Table of Contents





UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
  AMENDMENT
NO. 1 ON FORM 10-K/A
 
 (Mark One)x
                          ANNUAL
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the fiscal year ended December 31, 2008
                            or ̈
                          TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _______________to _________________
                            
                            Commission
      file number:
000–20985
  CALYPTE
BIOMEDICAL CORPORATION
 (Name
of small business issuer in its charter)
  DELAWARE
                
                06-1226727(State
      or other jurisdiction of
                  incorporation
      or organization)
                
                (I.R.S.
      Employer
                  Identification
      Number)16290
      S.W. Upper Boones Ferry Road,  Portland, OR
                
                97224(Address
      of principal executive offices)
                
                (Zip
      Code)
  Issuer’s
Telephone Number: (503) 726-2227
  Securities
registered under Section 12(b) of the Exchange Act:
  None
  Securities
registered under Section 12(g) of the Exchange Act:
  Common
Stock, $.03 par value per share
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes o  No  x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Exchange Act.  Yes o  No  x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.  Yes  x  No o
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Sec. 229.405 of this chapter) is not contained in this form and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.   o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, a
non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2
of the Exchange Act).
 Large
accelerated filer  o                                                                                                           Accelerated
Filer  o
 Non-accelerated
filer    o  (Do not
check if a smaller reporting
company)                        Smaller
reporting company  x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o  No  x
 
 The
aggregate market value of the voting and non-voting common equity held by
non–affiliates of the registrant as of June 30, 2008 was approximately
$17,250,00 based on the $0.056 per share closing price reported for such date on
the NASD Over the Counter Bulletin Board.
 
 The number ofsharesof the registrant’s common stock
outstandingas ofApril 20, 2009 was
439,354,624.
 
 EXPLANATORY
NOTE
  This
Amendment No. 1 on Form 10-K/A ("Amendment No. 1") to our Annual Report on Form
10-K for the year ended December 31, 2008, filed with the Securities and
Exchange Commission on April 27, 2009 (the "Original Filing"), only amends and
restates Item 9A of Part II of the Original Filing to include our
management’s conclusion regarding the effectiveness of our internal control over
financial reporting as of the end of the period covered by the Original
Filing.  No other information in the Original Filing is amended
hereby.  The foregoing item has not been updated to reflect other
events occurring after the initial Original Filing or to modify or update
disclosures affected by subsequent events.  In addition, the exhibit
list in Item 15 of Part IV has not been updated except to reflect that
an updated consent of our independent registered public accounting firm and
currently dated certifications from our Chief Executive Officer and Chief
Financial Officer, as required by Sections 302 and 906 of the
Sarbanes-Oxley Act of 2002, are filed with this Amendment No. 1 as Exhibits
23.1, 31.1 and 32.1.
 
 While
the remainder of the Original Filing is unchanged, this Amendment No. 1 is
an amendment and restatement of the Original Filing in its entirety in
order to provide a complete presentation.
  Except
as stated herein, this Amendment No. 1 does not reflect events occurring after
the date of the filing of the Original Filing.
   CALYPTEBIOMEDICAL CORPORATION
 FORM
10-K
 INDEX
  Page
      No.PART I.Item 1.
                                        Business
                                        
                                        1Item 1A.
                                        Risk
      Factors
                                        
                                        12Item 2.
                                        Properties
                                        
                                        25Item 3.
                                        Legal
      Proceedings
                                        
                                        26Item 4.
                                        Submission of
      Matters to a Vote of Security Holders
                                        
                                        26PART
      II.Item 5.
                                        Market for the
      Registrant’s Common Equity and Related Stockholder
      Matters
                                        
                                        28Item 7.
                                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                        
                                        28Item 8.
                                        Financial
      Statements and Supplementary Data
                                        
                                        40Item 9.
                                        Changes in and
      Disagreements with Accountants on Accounting and Financial
      Disclosure
                                        
                                        40Item 9A
                                        Controls and
      Procedures
                                        
                                        40PART
      III.Item 10.
                                        Directors,
      Executive Officers and Corporate Governance
                                        
                                        43Item 11.
                                        Executive
      Compensation
                                        
                                        45Item 12.
                                        Security
      Ownership of Certain Beneficial Owners and Managementand Related Stockholder
      Matters
                                        
                                        48Item 13.
                                        Certain
      Relationships and Related Transactions, and Director
      Independence
                                        
                                        50Item 14.
                                        Principal Accountant Fees and
      Services
                                        
                                        51PART
      IV.Item 15.
                                        Exhibits, Financial Statement
      Schedules
                                        
                                        52Signatures
                                        
                                        S-1Certifications
                                        
                                        IV-1
  
 Table of Contents
 
 PART
I
  Item1. Business.
 
 Recent
Developments
 
 As of
April 3, 2009, we are in default under the 2005 Credit Facility, as amended (the
“Credit Facility”), between us and Marr Technologies BV (“Marr”), our largest
stockholder, holding approximately 17% of our outstanding capital stock as of
April 20, 2009, and joint venture partner in the People’s Republic of China
(“China’), and under our Secured 8% Convertible Promissory Notes, as amended
(the “Convertible Notes”), issued to three note holders, one of whom is Marr,
pursuant to a Purchase Agreement dated April 4, 2005.  At maturity, we
owe an aggregate of $5,015,000 under the Credit Facility and $5,968,000 under
the Convertible Notes.
 
 We are
currently discussing termination, reduction or restructuring of our debt
obligations under the Credit Facility and the Convertible Notes with each of the
secured creditors. There can be no assurance that acceptable terms, or any
terms, will be reached between us and any of the creditors.  These
defaults, coupled with our significant working capital deficit and limited cash
resources, put us in significant financial jeopardy and place a high degree of
doubt on our ability to continue our operations.
 
 In light
of our existing operations and financial challenges, we are exploring strategic
and financing options in conjunction with our ongoing discussions with these
secured creditors to terminate, reduce or restructure our debt
obligations.  Failure to obtain additional financing and to resolve
the existing defaults with respect to the Credit Facility and the Convertible
Notes will likely cause us to seek bankruptcy protection under Chapter 7 of
Title 11 of the United States Code, 11 U.S.C. § 101 et seq., which would
have a material adverse effect on our business, on our ability to continue our
operations and on the value of our equity.
 
 Business
Development
 
 Calypte
Biomedical Corporation was incorporated in California in 1989 and reincorporated
in Delaware in 1996 in connection with our initial public offering.
 
 We
develop, manufacture, and distribute in vitro diagnostic tests,
primarily for the diagnosis of Human Immunodeficiency Virus (“HIV”) infection.
Up until late 2005, we manufactured and marketed urine-based HIV-1 diagnostic
screening tests and urine and serum-based Western Blot supplemental (sometimes
called “confirmatory”) tests for use in high-volume laboratories, which we
called our “Legacy Business.”  In November 2005, we sold our Legacy
Business and began to concentrate primarily on our rapid test platform products
which we began developing in 2003.  Our emphasis has been the
development and commercialization of our AwareTM HIV-1/2
rapid tests.  In 2007, we completed field trials and product
evaluations of our AwareTM HIV-1/2
OMT (oral fluid) rapid test covering an aggregate of over 8,000 samples in
China, India, South Africa and elsewhere and believe that the results of these
studies and evaluations have validated the test.  In our studies,
AwareTM HIV-1/2
OMT averaged 99.7% accuracy.  We have obtained regulatory approvals in
a number of key countries in Africa, Southeast Asia, the Middle East, Russia,
India and China, and we expect to expand our market reach on a steady
basis.  Sales of our rapid test products have continued to increase at
a slow, but steady, pace primarily through the efforts of our distributors in
South Africa and the United Arab Emirates (“U.A.E”).
  In
November 2003, we became the 51% owner of a joint venture, Beijing Calypte
Biomedical Technology Ltd. (“Beijing Calypte”), created to market our rapid test
products in China.  The remaining 49% of the joint venture is owned by
Marr Technologies Limited, an affiliate of Marr.  Through 2008, the
operations of Beijing Calypte were primarily organizational and financially
insignificant.
 
 In
January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceuticals Co.,
Ltd. (“Beijing Marr”).  We purchased our equity interest from Marr
Technologies Asia Limited (“Marr Asia”), an affiliate of Marr, which owns the
remaining 49% interest of Beijing Marr.  In 2008, Beijing Marr
obtained the necessary governmental approvals to manufacture, market, distribute
and sell our AwareTM HIV-1/2 OMT test and has begun to manufacture and market the
test. The Beijing Marr manufacturing facility has its ISO 13485:2003
qualification.  This facility has the capability to manufacture our
products for sale in China and for export to other
countries.  Obtaining these governmental approvals opened the door to
sales in China, it also opened the door to sales in countries that only permit
import of products that have governmental approval in the country of
manufacture.
 
 1
 Table of Contents
 Since
late 2004, we have been manufacturing and selling an HIV-1 BED Incidence EIA
test, our AwareTM BED Incidence Test, through an arrangement with the U. S.
Centers for Disease Control and Prevention (the “CDC”).
 
 In the
first quarter of 2008, we introduced AwareMessengerTM, our
oral fluid sample collection device.  Although we do not currently
have approval to sell this device for diagnostic purposes, we can sell it for
“research use only” in situations where assay developers and test laboratories
can qualify the product for use with their own assays.
 
 In the
second quarter of 2008, we launched a range of Life Sciences products, including
AwareMessengerTM, as
well as a number of recombinant proteins and specialty assay reagents, which we
marketed through a web-portal at www.calyptelifesciences.com
and a printed catalogue.  Late in the fourth quarter of 2008, we
suspended marketing and sales of our Life Sciences products as a result of our
operations and financial problems.
 
 General,
Requirements of Additional Capital and Business Plan
 
 The
development of our business took a steep downturn in the fourth quarter of 2008,
when our expected sources of financing dried up or failed to
materialize.  Marr, which had previously indicated its commitment to
continue funding our operations, advised us that it would no longer finance
us.  We no longer had access to our equity line (the “Equity Line”)
with Fusion Capital Fund II, LLC (“Fusion Capital”), as our stock price was well
below the floor threshold price of the Equity Line.  Warrant holders
did not exercise additional warrants and, as our stock price was below its par
value, we could not induce them to exercise their warrants by offering to lower
the exercise price to an “in the money” price.
 
 Since
that time, we have had to divert our focus from the commercialization of our
AwareTM HIV-1/2
rapid tests and the research and development of our other rapid oral test
products and focus on scaling down operations in order to continue our business
while attempting to restructure our business plan.  In the fourth
quarter of 2008, we substantially reduced our workforce in order to conserve
cash and continue our day-to-day operations at a minimal level. We have been
focused on restructuring our operations, looking for financing and terminating
or reducing our debt, with the hope that we will be able to continue as a going
concern and once again focus on commercializing our current products and
resuming the research and development of our other products.  We have
maintained a minimum staff in order to continue sales of our products to our
existing and new clients so that we do not lose the momentum we have gained over
the last few years.  While most of our marketing efforts have ceased,
we have continued our market efforts in certain places where to cease such
efforts would almost certainly cause us to lose ground.
 
 We have
taken steps to address our requirements for financial liquidity and have
developed a business plan that we believe will provide us sufficient financial
resources to conduct our business during 2009.  This business plan
includes negotiating with our secured creditors to terminate, reduce or convert
their debt into equity, negotiating with other creditors to reduce their debt,
raising additional capital through the exercise of outstanding warrants or
through the private placement of equity, reducing certain fixed costs and
increasing sales of our products through our current distribution network and
pursuing new distribution networks to generate cash flow.
 
 However,
there is substantial risk that we will not be able to carry out this business
plan.  Our cash resources are insufficient to continue our operations
through the near-term and, given the current market price of our common stock,
we may not have sufficient authorized shares of common stock available to raise
sufficient capital to continue operations.  Moreover, our stock price
is below its par value, which may make it difficult to raise capital through the
issuance of equity securities.  We do not have any definitive
agreements with respect to additional financing or a strategic opportunity, and
there is no assurance that any such financing or strategic opportunity will be
available to us on acceptable terms, or at all.  If such additional
financing is not available to us when required or is not available to us on
acceptable terms, or we are unable to arrange a suitable strategic opportunity,
we will be in significant financial jeopardy and we may be unable to continue
our operations at current levels, or at all.
 
 2
 Table of Contents
 Our
Products
  Our
product line includes our AwareTMline of
low cost rapid tests, our AwareTMHIV-1
BED Incidence test and our recently-introduced AwareMessengerTM
specimen collection device.  At present, our rapid tests are designed
for use in international markets.  Our business model calls for us to
introduce rapid tests for the domestic market in the future.
  The
AwareTM Rapid
Test Product Line
  Our HIV
1/2 rapid tests are used for the rapid detection of antibodies to HIV-1 and HIV
Type 2, a second type of HIV (“HIV-2”), in oral fluid and blood samples using a
lateral flow dipstick design (the “HIV-1/2 Rapid Tests”).  Rapid tests
provide diagnostic results in less than 20 minutes and are particularly suitable
for point-of-care testing in both the professional sector, such as in developing
countries that lack the medical infrastructure to support laboratory based
testing, and, for the first time, in the over-the-counter or “OTC”
market.
 
 Our
AwareTM line of
low cost rapid tests are especially suited to address the needs of developing
world markets in Africa and parts of Southeast Asia, as well as the Middle East
and Eastern Europe.  We have developed our AwareTM line of
low cost rapid tests in a simple, easy to use format suitable for use in point
of care settings in remote locations.  We have developed rapid tests
for the detection of antibodies to HIV-1 and HIV-2 that can use either oral
fluid or blood as a specimen sample.  We have also developed a rapid
test that uses urine as a specimen sample, but it is currently not a primary
focus.  We are primarily concentrating on introducing our oral fluid
rapid tests into international markets.
 
 Regardless
of the specimen sample, all versions of these immunochromatographic tests employ
a lateral flow “dipstick” design, free of plastic housings to reduce cost and
waste.  After dropping the dipstick into a disposable test tube that
contains the sample, the sample migrates up the strip.  Along the way,
the sample will wet a Protein A: gold conjugate pad.  The
reconstituted conjugate is reddish in color, and will bind with IgG in the
sample. So bound, the sample and conjugate will continue to migrate up the
dipstick.  As this complex of sample and gold conjugate migrates, it
will encounter a line of HIV proteins (recombinant or synthetic peptide,
depending on the assay).  At this point, the anti-HIV IgG in an
antibody-positive sample will form a classical antigen:antibody:conjugate
complex which is visually discernable as a red line.  Further up the
dipstick, the sample and conjugate complex will encounter a line of anti-human
IgG antibody.  Human IgG that is present in the sample will form a
visible antibody:antibody:conjugate line.  This second line acts as a
control line that indicates not only that the reagents imbedded in the test
device are functional, but that a valid, adequate sample was introduced to the
test.  For both the oral fluid and blood tests, positive results are
visible as soon as 5 minutes, although we advise users to allow 20 minutes
before interpreting a result.
 
 Oral
fluid samples are collected by wiping a swab across upper and lower gums, and
then releasing the material collected by the swab into a tube containing 1mL of
diluent.  The blood/serum/plasma test requires just 5 μL of sample in
a dropper-full (200 μL) of diluent.
 
 Our
current AwareTM line
includes the following products:
 
 AwareTM HIV-1/2
OMT (Oral fluid) PRO (Professional)
 
 We
developed the AwareTM HIV-1/2
OMT test to address the drawbacks of blood testing. We believe this test is
ideally suited to clinical or professional settings in the developing
world.  Although the range of other assays that can presently be
performed on OMT samples is limited, OMT samples can be easily collected
anywhere, including public settings, giving the test a unique advantage over
tests using other sample media.  Evaluations suggest that the accuracy
of our OMT test is only slightly less than a test using a laboratory blood
sample and on a par with the best of rapid blood tests.  The strengths
of the AwareTM HIV-1/2
OMT test are:
 
 ·
              It
      has a true IgG control line that indicates not only that the device is
      functional but that a human sample has been added (some assays feature a
      control line that appears even if the correct sample is not
      added)
 ·
              Kit
      packaging is designed to permit multiple users to use the kit
      simultaneously
  3
 Table of Contents
  ·
              Unlike
      its primary competitor, the AwareTM
      OMT sample preparation step produces surplus sample, which can be used to
      repeat the test, or to perform a confirmatory assay such as an oral fluid
      Western Blot test or a second rapid oral fluid
  test.
 ·
              AwareTM
      OMT testing is painless, safe, and
non-invasive
 ·
              Although
      more expensive than blood tests, the all-in costs (including costs of
      handling and disposal of blood) are less.  Further, we expect
      the AwareTM
      OMT to have a cost advantage over its primary current oral fluid
      competitor.  Additionally, it has a significantly longer shelf
      life than that of its primary
competitor.
 
 AwareTM HIV-1/2
Oral OTC
 
 The
AwareTM HIV-1/2
Oral OTC test is an over-the-counter version of our oral fluid rapid
test.  The test was designed for markets in which we see substantial
demand for a low-cost self-administered, over-the-counter HIV test, including
the Middle East, Russia and other Eastern European and Central Asian
countries.  The AwareTM HIV-1/2
Oral OTC has the same performance attributes as the PRO version but is packaged
for individual sale and includes simplified usage instructions tailored for the
non-professional consumer.
 
 AwareTM HIV-1/2
BSP PRO
 
 Although
we are committed to non-invasive (non-blood) testing, we developed the
AwareTM HIV-1/2
BSP (blood/serum/plasma) test to offer a full range of testing
solutions.  The BSP test allows us to participate in tenders that
specify blood tests and in markets where blood testing remains the
norm.  The BSP test also demonstrates our ability to develop and
manufacture a rapid HIV test that meets uniform international standards and
performs well in international evaluations.  Further, it allows us to
provide one-stop shopping and standardized methods for customers wanting to use
both blood and non-blood tests.  The strengths of the AwareTM HIV-1/2
BSP test are:
 
 ·
              It
      has a true IgG control line that indicates not only that the device is
      functional but that a human sample has been added (some assays feature a
      control line that appears even if the correct sample is not
      added)
 ·
              Kit
      packaging is designed to permit multiple users to use the kit
      simultaneously
 ·
              The
      test can be used on all types of blood: serum, plasma, venous whole blood
      and finger-stick whole blood. This flexibility is not found in all rapid
      HIV blood tests
 ·
              Its
      clinical performance effectively competes with the top brands of rapid
      blood HIV test
 ·
              As
      with all rapid blood tests, the sampling procedure can be easily modified
      to permit routine and convenient sample collection for epidemiology
      purposes (BED Incidence EIA)
  HIV-1
BED Incidence EIA
 
 The HIV-1
BED Incidence EIA Test, recently re-named the AwareTM
BEDTM HIV-1
Incidence Test, (the “Incidence Test”) is designed to estimate the rate of new
HIV infections in a population by determining what proportion of a population of
HIV infected people were infected recently (e.g. within approximately the past 6
months.)  Under a license from the CDC, we serve as the contract
manufacturer of this test and have the right to market it
worldwide.  We did not participate in the development or validation of
the Incidence Test or the development of the guidelines for its
use.  The guidelines that dictate how the test is to be interpreted
and how the data generated by the test are to be used are determined by the CDC
and other authoritative public health entities such as UNAIDS.  We
also market a control kit that contains materials required to use the Incidence
Test for testing Dried Blood, Serum or Plasma spots.
 
 We
believe that the capability of this test is significant because a critical
element of reducing HIV transmission rates is identifying where the increased
rates are occurring and instituting prevention programs
accordingly.  The Incidence Test is useful as an epidemiological
measurement tool to track the expansion of HIV infection into susceptible
populations, which will allow public health agencies to more efficiently use
their resources by focusing their prevention efforts on those groups having the
greatest need.  We believe that the Incidence Test can also provide
policy makers and program managers with valuable insights regarding the success
of their prevention programs and a scientific approach to both human and
financial resource allocation.  Incidence estimates help determine the
effectiveness of prevention programs from both a disease spread and financial
resource perspective and allow managers to evaluate areas appropriate for
alternative therapeutic media, such as vaccine trials.
 
 4
 Table of Contents
 Aware
MessengerTM Oral
Fluid Sample Collection Device
 
 Aware
MessengerTM oral fluid collection device is intended for the collection,
stabilization, and transport of an oral fluid specimen to be used for the
detection of specific antibodies or analytes.  Aware MessengerTM
specimens may be tested with conventional laboratory-based immunoassays (e.g.
ELISA) enabling high-throughput batch testing, automation, quantitative results,
and lower costs.  Oral fluid specimens collected with this device are
easily obtained and have been shown to yield high quality samples rich with
various analytes representative of those found in blood.  This device
is based on the same collection principle as employed in our AwareTM HIV-1/2
OMT test.  The device can be used to collect oral fluid analytes for
not only HIV antibodies, but also other screening application such as cotinine
(a metabolite of nicotine indicative of smoking) and cocaine.  Our
initial target for this product is for research use and to reference
laboratories in the life insurance risk assessment market having the capability
to self-validate assays employing the device.  We envision that many
blood tests can be optimized for use with the Aware MessengerTM device,
potentially providing a much larger market for this product.
 
 New
Products
 
 HIV-1/2
OMT Test using a synthetic antigen
 
 In an
effort to provide a complete oral fluid diagnostic testing solution, and to
comply with the WHO’s rapid testing algorithm requiring two rapid tests having
different antigens and/or platforms, we are developing a second OMT screening
test using a synthetic antigen, for use in conjunction with our AwareTM OMT test,
which employs a recombinant antigen.  This product is designed to
utilize the same sample collected for our current AwareTM HIV-1/2 OMT rapid test,
resulting in a completely non-invasive real-time testing
solution.  Our development plans for this project are currently
delayed as a result of our poor financial condition, however upon completion of
development we anticipate approval processes similar to those for the AwareTM
product line, depending on the country of interest.
 
 AwareTM II (The
Ani Platform)
 
 Our
current AwareTM product
line is a rapid testing solution that is well suited for developing
countries.  However, in developed countries, including in the U.S., a
cassette-enclosed format may be more acceptable.  On a longer-term
basis, we plan to introduce the AwareTM II
product line for these markets using such a format.  We believe that
we currently have all of the necessary technology licenses for this
format.
 
 The
AwareTM II line
provides a cassette-housed strip in a unique two-step platform that we have
licensed from Ani Biotech Oy (the “Ani Platform”).  To perform the
test, the sample applicator is first placed in the specimen - oral fluid or
blood – and then the end of the sample applicator stick is placed in the sample
inlet of the test device.  The sample and the mobilized conjugate move
through the porous carrier in the test device by capillary action, to the
detection and control zones.  In all instances, the labeled conjugate
is retained in the control zone, producing a color indicating that the test is
valid; any HIV-1/2 antibody in the sample forms a complex with the labeled
conjugate and is retained in the detection zone, producing a visible color there
if HIV-1/2 antibody is present in the sample.
 
 There are
currently no U.S. FDA-approved over-the-counter HIV tests; however an FDA
advisory panel has recommended that the FDA consider an approval protocol for
such a test.  We believe that OTC tests would be advantageous in the
battle against HIV transmission and that a rapid test platform such as the
AwareTM II
platform would be appropriate for use in an FDA-approved OTC application,
potentially coupled with tests such as a rapid incidence test and tests for
other sexually transmitted diseases (“STD’s”) or conditions.
 
 5
 Table of Contents
 Rapid
Incidence Test
 
 We have
executed a CRADA (a Cooperative Research and Development Agreement) with the CDC
to develop a new HIV-1 rapid incidence blood test.  This new test is
intended to be part of a diagnostic protocol used to both detect HIV-1
antibodies and to determine the rate of new HIV-1 infections in
populations.  If successful, this dual capability would strongly
distinguish the rapid incidence blood test as the next generation test by
providing a more complete diagnostic protocol.  We believe that the
test will provide a simplified rapid test format that can be performed in
resource poor settings and remote outreach locations for both diagnostic and
surveillance purposes.  Further, as a diagnostic tool, this test can
direct treatment protocols, which are generally more aggressive in young
infections.
  We plan
to introduce this product initially for international use on the current
AwareTM platform and
manufacture it overseas.  We may consider transferring it to the
AwareTM IIplatform,
potentially serving as the lead product for that platform in the
US.  Although we believe that we have demonstrated feasibility for
this product, there remains significant effort, including obtaining regulatory
approvals, before it will be ready for market.
 
 Potential
Future Products
 
 We
believe that the Ani Platform provides us with an alternative product format
having potential applicability in both the professional and OTC markets
worldwide.  It also gives us strategic opportunities.  Up
until we ceased our research and development efforts in mid-2008, we were in the
early stages of evaluating the feasibility of potential future products
employing this technology.  The development of a rapid test for the
detection of syphilis was potentially the first non-HIV project that we were
considering undertaking.
 
 If we are
able to resume research and development in the future, before we will be able to
exploit any of these opportunities, we would need to prove the viability of the
Ani Platform by completing development of the AwareTM II
product line, filing an IDE for those tests in the U.S. and establishing
domestic manufacturing capacity with which to begin FDA clinical trials,
initially for an HIV test.
  Marketing,
Sales and Distribution
 
 We
generally rely upon local distributors to explore local market conditions, to
pursue sales opportunities, follow up on leads we provide, to train and support
local customers and to assist in the regulatory approval process.  The
notable exception to this practice is in China where our products will be
marketed, distributed and sold through Beijing Marr, our joint venture with
Marr.  Additionally, we work with the CDC to distribute the Incidence
Test in the US and internationally.
 
 Traditionally,
we have preferred to appoint exclusive distributors in which ongoing exclusivity
is predicated upon the distributor’s purchase of mutually agreed minimum volumes
of product.  The distributors may, in turn, appoint
sub-distributors.  Where appropriate, we also consider more direct
routes to market, or in the case of OTC, private sector or charity-backed
programs, strategic relationships.  On an individual distributor
basis, agreement terms are typically set at 1, 2, or 3 years, and with a few
exceptions, all purchases must be at least 50% prepaid.
 
 Our
marketing efforts are severely curtailed at this time, due to the lack of
financing and certainty about our ability to continue in business and our
reduced workforce.  If we are able to overcome our current obstacles,
we expect to concentrate on the following primary markets during
2009:
 
 India
 
 Recent
estimates of the epidemic in India, based on an expanded and improved
surveillance system indicate that India has an estimated 2.5 million HIV
infections, ranking third behind South Africa and Nigeria for the highest number
of HIV/AIDS infected people. We expect the market for HIV diagnostic testing in
India to grow significantly in the next few years.  Early in the third
quarter of 2007, we received registration and marketing approval for our
AwareTM HIV-1/2
OMT (oral fluid) rapid test in India from the Central Drugs Standard Control
Organisation, commonly referred to as the DCAI.  We are targeting
three primary markets in India:  the private sector, the government
sector, and the military. Given the resources and potential opportunities in
this region, we may consider placing research and manufacturing operations in
India.
 
 6
 Table of Contents
 Africa
 
 In
Africa, we have been pursuing individual country markets for our AwareTM HIV-1/2
OMT rapid test products where we expect growth rates for HIV testing to be the
highest.  We will add other target countries as we see their markets
developing.  We received our initial orders for the AwareTM HIV-1/2
OMT test in 2006 from South Africa, and sales to our South African distributor
have continued regularly since then.  Our AwareTM HIV-1/2
OMT test is currently approved in South Africa, Cote d’Ivoire, Kenya, and
Uganda. We have recently began to receive market acceptance from the Kenyan and
Ugandan governments.  We have also initiated registration in Nigeria,
Tanzania, Cameroon Morocco, Libya and Egypt and are working to obtain product
approvals.
 
 Middle
East
 
 During
2008, we continued the process of entering markets within the
region.  We have product approval in Iraq and U.A.E. and are actively
pursuing registrations in Saudi Arabia, Kuwait and Iran (pending U.S. government
clearance).  In the fourth quarter of 2008, we made a significant sale
in U.A.E. through our new distributor.
  Competition
 
 Throughout
the world there are numerous manufacturers of rapid HIV antibody
tests.  Competitors include specialized biotechnology firms as well as
pharmaceutical companies with biotechnology divisions and medical diagnostic
companies.  Many of the tests are manufactured in countries with
emerging biotechnology industries such as India, China and
Korea.  With few exceptions, the products offered were blood tests
and, while their quality varies, they are generally of adequate accuracy to pass
local regulatory requirements.  The tests are often marketed at very
low prices to the end-user, which may indicate that the manufacturers are not
paying royalties on certain key patents such as those for detection of
HIV-2.  While many of these manufacturers were initially established
to supply products for their regional or domestic markets, many have now begun
to expand into other regions having less-stringent regulatory and intellectual
property environments and strong demand for low-cost HIV tests.
 
 Among
these manufacturers, there are a few that sell products meeting North American
and Western European quality standards in developing countries.  These
global players typically have an established presence in more than one
geographic region and their products set the performance standard for the
industry.  While these companies are primarily headquartered in
Western Europe or the United States, they may manufacture in lower cost
developing countries.  Their HIV rapid diagnostic tests are considered
to be the quality leaders in the market, with accuracies easily exceeding
99%.
  We
believe that we have a number of competitive advantages. First, we believe we
are well-positioned to meet the demands of testing in international markets with
our menu of HIV-1/2 Rapid Tests designed for use with either oral fluid or
blood.  Second, we believe our OMT tests have unique advantages
compared with blood based tests, as indicated below.
  §
              Non-invasive
      and painless sampling.  Studies show greater acceptance of HIV
      testing without the pain and risks of drawing blood, which translates into
      higher testing rates.  Increasing testing rates is one of the
      keys to controlling the spread of
HIV/AIDS
  §
              Safer
      than blood tests.  Eliminates the risk of infection through
      accidental needle or lancet stick injuries for both patients and health
      care workers
  §
              Easier
      to use.  Enables self sampling and self testing--no technicians,
      no needles, no lancets
  7
 Table of Contents
 §
              Sample
      can be collected anywhere, anytime, including open public
      settings
  §
              More
      cost effective than blood diagnostic tests (considering the all-in costs
      of drawing, handling and disposing of venous
  blood)
  §
              Risk
      of exposure to infectious agents during handling is minimal to
      non-existent
  §
              The
      Over-The-Counter (OTC) version may foster increased use as a result of
      increased privacy
  §
              Unlike
      other oral fluid tests, the AwareTM
      sampling system allows for a sample to be tested multiple times with
      different test devices and stored for future
use
 
 Research and Development
Spending
 
 We have
had to cease investing funds in research and development at this
time.  Our goal is to resume such funding in the future if and when we
are financially able to do so.  Our product research and development
spending increased from $1.3 million in 2007 to $1.4 million in
2008.  Domestic R&D expense increased by approximately $0.3
million in 2008 primarily as a result of filling vacancies in our R&D
staffing during the second half of 2007, offset by lower costs related to
outside consultants, clinical trials and travel expenses.  We have
terminated all of our domestic research and development personnel by the end of
2008.  Our Beijing Marr joint venture incurred approximately $0.2
million less in R&D expenses during 2008 compared with 2007 as personnel and
resources were directed away from product development to pre-manufacturing
activities recognized as administrative expense in 2008.
  Component
Supply
  Our
manufacturing operations employ a number of components, including antigens and
recombinants that we purchase from various suppliers for our various
tests.  We also use some single-source components.  Any
delay or interruption in the supply of these components, especially with respect
to single-source components, could significantly impair our ability to
manufacture products in sufficient quantities to meet demand because additional
or replacement suppliers cannot be quickly established. Certain antigens and
recombinants used in our HIV 1/2 Rapid Tests are provided by single contract
suppliers pursuant to supply agreements.  If for any reason these
suppliers were no longer able to supply our antigen or recombinant needs, we
believe that alternative supplies could be obtained at competitive
costs.  However, a change in any antigen or recombinant might require
additional changes to our products, potentially subjecting them to additional
regulatory requirements and reviews.  Any changes would require
significant time to complete and could disrupt our ability to manufacture and
sell our HIV 1/2 Rapid Tests.
  Intellectual
Property
 
 Our
success depends, in part, on our ability to obtain patent protection for our
products, to preserve our trade secrets and to avoid infringing the proprietary
rights of third parties.
  We have
acquired patent and other intellectual property rights to protect and preserve
our proprietary technology and our right to capitalize on the results of our
research and development activities.  We also rely on trade secrets,
know-how, continuing technological innovations and licensing opportunities to
provide competitive advantages for our products in our markets and to develop
new products.
 
 Although
important, the issuance of a patent or existence of trademark or trade secret
protection does not in itself ensure the success of our
business.  Competitors may be able to produce products competing with
our products without infringing our licensed patent rights.  The
issuance of a patent is not conclusive as to validity or as to the enforceable
scope of the patent that we license.  Trade secret protection does not
prevent independent discovery and exploitation of the secret product or
technique. Accordingly, we cannot assure that our patents rights, trademarks or
trade secrets will afford adequate protection to our products or that our
competitors will not be able to design around such patents, trademarks and trade
secrets.
  8
 Table of Contents
 We are
not aware of any pending claims of infringement or other challenges to our
rights to use this intellectual property or our rights to use our trademarks or
trade secrets in the U. S. or in other countries.
 
 We
require our employees, consultants, outside collaborators, and other advisors to
execute confidentiality and      assignment of
invention agreements upon the commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed by or made known to the individual during the course of
the individual’s relationship with us is to be kept confidential and not
disclosed to third parties except in specific circumstances. The agreements also
provide that all inventions conceived by the individual during his or her tenure
with us are our exclusive property.  We believe these confidential
information and invention assignment agreements are all valid and enforceable in
accordance with their terms.  However, we cannot assure that they are
valid and enforceable or that they will not be breached, and that we will have
adequate remedies for any breach.
  Rapid
Tests
 
 We
believe we have secured rights to intellectual property and related materials
necessary for the manufacture and worldwide sale of our HIV-1/2 Rapid
Tests.
 
 Synthetic
Antigen (Adaltis, Inc.):
 
 In April
2004, we entered into a license and supply agreement with Adaltis, Inc. under
which Adaltis supplies us with HIV-1/2 peptides for use in our HIV-1/2 Rapid
Tests.
 
 Guire/Swanson
Patent Suite (Abbott Laboratories, Inc.):
 
 In June
2004, we entered into a sublicense agreement with Abbott Laboratories, Inc. for
certain worldwide rights to patents relating to the design, manufacture and sale
of lateral-flow rapid diagnostic tests.  Under the terms of the
agreement, we were granted certain worldwide rights to use a family of patents
known as the “Guire/Swanson” patents in both the professional and OTC
markets.  The technology underlying these patents is fundamental to
nearly all lateral-flow rapid diagnostic tests.
 
 HIV-2
(Bio-Rad Laboratories):
 
 In
September 2004, we entered into a worldwide, non-exclusive sub-license agreement
with Bio-Rad Laboratories and Bio-Rad Pasteur for HIV-2 rights.  This
agreement permits us to commercialize and market our HIV-1/2 Rapid Tests in
areas where HIV-2 is increasing in prevalence or where it is required to achieve
regulatory approval for our tests.
 
 Ani
Platform (Ani Biotech Oy):
 
 In
September 2004, we acquired a license to the Ani Platform from Ani Biotech
Oy.  Under the terms of the license, we have the exclusive right to
develop, manufacture and sell rapid diagnostic tests for sexually transmitted
diseases, including HIV, HPV, Hepatitis B, Hepatitis C, Syphilis, Gonorrhea, and
Chlamydia when urine or oral fluid are the sample
media.  Additionally, we have the non-exclusive right to develop,
manufacture and sell the same sexually transmitted disease tests when blood,
serum, plasma, or urogenital swabs are the sample media.
 
 Incidence
Test
 
 We
initiated a technology transfer of the Incidence Test in April 2004 fromthe laboratories at the
National Center for HIV, STD and TB Prevention, a division of the Public Health
Service (PHS).
  9
 Table of Contents
 Manufacturing
  To meet
the challenges of testing for HIV in the developing world, we have adopted a
manufacturing strategy for our rapid tests that recognizes the reduced labor and
overhead rates typical of the regions in which we expect to sell our
tests.  We have established manufacturing capabilities in the U. S.
and Thailand and China, through our Beiing Marr joint venture.  We may
consider establishing research and manufacturing centers in other targeted
markets.  A key consideration in selecting manufacturing locations for
the current AwareTM product
relates to the presence and enforcement of certain lateral flow
patents.  Accordingly, we plan to produce our AwareTM line in
countries that offer both low cost manufacturing and where we have technological
freedom to operate.  Thailand and China meet these
criteria.  We believe there are no intellectual property restrictions
for the Incidence Test or for our Aware IITM
Tests.
  Pacific
Biotech
 
 We have
outsourced production of our AwareTM product
line to Pacific Biotech in Thailand.  Under the terms of the contract
manufacturing agreement, we pay Pacific Biotech a volume-variable price per test
for assembly of AwareTM test
kits.  Either we or Pacific Biotech may source the component
materials.  Pacific Biotech charges back to us at cost the materials
that they source.  Product produced at Pacific Biotech is available
for shipment into Africa, the Middle East, Eastern Europe and parts of Southeast
Asia.  Pacific Biotech is a GMP and ISO 13485 certified manufacturing
facility.
 
 MML
 
 We have
outsourced production of the Incidence Test and the Aware MessengerTMoral
fluid sampling device to MML in Troutdale, Oregon.  The terms of the
MML agreement are similar to the Pacific Biotech agreement.  MML
charges us a flat price per test for assembly of Incidence test kits or sampling
devices.  MML is an FDA registered GMP and ISO certified manufacturing
facility.
 
 Beijing
Marr
 
 Our joint
venture, Beijing Marr, has a manufacturing facility in the Huairou district of
Beijing. The site currently houses about 2,100 square meters of manufacturing
space with ample room to expand.  Beijing Marr renovated and upgraded
the facility to meet the requirements for the production of our AwareTM rapid
test product line.  Additionally, the facility has its ISO 13485
certification.  Production capacity at this facility is planned for up
to 10 million tests per month before a facility expansion is
required.  We would need to add additional personnel and equipment to
achieve that production level.  Product from this plant will be
available for sale in China as well as for export.
 
 Government
Regulation
  AwareTM Rapid
Tests
 
 Regulatory
approvals to sell products are characteristic of the diagnostic
industry.  Throughout the developing world, countries can generally be
classified in one of the following three categories regarding regulatory
approvals:
 
 1.
              Those
      requiring no local approval;
 2.
              Those
      requiring local approvals, and possibly clinical trials; or those
      requiring approval in the country of manufacture;
  or
 3.
              Those
      that may or may not require local approvals, but that rely on
      organizations such as the United States Agency for International
      Development (USAID) “approval” as a proxy for their own and for access to
      U.S. PEPFAR funding.
 
 Though
few in number, countries with regulatory mechanisms represent the path of least
resistance.  Generally, however, these countries are less likely to
make purchasing decisions based upon product quality and demonstrated
performance, but rather, based upon price.  We designed our AwareTM
products to be high in quality, which typically makes them ill-suited to compete
with locally-produced tests based solely on price.  The majority of
our target markets, therefore, have a local or other regulatory
process.
 
 10
 Table of Contents
 Local
Approvals
 
 The time,
effort, and cost of market entry for non-blood tests is significantly higher
than for blood tests.  In many countries, blood HIV tests may be
evaluated using archived sets of well characterized blood samples known as
standardized panels. While readily available for blood, such panels do not exist
for oral fluid tests.  Consequently, we must demonstrate the clinical
performance of our oral fluid tests through formal clinical
trials.  Regulatory requirements represent a potential barrier to our
timely entry to certain markets due to the high cost and time required for
clinical trials.
 
 The
following table summarizes the regulatory approvals that we have received for
products in our AwareTMproduct line as
of December 2008.
 
 Aware
      OMT
                      
                      §China
                      §India
                      §Kenya
                      §Russia
                      §South
      Africa
                      §Uganda
                      §Tanzania
                      §Iraq
                      §Cote
      d’Ivoire
                      §United Arab
      Emirates
                      §Peru
                      §USAID
                    Aware
      BSP
                      
                      §Kenya
                      §Malaysia
                      §South
      Africa
                      §Uganda
                      §Zimbabwe
                      §USAID
 
 USAID
Waiver
 
 Many
international HIV intervention programs are supported by foreign
funding.  In the case of funding supplied by the United States,
typically through USAID or PEPFAR, products that are not approved locally in the
country of intended use or by the USFDA may be used, provided they have a waiver
issued by the USAID and CDC.  Since the end of 2007, both our
AwareTM HIV-1/2
rapid blood test and our AwareTM HIV-1/2
rapid oral fluid test have been included on the USAID waiver list.
  BED
Incidence Test
  Our
Incidence Test is regulated by the FDA Center for Biologics Evaluation and
Research.  The FDA has classified the test as being “for surveillance
use” and not for clinical diagnosis within the U. S. and “for research use”
internationally, simplifying its availability for use by both domestic and
foreign public health organizations.
  Other
Regulations
  We are
subject to stringent federal, state and local laws, rules, regulations and
policies governing the use, generation, manufacture, storage, air emission,
discharge, handling and disposal of certain materials and wastes.
  Product
Liability and Recall Risk; Limited Insurance Coverage
  The
manufacture and sale of medical diagnostic products subjects us to risks of
product liability claims or product recalls, particularly in the event of false
positive or false negative reports.  A product recall or a successful
product liability claim or claims that exceed our insurance coverage could have
a material adverse effect on us.  We maintain a
$5,000,000 claims-made products liability insurance
policy.  However, our insurance coverage may not adequately protect us
from liability that we incur in connection with clinical trials or sales of our
products.
  11
 Table of Contents
 Employees
  As of
March 31, 2009, we have one full time employee and one part-time employee in the
U. S., one in sales and one in administration.  We have two
consultants that we use on an “as needed” basis for production, quality systems,
marketing and administration. Our employees are not represented by a union or
collective bargaining entity.  We believe our relations with our
employees are good.
  Where
to get more information
 
 We file
or furnish annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission (“SEC”).  Our
SEC filings are available to the public over the Internet at the SEC's web site
at http://www.sec.gov. You may also read and copy any document we file at the
SEC's public reference rooms in Washington, D.C. Please call the SEC at
1-800-SEC-0330 for further information on the public reference
room.
 
