   |  |   | 251,137    |  
|Net loss for the year                                                                                                                           |  |              |           |  |            |   |        |         |  |          |             |   |              |               |            |         |  |        |          |  |  |   | (3,109,274  | ) |  |   | (3,109,274 | )
|                                                                                                                                                |  |              |            |  |            |   |         |         |  |          |              |   |              |               |             |         |  |        |           |  | 
|Balance at December 31, 2004                                                                                                                    |  |              | 13,533,370 |  |            |   | 13,533  |         |  |          | 20,007,845   |   |              |               | (315,000    | )       |  |        |          |  |  |   | (17,027,344 | ) |  |   | 2,679,034  |  
|Exercise of warrants issued for services at $1.00 per share                                                                                     |  |              | 16,050     |  |            |   | 16      |         |  |          | (16          | ) |              |               |            |         |  |        |          |  |  |   |            |   |  |   |           |  
|Warrant Exchange, net                                                                                                                           |  |              | 4,960,918  |  |            |   | 4,961   |         |  |          | 1,332,124    |   |              |               |            |         |  |        |          |  |  |   |            |   |  |   | 1,337,085  |  
|Proceeds from 2005 Private Placement, net                                                                                                       |  |              | 1,665,167  |  |            |   | 1,665   |         |  |          | 2,478,324    |   |              |               |            |         |  |        |          |  |  |   |            |   |  |   | 2,479,989  |  
|Deferred stock compensation and stock and stock options issued
    for services                                                                 |  |              | 15,009     |  |            |   | 15      |         |  |          | 88,697       |   |              |               | 210,000     |         |  |        |          |  |  |   |            |   |  |   | 298,712    |  
|Net loss for the year                                                                                                                           |  |              |           |  |            |   |        |         |  |          |             |   |              |               |            |         |  |        |          |  |  |   | (3,277,239  | ) |  |   | (3,277,239 | )
|                                                                                                                                                |  |              |            |  |            |   |         |         |  |          |              |   |              |               |             |         |  |        |           |  | 
|Balance at December 31, 2005                                                                                                                    |  |              | 20,190,514 |  |            | $ | 20,190  |         |  | $        | 23,906,974   |   |              | $             | (105,000    | )       |  | $      |          |  |  | $ | (20,304,583 | ) |  | $ | 3,517,581  |  
|                                                                                                                                                |  |              |            |  |            |   |         |         |  |          |              |   |              |               |             |         |  |        |           |  | 



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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)