 Item1A.  Risk Factors.
 
 The
following risk factors and other information included in this Annual Report on
Form 10-K should be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties not
presently known to us or which we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business,
financial condition, operating results, and cash flows could be materially
adversely affected.
 
 Risks
Related to Our Financial Condition
 
 We
Are in Default Under Our Secured Debt Obligations
 
 We are in
default under our Credit Facility and Convertible Notes, both of which are
secured by our assets. As we do not have funds to repay these debt obligations,
we will need to enter into agreements with our creditors to terminate, reduce or
restructure our obligations to them. Although our relationships with our
creditors remain positive and we have taken steps to obtain additional capital
and negotiate termination, reduction or restructuring of our debt obligations,
there is no assurance that our creditors will not take actions that could be
detrimental to our ability to continue to conduct our operations. Our secured
creditors could at any time elect to foreclose on our
assets.  Moreover, there can be no assurance that we will be able to
enter into acceptable agreements with our secured creditors.  If we
are unable to enter into acceptable agreements with them, we may be forced to
seek bankruptcy protection under Chapter 7 of Title 11 of the United States
Code, 11 U.S.C. § 101 et seq.  If we are forced to seek
bankruptcy protection, the holders of our common stock will likely not be able
to realize any remaining value in their shares and the holders of our debt
securities will likely realize less than the principal amount of those
securities, because the value of our assets is less than our secured debt
obligations. Even if we are able to enter into agreements with each of our
secured creditors for the termination, reduction or restructuring of our debt,
there can be no assurance that we will be able to continue our business because
of our recurring operating losses, negative cash flow and limited cash
reserves.  To the extent we cannot terminate our debt obligations, we
will require additional capital to meet our debt obligations, even if they are
reduced or restructured.
 
 Because Of Our Recurring Operating
Losses And Negative Cash Flows From Operations, Our Audit Report Expresses
Substantial Doubt About Our Ability To Continue As A Going
Concern.
 
 Because
of our recurring operating losses and negative cash flows from operations and
substantial indebtedness, our audit report expresses substantial doubt about our
ability to continue as a going concern. At December 31, 2008 and 2007, we had
working capital deficits of $14.5 million and $3.5 million, respectively. As of April 3, 2009, the
$11.0 million outstanding under our Credit Facility and Convertible Notes is
currently due. Our cash on hand and existing sources of cash are insufficient to
fund our cash needs over the next twelve months under our current capital
structure. We have prepared our financial statements on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business.  The consolidated
financial statements do not include any adjustments that might be necessary
should we be unable to continue in existence.
  12
 Table of Contents
 We
Will Need Additional Financing To Meet Our Financial Needs.
 
 Our
current plan is to obtain additional financing after reviewing all possible
options in detail, including, but not limited to, the issuance of equity or debt
securities or alliances and/or joint ventures with other biotechnology firms,
pharmaceutical companies with biotechnology divisions or medical diagnostic
companies. It may be difficult, or impossible, for us to raise additional
capital because of our existing secured debt obligations, because our stock
price is below its par value and because we may not have sufficient shares of
authorized stock to issue to investors. If we are able to raise capital, funds
raised from the issuance of additional equity securities may have a negative
effect on our stockholders, such as a dilution of their percentage of ownership,
and the rights, preferences or privileges of the new security holders may be
senior to those of our current stockholders. There is no assurance that we will
be able to obtain any financing on favorable terms, or at all. Failure to obtain
additional financing would have a material adverse effect on our business,
results of operations and financial condition in the future, as we will likely
not be able to continue our operations.
 
 Our
Working Capital Deficit May Adversely Affect Our Ability To Further Implement
Our Growth Strategy And Expand Our Presence In The International Market for HIV
And Other Diagnostic Tests.
 
 Neither
our cash flow from operations nor our capital resources are sufficient to meet
our existing financial needs or sustain our operations. If we are unable to
generate significant revenue or attain profitability, we will not be able to
sustain operations and will have to curtail significantly or cease
operations.
 
 Our
Financial Condition has Adversely Affected Our Ability to Pay Suppliers, Service
Providers and Licensors on a Timely Basis Which May Jeopardize Our Ability to
Continue Our Operations and to Maintain License Rights Necessary to Continue
Shipments and Sales of Our Products.
 
 At
December 31, 2008, our domestic trade accounts payable totaled $1.5 million, of
which essentailly all was over sixty days past due.  Further, we
currently have a number of cash-only arrangements with
suppliers.  Certain vendors and service providers may choose to bring
legal action against us to recover amounts they deem due and
owing.  While we may dispute certain of these claims, should a
creditor prevail, we may be required to pay all amounts due to the
creditor.  If the working capital that enables us to make payments is
not available when required, we will be placed in significant financial jeopardy
and we may be unable to continue our operations at current levels, or at
all.  Additionally, our financial condition has prevented us from
ordering certain materials in the most economical order quantities, which
increases the cost of our products and reduces our margins.
 
 We
Have Federal and State Net Operating Losses and Research and Development Credits
Which May Expire Before We Can Utilize Them.
 
 At
December 31, 2008, we had federal net operating loss carryforwards of
approximately $175.6 million.  Section 382 of the Internal Revenue Code
imposes an annual limitation on the utilization of net operating loss
carryforwards following a “change in ownership.”  The amount of the
limitation is based on a statutory rate of return and the value of the
corporation at the time of the change of ownership.  Our private placements
and other sales of our equity securities can potentially cause a change of
ownership either individually or in the aggregate. We have conducted a
preliminary analysis of our stock ownership changes which indicates that
ownership changes within the meaning of Section 382 of the Internal Revenue Code
may have occurred in 2003 and 2004.  After applying the Section 382
limitations resulting from these presumed ownership changes, approximately $94
million and $36.5 million of federal and state net operating loss carryforwards,
respectively, are available at December 31, 2008.  If a change of
ownership has occurred as a result of past financings and an annual limitation
is imposed, we may not be able to fully utilize all of our federal and
state loss carryforwards and resesarch and development credit
carryforwards.  Our inability to fully utilize our net operating loss
carryforwards and tax credits could have a negative impact on our tax asset,
financial position and results of operations.
 
 13
 Table of Contents
 Risks
Related to the Market for Our Common Stock
 
 We
have a history of operating losses and expect to report future losses that may
cause our stock price to decline and a loss of your investment.
  Since our
inception of operations through December 31, 2008, we have incurred a cumulative
loss of $185.1 million. We expect to continue to incur losses as we spend
additional capital to market our products and establish our infrastructure and
organization to support anticipated operations. We cannot be certain whether we
will ever earn a significant amount of revenues or profit, or if we do, that we
will be able to continue earning such revenues or profit. Any economic weakness
or global recession, including the current environment, may limit our ability to
ultimately market our products. Any of these factors could cause our stock price
to decline and result in a loss of a portion or all of your
investment.
  The price
and trading volume of our common stock is subject to certain factors beyond our
control that may result in significant price and volume volatility, which
substantially increases the risk that you may not be able to sell your shares at
or above the price that you pay for the shares.
 
 Factors
beyond our control that may cause our share price to fluctuate significantly
include, but are not limited to, the following:
  ●
                the
      development of a market for our
products;
  ●
                changes
      in market valuations of similar
companies;
 
 ●
                announcement
      by us or our competitors of significant contracts, acquisitions, strategic
      partnerships, joint ventures or capital
  commitments;
 
 ●
                Additions
      or departures of key personnel;
and
 
 ●
                fluctuations
      in stock market price and
volume.
  Additionally,
in recent years the stock market in general, and the Over-the-Counter Bulletin
Board (the "OTCBB") stocks in particular, have experienced extreme price and
volume fluctuations. In some cases these fluctuations are unrelated or
disproportionate to the operating performance of the underlying company. These
market and industry factors may materially and adversely affect our stock price
regardless of our operating performance. The historical trading of our common
stock is not necessarily an indicator of how it will trade in the future and our
trading price as of the date of this prospectus is not necessarily an indicator
of what the trading price of our common stock might be in the
future.
  In the
past, class action litigation has often been brought against companies following
periods of volatility in the market price of those companies' common stock. If
we become involved in this type of litigation in the future it could result in
substantial costs and diversion of management attention and resources, which
could have a further negative effect on your investment in our
stock.
  Our
issuance of Convertible Notes, warrants and stock options may have a negative
effect on the trading price of our common stock.
  We
currently have a large number of Convertible Notes, stock options and warrants
outstanding.  The conversion of the Convertible Notes into shares of
common stock and the exercise and conversion of stock options and warrants into
shares of common stock could cause significant dilution to our
stockholders.  In addition to the potential dilutive effect of issuing
a large number of Convertible Notes, stock options and warrants, there is the
potential that a large number of the shares may be sold in the public market at
any given time, which could place significant downward pressure on the trading
price of our common stock.
  14
 Table of Contents
 There
is no assurance of an established public trading market, which would adversely
affect the ability of investors in our company to sell their securities in the
public markets.
  Although
our common stock trades on the OTCBB, a regular trading market for our common
stock may not be sustained in the future. The National Association of Securities
Dealers (the “NASD”) limits quotation on the OTCBB to securities of issuers that
are current in their reports filed with the SEC. If we fail to be current in the
filing of our reports with the SEC, after a grace period of approximately 30
days, our common stock will not be able to be traded on the
OTCBB.  The OTCBB is an inter-dealer market that provides
significantly less liquidity than a national securities exchange or automated
quotation system. Quotes for stocks included on the OTCBB are not listed in the
financial sections of newspapers as are those for stocks listed on national
securities exchanges or automated quotation systems. Therefore, prices for
securities traded solely on the OTCBB may be difficult to obtain and holders of
common stock may be unable to resell their securities at or near their original
offering price or at any price.
  Market
prices for our common stock may be influenced by a number of factors,
including:
 
 ●
              the
      issuance of new equity securities;
 
 ●
              changes
      in interest rates;
 
 ●
              competitive
      developments, including announcements by competitors of new products or
      services or significant contracts, acquisitions, strategic partnerships,
      joint ventures or capital
commitments;
 
 ●
              variations
      in quarterly operating results;
 
 ●
              change
      in financial estimates by securities
analysts;
 
 ●
              the
      depth and liquidity of the market for our common
  stock;
 
 ●
              investor
      perceptions of our company and the technologies industries generally;
      and
 
 ●
              general
      economic and other national
conditions.
 
 Our
limited public market and trading market may cause volatility in the market
price of our common stock.
  Our
common stock is currently traded on a limited basis on the OTCBB.  The
quotation of our common stock on the OTCBB does not assure that a meaningful,
consistent and liquid trading market currently exists, and in recent years such
market has experienced extreme price and volume fluctuations that have
particularly affected the market prices of many smaller companies like us. Our
common stock is thus subject to volatility. In the absence of an active trading
market:
 
 ●
              investors
      may have difficulty buying and selling or obtaining market
      quotations;
 
 ●
              market
      visibility for our common stock may be limited;
  and
 
 ●
              lack
      of visibility for our common stock may have a depressive effect on the
      market for our common stock.
  Our
common stock is a "penny stock."
  Our
common stock is a "penny stock" under Section 15(g) of the Exchange Act. Our
common stock: (i) trades at a price less than $5.00 per share; (ii) is not
traded on a "recognized" national exchange; (iii) is not quoted on The NASDAQ
Stock Market; and (iv) is issued by a company with net tangible assets less than
$2,000,000, if in business more than a continuous three years, or with average
revenues of less than $6,000,000 for the past three years. The principal result
or effect of being designated a "penny stock" is that securities broker-dealers
cannot recommend our common stock but can only trade in it on an unsolicited
basis.
  Resale
restrictions on transferring “penny stocks” are sometimes imposed by some
states, which may make transactions in our common stock more difficult and may
reduce the value of the investment. Various state securities laws impose
restrictions on transferring “penny stocks” and as a result, investors in our
common stock may have the ability to sell their shares of our common stock
impaired. Certain foreign countries also impose limitations and restrictions on
the ability of their citizens to own stock that is not traded on a recognized
exchange, which, in certain instances, does not include the OTCBB.
  15
 Table of Contents
 Broker-dealer
requirements may affect trading and liquidity.
  Section
15(g) of the Securities Exchange Act of 1934, as amended, and Rule 15g-2
promulgated there under by the SEC require broker-dealers dealing in penny
stocks to provide potential investors with a document disclosing the risks of
penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor's
account.
  Potential
investors in our common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Moreover, Rule 15g-9 requires broker-dealers in penny stocks to approve the
account of any investor for transactions in such stocks before selling any penny
stock to that investor. This procedure requires the broker-dealer to (i) obtain
from the investor information concerning his or her financial situation,
investment experience and investment objectives; (ii) reasonably determine,
based on that information, that transactions in penny stocks are suitable for
the investor and that the investor has sufficient knowledge and experience as to
be reasonably capable of evaluating the risks of penny stock transactions; (iii)
provide the investor with a written statement setting forth the basis on which
the broker-dealer made the determination in (ii) above; and (iv) receive a
signed and dated copy of such statement from the investor, confirming that it
accurately reflects the investor's financial situation, investment experience
and investment objectives. Compliance with these requirements may make it more
difficult for holders of our common stock to resell their shares to third
parties or to otherwise dispose of them in the market or otherwise.
  Shares
eligible for future sale may adversely affect the market price of our common
stock, as the future sale of a substantial amount of our restricted stock in the
public marketplace could reduce the price of our common stock.
  From time
to time, certain of our stockholders may be eligible to sell their shares of
common stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144 of the Securities Act (“Rule 144”), subject to certain
requirements.  In general, under Rule 144, unaffiliated stockholders
(or stockholders whose shares are aggregated) who have satisfied a six month
holding period may sell shares of our common stock, so long as we have filed all
required reports under Section 13 or 15(d) of the Exchange Act during the
twelve-month period preceding such sale.  Once a period of six months
has elapsed since the date the common stock was acquired from us or from an
affiliate of ours, unaffiliated stockholders can freely sell shares of our
common stock.  Following a period of twelve months after acquiring
shares from us or an affiliate, unaffiliated stockholders can freely sell their
shares without any restriction or requirement that we are current in our SEC
filings.   Any substantial sale of common stock pursuant to Rule 144
may have an adverse affect on the market price of our common stock.
  We
May Need our Stockholders to Authorize Additional Shares of Common Stock or a
Reverse Split of Our Common Stock in the Near Future.
 
 Under our
certificate of incorporation, we are authorized to issue 800 million shares of
common stock.  We currently have 439 million shares of common stock
issued and outstanding and 294 million shares of common stock reserved for
inssuance under our Convertible Notes, our Equity Line, warrants and stock
options.  There are 67 million shares of common stock available for
issuance in future financings or for other purposes. We may need to seek
stockholder approval to either increase the number of authorized shares of
common stock or effect a reverse stock split of our shares of common stock to
allow us to raise capital through the issuance of equity
securities.  After a reverse stock split, stockholders who hold a
number of shares less than the split ratio, would no longer be stockholders of
our company. Our remaining stockholders would own fewer shares of our common
stock, although the pervcentage owenrship for each would not change. Each
outstanding share of common stock would immediately and automatically be
changed, into a proportionate number of shares of common stock, based on the
reverse stock split ratio, and the number of shares of common stock subject to
outstanding options and warrants issued by us would be reduced proportionately
and the respective exercise prices would be increased proportionately. The
reverse stock split would effectively increase the number of authorized and
unissued shares of common stock available for future issuance for new financing
or other purposes because we would keep our authorized shares at 800 million.
Following a reverse stock split, the Board of Directors would have the
authority, subject to applicable securities laws, to issue authorized and
unissued shares without further stockholder approval, upon such terms and
conditions as the Board of Directors deems appropriate. This could cause
significant dilution to our stockholders.  In addition to the
potential dilutive effect of issuing new equity securities, there is the
potential that a large number of shares may be sold in the public market at any
given time, which could place significant downward pressure on the trading price
of our common stock.
 
 16
 Table of Contents
 Failure
to achieve and maintain internal controls in accordance with Sections 302 and
404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on
our business and stock price.
  We are
examining and evaluating our internal control procedures to satisfy the
requirements of Section 404 of the Sarbanes-Oxley Act, as required for our
Annual Report on Form 10-K for the year ending December 31, 2008.  If
we fail to maintain adequate internal controls or fail to implement required new
or improved controls, as such control standards are modified, supplemented or
amended from time to time, we may not be able to assert that we can conclude on
an ongoing basis that we have effective internal controls over financial
reporting. Effective internal controls are necessary for us to produce reliable
financial reports and are important in the prevention of financial
fraud.  If we cannot produce reliable financial reports or prevent
fraud, our business and operating results could be harmed, investors could lose
confidence in our reported financial information, and there could be a material
adverse effect on our stock price.
  Lawsuits
and legal proceedings.
  From time
to time, we may become involved in various lawsuits, disputes and claims
(“Actions”), arising in the ordinary course of business.  These
Actions may raise complex factual and legal issues and are subject to
uncertainties.  Actions filed against us could include product
liability, commercial, intellectual property, customer, employment and
securities related claims, including class action
lawsuits.  Plaintiffs in some Actions may seek unspecified damages or
injunctive relief, or both.  Adverse results in Actions may harm our
business and have material adverse effects on our business, results of
operations, liquidity or financial position any or all of which could adversely
affect our stock price.
  Risks
Related to Our Business
 
 A
Viable Market for Our Products May Not Develop or We May Not Be Able to
Successfully Develop and Market New Products That We Plan to
Introduce.
 
 Our
future success will depend, in large part, on the market acceptance, and the
timing of such acceptance, of our AwareTM HIV-1/2
OMT rapid test and the HIV-1 BED Incidence Test and such other new products or
technologies that we may develop or acquire. To achieve market acceptance, we
must make substantial marketing efforts and spend significant funds to inform
potential customers and the public of the perceived benefits of these
products.  We currently have extremely limited resources with which to
stimulate market interest in and demand for our products and limited evidence on
which to evaluate the market’s reaction to products that may be
developed.
 
 We
currently have approval to sell our AwareTM HIV-1/2
OMT rapid test product in countries including China, Russia, India, South
Africa, U.A.E., Iraq, Uganda, Kenya, Cote d’Ivoire and Peru.  We plan
to seek regulatory approval in other countries as resources
permit.  Sub-Saharan Africa, China, India and Russia are the areas
predicted to have the greatest increase in HIV infections over the next few
years.  We believe that a simple, non-invasive test such as ours will
have significant demand as it can be used as an integral part of a real-time
treatment program.  Although we are optimistic regarding the future
sales prospects for our AwareTM HIV-1/2
OMT rapid test, obtaining regulatory approval has not resulted in significant
product sales to date.  In Africa and elsewhere, government Ministries
of Health or similar agencies are the primary purchasers of HIV tests, typically
through a tender process which currently requires the exclusive use of blood
tests.  Such tenders often consider only the purchase cost of an HIV
diagnostic test, ignoring the ancillary costs of administration, including costs
such as personnel and materials required to draw and dispose of blood
samples.  We are directing considerable effort, including product
donations to key user agencies, to encourage the consideration and inclusion of
our oral fluid tests in such tenders.  We consider these efforts to be
part of an “enabling” strategy in which the standard of care for HIV diagnosis
evolves from the exclusive use of blood tests to more widespread use of
non-invasive oral fluid-based tests.  This process is time-consuming
and expensive.  There can be no assurance that our AwareTM HIV-1/2
OMT rapid tests will obtain widespread market acceptance internationally or that
significant sales will occur on a timetable that we can accurately
project.
 
 17
 Table of Contents
 We
manufacture the HIV-1 BED Incidence Test on behalf of the CDC and that test is
available for sale, but we have limited experience marketing it and sales
to-date have been modest.  The CDC has issued an Information Sheet
acknowledging that the assay may cause over-estimation under certain conditions
and has issued revised recommendations and protocols for its use.  As
a result, although we believe that the Incidence Test is a valuable technology
in the fight against the spread of HIV/AIDS and expect that the process of
refining its applications will continue as its use expands, there can be no
assurance that the Incidence Test will achieve widespread acceptance, either in
the U. S. or internationally.
 
 We have
recently introduced our Aware MessengerTM oral
fluid sample collection device, have no experience marketing such a product and
our financial condition has required that we suspend marketing efforts for the
product at present .
 
 If our
current products fail to achieve additional regulatory approvals or market
acceptance or generate significant revenues, we may have to abandon them and
alter our business plan.  Such modifications to our business plan will
likely delay achievement of sustainable cash flow from product sales and
profitability.  As a result, we may have to seek additional financing,
which may not be available on the timetable required or on acceptable terms, or
we may have to curtail our operations, or both.
 
 In
addition to our rapid HIV-1/2 diagnostic tests and the BED Incidence Test, we
plan to develop and/or commercialize other diagnostic products for other
infectious diseases or health conditions, some potentially in combination with
each other (i.e. multi-channel tests).  Through our research
collaborations with the CDC, we expect to develop a blood-based rapid HIV test
for diagnostic and surveillance purposes.  We may consider licensing
other capabilities from the CDC to evaluate the feasibility of additional
diagnostic tests.  There are numerous developmental and regulatory
issues that may preclude the introduction of these products into commercial
sale.  If we are unable to demonstrate the feasibility of these
products and successfully transfer the technology for commercial-scale
manufacturing while meeting regulatory requirements or resolving potential
patent licensing or government distribution or licensing requirements with
respect to their marketing, then there can be no assurance that any or all of
these products will achieve widespread acceptance, either in the U. S. or
internationally,
 
 Additionally,
neither we nor our marketing partners have significant experience marketing and
selling rapid diagnostic tests. Our success depends upon alliances with
third-party international distributors and joint venture partners and upon our
ability to penetrate expanded markets with such distributors and
partners.  There can be no assurance that:
 
 •
              our
      international distributors and joint ventures will successfully market our
      products;•
              our
      future selling efforts will be effective, as we have not yet introduced in
      significant volume either an HIV-1/2 product or other point of care
      test;•
              we
      will obtain market acceptance in the medical or public health community,
      including government and humanitarian funding sources critical in many
      international markets, which are essential for acceptance of our products;
      or that the relationships we develop with humanitarian agencies or their
      intermediaries will prove to be reliable and sustainable;
    or•
              if
      our relationships with distributors or marketing partners terminate, we
      will be able to establish relationships with other distributors or
      marketing partners on satisfactory terms, if at
  all.
 
 Consequently,
there can be no assurance that any of our current or potential new products will
obtain widespread market acceptance and fill the market need that is perceived
to exist.  Additionally, although we plan to introduce an over the
counter HIV diagnostic test for the domestic over the counter market, there can
be no assurance regarding the timeline for which or certainty that the FDA will
develop protocols for evaluation and approval of such a product.
 
 18
 Table of Contents
 We
are Dependent Upon Patents, Licenses and Other Proprietary Rights From Third
Parties.
 
 To
facilitate the development and commercialization of a proprietary technology
base for our rapid test products, we have obtained licenses to patents or other
proprietary rights from other parties. Obtaining such licenses has required the
payment of substantial amounts and will require the payment of royalties to
maintain them in the future.  We believe that the licenses to the
technologies we have acquired are critical to our ability to sell our rapid
tests currently being commercialized and other rapid tests that we may plan to
develop and/or commercialize in the future.
 
 There are
numerous patents in the United States and other countries which claim lateral
flow assay methods and related devices, some of which cover the technology used
in our rapid test products and are in force in the United States and other
countries. In 2004, we entered into a non-exclusive sublicense agreement with
Abbott Laboratories that grants us worldwide rights related to patents for
lateral flow assay methods and related devices.  We believe that the
acquisition of these rights will enable us to make or sell our rapid test
products in countries where these patents are in force.  In 2004, we
also acquired a sublicense from Bio-Rad Laboratories and Bio-Rad Pasteur for
patents related to the detection of the HIV-2 virus.  HIV-2 is a type
of the HIV virus estimated to represent a small fraction of the known HIV cases
worldwide.  Nevertheless, HIV-2 is considered to be an important
component in the testing regimen for HIV in many markets.  We believe
that this sub-license agreement makes it possible for us to sell HIV-2 tests in
countries where such patents are in force, or to manufacture in countries where
such patents are in force and then sell into non-patent
markets.  Additionally, in 2003 we licensed an antigen necessary for
certain of our rapid HIV-1/2 products from Adaltis, Inc., and in 2004, we
acquired rights from Ani Biotech for its rapid test diagnostic platform and
sample applicator, which we believe is a viable alternative to current lateral
flow technologies and with potentially worldwide applicability.  The
loss of any one of these licenses or challenges to the patents would be
detrimental to the commercialization of our rapid tests by delaying or limiting
our ability to sell our rapid test products, which would adversely affect our
results of operations, cash flows and business.
 
 In the
event that our financial condition inhibits our ability to pay license fees or
royalty payments due under our license agreements, our rights to use, transfer
or sublicense  those licenses could be jeopardized in the event of a
default in payment of fees or royalties.  The loss of any of the
foregoing licenses could have a materially adverse effect on our ability to
produce our products or introduce new HIV or other diagnostic products in
countries covered by those patents since the license agreements provide
necessary proprietary processes or components for the manufacture of our
products.
 
 Our
Success Depends on Our Ability to Protect Our Proprietary
Technologies.
  The
medical diagnostics test industry places considerable importance on obtaining
patent, trademark, and trade secret protection, as well as other intellectual
property rights, for new technologies, products and processes. Our success
depends, in part, on our ability to develop and maintain a strong intellectual
property portfolio or to obtain licenses to patents for products and
technologies, both in the United States and in other countries.
  As
appropriate, we intend to file patent applications and obtain patent protection
for our proprietary technology. These patent applications and patents, when
filed, are intended to cover, as applicable, compositions of matter for our
products, methods of making those products, methods of using those products, and
apparatus relating to the use or manufacture of those products. We will also
rely on trade secrets, know-how, and continuing technological advancements to
protect our proprietary technology.  There is, however, no assurance
that we will be successful in obtaining the required patent protection or that
such protection will be enforced in certain countries in which we
compete.
  We have
entered, and will continue to enter, into confidentiality agreements with our
employees, consultants, advisors and collaborators. However, these parties may
not honor these agreements and we may not be able to successfully protect our
rights to unpatented trade secrets and know-how. Others may independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to our trade secrets and know-how.
  19
 Table of Contents
 Certain
of our employees, including scientific and management personnel, were previously
employed by competing companies.  Although we encourage and expect all
of our employees to abide by any confidentiality agreement with a prior
employer, competing companies may allege trade secret violations and similar
claims against us.
  We have
collaborated in the past and expect to collaborate in the future with
universities and governmental research organizations which, as a result, may
acquire part of the rights to any inventions or technical information derived
from collaboration with them.
  We may
incur substantial costs and be required to expend substantial resources in
asserting or protecting our intellectual property rights, or in defending suits
against us related to intellectual property rights. Disputes regarding
intellectual property rights could substantially delay product development or
commercialization activities. Disputes regarding intellectual property rights
might include state, federal or foreign court litigation as well as patent
interference, patent reexamination, patent reissue, or trademark opposition
proceedings in the United States Patent and Trademark Office. Opposition or
revocation proceedings could be instituted in a foreign patent office. An
adverse decision in any proceeding regarding intellectual property rights could
result in the loss or limitation of our rights to a patent, an invention or
trademark.
 
 We
May Need to Establish Additional Collaborative Agreements, and this Could Have a
Negative Effect on Our Freedom to Operate Our Business or Profit Fully from
Sales of Our Products.
 
 We may
seek to collaborate with other companies to gain access to their research and
development, manufacturing, marketing and financial
resources.  However, we may not be able to negotiate arrangements with
any collaborative partners on acceptable terms. Any collaborative relationships
that we enter into may include restrictions on our freedom to operate our
business or to profit fully from the sales of our products.
 
 Once a
collaborative arrangement is established, the collaborative partner may
discontinue funding any particular program or may, either alone or with others,
pursue alternative technologies for the protects or diseases we are targeting.
Competing products, developed by a collaborative partner or to which a
collaborative partner has rights, may result in the collaborative partner
withdrawing support as to all or a portion of our technology.
 
 Without
collaborative arrangements, we must fund our own research and development
activities, accelerating the depletion of our financing resources and requiring
us to develop our own marketing capabilities. Therefore, if we are unable to
establish and maintain collaborative arrangements, we could experience a
material adverse effect on our ability to develop products and, once developed,
to market them successfully.
 
 The
Time Needed to Obtain Regulatory Approvals and Respond to Changes in Regulatory
Requirements Could Adversely Affect Our Business.
  Our
existing and proposed products are subject to regulation by the Chinese FDA (the
SFDA), the FDA, Russian and Indian regulatory bodies and other governmental or
public health agencies.  In particular, we are subject to strict
governmental controls on the development, manufacture, labeling, distribution
and marketing of our products.  In addition, we are often required to
obtain approval or registration with other foreign governments or regulatory
bodies before we can import and sell our products in these
countries.
  The
process of obtaining required approvals or clearances from governmental or
public health agencies can involve lengthy and detailed laboratory testing,
human clinical trials, sampling activities and other costly, time-consuming
procedures.  The submission of an application to the SFDA, the FDA or
other regulatory authority does not guarantee that an approval or clearance to
market a product will be received.  Each authority may impose its own
requirements and delay or refuse to grant approval or clearance, even though a
product has been approved in another country or by another agency.
  Moreover,
the approval or clearance process for a new product can be complex and
lengthy.  This time span increases our costs to develop new products
as well as the risk that we will not succeed in introducing or selling them in
our target markets.
  20
 Table of Contents
 Newly
promulgated or changed regulations could also require us to undergo additional
trials or procedures, or could make it impractical or impossible for us to
market our products for certain uses, in certain markets, or at
all.
 
 Failure
to Comply With SFDA, FDA or Similar International Regulatory Bodies or Other
Requirements May Require Us to Suspend Production of Our ProductsWhich Could Result in a
Loss of Revenues.
  We can
manufacture and sell products, both in China, the United States and elsewhere
abroad, only if we comply with regulations of government agencies such as the
SFDA and the FDA.  We have implemented quality assurance and other
systems that are intended to comply with applicable government regulations with
regard to both our planned manufacturing in China and our contract manufacturing
operations.
  The SFDA,
the FDA, or another government or public health agency could force us to stop
manufacturing our products if it concludes that we are out of compliance with
applicable regulations.  They could also require us to recall products
if we fail to comply with applicable regulations, which could force us to stop
manufacturing such products.  Either of these events would result in a
material adverse effect on our business.
 
 We
Engage Contract Manufacturers and Plan to Conduct International Manufacturing
Operations to Produce Some of Our Products, Including Our Rapid Tests Currently
Being Commercialized.
 
 We have
engaged a domestic contract manufacturer to produce our BED Incidence tests and
our Aware MessengerTM
sampling device and another in Thailand to produce our rapid HIV tests and we
have  manufacturing operations in China through our affiliate and plan
to do so elsewhere. We intend to subsequently introduce a new line of products
using the Ani technology platform, and again expect to rely on outsourced or
overseas manufacturing organizations. Initially, none of these entities will
have more than limited experience, if any, in manufacturing our products and
will have no experience in manufacturing them in commercial
quantities.  Furthermore, our rapid tests are not yet approved for
sale in Thailand, which precludes us from selling them in certain countries in
which approval in the country of manufacture, i.e. a “Certificate of
Origin,”  is a prerequisite to local product
approval.  While outsourcing our manufacturing processes to contract
manufacturers may permit us to expand our manufacturing capacity more quickly,
it may also subject us to problems in such areas as:
  •
              transferring
      the technology from the laboratory or pilot operation to the contract
      manufacturer on a commercial scale;•
              lack
      of technical knowledge regarding regulated procedures and the ability of
      the contract manufacturer to obtain and maintain the necessary GMP or
      other regulatory certifications;•
              uncertain
      or unreliable production yields;•
              maintaining
      quality control and assurance;•
              regulatory
      compliance, since most rapid test manufacturers do not produce products
      that are as stringently controlled as HIV diagnostics;•
              misappropriation
      of intellectual property, particularly in foreign countries where patent
      protection is less stringent, and depending on the extent of manufacturing
      processes that are outsourced;•
              developing
      market acceptance for new product;•
              production
      yields;•
              quality
      control and assurance;•
              raw
      material supply;•
              shortages
      of qualified personnel; and•
              maintaining
      appropriate financial controls and
procedures.
 
 Any of
these problems could affect our ability to meet increases in demand should our
products gain market acceptance and could impede the growth of our sales
revenues.
 
 21
 Table of Contents
 We
Rely on Sole Source Suppliers that We Cannot Quickly Replace for Certain
Components Critical to the Manufacture of Our Products.
 
 Among the
critical items we purchase from qualified sole source suppliers are various
conjugates, and HIV-positive and HIV-negative testing samples.  Any
delay or interruption in the supply of these or other sole source components
could have a material adverse effect on us by significantly impairing our or our
contract manufacturer’s ability to manufacture products in sufficient
quantities, particularly as we increase our manufacturing activities in support
of commercial sales.  Further, price increases imposed by these
suppliers may result in increased costs and reduced margins to us, if we are
unable to pass the increased costs on to our customers.  In addition,
if our financial condition impairs our ability to pay for critical components on
a timely basis, our suppliers may delay or cease selling critical components to
us, which could also restrict our ability to manufacture.  We
typically do not have long-term supply agreements with these suppliers, relying
instead on periodic purchase orders to acquire materials with the result that
suppliers could delay or decline to ship components until payment is made in
advance or on a COD basis.
 
 We
May Not Be Able to Retain and/or Attract Key Executives and Other
Personnel.
 
 Certain
of our executives and senior employees left the Company during 2007 and 2008,
prior to the reduction in our workforce in the fourth quarter of
2008.  As a small company, our success depends on the services of key
employees in various research and development, administrative, marketing and
quality systems positions.  Our inability to replace or attract key
employees in certain positions as a result of our financial condition, or for
other reasons, could have a material adverse effect on our
operations.
 
 Our
Research, Development and Commercialization Efforts May Not Succeed or Our
Competitors May Develop and Commercialize More Effective or Successful
Diagnostic Products.
  In order
to remain competitive, we must regularly commit substantial resources to
research and development and the commercialization of new
products.  The research and development process generally takes a
significant amount of time and money from inception to commercial product
launch.  This process is conducted in various
stages.  During each stage there is a substantial risk that we will
not achieve our goals on a timely basis, or at all, and we may have to abandon a
product in which we have invested substantial amounts of money.
  A primary
focus of our efforts has been rapid HIV tests that we are commercializing or
that are in the process of being developed.  We plan to expand our
product line to include tests for other STD’s or synergistic diseases or
conditions.  However, there can be no assurance that we will have the
funds to perform the necessary research and development to do
this.  Moreover, there can be no assurance that will succeed in our
research and development efforts with respect to rapid tests or other
technologies or products or in our commercialization of these
tests.
  Successful
products require significant development and investment, including testing, to
demonstrate their efficacy, cost-effectiveness and other benefits prior to
commercialization.  In addition, regulatory approval must be obtained
before most products may be sold.  Regulatory authorities may not
approve these products for commercial sale.  In addition, even if a
product is developed and all applicable regulatory approvals are obtained, there
may be little or no market for the product at a price that will allow us to earn
a reasonable profit, or we may be unable to obtain the requisite licenses to
sell the product or to qualify for a government tender, which are often
requirements in third world countries where the greatest need and largest market
for HIV diagnostic testing exists.  Accordingly, if we fail to develop
commercially successful products, or if competitors develop more effective
products or a greater number of successful new products, or there are
governmental limitations affecting our ability to sell our products, customers
may decide to use products developed by our competitors.  This would
result in a loss of current or anticipated future revenues and adversely affect
our results of operations, cash flows and business.
 
 22
 Table of Contents
 We
Face Intense Competition in the Medical Diagnostic Products Market and Rapid
Technological Advances by Competitors.
 
 Competition
in our diagnostic market is intense and we expect it to
increase.  Many of our competitors have significantly greater
financial, marketing and distribution resources than we do.  Our
competitors may succeed in developing or marketing technologies and products
that are more effective than ours.  In addition, if acceptance for
oral fluid testing expands, we may experience competition from companies in
areas where intellectual property rights may not be as stringent as in the
United States.  These developments could render our technologies or
products obsolete or noncompetitive or otherwise affect our ability to increase
or maintain our products’ market share. Further, the greater resources of our
competitors could enable them to develop competing products more quickly so as
to make it difficult for us to develop a share of the market for these
products.  By having greater resources, our competitors may also be
able to respond more quickly to technology changes in the marketplace and may be
able to obtain regulatory approval for products more quickly than we
can.  Our future success will depend on our ability to remain
competitive with other developers of medical devices and therapies.
 
 Our
Quarterly Results May Fluctuate Due to Certain Regulatory, Marketing, Financing
and Competitive Factors Over Which We Have Little or No Control.
 
 The
factors listed below, some of which we cannot control, may cause our revenues
and results of operations to fluctuate significantly:
  •
              actions
      taken by the FDA or foreign regulatory bodies relating to products we are
      commercializing or seeking to develop;•
              the
      extent to which our current or proposed new products gain market
      acceptance;•
              the
      timing and size of purchases by our customers, distributors or joint
      venture partners;•
              introductions
      of alternative means for testing for HIV by
competitors;•
              changes
      in the way regulatory authorities evaluate HIV testing, including
      supplemental testing of the results of a rapid HIV screening
      test;•
              the
      failure to raise funds to continue our operations; and•
              customer
      concerns about the stability of our business which could cause them to
      seek alternatives to our product.
 
 The
Success of Our Plans to Enter International Markets May Be Limited or Disrupted
Due to Risks Related to International Trade and Marketing and the Capabilities
of Our Distributors, Manufacturers and Joint Venture Partners.
 
 We must
rely on revenues to be generated from sales of our current or planned incidence
and rapid tests, largely to international distributors and/or joint
ventures.  We believe that our alternative fluid-based tests can
provide significant benefits in countries that do not have the facilities or
personnel to safely and effectively collect and test blood
samples.  To date, however, sales to international customers have
resulted in relatively insignificant revenues.  A majority of the
companies with which we compete in the sale of HIV screening tests actively
market their diagnostic products outside of the United
States.  Manufacturers from Japan, Canada, Europe, and Australia offer
a number of HIV screening tests in those markets, including HIV-1/2 rapid tests,
which are not approved for sale in the U.S. market.  There can be no
assurance that our products will compete effectively against these products in
foreign markets.  The following risks may limit or disrupt the success
of our international efforts:
  •
              the
      imposition of government controls (regulatory
approval);•
              export
      license requirements;•
              political
      and economic instability;•
              trade
      restrictions;•
              changes
      in tariffs;•
              difficulties
      in managing international operations (difficulty in establishing a
      relationship with a foreign distributor, joint venture partner, or
      contract manufacturer with the financial and logistical ability to
      maintain quality control of product);           23
 Table of Contents
  •
              the
      ability to secure licenses for intellectual property or technology that
      are necessary to manufacture or sell our products in the selected
      countries;•
              fluctuations
      in foreign currency exchanges rates;•
              the
      financial stability of our distributors and/or their expertise in
      obtaining local country regulatory approvals;•
              the
      financial capabilities of potential customers in lesser-developed
      countries or, alternatively, our inability to obtain approvals which would
      enable such countries access to outside financing, such as the World
      Bank;•
              the
      ability of our distributors to successfully sell into their contractual
      market territory or to successfully cover their entire
      territory;•
              the
      possibility that a distributor may be unable to meet minimum contractual
      commitments;•
              establishing
      market awareness; and•
              external
      conditions such as regional conflicts, health crises or natural
      disasters.
           Some of
our distributors have limited international marketing
experience.  There can be no assurance that these distributors will be
able to successfully market our products in foreign markets.  Any such
failure will delay or disrupt our plans to expand our business.
 
 The
Chinese Government Could Change Its Policies Toward Private Enterprises or Even
Nationalize or Expropriate Them, Which Could Result in the Total Loss of
Business in That Country.
 
 We have
established joint ventures in China with an entity related to our largest
stockholder through which we expect to manufacture and sell our
products.  Our business in China is subject to political or economic
uncertainties and may be adversely affected by political, economic and social
developments in China.  Over the past decade, the Chinese government
has pursued economic reform policies, including the encouragement of private
economic activity and greater economic decentralization.  The Chinese
government may choose to end these policies or alter them significantly to our
detriment with little, if any, notice.
 
 Changes
in policies, laws and regulations or in their interpretation or the imposition
of taxation, restrictions on currency conversion, restrictions or devaluations
of currency, nationalization or other expropriation of private enterprises could
have a material adverse effect on our business in
China.  Nationalization or expropriation could result in the total
loss of business in China.
 
 An
Economic Downturn, Terrorist Attacks or Other Conditions Beyond Our Control May
Adversely Affect Our Business or Our Customers May Not Be Able to Satisfy Their
Contractual Obligations and We May Not Be Able to Deliver Our Products as a
Result of the Impact of Conditions Such as Certain World Events or Natural
Disasters.
 
 Changes
in economic conditions could adversely affect our business.  For
example, in a difficult economic environment, customers may be unwilling or
unable to invest in new diagnostic products, may elect to reduce the amount of
their purchases or may perform less HIV testing.  A weakening business
climate could also cause longer sales cycles and slower growth, and could expose
us to increased business or credit risk in dealing with customers adversely
affected by economic conditions.
  Terrorist
attacks or regional conflicts and subsequent governmental responses to these
attacks could cause further economic instability or lead to further acts of
terrorism in the United States and elsewhere.  These actions could
adversely affect economic conditions outside the United States and reduce demand
for our products internationally. Terrorist attacks could also cause regulatory
agencies, such as the FDA or agencies that perform similar functions outside the
United States, to focus their resources on vaccines or other products intended
to address the threat of biological or chemical warfare.  This
diversion of resources could delay our ability to obtain regulatory approvals
required to manufacture, market or sell our products in the United States and
other countries.
 
 24
 Table of Contents
 Our
business model and future revenue forecasts call for a significant expansion of
sales in the People’s Republic of China as well as in Africa, Russia, India and
elsewhere upon successful commercialization of our rapid test
products.  Should conditions beyond our control, such as disease
outbreaks, natural disasters, war or political unrest, redirect attention from
the worldwide HIV/AIDS epidemic or concern for other STD’s, if and when we are
able to develop and introduce such diagnostic products, our customers’ ability
to meet their contractual purchase obligations and/or our ability to supply
product internationally for either evaluation or commercial use may prevent us
from achieving the revenues we have projected.  As a result, we may
have to seek additional financing beyond that which we have projected, which may
not be available on the timetable required or on acceptable terms that are not
substantially dilutive to our stockholders, or we may have to curtail our
operations, or both.
 
 As
a Small Manufacturer of Medical Diagnostic Products, We Are Exposed to Product
Liability and Recall Risks For Which Insurance Coverage is Expensive, Limited
and Potentially Inadequate.
 
 We
manufacture medical diagnostic products, which subjects us to risks of product
liability claims or product recalls, particularly in the event of false positive
or false negative reports.  A product recall or a successful product
liability claim or claims that exceed our insurance coverage could have a
material adverse effect on us.  We maintain a $5,000,000 claims-made
policy of product liability insurance.  However, product liability
insurance is expensive. In the future we may not be able to obtain coverage on
acceptable terms, if at all.  Moreover, our insurance coverage may not
adequately protect us from liability that we incur in connection with clinical
trials or sales of our products.
 
 Item2. Properties
  Our
principal corporate offices, administrative, sales and marketing, research and
development and support facilities are located at 16290 S.W. Upper Boones Ferry
Road, Portland, Oregon, 97224 and consist of approximately 11,000 square feet of
leased office, laboratory, warehouse, assembly, test and manufacturing
space.  We entered into a 63 month lease for this facility, which
expires in November 2012, with an average cost of approximately $14,000 per
month.
 
 We also
lease small office space in Dubai, U.A.E. and Geneva, Switzerland for satellite
sales and marketing purposes.
 
 Our joint
venture, Beijing Marr, has land use rights in the Huairou district of Beijing,
China to approximately 24,000 square meters that includes approximately 2,100
square meters of manufacturing facilities and other office and warehouse
buildings.  It also rents office space in Air China Plaza in the
Huairou district of Beijing for RMB42,000 per month pursuant to a lease that
began on March 8, 2007 and terminates on May 31, 2009.
 
 We
believe our properties are adequate for our current needs.
 
 We have
sublet our former 26,000 square foot manufacturing, research and office site in
Rockville, Maryland to Maxim Biomedical Corporation (“Maxim”).  In
connection with the purchase of our Legacy Business, Maxim assumed our
obligations as lessee under this lease, which expires in February
2009.
 
 
 25
 Table of Contents
 Item3. Legal Proceedings
  On
September 28, 2008, David K. Harris, the former Chief Executive Officer of our
subsidiary, Beijing Marr, filed a labor dispute claim against Beijing Marr with
the Beijing Chaoyang District, China, Labor Dispute Arbitration Commission
claiming that he was wrongfully terminated by Beijing Marr and seeking
approximately $381,000 for unpaid salary, expense reimbursement, severance
payment and penalties.  In January 2009, Beijing Marr filed a
counterclaim against Mr. Harris for damages it suffered as a result of various
instances of misconduct and failure to perform his duties as chief executive
officer and seeking approximately RMB 493,346.  The matter so far has
been heard on November 28, 2008, February 2, 2009 and April 20,
2009.
 
 In late
2008, two former employees of Beijing Marr filed complaints against Beijing Marr
with the Labor Arbitration Committee of Chaoyang District, Beijing, claiming
that they are owed additional compensation as a result of noncompliance with
certain provisions of the Labor Contract Law of China.  Each is
claiming they are owed one month salary.  The total claimed is
approximately RMB 311,122.  The first hearing is scheduled for April
30, 2009.
 
 In late
2008, a complaint was filed by Fangcui Green Garden Project Co., Ltd. against
Beijing Marr in the Beijing Arbitration Committee in the amount of RMB
195,499.13 seeking payment for a construction project performed by Fangcui Green
Garden Project for Beijing Marr at its manufacturing facility. Beijing Marr has
counterclaimed for damages resulting from faulty workmanship in an amount in
excess of RMB 118,000.  The first hearing of the matter was held on
April 15, 2009.
 
 On March
2, 2009, Sun Deming filed a complaint against Beijing Marr in the People’s Court
of Chaoyang District, China, for breach of an apartment lease between Sun
Deming, as landlord, and Beijing Marr, as tenant, in the amount of RMB 70,000
for five months unpaid rental for the months of May 2008 through September 2008
plus penalties of RMB 1,418 and court costs equal to 10% of the claimed amount
for a total of RMB 80,000.  Arbitration was scheduled for April 8,
2009.  On April 7, 2009 the parties settled this matter out of court.
Beijing Marr agreed to pay Sun Deming RMB 70,000 by making a cash payment of RMB
56,000 and forfeiting the return of the deposit of RMB 14,000.
 
 In
January 2006, a complaint was filed against us and certain of our current and
former officers by Logisticorp, Inc. and Southwest Resource Preservation, Inc.
(collectively, the “Complainants”) in the Superior Court of the State of
California in and for the County of Los Angeles – Central District seeking
damages in the amount of approximately $1,100,000, plus interest, trading
penalties of $5,000 per day and other damages.  On April 17, 2007, the
Superior Court entered a final judgment dismissing the complaint with prejudice
for failure to state a cause of action and ordering the Complainants to pay us
our costs and attorneys’ fees in the aggregate amount of $106,304.  On
June 15, 2007, the Complainants filed a notice to appeal the judgment with the
Court of Appeal of the State of California, Second Appellate District, but
failed to file an opening brief by the statutory deadline date.  On
November 13, 2008, the Court of Appeal issued an opinion affirming the trial
court judgment.  Remittitur was issued on January 16, 2009. The
plaintiff/appellant did not file a petition for review with the California
Supreme Court.  As a result, the case has been finally determined in
our favor.
  Item4.  Submission of Matters to a Vote of Security
Holders
  We held
our 2008 Annual Meeting of Stockholders on December 10, 2008, at which our
stockholders voted on the following proposals:
 
 1.
                      
                      Elect
      five directors of the Company to hold office until the next annual meeting
      of stockholders or until their respective successors have been elected and
      qualified.2.
                      
                      Ratify
      the selection of Odenberg Ullakko Muranishi & Co. LLP as our
      independent registered public accounting firm for the year ending
      December 31, 2008.3.
                      
                      Approve
      an amendment to the 2004 Incentive Plan to increase the number of shares
      of our common stock available for issuance thereunder from 47,000,000 to
      120,000,000;4.
                      
                      Approve
      an amendment to the 2005 Director Incentive Plan to increase the number of
      shares of our common stock available for issuance thereunder from
      18,000,000 to 46,000,0005.
                      
                      Approve
      an amendment to the Amended and Restated Certificate of Incorporation to
      effect a reverse stock split of the issued and outstanding shares of
      common stock at the ratio of 1:20 and to lower the par value of the common
      stock to
$0.001
 
 26
 Table of Contents
 The
record date for determining stockholders eligible to vote at the meeting was
October 17, 2008.  On the record date, there were 439,354,624 shares
of our common stock outstanding and eligible to vote.  There were
present at the meeting, in person or by proxy, holders of 200,780,192 shares,
representing 45.7% of the common stock outstanding.
 
 Roger I.
Gale, who had served as Chairman of the Board of Directors since November 2004,
did not stand for re-election to the Board of Directors at the 2008 Annual
Meeting.  Maxim A. Soulimov resigned from the Board of Directors on
November 19, 2009.  Otherwise, each nominee for the Board of Directors
was re-elected at the 2008 Annual Meeting.  The following number of
votes was cast for and against each nominee:
 
 For
                    
                    
                    AgainstJohn
      J. DiPietro
                    
                    
                    194,457,426
                    
                    
                    
                    6,232,766Paul
      E. Freiman
                    
                    
                    194,632,612
                    
                    
                    
                    6,147,580Adel
      Karas
                    
                    
                    194,786,931
                    
                    
                    
                    5,993,261Julius
      R. Krevans, M.D.
                    
                    
                    186,227,710
                    
                    
                    
                    14,552,482
 
 The
stockholders approved the following proposal.  The following votes
were tabulated:
 
 For
                
                
                Against
                
                
                AbstainProposal
      2
                
                
                199,084,407
                
                
                
                822,344
                
                
                
                873,440
 
 The
stockholders did not approve the following proposals.  The following
votes were tabulated:
 
 For
                  
                  
                  Against
                  
                  
                  Abstain
                  
                  
                  Broker
      Non-VotesProposal
      3
                  
                  
                  70,393,537
                  
                  
                  
                  6,411,518
                  
                  
                  
                  40,720
                  
                  
                  
                  123,934,417Proposal
      4
                  
                  
                  70,385,561
                  
                  
                  
                  6,402,875
                  
                  
                  
                  57,339
                  
                  
                  
                  123,934,417Proposal
      5
                  
                  
                  170,737,517
                  
                  
                  
                  29,781,069
                  
                  
                  
                  261,603
                  
                  
                  
                  -
 
 27
 Table of Contents
 PART
II
  Item5. Market for the Registrant’s Common Equity and Related
Stockholder Matters
  Trading
Market
 
 Since
September 8, 2006 our common stock, par value $0.03 per share, has traded on the
NASD Over-the-Counter Bulletin Board (“OTCBB”) under the symbol
“CBMC.”  Between August 17, 2004 and September 7, 2006, our stock
traded on the American Stock Exchange under the symbol “HIV.”  Prior
to August 17, 2004, it traded on the OTCBB under the symbol
“CYPT.”  High and low quotations reported by the OTCBB or the American
Stock Exchange, as applicable, during the periods indicated are shown
below.  These quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions and may not represent actual
transactions.
 
 Fiscal
      Year
                                        
                                        Quarter
                                        
                                        
                                        High
                                        
                                        
                                        Low2008
                                        
                                        4th
                                        
                                        
                                        $
                                        0.030
                                        
                                        
                                        $
                                        0.0042008
                                        
                                        3rd
                                        
                                        
                                        
                                        0.067
                                        
                                        
                                        
                                        0.0202008
                                        
                                        2nd
                                        
                                        
                                        
                                        0.128
                                        
                                        
                                        
                                        0.0402008
                                        
                                        1st
                                        
                                        
                                        
                                        0.175
                                        
                                        
                                        
                                        0.0632007
                                        
                                        4th
                                        
                                        
                                        
                                        0.23
                                        
                                        
                                        
                                        0.092007
                                        
                                        3rd
                                        
                                        
                                        
                                        0.22
                                        
                                        
                                        
                                        0.072007
                                        
                                        2nd
                                        
                                        
                                        
                                        0.11
                                        
                                        
                                        
                                        0.062007
                                        
                                        1st
                                        
                                        
                                        
                                        0.08
                                        
                                        
                                        
                                        0.05
  On April
20, 2009, there were approximately 13,300 holders of record of our common
stock.  The closing price of our common stock on April 20, 2009 was
$0.006 per share.  We have never paid any cash dividends, and our
Board does not anticipate paying cash dividends in the foreseeable
future.  We intend to retain any future earnings to provide funds for
the operation and expansion of our business.
 
 Item7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
  The
following management’s discussion and analysis of financial condition and
results of operations (“MD&A”) should be read in conjunction with our
consolidated financial statements and notes thereto which appear elsewhere in
this Annual Report on Form 10-K.  This MD&A should also be read in
conjunction with Item 1.A. “Risk Factors.”
  This
MD&A contains forward-looking statements regarding our business
development plans, the characteristics and growth of our markets and customers;
our objectives and plans for future operations and products and our liquidity
and capital resources. These forward-looking statements express our current
intentions, beliefs, expectations, strategies or predictions and are based on a
number of assumptions and currently available information.  Our
forward-looking statements are subject to a number of risks and uncertainties,
including, without limitation, our ability to obtain an increased market share
in the diagnostic test market; market acceptance of our products by governmental
and other public health agencies, health care providers and consumers; the
success of our future marketing and brand-building efforts; FDA and
international regulatory actions; our ability to protect our proprietary
technologies; the further development of our technologies and products; our
ability to compete successfully against existing and new competitors; our future
financial and operating results; our liquidity and capital resources; our
ability to obtain additional financing as necessary to fund both our short- and
long-term business plans; our ability to terminate or reduce our debt
obligations; changes in domestic or international conditions beyond our control
that may disrupt our or our customers’ or distributors’ ability to meet
contractual obligations; changes in health care policy in the United States or
abroad; fluctuations in market demand for and supply of our products; public
concern as to the safety of products that we or others develop and public
concern regarding HIV and AIDS; availability of reimbursement for use of our
products from private health insurers; governmental health administration
authorities and other third-party payors; our ability to attract or retain key
personnel and various other matters (including contingent liabilities and
obligations and changes in accounting policies, standards and
interpretations).
 
 28
 Table of Contents
 Forward-looking
statements are generally identifiable by the use of terms such as “anticipate,”
“will,” “expect,” “believe,” “should” or similar expressions. Although we
believe that the assumptions on which the forward-looking statements contained
herein are based are reasonable, any of those assumptions could prove to be
inaccurate given the inherent uncertainties as to the occurrence or
nonoccurrence of future events. These statements are not guarantees of future
performance and involve risks and uncertainties that are difficult to
predict.  Therefore, actual outcomes and results may, and are likely
to, differ materially from what is expressed or forecasted in the
forward-looking statements due to numerous factors, including the potential
risks and uncertainties set forth in Item 1A of this Form 10-K and relate
to our business plan, our business strategy, development of our proprietary
technology platform and our products, timing of such development, timing and
results of clinical trials, level and timing of FDA regulatory clearance or
review, market acceptance of our products, protection of our intellectual
property, implementation of our strategic, operating and people initiatives,
benefits to be derived from personnel and directors, ability to commercialize
our products, our assumptions regarding cash flow from operations and cash
on-hand, the amount and timing of operating costs and capital expenditures
relating to the expansion of our business, operations and infrastructure,
implementation of marketing programs, our key agreements and strategic
alliances, our ability to terminate or reduce our debt obligations, our
ability to obtain additional capital as, and when, needed, and on acceptable
terms and general economic conditions specific to our industry, any of which
could impact sales, costs and expenses and/or planned strategies and
timing.  If we are not able to generate sufficient liquidity from
operations or raise sufficient additional capital, this could have a material
adverse affect on our business, results of operations, liquidity and financial
condition. We assume no obligation to, and do not currently intend to,
update these forward-looking statements.
 
 Overview
of Critical Events in 2008
 
 Throughout
2008, we focused on marketing and selling our AwareTM HIV-1/2
Rapid Tests in countries where we have regulatory approval and where we soon
expected to have regulatory approval, primarily concentrating on South Africa,
Cote d’Ivoire, Kenya, Uganda, U.A.E., India and Russia.  Most of our
AwareTM HIV-1/2
Rapid Tests sales were in Africa, through our South African distributor, however
in the fourth quarter of 2008, we also completed a sale to our new distributor
in the U.A.E. that represented 48% of our rapid test sales revenue for
2008.  After receiving registration and marketing approval in April
2008, Beijing Marr began actively marketing AwareTM HIV-1/2
OMT in China.  Local sales of our rapid test in China were
insignificant during 2008 as our financial constraints limited our marketing
opportunities.
 
 Sales of
our BED Incidence Test accounted for 56% of our sales in 2008 and posted a 4%
revenue increase compared with 2007.  Such sales tend to be irregular
as public health and research institutions begin or conclude various studies to
monitor the incidence of HIV infection within their subject
populations.  Our new AwareMessengerTM oral
fluid sample collection device and our Life Sciences reagents, both introduced
during early 2008, accounted for 2% of our 2008 sales.
 
 We also
continued our clinical trial and regulatory approval process through 2008,
primarily focusing on countries which have been selected for funding by PEPFAR,
the President’s Emergency Plan for AIDS Relief.  Both our AwareTM HIV-1/2
BSP (blood, serum and plasma) rapid test and our AwareTM HIV-1/2
OMT (oral fluid) rapid test have been evaluated and are now included in the
USAID waiver list.
 
 We spent
considerable time and effort developing a complementary oral fluid test using an
alternative antigen that will enable us to market a non-invasive screening and
confirmation testing system for HIV-1/2.  We also began preclinical
development and evaluation activities for a second oral fluid test using a
synthetic peptide antigen , which would provide us with a full non-invasive
testing protocol in accordance with the WHO rapid testing guideline algorithm,
which we believe will benefit current diagnostic and treatment efforts and help
us achieve sales in regions that adhere to the WHO testing algorithm, and for a
lateral flow platform design suitable for over-the-counter applications of our
AwareTMHIV-1/2 Rapid Tests, which would permit our entry into the HIV rapid test
market in the United States and to expand our product line beyond HIV to a
broader set of non-invasive diagnostic tests for other sexually transmitted
diseases or diseases such as tuberculosis, malaria and hepatitis.
 
 29
 Table of Contents
 Our
operations and business plans were severely impacted by our inability to secure
additional capital in the fourth quarter of 2008. We had to curtail our
marketing, sales and development efforts to continue our business while
attempting to restructure our operations and seek additional
financing.  In the fourth quarter of 2008, we substantially reduced
our workforce in order to conserve cash and continue our day-to-day operations
at a minimal level. Since then, we have been focused on restructuring our
operations, looking for financing and reducing our debt, with the hope that we
will be able to continue as a going concern and once again focus on
commercializing our current products and resuming the research and development
of our other products. We have maintained a minimum staff in order to continue
sales of our products to our existing and new clients so that we do not lose the
momentum we have gained over the last few years. While most of our marketing
efforts have ceased, we have continued our market efforts in certain places
where to cease such efforts would almost certainly cause us to lose
ground.
  Business
Environment
 
 Although
we have received regulatory approval in a number of countries, there is a long
lag time between regulatory approval and sales.  In our target
markets, government ministries of health or similar government and
nongovernmental agencies are the primary purchasers of our products, typically
through a “lowest-cost” tender process. These purchasers have historically
purchased blood-based HIV tests.  We have had to overcome the obstacle
of changing these purchasers’ mindsets from preferring tests that use the
current blood standard of care.  We have expended much time, money and
effort to try to convince government bodies and non-government organizations to
try our oral fluid tests, both for its ease of use, efficiency and lower-cost
benefits.
 
 We have
directed considerable money and effort, including product donations to key user
agencies and lobbying for changes in tender regulations, to encourage the
consideration and inclusion of our oral fluid tests in purchase tenders. We
consider these efforts to be part of a strategy in which the “standard of care”
for HIV diagnosis evolves from the exclusive use of blood tests to more
widespread use of non-invasive oral fluid-based tests.  If we can
successfully change the standard of care, we expect to reach a point at which
time our revenue growth will increase significantly. We are not forecasting the
timing of this point as it is largely governed by factors that we can only
partially influence
  We
believe the demand for fast, easy-to-use HIV tests is strong and
growing.  By many accounts, governments are requiring more testing for
HIV and allocating more funds to such testing, non-governmental organizations
and charities have increased their funding for HIV testing
too.  Although we face barriers to market acceptance, we have started
making inroads.  For instance, according to the National Aids/STD
Control Programme. Kenya will soon roll out a national campaign to increase the
testing of Kenyans for HIV and will use our AwareTM HIV-1/2
OMTin this
campaign. We are unable to predict future demand for our products, however, we
believe that we will be able to increase market acceptance of our products and
our market position.
  Outlook
 
 As of
April 3, 2009, we are in default under our Credit Facility and Convertible
Notes. We are currently discussing termination, reduction or restructuring of
the Credit Facility and Convertible Notes with each of the secured creditors.
There can be no assurance that acceptable terms, or any terms, will be reached
between us and any of the creditors.  Our ability to terminate, reduce
or restructure our debt will impact whether or not we are able to raise
additional capital.  If we are unable to terminate, reduce or
restructure the debt, it is unlikely that we will be able to raise capital. As
our cash flows from our operating and investing activities are currently not
adequate to sustain our operations, if we are unable to raise capital, we will
likely be unable to continue our operations.
 
 In light
of our existing operations and financial challenges, we are exploring strategic
and financing options in conjunction with our ongoing discussions with these
secured creditors to terminate, reduce or restructure our debt
obligations.  Failure to obtain additional financing and to resolve
the existing defaults with respect to the Credit Facility and the Convertible
Notes will likely cause us to seek bankruptcy protection under Chapter 7 of
Title 11 of the United States Code, 11 U.S.C. § 101 et seq., which would
have a material adverse effect on our business, on our ability to continue our
operations and on the value of our equity.
 
 30
 Table of Contents
 Management
believes that we have the ability to sustain our operations, at least for the
near-term, through the termination, reduction or restructuring of our debt
obligations, effective management of our operations and the ability to raise
additional capital through private placements of equity.  However, if
we are unable to terminate, reduce or restructure our debt obligations or if we
are unable to raise sufficient additional capital, we will be unable to meet our
operating and debt obligations and will likely be unable to continue our
operations.
 
 We
believe that certain factors are critical to our success, including having
sufficient financial liquidity to fund our operations; raising additional funds
through the private placement of equity; terminating, reducing or restructuring
our debt obligations; reducing certain fixed costs; continuing to expand our
marketing and increasing sales of our products; and developing a larger
international market presence.
 
 Since
2003 we have developed and brought to market our AwareTM Rapid
Test Product Line and Aware MessengerTM Oral
Fluid Sample Collection Device and have either developed or have the technology
to develop next generation HIV test products and additional diagnostic test
products based on our technology and test platform.  These critical
additions to our product base over the past few years have positioned us to grow
our business and to achieve better margins as we move into the market for HIV
tests. These products are the core of our business and the key to our future
success.
 
 In order
to accomplish our business plan and meet our financial obligations, we
must:
 
 -     Negotiate
a termination, reduction or restructuring of our secured debt
obligations.
 -     Raise
additional capital to fund working capital requirements.
 -     Reduce
accounts payable and other debt and associated fixed costs.
 -     Increase
marketing and sales of our products through our current and new distribution
network.
 
 We have
been actively pursuing potential opportunities to address the above matters, the
ultimate resolution of which is beyond our control and will have a significant
impact on our financial condition and ability to continue our operations. As a
result, no assurances can be given that these transactions will be completed as
contemplated or at all, which could have a detrimental effect on our ability to
continue our operations. For more information regarding our business plan and
these transactions, see "Item 1. Business - General, Requirements of Additional
Capital and Business Plan" and for the related risks, see "Risk Factors"
below.
 
 As 2009
begins, we remain focused on our strategy of increasing marketing and sales in
the countries where our products are registered, seeking additional product
registrations in countries where we have a high likelihood of making sales and
keeping our operations costs low.
 
 AwareTMBED Incidence
Test
 
 We began
selling the BED Incidence Test in the fourth quarter of 2004.  It
accounted for approximately 56% and 66% of our sales in calendar years 2008 and
2007, respectively.  In absolute terms, revenue from the sale of the
Incidence Test increased by approximately 4% between 2007 and 2008.
 
 AwareTMHIV 1/2 Rapid Tests
 
 Sales of
our HIV-1/2 rapid diagnostic tests accounted for approximately 43% of our
revenues in 2008 compared with 34% in 2007.  We expect that our future
near- and medium-term revenues will be derived primarily from selling our
HIV-1/2 rapid tests in both the professional and over-the-counter (OTC) markets,
and potentially from selling diagnostic tests for other STDs or synergistic
tests, such as tuberculosis or malaria, in the longer term.
 
 31
 Table of Contents
 AwareTMMessengerTMSampling Device
 
 Our new
AwareMessengerTM oral
fluid sample collection device and our Life Sciences reagents, both introduced
during early 2008, accounted for 2% of our 2008 sales.
 
 Financial
Condition and Results of Operations
 
 During
2008 and 2007, we used cash of $4.6 million and $6.1 million, respectively, in
our operations.  In both periods, the cash used in operations was
primarily for development and commercialization of our rapid tests, as well as
for our selling, general and administrative expenses, including those of our
Chinese joint ventures.
 
 The
following summarizes the results of our operations for the years ended December
31, 2008 and 2007 (in thousands):
  Year
      Ended December 31,2008
                        
                        
                        2007Product
      sales revenue
                        
                        $
                        725
                        
                        
                        $
                        589Cost
      of product sales
                        
                        
                        685
                        
                        
                        
                        559Gross
      margin
                        
                        
                        40
                        
                        
                        
                        30Operating
      costs and expenses:Research
      and development expenses
                        
                        
                        1,405
                        
                        
                        
                        1,260Selling,
      general and administrative expenses
                        
                        
                        5,862
                        
                        
                        
                        6,409Impairment
      of assets
                        
                        
                        -
                        
                        
                        
                        1,528Total
      operating expenses
                        
                        
                        7,267
                        
                        
                        
                        9,197Loss
      from operations
                        
                        
                        (7,227
                        )
                        
                        
                        (9,167
                        )Interest
      expense, net
                        
                        
                        (2,520
                        )
                        
                        
                        (235
                        )Minority
      interest in losses of consolidated joint ventures
                        
                        
                        313
                        
                        
                        
                        1,206Other
      income (expense), net
                        
                        
                        257
                        
                        
                        
                        (72
                        )Loss
      before income taxes
                        
                        
                        (9,177
                        )
                        
                        
                        (8,268
                        )Income
      taxes
                        
                        
                        -
                        
                        
                        
                        (2
                        )Net
      loss
                        
                        $
                        (9,177
                        )
                        
                        $
                        (8,270
                        )
  Years
Ended December 31, 2008 and 2007
 
 Our
revenue for 2008 totaled $725,000 compared with $589,000 for 2007, an increase
of $136,000 or 23%.  Sales of our BED Incidence Test accounted for 56%
of our sales in 2008, compared with 66% in 2007.  Revenue from the
sales of the BED Incidence Test increased by 4% in 2008 compared with
2007.  Such sales tend to be irregular as public health and research
institutions begin or conclude various studies to monitor the incidence of HIV
infection within their subject populations.  Sales of our AwareTM HIV-1/2
rapid tests accounted for 43% and 34% of our revenues for 2008 and 2007,
respectively.  Revenues from the sale of our HIV-1/2 rapid tests
increased by 56% in 2008 compared with revenues in 2007, primarily due to the
impact of a $150,000 fourth quarter sale to our new distributor in the
UAE.  Sales of our HIV-1/2 rapid tests continue to be irregular during
our commercialization period as we gain approvals for and begin distribution of
those tests in various parts of the world.  Our new AwareMessengerTM oral
fluid sample collection device and our Life Sciences reagents, both introduced
during early 2008, accounted for the remaining 2% of our 2008
sales.
 
 32
 Table of Contents
 Three
customers accounted for approximately 56% of our revenue for
2008.  Our South African distributor purchased both BED Incidence
Tests and our AwareTM HIV-1/2
oral fluid rapid tests representing 24% of our 2008 revenue.  During
the fourth quarter of 2008, our new distributor in the U.A.E. purchased
AwareTM HIV-1/2
oral fluid rapid tests representing 21% of our total 2008
revenue.  BED Incidence Test purchases by the CDC’s contract testing
labs in New York accounted for 11% of our revenue for 2008.  Three
customers accounted for approximately 51% of our revenue for
2007.  Our South African distributor purchased both BED Incidence
Tests and our AwareTM HIV-1/2
oral fluid rapid tests representing 27% of our 2007 revenue.  A second
quarter purchase of our AwareTM HIV-1/2
oral fluid rapid tests by a Russian distributor accounted for 13% of our revenue
for 2007.  BED Incidence Test purchases by the CDC’s contract testing
labs in New York accounted for 11% of our revenue for 2007.
 
 We
reported a gross margin of 5.5% of sales in 2008, compared with a gross margin
of 5.1% in 2007, in spite of increases in the costs of our raw materials and the
expense attributable to increased staffing dedicated to our manufacturing
quality systems that began in the second half of 2007 and that we treat as a
component of product costs.  The margins we reported in both 2008 and
2007, however, are not typical of our expected future results because of the
relatively nominal amounts of revenues and product quantities over which the
quality systems costs and certain fixed expenses, like annual royalty minimum
payments, have been allocated.  Product costs in both periods are
based on resource-constrained purchasing patterns and pilot-plant-sized
production lots, and do not reflect the economies of scale that we anticipate
when we achieve true commercial scale operations.
 
 Research
and development costs increased by $145,000 or 12%, from $1,260,000 in 2007 to
$1,405,000 in 2008.  Domestic R&D expense increased by $315,000 or
29% in 2008 compared with 2007 primarily due to salary, benefits and related
employee expenses attributable to new R&D staff added during the second half
of 2007 who remained employed until the middle of the fourth quarter of 2008,
non-cash expense totaling $197,000 related to employee stock bonuses granted in
the first quarter of 2008 and employee stock options granted in the second
quarter of 2008, and costs incurred relating to patent and trademark
applications for our AwareTM HIV-1/2
oral fluid rapid tests and our Aware MessengerTM
sampling device. Offsetting these increases were reductions in expenses related
to travel, clinical trials and both cash and non-cash consulting
expenses.  R&D expense incurred by our Beijing Marr joint venture
decreased by $170,000 in 2008 compared with 2007.
  Selling,
general and administrative costs decreased by $547,000, or 9%, from $6,409,000
in 2007 to $5,862,000 in 2008.  The primary components of the net
decrease in 2008 include the following:
  ·
              a
      decrease of approximately $350,000 in salary and benefits expenses
      attributable to the elimination of certain senior administrative and sales
      management positions in the fourth quarter of 2007, resignations of
      officers during the second and third quarters of 2008, and the reduction
      in force that occurred during the fourth quarter of
  2008;
 ·
              a
      decrease in non-cash expense of $100,000 attributable to stock grants to
      an officer in each year;
 ·
              a
      reduction in administrative consulting and public company–related expenses
      of approximately $230,000;
 ·
              a
      reduction in marketing and administrative travel expenses of approximately
      $325,000;
 ·
              a
      decrease of approximately $139,000 attributable to non-cash stock based
      compensation expense primarily related to the fair value of April 2008
      option grants to employees, and subsequent modifications to them, and the
      November 2007 option grants to members of our Board of
      Directors;  offset by
 ·
              a
      second quarter 2008 non-cash charge of $350,000 resulting from the
      modification of warrants as part of a severance arrangement in a
      management change;
 ·
              increases
      in consulting and occupancy expenses aggregating approximately $186,000
      related to new representative offices opened in Dubai and Geneva during
      2007; and
 ·
              an
      increase of $166,000 in marketing and administrative expenses incurred by
      our Chinese joint ventures as they expanded their marketing
      efforts.
  In the
fourth quarter of 2007, we recorded non-cash impairment losses aggregating
$1,528,000 attributable to certain regulatory approvals, licenses and
certifications included in the manufacturing assets acquired by Beijing Marr
prior to the creation of our joint venture that we do not believe are
recoverable in the future.
 
 Our loss
from operations for 2008, at $7,227,000 reflects a reduction of $1,940,000
or 21% from the $9,167,000 loss from operations reported for 2007.
 
 33
 Table of Contents
 We
recorded net interest expense of $2,520,000 for 2008 compared with net interest
expense of $235,000 in 2007.  The increase in expense primarily
results from the $2.3 million fair value adjustment in 2007 attributable to the
accounting for the anti-dilution obligations related to our February 2007 and
March 2007 private placements.  Additionally, the decrease in expense
upon completing the amortization of the discounts and deferred offering costs of
the Convertible Notes transaction through the original April 2007 note maturity
date was partially offset by the increased expense related to amortizing the
discounts and derivative obligations arising from extending the term of the
Convertible Notes and the Credit Facility until April 3, 2009 and subsequently
modifying the conversion terms for the Conversion Notes held by Marr and the
Credit Facility.  The discounts attributable to extending the term of
the Convertible Notes and the Credit Facility are being amortized over the
period from March 2007 through April 2009.  The additional discounts
resulting from the December 2007 restructuring of the Convertible Notes held by
Marr and the Credit Facility are being amortized over the period from December
2007 through December 2008.  Interest expense for 2008 also includes
$305,000 attributable to the write-off of the deferred offering costs related to
our Equity Line arrangement with Fusion Capital as a result of the decline in
the market price of our common stock and our expected inability to make further
sales of our common stock to Fusion Capital under the arrangement.
 
 The
following table summarizes the components of interest expense (in
thousands):
   (Increase)Year
      ended December 31,
                              
                              
                              Decrease2008
                              
                              
                              2007
                              
                              
                              ExpenseInterest
      expense on debt instruments paid or payable in cash
                              
                              $
                              (303
                              )
                              
                              $
                              (315
                              )
                              
                              $
                              12Non-cash
      expense composed of:Accrued
      interest on 8% Convertible Notes (paid by issuing
    additionalNotes)
                              
                              
                              (453
                              )
                              
                              
                              (416
                              )
                              
                              
                              (37
                              )Amortization
      of 8% Convertible Note discounts and deferred offeringcosts
      through original maturity date
                              
                              
                              -
                              
                              
                              
                              (1,208
                              )
                              
                              
                              1,208Amortization
      of discounts associated with March 2007 extensionand
      December 2007 restuctructuring of 8% convertible notes andMarr
      Credit Facility notes
                              
                              
                              (1,372
                              )
                              
                              
                              (449
                              )
                              
                              
                              (923
                              )Mark
      to market adjustment of and intrinsic value of shares
    issuedunder
      anti-dilution obligations arising from the February andMarch
      2007 financings
                              
                              
                              32
                              
                              
                              
                              2,281
                              
                              
                              
                              (2,249
                              )Write-off
      of deferred offering costs related to Purchase Agreementwith
      Fusion Capital
                              
                              
                              (305
                              )
                              
                              
                              -
                              
                              
                              
                              (305
                              )Expense
      attributable to extension of term of August 2006Additional
      Warrants
                              
                              
                              -
                              
                              
                              
                              (29
                              )
                              
                              
                              29Expense
      attributable to dividends on mandatorily redeemable SeriesA
      preferred stock
                              
                              
                              (120
                              )
                              
                              
                              (120
                              )
                              
                              
                              -Total
      non-cash items
                              
                              
                              (2,218
                              )
                              
                              
                              59
                              
                              
                              
                              (2,277
                              )Total
      interest expense
                              
                              
                              (2,521
                              )
                              
                              
                              (256
                              )
                              
                              
                              (2,265
                              )Interest
      income
                              
                              
                              1
                              
                              
                              
                              21
                              
                              
                              
                              (20
                              )Net
      interest expense
                              
                              $
                              (2,520
                              )
                              
                              $
                              (235
                              )
                              
                              $
                              (2,285
                              )
  Liquidity
and Capital Resources
  For the
year ended December 31, 2008, we incurred a net loss of $9.2 million and a
negative cash flow of $4.6 million as a result of our operations.  At
December 31, 2008, we had a working capital deficit of $14.5 million and our
stockholders’ deficit was $12.1 million. Our cash balance at December 31, 2008
was $0.2 million.
 
 Our
consolidated operating cash burn rate for 2008 averaged approximately $382,000
per month compared to approximately $516,000 per month in 2007.  Our
decreased burn rate for 2008 reflects our efforts to reduce expenditures in
response to the absence of the anticipated exercise of warrants issued in our
March 2007 private placement and our inability to raise financing from other
sources, which ultimately led to a significant reduction in our workforce by the
end of 2008. We were required to significantly reduce or eliminate the
expenditures required to ramp up marketing and manufacturing initiatives to
achieve our near-term milestones.
 
 34
 Table of Contents
 During
2008, we sold 13,831,133 shares of our common stock under the terms of our
Equity Line and received cash proceeds of $950,000.  During 2008,
investors from our February 2007 and March 2007 private placements exercised
warrants to purchase an aggregate of 28,402,004 shares of common stock at
exercise prices between $0.05 per share and $0.08 per share and we received
$1,602,000 in proceeds.  In August 2008 and September 2008 we received
an aggregate of $1,400,000 from the sale of 34,000,000 shares of common stock in
private placements at prices of $0.05 per share and $0.035 per
share.
 
 During
the first quarter of 2009, one of our existing investors advanced funds
aggregating $300,025 to us in anticipation of a financing agreement. As of the
date of this filing, we do not have a definitive agreement with this investor
regarding the terms of these advances.
  Liquidity
Needs and our Business Plan
 
 We expect
to need a significant amount of capital to finance our operations and meet our
debt obligations. We are taking steps to address our capital requirements for
financial liquidity and have developed a business plan that we believe will
provide us with sufficient financial resources to continue to conduct our
operations. Please refer to "Item 1. Business - General, Requirements of
Additional Capital and Business Plan" and "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Executive Summary"
for more details on our plan. However, no assurances can be given that we will
successfully accomplish the objectives of our plan.
 
 We
believe that we will continue to incur net losses and negative cash flow from
operating activities through 2009.  We have financed our operations
from our inception primarily through the private placements of preferred stock
and common stock, our initial public offering and the issuance of convertible
notes and debentures.  Due to our historical operating losses, our
operations have not been a source of liquidity. We do not have sufficient
capital resources to fund our operations beyond the very
near-term.  We presently do not have any available credit, bank
financing or other external sources of liquidity. Additional financing is
required in order to meet our current and projected cash flow deficits from
operations. In order to obtain financing, we may need to sell additional shares
of our common stock, other equity or debt securities or borrow funds from
private lenders. Our ability to raise additional capital will depend upon the
status of capital markets and industry conditions and our ability to terminate,
reduce or restructure our debt obligations and warrant overhang. Moreover, it
may be difficult, or impossible, for us to raise additional capital because of
our existing secured debt obligations, because our stock price is below its par
value and because we may not have sufficient shares of authorized stock to issue
to investors. If we issue additional equity or debt securities, stockholders may
experience dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing stockholders. There can be no assurance
that financing will be available in amounts or on terms acceptable to us, if at
all.  If we are not successful in generating sufficient liquidity from
operations or in raising sufficient capital resources, on terms acceptable to
us, this could have a material adverse effect on our business, results of
operations, liquidity and financial condition.
 
 We may
experience fluctuations in operating results in future periods due to a variety
of factors, including our ability to obtain additional financing in a timely
manner and on terms favorable to us, our ability to successfully implement our
business plan and execute our business model, the amount and timing of operating
costs and capital expenditures relating to the expansion of our business,
operations and infrastructure and the implementation of marketing programs, key
agreements, and strategic alliances, and general economic conditions as well as
those specific to our industry.
  Our
registered independent certified public accountants have expressed in their
report dated April 22, 2009, that our recurring operating losses and negative
cash flows from operations and substantial indebtedness raise substantial doubt
about our ability to continue as a going concern.
  35
 Table of Contents
 Off-Balance Sheet
Arrangements
  We do not
have any off-balance sheet arrangements, as defined in Item
303(a)(4)(ii).
  Critical
Accounting Policies and Estimates
  This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations is based upon our consolidated financial statements, which have been
prepared in accordance with U.S generally accepted accounting
principles.  The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.  On an on-going basis, we evaluate our estimates and
judgments, including those related to bad debts, inventories, intangible assets,
income taxes, restructuring costs, derivative and anti-dilution liabilities and
contingencies and litigation.  We base our estimates on historical
experience and on various other factors that we believe to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources.  Actual results may differ from these
estimates under different assumptions or conditions.
  We
believe the following critical accounting policies and estimates, among others,
reflect our more significant judgments used in the preparation of our
consolidated financial statements.
 