STATEMENTS OF CASH FLOWS


For the Years ended December 31, 2005 and 2004 and


For the Period from Inception (November 7, 1988) to
December 31, 2005


|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |   |         |           |            |   |         |  
|------------------------------------------------ | --------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------ | ----------- | ------------------- | --------- | --------- | ---------- | - | ------- | --------- | ---------- | - | ------- | -
|                                                 |                                               | Inception                                                                       |                                            |             | For the Years Ended |          
|                                                 |                                               | (November 7, 1988)                                                              |                                            |             | December 31,        |          
|                                                 |                                               | to December 31,                                                                 |                                            |             |                     |          
|                                                 |                                               | 2005                                                                            |                                            |             | 2005                |           |           | 2004       |  
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|Cash Flows from Operating Activities             |                                               |                                                                                 |                                            |             |                     |           |           |            |   |         |           |           
|                                                 | Net loss                                      |                                                                                 | $                                          | (20,304,583 | )                   |           | $         | (3,277,239 | ) |         | $         | (3,109,274 | )
|                                                 |                                               | Adjustments to reconcile net loss to net cash used in operating
    activities: |                                            |             |                     |           |           |            |   |         |           |            |   |        
|                                                 |                                               |                                                                                 | Depreciation and amortization              |             |                     | 900,738   |           |            |   | 175,136 |           |            |   | 160,578 |  
|                                                 |                                               |                                                                                 | Amortization of debt discount              |             |                     | 728,552   |           |            |   |        |           |            |   |        |  
|                                                 |                                               |                                                                                 | Stock-based compensation costs             |             |                     | 4,078,506 |           |            |   | 298,712 |           |            |   | 461,137 |  
|                                                 |                                               |                                                                                 | Interest expense converted to common stock |             |                     | 231,180   |           |            |   |        |           |            |   |        |  
|                                                 |                                               |                                                                                 | Research and development                   |             |                     | 53,000    |           |            |   |        |           |            |   |        |  
|                                                 |                                               |                                                                                 | Gain on sale of assets                     |             |                     | (6,453    | )         |            |   |        |           |            |   | (6,453  | )
|                                                 |                                               | Changes in operating assets and liabilities:                                    |                                            |             |                     |           |           |            |   |         |           |            |   |        
|                                                 |                                               |                                                                                 | Accounts receivable                        |             |                     | (10,288   | )         |            |   | (10,288 | )         |            |   |        |  
|                                                 |                                               |                                                                                 | Inventory                                  |             |                     | (35,316   | )         |            |   | (35,316 | )         |            |   |        |  
|                                                 |                                               |                                                                                 | Prepaid expenses and other current assets  |             |                     | (95,353   | )         |            |   | (10,292 | )         |            |   | (33,271 | )
|                                                 |                                               |                                                                                 | Other assets                               |             |                     | (67,400   | )         |            |   |        |           |            |   | 29,396  |  
|                                                 |                                               |                                                                                 | Accounts payable  related party           |             |                     | 341,602   |           |            |   |        |           |            |   |        |  
|                                                 |                                               |                                                                                 | Accounts payable                           |             |                     | 60,327    |           |            |   | (4,060  | )         |            |   | 5,761   |  
|                                                 |                                               |                                                                                 | Accrued expenses                           |             |                     | 240,644   |           |            |   | 40,373  |           |            |   | (23,468 | )
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|                                                 | Net cash used in operating activities         |                                                                                 |                                            | (13,884,844 | )                   |           |           | (2,822,974 | ) |         |           | (2,515,594 | )
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|Cash Flows from Investing Activities             |                                               |                                                                                 |                                            |             |                     |           |           |            |   |         |           |           
|                                                 | Investment in Helix Delaware                  |                                                                                 |                                            | (10         | )                   |           |           |           |   |         |           |           |  
|                                                 | Proceeds from sale of assets                  |                                                                                 |                                            | 8,900       |                     |           |           | 1,500      |   |         |           | 7,400      |  
|                                                 | Purchase of property and equipment            |                                                                                 |                                            | (622,943    | )                   |           |           | (53,144    | ) |         |           | (4,479     | )
|                                                 | Increase in capitalized patents               |                                                                                 |                                            | (654,944    | )                   |           |           | (22,525    | ) |         |           | (43,181    | )
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|                                                 | Net cash used in investing activities         |                                                                                 |                                            | (1,268,997  | )                   |           |           | (74,169    | ) |         |           | (40,260    | )
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|Cash Flows from Financing Activities             |                                               |                                                                                 |                                            |             |                     |           |           |            |   |         |           |           
|                                                 | Cash received in reverse acquisition          |                                                                                 |                                            | 634,497     |                     |           |           |           |   |         |           |           |  
|                                                 | Proceeds from notes payable                   |                                                                                 |                                            | 3,089,894   |                     |           |           |           |   |         |           |           |  
|                                                 | Proceeds from notes payable  related party   |                                                                                 |                                            | 379,579     |                     |           |           |           |   |         |           |           |  
|                                                 | Repayments from notes payable  related party |                                                                                 |                                            | (163,154    | )                   |           |           |           |   |         |           |           |  
|                                                 | Issuance of stock and warrants for cash, net  |                                                                                 |                                            | 14,040,984  |                     |           |           | 3,817,074  |   |         |           | 2,392,976  |  
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|                                                 | Net cash provided by financing activities     |                                                                                 |                                            | 17,981,800  |                     |           |           | 3,817,074  |   |         |           | 2,392,976  |  
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|Net increase in cash and cash equivalents        |                                               |                                                                                 | 2,827,959                                  |             |                     |           | 919,931   |            |   |         | (162,878  | )         
|Cash and cash equivalents at beginning of period |                                               |                                                                                 |                                           |             |                     |           | 1,908,028 |            |   |         | 2,070,906 |           
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  
|Cash and cash equivalents at end of period       |                                               | $                                                                               | 2,827,959                                  |             |                     | $         | 2,827,959 |            |   | $       | 1,908,028 |           
|                                                 |                                               |                                                                                 |                                            |             |                     |           |           |            |  



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)





NOTES TO FINANCIAL STATEMENTS


for the Period from Inception (November 7, 1988) to
December 31, 2005




|        |                                           
|------- | ------------------------------------------
|Note 1. | Summary of Significant Accounting Policies

Description of Entity






Development Stage Activities












35



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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)








5-year








| |   |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 2001/2002 Warrants: (warrants to purchase shares of our
    common stock issued as part of the units described in our
    private placement memorandum dated May 2001) The Company offered
    to issue either (a) 0.82 shares for each warrant share
    tendered; or (b) 1.0 share for each warrant share
    tendered upon payment of $0.25 for each warrant share tendered.                                     
|
| |  | 2002/2003 Warrants: (warrants to purchase shares of our
    common stock issued as part of the units described in our
    private placement memorandum dated September 2002, and amended
    December 2002) The Company offered to issue either
    (a) 0.84 shares for each warrant share tendered; or
    (b) 1.0 share for each warrant share tendered upon
    payment of $0.25 for each warrant share tendered.
|
| |  | 2003 Warrants: (warrants to purchase shares of our common
    stock issued as part of the units described in our private
    placement memorandum dated November 2003) The Company offered to
    issue either (a) 0.37 shares for each warrant share
    tendered; or (b) 1.0 share for each warrant share
    tendered upon payment of $0.56 for each warrant share tendered.                                     
|
| |  | 2004 Warrants: (warrants to purchase shares of our common
    stock issued as part of the units described in our private
    placement memorandum dated March 2004) The Company offered to
    issue either (a) 0.60 shares for each warrant share
    tendered; or (b) 1.0 share for each warrant share
    tendered upon payment of $0.50 for each warrant share tendered.                                        



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)




5-year


5-year






Use of Estimates




Cash Equivalents




Property and Equipment




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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)


Intangibles






Impairment of Long-Lived Assets




Revenue Recognition




Research and Development




Income Taxes




Loss per Share




38



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                     |  |              |           |  |      |  |           | 
|-------------------- |  | ------------ | --------- |  | ---- |  | --------- | 
|                     |  | December 31, |          
|                     |  |              |          
|                     |  | 2005         |           |  | 2004 | 
|                     |  |              |           |  |      | 
|Outstanding options  |  |              | 2,592,000 |  |      |  | 2,426,166 | 
|Outstanding warrants |  |              | 2,580,744 |  |      |  | 7,952,369 | 