 ·
              Revenue
      Recognition.  We recognize revenue from product sales
      upon shipment to customers and when all requirements related to the
      shipments have occurred.  Should changes in terms cause us to
      determine these criteria are not met for certain future transactions,
      revenue recognized for any reporting period could be adversely
      affected.
 
 ·
              Inventory
      Valuation.  We adjust the value of our inventory for
      estimated obsolescence or unmarketable inventory equal to the difference
      between the cost of inventory and the estimated market value based upon
      assumptions about future demand and market conditions and development of
      new products by our competitors.  Further, we also review our
      inventories for lower of cost or market valuation.  At December
      31, 2008 and 2007, our inventories consisted of only BED Incidence Test
      and HIV-1/2 rapid test raw materials, components and finished
      products.
 
 ·
              Deferred Tax Asset
      Realization.  We record a full valuation allowance to
      reduce our deferred tax assets to the amount that is more likely than not
      to be realized.  While we have considered future taxable income
      and ongoing prudent and feasible tax planning strategies in assessing the
      need for the valuation allowance, in the event we were to determine that
      we would be able to realize our deferred tax assets in the future in
      excess of its net recorded amount, an adjustment to the deferred taxasset would increase
      income in the period such determination was
  made.
 
 ·
              
              Classification of
      Financial Instruments with Characteristics of both Liability and
      Equity.  We account for financial instruments that we
      have issued and that have characteristics of both liability and equity in
      accordance with SFAS No. 150, Accounting for Certain
      Financial Instruments with Characteristics of Both Liabilities and
      Equity.  SFAS No. 150 specifies that mandatorily
      redeemable financial instruments are to be recorded as liabilities unless
      the redemption is required to occur upon the liquidation or termination of
      the issuer.  SFAS No. 150 also specifies that a financial
      instrument that embodies a conditional obligation that an issuer may
      settle by issuing a variable number of its equity shares is to be
      classified as a liability if, at inception, the value of the obligation is
      based solely or predominantly on variations inversely related to changes
      in the fair value of the issuer’s equity shares.  Should a
      financial instrument not be classified as a liability under the provisions
      of SFAS No. 150, we further apply the criteria in Emerging Issues Task
      Force (EITF) Issue No. 00-19, Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,which enumerates additional criteria to determine the appropriate
      classification as liability or equity.  We also evaluate the
      anti-dilution and/or beneficial conversion features that may be included
      in our financial instruments in accordance with the provisions of SFAS No.
      133, Accounting for
      Derivative Instruments and Hedging Activities,which may classify
      the feature as an embedded derivative and require that the financial
      instrument be bifurcated and the feature accounted for
      separately.  We evaluate each financial instrument on its own
      merits at inception or other prescribed measurement or valuation dates and
      may engage the services of valuation experts and other professionals to
      assist us in our determination of the appropriate
      classification.
 
 36
 Table of Contents
  ·
              Stock based
      compensation    We adopted Statement of Financial
      Accounting Standards No. 123 (revised 2004), Share-Based
      Payment (“SFAS 123R”) effective January 1, 2006.  We
      adopted SFAS 123R using the modified prospective method, which requires
      that we apply the provisions of SFAS 123R to all awards granted or
      modified after the date of adoption.  We recognized the
      unrecognized expense attributable to awards not fully vested at our
      January 1, 2006 date of adoption in our net loss during 2006 and 2007
      using the same valuation method (i.e. Black-Scholes) and assumptions
      determined under the original provisions of SFAS 123, “Accounting for
      Stock-Based Compensation,” as disclosed on a pro-forma basis in our
      previous financial statements.  Under the fair value recognition
      provisions of SFAS 123R, we recognize stock-based compensation, net of an
      estimated forfeiture rate which results in recognizing compensation
      expense for only those awards expected to vest, over the service period of
      the award.  Since our adoption of SFAS 123R, we have estimated the
      fair value of options granted to employees and directors, and we expect to
      estimate the fair value of future grants, using the Black-Scholes option
      pricing model.  This model requires the input of highly
      subjective assumptions, including the expected term of the stock-based
      awards, stock price volatility, and pre-vesting option forfeitures. 
      To date, we have generally estimated the expected life of options granted
      based on the simplified method provided in Staff Accounting Bulletin No.
      107 for “plain vanilla” options.  Where appropriate, we will
      consider separately for valuation purposes groups of employees or
      directors that have similar historical exercise behavior.  We
      estimate the volatility of our common stock at the date of grant based on
      its historical volatility over a period generally equivalent to the
      expected term of the grant.  We estimate the expected
      pre-vesting forfeiture rate and recognize expense for only those shares
      expected to vest.  We have estimated our forfeiture rate based on our
      historical experience with stock-based awards that are granted and
      forfeited prior to vesting.  If the actual forfeiture rate is
      materially different from the estimate, the stock-based compensation
      expense could also differ from what we have recorded in the current
      period.  As required under SFAS 123R, we will review our valuation
      assumptions at each grant date and, as a result, may periodically change
      the valuation assumptions used to value employee stock-based awards
      granted in future
periods.
 
 Recent
Accounting Pronouncements
 
 In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement No.
161, Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133 (“SFAS 161”).  This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  We do not expect that the adoption of SFAS 161
will have a material impact on our consolidated financial position or results of
operations.
 
 In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"). SFAS 141(R) changes several underlying principles in applying the
purchase method of accounting. Among the significant changes, SFAS 141(R)
requires a redefining of the measurement date of a business combination,
expensing direct transaction costs as incurred, capitalizing in-process research
and development costs as an intangible asset and recording a liability for
contingent consideration at the measurement date with subsequent re-measurements
recorded in the results of operations. SFAS 141(R) also requires that costs for
business restructuring and exit activities related to the acquired company will
be included in the post-combination financial results of operations and also
provides new guidance for the recognition and measurement of contingent assets
and liabilities in a business combination. In addition, SFAS 141(R) requires
several new disclosures, including the reasons for the business combination, the
factors that contribute to the recognition of goodwill, the amount of
acquisition related third-party expenses incurred, the nature and amount of
contingent consideration, and a discussion of pre-existing relationships between
the parties. SFAS 141(R) is effective for fiscal years beginning after December
15, 2008.  We adopted SFAS 141 (R) on January 1, 2009, which did not
have a material impact on our consolidated financial position or results of
operations.
  37
 Table of Contents
 In June
2008, the EITF reached a consensus on EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity's Own Stock ("EITF No.
07-05"). EITF No. 07-5 provides guidance on how to determine if certain
instruments (or embedded features) are considered indexed to our own stock,
including instruments similar to our issued warrants to purchase our stock. EITF
No. 07-5 requires companies to use a two-step approach to evaluate an
instrument's contingent exercise provisions and settlement provisions in
determining whether the instrument is considered to be indexed to its own stock
and exempt from the application of SFAS No. 133. Although EITF No. 07-5 is
effective for fiscal years beginning after December 15, 2008, any outstanding
instrument at the date of adoption will require a retrospective application of
the accounting through a cumulative effect adjustment to retained earnings upon
adoption. We are currently assessing the potential impact that the adoption of
EITF No. 07-5 will have on our financial statements.
 
 In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS 160”), which introduces changes in
the accounting and reporting for business acquisitions and noncontrolling
interest in a subsidiary.  The changes introduced by SFAS 160 include
reporting noncontrolling interest (previously referred to as minority interest)
as part of equity in the consolidated financial statements; allocating losses to
the noncontrolling interest even when such allocation might result in a deficit
balance and reduce the loss allocated to the controlling interest; treating
changes in ownership interests as equity transactions if control is maintained;
and recognizing in earnings any gain or loss on the interest sold upon a loss of
control, with the retained interest remeasured at fair value on the date control
is lost.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  We have not yet evaluated the impact on our
consolidated financial statements of adopting SFAS No. 160.
 
 In June
2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue
No. 07-03, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities (“EITF 07-03”), which requires
nonrefundable advance payments for future R&D activities to be capitalized
and recognized as an expense as the goods are delivered or services are
performed. EITF 07-03 is effective for fiscal years beginning after December 15,
2007.  Our adoption of EITF 07-03 effective January 1, 2008 did not
have a material impact on our consolidated financial statements.
 
 In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”).  FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements required under other accounting
pronouncements.  FAS 157 does not change existing guidance regarding
whether or not an instrument is carried at fair value.  SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007.  Our adoption of SFAS No. 157 effective January 1,
2008 did not have a material impact on our consolidated financial
statements.
 
 In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“FAS 159”).  FAS 159 permits
the measurement of many financial instruments and certain other items at fair
value. Entities may choose to measure eligible items at fair value at specified
election dates, reporting unrealized gains and losses on such items at each
subsequent reporting period.  The objective of FAS 159 is to provide
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.  It is intended to expand the use
of fair value measurement.  FAS 159 is effective for fiscal years
beginning after November 15, 2007.  Our adoption of SFAS No. 159
effective January 1, 2008 did not have a material impact on our consolidated
financial statements.
 
 In
November 2007, the EITF issued EITF Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property.  EITF 07-1 addresses situations in which companies
enter into arrangements with other companies to jointly develop, manufacture,
distribute and market a product.  Often the activities associated with
these arrangements are conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a “virtual joint
venture”).  The arrangements generally provide that the collaborators
will share, based on contractually defined calculations, the profits or losses
from the associated activities.  Periodically, the collaborators share
financial information related to product revenues generated (if any) and costs
incurred that may trigger a sharing payment for the combined profits or
losses.  The EITF consensus requires collaborators in such an
arrangement to present the result of activities for which they act as the
principle on a gross basis and report any payments received from, or made to,
other collaborators based on other applicable GAAP or, in the absence of other
applicable GAAP, based on analogy to authoritative accounting literature or a
reasonable, rational and consistently applied accounting policy
election.  EITF 07-1 is effective for collaborative arrangements in
place at the beginning of the annual reporting period beginning after December
15, 2008.  We do not expect that the adoption of EITF 07-1 will have a
material impact on our financial position or results of operations.
 
 38
 Table of Contents
 Item8. Financial Statements and Supplementary Data
  The
Company’s Consolidated Financial Statements as of and for the year ended
December 31, 2008 are included on pages F-1 through F-48 of this Annual Report
on Form 10-K.
 
 Item9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
  None.
  Item9A.  Controls and Procedures
 
 (1)           Evaluation of Disclosure Controls and
Procedures
  Under the
supervision and with the participation of our principal executive and financial
officer (our “Chief Executive Officer”), we conducted an evaluation, of the
design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), as of December 31, 2008.  Disclosure
controls and procedures are those controls and procedures designed to provide
reasonable assurance that the information required to be disclosed in our
Exchange Act filings is (1) recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission’s rules and
forms, and (2) accumulated and communicated to management, including our Chief
Executive Officer, as appropriate, to allow timely decisions regarding required
disclosure.
 
 This
evaluation identified a deficiency in our disclosure controls and procedures
with respect to accounting procedures used by our Chinese subsidiaries, Beijing
Calypte and Beijing Marr, and their reporting to us of financial information.
Because of this deficiency, our Chief Executive Officer concluded that our
disclosure controls and procedures were not effective as of December 31, 2008.
Moreover, our Chief Executive Officer has determined that this deficiency could
constitute a material weakness in our financial reporting if our Chinese
subsidiaries had more substantial operations.
  As a
result of our evaluation, we determined that we do not have adequate controls
and procedures with respect to our Chinese subsidiaries.  Beijing Marr
and Beijing Calypte employed a single financial manager for both companies who
resigned in the first quarter of 2008. Because of financial constraints, that
position has since remained vacant. There are no personnel at our Chinese
subsidiaries with sufficient understanding and skills in the application of U.S.
generally accepted accounting principles (“GAAP”) to prepare financial
statements in accordance with U.S. GAAP or in U.S. federal securities law
disclosure and reporting obligations. The absence of qualified financial
personnel at our Chinese subsidiaries has precluded proper monitoring of the
financial results of those operations and timely preparation of sufficient and
accurate financial statements, rendering our efforts to apply controls over the
completeness and accuracy of our Chinese subsidiaries financial statements,
closing processes relating to reconciliations, journal entries, spreadsheets,
reporting packages and review and preparation of monthly expenditure reports
ineffective.
 
 Because
of the limited level of activity of our Chinese subsidiaries during 2008, no
material adjustments were required to be made to our consolidated financial
statements.  However, as Beijing Marr commences anticipated
manufacturing and sales activities, the absence of an adequately trained
financial staff could, in subsequent periods, result in material misstatements
of annual or interim financial statements that would not be prevented or
detected.
 
 39
 Table of Contents
 We are
evaluating how to remedy this situation in consultation with our Chinese
subsidiaries’ management and our joint venture partner.
  (2)           Management’s Report on Internal
Control over Financial Reporting
  Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a–15(f) and
15d-15(f).  Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
reporting purposes in accordance with GAAP. Management conducted an assessment
of the effectiveness of our internal control over financial reporting based on
the framework in Internal
Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission as of the December 31, 2008. Based on
this assessment, our management concluded that our internal control over
financial reporting is not effective as of December 31, 2008. Management has
identified the following material weaknesses in our internal control over
financial reporting as of December 31, 2008:
 
 A. Control
Environment.  We did not maintain an effective control
environment, which is the foundation for the discipline and structure necessary
for effective internal control over financial reporting, as evidenced by: (i)
lack of segregation of duties over individuals responsible for certain key
control activities; (ii) an insufficient number of personnel appropriately
qualified to perform control monitoring activities, including the recognition of
the risks and complexities of transactions; and (iii) an insufficient number of
personnel, such as absence of permanent chief financial officer, with an
appropriate level of GAAP knowledge and experience or training in the
application of GAAP commensurate with our financial reporting requirements. This
control environment material weakness contributed to the following:
 
 (1) We
did not have effective controls to ensure an effective financial statement close
process such that financial statements are completed and prepared in a timely
manner;
 
 (2) We
did not have effective controls to ensure that there is independent review and
approval of accounting journal entries;
 
 (3) We
did not have effective controls to ensure proper and timely valuation of prepaid
and other assets such that unused deferred offering costs that likely has no
future benefits would be identified, reviewed and recognized as expense in the
appropriate accounting periods; and
 
 (4)  We
did not have effective controls to ensure that a physical inventory count is
conducted effectively and inventories counted are properly priced and
valued.
 
 B. Chinese
subsidiaries.  We did not maintain adequate controls and
procedures with respect to our Chinese subsidiaries, resulting in our inability
to adequately disclose financial and other material information or to report it
in a timely manner.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements should they occur. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the control procedure may deteriorate.
  This
Annual Report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this Annual
Report.
  40
 Table of Contents
 (3)           Change in Internal Control Over
Financial Reporting
 
 There has
been no change in our internal controls over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial
reporting.
   41
 Table of Contents
 PART
III
 
 Item10.  Directors, Executive Officers and Corporate
Governance
 
 Following
is a list of our directors and executive officers as of April 20,
2009. Directors serve until the next annual meeting stockholders and until
their successors are elected or until their earlier death, retirement,
resignation or removal.
 
 Name
                            
                            Age
                            
                            Calypte
      Position; Principal Occupation
                            
                            Director
      SinceJohn
      J. DiPietro
                            
                            51
                            
                            Director
                            
                            10/99Paul
      E. Freiman
                            
                            74
                            
                            Director
                            
                            12/97Adel
      Karas
                            
                            65
                            
                            President,
      Chief Executive Officer and Chief Financial Officer and
      Director
                            
                            5/07Julius
      R. Krevans, M.D.
                            
                            84
                            
                            Director
                            
                            3/95
 
 John J. DiPietrowas elected
to our Board of Directors in October 1999. Since September 2002, he has
served as the Chief Financial Officer of Chronix Biomedical Inc, a private
biotechnology company.  Mr. DiPietro was a member of the Board of
Directors of Chronix Biomedical from February 2003 through July
2006.  From September 1999 to September 2002 he was the Chief
Financial Officer and Vice President-Finance and Administration of Tripath
Technology, Inc., a semi-conductor manufacturing company. He served as our Chief
Operating Officer, Vice President of Finance, Chief Financial Officer and
Secretary from December 1997 through September 1999. From October 1995 until
December 1997, he served as our Vice President of Finance, Chief Financial
Officer and Secretary. He is a Certified Public Accountant and received his
M.B.A. from the University of Chicago, Graduate School of Business and a B.S. in
Accounting from Lehigh University.
  Paul E. Freimanhas served as
a member of our Board of Directors since December 1997. He has served as
the President and Chief Executive Officer of Neurobiological Technologies, Inc.
since May 1997. In 1995, Mr. Freiman retired from his position as Chairman and
Chief Executive Officer of Syntex Corporation, a pharmaceutical company. Mr.
Freiman is currently serving on the Board of Directors of Penwest
Pharmaceuticals Inc. and Neurobiological Technologies, Inc. and several private
biotechnology companies. He has been chairman of the Pharmaceutical
Manufacturers Association of America (PhARMA) and has also chaired a number of
key PhARMA committees. Mr. Freiman is also an advisor to Burrill & Co., a
San Francisco merchant bank.
  Adel Karaswas appointed to
our Board of Directors in May 2007.  On March 16, 2009, the Board of
Directors appointed Mr. Karas as our interim Chief Executive Officer, Chief
Financial Officer and Secretary, to act as the Company’s principal executive
officer, president and principal financial officer.  Since December
2005 Mr. Karas has worked as the Regional Director (Asia, Africa & Middle
East) for the World Agency of Planetary Monitoring & Earthquake Risk
Reduction (WAPMERR) based in Dubai, United Arab Emirates (UAE).  WAPMERR is
involved with disaster management and risk assessments.  Prior to his
involvement with WAPMERR, in 2003 Mr. Karas co-founded and served as Managing
Director of Strategic Energy Investment Group in Dubai. He started this group
following his retirement from Petroleum Geo-Services (PGS) in Houston, Texas
where he served as Senior Vice President of Business Development for two years
before moving to Dubai where he set up and, for the next eight years, served as
President of PGS for the Middle East Region.  Mr. Karas served, as well, as
the executive vice president for Grant Tensor Geophysical in Houston-Texas and
as the president of Tensor Geophysical in Egypt. Mr. Karas attended AinShams
University, University of Texas and University of Houston. He holds degrees in
Geophysics and Operations Research as well as a Masters Degree in electrical
engineering and an MBA.
 
 Julius R. Krevans, M.D.has
served on our Board of Directors since March 1995. Dr. Krevans served as
Chancellor Emeritus and Director of International Medical Care at University of
California at San Francisco from 1993 until his retirement in June
2002.  Dr. Krevans received his M.D. from New York University,
College of Medicine and completed a residency in Medicine at Johns Hopkins
University School of Medicine.
 
 42
 Table of Contents
 The
Board of Directors and Its Committees
  Our Board
of Directors directs the management of our business and affairs as provided by
Delaware law and conducts its business through meetings of the full Board of
Directors and three standing committees: the Audit Committee, the Compensation
Committee and the Nominating Committee.  The charter for each of these
committees is available on our website at www.calypte.com.  From
time to time when necessary, the Board of Directors may establish other
committees under its direction to address specific issues.
  The Audit
Committee currently includes our three independent Directors, Mr. Freiman as
Chairman, Mr. DiPietro and Dr. Krevans.  As described in its Charter,
the duties and responsibilities of the Audit Committee include recommending to
the Board of Directors the appointment or termination of the engagement of our
independent public accountants, otherwise overseeing the independent auditor
relationship, reviewing our significant accounting policies and internal
controls and reporting its recommendations and findings to the full Board of
Directors. The Board of Directors has determined that Messrs. Freiman and
DiPietro are Audit Committee financial experts as defined by Item 407(d)(5) of
Regulation S-K of the Securities Exchange Act of 1934 (the “Exchange Act”) and
are independent within the meeting of Item 407(a)(i) of Schedule 14A of the
Exchange Act.
 
 The
Compensation Committee currently includes Dr. Krevans as Chairman and Mr.
Freiman.  As described in its Charter, the Compensation Committee
reviews and approves the compensation of our Chief Executive Officer and
Principal Financial and Accounting Officer, recommends to the Board of Directors
the compensation of members of the Board of Directors and administers our stock
option and other benefit plans.
 
 The
Nominating Committee currently includes Mr. Freiman as Chairman and Dr. Krevans
and Mr. Karas.  As described in its Charter, the Nominating Committee
assists the Board of Directors in fulfilling its oversight responsibilities
relating to the Company's corporate governance matters, including the
determination of the independence status of current and prospective members of
the Board of Directors, periodic evaluation of the Board of Directors, its
committees and individual directors, and the identification and selection of
director nominees.
 
 The
Nominating Committee will consider candidates nominated by stockholders in
accordance with the procedures set forth in our by-laws. Under our by-laws,
nominations other than those made by the Board of Directors or the Nominating
Committee must be made pursuant to timely notice in proper written form to our
Secretary.  To be timely, a stockholder’s request to nominate a person
for election to the Board of Directors at an annual meeting of stockholders,
together with the written consent of such person to serve as a Director, must be
received by our Secretary not less than 120 days prior to the anniversary of the
annual meeting of stockholders held in the previous year.  To be in
proper written form, the notice must contain certain information concerning the
nominee and the shareholder submitting the nomination.
 
 Compliance
with Section 16(a) of the Exchange Act
  Section
16(a) (“Section 16(a)”) of the Exchange Act requires our executive officers,
directors, and persons who beneficially own more than 10% of our Common Stock
(collectively, “Reporting Persons”) to file reports of ownership on Form 3 and
changes in ownership on Form 4 or Form 5 with the Commission. Such Reporting
Persons are also required by the Securities and Exchange Commission rules to
furnish us with copies of all Section 16(a) forms that they file. Except as
described below, we believe that during fiscal year 2008, all of the Reporting
Persons complied with all applicable filing requirements.
 
 Mr.
Mohamed Ahmed failed to file a Form 4 for his exercise of warrants to purchase
4,375,000 shares of our common stock on February 26, 2008 and for his exercise
of warrants to purchase 6,000,000 shares of our common stock on June 17,
2008.  Mr. Mohamed Yousif Ahmed Saleh Sulaiman failed to file a Form 4
for his exercise of warrants to purchase 1,375,000 shares of our common stock on
February 26, 2008 and for his exercise of warrants to purchase 2,000,000 shares
of our common stock on June 18, 2008. Mr. David Khidasheli failed to file a Form
4 for his exercise of warrants to purchase 2,000,000 shares of our common stock
on June 11, 2008.  Ahmed Abdalla Deemas Alsuwaidi failed to file a
Form 4 for his exercise of warrants to purchase 9,920,000 shares of our common
stock on July 21, 2008. Each of these investors also failed to file a Form 5 by
February 14, 2009 to report these transactions.
 
 43
 Table of Contents
 Code
of Business Conduct
 
 We have
adopted a Code of Business Conduct that applies to all of our employees,
including our chief executive officer and principal financial and accounting
officer, and to the members of our Board of Directors.  The Code of
Business Conduct is posted on our website at www.calypte.com.
 
 Compensation
Committee Interlocks and Insider Participation
  During
2008, the Compensation Committee consisted of Dr. Krevans and Mr. Freiman, each
of whom is a non-employee director.  Neither member of the
Compensation Committee has a relationship that would constitute an interlocking
relationship with executive officers or directors of another
entity.
 
 Item11.  Executive Compensation
 
 SUMMARY
COMPENSATION TABLE
 
 The
following table sets forth all compensation we awarded or paid to all
individuals serving as our chief executive officer and those individuals who
received compensation in excess of $100,000 per year for the fiscal year ended
December 31, 2008 (collectively, the “Named Executives”) for the fiscal years
ended December 31, 2008 and 2007.
  Name
      and Principal Position
                            
                            Year
                            
                            Salary
      ($)
                            
                            
                            Bonus
      ($)
                            
                            
                            Stock
      Awards ($)
                            
                            
                            Option
      Awards ($)
                            
                            
                            All
      Other Compensation
                            
                            
                            Total
      ($)(a)
                            
                            (b)
                            
                            (c
      )
                            
                            
                            (d)
                            
                            
                            (e)
                            
                            
                            (f)(1)
                            
                            
                            (i)(2)
                            
                            
                            (j)Roger
      I. Gale, Chief Executive Officer, President and Chairman of the Board
      (3)
                            
                            2008
                            
                            $
                            318,796
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            386,656
                            (4)
                            
                            $
                            368,199
                            (5)
                            
                            $
                            1,073,6512007
                            
                            $
                            350,000
                            (6)
                            
                            $
                            -
                            
                            
                            $
                            150,000
                            
                            
                            $
                            -
                            
                            
                            $
                            50,515
                            (7)
                            
                            $
                            550,515Donald
      N. Taylor, President and Chief Executive Officer (8)
                            
                            2008
                            
                            $
                            78,780
                            
                            
                            $
                            -
                            
                            
                            $
                            50,000
                            
                            
                            $
                            26,791
                            (9)
                            
                            $
                            -
                            
                            
                            $
                            155,571Ronald
      W. Mink,
                            
                            2008
                            
                            $
                            234,844
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            137,794
                            (11)
                            
                            $
                            -
                            
                            
                            $
                            372,638Chief
      Scientific Officer (10)
                            
                            2007
                            
                            $
                            226,135
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            226,135Jerrold
      D. Dotson,
                            
                            2008
                            
                            $
                            165,266
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            117,812
                            (13)
                            
                            $
                            18,125
                            (14)
                            
                            $
                            301,203Vice
      President-Finance (12)
                            
                            2007
                            
                            $
                            184,615
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            15,000
                            (15)
                            
                            $
                            199,615
  (1)
                                                        
                                                        The
      assumptions used to derive the fair value of the stock option award noted
      in this column are discussed in Footnote 11 to the Consolidated Financial
      Statements included in Item 8 of this Form 10-K.(2)
                                                        
                                                        Does
      not include the value of perquisites and other personal benefits that do
      not aggregate at least $10,000 in each fiscal year for each Named
      Executive Officer.(3)
                                                        
                                                        Mr.
      Gale’s employment terminated in June 2008.(4)
                                                        
                                                        This
      amount represents the fair value of an option to purchase 5,000,000 shares
      of common stock at an exercise price of $0.065 per share, which was
      granted to Mr. Gale in April 2008 in lieu of a restricted stock award he
      was entitled to receive under his employment agreement dated September 26,
      2006.  50% of the options were immediately exercisable, with an
      additional 25% becoming exercisable on the first anniversary of the grant
      and the remaining 25% becoming exercisable on the second anniversary of
      the grant.  In connection with the termination of his
      employment, the vesting of the option was accelerated in June 2008 and the
      exercise period was extended. The stock option was granted pursuant to the
      2004 Incentive Plan.
   44
 Table of Contents
 (5)
                                                        
                                                        This
      amount represents $18,000 paid pursuant to a consulting agreement with Mr.
      Gale subsequent to his employment as president and chief executive
      officer.  This amount also includes $350,199, representing the
      fair value of the extension of the maturity of warrants issued to Mr. Gale
      pursuant to his investment in our   March 28, 2007 private
      placement, in connection with the termination of his employment and
      recognized as severance expense by the Company.(6)
                                                        
                                                        This
      amount reflects Mr. Gale’s total annual salary entitlement for fiscal year
      2007 under his employment agreement dated September 26,
      2006.  Mr. Gale elected to receive $309,615 in cash and to
      forego $40,385 and instead receive shares of common stock and warrants to
      purchase shares of common stock on the same terms and conditions as the
      investors in our March 28, 2007 private placement.  Mr. Gale
      elected to forego cash payment of certain amounts of compensation earned
      in 2006 and 2007 and instead receive shares of our common stock and
      warrants.  In aggregate, Mr. Gale received 8,271,870 shares of
      our common stock valued at $0.0.052 per share, a 12-month warrant to
      purchase 8,271,870 shares of our common stock at the exercise price of
      $0.08 per share and an 18-month warrant to purchase 4,135,935 shares of
      our common stock at the exercise price of $0.11 per share based on an
      aggregate investment of $430,137, including the compensation amounts
      described in this table.  Mr. Gale’s aggregate investment also
      includes the repayment of $90,000, plus accrued interest, of loans made to
      us by Mr. Gale in 2006 and 2007 and a $100,000 advance he made to us on
      November 16, 2006.(7)
                                                        
                                                        This
      amount represents perquisites and other personal benefits paid to Mr. Gale
      under his employment agreement dated September 26, 2006, including,
      without limitation, $36,000 for his housing allowance and $9,600 for his
      automobile allowance, of which he elected to forego cash in the aggregate
      amount of $10,523 and receive shares of common stock and warrants to
      purchase shares of common stock on the same terms and conditions as the
      investors in our March 28, 2007 private placement.  See note (6)
      above for the details of this stock and warrant
    compensation.(8)
                                                        
                                                        Mr.
      Taylor’s employment commenced in June 2008 and terminated in December
      2008.(9)
                                                        
                                                        This
      amount represents the fair value of an option to purchase 1,000,000 shares
      of common stock at an exercise price of $0.047 per share, which was
      granted to Mr. Taylor in June 2008 pursuant to his employment agreement
      dated June 12, 2008.  The stock option was granted pursuant to
      the 2004 Incentive Plan.(10)
                                                        
                                                        Dr.
      Mink’s employment terminated in December 2008.(11)
                                                        
                                                        This
      amount represents the fair value of an option to purchase 3,250,000 shares
      of common stock at an exercise price of $0.065 per share, which was
      granted to Dr. Mink in April 2008.  The stock option was granted
      pursuant to the 2004 Incentive Plan.(12)
                                                        
                                                        Mr.
      Dotson’s employment terminated in September 2008.(13)
                                                        
                                                        This
      amount represents the fair value of an option to purchase 2,750,000 shares
      of common stock at an exercise price of $0.065 per share, which was
      granted to Mr. Dotson in April 2008.  The stock option was
      granted pursuant to the 2004 Incentive Plan.(14)
                                                        
                                                        This
      amount represents amounts paid pursuant to a consulting agreement with Mr.
      Dotson subsequent to his employment as Vice President –
      Finance.(15)
                                                        
                                                        This
      amount represents amounts paid pursuant to a consulting agreement with Mr.
      Dotson prior to his employment as Vice President –
  Finance.
 
 45
 Table of Contents
 OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
 
 The
following table sets forth information concerning stock options granted to the
Named Executive Officers that are outstanding at December 31, 2008.
  OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR END - 2008Name
                          
                          Number
      of Securities Underlying Unexercised Options (#)
    Exercisable
                          
                          
                          Number
      of Securities Underlying Unexercised Options (#)
    Unexercisable
                          
                          
                          Option
      Exercise Price ($)
                          
                          Option
      Expiration Date(a)
                          
                          (b)
                          
                          
                          (c
      )
                          
                          
                          (e)
                          
                          (f)Roger
      I Gale
                          
                          
                          850,000
                          
                          
                          
                          -
                          
                          
                          $
                          0.35
                          
                          6/16/20105,000,000
                          
                          
                          
                          
                          
                          
                          $
                          0.065
                          
                          6/16/2010Donald
      N. Taylor
                          
                          
                          500,000
                          
                          
                          
                          
                          
                          
                          $
                          0.047
                          
                          6/11/2009Ronald
      W. Mink
                          
                          
                          1,667
                          
                          
                          
                          -
                          
                          
                          $
                          0.32
                          
                          3/5/200940,000
                          
                          
                          
                          -
                          
                          
                          $
                          0.32
                          
                          3/5/200925,000
                          
                          
                          
                          -
                          
                          
                          $
                          0.38
                          
                          3/5/20091,875,000
                          
                          
                          
                          -
                          
                          
                          $
                          0.065
                          
                          6/11/2009Jerrold
      D. Dotson
                          
                          
                          15,633
                          
                          
                          
                          -
                          
                          
                          $
                          0.32
                          
                          3/12/200940,000
                          
                          
                          
                          -
                          
                          
                          $
                          0.32
                          
                          3/12/20092,750,000
                          
                          
                          
                          -
                          
                          
                          $
                          0.065
                          
                          6/19/2009
   DIRECTOR
COMPENSATION
  We have
no compensation arrangements with our directors.  Directors are
reimbursed for their out-of-pocket travel expenses associated with their
attendance at Board of Directors and committee meetings.
 
 The
following table sets forth compensation we awarded or paid to persons who served
as our directors during 2008.
  Name
                              
                              Fees
      Earned or Paid in Cash ($)
                              
                              
                              Stock
      Awards ($)
                              
                              
                              Option
      Awards ($)
                              
                              
                              
                              All
      Other Compensation ($)
                              
                              
                              Total
      ($)(a)
                              
                              (b)
                              
                              
                              (c
      )
                              
                              
                              (d)
      (1)
                              
                              
                              
                              
                              
                              (g)
                              
                              
                              (h)Roger
      I. Gale (2)
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              (3)
                              
                              
                              $
                              -
                              
                              
                              $
                              -John
      J. DiPietro
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945
                              
                              
                              (4)
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945Paul
      E. Freiman
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945
                              
                              
                              (5)
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945Adel
      Karas
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945
                              
                              
                              (6)
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945Julius
      R. Krevans, M.D.
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945
                              
                              
                              (7)
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945Maxim
      A. Soulimov (8)
                              
                              $
                              -
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945
                              
                              
                              (9)
                              
                              
                              $
                              -
                              
                              
                              $
                              80,945
  
 
 (1)
              The
      assumptions used to derive the fair value of the stock option award noted
      in this column are discussed in Footnote 11 to the Consolidated Financial
      Statements included in Item 8 of this Form
10-K.
 (2)
              Mr.
      Gale did not to stand for re-election to the Board of Directors at the
      2008 Annual Meeting of Stockholders and, therefore, was no longer a
      director as of December 10, 2008.
 (3)
              At
      December 31, 2008, Mr. Gale has outstanding options to purchase an
      aggregate of 5,850,000 shares of our common
  stock.
  46
 Table of Contents
  (4)
              At
      December 31, 2008, Mr. DiPietro has outstanding options to purchase an
      aggregate of 3,202,734 shares of our common stock.  The
      compensation amount indicated relates to an option to purchase 3,000,000
      shares of our common stock granted on November 28,
  2007.
 (5)
              At
      December 31, 2008, Mr. Freiman has outstanding options to purchase an
      aggregate of 3,202,834 shares of our common stock.  The
      compensation amount indicated relates to an option to purchase 3,000,000
      shares of our common stock granted on November 28,
  2007.
 (6)
              At
      December 31, 2008, Mr. Karas has outstanding options to purchase an
      aggregate of 3,000,000 shares of our common stock.  The
      compensation amount indicated relates to an option to purchase 3,000,000
      shares of our common stock granted on November 28,
  2007.
 (7)
              At
      December 31, 2008, Dr. Krevans has outstanding options to purchase an
      aggregate of 3,202,834 shares of our common stock.  The
      compensation amount indicated relates to an option to purchase 3,000,000
      shares of our common stock granted on November 28,
  2007.
 (8)
              Mr.
      Soulimov resigned as a director effective November 19,
    2008.
 (9)
              At
      December 31, 2008, Mr. Soulimov has outstanding options to purchase an
      aggregate of 1,700,000 shares of our common stock.  The
      compensation amount indicated relates to an option to purchase 3,000,000
      shares of our common stock granted on November 28, 2007, of which the
      option to purchase 1,500,000 shares was forfeited upon Mr. Soulimov’s
      resignation as a director.
 
 Item12.  Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters
 
 Except as
set forth in the footnotes to this table, the following table sets forth
information known to us with respect to the beneficial ownership of our common
stock as of April 20, 2009 for (i) all persons known by us to own beneficially
more than 5% of our outstanding common stock, (ii) each of our directors, (iii)
each Named Executive Officer and (iv) all current directors and executive
officers as a group.
 
 5%
      Stockholders, Directors and Officers (1)
                      
                      Shares
                        Beneficially
                        Owned
                      
                      %
      of Total (2)Marr
      Technologies BV (3)
                      
                      86,699,381
                      
                      19.17Strawinskylaan
      14311077XX,
      AmsterdamThe
      NetherlandsDavid
      Khidasheli (4)
                      
                      75,000,000
                      
                      15.61Sheikh
      Zayed RoadFairmont
      Building, # 3104Dubai,
      United Arab EmiratesMohamed
      Yousif Ahmed Saleh Sulaiman (5)
                      
                      70,000,000
                      
                      14.64P.O.
      Box 19533Sharjah,
      United Arab EmiratesMohamed
      Ahmed (6)
                      
                      55,000,000
                      
                      11.91P.O.
      Box 33280Dubai,
      United Arab EmiratesAhmed
      Abdalla Deemas Alsuwaidi (7)
                      
                      50,000,000
                      
                      10.98P.O.
      Box 681Sharjah,
      United Arab EmiratesSF
      Capital Partners Ltd. (8)
                      
                      26,942,134
                      
                      5.793600
      South Lake DriveSt.
      Francis, WI 53235Roger
      I. Gale (9)
                      
                      30,006,411
                      
                      6.56John
      J. DiPietro (10)
                      
                      2,452,977
                      
                      *Jerrold
      D. Dotson (11)
                      
                      2,770,744
                      
                      *Paul
      E. Freiman (12)
                      
                      2,452,834
                      
                      *Adel
      Karas (13)
                      
                      2,300,000
                      
                      *Julius
      R. Krevans, M.D.(14)
                      
                      2,453,301
                      
                      *Ronald
      L. Mink (15)
                      
                      1,876,917
                      
                      *Maxim
      A. Soulimov (16)
                      
                      1,700,000
                      
                      *Donald
      N. Taylor (17)
                      
                      1,500,000
                      
                      *All
      current directors and executive officers as a group (4
      persons)
                      
                      9,659,112
                      
                      2.15  47
  *
              
              Represents
      beneficial ownership of less than
1%.
 
 (1)
                                                                                To
      the Company’s knowledge, except as set forth in the footnotes to this
      table and subject to applicable community property laws, each person named
      in this table has sole voting and investment power with respect to the
      shares set forth opposite such person’s name. Except as otherwise
      indicated, the address of each of the persons in this table is as follows:
      c/o Calypte Biomedical Corporation, 16290 S.W. Upper Boones Ferry Road,
      Portland, Oregon 97224.(2)
                                                                                Based
      on 439,354,624 shares outstanding as of April 20,
    2009.(3)
                                                                                Based
      on holdings reported in Amendment No. 6 to Schedule 13D dated December 6,
      2007 filed with the Commission on March 20, 2008 plus shares of common
      stock underlying Convertible Notes issued as quarterly interest which
      are immediately convertible into shares of common stock at $0.30 per
      share.  Marat Safin has voting and investment control over
      shares held by Marr Technologies BV.(4)
                                                                                Based
      on holdings reported in Schedule 13G dated March 28, 2007 filed with the
      Commission on October 31, 2007.  Includes 41,000,000 shares of
      common stock underlying warrants exercisable within 60 days of April 20,
      2009.(5)
                                                                                Based
      on holdings reported in Schedule 13G dated March 28, 2007 filed with the
      Commission on November 2, 2007.  Includes 38,625,000 shares of
      common stock underlying warrants exercisable within 60 days of April 30,
      2009.(6)
                                                                                Based
      on holdings reported in Schedule 13G dated March 28, 2007 filed with the
      Commission on October 30, 2007.  Includes 22,625,000 shares of
      common stock underlying warrants exercisable within 60 days of April 30,
      2009.(7)
                                                                                Based
      on holdings reported in Schedule 13G dated March 28, 2007 filed with the
      Commission on October 29, 2007.  Includes 16,080,000 shares of
      common stock underlying warrants exercisable within 60 days of April 30,
      2009.(8)
                                                                                Based
      on holdings reported in Amendment No.8 to Schedule 13G dated December 31,
      2008 filed with the Commission on February 18, 2009 plus shares of common
      stock underlying Convertible Notes issued as quarterly interest which
      are immediately convertible at $0.30 per share.  The Convertible
      Notes and warrants contain conversion caps that preclude SF Capital
      Partners Ltd. From utilizing its exercise rights within 60 days to the
      extent that it would beneficially own (determined in accordance with
      Section 13(d) of the Securities Act) in excess of 9.999% of the Company’s
      common stock, giving effect to such exercise.  Those conversion
      caps are currently not applicable.  Michael A. Roth and Brian J.
      Stark possess voting and dispositive power over all of the shares owned by
      SF Capital Partners Ltd.(9)
                                                                                Includes
      5,850,000 shares of common stock underlying options exercisable within 60
      days of April 20, 2009 and 12,084,136 shares underlying warrants
      exercisable within 60 days of April 20, 2009.(10)
                                                                                Includes
      2,452,734 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.(11)
                                                                                Includes
      2,750,000 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.                                 48
 Table of Contents
  (12)
                                                                                Includes
      2,452,834 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.(13)
                                                                                Includes
      2,250,000 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.(14)
                                                                                Includes
      2,452,834 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.(15)
                                                                                Includes
      1,875,000 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.(16)
                                                                                Includes
      1,700,000 shares of common stock underlying options exercisable within 60
      days of April 20, 2009.(17)
                                                                                Includes
      500,000 shares of common stock underlying options exercisable within 60
      days of April20,
      2009.
 Item13.  Certain Relationships and Related
Transactions, and Director Independence
 
 On June
16, 2008, our Board of Directors appointed Donald N. Taylor as our President and
Chief Executive Officer.  Mr. Taylor was recommended to the Board of
Directors by Marr, our largest stockholder.  From February 2007, and
during his service as our President and Chief Executive Officer, Mr. Taylor also
served as Chief Executive Officer of Swivel Secure Ltd., a United Kingdom-based
company providing tokenless authentication software, which is primarily owned by
The Marr Group, an affiliate of Marr.  Mr. Taylor’s employment
agreement was terminated by mutual agreement on December 5, 2008.  Mr.
Taylor was subsequently rehired for a short period in February
2009.
 
 On April
4, 2005, we entered into our Credit Facility with Marr. The Credit Facility was
subsequently modified a number of times between 2005 and 2007, including an
amendment in March 2007 to extend the Credit Facility from April 3, 2007 to
April 3, 2009 and an amendment in December 2007 to grant Marr the right to
convert the money owed to it under the Credit Facility into shares of common
stock at a conversion price of $0.16 per share for one year.  The
conversion option expired in December 2008.  At December 31, 2008, we
owed Marr $4,940,000 in principal and interest under the Credit
Facility.
 
 In March
2007 we extended the due date of Marr’s Convertible Notes, in the principal
amount of $3,223,000 plus interest.  In December 2007, we granted Marr
the right to convert the Convertible Notes into shares of common stock at a
conversion price of $0.16 per share for one year.  The conversion
option expired in December 2008. At December 31, 2008, we owed Marr an aggregate
of $3,709,000 under the Convertible Notes.  Additional quarterly
interest notes in the aggregate amount of $152,000 were issuable to Marr on
January 3, 2009 and April 3, 2009.
 
 During
2006 and 2007 we issued promissory notes in the aggregate prinicpal amount of
$96,300 with an annual interest rate of 8% to Mr. Gale, who was then our chief
executive officer.  We also received from Mr. Gale $100,000 as an
advance from him for participation in a future equity financing.  In
2007, we repaid $6,300 of the promissory note in cash.  The remaining
money owed to him under the promissory was applied, along with the $100,000
advance and other amounts owed to him for unpaid compensation under his initial
consulting contract with us and under his employment agreement, a total of
approximately $430,000, to Mr. Gale’s participation in our March 2007 private
placement.  In June 2008, we extended the term of the warrants issued
to Mr. Gale in the March 2007 private placement by two years.
 
 In March
2007, Richard D. Brounstein, a former named executive officer, participated in
our March 2007 private placement by exchanging our obligation to pay him
$200,000 of accrued but unpaid severance for shares of common stock and warrants
on the private placement subscription terms.
 
 49
 Table of Contents
 In
February 2007, a former employee made a loan to us in the principal amount of
$65,000 pursuant to the terms of a promissory note.  The proceeds were
to be used to purchase certain materials to produce our BED Incidence
tests.  The promissory note had an annual interest rate of
12%.  We granted the employee a secured interest in the tests
produced.  We repaid the loan in full in May 2007.
 
 In July
2007, we entered into a 9-month lease with renewal options for office space in
Geneva, Switzerland.   Monthly rent is approximately
$6,000.  The lessor is a relative of one of the principals of
Marr.
 
 Director
Independence
 
 The Board
of Directors has determined that Messrs. DiPietro, Freiman and Krevans are
independent under the rules of the American Stock Exchange and have no direct or
indirect material relationships with us.  In particular, the Board of
Directors has determined that none of these directors have relationships that
would cause them not to be independent under the specific criteria of Section
803(A)(2) of the American Stock Exchange Company Guide.
 
 Item14.  Principal Accountant Fees and
Services
  Odenberg
Ullakko Muranishi & Co. LLP (“OUM”) is the independent registered public
accounting firm that audited our financial statements for the years ended
December 31, 2008 and 2007.  The Audit Committee of the Board of
Directors first engaged OUM in December 2003.  OUM performed only
audit and review services for 2008 and 2007.  The aggregate fees
billed during 2008 and 2007 for each of the following categories of services are
set forth below:
 
 2008
                  
                  
                  2007Audit
      fees
                  
                  
                  $238,650
                  
                  
                  
                  $203,085Audit-related
      fees
                  
                  
                  -
                  
                  
                  
                  -Tax
      fees
                  
                  
                  -
                  
                  
                  
                  -All
      other fees
                  
                  
                  -
                  
                  
                  
                  -
 
 “Audit
fees” include fees invoiced in 2008 and 2007 for the audits of our annual
financial statements for 2008 and 2007; fees for the quarterly review of the
statements for the quarters ended March 31, June 30, and September 30, 2008 and
2007, as well as fees for consultation regarding accounting issues and their
impact on or presentation in our financial statements; and fees for the review
of registration statements and the issuance of related consents.  OUM
provided no “Audit-related services” to us.  “Tax fees” include tax
planning and the preparation of the Company’s tax returns.  OUM does
not provide any tax or financial information systems design or implementation
services to us.
  50
 Table of Contents
 PART
IV
 
 Item15.  Exhibits, Financial Statement
Schedules.
  (a)
              Certain
      Documents Filed as Part of the Form
10-K
  1.
                The
      Company’s Consolidated Financial Statements are included on pages F-1
      through F-48 of this Annual Report on Form
10-K.
  2.
              Exhibits
  2.1
                        Asset
      Purchase Agreement, dated as of November 18, 1998, between Calypte and
      Cambridge; incorporated by reference from an exhibit filed with the
      Company’s Report on Form 8-K dated December 16, 1998.3.1
                        Bylaws
      of the Registrant, as amended on March 7, 2005.3.2
                        Restated
      Certificate of Incorporation of Calypte Biomedical Corporation, a Delaware
      corporation, filed July 31, 1996; incorporated by reference from an
      exhibit filed with the Company’s Report on Form 10-K dated March 28,
      1997.3.3
                        Certificate
      of Amendment of the Amended and Restated Certificate of Incorporation of
      Calypte Biomedical Corporation effective as of February 14, 2003
      incorporated by reference from an exhibit filed with the Company’s Report
      on Form 10-K dated March 26, 2003.3.4
                        Certificate
      of Amendment of the Amended and Restated Certificate of Incorporation of
      Calypte Biomedical Corporation, effective as of May 27,
    2003.3.5
                        Certificate
      of Correction of Calypte Biomedical Corporation, effective as of May 28,
      2003.4.1
                        Rights
      Agreement between the Registrant and Chase Mellon Shareholders L.L.C. as
      Rights Agents dated December 15, 1998; incorporated by reference from an
      exhibit filed with the Company’s Report on Form 8-K dated December 16,
      1998.10.1
                        Form
      of Indemnification Agreement between the Company and each of its directors
      and officers, as amended January 19, 2004.10.2
                        1991
      Incentive Stock Plan; incorporated by reference from exhibits filed with
      the Company’s Registration Statement on Form S-1 (File No. 333-04105)
      filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
      26, 1996.10.3
                        1995
      Director Option Plan, as amended effective May 20, 2003; incorporated by
      reference from an exhibit filed with the Company’s Registration Statement
      on Form S-8 (File No. 333-106389) dated June 23, 2003.10.4
                        1995
      Employee Stock Purchase Plan, amended as of May 20, 2003; incorporated by
      reference from an exhibit filed with the Company’s Registration Statement
      on Form S-8 (File No. 333-106389) dated June 23, 2003.10.15^
                        License
      Agreement between the Registrant and New York University, dated as of
      August 13, 1993; incorporated by reference from exhibits filed with the
      Company’s Registration Statement on Form S-1 (File No. 333-04105) filed on
      May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26,
      1996.10.16
                        First
      Amendment to License Agreement between the Registrant and New York
      University, dated as of January 11, 1995; incorporated by reference from
      exhibits filed with the Company’s Registration Statement on Form S-1 (File
      No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July
      15, 1996 and July 26, 1996.
  51
 Table of Contents
  10.17
                          Second
      Amendment to License Agreement between the Registrant and New York
      University, dated as of October 15, 1995; incorporated by reference from
      exhibits filed with the Company’s Registration Statement on Form S-1 (File
      No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July
      15, 1996 and July 26, 1996.10.18^
                          Third
      Amendment to License Agreement between the Registrant and New York
      University, dated as of January 31, 1996; incorporated by reference from
      exhibits filed with the Company’s Registration Statement on Form S-1 (File
      No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July
      15, 1996 and July 26, 1996.10.21^
                          Sublicense
      Agreement between the Registrant and Cambridge Biotech Corporation, dated
      as of March 31, 1992; incorporated by reference from exhibits filed with
      the Company’s Registration Statement on Form S-1 (File No. 333-04105)
      filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
      26, 1996.10.22^
                          Master
      Agreement between the Registrant and Cambridge Biotech Corporation, dated
      as of April 12, 1996; incorporated by reference from exhibits filed with
      the Company’s Registration Statement on Form S-1 (File No. 333-04105)
      filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
      26, 1996.10.23^
                          Sub–License
      Agreement between the Registrant and Cambridge Biotech Corporation, dated
      as of April 12, 1996; incorporated by reference from exhibits filed with
      the Company’s Registration Statement on Form S-1 (File No. 333-04105)
      filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
      26, 1996.10.24^
                          Agreement
      between the Registrant and Repligen Corporation, dated as of March 8,
      1993; incorporated by reference from exhibits filed with the Company’s
      Registration Statement on Form S-1 (File No. 333-04105) filed on May 20,
      1996, as amended to June 25, 1996, July 15, 1996 and July 26,
      1996.10.25^
                          Non–Exclusive
      License Agreement between the Registrant and The Texas A&M University
      System, dated as of September 12, 1993; incorporated by reference from
      exhibits filed with the Company’s Registration Statement on Form S-1 (File
      No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996, July
      15, 1996 and July 26, 1996.10.51
                          Non–Exclusive
      Patent and License Agreement between the Registrant and Public Health
      Service, dated June 30, 1999; incorporated by reference from an exhibit
      filed with the Company’s Report on Form 10-Q dated November 15,
      1999.10.55
                          Master
      Lease Agreement between Aquila Biopharmaceuticals, Inc., Landlord, and
      Biomerieux Vitek, Inc., Tenant, dated as of October 22, 1996; incorporated
      by reference from an exhibit filed with the Company’s Report on Form 10-K
      dated March 30, 2000.10.56
                          First
      Amendment to Lease between Aquila Biopharmaceuticals, Inc. Landlord, and
      Biomerieux Vitek, Inc., Tenant, dated October 2, 1997; incorporated by
      reference from an exhibit filed with the Company’s Report on Form 10-K
      dated March 30, 2000.10.57
                          Sublease
      Agreement between Registrant and Cambridge Biotech Corporation, assignee
      of Biomerieux, Inc. dated as of December 17, 1998; incorporated by
      reference from an exhibit filed with the Company’s Report on Form 10-K
      dated March 30, 2000.10.58
                          Sublease
      Agreement between Registrant and Cambridge Biotech Corporation, sub-lessee
      of DynCorp, dated as of December 17, 1998; incorporated by reference from
      an exhibit filed with the Company’s Report on Form 10-K dated March 30,
      2000.10.73^
                          Fourth
      Amendment to the License Agreement between the Registrant and New York
      University, dated as of June 1, 2000; incorporated by reference from an
      exhibit filed with the Company’s Report on Form 10-Q dated August 10,
      2000.10.74
                          2000
      Equity Incentive Plan, amended as of May 20, 2003; incorporated by
      reference from an exhibit filed with the Company’s Registration Statement
      on Form S-8 (File No. 333-106389) dated June 23,
  2003.
  52
 Table of Contents
  10.113
                        Employment
      Agreement between the Registrant and Anthony J. Cataldo dated May 10,
      2002; incorporated by reference from an exhibit filed with the Company’s
      Report on Form 10-Q dated August 14, 2002.10.114
                        Amendment
      to Non-Exclusive Patent and License Agreement between Registrant and
      Public Health Service, dated April 5, 2002; incorporated by reference from
      an exhibit filed with the Company’s Report on Form 10-Q dated August 14,
      2002.10.116
                        Term
      Sheet for Mercator Momentum Fund LP and Form of Registration Rights
      Agreement; incorporated by reference from an exhibit filed with the
      Company’s Report on Form 8-K dated November 12, 2002.10.121
                        Distribution
      Agreement between the Registrant and Zhong Yang Pute Co. dated as of
      October 10, 2002; incorporated by reference from an exhibit filed with the
      Company’s Report on Form 10-Q/A (No.3) dated February 4,
    2003.10.125
                        Employment
      Agreement between Registrant and Richard D. Brounstein dated as of January
      1, 2003; incorporated by reference from an exhibit filed with the
      Company’s Annual Report on Form 10-K dated March 26,
  2003.10.128
                        2003
      Non-Qualified Stock Option Plan; incorporated by reference from an exhibit
      filed with the Company’s Registration Statement on Form S-8 (File No.
      333-106387) dated June 23, 2003.10.129
                        Consulting
      Agreement between Registrant and Junebug Enterprises effective as of April
      23, 2003; incorporated by reference from an exhibit filed with the
      Company’s Report on Form 10-QSB dated August 14, 2003.10.132
                        Subscription
      Agreement between Registrant and Marr Technologies B.V. dated as of August
      1, 2003 incorporated by reference from an exhibit filed with the Company’s
      Report on Form 10-QSB dated August 14, 2003.10.133
                        Subscription
      Agreement between the Company and Marr Technologies B.V. for 20,000,000
      shares of Registrant’s Common Stock dated August 28, 2003; incorporated by
      reference from an exhibit filed with the Company’s Report on Form 8-K
      dated September 12, 2003.10.134
                        Agreement
      for Commitment to Purchase Aggregate of $10,000,000 of 5% Promissory Notes
      between the Company and Marr Technologies B.V. dated November 13, 2003;
      incorporated by reference from an exhibit filed with the Company’s Report
      on Form 10-QSB dated November 14, 2003.10.137
                        Lease
      Agreement between the Company and ARE-1500 East Gude LLC dated as of March
      1, 2004; incorporated by reference from an exhibit filed with the
      Company’s Annual Report on Form 10-KSB dated March 29,
    2004.10.141
                        Form
      of Securities Purchase Agreement between the Company and the investors in
      the May 2004 PIPE financing incorporated by reference from an exhibit
      filed with the Company’s Report on Form 8-K on June 1,
    2004.10.142
                        Form
      of Registration Rights Agreement between the Company and the investors in
      the May 2004 PIPE financing incorporated by reference from an exhibit
      filed with the Company’s Report on Form 8-K on June 1,
    2004.10.143
                        Form
      of Warrant between the Company and the investors in the May 2004 PIPE
      financing incorporated by reference from an exhibit filed with the
      Company’s Report on Form 8-K on June 1, 2004.10.146
                        2004
      Incentive Plan, incorporated by reference from an exhibit filed with the
      Company’s Registration Statement on Form S-8 on June 25,
    2004.10.147
                        Form
      of Securities Purchase Agreement between the Company and the investors in
      the July 2004 PIPE financing incorporated by reference from an exhibit
      filed with the Company’s Report on Form 8-K on July 13,
    2004.
   53
 Table of Contents
  10.148
                        Form
      of Registration Rights Agreement between the Company and the investors in
      the July 2004 PIPE financing incorporated by reference from an exhibit
      filed with the Company’s Report on Form 8-K on July 13,
    2004.10.149
                        Form
      of Warrant between the Company and the investors in the July 2004 PIPE
      financing incorporated by reference from an exhibit filed with the
      Company’s Report on Form 8-K on July 13, 2004.10.150
                        Sublicense
      Agreement between the Company and Abbott Laboratories dated June 28, 2004
      incorporated by reference from an exhibit filed with the Company’s
      Quarterly Report on Form 10-QSB/A (No. 1) dated December 20,
      2004.10.151
                        License
      Agreement and Technology Transfer Agreement between the Company and Ani
      Biotech Oy dated as of September 30, 2004 incorporated by referenced from
      an exhibit filed with the Company’s Report on Form 8-K/A (No.1) on
      December 20, 2004.10.152
                        License
      Agreement between the Company and Bio-Rad Laboratories, Inc. and Bio-Rad
      Pasteur dated September 28, 2004, incorporated by reference from an
      exhibit filed with the Company’s Report on Form 8-K/A (No.1) on December
      20, 2004.10.153
                        Consulting
      Contract between the Company and Roger Gale effective as of February 9,
      2005, incorporated by reference from an exhibit filed with the Company’s
      Current Report on Form 8-K/A (No.1) on February 10,
  2005.10.154
                        Separation
      and Consulting Agreement and Release of Claims between the Company and
      Anthony J. Cataldo effective as of November 15, 2004.10.155
                        Form
      of $2,000,000 7% Promissory Note issued by the Company to Marr
      Technologies BV dated January 14, 2005 and form of Amendment thereto
      incorporated by reference from an exhibit filed with the Company’s Annual
      Report on Form 10-KSB on March 31, 2005.10.156
                        Form
      of Purchase Agreement between the Company and the investors in the April
      2005 financing dated April 4, 2005 incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on April 5,
      2005.10.157
                        Form
      of Secured 8% Convertible Promissory Note between the Company and the
      investors in the April 2005 financing dated April 4, 2005 incorporated by
      reference from an exhibit filed with the Company’s Current Report on Form
      8-K on April 5, 2005.10.158
                        Form
      of Registration Rights Agreement between the Company and the investors in
      the April 2005 financing dated April 4, 2005 incorporated by reference
      from an exhibit filed with the Company’s Current Report on Form 8-K on
      April 5, 2005.10.159
                        Form
      of Series A Warrant between the Company and the investors in the April
      2005 financing dated April 4, 2005 incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on April 5,
      2005.10.160
                        Form
      of Series B Warrant between the Company and the investors in the April
      2005 financing dated April 4, 2005 incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on April 5,
      2005.10.161
                        Form
      of Security Agreement between the Company and the investors in the April
      2005 financing dated April 4, 2005 incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on April 5,
      2005.10.162
                        Form
      of Amendment to Securities Purchase Agreement between the Company and the
      investors in the May 2004 and July 2004 Private Placements dated April 4,
      2005 incorporated by reference from an exhibit filed with the Company’s
      Current Report on Form 8-K on April 5, 2005.10.163
                        2005
      Credit Facility Agreement between the Company and Marr Technologies BV
      dated April 4, 2005 incorporated by reference from an exhibit filed with
      the Company’s Current Report on Form 8-K on April 5,
  2005.
   54
 Table of Contents
  10.164
                        Agreement
      effective September 1, 2005 between the Company and Marr Technologies Asia
      Limited describing the rights, duties and obligations of the shareholders
      of Beijing Calypte Biomedical Technology Ltd., a corporation organized in
      the Peoples’ Republic of China incorporated by reference from an exhibit
      filed with the Company’s Quarterly Report on Form 10-QSB dated November
      14, 2005.10.165
                        Asset
      Purchase and License Agreement dated November 15, 2005 by and between the
      Company and Maxim Biomedical, Inc. incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on November
      21, 2005.10.166
                        Amendment
      to 2005 Credit Facility between the Company and Marr Technologies BV
      effective November 30, 2005 incorporated by reference from an exhibit
      filed with the Company’s Current Report on Form 8-K on December 6,
      2005.10.167
                        Letter
      Agreement between the Company and Roger I. Gale dated January 4, 2006
      incorporated by reference from an exhibit filed with the Company’s Current
      Report on Form 8-K/A (No. 1) on January 10, 2006.10.168
                        Equity
      Transfer Agreement between the Company and Marr Technologies Asia Limited
      dated December 21, 2005 incorporated by reference from an exhibit filed
      with the Company’s Current Report on Form 8-K on March 30,
      2006.10.169
                        Agreement
      dated December 21, 2005 between the Company and Marr Technologies Asia
      Limited describing the rights, duties and obligations of the shareholders
      of Beijing Marr Bio-Pharmaceutical Technology Ltd., incorporated by
      reference from an exhibit filed with the Company’s Current Report on Form
      8-K on March 30, 2006.10.170
                        Form
      of Subscription Agreement between the Company and two investors for the
      purchase of an aggregate of $3 million of the Company’s common stock
      effective June 19, 2006, incorporated by reference from an exhibit filed
      with the Company’s Quarterly Report on Form 10-QSB dated August 4,
      2006.10.171
                        Employment
      Agreement between the Company and Roger I. Gale dated as of June 28, 2006,
      incorporated by reference from an exhibit filed with the Company’s
      Quarterly Report on Form 10-QSB dated August 4, 2006.10.172
                        Form
      of Subscription Agreement between the Company and the investors in the
      February 2007 PIPE financings, effective February 23, 2007 through March
      27, 2007.10.173
                        Form
      of Warrant between the Company and the investors in the February 2007 PIPE
      financings, effective February 23, 2007 through March 27,
      2007.10.174
                        Form
      of Subscription Agreement between the Company and the investors in the
      March 2007 PIPE financing, dated March 28, 2007.10.175
                        Form
      of Registration Rights Agreement between the Company and the investors in
      the March 2007 PIPE financing, dated March 28, 2007.10.176
                        Form
      of Series A Warrant between the Company and the investors in the March
      2007 PIPE financing, dated March 28, 2007.10.177
                        Form
      of Series B Warrant between the Company and the investors in the March
      2007 PIPE financing, dated March 28, 2007.10.178
                        Form
      of Amendment to 8% Secured Convertible Promissory Notes between the
      Company and SF Capital Partners Ltd. dated March 21, 2007, effective March
      28, 2007.10.179
                        Form
      of Sixth Amendment to 2005 Credit Facility between the Company and Marr
      Technologies BV dated March 21, 2007, effective March 28,
      2007.10.180
                        Form
      of Amendment to 8% Secured Convertible Promissory Notes between the
      Company and Marr Technologies BV dated March 21, 2007, effective March 28,
      2007.
   55
 Table of Contents
  10.181
                        Form
      of Amendment to 8% Secured Convertible Promissory Notes between the
      Company and Morningtown Limited dated March 21, 2007, effective March 28,
      2007.10.182
                        Form
      of Amendment to Registration Right Agreement between the Company and the
      investors in the March 2007 private placement, effective July 7, 2007,
      incorporated by reference from an exhibit filed with the Company’s
      Registration Statement on Form SB-2 on July 23, 2007 (File No.
      333-144778).10.183
                        Seventh
      Amendment to 2005 Credit Facility between the Company and Marr
      Technologies BV dated December 4, 2007, incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on December
      10, 2007.10.184
                        Amendment
      No. 3 to Secured 8% Convertible Promissory Notes between the Company and
      Marr Technologies BV dated December 4, 2007, incorporated by reference
      from an exhibit filed with the Company’s Current Report on Form 8-K on
      December 10, 2007.10.185
                        Common
      Stock Purchase Agreement, dated as of January 16, 2008, by and between the
      Company and Fusion Capital Fund II, LLC. incorporated by reference from an
      exhibit filed with the Company’s Current Report on Form 8-K on January 23,
      2008.10.186
                        Registration
      Rights Agreement, dated as of January 16, 2008, by and between the Company
      and Fusion Capital Fund II, LLC. incorporated by reference from an exhibit
      filed with the Company’s. Current Report on Form 8-K on January 23,
      2008.10.187
                        Employment
      Agreement, dated as of June 12, 2008, between the Company and Donald N.
      Taylor, incorporated by reference from an exhibit filed with the Company’s
      Quarterly Report on Form 10-Q dated August 14, 2008.10.188
                        Subscription
      Agreement, dated August 15, 2008, between the Company and Tinja Limited,
      incorporated by reference from an exhibit filed with the Company’s.
      Current Report on Form 8-K on August 21, 2008.10.189
                        Form
      of Warrant issued to Tinja Limited incorporated by reference from an
      exhibit filed with the Company’s. Current Report on Form 8-K on August 21,
      2008.10.190
                        Form
      of Subscription Agreement between the Company and Almyn Limited, effective
      September 19, 2008 incorporated by reference from an exhibit filed with
      the Company’s. Current Report on Form 8-K on September 23,
      2008.10.191
                        Form
      of Warrant issued to Almyn Limited incorporated by reference from an
      exhibit filed with the Company’s. Current Report on Form 8-K on September
      23, 2008.21.1
                        Subsidiaries
      of the Registrant; incorporated by reference from exhibits filed with the
      Company’s Registration Statement on Form S-1 (File No. 333-04105) filed on
      May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July 26,
      1996.23.1
                        Consent
      of Odenberg Ullakko Muranishi & Co. LLP, Independent Registered Public
      Accounting Firm.24.1
                        Power
      of Attorney (see page S-1).31.1
                        Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to Section
      302 of the Sarbanes-Oxley Act of 200232.1
                        Certification
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      the Sarbanes-Oxley Act of
2002
  
  ^ 
Confidential
treatment has been granted as to certain portions of this
exhibit.


(b)
              Reports
      on Form 8-K filed during the fourth quarter of 2008 and through March 19,
      2009.





Form
      8-K regarding Item 5.02 Departure of Directors or Principal Officers;
      Election of Directors; Appointment of Principal Officers and Item 8.01
      Other Events – filed November 25, 2008 – Announcing the resignation of
      Maxim A. Soulimov as a member of the Board of Directors effective November
      19, 2008 and the November 14, 2008 reduction of the Company’s
      workforce.





56
 Table of Contents


Form
      8-K regarding Item 5.02 Departure of Directors or Principal Officers;
      Election of Directors; Appointment of Principal Officers – filed December
      15, 2008 – Announcing the termination of the employment agreement with
      Donald N. Taylor and his employment as Chief Executive Officer and Chief
      Financial Officer effective December 5,
2008.





Form
      8-K regarding 5.02 Departure of Directors or Principal Officers; Election
      of Directors; Appointment of Principal Officers and Item 7.01 Regulation
      FD Disclosure – filed January 9, 2009 - Announcing the reappointment of
      Donald N. Taylor as President, Chief Executive Officer and Chief Financial
      Officer effective January 5, 2009 and reiterating the Company’s reduction
      in its workforce due to financial
constraints.





Form
      8-K regarding 5.02 Departure of Directors or Principal Officers; Election
      of Directors; Appointment of Principal Officers and Item 7.01 Regulation
      FD Disclosure – filed February 27, 2009 - Announcing the appointment of
      Richard C. Dietz as the Company’s Chief Financial Officer effective
      February 23, 2009 and the concurrent relinquishment by Donald N. Taylor of
      that position.





Form
      8-K regarding 5.02 Departure of Directors or Principal Officers; Election
      of Directors; Appointment of Principal Officers – filed March 19, 2009 –
      Announcing the resignation of Richard C. Dietz as the Company’s Chief
      Financial Officer effective March 13, 2009, the termination of Donald N.
      Taylor as the Company’s President, Chief Executive Officer and Secretary
      effective March 16, 2009, and the appointment of Adel Karas, a member of
      the Company’s Board of Directors, as its President, interim Chief
      Executive Officer, Chief Financial Officer and Secretary effective March
      16, 2009.








57
 Table of Contents







INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS




Report ofIndependent Registered Public
      Accounting Firm
                
                F-2Consolidated Balance
      Sheets
                
                F-3Consolidated Statements of
      Operations
                
                F-4Consolidated Statements of
      Stockholders’ Deficit
                
                F-5Consolidated Statements of Cash
      Flows
                
                F-7Notes to Consolidated Financial
      Statements
                
                F-9







F-1
 Table of Contents


REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders of


Calypte
Biomedical Corporation





We have
audited the accompanying consolidated balance sheets of Calypte Biomedical
Corporation as of December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements audited by us present fairly, in all material
respects, the consolidated financial position of Calypte Biomedical Corporation
at December 31, 2008 and 2007, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with U.S. generally
accepted accounting principles.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring operating
losses and negative cash flows from operations, and management believes that the
Company’s cash resources will not be sufficient to sustain its operations
through 2009 without additional financing. This raises substantial doubt about
the Company’s ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.





/s/
ODENBERG, ULLAKKO, MURANISHI & CO. LLP


San
Francisco, California


April 22,
2009





F-2
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES




CONSOLIDATED
BALANCE SHEETS




(in
thousands, except share data)




December
      31,2008
                              
                              
                              2007ASSETSCurrent
      assets:Cash
      and cash equivalents
                              
                              $
                              196
                              
                              
                              $
                              776Accounts
      receivable, net of allowance of $1 at December 31, 2008 and
      2007
                              
                              
                              46
                              
                              
                              
                              -Inventory
                              
                              
                              407
                              
                              
                              
                              520Prepaid
      expenses
                              
                              
                              223
                              
                              
                              
                              320Other
      current assets
                              
                              
                              -
                              
                              
                              
                              21Total
      current assets
                              
                              
                              872
                              
                              
                              
                              1,637Property
      and equipment, net
                              
                              
                              3,032
                              
                              
                              
                              3,095Intangible
      assets, net of accumulated amortization of $654 and $436 at December
      31,2008
      and 2007, respectively
                              
                              
                              2,280
                              
                              
                              
                              2,498Other
      assets
                              
                              
                              364
                              
                              
                              
                              226Total
      assets
                              
                              $
                              6,548
                              
                              
                              $
                              7,456LIABILITIES
      AND STOCKHOLDERS’ DEFICITCurrent
      liabilities:Accounts
      payable and accrued expenses
                              
                              $
                              2,995
                              
                              
                              $
                              2,976Advances
      from related parties
                              
                              
                              2,256
                              
                              
                              
                              2,0718%
      Convertible notes payable, net of discount of $401
                              
                              
                              5,333
                              
                              
                              
                              -7%
      Notes payable to a related party, including accrued interest of $740, net
      of discount of $225
                              
                              
                              4,715
                              
                              
                              
                              -12%
      Convertible debentures payable
                              
                              
                              60
                              
                              
                              
                              60Anti-dilution
      obligation
                              
                              
                              -
                              
                              
                              
                              32Total
      current liabilities
                              
                              
                              15,359
                              
                              
                              
                              5,139Deferred
      rent obligation
                              
                              
                              29
                              
                              
                              
                              288%
      Convertible notes payable, net of discount of $1,283
                              
                              
                              -
                              
                              
                              
                              4,0077%
      Notes payable to a related party including accrued interest of $443, net
      of discount of $715
                              
                              
                              -
                              
                              
                              
                              3,928Minority
      interest in consolidated joint ventures
                              
                              
                              -
                              
                              
                              
                              69Mandatorily
      redeemable Series A preferred stock, $0.001 par value; no shares
      authorized atDecember
      31, 2008 and 2007; 100,000 shares issued and outstanding at December 31,
      2008and
      2007; aggregate redemption and liquidation value of $1,000 plus cumulative
      dividends
                              
                              
                              3,296
                              
                              
                              
                              3,176Total
      liabilities
                              
                              
                              18,684
                              
                              
                              
                              16,347Commitments
      and contingenciesStockholders’
      deficit:Preferred
      stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or
      outstanding
                              
                              
                              -
                              
                              
                              
                              -Common
      stock, $0.03 par value; 800,000,000 shares authorized at December 31, 2008
      and2007;  439,354,624
      and 357,241,802 shares issued and outstanding as of December 31,
      2008and
      2007, respectively
                              
                              
                              13,181
                              
                              
                              
                              10,717Additional
      paid–in capital
                              
                              
                              159,654
                              
                              
                              
                              156,202Other
      comprehensive income
                              
                              
                              119
                              
                              
                              
                              103Accumulated
      deficit
                              
                              
                              (185,090
                              )
                              
                              
                              (175,913
                              )Total
      stockholders’ deficit
                              
                              
                              (12,136
                              )
                              
                              
                              (8,891
                              )Total
      liabilities and stockholders' deficit
                              
                              $
                              6,548
                              
                              
                              $
                              7,456






See
accompanying notes to consolidated financial statements.





F-3
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF OPERATIONS




(in
thousands, except per share data)




Years
      Ended December 31,2008
                              
                              
                              2007Revenues:Product
      sales
                              
                              $
                              725
                              
                              
                              $
                              589Operating
      costs and expenses:Cost
      of product sales
                              
                              
                              685
                              
                              
                              
                              559Research
      and development expenses
                              
                              
                              1,405
                              
                              
                              
                              1,260Selling,
      general and administrative expenses (non-cash of $1,348 and
      $1,500in
      2008 and 2007, respectively)
                              
                              
                              5,862
                              
                              
                              
                              6,409Impairment
      of assets
                              
                              
                              -
                              
                              
                              
                              1,528Total
      operating expenses
                              
                              
                              7,952
                              
                              
                              
                              9,756Loss
      from operations
                              
                              
                              (7,227
                              )
                              
                              
                              (9,167
                              )Interest
      expense, net (non-cash expense of $(2,218) in 2008 and
      non-cashincome
      of $59 in 2007)
                              
                              
                              (2,520
                              )
                              
                              
                              (235
                              )Minority
      interest in losses of consolidated joint ventures
                              
                              
                              313
                              
                              
                              
                              1,206Other
      income (expense), net
                              
                              
                              257
                              
                              
                              
                              (72
                              )Loss
      before income taxes
                              
                              
                              (9,177
                              )
                              
                              
                              (8,268
                              )Income
      taxes
                              
                              
                              -
                              
                              
                              
                              (2
                              )Net
      loss
                              
                              
                              (9,177
                              )
                              
                              
                              (8,270
                              )Deemed
      dividend attributable to modification of warrants
                              
                              
                              (3,047
                              )
                              
                              
                              -Net
      loss applicable to common stockholders
                              
                              $
                              (12,224
                              )
                              
                              $
                              (8,270
                              )Net
      loss per share applicable to common stockholders (basic and
      diluted)
                              
                              $
                              (0.03
                              )
                              
                              $
                              (0.03
                              )Weighted
      average shares used to compute net loss per share applicable
      tocommon
      stockholders (basic and diluted)
                              
                              
                              398,994
                              
                              
                              
                              314,928




See
accompanying notes to consolidated financial statements.




F-4
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT




YEARS
ENDED DECEMBER 31, 2007 and 2008





(in
thousands, except share data)




Number
      of Common Shares
                          
                          Common
      Stock
                          
                          
                          Common
      Stock Subscribed
                          
                          
                          Additional
      Paid-in Capital
                          
                          
                          Accumulated
      Other Comprehensive Income
                          
                          
                          Accumulated
      Deficit
                          
                          
                          Total
      Stockholders' DeficitBalances
      at December 31, 2006
                          
                          
                          221,145,656
                          
                          
                          $
                          6,634
                          
                          
                          $
                          100
                          
                          
                          $
                          151,511
                          
                          
                          $
                          -
                          
                          
                          $
                          (167,643
                          )
                          
                          $
                          (9,398
                          )Shares
      issued upon exercise ofemployee
      options
                          
                          
                          16,827
                          
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1Stock-based
      employee and directorcompensation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          999
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          999Shares
      issued in February 2007 PrivatePlacement
      (including anti-dilutionshares)
                          
                          
                          4,326,924
                          
                          
                          
                          130
                          
                          
                          
                          -
                          
                          
                          
                          138
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          268Shares
      issued in March 2007 PrivatePlacement,
      net of expenses
                          
                          
                          112,118,024
                          
                          
                          
                          3,364
                          
                          
                          
                          (100
                          )
                          
                          
                          2,446
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          5,710Shares
      issued upon exercise of warrants
                          
                          
                          14,482,292
                          
                          
                          
                          434
                          
                          
                          
                          
                          
                          
                          
                          657
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,091Shares
      issued as compensation toemployees,
      consultants and serviceproviders
                          
                          
                          5,152,079
                          
                          
                          
                          154
                          
                          
                          
                          -
                          
                          
                          
                          275
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          429Fair
      value of options and warrants issuedas
      severance and to consultants andand
      mark to market adjustments
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          56
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          56Fair
      value of modification of 2006 AdditionalWarrants
      in conjunction with March2007
      private placement
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          29
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          29Fair
      value of anti-dilution rights associatedwith
      February 2007 and March 2007Private
      Placements
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,357
                          )
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (2,357
                          )Fair
      value of modification of 8% ConvertibleNotes
      and 7% Credit Facility Notes inconjunction
      with March 2007 PrivatePlacement
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,161
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,161Fair
      value of modification of 8% ConvertibleNotes
      and gain on extinguishment of7%
      Marr Credit Facility Notes inconjunction
      with December 2007debt
      restructuring with Marr
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,287
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,287Comprehensive
      loss:Foreign
      currency translation
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          103
                          
                          
                          
                          -
                          
                          
                          
                          103Net
      loss
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (8,270
                          )
                          
                          
                          (8,270
                          )Total
      comprehensive loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (8,167
                          )Balances
      at December 31, 2007
                          
                          
                          357,241,802
                          
                          
                          $
                          10,717
                          
                          
                          $
                          -
                          
                          
                          $
                          156,202
                          
                          
                          $
                          103
                          
                          
                          $
                          (175,913
                          )
                          
                          $
                          (8,891
                          )




(continued)




F-5
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT  (CONTINUED)




YEARS
ENDED DECEMBER 31, 2007 and 2008





(in
thousands, except share data)




Number
      of Common Shares
                                                
                                                
                                                Common
      Stock
                                                
                                                
                                                Common
      Stock Subscribed
                                                
                                                
                                                Additional
      Paid-in Capital
                                                
                                                
                                                Accumulated
      Other Comprehensive Income
                                                
                                                
                                                Accumulated
      Deficit
                                                
                                                
                                                Total
      Stockholders' DeficitBalances
      at December 31, 2007
                                                
                                                
                                                357,241,802
                                                
                                                
                                                $
                                                10,717
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                156,202
                                                
                                                
                                                $
                                                103
                                                
                                                
                                                $
                                                (175,913
                                                )
                                                
                                                $
                                                (8,891
                                                )Shares
      issued upon exercise ofemployee
      options
                                                
                                                
                                                24,038
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -Shares
      issued for fees and expenses inconnection
      with Purchase Agreementwith
      Fusion Capital
                                                
                                                
                                                4,043,647
                                                
                                                
                                                
                                                121
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                223
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                344Shares
      sold to Fusion Capital underPurchase
      Agreement
                                                
                                                
                                                13,831,133
                                                
                                                
                                                
                                                415
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                535
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                950Shares
      issued upon exercise of warrants
                                                
                                                
                                                28,402,004
                                                
                                                
                                                
                                                852
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                750
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,602Shares
      issued as compensation toemployees,
      consultants and serviceproviders
                                                
                                                
                                                1,812,000
                                                
                                                
                                                
                                                55
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                99
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                154Shares
      sold in August 2008 PrivatePlacement
                                                
                                                
                                                14,000,000
                                                
                                                
                                                
                                                420
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                280
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                700Shares
      sold in September 2008 PrivatePlacement
                                                
                                                
                                                20,000,000
                                                
                                                
                                                
                                                600
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                100
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                700Expenses
      related to sales of common stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (74
                                                )
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (74
                                                )Stock-based
      employee and directorcompensation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,144
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                1,144Fair
      value of warrant modifications relatedto
      severance agreement
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                350
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                350Fair
      value of options issued as compensationto
      consultants and mark to marketadjustments
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                46
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                46Comprehensive
      loss:Foreign
      currency translation
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                16
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                16Net
      loss
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (9,177
                                                )
                                                
                                                
                                                (9,177
                                                )Total
      comprehensive loss
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                
                                                (9,161
                                                )Balances
      at December 31, 2008
                                                
                                                
                                                439,354,624
                                                
                                                
                                                $
                                                13,181
                                                
                                                
                                                $
                                                -
                                                
                                                
                                                $
                                                159,654
                                                
                                                
                                                $
                                                119
                                                
                                                
                                                $
                                                (185,090
                                                )
                                                
                                                $
                                                (12,136
                                                )







See
accompanying notes to consolidated financial statements.