Fair Value of Financial Instruments




Stock-Based Compensation


96-18.




|                   |                                                                                                       |                         |   |            |      |  |   |            |  
|------------------ | ----------------------------------------------------------------------------------------------------- | ----------------------- | - | ---------- | ---- |  | - | ---------- | -
|                   |                                                                                                       | Year Ended December 31, |  
|                   |                                                                                                       |                         |  
|                   |                                                                                                       | 2005                    |   |            | 2004 | 
|                   |                                                                                                       |                         |   |            |      | 
|Net loss           |                                                                                                       |                         |   |            |      |  |   |           
|                   | As reported                                                                                           |                         | $ | (3,277,239 | )    |  | $ | (3,109,274 | )
|                   | Add: Stock-based employee compensation expense included in
    reported net loss                      |                         |   | 210,000    |      |  |   | 210,000    |  
|                   | Deduct: Stock-based employee compensation determined under fair
    value based method for all awards |                         |   | (724,898   | )    |  |   | (543,726   | )
|                   |                                                                                                       |                         |   |            |      | 
|                   | Pro forma net loss                                                                                    |                         | $ | (3,792,137 | )    |  | $ | (3,443,000 | )
|                   |                                                                                                       |                         |   |            |      | 
|Net loss per share |                                                                                                       |                         |   |            |      |  |   |           
|                   | As reported                                                                                           |                         | $ | (0.18      | )    |  | $ | (0.23      | )
|                   |                                                                                                       |                         |   |            |      | 
|                   | Pro forma net loss                                                                                    |                         | $ | (0.21      | )    |  | $ | (0.26      | )
|                   |                                                                                                       |                         |   |            |      | 



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                        |  |              |      |   |      |  |      |  
|----------------------- |  | ------------ | ---- | - | ---- |  | ---- | -
|                        |  | Year Ended   |     
|                        |  | December 31, |     
|                        |  |              |     
|                        |  | 2005         |      |   | 2004 | 
|                        |  |              |      |   |      | 
|Expected dividend yield |  |              | 0    | % |      |  | 0    | %
|Risk-free interest rate |  |              | 4.29 | % |      |  | 3.50 | %
|Expected volatility     |  |              | 100  | % |      |  | 110  | %
|Expected life in years  |  |              | 6.25 |   |      |  | 3.0  |  

Recently Issued Accounting Pronouncements






|        |              
|------- | -------------
|Note 2. | Notes Payable





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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)










|        |                               
|------- | ------------------------------
|Note 3. | Identifiable Intangible Assets



|                                    |  |      |           |   |      |   |           |  
|----------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                    |  | 2005 |           |   | 2004 |  
|                                    |  |      |           |   |      |  
|Antimicrobial technology            |  | $    | 222,187   |   |      | $ | 222,187   |  
|Licensing agreements                |  |      | 61,391    |   |      |   | 61,391    |  
|Patents pending and approved        |  |      | 834,301   |   |      |   | 811,776   |  
|                                    |  |      |           |   |      |  
|                                    |  |      | 1,117,879 |   |      |   | 1,095,354 |  
|Less accumulated amortization       |  |      | (527,638  | ) |      |   | (449,299  | )
|                                    |  |      |           |   |      |  
|Identifiable intangible assets, net |  | $    | 590,241   |   |      | $ | 646,055   |  
|                                    |  |      |           |   |      |  



|           |  |               |        |  |            |   |        |                 |  |   |         |  |  |   |         | 
|---------- |  | ------------- | ------ |  | ---------- | - | ------ | --------------- |  | - | ------- |  |  | - | ------- | 
|           |  | Antimicrobial |        |  | Licensing  |   |        | Patents Pending |  |   |        
|Year       |  | Technology    |        |  | Agreements |   |        | and Approved    |  |   | Total   | 
|           |  |               |        |  |            |   |        |                 |  |   |         | 
|2006       |  | $             | 11,109 |  |            | $ | 3,595  |                 |  | $ | 64,175  |  |  | $ | 78,879  | 
|2007       |  |               | 11,109 |  |            |   | 3,595  |                 |  |   | 64,175  |  |  |   | 78,879  | 
|2008       |  |               | 11,109 |  |            |   | 3,595  |                 |  |   | 64,175  |  |  |   | 78,879  | 
|2009       |  |               | 3,995  |  |            |   | 3,595  |                 |  |   | 64,175  |  |  |   | 71,765  | 
|2010       |  |               |       |  |            |   | 3,595  |                 |  |   | 64,175  |  |  |   | 67,770  | 
|Thereafter |  | $             |       |  |            | $ | 29,036 |                 |  | $ | 185,033 |  |  | $ | 214,069 | 



|        |                     
|------- | --------------------
|Note 4. | Stockholders Equity

Preferred Stock




Stock Split


1-for-500


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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)