F-6
 Table of Contents




CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS




(in
thousands)




Years
      ended December 31,2008
                            
                            
                            2007Cash
      flows from operating activities:Net
      loss
                            
                            $
                            (9,177
                            )
                            
                            $
                            (8,270
                            )Adjustments
      to reconcile net loss to operating  activities:Depreciation
      and amortization
                            
                            
                            458
                            
                            
                            
                            492Non-cash
      interest expense attributable to:Amortization
      and proportional write-off upon conversion of note
    discountsand
      deferred debt issuance costs
                            
                            
                            1,409
                            
                            
                            
                            1,657Write-off
      of deferred offering costs related to Purchase Agreement with Fusion
      Capital
                            
                            
                            305
                            
                            
                            
                            -Dividends
      on mandatorily redeemable Series A preferred stock
                            
                            
                            120
                            
                            
                            
                            120Anti-dilution
      obligation and note derivative liability
                            
                            
                            (32
                            )
                            
                            
                            (2,281
                            )Extension
      of maturity of August 2006 Additional Warrants
                            
                            
                            -
                            
                            
                            
                            29Stock-based
      employee and director compensation expense
                            
                            
                            1,144
                            
                            
                            
                            999Fair
      market value of common stock, warrants and options granted for
      services
                            
                            
                            202
                            
                            
                            
                            544Non-cash
      severance expense related to modification of Series A Warrants and Series
      BWarrants
      issued in March 2007 Private Placement
                            
                            
                            350
                            
                            
                            
                            -Loss
      on disposition of equipment
                            
                            
                            24
                            
                            
                            
                            22Impairment
      loss on intangible assets acquired with China manufacturing
      facility
                            
                            
                            -
                            
                            
                            
                            1,528Minority
      interest in joint venture losses
                            
                            
                            (313
                            )
                            
                            
                            (1,206
                            )Changes
      in operating assets and liabilities:Accounts
      receivable
                            
                            
                            (46
                            )
                            
                            
                            16Inventory
                            
                            
                            120
                            
                            
                            
                            (256
                            )Prepaid
      expenses and other current assets
                            
                            
                            103
                            
                            
                            
                            90Deferred
      debt issuance costs and other assets
                            
                            
                            -
                            
                            
                            
                            73Accounts
      payable, accrued expenses and other current liabilities
                            
                            
                            747
                            
                            
                            
                            327Other
      non-current liabilities
                            
                            
                            1
                            
                            
                            
                            27Net
      cash used in operating activities
                            
                            
                            (4,585
                            )
                            
                            
                            (6,089
                            )Cash
      flows from investing activities:Purchases
      of equipment and other fixed assets
                            
                            
                            (15
                            )
                            
                            
                            (436
                            )Net
      cash used in investing activities
                            
                            
                            (15
                            )
                            
                            
                            (436
                            )Cash
      flows from financing activities:Proceeds
      from sale of stock, net of expenses
                            
                            
                            3,883
                            
                            
                            
                            6,496Proceeds
      from notes issued to related parties
                            
                            
                            48
                            
                            
                            
                            508Repayment
      of notes issued to related parties
                            
                            
                            -
                            
                            
                            
                            (321
                            )Investment
      in joint ventures by minority interest owner
                            
                            
                            93
                            
                            
                            
                            510Principal
      payment on capital lease obligations
                            
                            
                            -
                            
                            
                            
                            (131
                            )Net
      cash provided by financing activities
                            
                            
                            4,024
                            
                            
                            
                            7,062Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            (576
                            )
                            
                            
                            537Effect
      of foreign currency exchange rates on cash
                            
                            
                            (4
                            )
                            
                            
                            (133
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            776
                            
                            
                            
                            372Cash
      and cash equivalents at end of period
                            
                            $
                            196
                            
                            
                            $
                            776






(continued)


F-7
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES




CONSOLIDATED
STATEMENTS OF CASH FLOWS  (CONTINUED)




(in
thousands)




Years
      ended December 31,2008
                    
                    
                    2007Supplemental
      disclosure of cash flow activities:Cash
      paid for interest
                    
                    $
                    303
                    
                    
                    $
                    315Cash
      paid for income taxes
                    
                    
                    -
                    
                    
                    
                    2Supplemental
      disclosure of non-cash activities:Common
      stock issued for fees and expenses under Purchase Agreement with Fusion
      Capital
                    
                    
                    344
                    
                    
                    
                    28Conversion
      of accrued interest into notes payable
                    
                    
                    444
                    
                    
                    
                    407Non-cash
      interest (expense) income
                    
                    
                    (2,218
                    )
                    
                    
                    59Conversion
      of notes payable and accrued interest to common stock
                    
                    
                    -
                    
                    
                    
                    92Common
      stock issued in payment of accrued compensation
                    
                    
                    -
                    
                    
                    
                    438Accrued
      liability for acquisition of Chinese manufacturing facility and related
      assets
                    
                    
                    -
                    
                    
                    
                    327










See
accompanying notes to consolidated financial statements.





F-8
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007




(1)    The
Company




Calypte
Biomedical Corporation (the “Company”) develops, manufactures, and distributes
in vitro diagnostic
tests, primarily for the diagnosis of Human Immunodeficiency Virus (“HIV”)
infection.  We were incorporated in California in 1989 and
reincorporated in Delaware in 1996 at the time of our initial public
offering.  Since September 8, 2006, our common stock has traded on the
NASD Over the Counter Bulletin Board under the symbol “CBMC.”  During
the third quarter of 2007, we combined our research and development operations
and our administrative offices in a facility in Portland, Oregon that also
includes space for manufacturing operations.  Prior to that, our
administrative offices were located in Lake Oswego, Oregon, a suburb of
Portland, near where our research and development operations were
located.  Through our 51%-owned joint ventures, we have manufacturing
and marketing operations in Beijing, China.  In the second quarter of
2007, we established a representative sales and marketing office in Dubai,
United Arab Emirates (“U.A.E.”) and, in the third quarter of 2007, we
established a similar office in Geneva, Switzerland.





Through
late 2005, we manufactured and marketed urine-based HIV-1 diagnostic screening
tests and urine and serum-based Western Blot supplemental (sometimes called
“confirmatory”) tests for use in high-volume laboratories, which we refer to as
our “Legacy Business.”  In November 2005, we sold the Legacy Business
to Maxim Biomedical, Inc. to concentrate on the development of our rapid test
platform products.





Our
current emphasis is commercializing our HIV-1/2 Rapid Tests, test products for
the rapid detection of antibodies to HIV-1 and HIV Type 2, a second type of HIV
(“HIV-2”), in oral fluid and blood samples using a lateral flow dipstick design
(the “HIV-1/2 Rapid Tests”).  Rapid tests provide diagnostic results
in less than 20 minutes and are particularly suitable for point-of-care testing
in both the professional sector, such as in developing countries that lack the
medical infrastructure to support laboratory based testing, and, for the first
time, in the over-the-counter or “OTC” market.  We have completed
field trials or product evaluations of our AwareTM HIV-1/2
OMT (oral fluid) rapid test covering an aggregate of over 8,000 samples in
China, India, South Africa and elsewhere and believe that the results of these
studies and evaluations have validated the test.  In our studies, this
test has averaged 99.7% accuracy.  We have obtained regulatory
approvals in a number of key countries in Africa, Southeast Asia, the Middle
East, Russia, India and China, and we expect to expand our market reach on a
steady basis.  Sales of our rapid test products have continued to
increase at a slow, but steady, pace primarily through the efforts of our
distributors in South Africa and the U.A.E.





In the
fourth quarter of 2004, through an arrangement with the U. S. Centers for
Disease Control and Prevention (the “CDC”), we introduced an HIV-1 BED Incidence
EIA test (the “BED Incidence Test”) that detects HIV-1 infections that have
occurred within approximately the prior 6 months and that can be used by public
health agencies to identify those regions and the populations within them where
HIV transmission is occurring most recently.




In
November 2003, we became the 51% owner of a joint venture, Beijing Calypte
Biomedical Technology Ltd. (“Beijing Calypte”), created to market our rapid test
products in China.  The remaining 49% of the joint venture is owned by
Marr Technologies Limited, an affiliate of Marr Technologies BV (“Marr”), our
largest stockholder, which currently holds approximately 17% of our outstanding
stock.  Through 2008, the operations of Beijing Calypte have been
primarily organizational and financially insignificant.





Effective
in January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceutical Co.,
Ltd. (“Beijing Marr”).  We purchased our equity interest from Marr
Technologies Asia Limited (“Marr Asia”), an affiliate of Marr, which owns the
remaining 49% interest in Beijing Marr.  In 2008, Beijing Marr
obtained the necessary governmental approvals to manufacture, market, distribute
and sell our AwareTM HIV-1/2 OMT test and has begun to manufacture and market the
test. The Beijing Marr manufacturing facility is qualified under ISO 13485:2003
standards.  This facility has the capability to manufacture our
products for sale in China and for export to other
countries.  Obtaining these governmental approvals opened the door to
sales in China, and also to sales in countries that only permit import of
products that have governmental approval in the country of
manufacture.





F-9
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


The
accompanying financial statements reflect our consolidated operations and
ownership interests in Beijing Calypte and in Beijing Marr.





In the
first quarter of 2008, we introduced AwareMessengerTM, our
oral fluid sample collection device.  Although we do not currently
have approval to sell this device for diagnostic purposes, we can sell it for
“research use only” in situations where assay developers and test laboratories
can qualify the product for use with their own assays.  In the second
quarter of 2008, we launched a range of Life Sciences products, including
AwareMessengerTM, as
well as a number of recombinant proteins and specialty assay reagents, which we
are marketing through a web-portal at www.calyptelifesciences.com
and a printed catalogue.  Late in the fourth quarter of 2008, we
suspended marketing and sales of our Life Sciences products.  Sales of
these products were not material during 2008.





Our
current revenues from international sales of our HIV-1/2 Rapid Tests and sales
of the BED Incidence Test are not adequate to support our business operations,
requiring that we also rely on external financing sources to pursue our business
milestones and achieve profitability.





In March
2007, we received cash proceeds of $5.2 million from the March 2007 private
placement that funded our operations through 2007.  As part of the
March 2007 private placement, we issued to the investors in that private
placement immediately exercisable Series A common stock purchase warrants (the
“Series A Warrants”) expiring on June 28, 2008 to purchase an aggregate of 100
million shares of our common stock at $0.08 per share and immediately
exercisable Series B common stock purchase warrants (the “Series B Warrants”)
expiring on September 28, 2008 to purchase an aggregate of 50 million shares of
our common stock at $0.11 per share.  We expected that the warrants
would be exercised to potentially provide up to $13.5 million of additional
near-term financing.  Through March 31, 2008, the investors in the
March 2007 private placement had exercised an aggregate of 11,750,000 of the
warrants exercisable at $0.08 per share and we had received $940,000 in cash
proceeds.  As described more completely in Note 11, Stockholder’s
Deficit, in June 2008, we reduced the exercise price of the Series A Warrants
for the four primary investors in the March 2007 Private Placement from $0.08
per share to $0.05 per share and extended the term of their Series A Warrants
for one year to June 28, 2009.  We also extended the term of their
Series B Warrants for one year to September 28, 2009.  In exchange for
these modifications, the investors in the March 2007 Private Placement agreed to
exercise re-priced Series A Warrants to purchase an aggregate of 20,000,000
shares of our common stock by July 18, 2008.  By July 21, 2008, the
four investors had exercised Series A Warrants to purchase an aggregate of
19,920,000 shares of our common stock and we had received cash proceeds of
$996,000.





As
described more completely in Note 11, Stockholder’s Deficit, in August 2008 and
September 2008, we entered into private placement transactions with two new
investors.  We sold to the investor in the August 2008 transaction
14,000,000 shares of our common stock at a purchase price of $0.05 per share and
issued a two-year warrant to purchase an additional 1,000,000 shares of our
common stock at $0.08 per share and received cash proceeds of
$700,000.  We sold to the investor in the September 2008 transaction
20,000,000 shares of our common stock at a purchase price of $0.035 per share
and issued a two-year warrant to purchase an additional 1,000,000 shares of our
common stock at $0.06 per share and received cash proceeds of
$700,000.





As also
described more completely in Note 11, Stockholder’s Deficit, in January 2008, we
entered into a financing arrangement under which the investor, Fusion Capital
Fund II, LLC (“Fusion Capital”) is obligated, under certain conditions, to
purchase up to $8 million of our common stock over a 24 month
period.  Through December 31, 2008, we have sold an aggregate of
approximately 13,800,000 shares of our common stock and received cash proceeds
of $950,000 under this arrangement.  The market price of our common
stock has prevented us from selling additional shares under this arrangement
since May 2008 and we do not currently expect to sell additional shares under
this arrangement prior to its expiration.





In March
2007, we extended the maturity of our April 2005 Secured 8% Convertible Notes
and related interest notes and the 7% Promissory Notes issued under the 2005
Marr Credit Facility from April 2007 until April 2009.  At December
31, 2008, we owed an aggregate of approximately $10.7 million under the April
2005 Secured 8% Convertible Notes and related interest notes and the 7%
Promissory Notes issued under the 2005 Marr Credit Facility, including the
related accrued interest, all of which matures in April 2009. (See Note
19.)





F-10
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


The
development of our business took a steep downturn in the fourth quarter of 2008,
when our expected sources of financing failed to materialize.  Marr,
which had previously participated in many of our financing arrangements, advised
us that it would no longer provide financing to us.  Investors in our
March 2007 private placement did not exercise additional warrants and, as the
market price of our common stock was below its par value, we could not induce
them to exercise their warrants by offering to lower the exercise price to an
“in the money” price.  We were unable to sell our stock under the
arrangement with Fusion Capital as our stock price was well below the floor
threshold of the stock purchase arrangement.





During
and since the fourth quarter of 2008, we have diverted our focus from
commercializing our AwareTM HIV-1/2
rapid tests and the research and development of our other rapid oral test
products to focus on scaling down our operations to continue our business while
attempting to restructure our business plan.  In the fourth quarter of
2008, we substantially reduced our workforce to conserve cash and continue our
day-to-day operations at a minimal level. We have been focused on restructuring
our operations, seeking opportunities for financing and restructuring our debt,
with the hope that we will be able to continue as a going concern and again
focus on commercializing our current products and resuming the research and
development of our other products.  We have maintained a minimum staff
in order to continue sales of our products to our existing and new clients so
that we do not lose the momentum we have gained over the last few
years.  While most of our marketing efforts have ceased, we have
continued those efforts in certain places where to cease such efforts would
almost certainly cause us to lose ground.





During
2008, we incurred a net loss of $9.2 million.  At December 31, 2008,
we had a working capital deficit of $14.5 million and our stockholders’ deficit
was $12.1 million.  Our cash balance at December 31, 2008 was $0.2
million, which is inadequate to fund our operations and meet our obligations
through 2009.  As discussed in Note 19, a total of $10.983 million was
payable under our 8% Convertible Notes and related Interest Notes and 7%
Promissory Notes on April 3, 2009.  We are currently discussing
termination, reduction or restructuring of these debt obligations with each of
the secured creditors. Further, given the current market price of our common
stock, we have insufficient authorized shares of common stock available to raise
adequate capital to continue our operations.  The market price of our
common stock price is below its par value, which may make it difficult to raise
capital through the issuance of equity securities.  We do not have any
definitive agreements with respect to additional financing or a strategic
opportunity, and there is no assurance that any such financing or strategic
opportunity will be available to us on acceptable terms, or at
all.  If such additional financing is not available to us when
required or is not available to us on acceptable terms, or we are unable to
arrange a suitable strategic opportunity, we will be in significant financial
jeopardy and we may be unable to continue our operations at current levels, or
at all.  Our failure to obtain additional financing or to resolve the
existing defaults with respect to the 7% Promissory Notes and the 8% Convertible
Notes will likely cause us to seek bankruptcy protection under Chapter 7 of
Title 11 of the United States Code, which would have a material adverse affect
on our business and on our ability to continue our operations. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.








(2)    
Summary of Significant Accounting Policies




Principles of
Consolidation


The
accompanying consolidated financial statements include the results of operations
of the Company, its wholly-owned subsidiary, Calypte, Inc., and its 51% ownerhip
interests in both Beijing Calypte and Beijing Marr.  We have
eliminated all significant intercompany accounts and transactions in
consolidation.





Foreign Currency
Translation


The
functional currency of our consolidated Chinese joint ventures is the local
currency, the Chinese Yuan Renminbi.  We translate the assets and
liabilities of our foreign subsidiary to U.S. dollars at the rate of exchange in
effect at the end of the reporting period.  We translate revenues and
expenses at the average rates of exchange for the accounting
period.  We have reported the effect of translation gains and losses
as our only component of other comprehensive income in our Consolidated
Statements of Operations.





Cash and Cash
Equivalents


Cash
equivalents consist of investments in money market accounts.




F-11
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Allowance for Doubtful
Accounts


We
provide an allowance for doubtful accounts on a specific identification basis
when, due to passage of time or receipt of information, there is appropriate
evidence of a customer’s inability to make the required payments.





Inventories


Our
inventories are stated at the lower of cost or market with cost determined using
the first-in, first-out method.





Property and
Equipment


Our
property and equipment is stated at cost, net of accumulated
depreciation.  We depreciate our buildings, machinery and equipment,
furniture and fixtures, and computer equipment using the straight line method
over the estimated useful lives of the assets.  We amortize land use
rights related to property in China occupied by our Chinese joint venture over
the life of the rights.  We generally depreciate our assets as
follows:




Computer
      equipment
                3
      yearsMachinery
      and equipment
                5
      yearsFurniture
      and fixtures
                5
      yearsBuildings
                20-40
      yearsLand
      use rights
                Life
      of use rights, 43 yearsLeasehold
      improvements
                3-7 years





Leasehold
improvements and equipment under capital leases are amortized or depreciated
over the shorter of the remaining lease term or the useful life of the equipment
or improvement.




Impairment of Long-Lived
Assets


Long-lived
assets are comprised of property and equipment and intangible
assets.  We review our long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable.  We compare an estimate of undiscounted
future cash flows produced by the asset, or by the appropriate grouping of
assets, to the carrying value to determine whether impairment
exists.  If an asset is determined to be impaired, we measure the loss
based on quoted market prices in active markets, if available.  If
quoted market prices are not available, we estimate the fair value based on
various valuation techniques, including a discounted value of estimated future
cash flow and fundamental analysis.  We report an asset to be disposed
of at the lower of its carrying value or its estimated net realizable
value.





Fair Value of Financial
Instruments


Financial
assets and short-term liabilities, with the exception of the convertible notes
and debentures, have carrying values which approximate their fair values for all
periods presented.  The carrying amounts of cash equivalents
approximate fair value because of their short-term nature and because such
amounts are invested in accounts earning market rates of
interest.  The maturity amount of the convertible notes approximates
fair value because of the relatively short period until the maturity of the
notes.  The face amount of the convertible notes is offset by
discounts related to the unamortized portion of beneficial conversion and/or
anti-dilution features, if any, embedded in the notes or discounts occuring as a
result of modification of the notes.  We record any related
anti-dilution obligations and/or note derivative liabilities at their fair value
at the end of each reporting period.




F-12
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Revenue
Recognition


We record
revenues only upon the occurrence of all of the following
conditions:




•
            We
      have received a binding purchase order or similar commitment from the
      customer or distributor authorized by a representative empowered to commit
      the purchaser (evidence of a sale).•
            The
      purchase price has been fixed, based on the terms of the purchase
      order.•
            We
      have delivered the product from our contract manufacturing plant to a
      common carrier acceptable to the purchaser.  Our customary
      shipping terms are FOB shipping point. Because of the need for controlled
      conditions during shipment, we suggest, but leave to the purchaser’s
      discretion, acquiring insurance for the value of the
      shipment.  If the purchaser elects to insure the shipment, the
      insurance is at the purchaser’s expense.•
            We
      deem the collection of the amount invoiced probable.  To
      eliminate the credit risk associated with international distributors with
      whom we have had little or no experience, we require prepayment of the
      order or a letter of credit before
shipment.





Except in
the event of verified product defect, we do not permit product
returns.  Our products must be maintained under rigidly controlled
conditions that we cannot control after the product has been shipped to the
customer.




We
provide no price protection.  Subject to the conditions noted above,
we recognize revenue upon shipment of product.





Income
Taxes


We
account for income taxes under Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for
Income Taxes. SFAS No. 109 requires an asset and liability approach for
the financial reporting of income taxes.  Under SFAS No. 109, we
recognize deferred tax assets and liabilities for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards.  We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled.  Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.  To date, we have no history of
earnings.  Therefore, our deferred tax assets are reduced by a
valuation allowance to the extent that realization of the deferred tax asset is
not assured.  We have recorded a valuation allowance for the full
amount of our calculated deferred tax asset as of December 31, 2008 and
2007.





We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109(“FIN 48”), on
January 1, 2007.  FIN 48 provides clarification related to
the process associated with accounting for uncertain tax positions recognized in
financial statements. FIN 48 prescribes a more-likely-than-not threshold for
financial statement recognition and measurement of a tax position taken, or
expected to be taken, in a tax return. FIN 48 also provides guidance related to,
among other things, classification, accounting for interest and penalties
associated with tax positions, and disclosure requirements. Upon adoption of FIN
48, we determined that we did not have any unrecognized tax benefits and there
was no effect on our financial condition or results of operations as a result of
implementing FIN 48 (see Note 14, Income Taxes).





Classification of Financial
Instruments with Characteristics of both Liability and
Equity


We
account for financial instruments that we have issued and that have
characteristics of both liability and equity in accordance with SFAS No. 150,
Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity.  SFAS No. 150 specifies that mandatorily redeemable
financial instruments are to be recorded as liabilities unless the redemption is
required to occur upon the liquidation or termination of the
issuer.  SFAS No. 150 also specifies that a financial instrument that
embodies a conditional obligation that an issuer may settle by issuing a
variable number of its equity shares is to be classified as a liability if, at
inception, the value of the obligation is based solely or predominantly on
variations inversely related to changes in the fair value of the issuer’s equity
shares.  Should a financial instrument not be classified as a
liability under the provisions of SFAS No. 150, we further apply the criteria in
Emerging Issues Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock,which
enumerates additional criteria to determine the appropriate classification as
liability or equity.  We also evaluate the anti-dilution and/or
beneficial conversion features that may be included in our financial instruments
in accordance with the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities,which may classify the feature as an
embedded derivative and require that the financial instrument be bifurcated and
the feature accounted for separately.  We evaluate each financial
instrument on its own merits at inception or other prescribed measurement or
valuation date and may engage the services of valuation experts and other
professionals to assist in our detemination of the appropriate
classification.





F-13
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007




Stock-Based
Compensation Expense


We
adopted Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment
(“SFAS 123R”) effective January 1, 2006, using the modified prospective
method.  Under this method, we apply the provisions of SFAS 123R to
all awards granted or modified after the date of adoption.  We
recognized in our net loss for the periods after the date of adoption the
unrecognized expense attributable to awards not yet vested at the January 1,
2006 date of adoption using the same valuation method (i.e. Black-Scholes option
valuation model) and assumptions determined under the original provisions of
SFAS 123, “Accounting for Stock-Based Compensation,” as disclosed on a pro-forma
basis in our previous financial statements.  During 2007, we recorded
stock compensation expense attributable to unvested options granted prior to our
adoption of SFAS 123R of $59,000 in selling, general and administrative expenses
in our Consolidated Statement of Operations. Under the fair value
recognition provisions of SFAS 123R, we recognize stock-based compensation, net
of an estimated forfeiture rate which results in recognizing compensation
expense for only those awards expected to vest, over the service period of the
award.




We
estimate the fair value of stock option grants made to employees and directors
during 2008 and 2007, and expect to estimate the fair value of future grants,
using the Black-Scholes option pricing model.  Calculating stock-based
compensation expense under the provisions of SFAS 123R requires the input of
highly subjective assumptions, including the expected term of the stock-based
awards, stock price volatility, and pre-vesting option forfeitures. 
Because of significant restructurings of our operations and reductions in our
workforce in the past which have resulted in the termination of a significant
number of our employees prior to the vesting of their options, to date, we have
generally estimated the expected life of options granted in the future based on
the simplified method provided in Staff Accounting Bulletin No. 107 for “plain
vanilla” options.  Where appropriate, we will consider separately for
valuation purposes groups of employees or directors that have similar historical
exercise behavior.  We estimate the volatility of our common stock at
the date of grant based on its historical volatility over a period generally
equivalent to the expected term of the grant.  We estimate the
expected pre-vesting forfeiture rate and recognize expense for only those shares
expected to vest.  We have estimated our forfeiture rate based on our
historical experience with stock-based awards that are granted and forfeited
prior to vesting.  If the actual forfeiture rate is materially
different from the estimate, the stock-based compensation expense could also
differ from what we have recorded in the current period.  The assumptions
used in calculating the fair value of stock-based awards represent our best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment.  As required under SFAS 123R, we review
our valuation assumptions at each grant date and, as a result, may periodically
change the valuation assumptions used to value employee and director stock-based
awards granted in future periods.





Net Loss Per
Share


We
compute basic net loss per share by dividing net loss by the weighted average
number of shares of common stock outstanding during the periods
presented.  The computation of diluted loss per common share is
similar to the computation of basic net loss per share, except that the
denominator is increased for the assumed conversion of convertible securities
and the exercise of options and warrants, to the extent they are dilutive, using
the treasury stock method.  The weighted average shares used in
computing basic and diluted net loss per share are the same for the periods
presented in these consolidated financial statements.  Outstanding
options and warrants to purchase 207,960,767 shares and 232,129,542 shares were
excluded from the computation of loss per share for the years ended December 31,
2008 and 2007, respectively, as their effect is anti-dilutive.  The
computation of loss per share also excludes 19,113,444 shares and 56,632,934
shares issuable upon the conversion of 8% Convertible Notes, including 8%
Convertible Notes issued in payment of interest, and, in 2007, 7% Notes issued
under the Marr Credit Facility for the years ended December 31, 2008 and 2007,
respectively, as their effect is also anti-dilutive.





F-14
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Concentrations of Credit
Risk


Financial
instruments which potentially subject us to concentrations of credit risk
consist principally of cash and cash equivalents and trade accounts
receivable.  We have investment policies that limit investments to
short-term, low-risk investments.  Concentration of credit risk with
respect to trade accounts receivable is limited due to the fact that we sell our
products primarily to established distributors or require prepayment for certain
orders where the relationship between the parties is not
well-established.




Use of
Estimates


The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.




Risks and
Uncertainties


We
purchase certain raw materials and components used in manufacturing our products
from a number of suppliers, but we rely on single sources for certain other
components.  We cannot quickly establish additional or replacement
suppliers for these components.  Any delay or interruption in the
supply of these components could have a material adverse effect on us by
significantly impairing our ability to manufacture products in sufficient
quantities to meet commercial sales demand.  Additionally, if our
financial condition impairs our ability to pay for critical components on a
timely basis or to make royalty payments as required under our license
agreements, suppliers may delay or cease selling critical components to us or
our rights to use license agreements could be jeopardized, both of which could
also impair our ability to manufacture and/or market our products.





Comprehensive
Loss


We report
the effect of translation gains and losses related to our consolidated Chinese
joint ventures as our only component of other comprehensive income in our
Consolidated Statements of Stockholders' Deficit.




Segment and Geographic
Information


SFAS No.
131 Disclosures about Segments
of an Enterprise and Related Information requires that we report segment
information based on how our management internally evaluates the operating
performance of our business units (segments).  Our operations are
currently confined to a single business segment, the development and sale of HIV
diagnostics.





The
following table summarizes our product sales revenues by product for the years
ended December 31, 2008 and 2007 (in thousands).




2008
                      
                      
                      2007Aware
      TM
      BED HIV-1 Incidence tests
                      
                      $
                      403
                      
                      
                      $
                      388Aware
      TM
      Rapid HIV diagnostic tests
                      
                      
                      313
                      
                      
                      
                      201All
      other
                      
                      
                      9
                      
                      
                      
                      -Revenue
      from product sales
                      
                      $
                      725
                      
                      
                      $
                      589


F-15
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Sales to
international customers accounted for approximately 77% and 81% of our revenues
in 2008 and 2007, respectively.  At December 31, 2008 approximately
$262,000, or 65%, of our inventory and $2,862,000, or 94%, of our property and
equipment, net, was held in international locations.




Three
customers accounted for approximately 56% of our revenue for
2008.  Our South African distributor purchased both BED Incidence
Tests and our AwareTM HIV-1/2
oral fluid rapid tests representing 24% of our 2008 revenue.  During
the fourth quarter of 2008, our new distributor in the U.A.E. purchased
AwareTM HIV-1/2
oral fluid rapid tests representing 21% of our total 2008
revenue.  BED Incidence Test purchases by the CDC’s contract testing
labs in New York accounted for 11% of our revenue for 2008.  Three
customers accounted for approximately 51% of our revenue for
2007.  Our South African distributor purchased both BED Incidence
Tests and our AwareTM HIV-1/2
oral fluid rapid tests representing 27% of our 2007 revenue.  A second
quarter purchase of our AwareTM HIV-1/2
oral fluid rapid tests by a Russian distributor accounted for 13% of our revenue
for 2007.  BED Incidence Test purchases by the CDC’s contract testing
labs in New York accounted for 11% of our revenue for 2007.





Reclassifications


Certain
amounts previously reported in the consolidated financial statements have been
reclassified to conform to the current year presentation.





Recent Accounting
Pronouncements


In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement No.
161, Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement No.
133 (“SFAS 161”).  This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008.  We do not expect that the adoption of SFAS 161
will have a material impact on our consolidated financial position or results of
operations.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations ("SFAS
141(R)"). SFAS 141(R) changes several underlying principles in applying the
purchase method of accounting. Among the significant changes, SFAS 141(R)
requires a redefining of the measurement date of a business combination,
expensing direct transaction costs as incurred, capitalizing in-process research
and development costs as an intangible asset and recording a liability for
contingent consideration at the measurement date with subsequent re-measurements
recorded in the results of operations. SFAS 141(R) also requires that costs for
business restructuring and exit activities related to the acquired company will
be included in the post-combination financial results of operations and also
provides new guidance for the recognition and measurement of contingent assets
and liabilities in a business combination. In addition, SFAS 141(R) requires
several new disclosures, including the reasons for the business combination, the
factors that contribute to the recognition of goodwill, the amount of
acquisition related third-party expenses incurred, the nature and amount of
contingent consideration, and a discussion of pre-existing relationships between
the parties. SFAS 141(R) is effective for fiscal years beginning after December
15, 2008.  We adopted  SFAS 141(R) on January 1, 2009, which
did not have a material impact on our consolidated financial position or results
of operations.





In June
2008, the EITF reached a consensus on EITF Issue No. 07-5, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entity's Own Stock("EITF No.
07-05"). EITF No. 07-5 provides guidance on how to determine if certain
instruments (or embedded features) are considered indexed to our own stock,
including instruments similar to our issued warrants to purchase our stock. EITF
No. 07-5 requires companies to use a two-step approach to evaluate an
instrument's contingent exercise provisions and settlement provisions in
determining whether the instrument is considered to be indexed to its own stock
and exempt from the application of SFAS No. 133. Although EITF No. 07-5 is
effective for fiscal years beginning after December 15, 2008, any outstanding
instrument at the date of adoption will require a retrospective application of
the accounting through a cumulative effect adjustment to retained earnings upon
adoption. We are currently assessing the potential impact that the adoption of
EITF No. 07-5 will have on our financial statements.





F-16
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


In
December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements(“SFAS 160”), which introduces changes in
the accounting and reporting for business acquisitions and noncontrolling
interest in a subsidiary.  The changes introduced by SFAS 160 include
reporting noncontrolling interest (previously referred to as minority interest)
as part of equity in the consolidated financial statements; allocating losses to
the noncontrolling interest even when such allocation might result in a deficit
balance and reduce the loss allocated to the controlling interest; treating
changes in ownership interests as equity transactions if control is maintained;
and recognizing in earnings any gain or loss on the interest sold upon a loss of
control, with the retained interest remeasured at fair value on the date control
is lost.  SFAS 160 is effective for fiscal years beginning after
December 15, 2008.  We have not yet evaluated the impact on our
consolidated financial statements of adopting SFAS No. 160.





In June
2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue
No. 07-03, Accounting for
Nonrefundable Advance Payments for Goods or Services to Be Used in Future
Research and Development Activities (“EITF 07-03”), which requires
nonrefundable advance payments for future R&D activities to be capitalized
and recognized as an expense as the goods are delivered or services are
performed. EITF 07-03 is effective for fiscal years beginning after December 15,
2007.  Our adoption of EITF 07-03 effective January 1, 2008 did not
have a material impact on our consolidated financial statements.





In
September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“FAS
157”).  FAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements required under other accounting
pronouncements.  FAS 157 does not change existing guidance regarding
whether or not an instrument is carried at fair value.  SFAS No. 157
is effective for financial statements issued for fiscal years beginning after
November 15, 2007.  Our adoption of SFAS No. 157 effective January 1,
2008 did not have a material impact on our consolidated financial
statements.





In
February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (“FAS 159”).  FAS 159 permits
the measurement of many financial instruments and certain other items at fair
value. Entities may choose to measure eligible items at fair value at specified
election dates, reporting unrealized gains and losses on such items at each
subsequent reporting period.  The objective of FAS 159 is to provide
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions.  It is intended to expand the use
of fair value measurement.  FAS 159 is effective for fiscal years
beginning after November 15, 2007.  Our adoption of SFAS No. 159
effective January 1, 2008 did not have a material impact on our consolidated
financial statements.





In
November 2007, the EITF issued EITF Issue No. 07-1 (“EITF 07-1”), Accounting for Collaborative
Arrangements Related to the Development and Commercialization of Intellectual
Property.  EITF 07-1 addresses situations in which companies
enter into arrangements with other companies to jointly develop, manufacture,
distribute and market a product.  Often the activities associated with
these arrangements are conducted by the collaborators without the creation of a
separate legal entity (that is, the arrangement is operated as a “virtual joint
venture”).  The arrangements generally provide that the collaborators
will share, based on contractually defined calculations, the profits or losses
from the associated activities.  Periodically, the collaborators share
financial information related to product revenues generated (if any) and costs
incurred that may trigger a sharing payment for the combined profits or
losses.  The EITF consensus requires collaborators in such an
arrangement to present the result of activities for which they act as the
principle on a gross basis and report any payments received from, or made to,
other collaborators based on other applicable GAAP or, in the absence of other
applicable GAAP, based on analogy to authoritative accounting literature or a
reasonable, rational and consistently applied accounting policy
election.  EITF 07-1 is effective for collaborative arrangements in
place at the beginning of the annual reporting period beginning after December
15, 2008.  We do not expect that the adoption of EITF 07-1 will have a
material impact on our financial position or results of operations.





F-17
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007





(3)    Inventory




Inventory
as of December 31, 2008 and 2007 consisted of the following (in
thousands):




December
      31,2008
                            
                            
                            2007Raw
      materials
                            
                            $
                            241
                            
                            
                            $
                            398Work-in-process
                            
                            
                            14
                            
                            
                            
                            91Finished
      goods
                            
                            
                            152
                            
                            
                            
                            31Total
      inventory
                            
                            $
                            407
                            
                            
                            $
                            520









(4)    Property
and Equipment




Property
and equipment as of December 31, 2008 and 2007 consisted of the following (in
thousands):




December
      31,2008
                            
                            
                            2007Computer
      equipment
                            
                            $
                            208
                            
                            
                            $
                            379Machinery
      and equipment
                            
                            
                            783
                            
                            
                            
                            738Furniture
      and fixtures
                            
                            
                            64
                            
                            
                            
                            79Leasehold
      improvements
                            
                            
                            46
                            
                            
                            
                            63Buildings
                            
                            
                            825
                            
                            
                            
                            773Land
      use rights
                            
                            
                            1,825
                            
                            
                            
                            1,710Construction
      in process
                            
                            
                            122
                            
                            
                            
                            1143,873
                            
                            
                            
                            3,856Accumulated
      depreciation
                            
                            
                            (841
                            )
                            
                            
                            (761
                            )$
                            3,032
                            
                            
                            $
                            3,095




We
recognized depreciation and amortization of land use rights expenses of $240,000
and $273,000 for the years ended December 31, 2008 and 2007,
respectively.




(5)    Intangible
assets





During
2004 and 2005, we entered into various license agreements and similar
arrangements under which we invested approximately $2,934,000 to acquire the
technology and materials necessary for the commercialization of our rapid
tests.  These licenses provide us with access to the HIV-2 antigen, to
certain lateral flow technologies and to certain HIV-1/2 peptides used in our
rapid tests.  We recorded the license amount for each license
agreement as an intangible asset.  We began amortizing these
intangible assets in 2006, when we began commercial sales of the products
employing the licensed technology or materials.  We recognized
amortization expense of $218,000 in each of the years ended December 31, 2008
and 2007.  Each of the license agreements also contains a royalty on
sales component that takes into consideration the different pricing realities of
markets around the world.








F-18
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007





(6)
Impairment of Assets in China Facility Acquisition





Beijing
Marr was incorporated in August 2005 as an entity wholly owned by Marr
Technologies Asia Limited.  In October 2005, prior to the creation of
our joint venture, Beijing Marr acquired a manufacturing facility, certain
manufacturing certifications and product licenses, and other
assets.  Through the third quarter of 2007, we reported the payments
and/or deposits made by Beijing Marr in conjunction with the acquisition of
these assets as a Deposit on China facility acquisition, pending final approval
and acceptance of the transaction by various Chinese regulatory
authorities.  During the fourth quarter of 2007, the transaction
closed and we allocated these payments to appropriate asset
categories.  We also evaluated them in conjunction with Statement of
Financial Accounting Standards No. 144 – Accounting for the Impairment or
Disposal of Long-Lived Assetsand determined that certain of these assets
would not be recoverable in the future as the result of changes in regulatory
requirements, the expiration of certain certifications and our decision not to
pursue the manufacture of certain products.  Accordingly, in the
fourth quarter of 2007, we recognized $1,528,000 in impairment expense
attributable to these assets in the Consolidated Statements of
Operations.








(7)    Accounts
payable and  accrued expenses




Accounts
payable and accrued expenses as of December 31, 2008 and, 2007 consisted of the
following (in thousands):






December 31,2008
                              
                              
                              2007Trade
      accounts payable
                              
                              $
                              1,499
                              
                              
                              $
                              1,530Accrued
      royalties
                              
                              
                              92
                              
                              
                              
                              65Accrued
      salary, severance and vacation pay
                              
                              
                              34
                              
                              
                              
                              50Customer
      prepayments on purchases
                              
                              
                              10
                              
                              
                              
                              90Accrued
      interest
                              
                              
                              101
                              
                              
                              
                              125Accrued
      audit, legal and consulting expenses
                              
                              
                              247
                              
                              
                              
                              276Accrued
      liabilities under intellectual property license agreements
                              
                              
                              40
                              
                              
                              
                              40Accounts
      payable and accrued expenses of consolidated joint
ventures
                              
                              
                              206
                              
                              
                              
                              145Accrued
      liabilities of legacy business
                              
                              
                              190
                              
                              
                              
                              190Accrued
      liability for acquisition of Chinese manufacturing
    operation
                              
                              
                              349
                              
                              
                              
                              327Other
                              
                              
                              227
                              
                              
                              
                              138Total
      accounts payable and accrued expenses
                              
                              $
                              2,995
                              
                              
                              $
                              2,976







(8)    
Notes and Debentures Payable





We issued
7% promissory notes to finance our operations during 2007 and also issued 8%
secured convertible notes in payment of quarterly interest on previously
outstanding 8% notes in both 2008 and 2007.  The following tables
summarize the note and debenture activity for the years ended December 31, 2007
and 2008 (in thousands).




F-19
 Table of Contents


CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007




NetBalance
                                                        
                                                        
                                                        
                                                        Conversion
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        Discount
      at
                                                        
                                                        
                                                        Balance
      at12/31/06
                                                        
                                                        
                                                        Additions
                                                        
                                                        
                                                        to
      Equity
                                                        
                                                        
                                                        Repayments
                                                        
                                                        
                                                        12/31/07
                                                        
                                                        
                                                        12/31/07
                                                        
                                                        
                                                        12/31/07Current Notes and
Debentures8%
      Promissory Notes to related party -Chief
      Executive Officer
                                                        
                                                        $
                                                        46
                                                        
                                                        
                                                        $
                                                        50
                                                        
                                                        
                                                        $
                                                        (90
                                                        )
                                                        
                                                        $
                                                        (6
                                                        )
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -12%
      Promissory Note to related party -Employee
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        65
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        (65
                                                        )
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -12%
      Convertible Debentures –Mercator
      assignees - Logisticorp andSouthwest
      Resources Preservation
                                                        
                                                        $
                                                        60
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        60
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        60Non-current Notes Payable8%
      Secured Convertible Notes –April
      4, 2005
                                                        
                                                        $
                                                        4,399
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        4,399July
      4, 2005 Interest
                                                        
                                                        
                                                        66
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        66October
      4, 2005 Interest
                                                        
                                                        
                                                        68
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        68January
      4, 2006 Interest
                                                        
                                                        
                                                        69
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        69April
      4, 2006 Interest
                                                        
                                                        
                                                        68
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        68July
      4 and 21, 2006 Interest
                                                        
                                                        
                                                        122
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        122October
      4, 2006 Interest
                                                        
                                                        
                                                        91
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        91January
      4, 2007 Interest
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        100
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        100April
      3, 2007 Interest
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        99
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        99July
      3, 2007 Interest
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        102
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        102October 3, 2007 Interest
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        106
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        106Total
      8% Secured Convertible Notes
                                                        
                                                        $
                                                        4,883
                                                        
                                                        
                                                        $
                                                        407
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        5,290
                                                        
                                                        
                                                        $
                                                        (1,283
                                                        )
                                                        
                                                        $
                                                        4,0077%
      Promissory Notes to related party -2005
      Credit Facility with Marr
                                                        
                                                        $
                                                        4,057
                                                        
                                                        
                                                        $
                                                        393
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        (250
                                                        )
                                                        
                                                        $
                                                        4,200
                                                        
                                                        
                                                        $
                                                        (715
                                                        )
                                                        
                                                        $
                                                        3,485




NetBalance
                                                                
                                                                
                                                                
                                                                
                                                                Conversion
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Balance
                                                                
                                                                
                                                                Discount
      at
                                                                
                                                                
                                                                Balance
      at12/31/07
                                                                
                                                                
                                                                Additions
                                                                
                                                                
                                                                to
      Equity
                                                                
                                                                
                                                                Repayments
                                                                
                                                                
                                                                12/31/08
                                                                
                                                                
                                                                12/31/08
                                                                
                                                                
                                                                12/31/08Current Notes and
Debentures8%
      Secured Convertible Notes –April
      4, 2005
                                                                
                                                                $
                                                                4,399
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                4,399July
      4, 2005 Interest
                                                                
                                                                
                                                                66
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                66October
      4, 2005 Interest
                                                                
                                                                
                                                                68
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                68January
      4, 2006 Interest
                                                                
                                                                
                                                                69
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                69April
      4, 2006 Interest
                                                                
                                                                
                                                                68
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                68July
      4 and 21, 2006 Interest
                                                                
                                                                
                                                                122
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                122October
      4, 2006 Interest
                                                                
                                                                
                                                                91
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                91January
      4, 2007 Interest
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                100April
      3, 2007 Interest
                                                                
                                                                
                                                                99
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                99July
      3, 2007 Interest
                                                                
                                                                
                                                                102
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                102October
      3, 2007 Interest
                                                                
                                                                
                                                                106
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                106January
      3, 2008 Interest
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                108
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                108April
      3, 2008 Interest
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                110
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                110July 3, 2008 Interest
                                                                
                                                                
                                                                
                                                                111
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                111October 3, 2008 Interest
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                115
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                115Total
      8% Secured Convertible Notes
                                                                
                                                                $
                                                                5,290
                                                                
                                                                
                                                                $
                                                                444
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                5,734
                                                                
                                                                
                                                                $
                                                                (401
                                                                )
                                                                
                                                                $
                                                                5,3337%
      Promissory Notes to relatedparty
      -2005
      Credit Facility with Marr
                                                                
                                                                $
                                                                4,200
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                4,200
                                                                
                                                                
                                                                $
                                                                (225
                                                                )
                                                                
                                                                $
                                                                3,97512%
      Convertible Debentures –Mercator
      assignees
                                                                
                                                                $
                                                                60
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                60
                                                                
                                                                
                                                                $
                                                                -
                                                                
                                                                
                                                                $
                                                                60




F-20
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007







8% Notes to a related
party


On
November 10 and November 30, 2006, we issued 8% promissory notes to our Chief
Executive Officer in the face amount of $6,300 and $40,000,
respectively.  The notes were due six months from their date of
issuance, on May 10, 2007 and May 31, 2007, respectively.  On February
6, 2007, we issued an additional 8% promissory note in the face amount of
$50,000 to our Chief Executive Officer.  This note was payable in full
on March 31, 2007.  Interest on each of the notes was payable in cash
at maturity.  We used the proceeds of the notes for general corporate
purposes.  On March 28, 2007, our Chief Executive Officer cancelled
our obligation to repay the November 30, 2006 and February 6, 2007 notes and the
related accrued interest in conjunction with his participation in the March 2007
Private Placement described in Note 11, Stockholders’ Deficit.  We
repaid the November 10, 2006 note in cash on March 30, 2007.