Stockholder Rights Agreement




Options






|                             |           |                     |           |               |           |   |      |      | 
|---------------------------- | --------- | ------------------- | --------- | ------------- | --------- | - | ---- | ---- | 
|                             |           | Options Outstanding |          
|                             |           |                     |          
|                             |           |                     |           | Weighted      |          
|                             |           |                     |           | Avg. Exercise |          
|                             |           | Number of           |           |               | Price Per |  
|                             |           | Shares              |           |               | Share     |  
|                             |           |                     |           |               |           |  
|Balance at December 31, 2003 |           |                     | 1,777,000 |               |           | $ | 1.15 |     
|                             | Granted   |                     |           | 810,000       |           |   | $    | 1.80 | 
|                             | Exercised |                     |           |              |           |   |      |     | 
|                             | Canceled  |                     |           | (160,834      | )         |   | $    | 1.39 | 
|                             |           |                     |           |               |           |  
|Balance at December 31, 2004 |           |                     | 2,426,166 |               |           | $ | 1.35 |     
|                             | Granted   |                     |           | 245,000       |           |   | $    | 1.66 | 
|                             | Exercised |                     |           |              |           |   |      |     | 
|                             | Cancelled |                     |           | (79,166       | )         |   | $    | 1.38 | 
|                             |           |                     |           |               |           |  
|Balance at December 31, 2005 |           |                     | 2,592,000 |               |           | $ | 1.38 |     
|                             |           |                     |           |               |           |  

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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)




|                         |  |             |           |                     |             |  |                     |                |  |   |             |               |  |                |           |  |  |   |      | 
|------------------------ |  | ----------- | --------- | ------------------- | ----------- |  | ------------------- | -------------- |  | - | ----------- | ------------- |  | -------------- | --------- |  |  | - | ---- | 
|                         |  |             |           | Options Outstanding |             |  | Options Exercisable |               
|                         |  |             |           |                     |             |  |                     |               
|                         |  |             |           | Weighted Avg.       |             |  | Weighted Avg.       |                |  |   |             | Weighted Avg. | 
|                         |  | Number      |           |                     | Contractual |  |                     | Exercise Price |  |   | Number      |               |  | Exercise Price |          
|Exercise Price Per Share |  | Outstanding |           |                     | Term        |  |                     | Per Share      |  |   | Exercisable |               |  | Per Share      |          
|                         |  |             |           |                     |             |  |                     |                |  |   |             |               |  |                |          
|$0.70                    |  |             | 165,500   |                     |             |  | 4.59 years          |                |  | $ | 0.70        |               |  |                | 165,500   |  |  | $ | 0.70 | 
|$1.00                    |  |             | 899,000   |                     |             |  | 6.50 years          |                |  | $ | 1.00        |               |  |                | 731,000   |  |  | $ | 1.00 | 
|$1.48-$1.50              |  |             | 668,750   |                     |             |  | 6.53 years          |                |  | $ | 1.50        |               |  |                | 618,750   |  |  | $ | 1.50 | 
|$1.65-$2.00              |  |             | 858,750   |                     |             |  | 7.53 years          |                |  | $ | 1.81        |               |  |                | 538,885   |  |  | $ | 1.81 | 
|                         |  |             |           |                     |             |  |                     |                |  |   |             |               |  |                |          
|Total                    |  |             | 2,592,000 |                     |             |  | 6.73 years          |                |  | $ | 1.38        |               |  |                | 2,054,135 |  |  | $ | 1.34 | 
|                         |  |             |           |                     |             |  |                     |                |  |   |             |               |  |                |          



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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)


Common Stock Purchase Warrants




|                                                                                 |                                        |              |           |            |             |   |            |      |        |   |        |      |  |             |           |            |      |   |            |            |  |   |      |      | 
|-------------------------------------------------------------------------------- | -------------------------------------- | ------------ | --------- | ---------- | ----------- | - | ---------- | ---- | ------ | - | ------ | ---- |  | ----------- | --------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---- | ---- | 
|                                                                                 |                                        | December 31, |          
|                                                                                 |                                        |              |          
|                                                                                 |                                        | 2005         |           |            | 2004        |  
|                                                                                 |                                        |              |           |            |             |  
|                                                                                 |                                        |              |           | Wghtd.     |             |   |            |      | Wghtd. |  
|                                                                                 |                                        | Number       |           |            | Price range |   |            | Avg. |        |   | Number |      |  | Price range |           |            | Avg. |  
|                                                                                 |                                        |              |           |            |             |   |            |      |        |   |        |      |  |             |           |            |      |  
|Warrants issued to employees and non-employees for services                      |                                        |              | 1,723,669 |            |             | $ | 0.25-$6.00 |      |        | $ | 1.54   |      |  |             | 2,087,954 |            |      | $ | 0.25-$6.00 |            |  | $ | 1.54 |     
|                                                                                 | Exercised                              |              |           | (10,000    | )           |   | $          | 1.00 |        |   | $      | 1.00 |  |             |           | (60,000    | )    |   | $          | 0.25       |  |   | $    | 0.25 | 
|                                                                                 | Expired/Cancelled                      |              |           |           |             |   |            |     |        |   |        |     |  |             |           | (304,285   | )    |   | $          | 1.00-$1.50 |  |   | $    | 1.34 | 
|Remaining warrants issued in connection with 1999 equity
    financing           |                                        |              |          |            |             |   |           |      |        |   |       |      |  |             | 2,890,643 |            |      | $ | 3.25       |            |  | $ | 3.25 |     
|                                                                                 | Expired 2004                           |              |           |           |             |   |            |     |        |   |        |     |  |             |           | (477,543   | )    |   | $          | 3.25       |  |   | $    | 3.25 | 
|                                                                                 | Exchanged                              |              |           |           |             |   |            |     |        |   |        |     |  |             |           | (2,413,100 | )    |   | $          | 2.25       |  |   | $    | 2.25 | 
|Remaining warrants issued in connection with 2003 warrant
    exchange           |                                        |              | 2,413,100 |            |             | $ | 2.25       |      |        | $ | 2.25   |      |  |             | 2,413,100 |            |      | $ | 2.25       |            |  | $ | 2.25 |     
|                                                                                 | Exchanged in the 2005 Warrant Exchange |              |           | (2,266,850 | )           |   | $          | 2.25 |        |   | $      | 2.25 |  |             |           |            |      |   |            |            |  |   |      |      | 
|Remaining warrants issued in connection with 2001 convertible
    debt financing |                                        |              | 1,153,000 |            |             | $ | 1.00       |      |        | $ | 1.00   |      |  |             | 1,153,000 |            |      | $ | 1.00       |            |  | $ | 1.00 |     
|                                                                                 | Exchanged in the 2005 Warrant Exchange |              |           | (845,000   | )           |   | $          | 1.00 |        |   | $      | 1.00 |  |             |           |            |      |   |            |            |  |   |      |      | 
|Remaining warrants issued in connection with 2002 and 2003
    equity financings |                                        |              | 2,248,200 |            |             | $ | 1.00       |      |        | $ | 1.00   |      |  |             | 2,248,200 |            |      | $ | 1.00       |            |  | $ | 1.00 |     
|                                                                                 | Exercised                              |              |           | (12,000    | )           |   | $          | 1.00 |        |   | $      | 1.00 |  |             |           |            |      |   |            |            |  |   |      |      | 
|                                                                                 | Exchanged in the 2005 Warrant Exchange |              |           | (1,977,600 | )           |   | $          | 1.00 |        |   | $      | 1.00 |  |             |           |            |      |   |            |            |  |   |      |      | 
|Warrants issued in connection with 2004 equity financing                         |                                        |              | 414,400   |            |             | $ | 2.00       |      |        | $ | 2.00   |      |  |             | 414,400   |            |      | $ | 2.00       |            |  | $ | 2.00 |     
|                                                                                 | Exchanged in the 2005 Warrant Exchange |              |           | (385,175   | )           |   | $          | 2.00 |        |   | $      | 2.00 |  |             |           |            |      |   |            |            |  |   |      |      | 
|Warrants issued in connection with 2005 equity financing                         |                                        |              | 125,000   |            |             | $ | 1.50       |      |        | $ | 1.50   |      |  |             |           |            |      |   |            |            |  |   |      |     
|                                                                                 |                                        |              |           |            |             |   |            |      |        |   |        |      |  |             |           |            |      |  
|Total outstanding warrants                                                       |                                        |              | 2,580,744 |            |             | $ | 0.25-$6.00 |      |        | $ | 1.47   |      |  |             | 7,952,369 |            |      | $ | 0.25-$6.00 |            |  | $ | 1.55 |     
|                                                                                 |                                        |              |           |            |             |   |            |      |        |   |        |      |  |             |           |            |      |  

Stock Offerings




44



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)






5-year






5-year


5-year


401(k) Plan




Employee Equity Compensation Costs




Stockholders Equity and Comprehensive Income




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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)






|        |             
|------- | ------------
|Note 5. | Income Taxes



|                                         |                                   |      |           |            |      |   |           |            |  
|---------------------------------------- | --------------------------------- | ---- | --------- | ---------- | ---- | - | --------- | ---------- | -
|                                         |                                   | 2005 |           |            | 2004 |  
|                                         |                                   |      |           |            |      |  
|Gross deferred tax assets (liabilities): |                                   |      |           |            |      |   |           |           
|                                         | Net operating loss carry forwards |      | $         | 5,109,400  |      |   | $         | 4,194,800  |  
|                                         | Research and development credits  |      |           | 97,400     |      |   |           | 116,200    |  
|                                         | Stock compensation                |      |           | 669,300    |      |   |           | 567,800    |  
|                                         | Accrued expenses                  |      |           | 14,700     |      |   |           | 21,400     |  
|                                         |                                   |      |           |            |      |  
|Gross deferred tax assets                |                                   |      | 5,890,800 |            |      |   | 4,900,200 |           
|                                         | Less valuation allowance          |      |           | (5,877,400 | )    |   |           | (4,873,000 | )
|                                         |                                   |      |           |            |      |  
|Net deferred tax assets                  |                                   |      | 13,400    |            |      |   | 27,200    |           
|Deferred tax liabilities                 |                                   |      |           |            |      |   |           |           
|                                         | Fixed and Intangible Assets       |      |           | (13,400    | )    |   |           | (27,200    | )
|                                         |                                   |      |           |            |      |  
|Net deferred tax assets/liabilities      |                                   | $    |          |            |      | $ |          |           
|                                         |                                   |      |           |            |      |  







|        |                           
|------- | --------------------------
|Note 6. | Related Party Transactions





|    |                                    
|--- | -----------------------------------
|(a) | With University of British Columbia



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)






|    |                               
|--- | ------------------------------
|(b) | With Katz-Miller Ventures, LLC





|    |                                          
|--- | -----------------------------------------
|(c) | With Dunsford Hill Capital Partners, Inc.