12% Note to a related
party


On
February 26, 2007, we issued a 12% secured promissory note in the face amount of
$65,000 to an employee.  We used the proceeds of the note to purchase
materials to produce our BED Incidence tests.  We granted the employee
a purchase money security interest in the tests produced.  We repaid
the note and accrued interest on May 18, 2007.





12% Convertible
Debentures


On
October 2, 2003, we issued the final $130,000 tranche of two-year debentures
under a $2 million September 2002 12% convertible debenture commitment to four
assignees of Mercator Momentum Fund and received net proceeds of
$130,000.  During October 2003, two of these investors converted
$70,000 of principal of these debentures at a price of $0.59 per share and we
issued approximately 118,400 shares of our common stock.  At December
31, 2006 and 2007, two debentures having an aggregate face value of $60,000
remained outstanding.  We have not issued any shares with respect to
these debentures.  See Note 18, Commitments and Contingencies,
regarding a lawsuit brought against us by the two holders of these
debentures.





8% Secured Convertible
Notes


On April
4, 2005, we concluded a private placement (the “April 2005 Placement”) to five
institutional investors (the “2005 Investors”) of $8,000,000 of Secured 8%
Convertible Notes originally due April 3, 2007 (the “Notes”).  The
Notes are convertible at $0.30 per share (the “Conversion Price”) into shares of
our common stock.  The Conversion Price of the Notes was subject to
anti-dilution adjustments had we issued common stock or common stock equivalents
for a price less than the Conversion Price prior to April 4, 2006, when the
anti-dilution provisions expired.  We also issued to the 2005
Investors Series A common stock purchase warrants (the “2005 Series A Warrants”)
and Series B common stock purchase warrants (the “2005 Series B Warrants), each
exercisable after October 4, 2005 and expiring on April 3, 2010. The 2005 Series
A Warrants were exercisable to purchase 26,666,667 shares of our common stock,
initially at $0.325 per share and the 2005 Series B Warrants were exercisable to
purchase 12,000,000 shares of our common stock, initially at $0.325 per
share.  The 2005 Series A Warrants provided for anti-dilution and
other adjustments of the issuable shares and the exercise prices thereof had we
issued common stock or common stock equivalents for a price less than the
exercise price of the Series A Warrants prior to April 4, 2006.





At April
4, 2005, we determined that, in addition to the anti-dilution provisions, the
Notes included a beneficial conversion feature.  We accounted for the
anti-dilution feature in accordance with the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities as an embedded
derivative.  Accordingly, the $5,330,000 fair value of the derivative
at inception was accounted for as a discount to the face value of the Notes and
as a corresponding liability that was marked to market at each balance sheet
date through the April 3, 2006 expiration of the anti-dilution provision with
the change in the fair value of the derivative being recorded as interest
expense.





F-21
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


In
accordance with the provisions of EITF Issues No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,and 00-27, Application of Issue No. 98-5 to
Certain Convertible Instruments, we allocated the remaining Note proceeds
of approximately $2,670,000 at April 4, 2005 between the fair value of the Notes
(determined without consideration of any anti-dilution or conversion features)
and the fair value of the Series A Warrants and the Series B
Warrants.  The relative fair value of the Series A Warrants and Series
B Warrants at April 4, 2005 was approximately $1,773,000, which we recorded as
an additional discount to the Notes, with a corresponding credit to additional
paid-in capital.  The one-year anti-dilution provision contained in
the Series A Warrants potentially reduced the exercise price but did not
increase the number of shares issuable to the warrant
holders.  Accordingly, the Series A Warrants did not require liability
treatment under the provisions of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.Furthermore, we determined that the proceeds allocated
to the warrants should be treated as equity in accordance with the provisions of
EITF 00-19.  The aggregate amount of the discount to the Notes at
April 4, 2005 was approximately $7,103,000, which we amortized to interest
expense between April 2005 and March 2007 using the effective interest method
prescribed by APB Opinion No. 21, Interest on Receivable and
Payables, over the life of the Notes.  The effective interest
rate on the Notes was approximately 144% based on the stated interest rate, the
amount of amortized discount, the amount of deferred offering costs attributable
to the notes and their term.  Upon conversion or cancellation of any
portion of the Notes or the Interest Notes, we wrote off the proportional share
of the remaining unamortized discount to interest expense.  See Extension of Note Maturity
Dates and Modification
of Conversion Terms of 2005 Credit Facility Notes and 8% Convertible Notes with
Marrbelow and Note 11, Stockholders Deficit.





The Notes
provide for quarterly interest to be paid in cash, or subject to certain
conditions, by issuing additional Notes maturing on April 3,
2007.  See Extension
of Note Maturity Dates below.  From July 4, 2005 through
October 3, 2008 we issued additional 8% Convertible Notes in an aggregate face
amount of $1,817,000 in payment of quarterly interest (the “Interest
Notes”).  The Interest Notes issued through October 2008 were
convertible into an aggregate of 6.1 million shares of our common stock at the
Conversion Price.  With the exception of the Interest Notes issued to
Marr from October 2007 through October 2008, the Interest Notes have the same
terms and conditions as the April 4, 2005 Notes and the subsequently issued
Interest Notes, except that they do not have anti-dilution provisions and they
are now due on April 3, 2009.  Effective July 3, 2007, we entered into
an Amendment Agreement with Marr which permits us to issue Secured 8%
Convertible Notes to Marr in payment of quarterly interest due on and after July
3, 2007 which do not have registered shares of our common stock underlying the
Notes.  There are no registered shares of our common stock underlying
the quarterly Interest Notes issued to Marr from July 3, 2007 through October 3,
2008.  We have not issued warrants in conjunction with any Interest
Notes.  As a result of the beneficial conversion and anti-dilution
features contained in the July 2005 through January 2006 Interest Notes, the
effective interest rate on the interest notes issued between July 2005 and
October 2008 ranged from approximately 8% to 48% based on the stated interest
rate, the amount of discount and the term of the notes. Refer to Note 19,
Subsequent Events, for information regarding the status of the Notes and
Interest Notes after December 31, 2008.





7% Promissory Notes Payable
to a Related Party


On April
4, 2005, we entered into a line of credit agreement (the “2005 Credit Facility”)
with Marr, pursuant to which, at any time prior to December 31, 2005, we could
borrow up to $5.5 million by issuing promissory notes bearing interest at the
rate of 9% per annum (each, a “Promissory Note”).  We could borrow up
to a maximum of $1,500,000 per Promissory Note, in increments of $500,000, and
could issue no more than one Promissory Note in any 30-day
period.  The issuance of a Promissory Note required unanimous approval
of our Board of Directors.  At that time Marr had two representatives
serving on our Board of Directors.  The maximum amount we could borrow
under the 2005 Credit Facility was to be reduced dollar for dollar by the net
amount of any funds received from equity financings consummated after April 4,
2005.  Each Promissory Note had a 12-month term, at which time
principal and accrued interest would be due in full; however, any outstanding
principal and accrued interest was to have been payable in full upon the May 31,
2006 original expiration of the 2005 Credit Facility.  As
consideration for the 2005 Credit Facility, on April 4, 2005, we issued to Marr
a common stock purchase warrant (the “Marr Warrant”), expiring on April 3, 2010,
exercisable to purchase 500,000 shares of our common stock at $0.40 per
share.





F-22
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


On
November 30, 2005, we agreed with Marr to amend the 2005 Credit Facility to
extend the term under which we might issue promissory notes from December 31,
2005 until April 3, 2006.  The interest rate for promissory notes
issued under the amendment was lowered to 7% per annum from 9% per
annum.  The term of any promissory notes issued under the amendment
was extended so that such promissory notes would become due on April 3, 2007,
instead of the later of twelve months from the issuance date or May 31,
2006.  The issuance of promissory notes under the terms of the
amendment required approval by a majority of a quorum of our Board of Directors,
instead of the entire Board of Directors.  We granted Marr a security
interest in our assets, up to an aggregate maximum of $6,000,000, to secure the
repayment of monies borrowed under the terms of the amended
agreement.  We were permitted to use the proceeds from the issuance of
promissory notes under the amended agreement for general corporate purposes,
including investments in our international subsidiaries or joint
ventures.  Through January 19, 2006, we had issued an aggregate of
$3,000,000 face value of Promissory Notes under the amended terms of the 2005
Credit Facility.  Effective on February 22, 2006, we agreed with Marr
to again extend the period during which we could issue promissory notes under
the 2005 Credit Facility through July 31, 2006.  Between February 23,
2006, and May 29, 2006, we issued four promissory notes to Marr for an aggregate
of $2,000,000.  Effective on July 26, 2006, we agreed with Marr to
further extend the period during which we could issue promissory notes under the
2005 Credit Facility through August 31, 2006.  We advised Marr of our
intent to issue a Note in the face amount of $500,000 prior to August 31, 2006,
and the Note was funded on September 20, 2006.  Each promissory note
bears interest at a rate of 7% per annum and was payable in full in accordance
with its terms on April 3, 2007.  See Extension of Note Maturity
Dates below.  The effective interest rate on each of these
notes approximated the 7% stated rate.





In
conjunction with our July 2006 offer to reduce the exercise price of warrants
issued in conjunction with certain 2004 other financings in which Marr had
participated, Marr exercised its warrants to purchase an aggregate of
approximately 16,965,000 shares of our common stock.  In lieu of
paying us cash, Marr cancelled our obligation to repay an aggregate of
$2,443,000 of our 7% Promissory Notes issued under the 2005 Marr Credit Facility
and $102,000 of accrued interest on the 7% Promissory Notes.





Effective
on December 22, 2006, we agreed with Marr to further extend the period during
which we could issue promissory notes under the 2005 Credit Facility through
December 29, 2006.  We issued a promissory note to Marr in the face
amount of $1,000,000 on December 22, 2006, bringing the aggregate balance of the
7% Promissory Notes outstanding under the 2005 Credit Facility to $4,057,000,
all of which were due on April 3, 2007.  See Extension of Note Maturity
Dates below.  The effective interest rate on all of these
promissory notes approximated the 7% stated rate.





On
February 7, 2007, we agreed with Marr to further amend the terms of the 2005
Marr Credit Facility to extend the period during which we might issue promissory
notes under the facility and to reduce the minimum size of notes issuable under
the facility.  On February 7, 2007, we issued a promissory note in the
face amount of $142,800 to Marr, the proceeds of which we used to make a capital
contribution to Beijing Marr.  On February 23, 2007 and on March 7,
2007, we issued additional promissory notes to Marr in the face amount of
$100,000 and $150,000, respectively, the proceeds of which we used for general
corporate purposes.  Each promissory note bears interest at a rate of
7% per annum.  The February 7, 2007 note was payable in full on April
3, 2007 and the two later notes were payable on the earlier of five days
following our completion of an equity financing transaction of at least
$3,000,000, or April 3, 2007.  We repaid the February 23, 2007 and
March 7, 2007 notes in cash on March 30, 2007.  The initial effective
interest rate on the 7% notes issued under the 2005 Marr Credit Facility in
February and March 2007 approximated the stated rate because there were no
discounts or deferred offering costs associated with the notes.  See
Extension of Note Maturity
Dates below and Note 11, Stockholders Deficit.





Extension of Note Maturity
Dates (the “March 2007 Debt Restructuring”)


Effective
March 28, 2007, when the market price of our common stock was $0.063, we entered
into agreements with the three remaining holders of our outstanding Secured 8%
Convertible Notes and with Marr to extend the due dates of an aggregate of
$4,983,000 of Secured 8% Convertible Notes and related Interest Notes and
$4,200,000 of 7% Promissory Notes issued under the 2005 Credit Facility prior to
February 23, 2007 (the “7% Credit Facility Notes”) from April 3, 2007 until
April 3, 2009.  In conjunction with the extension of the note maturity
dates, we agreed to re-price an aggregate of approximately 31 million of the
investors’ outstanding warrants under a formula of 40% of their total
outstanding warrants re-priced to $0.03 per share and 60% re-priced to $0.10 per
share.  The warrants had original exercise prices of $0.325 and $0.25
per share.  We also eliminated the piggyback registration rights
originally granted with respect to certain Additional Warrants issued in
connection with the July 2006 Warrant Re-pricing to current holders of our
Secured 8% Convertible Notes and to Marr and extended the term of those warrants
from August 3, 2007 until April 3, 2009.  Refer to Note 11,
Stockholders’ Deficit, for information regarding extending the term of the
remaining Additional Warrants.





F-23
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


We
evaluated the extension of the note maturity dates for both the Secured 8%
Convertible Notes and the 7% Credit Facility Notes in accordance with the
provisions of EITF Issue 02-4, Determining Whether a Debtor’s
Modification or Exchange of Debt Instruments is Within the Scope of FASB
Statement 15 (“EITF 02-4”).We determined
that the modification with respect to the Secured 8% Convertible Notes was
within the Scope of FASB Statement 15, Accounting by Debtors and Creditors
for Troubled Debt Restructurings(“SFAS 15”), but that the modification
with respect to the 7% Credit Facility Notes was not within the scope of SFAS
15.





For
purposes of the EITF 02-4 analysis, we allocated the incremental fair value
resulting from the re-pricing and extension of the term of the note holders’
warrants, aggregating approximately $787,000, between the outstanding face value
of the Secured 8% Convertible Notes and the 7% Credit Facility Notes to
determine the consideration provided to the respective creditors from that
source.  We calculated the incremental fair value of the warrants
using the Black-Scholes option pricing model and the following
assumptions:




Pre-modification
      Assumptions
                                              
                                              
                                              Post-modification
      AssumptionsNumber
      of shares
                                              
                                              
                                              408,333
                                              
                                              
                                              
                                              19,333,333
                                              
                                              
                                              
                                              11,319,792
                                              
                                              
                                              
                                              408,333
                                              
                                              
                                              
                                              8,596,666
                                              
                                              
                                              
                                              10,736,667
                                              
                                              
                                              
                                              3,827,917
                                              
                                              
                                              
                                              7,491,875Exercise
      price
                                              
                                              $
                                              0.325
                                              
                                              
                                              $
                                              0.325
                                              
                                              
                                              $
                                              0.25
                                              
                                              
                                              $
                                              0.10
                                              
                                              
                                              $
                                              0.03
                                              
                                              
                                              $
                                              0.10
                                              
                                              
                                              $
                                              0.03
                                              
                                              
                                              $
                                              0.10Term
      (years)
                                              
                                              
                                              2.17
                                              
                                              
                                              
                                              3.02
                                              
                                              
                                              
                                              0.35
                                              
                                              
                                              
                                              2.17
                                              
                                              
                                              
                                              3.02
                                              
                                              
                                              
                                              3.02
                                              
                                              
                                              
                                              2.02
                                              
                                              
                                              
                                              2.02Volatility
                                              
                                              
                                              126.03%
                                              
                                              
                                              
                                              121.16%
                                              
                                              
                                              
                                              105.97%
                                              
                                              
                                              
                                              126.03%
                                              
                                              
                                              
                                              121.16%
                                              
                                              
                                              
                                              121.16%
                                              
                                              
                                              
                                              128.55%
                                              
                                              
                                              
                                              128.55%Interest
      Rate
                                              
                                              
                                              4.57%
                                              
                                              
                                              
                                              4.51%
                                              
                                              
                                              
                                              5.08%
                                              
                                              
                                              
                                              4.57%
                                              
                                              
                                              
                                              4.51%
                                              
                                              
                                              
                                              4.51%
                                              
                                              
                                              
                                              4.57%
                                              
                                              
                                              
                                              4.57%Expected
      dividend rate
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%
                                              
                                              
                                              
                                              0%Option
      value per share
                                              
                                              $
                                              0.0224
                                              
                                              
                                              $
                                              0.0289
                                              
                                              
                                              $
                                              0.0004
                                              
                                              
                                              $
                                              0.0366
                                              
                                              
                                              $
                                              0.0517
                                              
                                              
                                              $
                                              0.0414
                                              
                                              
                                              $
                                              0.0488
                                              
                                              
                                              $
                                              0.0359




We
allocated approximately $581,000 of the incremental fair value to the Secured 8%
Convertible Notes and approximately $206,000 to the 7% Credit Facility
Notes.





We also
calculated the fair value of the extended conversion feature of the Secured 8%
Convertible Notes as approximately $374,000 using the Black-Scholes option
pricing model with the following assumptions: risk free interest rate of 4.57%;
expected dividend rate of 0.00%; volatility of 128.55%; and expected term of
2.02 years.





In
accordance with the provisions of SFAS 15 applicable to the 8% Convertible
Notes, we accounted for the modification as a troubled debt restructuring on a
prospective basis.  We recorded a discount to the 8% Convertible Notes
equal to the allocated incremental fair value of the re-priced and extended
warrants plus the fair value of the extended conversion feature with a
corresponding credit to additional paid-in capital.  We are amortizing
the discount as non-cash interest expense over the remaining two-year term of
the 8% Convertible Notes using the effective interest method prescribed by APB
Opinion No. 21, Interest on
Receivables and Payables.  The effective interest rate of the
extended 8% Convertible Notes is 19.98%.





Because
the extension of the maturity of the 7% Credit Facility Notes is not within the
provisions of SFAS 15, as determined by our EITF 02-4 analysis, we subsequently
evaluated the modification of the 7% Credit Facility Notes in accordance with
the provisions of EITF Issue 96-19, Debtor’s Accounting for a
Modification or Exchange of Debt Instruments(“EITF 96-19”), and EITF
Issue 06-6, Debtor’s
Accounting for a Modification (or Exchange) of Convertible Debt
Instruments.  In accordance with the provisions of EITF 96-19,
we determined that the extension of the maturity date should be treated as a
modification to the debt on a prospective basis.  Accordingly, we
recorded a discount to the 7% Credit Facility Notes equal to the $206,000
allocated incremental fair value of the re-priced and extended warrants with a
corresponding credit to additional paid-in capital.  We are amortizing
the discount as non-cash interest expense over the remaining two-year term of
the 7% Credit Facility Notes using the effective interest method prescribed by
APB Opinion No. 21, Interest
on Receivables and Payables.  The effective interest rate of
the extended 7% Credit Facility Notes is 8.85%.





F-24
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Modification of Conversion
Terms of 2005 Credit Facility Notes and 8% Convertible Notes with Marr (the
“December 2007 Restructuring with Marr”)


On
December 4, 2007, we agreed with Marr to further amend the 2005 Credit Facility
Agreement to give Marr the option to convert (the “Credit Facility Conversion
Option”), for a one year period commencing on December 4, 2007 and ending on
December 3, 2008 (the “Term”), all or any portion of the principal amount and
accrued interest of the 7% promissory notes issued under the 2005 Credit
Facility and outstanding during the Term into shares of our common stock at the
conversion price of $0.16 per share.





Also on
December 4, 2007, we entered into an amendment to the Secured 8% Convertible
Promissory Notes (the “8% Notes Amendment”) with Marr to reduce the Conversion
Price of the 8% convertible notes issued to Marr on April 4, 2005 and all
subsequent Interest Notes issued, and to be issued, to Marr thereafter for the
payment of interest on the Notes from $0.30 per share to $0.16 per share of
common stock, for the Term described above.





We
granted Marr the Credit Facility Conversion Option and the 8% Notes Amendment in
consideration for Marr’s immediate exercise of all Marr’s outstanding warrants
to purchase shares of our common stock.  Marr exercised warrants to
purchase an aggregate of 8,482,292 shares of our common stock and we received
cash proceeds of $611,000.  Marr did not exercise its option to
convert either the 7% Credit Facility Notes or the 8% Convertible Notes or
related Interest Notes prior to the expiration of the
Term.  Accordingly, both the 7% Credit Facility Notes and the 8%
Convertible Notes are due and payable on April 3, 2009.





At
December 7, 2007, we again evaluated the modification of the conversion terms
for both the 8% Convertible Notes issued to Marr and the 7% Credit Facility
Notes in accordance with the provisions of EITF 02-4.  In accordance
with the provisions of EITF 02-4 and EITF 96-19, because the December 2007
Restructuring with Marr occurred within one year of the March 2007 Debt
Restructuring, we were required to conduct the evaluation of the December 2007
Restructuring with Marr with respect to the terms of the notes that existed
prior to the extension of their maturities in March 2007.  As in our
previous evaluation of the March 2007 Debt Restructuring, we determined that the
conversion price modification with respect to the Secured 8% Convertible Notes
was within the scope of SFAS 15, but that the modification with respect to the
7% Credit Facility Notes was not within the scope of SFAS 15.





In
conducting this evaluation of the 8% Convertible Notes issued to Marr, we
allocated to these notes the proportion of the note modification discounts
determined in the March 2007 Debt Restructuring analyses attributable to the
face amount of 8% Convertible Notes held by Marr.  We also calculated
the fair value of the reduced conversion price of the Secured 8% Convertible
Notes held by Marr as approximately $662,000 by valuing the conversion feature
before and after the modification using the Black-Scholes option pricing model
and the following assumptions:




Before
                        
                        
                        AfterModification
                        
                        
                        ModificationMarket
      price at 12/4/07
                        
                        $
                        0.125
                        
                        
                        $
                        0.125Exercise
      Price
                        
                        $
                        0.300
                        
                        
                        $
                        0.160Term
      (Years)
                        
                        
                        1
                        
                        
                        
                        1Volatility
                        
                        
                        107.72%
                        
                        
                        
                        107.72%Interest
      Rate
                        
                        
                        3.11%
                        
                        
                        
                        3.11%Expected
      dividend rate
                        
                        
                        0.00%
                        
                        
                        
                        0.00%Number
      of shares (a)
                        
                        
                        11,407,058
                        
                        
                        
                        21,388,234Option
      value per share
                        
                        $
                        0.0233
                        
                        
                        $
                        0.0434(a)
      based on $3,422,177 (outstanding balance atDecember 4, 2007) divided by exercise price









F-25
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


In
accordance with the provisions of SFAS 15 applicable to the 8% Convertible Notes
held by Marr, we accounted for the reduction of the conversion price as a
troubled debt restructuring on a prospective basis.  We recorded a
discount to the 8% Convertible Notes held by Marr equal to the allocated
incremental fair value of the re-priced and extended warrants plus the fair
value of the extended conversion feature arising from the March 2007 Debt
Restructuring plus the fair value of the reduced conversion price determined in
the December 2007 Restructuring with Marr with a corresponding credit to
additional paid-in capital.  We are amortizing the discount as
non-cash interest expense over the remaining term of the 8% Convertible Notes
held by Marr using the effective interest method prescribed by APB Opinion No.
21, Interest on Receivables
and Payables.  The effective interest rate of the restructured
8% Convertible Notes held by Marr is 28.10%.





Because
the extension of the maturity of the 7% Credit Facility Notes is not within the
provisions of SFAS 15, as determined by our EITF 02-4 analysis, we subsequently
evaluated the modification of the 7% Credit Facility Notes in accordance with
the provisions of EITF 96-19 and EITF Issue 06-6.  Additionally, we
determined the fair value of the conversion feature value as approximately
$1,252,000 using the Black-Scholes option pricing model and the following
assumptions:  risk free interest rate of 3.11%; expected dividend rate
of 0.00%; volatility of 107.72%; and expected term of 1.0 year.  We
determined that the addition of the conversion feature to the 7% Credit Facility
Notes was substantive at the date of the modification in accordance with the
provisions of EITF Issue 05-1, Accounting for the Conversion of an
Instrument that Became Convertible upon the Issuer’s Exercise of a Call Option.In accordance with the provisions of EITF 96-19, the addition of a
substantive conversion feature is to be accounted for as a debt extinguishment,
and the new debt instrument should be initially recorded at fair value and that
amount should be used to determine the debt extinguishment gain or loss to be
recognized and the effective rate of the new instrument.





To
determine the fair value of the restructured debt, we considered the effective
interest rates at the inception of our borrowings since late 2003, including the
8% Convertible Notes and the 7% Credit Facility Notes.  We determined,
comparing the effective rate of our previous borrowings and our current risk
profile, that 65% was an appropriate discount rate for determining the present
value of the cash flows and the fair value of the restructured
debt.  Accordingly, we determined that the fair value of the
restructured 7% Credit Facility Notes was approximately $3,829,000, including
the fair value of approximately $1,252,000 of the new conversion feature, as
noted above.  Considering the carrying value of the 7% Credit Facility
Notes, including the discount determined in the March 2007 Debt Restructuring
and the related accrued interest, we recognized a gain of approximately $625,000
on the extinguishment, which we have treated as an additional discount to the
notes.  Because the restructuring was with Marr, our largest
stockholder and a related party, the extinguishment gain has been recorded as a
credit to additional paid-in capital rather than in earnings.  The
effective interest rate on the restructured 7% Credit Facility Notes is
20.46%.





Interest
expense


The
following table summarizes the components of net interest expense for the years
ended December 31, 2008 and 2007 related to the notes and debentures described
above and other financing instruments as reported in the Consolidated Statements
of Operations (in thousands).





F-26
 Table of Contents




CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007




Year
      ended December 31,2008
                      
                      
                      2007Interest
      expense on debt instruments paid or payable in cash
                      
                      $
                      (303
                      )
                      
                      $
                      (315
                      )Non-cash
      expense composed of:Accrued
      interest on 8% Convertible Notes (paid by issuing
    additionalNotes)
                      
                      
                      (453
                      )
                      
                      
                      (416
                      )Amortization
      of 8% Convertible Note discounts and deferred offeringcosts
      through original maturity date
                      
                      
                      -
                      
                      
                      
                      (1,208
                      )Amortization
      of discounts associated with March 2007 extensionand
      December 2007 restuctructuring of 8% Convertible Notes andMarr
      Credit Facility notes
                      
                      
                      (1,372
                      )
                      
                      
                      (449
                      )Mark
      to market adjustment of and intrinsic value of shares
    issuedunder
      anti-dilution obligations arising from the February andMarch
      2007 Private Placements
                      
                      
                      32
                      
                      
                      
                      2,281Write-off
      of deferred offering costs related to Purchase Agreementwith
      Fusion Capital
                      
                      
                      (305
                      )
                      
                      
                      -Expense
      attributable to extension of term of August 2006Additional
      Warrants
                      
                      
                      -
                      
                      
                      
                      (29
                      )Expense
      attributable to dividends on mandatorily redeemable SeriesA
      preferred stock
                      
                      
                      (120
                      )
                      
                      
                      (120
                      )Total
      non-cash items
                      
                      
                      (2,218
                      )
                      
                      
                      59Total
      interest expense
                      
                      
                      (2,521
                      )
                      
                      
                      (256
                      )Interest
      income
                      
                      
                      1
                      
                      
                      
                      21Net
      interest expense
                      
                      $
                      (2,520
                      )
                      
                      $
                      (235
                      )




(9)    Lease
Commitments




Capital
Leases


During
2004, we entered into a 36-month capital lease secured by machinery and
equipment located at our former Rockville, Maryland location and having an
agreed fair value of $500,000.  The lease agreement carried an
effective interest rate of approximately 18% per annum.  In
conjunction with the sale of our Legacy Business, we sold all of the assets
subject to the capital lease to Maxim, but remained liable for its payment
obligation under the lease, for which the monthly payments were reimbursed by
Maxim.  At the time of the sale of the Legacy Business, we recorded a
non-current asset for the fair value of the aggregate lease payments receivable
from Maxim.  We reduced the amount of the non-current asset upon
receipt of payments from Maxim.  We satisfied the lease obligation
during 2007 and have not entered into any other capital lease
arrangements.





Operating
Leases


From July
2005 through August 2007, we rented administrative offices in Lake Oswego,
Oregon under a month-to-month agreement.  We also leased office and
research laboratory space in Vancouver, Washington during that period under a
month-to-month agreement.  In September 2007, we entered into a
63-month lease agreement for office, laboratory and manufacturing space in
Portland, Oregon and terminated the Lake Oswego and Vancouver
arrangements.  In June 2007, we entered into a 19-month lease for
office space in Dubai, U.A.E.. In July 2007, we entered into a 9-month lease,
with an annual renewal option, for office space in Geneva, Switzerland. Our
consolidated Chinese joint ventures rent office space, management housing, and
vehicles under month-to-month arrangements.  We previously leased
manufacturing space in Rockville, Maryland under two operating
subleases.  In connection with the sale of the Legacy Business, we
entered into a sublease agreement with Maxim under which Maxim assumed our
obligations under the Rockville premises subleases.  In March 2004, we
entered into a new lease agreement with the primary landlord of the
manufacturing facility in Rockville that extended the lease of the premises
through February 28, 2009, or 28 months beyond the expiration of the original
sublease.  Additionally, the new lease provided for tenant
improvements to be made in connection with the consolidation of our
manufacturing operations at this facility in the amount of approximately
$250,000.  Prior to the August 2005 relocation of our administrative
offices to Lake Oswego, Oregon, we leased office space in Pleasanton, California
beginning in July 2004 under a noncancelable operating lease which expired in
June 2007.  In October 2005, we entered into a sublease of the
Pleasanton office space that continued through the expiration of the
lease.





F-27
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Net rent
expense under these leases was $416,000 and $309,000 for the years ended
December 31, 2008 and 2007, respectively. Future minimum rental payments under
all noncancelable operating leases, including the Rockville subleases, as of
December 31, 2008 were (in thousands):




Gross
      Payments
                  
                  
                  Sublease
      Payments
                  
                  
                  Net
      Rental PaymentsYear
      ended December 31,2009
                  
                  $
                  278
                  
                  
                  $
                  (96
                  )
                  
                  $
                  1822010
                  
                  
                  150
                  
                  
                  
                  -
                  
                  
                  
                  1502011
                  
                  
                  154
                  
                  
                  
                  -
                  
                  
                  
                  1542012
                  
                  
                  145
                  
                  
                  
                  -
                  
                  
                  
                  145Total
                  
                  $
                  727
                  
                  
                  $
                  (96
                  )
                  
                  $
                  631








(10)    Mandatorily
Redeemable Preferred Stock




At the
time of our original incorporation, we issued both common stock and $1,000,000
of mandatorily redeemable Series A preferred stock.  We are required
to redeem all shares of mandatorily redeemable Series A preferred stock within
60 days of any fiscal year-end in which we attain $3,000,000 in retained
earnings, and funds are legally available.  Based on losses
accumulated through December 31, 2008, we must achieve approximately
$188,000,000 in future earnings before any repayment is required.  The
mandatorily redeemable Series A preferred stock is nonvoting and holders of
these shares are entitled to receive cumulative dividends at the rate of $1.20
per share per annum.  Through June 30, 2003, we had charged cumulative
preferred dividends totaling $1,636,000 to stockholders’ deficit to accrete for
the mandatorily redeemable Series A preferred stock redemption value with a
corresponding increase in the recorded amount of the mandatorily redeemable
Series A preferred stock.  Since that date, we have charged the
preferred dividends to interest expense to accrete for the mandatorily
redeemable Series A preferred stock redemption value.  During each of
the years ended December 31, 2008 and 2007, we charged preferred dividends
totaling $120,000 to interest expense with a corresponding increase in the
recorded amount of the mandatorily redeemable Series A preferred
stock.




In
anticipation of using a portion of the proceeds from its Initial Public Offering
to redeem the Series A preferred stock, we eliminated the Series A preferred
stock from our articles of incorporation upon our reincorporation in Delaware in
June 1996. However, we subsequently chose not to redeem the Series A preferred
stock and as of December 31, 2008 it remains outstanding. The holders of such
shares maintain the same rights as held before the reincorporation.








(11)    Stockholders’
Deficit





Repricing and exercise of
Warrants, Settlement of Notes (the “2006 Warrant
Re-pricing”)


During
July 2006, we offered to amend to $0.15 per share the exercise price of warrants
issued in conjunction with certain earlier financings, including the April 2005
8% Convertible Notes and the 2005 Credit Facility with Marr for those warrant
holders agreeing to exercise all or a portion of their warrants by July 21,
2006.  We also agreed to issue to warrant holders exercising their
re-priced warrants new warrants exercisable at a price of $0.25 per share (the
“Additional Warrants”), equal in amount to 50% of the warrants
exercised.  On July 21, 2006, when the market price of our common
stock was $0.19 per share, warrant holders exercised warrants to purchase an
aggregate of 25,080,000 shares of our common stock at the reduced exercise
price.  The warrant holders who exercised the re-priced warrants
received Additional Warrants to purchase an aggregate of approximately
12,540,000 shares of our common stock. We issued the Additional Warrants on
August 3, 2006 and they became exercisable 6 months after their issuance, on
February 3, 2007, and had a term of one year after issuance.  We
granted piggyback registration rights for the shares underlying the Additional
Warrants.  Marr exercised all of its outstanding re-priced warrants
and purchased approximately 16,965,000 shares of our common stock.





F-28
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


As
described in Note 8, Notes and Debentures Payable, in March 2007, in conjunction
with the March 2007 Debt Restructuring, we agreed to re-price the outstanding
warrants held by the holders of our Secured 8% Convertible Notes and 7% Credit
Facility Notes under a formula of 40% of their total outstanding warrants
re-priced to $0.03 per share and 60% re-priced to $0.10 per
share.  The warrants had original exercise prices of $0.325 and $0.25
per share.  We also eliminated the piggyback registration rights
originally granted with respect to the Additional Warrants issued in August 2006
to current holders of our Secured 8% Convertible Notes and to Marr and extended
the term of those warrants from August 3, 2007 until April 3, 2009.





Effective
April 20, 2007, when the market price of our common stock was $0.079 per share,
we entered into amendment agreements with the holders of Additional Warrants
issued in connection with the 2006 Warrant Re-pricing who are not also holders
of our 8% Secured Convertible Notes or our 7% Notes issued under the 2005 Marr
Credit Facility.  Under the terms of these agreements, in return for
the cancellation of registration rights originally granted to the holders of the
warrants, we extended the term of warrants exercisable at $0.25 per share to
purchase an aggregate of 1,220,446 shares of our common stock from August 3,
2007 to April 3, 2009 and provided cashless exercise rights.  We
recorded $29,000 of non-cash interest expense attributable to the incremental
fair value resulting from the extension of these warrants, calculated using the
Black-Scholes option pricing model and the following assumptions:




Pre-modification
                        
                        
                        Post-modificationExercise
      price
                        
                        $
                        0.25
                        
                        
                        $
                        0.25Term
      (years)
                        
                        
                        0.29
                        
                        
                        
                        1.95Volatility
                        
                        
                        117.21%
                        
                        
                        
                        129.47%Interest
      Rate
                        
                        
                        5.01%
                        
                        
                        
                        4.67%Expected
      dividend rate
                        
                        
                        0%
                        
                        
                        
                        0%Option
      value per share
                        
                        $
                        0.0004
                        
                        
                        $
                        0.0242




Common Stock
Subscribed


On
November 15, 2006, we entered into a letter agreement with our Chief Executive
Officer under which he advanced $100,000 to us as an investment in a prospective
equity financing that we had not completed at December 31, 2006.  This
subscription was subsequently included in the March 2007 Private Placement
described below.  We used the funds received for general corporate
purposes.





February 2007 Private
Placement


On
February 23, 2007, when the market price of our common stock was $0.064 per
share, we entered into a subscription agreement with an accredited investor
pursuant to which the investor agreed to purchase 1,666,667 shares of our common
stock and five-year warrants exercisable at $0.12 per share to purchase
1,666,667 shares of our common stock at a price of $0.06 per share, for an
aggregate purchase price of $100,000, in a private placement transaction
pursuant to Regulation D of the Securities Act of 1933, as
amended.  On March 23, 2007, when the market price of our common stock
was $0.067 per share, we entered into a subscription agreement with the same
investor pursuant to which the investor agreed to purchase 833,334 shares of our
common stock and five-year warrants exercisable at $0.12 per share to purchase
1,041,668 shares of our common stock at a price of $0.06 per share, for an
aggregate purchase price of $50,000.  On March 27, 2007, when the
market price of our common stock was $0.062 per share, we entered into
subscription agreements with two additional accredited investors pursuant to
which the investors agreed to purchase an aggregate of 1,250,001 shares of our
common stock and five-year warrants exercisable at $0.12 per share to purchase
1,250,001 shares of our common stock at a price of $0.06 per share, for an
aggregate purchase price of $75,000.  We granted the investors
piggyback registration rights for the shares issued.  We used the
proceeds received for general corporate purposes.





F-29
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Each of
the subscription agreements in the February 2007 Private Placement contained an
anti-dilution clause requiring that we issue additional shares of our common
stock to the investors for no additional consideration if we issued shares of
our common stock in a subsequent financing transaction at less than $0.06 per
share in the year following the investors’ purchase of our common
stock.  We determined that the anti-dilution provisions of the
subscription agreements are, in effect, a net share settled written put option
as contemplated by SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity and that
the valuation of the anti-dilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as interest expense.  We valued the
anti-dilution obligation of each tranche of the February 2007 Private Placement
at its inception using a binomial pricing model to estimate future stock prices
and derived an aggregate value of $95,000 using the following
assumptions:




Current
                                  
                                  
                                  Historical
                                  
                                  Risk-free
                                  
                                  
                                  
                                  
                                  Expected
                                  
                                  
                                  Probabilityshare
                                  
                                  
                                  stock
      price
                                  
                                  interest
                                  
                                  
                                  Term
                                  
                                  
                                  dividend
                                  
                                  
                                  of
      additionalprice
                                  
                                  
                                  volatility
                                  
                                  rate
                                  
                                  
                                  (years)
                                  
                                  
                                  rate
                                  
                                  
                                  financingFebruary
      23, 2007
                                  
                                  $
                                  0.06
                                  
                                  
                                  
                                  114.61%
                                  
                                  
                                  
                                  5.05%
                                  
                                  
                                  
                                  1.0
                                  
                                  
                                  
                                  0%
                                  
                                  
                                  
                                  100%March
      23, 2007
                                  
                                  $
                                  0.06
                                  
                                  
                                  
                                  112.63%
                                  
                                  
                                  
                                  4.67%
                                  
                                  
                                  
                                  1.0
                                  
                                  
                                  
                                  0%
                                  
                                  
                                  
                                  100%March
      27, 2007
                                  
                                  $
                                  0.06
                                  
                                  
                                  
                                  130.04%
                                  
                                  
                                  
                                  4.93%
                                  
                                  
                                  
                                  1.0
                                  
                                  
                                  
                                  0%
                                  
                                  
                                  
                                  100%




We marked
the February 2007 Private Placement anti-dilution obligation to market at
December 31, 2007, again using a binomial pricing model, and derived a value of
$1,000 using the following assumptions:  current share
price:  $0.11; historical stock price volatility:  104.45%
to 122.71%; risk-free interest rate:  3.06% to 3.36%; term
(years):  0.15 to 0.24; expected dividend rate:  0%; and a
10% probability of completing an additional round of financing during the
remaining term of the obligation.  We recorded the reduction in the
value of the obligation as a non-cash credit to interest expense.