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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)






|    |                        
|--- | -----------------------
|(d) | With Paisley Group, LLC





|    |                                
|--- | -------------------------------
|(e) | With Robert E.W. Hancock, Ph.D.





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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)






|    |                
|--- | ---------------
|(f) | With Ralph Katz







|    |                      
|--- | ---------------------
|(g) | Employment Agreements





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HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)










|        |                                                 
|------- | ------------------------------------------------
|Note 7. | Supplemental Disclosure of Cash Flow Information

|                                                  |  |              |           |  |              |  |   |      |  |   |        | 
|------------------------------------------------- |  | ------------ | --------- |  | ------------ |  | - | ---- |  | - | ------ | 
|                                                  |  | Inception    |           |  |              |  |  
|                                                  |  | (November 7, |           |  |             
|                                                  |  | 1988) to     |           |  | Years Ended  | 
|                                                  |  | December 31, |           |  | December 31, | 
|                                                  |  |              |           |  |              | 
|                                                  |  | 2005         |           |  | 2005         |  |   | 2004 | 
|                                                  |  |              |           |  |              |  |   |      | 
|Deferred stock compensation                       |  | $            | 525,000   |  |              |  |  |      |  | $ |       | 
|Stock issued to acquire patents                   |  |              | 66,486    |  |              |  |  |      |  |   |       | 
|Debt issued to acquire technology                 |  |              | 200,000   |  |              |  |  |      |  |   |       | 
|Bridge loans outstanding at acquisition           |  |              | 200,000   |  |              |  |  |      |  |   |       | 
|Patent costs included in accounts payable         |  |              | 99,859    |  |              |  |  |      |  |   |       | 
|Accounts payable converted to notes               |  |              | 704,559   |  |              |  |  |      |  |   |       | 
|Accrued interest converted to notes               |  |              | 403,453   |  |              |  |  |      |  |   |       | 
|Notes converted to equity                         |  |              | 4,722,048 |  |              |  |  |      |  |   |       | 
|Accrued interest converted to equity              |  |              | 231,180   |  |              |  |  |      |  |   |       | 
|Detachable warrants issued with notes payable     |  |              | 728,552   |  |              |  |  |      |  |   |       | 
|Issuance of stock for services provided           |  |              | 14,400    |  |              |  |  |      |  |   |       | 
|Purchase of property included in accrued expenses |  |              | 224,458   |  |              |  |  |      |  |   |       | 
|Stock subscription receivable                     |  |              | 135,000   |  |              |  |  |      |  |   |       | 
|Cash paid for interest                            |  |              | 105,430   |  |              |  |  |      |  |   |       | 
|Accounts receivable from sale of equipment        |  |              | 10,200    |  |              |  |  |      |  |   | 10,200 | 

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##### Table of Contents



HELIX BIOMEDIX, INC.


(A DEVELOPMENT STAGE COMPANY)


NOTES TO FINANCIAL STATEMENTS  (Continued)




|        |                 
|------- | ----------------
|Note 8. | Long Term Leases





|        |                  
|------- | -----------------
|Note 9. | License Agreement



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##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE








|         |                        
|-------- | -----------------------
|ITEM 8A. | CONTROLS AND PROCEDURES

13a-15.









|         |                  
|-------- | -----------------
|ITEM 8B. | OTHER INFORMATION






PART III







|        |                                                                                                                        
|------- | -----------------------------------------------------------------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
    PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
    ACT










|         |                       
|-------- | ----------------------
|ITEM 10. | EXECUTIVE COMPENSATION








|         |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS



52



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##### Table of Contents



Securities Authorized For Issuance Under Equity Compensation
Plans




|                                                              |       |                            |           |                  |                   |                      |                                |                          |  |  |           |           | 
|------------------------------------------------------------- | ----- | -------------------------- | --------- | ---------------- | ----------------- | -------------------- | ------------------------------ | ------------------------ |  |  | --------- | --------- | 
|                                                              |       |                            |           |                  |                   | Number of Securities |                               
|                                                              |       |                            |           | Weighted-average |                   |                      | Remaining Available for Future |                         
|                                                              |       | Number of Securities to Be |           |                  | Exercise Price of |                      |                                | Issuance under Equity    | 
|                                                              |       | Issued Upon Exercise of    |           |                  | Outstanding       |                      |                                | Compensation Plans       | 
|                                                              |       | Outstanding Options,       |           |                  | Options, Warrants |                      |                                | (Excluding Securities    | 
|                                                              |       | Warrants and Rights        |           |                  | and Rights        |                      |                                | Reflected in Column (a)) | 
|                                                              |       |                            |           |                  |                   |                      |                                |                          | 
|Equity compensation plans approved by security holders        |       |                            | 2,592,000 |                  |                   | $                    | 1.38                           |                          |  |  | 2,763,000 |          
|Equity compensation plans not approved by security holders(1) |       |                            | 2,580,744 |                  |                   | $                    | 1.47                           |                          |  |  |          |          
|                                                              |       |                            |           |                  |                   |                      |                                |                          | 
|                                                              | Total |                            |           | 5,172,744        |                   |                      | $                              | 1.42                     |  |  |           | 2,763,000 | 
|                                                              |       |                            |           |                  |                   |                      |                                |                          | 






|    |                                                                                                                                                                                                                
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Consists of warrants to purchase common stock issued to certain
    employees and consultants in connection with services rendered
    and to certain shareholders in connection with financing
    activities.






|         |                                               
|-------- | ----------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS








|         |         
|-------- | --------
|ITEM 13. | EXHIBITS

|        |    |                          |  |                                                                                                                                                                                                                                                                  
|------- | -- | ------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                         
|No.     |    | Description and Location
|        |    |                         
|        | 2  | .1                       |  | Proposal for Approval of Reincorporation of Helix BioMedix,
    Inc., a Colorado corporation, from Colorado to Delaware
    (incorporated by reference from Exhibit 2 to the
    Companys Form 10-KSB for the year ended
    December 31, 2000)                 
|        | 3  | .1                       |  | Certificate of Ownership and Merger of Helix BioMedix, Inc. a
    Delaware corporation and Helix BioMedix, Inc., a Louisiana
    corporation (incorporated by reference from Exhibit 2 to
    the Companys Form 10-KSB for the year ended
    December 31, 2000)
|        | 3  | .2                       |  | Certificate of Incorporation of Helix BioMedix, Inc.
    (incorporated by reference from Exhibit 3-a to the
    Companys Form 10-KSB for the year ended
    December 31, 2000)                                                                                  
|        | 3  | .3                       |  | Certificate of Amendment to the Certificate of Incorporation of
    Helix BioMedix, Inc. (incorporated by reference from
    Exhibit 3.3 to the Companys Form 10-KSB/A for
    the year ended December 31, 2002)                                                
|        | 3  | .4                       |  | Bylaws of Helix BioMedix, Inc. (incorporated by reference from
    Exhibit 3-b to the Companys Form 10-KSB for the
    year ended December 31, 2000)                                                                                                            
|        | 10 | .1                       |  | R. Stephen Beatty Employment Agreement dated July 1, 2001
    (incorporated by reference from Exhibit 10.1 to the
    Companys Form 10-KSB for the year ended
    December 31, 2001)                                                                            
|        | 10 | .2                       |  | Tim Falla Employment Agreement dated June 15, 2001
    (incorporated by reference from Exhibit 10.3 to the
    Companys Form 10-KSB for the year ended
    December 31, 2001)                                                                                   
|        | 10 | .3                       |  | Helix BioMedix, Inc. Amended and Restated 2000 Stock Option Plan
    (incorporated by reference from Exhibit 10.3 to the
    Companys Form 10-KSB/A for the year ended
    December 31, 2002)                                                                   
|        | 10 | .4                       |  | Employment Agreement dated September 24, 2003, effective
    July 1, 2003, between the Company and Tim Falla
    (incorporated by reference from Exhibit 10.8 to the
    Companys Form 10-KSB for the year ended
    December 31, 2003)                         

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##### Table of Contents



|        |    |                          |  |                                                                                                                                                                                                                                                                 
|------- | -- | ------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                         
|No.     |    | Description and Location
|        |    |                         
|        | 10 | .5                       |  | Employment Agreement dated September 24, 2003, effective
    July 1, 2003, between the Company and R. Stephen Beatty
    (incorporated by reference from Exhibit 10.9 to the
    Companys Form 10-KSB for the year ended
    December 31, 2003)                
|        | 10 | .6                       |  | Letter Agreement dated May 19, 2003 between the Company and
    Parker Sroufe (incorporated by reference from Exhibit 10.10
    to the Companys Form 10-KSB for the year ended
    December 31, 2003)                                                          
|        | 10 | .7                       |  | Separation Agreement and Release dated November 26, 2003
    between the Company and Kerry Palmer (incorporated by reference
    from Exhibit 10.11 to the Companys Form 10-KSB
    for the year ended December 31, 2003)                                      
|        | 10 | .8                       |  | Amendment to Employment Agreement dated December 10, 2003
    between the Company and Timothy Falla (incorporated by reference
    from Exhibit 10.12 to the Companys Form 10-KSB
    for the year ended December 31, 2003)                                    
|        | 10 | .9                       |  | Amendment to Employment Agreement dated December 10, 2003
    between the Company and R. Stephen Beatty (incorporated by
    reference from Exhibit 10.12 to the Companys
    Form 10-KSB for the year ended December 31, 2003)                                
|        | 10 | .10                      |  | Employment Agreement between David H. Kirske dated July 2,
    2004 (incorporated by reference from Exhibit 10.1 to the
    Companys Form 10-QSB for the fiscal quarter ended
    September 30, 2004)                                                          
|        | 10 | .11                      |  | Employment Agreement between David Drajeske dated August 12
    (incorporated by reference from Exhibit 10.2 to the
    Companys Form 10-QSB for the fiscal quarter ended
    September 30, 2004)                                                              
|        | 10 | .12                      |  | TPI Licensing Agreement dated September 5, 2001
    (incorporated by reference from Exhibit 10.4 to the
    Companys Form 10-KSB for the year ended
    December 31, 2001)                                                                                     
|        | 10 | .13                      |  | University of British Columbia License Agreement dated
    October 1, 2001 (incorporated by reference from
    Exhibit 10.5 to the Companys Form 10-KSB for the
    year ended December 31, 2001)                                                              
|        | 10 | .14                      |  | Amended and Restated Consulting Agreement between the Company
    and Dunsford Hill Capital Partners dated May 30, 2001
    (incorporated by reference from Exhibit 10.7 to the
    Companys Form 10-KSB for the year ended
    December 31, 2001)             
|        | 10 | .15                      |  | Second Amended and Restated Consulting Agreement between the
    Company and Dunsford Hill Capital Partners dated August 15,
    2002 (incorporated by reference from Exhibit 10.13 to the
    Companys Form 10-KSB/A for the year ended
    December 31, 2002)
|        | 10 | .16                      |  | Hancock Consulting Agreement dated June 18, 2001
    (incorporated by reference from Exhibit 10.9 to the
    Companys Form 10-KSB for the year ended
    December 31, 2001)                                                                                    
|        | 10 | .17                      |  | Lease between the Company and Teachers Insurance &
    Annuity Association of America, Inc. dated August 14, 2001
    (incorporated by reference from Exhibit 10.11 to the
    Companys Form 10-KSB for the year ended
    December 31, 2001)                  
|        | 10 | .17(a)                   |  | First Amendment to Lease between the Company and Teachers
    Insurance and Annuity Association of America, Inc. dated
    December 6, 2005                                                                                                                     
|        | 10 | .18                      |  | Rights Agreement dated August 21, 2003 (incorporated by
    reference from Exhibit 10.27 to the Companys
    Form 10-KSB for the year ended December 31, 2003)                                                                                                 
|        | 10 | .19                      |  | Acceptance and Acknowledgement of Appointment dated
    January 4, 2004 (incorporated by reference from
    Exhibit 10.28 to the Companys Form 10-KSB for
    the year ended December 31, 2003)                                                                
|        | 10 | .20                      |  | License Agreement between the Company and E.I. du Pont de
    Nemours dated March 9, 2004 (incorporated by reference from
    Exhibit 99.1 to the Companys Form 8-K dated
    March 16, 2004)                                                                  
|        | 10 | .21*                     |  | Joint Marketing Agreement between the Company and Body Blue Inc.
    dated November 2, 2004 (incorporated by reference from
    Exhibit 10.21 to the Companys Form 10-KSB for
    the year ended December 31, 2004)                                            

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##### Table of Contents



|        |    |                          |  |                                                                                                                                                               
|------- | -- | ------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |                         
|No.     |    | Description and Location
|        |    |                         
|        | 10 | .21(a)*                  |  | First Amendment to Joint Marketing Agreement between the Company
    and Body Blue Inc. dated February 13, 2006                                               
|        | 14 | .0                       |  | Code of Ethics adopted August 11, 2003 (incorporated by
    reference from Exhibit 14.0 to the Companys
    Form 10-KSB for the year ended December 31, 2003)
|        | 31 | .1                       |  | Certification of the Companys Chief Executive Officer
    Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
    Securities Exchange Act of 1934            
|        | 31 | .2                       |  | Certification of the Companys Chief Financial Officer
    Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the
    Securities Exchange Act of 1934            
|        | 32 | .1                       |  | Certification of the Companys Chief Executive Officer
    Pursuant to 18 U.S.C. Section 1350                                                                 
|        | 32 | .2                       |  | Certification of the Companys Chief Financial Officer
    Pursuant to 18 U.S.C. Section 1350                                                                 






|  |                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Confidential treatment has been requested for confidential
    commercial and financial information, pursuant to
    Rule 24b-2 under
    the Securities Exchange Act of 1934, as amended.






|         |                                       
|-------- | --------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES



55



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##### Table of Contents



SIGNATURES




|                                                                                                                |  |                                                                                                                                                        
|--------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|HELIX BIOMEDIX, INC.
    (Registrant)                                                                           |  |                                                                                                                                                        
|                                                                                                               
|                                                                                                               
|By: /s/ R. Stephen BeattyR. Stephen BeattyPresident, Chief Executive Officer
     (Principal Executive Officer) |  | By: /s/ David H. KirskeDavid H. KirskeVice President and Chief Financial Officer
    (Principal Financial Officer and Principal Accounting
    Officer)
|                                                                                                               
|Date: March 27, 2006                                                                                            |  | Date: March 27, 2006                                                                                                                                   

POWER OF ATTORNEY


attorney-in




|                                                           |  |                                                 |  |                |  | 
|---------------------------------------------------------- |  | ----------------------------------------------- |  | -------------- |  | 
|Signature                                                  |  | Title                                           |  | Date          
|                                                           |  |                                                 |  |               
|                                                          
|/s/ R. STEPHEN BEATTYR. Stephen Beatty                     |  | President, Chief Executive Officer and Director |  | March 27, 2006
|                                                          
|/s/ RANDALL L-W. CAUDILL, Ph.D.Randall L-W. Caudill, Ph.D. |  | Director                                        |  | March 27, 2006
|                                                          
|/s/ RICHARD M. COHENRichard M. Cohen                       |  | Director                                        |  | March 27, 2006
|                                                          
|/s/ JOHN C. FIDDES, PH.D.John C. Fiddes, Ph.D.             |  | Director                                        |  | March 27, 2006
|                                                          
|/s/ JEFFREY A. MILLER, PH.D.Jeffrey A. Miller, Ph.D.       |  | Director                                        |  | March 27, 2006
|                                                          
|/s/ GEORGE A. MURRAYGeorge A. Murray                       |  | Director                                        |  | March 27, 2006
|                                                          
|/s/ BARRY L. SEIDMANBarry L. Seidman                       |  | Director                                        |  | March 27, 2006
|                                                          
|/s/ DANIEL O. WILDSDaniel O. Wilds                         |  | Director                                        |  | March 27, 2006

56