The
one-year anti-dilution provision contained in each of the February 2007 Private
Placement Warrants potentially reduces the exercise price but does not increase
the number of shares issuable to the warrant holders.  Accordingly, we
determined that the February 2007 Private Placement warrants do not require
liability treatment under the provisions of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.Furthermore, we determined that the warrants should be
treated as equity in accordance with the provisions of EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.





The terms
of the March 2007 Private Placement, described below, triggered the
anti-dilution provisions of the February 2007 subscription and warrant
agreements.  Under the terms of the anti-dilution provisions, we
issued to the investors an aggregate of 576,922 additional shares in April 2007
and reduced the exercise price of the warrants from $0.12 per share to $0.104
per share.  We recorded $43,000 of non-cash interest expense in 2007
to recognize the intrinsic value of the additional shares issued.  No
adjustment was required for the re-pricing of the warrants.  The
anti-dilution obligations related to the February 2007 Private Placements
expired in February 2008 and the non-cash interest expense related to adjusting
the fair value of the obligation at its expiration date was
immaterial.





Modification of Warrants
Issued in February 2007 Private Placement and Deemed
Dividend


Effective
February 15, 2008, when the market price of our common stock was $0.136 per
share, we entered into an amendment agreement with an investor in the February
2007 Private Placement to reduce the exercise price of a warrant to purchase
1,041,668 shares of our common stock issued in the February 2007 Private
Placement and a warrant to purchase 100,000 shares of our common stock issued in
November 2007 pursuant to a consulting agreement from $0.104 and $0.15,
respectively, to $0.05 per share, subject to the complete exercise of the
warrants by February 19, 2008.  The investor exercised the re-priced
warrants and we received cash proceeds of approximately $57,000.  We
have recognized a deemed dividend of $98,000 in our Condensed Consolidated
Statement of Operations attributable to the incremental fair value resulting
from the modification of these warrants, calculated as of the date of the
modification using the Black-Scholes option pricing model and the following
assumptions: exercise price per share: $0.05; term in years: 0.011; volatility:
135.95%; risk-free interest rate: 2.40%; dividend rate: 0%.





F-30
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


On July
3, 2008, when the market price of our common stock was $0.055 per share, we
amended a common stock purchase warrant to purchase 1,666,667 shares of our
common stock issued to the same investor in the February 2007 Private Placement
to reduce the exercise price from $0.104 per share to $0.05 per
share.  On August 1, 2008, the investor exercised warants to purchase
416,667 shares and we received cash proceeds of approximately
$21,000.  We have recognized a deemed dividend of $8,000 in our
Condensed Consolidated Statement of Operations attributable to the incremental
fair value resulting from the modification of this warrant, calculated as of the
date of the modification using the Black-Scholes option pricing model and the
following assumptions:




Pre-modification
                      
                      
                      Post-modificationExercise
      price
                      
                      $
                      0.1040
                      
                      
                      $
                      0.0500Term
      (years)
                      
                      
                      3.644
                      
                      
                      
                      3.644Volatility
                      
                      
                      124.17%
                      
                      
                      
                      124.17%Interest
      Rate
                      
                      
                      2.82%
                      
                      
                      
                      2.82%Expected
      dividend rate
                      
                      
                      0%
                      
                      
                      
                      0%Option
      value per share
                      
                      $
                      0.0383
                      
                      
                      $
                      0.0433




March 2007 Private
Placement


On March
28, 2007, when the market price of our common stock was $0.063 per share, we
completed a private placement transaction with four accredited investors for the
sale of an aggregate of 100 million shares of our common stock plus warrants and
received an aggregate of $5.2 million in cash which we are using for general
corporate purposes.  The investors received immediately exercisable
warrants to purchase an aggregate of 150 million additional shares of our common
stock.  The Series A stock purchase warrants (the “2007 Series A
Warrants”) to purchase 100 million shares have an exercise price of $0.08 per
share and are exercisable through June 28, 2008.  The Series B stock
purchase warrants (the “2007 Series B Warrants”) to purchase 50 million shares
have an exercise price of $0.11 per share and are exercisable through September
28, 2008.  The 2007 Series A Warrants and the 2007 Series B Warrants
are hereafter collectively referred to as the “March 2007 Private Placement
Warrants.” If fully exercised, we would receive cash proceeds of $13.5
million.  We agreed to file a registration statement for the resale of
the shares purchased and the shares underlying the March 2007 Private Placement
Warrants within 45 days of the closing and use our best efforts to obtain its
effectiveness.  The registration rights agreement was subsequently
amended to remove our obligation to register the shares underlying the March
2007 Private Placement Warrants.  A resale registration statement for
the shares purchased is not yet effective; however, the shares are eligible for
resale by the investors under the terms of Securities and Exchange Commission
Rule 144.  Two of our officers also participated in this Private
Placement by applying previously subscribed funds and canceling our obligation
to repay notes and other amounts owed to them, aggregating $630,000, in return
for issuance of stock and warrants under the same terms as those made available
to the primary investors in the March 2007 Private Placement.





The
subscription agreements in the March 2007 Private Placement contained an
anti-dilution clause requiring that we issue additional shares of our common
stock to the investors for no additional consideration if we issued shares of
our common stock in a subsequent financing transaction at less than $0.052 per
share in the year following the investors’ purchase of our common
stock.  We determined that the anti-dilution provisions of the
subscription agreements are, in effect, a net share settled written put option
as contemplated by SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity and that
the valuation of the anti-dilution obligation should be classified as a
liability and marked-to-market at each balance sheet date with the change in
liability being recorded as interest expense.  We valued the
anti-dilution obligation of the March 2007 Private placement at its inception
using a binomial pricing model to estimate future stock prices and derived a
value of $2,260,000 using the following assumptions:  current share
price:  $0.06; historical stock price volatility:  129.29%;
risk-free interest rate:  4.90%; term (years):  1.0;
expected dividend rate:  0%; and a 100% probability of completing an
additional round of financing during the remaining term of the
obligation.  We marked the March 2007 Private Placement anti-dilution
obligation to market at December 31, 2007, again using a binomial pricing model,
and derived a value of $31,000 using the following
assumptions:  current share price:  $0.11; historical stock
price volatility:  104.45%; risk-free interest rate:  3.36%;
term (years):  0.24; expected dividend rate:  0%; and a 10%
probability of completing an additional round of financing during the remaining
term of the obligation.  We recorded the reduction in the value of the
obligation as a non-cash credit to interest expense.  The
anti-dilution obligations related to the March 2007 Private Placement expired in
March 2008 and we recognized approximately $32,000 in non-cash interest income
during the first quarter of 2008 as a result of adjusting the fair value of this
obligation at its expiration date.





F-31
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


The March
2007 Private Placement Warrants have one-year anti-dilution provisions which
potentially reduce the exercise price proportionally in relation to the adjusted
purchase price of the shares, but do not increase the number of shares issuable
to the warrant holders.  Accordingly, we determined that the March
2007 Private Placement Warrants do not require liability treatment under the
provisions of SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity.Furthermore, we determined that the warrants should be
treated as equity in accordance with the provisions of EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.





During
the first quarter of 2008, two investors in the March 2007 Private Placement
exercised 2007 Series A Warrants at $0.08 per share to purchase an aggregate of
5,750,000 shares of our common stock and we received cash proceeds of
$460,000.





On April
1, 2008, an officer who participated in the March 2007 Private Placement
exercised Series A Warrants at $0.08 per share to purchase 323,669 shares of our
common stock.  On June 10, 2008, in connection with an expected
management change, the Compensation Committee of our Board of Directors agreed
to extend the expiration date of the unexercised Series A Warrants and the
Series B Warrants issued to this officer by two additional years, to June 28,
2010 and September 28, 2010, respectively.  The officer, who remained
a member of our Board of Directors until December 2008, resigned as an officer
on June 16, 2008.  We recognized $350,000 of non-cash expense in
selling, general and administrative expenses in our Condensed Consolidated
Statement of Operations attributable to the incremental fair value resulting
from extending the expiration of these warrants, calculated as of the date of
the modification using the Black-Scholes option pricing model and the following
assumptions:




Series
      A Warrants
                                
                                
                                Series
      B WarrantsPre-modification
                                
                                
                                Post-modification
                                
                                
                                Pre-modification
                                
                                
                                Post-modificationNumber
      of shares
                                
                                
                                7,948,201
                                
                                
                                
                                7,948,201
                                
                                
                                
                                4,135,935
                                
                                
                                
                                4,135,935Exercise
      price
                                
                                $
                                0.0800
                                
                                
                                $
                                0.0800
                                
                                
                                $
                                0.1100
                                
                                
                                $
                                0.1100Term
      (years)
                                
                                
                                0.049
                                
                                
                                
                                2.049
                                
                                
                                
                                0.301
                                
                                
                                
                                2.301Volatility
                                
                                
                                96.25%
                                
                                
                                
                                133.67%
                                
                                
                                
                                127.80%
                                
                                
                                
                                130.34%Interest
      Rate
                                
                                
                                2.00%
                                
                                
                                
                                2.91%
                                
                                
                                
                                2.02%
                                
                                
                                
                                2.91%Expected
      dividend rate
                                
                                
                                0%
                                
                                
                                
                                0%
                                
                                
                                
                                0%
                                
                                
                                
                                0%Option
      value per share
                                
                                $
                                0.0001
                                
                                
                                $
                                0.0310
                                
                                
                                $
                                0.0038
                                
                                
                                $
                                0.0291







Modification of Series A
Warrants and Series B Warrants Issued in the March 2007 Private Placement and
Deemed Dividend


On June
11, 2008, we entered into agreements with the four primary investors in the
March 2007 Private Placement to modify the Series A Warrants and the Series B
Warrants issued in the March 2007 Private Placement.  We reduced the
exercise price of the remaining unexercised Series A Warrants from $0.08 per
share to $0.05 per share and extended their expiration date by one year to June
28, 2009.  We also extended the expiration date of the Series B
Warrants by one year to September 28, 2009.  The investors agreed to
exercise re-priced Series A Warrants to purchase an aggregate of 20,000,000
shares of our common stock by July 18, 2008.  By July 21, 2008 the
four investors had exercised Series A Warrants to purchase an aggregate of
19,920,000 shares of our common stock and we had received cash proceeds of
$996,000.  On June 25, 2008, we also agreed to reduce the exercise
price to $0.05 per share and extend by one year the expiration date of the
Series A Warrants and extend by one year the expiration date of the Series B
Warrants issued to a former officer who participated in the March 2007 Private
Placement.  On June 30, 2008, the former officer exercised Series A
warrants to purchase 850,000 shares of our common stock and we received cash
proceeds of $42,500.  We have recognized a deemed dividend of
$2,941,000 in our Condensed Consolidated Statement of Operations attributable to
the incremental fair value resulting from the modifications of these warrants,
calculated as of the date of the modification using the Black-Scholes option
pricing model and the following assumptions:





F-32
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007
  Series
      A Warrants
                                    
                                    
                                    Series
      B WarrantsPre-modification
                                    
                                    
                                    Post-modification
                                    
                                    
                                    Pre-modification
                                    
                                    
                                    Post-modificationNumber
      of shares
                                    
                                    
                                    92,096,154
                                    
                                    
                                    
                                    92,096,154
                                    
                                    
                                    
                                    51,923,077
                                    
                                    
                                    
                                    51,923,077Exercise
      price
                                    
                                    $
                                    0.0800
                                    
                                    
                                    $
                                    0.0500
                                    
                                    
                                    $
                                    0.1100
                                    
                                    
                                    $
                                    0.1100Term
      (years)
                                    
                                    
                                    0.008
      - 0.047
                                    
                                    
                                    
                                    1.008
      - 1.047
                                    
                                    
                                    
                                    0.260
      - 0.299
                                    
                                    
                                    
                                    1.260
      - 1.299Volatility
                                    
                                    
                                    97.73%
      - 127.19%
                                    
                                    
                                    
                                    124.94
      % - 127.37%
                                    
                                    
                                    
                                    128.69%
      - 140.82%
                                    
                                    
                                    
                                    121.34%
      - 124.08%Interest
      Rate
                                    
                                    
                                    1.49%
      - 1.91%
                                    
                                    
                                    
                                    2.47%
      - 2.48%
                                    
                                    
                                    
                                    1.81%
      - 1.96%
                                    
                                    
                                    
                                    2.47%
      - 2.48%Expected
      dividend rate
                                    
                                    
                                    0%
                                    
                                    
                                    
                                    0%
                                    
                                    
                                    
                                    0%
                                    
                                    
                                    
                                    0%Option
      value per share
                                    
                                    
                                    $0.0000
      to $0.0001
                                    
                                    
                                    
                                    $0.0242
      - $0.0265
                                    
                                    
                                    
                                    $0.0033
      - $0.0043
                                    
                                    
                                    
                                    $0.0170
      - $0.0176




Equity Line with Fusion
Capital


On
January 16, 2008, we entered into an equity line transaction with Fusion Capital
Fund II, LLC, an Illinois limited liability company (“Fusion Capital”), pursuant
to which we may sell up to $8.0 million of our common stock to Fusion Capital in
amounts between $100,000 and $1.0 million, depending on certain conditions, from
time to time over a 24-month period beginning February 8, 2008, the date on
which the Securities and Exchange Commission (“SEC”) declared effective the
registration statement related to the transaction.  In January 2008,
we issued 3,490,401 shares of our common stock to Fusion Capital as a commitment
fee for entering into the equity line.  In December 2007, we issued
250,000 shares of our common stock to Fusion Capital for reimbursement of due
diligence expenses related to the equity line.  We recorded the
aggregate value of the commitment fee shares and due diligence fee shares issued
to Fusion Capital, approximately $342,000, as a Deferred Offering
Cost.  We had planned to recognize this cost as an expense of selling
our stock under the equity line in an amount equivalent to the proportional
amount of each sale in relation to the total commitment
amount.  During 2008, we recognized $37,000 of such expense based on
sales of our stock to Fusion Capital.  Through December 31, 2008, we
have sold an aggregate of 13,831,133 shares of our common stock to Fusion
Capital at an average price of $0.0687 per share and have received proceeds of
$950,000.  The purchase price of the shares we sell to Fusion Capital
is determined based upon the market price of our common stock, as defined,
without any fixed discount.  We cannot sell shares to Fusion Capital
if the market price of our common stock is below $0.052 per share; and
accordingly, we have been precluded from selling additional shares under this
arrangement since May 2008.  Based on the current market price of our
common stock and our recent and expected future inability to sell stock to
Fusion Capital under this arrangement prior to its expiration, we expensed the
remaining unamortized balance of Deferred Offering Cost, $305,000, as a
component of interest expense during the fourth quarter of 2008.





Under the
terms of an investment banking agreement with Capstone Investments (“Capstone”),
we are required to issue to Capstone as a fee for services the number of shares
equal to 4% of the number of shares sold to Fusion Capital.  Through
December 31, 2008, we have issued an aggregate of 553,246 unregistered shares of
our common stock valued at $30,000 on the date of issuance to Capstone under
this agreement.





August 2008 Private
Placement


On August
15, 2008, when the market price of our common stock was $0.044 per share, we
entered into a subscription agreement with Tinja Limited (“Tinja”), an entity
formed under the laws of Mauritius, pursuant to which Tinja agreed to purchase
14,000,000 shares of our common stock at a purchase price of $0.05 per
share, for a total purchase price of $700,000, in a private placement
transaction.  Under the terms of the subscription agreement, we also
issued a two-year warrant to Tinja to purchase 1,000,000 shares of our common
stock at an exercise price of $0.08 per share.  We also granted
certain piggy-back registration rights which require us to use our best efforts
to register all or a portion of the shares issued and the shares underlying the
warrant on the next registration statement we file with the Securities and
Exchange Commission under the Securities Act.  On August 20, 2008, we
received the $700,000 cash purchase price for the shares from Tinja and issued
the shares and the warrant.  We used the proceeds of the private
placement for general working capital purposes.  We treated the shares
and the warrant issued to Tinja in the August 2008 private placement as equity
for accounting purposes.





F-33
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


September 2008 Private
Placement


On
September 19, 2008, when the market price of our common stock was $0.033 per
share, we entered into a subscription agreement with Almyn Limited (“Almyn”), an
entity registered under the laws of the British Virgin Islands, pursuant to
which Almyn agreed to purchase 20,000,000 shares of our common stock at a
purchase price of $0.035 per share, for a total purchase price of $700,000, in a
private placement transaction.  Under the terms of the subscription
agreement, we also issued a two-year warrant to Almyn to purchase 1,000,000
shares of our common stock at an exercise price of $0.06 per
share.  We also granted certain piggy-back registration rights which
require us to use our best efforts to register all or a portion of the shares
issued and the shares underlying the warrant on the next registration statement
we file with the Securities and Exchange Commission under the Securities
Act.  On September 19, 2008, we received the $700,000 cash purchase
price for the shares from Almyn and issued the shares and the
warrant.  We expect to use the proceeds of the private placement for
general working capital purposes.  We treated the shares and the
warrant issued to Almyn in the September 2008 private placement as equity for
accounting purposes.





Warrants, options and stock
grants


During
2007, we issued stock grants for 5,152,079 shares of our common stock to certain
related parties and consultants under various agreements and recorded non-cash
research and development expense of $42,000, net of accruals, and non-cash
selling, general and administrative expense of approximately $303,000, net of
prepaid amounts.  Included in these grants are:


·
            2,000,000
      shares awarded to our President and Chief Executive Officer from our 2004
      Incentive Plan under the terms of an employment agreement approved by the
      Compensation Committee of the Board of Directors on January 11,
      2007;


·
            2,340,279
      shares awarded to consultants and service providers from our 2004
      Incentive Plan and our 2000 Equity Incentive Plan for
      services;


·
            562,000
      unregistered shares granted under the terms of an agreement for investor
      relations services; and


·
            250,000
      shares issued to a potential investor for reimbursement of due diligence
      expenses (see Equity
      Line with Fusion Capital,
above).





During
the first quarter of 2008, we issued stock grants for an aggregate of 200,000
shares of our common stock to certain employees under the terms of our 2000
Equity Incentive Plan and recorded non-cash research and development expense of
$28,000. We also granted 562,000 shares of our unregistered common stock to a
consultant under the terms of a consulting agreement pursuant to which we
recognized approximately $86,000 of non-cash selling, general and administrative
expense, net of prepayments.  During the second quarter of 2008, we
granted 50,000 registered shares of our common stock to a consultant under the
terms of our 2000 Equity Incentive Plan pursuant to a letter agreement and
recognized approximately $3,000 of non-cash selling, general and administrative
expense.  In the third quarter of 2008, we granted 1,000,000 shares of
our common stock pursuant to the employment agreement with our new President and
Chief Executive Officer (see Note 16, Employment and Consulting Agreements)
under the terms of our 2004 Incentive Plan and recorded non-cash selling,
general and administrative expense of $50,000.





On
February 1, 2007, when the market price for our common stock was $0.073 per
share, we issued an option to purchase 500,000 shares of our common stock at
$0.03 per share under the terms of our 2004 Incentive Plan to a former officer
in connection with a separation agreement and recorded non-cash selling, general
and administrative expense of approximately $40,000.  The option
vested 50% upon grant and 50% after 90 days.  We valued the option
using the Black-Scholes option pricing model and the following
assumptions:  contractual term:  10 years; stock price
volatility:  195.94%; risk-free interest rate:  4.72%;
expected dividend rate:  0%.





F-34
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


On August
23, 2007, when the market price for our common stock was $0.13 per share, we
issued an option to purchase 57,693 shares of our common stock at $0.13 per
share under the terms of our 2004 Incentive Plan as partial compensation for
consulting services and recorded non-cash selling, general and administrative
expense of approximately $5,000.  The option was fully vested at the
date of grant.  We valued the option using the Black-Scholes option
pricing model and the following assumptions:  contractual
term:  10 years; stock price volatility:  130.31%; risk-free
interest rate:  4.31%; expected dividend
rate:  0%.





On
November 15, 2007, when the market price for our common stock was $0.15 per
share, we issued an immediately exercisable warrant to purchase 100,000 shares
of our common stock at $0.15 per share as compensation for consulting
services.  We valued the warrant at $0.098 per share using the
Black-Scholes option pricing model and the following
assumptions:  exercise price - $0.15 per share; contractual term – 2
years, volatility – 129.09%; risk free interest rate – 3.34%, dividend yield –
0%.  We recorded $10,000 of non-cash selling, general and
administrative expense in connection with this warrant.  We did not
grant registration rights for the shares underlying the warrant.





On April
1, 2008, when the market price for our common stock was $0.065 per share, we
granted stock options to purchase an aggregate of 1,500,000 shares of our common
stock at $0.065 per share to two consultants.  The options have a term
of 10 years from the date of grant.  Options to purchase 1,000,000
shares are immediately exercisable; options to purchase an additional 250,000
shares become exercisable on the first anniversary of the grant and options to
purchase the remaining 250,000 shares become exercisable on the second
anniversary of the grant.  We utilized the Black Scholes option
pricing model with the following assumptions to determine the valuation of the
options as of the date of grant:




Exercise
      Price per share
                        
                        $
                        0.065Risk-free
      interest rate
                        
                        
                        3.68%Expected
      volatility
                        
                        
                        197.83%Contractual
      term (in years)
                        
                        
                        10.00Dividend
      yield
                        
                        
                        0%Valuation
      per share
                        
                        $
                        0.0649




We have
recognized approximately $34,000 and $2,000 of non-cash research and development
and selling, general and administrative expenses, respectively, attributable to
these options.  In conjunction with the grant of options to purchase
500,000 shares, one of the consultants agreed to modify the expiration of
previously vested options to purchase 5,000,000 shares of our common stock
exercisable at $0.585 per share from May 28, 2013 to May 28,
2008.  The modified options expired unexercised at May 28,
2008.





As noted
in the preceding descriptions of the February 2007 Private Placement and the
March 2007 Private Placement, we issued warrants to purchase an aggregate of
3,958,336 shares of our common stock at $0.104 per share, following the
anti-dilution price reset, in the February 2007 Private Placement and warrants
to purchase an aggregate of 168,177,036 shares of our common stock at $0.08 per
share or $0.11 per share in the March 2007 Private Placement.  We also
issued an aggregate of 125,000 warrants to purchase our common stock at prices
from $0.06 to 0.067 per share to placement agents in the February 2007 Private
Placement.  Additionally, as described previously, in March 2007 we
re-priced and extended the term of certain previously-issued warrants in
connection with the extension of the due dates of our 8% Secured Convertible
Notes and our 7% Notes issued under the 2005 Marr Credit Facility and in April
2007 we extended the term of the Additional Warrrants not held by investors who
also held any of our outstanding notes.





In
December 2007, two of the investors in the March 2007 Private Placement
exercised 2007 Series A Warrants to purchase an aggregate of 6,000,000 shares of
our common stock and we received cash proceeds of $480,000.  During
2008, investors in the February 2007 and March 2007 Private Placement exercised
warrants, primarily 2007 Series A Warrants, to purchase an aggregate of
28,402,004 shares of our common stock and we received cash proceeds of
$1,602,000.





F-35
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


At
December 31, 2008, we had warrants outstanding to purchase an aggregate of
173,864,184 shares of our common stock at a weighted average price of $0.094 per
share, as summarized in the following table:




AverageNumber
      of
                                        
                                        
                                        Exercise
      priceShares
                                        
                                        
                                        per
      share
                                        
                                        Expiration
      DateWarrant
      issued in connection with August 2008 Private Placement
                                        
                                        1,000,000
                                        
                                        
                                        $
                                        0.080
                                        
                                        August
      20, 2010Warrant
      issued in connection with September 2008 Private Placement
                                        
                                        1,000,000
                                        
                                        
                                        $
                                        0.060
                                        
                                        September
      19, 2010Series
      A warrants issued in connection with March 2007 Private
      Placement
                                        
                                        79,274,355
                                        
                                        
                                        $
                                        0.053
                                        
                                        June
      28, 2009, except 7,948,201 on June 28, 2010Series
      B warrants issued in connection with March 2007 Private
      Placement
                                        
                                        56,059,012
                                        
                                        
                                        $
                                        0.110
                                        
                                        September
      28, 2009, except 4,135,935 on September 28, 2010Warrants
      issued in connection with February 2007 Private Placement
                                        
                                        2,500,001
                                        
                                        
                                        $
                                        0.077
                                        
                                        February
      23, 2012 to March 27, 2012Warrants
      issued to placement agents in connection with the February2007
      Private Placement
                                        
                                        125,000
                                        
                                        
                                        $
                                        0.062
                                        
                                        February
      23, 2012 to March 27, 2012Series
      A and Series B warrants issued in connection with April 2005
      PrivatePlacement,
      including warrants to placement agents
                                        
                                        24,041,610
                                        
                                        
                                        $
                                        0.119
                                        
                                        April
      3, 2010Warrants
      issued to investors in connection with the 2004 PIPEs,
      includingwarrants
      issued to placement agents
                                        
                                        4,270,300
                                        
                                        
                                        $
                                        0.452
                                        
                                        May
      28, 2009 or July 9, 2009Anti-dilution
      warrants issued to investors in the 2004 PIPEs
                                        
                                        885,677
                                        
                                        
                                        $
                                        0.221
                                        
                                        May
      28, 2009 or July 9, 2009Additional
      Warrants issued to investors exercising previously issuedwarrants
      in connection with July 2006 Warrant Re-pricing
                                        
                                        4,057,946
                                        
                                        
                                        $
                                        0.138
                                        
                                        April
      3, 2009Warrant
      issued for investment banking services
                                        
                                        500,000
                                        
                                        
                                        $
                                        0.085
                                        
                                        October
      31, 2011All
      other
                                        
                                        150,283
                                        
                                        
                                        $
                                        0.506
                                        
                                        February
      11, 2009 to May 6, 2009173,864,184
                                        
                                        
                                        $
                                        0.094







Shares reserved for future
issuance


The
following table summarizes shares reserved for future issuance at December 31,
2008:




Shares
      issuable pursuant to options outstanding under benefit
    plans
                        
                        
                        34,096,583Shares
      reserved for future issuance under benefit plans
                        
                        
                        26,994,130Shares
      issuable pursuant to warrants outstanding
                        
                        
                        173,864,184Shares
      issuable under equity line with Fusion Capital
                        
                        
                        37,885,604Shares
      issuable upon conversion of debt securities, including accrued interest
      through maturity
                        
                        
                        20,536,002293,376,503








(12)    Share
Based Payments




We adoptedStatement of
Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment(“SFAS 123R”)
effective January 1, 2006.  SFAS 123R requires the recognition of the
fair value of stock compensation, including stock options, in net income
(loss).  We recognize the stock compensation expense over the
requisite service period of the individual grantees, which generally is the same
as the vesting period of the grant.  All of our stock compensation is
accounted for as an equity instrument.  We generally issue stock
option grants to employees with an exercise price equal to the market price at
the grant date.





We
adopted SFAS 123R using the modified prospective method.  Under this
method, the provisions of SFAS 123R are applied to all awards granted or
modified after the date of adoption.  We recognized in our net loss
the unrecognized expense attributable to awards not yet vested at our January 1,
2006 date of adoption in the periods after the date of adoption using the same
valuation method (i.e. Black-Scholes) and assumptions determined under the
original provisions of SFAS 123, Accounting for Stock-Based
Compensation, as disclosed on a pro-forma basis in our previous
filings.





We value
option grants to non-employees at the date of grant using the Black-Scholes
option-pricing model.  Option grants that do not include sufficient
disincentive for non-performance are accounted for in accordance with EITF
96-18, Accounting forEquity
Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with, Selling Goods and Servicesand EITF 00-18, Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than
Employees.  In such instances, the deferred compensation is
amortized over the term of the agreement on a straight-line
basis.  Until the awards are fully vested or a measurement date is
achieved, we record an adjustment to deferred compensation and consultant
expense to reflect the impact of the fair value, as remeasured at quarter-end,
of the options based on changes to our stock price.





F-36
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


In 2007,
we granted options to one employee and to the non-employee members of our Board
of Directors.  During 2007, we recorded stock compensation expense of
$999,000 in selling, general and administrative expenses in our Consolidated
Statements of Operations, of which $59,000 was attributable to unvested options
granted prior to our adoption of SFAS 123R.





On April
1, 2008, when the market price of our common stock was $0.065 per share, we
granted options to purchase 18,520,000 shares of our common stock at that price
to our employees.  In conjunction with the grants to purchase
2,100,000 of those shares, certain employees agreed to modify the expiration of
previously vested options to purchase 2,100,000 shares at prices between $0.585
per share and $1.40 per share from expiration dates ranging from May 28, 2013
through April 26, 2014 to May 28, 2008.  All of the modified options
expired unexercised at May 28, 2008.  On June 17, 2008, when the
market price of our common stock was $0.047 per share, we granted an option to
purchase 1,000,000 shares of our common stock to our new President and Chief
Executive Officer under the terms of an Employment Agreement (see Note 16,
Employment and Consulting Agreements).  During 2008, we recorded an
aggregate of $1,144,000 in stock compensation expense, including $961,000 in
selling, general and administrative expense and $169,000 in research and
development expense, and $14,000 in cost of product sales expense.





We
utilized the Black-Scholes option pricing model with the following weighted
average assumptions as of the date of grant for estimating the fair value of the
stock compensation granted during 2008 and 2007:




2008
                  
                  
                  2007Exercise
      Price per share
                  
                  $
                  0.064
                  
                  
                  $
                  0.111Risk-free
      interest rate
                  
                  
                  3.00%
                  
                  
                  
                  3.73%Expected
      volatility
                  
                  
                  154.97%
                  
                  
                  
                  192.59%Expected
      life (in years)
                  
                  
                  5.71
                  
                  
                  
                  5.31Dividend
      yield
                  
                  
                  0%
                  
                  
                  
                  0%Valuation
      per share
                  
                  $
                  0.0589
                  
                  
                  $
                  0.1070




We expect
to continue utilizing the Black-Scholes option pricing model for estimating the
fair value of stock compensation attributable to any options granted to
employees in the future.  In conjunction with the management change
described in Note 16, Employment and Consulting Agreements, we accelerated the
vesting of options to purchase 2,500,000 shares of our common stock previously
issued to one of our officers.  We further modified outstanding
options, including those for which the vesting was accelerated, to purchase an
aggregate of 5,850,000 shares of our common stock to extend the post-employment
exercise period during which the officer may exercise the options to two years
following the termination of his employment.  We recorded an
additional $97,000 in stock based employee compensation expense related to these
modifications in the second quarter of 2008.  We have assumed an
annual pre-vesting forfeiture rate of 7.75% in determining our stock
compensation expense in both 2008 and 2007. In determining the inputs to the
Black-Scholes option valuation model, we have assumed a dividend yield of zero
since we have never paid cash dividends and have no present intention to do
so.  We estimate volatility based upon the historical volatility of
our common stock over a period generally commensurate with the expected life of
the options.  We determine the risk-free interest rate based on the
quoted U.S. Treasury Constant Maturity Rate for a security having a comparable
term at the time of the grant.  To-date, we have calculated the
expected term of option grants using the simplified method prescribed by SEC
Staff Accounting Bulletin 107 for “plain vanilla” options.  We have
historically granted options having a ten year contractual term to our employees
and directors.





F-37
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Stock
bonus awards reflect shares of our common stock granted to employees and
consultants.  We recognize compensation expense at the time of
grant.  The expense is determined based on the number of shares
awarded and the closing market price at the date of the award.





At
December 31, 2008, we had options to purchase shares of our common stock
outstanding under each of the following plans:





2004 Incentive
Plan


At the
annual stockholders’ meeting in June 2004, our stockholders approved the
adoption of the 2004 Incentive Plan (the 2004 Plan) to replace our 2000 Equity
Incentive Plan (the 2000 Incentive Plan), for which only a small number of
authorized shares remained available for grant.  The stockholders
authorized 30,000,000 shares for awards from the 2004 Plan.  At the
annual meeting of stockholders in June 2005, the stockholders authorized an
additional 17,000,000 shares for awards from the 2004 Plan and an increase from
8,000,000 shares to 20,000,000 shares in the number of shares of our common
stock which may be issued as restricted share or restricted share unit awards
under the 2004 Plan.  The Compensation Committee of our Board of
Directors administers the Plan.  The Board of Directors may amend or
modify the 2004 Plan at any time.  It will expire in June 2014, unless
terminated earlier by the Board of Directors.  We granted options to
purchase 21,020,000 shares of our common stock at an average price of $0.064 per
share and 1,482,693 shares of our common stock at an average price of $0.099 per
share during the years ended December 31, 2008 and 2007,
respectively.  At December 31, 2008, there were 21,584,017 shares of
our common stock available for grant under the 2004 Plan.





2005 Director Incentive
Plan


At the
annual stockholders’ meeting in June 2005, our stockholders approved the
adoption of the 2005 Director Incentive Plan (the 2005 Director Plan) to replace
the 1995 Director Option Plan (the 1995 Director Plan), which expired in
December 2005.  The stockholders authorized 18,000,000 shares for
awards from the 2005 Director Plan.  The Compensation Committee of our
Board of Directors administers the 2005 Director Plan.  The Board of
Directors may amend or modify the 2005 Director Plan at any time.  It
will expire in June 2015, unless terminated earlier by the Board of
Directors.  We granted options to purchase an aggregate of 15,808,402
shares of our common stock at an exercise price of $0.11 per share under the
2005 Director Plan in 2007.  We granted no options from the 2005
Director Plan during 2008.  At December 31, 2008, there were 3,691,598
shares of our common stock available for grant under the 2005 Director
Plan.





2000 Equity Incentive
Plan


In June
2000, our Board of Directors and stockholders approved the adoption of the 2000
Equity Incentive Plan (the “2000 Incentive Plan”) to replace the 1991 Incentive
Stock Plan, which expired in April 2001.  The Compensation Committee
of our Board of Directors administers the Plan.  The Board of
Directors may amend or modify the 2000 Incentive Plan at any time.  It
has been replaced by the 2004 Plan, but has not been formally terminated by the
Board of Directors.  During 2008 and 2007 we granted only stock bonus
awards from the 2000 Incentive Plan and we do not anticipate making additional
option grants from this plan.  At December 31, 2008, there were
1,718,515 shares of our common stock available for grant under the 2000
Incentive Plan.




1995 Director Option
Plan


In
December 1995, our Board of Directors approved the 1995 Director Option Plan
(the Director Option Plan).  At the annual meeting of stockholders in
June 2005, our stockholders approved the 2005 Director Incentive Plan to replace
the Director Option Plan, which expired in accordance with its terms in December
2005.  Under the Director Option Plan, the Board of Directors
determined the number of options to purchase shares of our stock that were
granted each year to newly-elected or re-elected directors.  We
granted non-statutory options under this plan to non-employee directors or,
pursuant to an agreement between us and another person, entity or affiliate with
whom a non-employee director was associated, to that other person, entity, or
affiliate.  Each option granted under the Director Option Plan was
exercisable at 100% of the fair market value of our common stock on the date the
option was granted and generally had a term of 10 years.  Each grant
under the plan vested monthly over the twelve month period commencing with the
director’s date of election or re-election, provided that the option became
vested and fully exercisable on the date of the next annual meeting of
stockholders if such meeting occurred less than one year after the date of the
grant.  There are no shares of our common stock available for grant
under the Director Option Plan at December 31, 2008.





F-38
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


1991 Incentive Stock
Plan


In April
1991, our Board of Directors approved the adoption of the Incentive Stock Plan
(the Stock Plan). A total of 141,366 shares of common stock were reserved for
issuance under the Stock Plan.  Since the adoption of the 2000 Equity
Incentive Plan in June 2000, no additional shares have been granted from the
Stock Plan.  Other than the expiration of unexercised options during
2008, there was no activity in the Stock Plan during 2008 or 2007 and no shares
are available for grant under the Stock Plan.





Under the
terms of each of the Company’s active equity incentive plans, a participant’s
options or other awards may be subject to accelerated vesting upon the occurance
of a change of control, as defined in the plan.





Description of the 2004 Plan
and the 2005 Director Plan


Under the
terms of the 2004 Plan, the Compensation Committee may grant nonstatutory stock
options, stock appreciation rights, dividend equivalent rights, restricted
stock, restricted stock units and stock bonuses to employees, including
directors who are employees, non-employee directors, and
consultants.  The Compensation Committee may grant incentive stock
options only to employees.  Under the terms of the 2005 Director Plan,
the Compensation Committee may grant nonstatutory stock options, stock
appreciation rights, dividend equivalent rights, restricted stock, restricted
stock units and stock bonuses only to an Outside Director, who is defined as a
Director who is not an employee or a greater than 10% stockholder, directly or
beneficially, of the Company or any affiliate.




The
Compensation Committee may grant nonstatutory stock options under the 2004 Plan
at a price less than the fair market value of the common stock on the date the
option is granted.  The Compensation Committee may not grant incentive
stock options under the 2004 Incentive Plan at a price less than 100% of the
fair market value of the common stock on the date the option is
granted.  Incentive stock options granted to employees who, on the
date of grant, own stock representing more than 10% of the voting power of all
classes of our stock are granted at an exercise price not less than 110% of the
fair market value of the common stock.  Options granted to employees
under the 2004 Plan generally vest monthly over periods of up to three years, as
specified in the option agreements.  The term of nonstatutory and
incentive stock options granted is 10 years or less from the date of the grant,
as provided in the option agreements.




The terms
of options granted from the 2005 Director Plan are determined solely by the
Compensation Committee.  The exercise price of options granted under
the 2005 Director Plan may be paid in cash or by such other method as the
Committee may prescribe, provided, however, that any participant exercising
rights and obtaining shares pursuant to awards granted under the 2005 Director
Plan must pay cash or other valid consideration equal to the aggregate par value
of such shares to the extent required by the Delaware General Corporation
Laws.  The participant must pay any taxes required to be withheld at
the time of exercise.  The Compensation Committee will determine the
term of any option, but no option may be exercised after ten years from the date
it is granted.  Option awards will provide rules covering the time of
exercise of an option in case of retirement, death, disability, or other
termination of service as an Outside Director.





The 2004
Plan and the 2005 Director Plan permit the granting of stock appreciation rights
in conjunction with all or part of a stock option granted under the respective
Plan.  In the case of a nonstatutory stock option, such rights may be
granted either at or after the date of grant of such option.  In the
case of an incentive stock option granted from the 2004 Plan, such rights may be
granted only at the date of grant of such option.  Stock appreciation
rights will be exercisable only at such time and to the extent that the stock
options to which they relate are exercisable.  Upon exercise of a
stock appreciation right, a participant will receive an amount equal to the
product of (a) the excess of the fair market value of one share of common stock
over the exercise price per share specified in the related stock option times
(b) the number of shares in respect of which the stock appreciation right shall
have been exercised, in cash, shares of common stock or both, with the
Compensation Committee having the right to determine the form of
payment.





F-39
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


The 2004
Plan and the 2005 Director Plan permit the Compensation Committee to include in
any award a dividend equivalent right entitling the participant to receive
amounts equal to all or any portion of the dividends that would be paid on the
shares of common stock covered by the award if such shares had been delivered
pursuant to the award.  The Compensation Committee will determine
whether the payment of dividend equivalent rights will be made in cash, in
shares of common stock or in another form, whether they shall be conditioned
upon the exercise of the award to which they relate, the time at which they
shall be made, and such other terms and conditions as the Committee considers
appropriate.





The 2004
Plan and the 2005 Director Plan permit the granting of or offering for sale
restricted shares of common stock and restricted stock units in such amounts and
subject to such terms and conditions as the Compensation Committee may
determine.  Upon receipt of restricted shares of common stock, the
participant has the rights of a shareholder with respect to the restricted
stock, subject to any restrictions and conditions that the Compensation
Committee may impose.  On the delivery date of a restricted stock
unit, the participant receives one share of common stock or cash equal in value
to a share of common stock or a combination thereof, as specified by the
Compensation Committee.  No more than a total of 20,000,000 shares of
common stock are available for delivery as restricted stock and restricted stock
units from the 2004 Plan.





The 2004
Plan and the 2005 Director Plan also permit the Compensation Committee to grant
other types of equity-based or equity-related awards (including the grant or
offer for sale of unrestricted shares of Common Stock) in such amounts and
subject to such terms and conditions as the Compensation Committee may
determine.  Such awards may entail the transfer of actual shares of
common stock to participants or payment in cash or otherwise of amounts based on
the value of shares of common stock.





The 2004
Plan permits the Compensation Committee to grant Incentive awards in such
amounts and subject to the achievement of performance goals and other terms and
conditions as the Committee may determine.  Incentive awards will be
granted and administered to comply with the requirements of Section 162(m) of
the Internal Revenue Code.  After the term for the applicable
performance period has ended, the participant will be entitled to payment based
on the level of achievement of the performance goals set by the Compensation
Committee.  The Compensation Committee will certify the achievement of
the performance goals in writing before the incentive award is
settled.  At the discretion of the Compensation Committee, the
settlement of incentive awards may be in cash, shares of common stock, or in
some combination thereof.





The
Compensation Committee may grant to a participant in either the 2004 Plan or the
2005 Director Plan a specified amount for the purpose of assisting the
participant to pay taxes resulting from the grant of an award.




The
following table presents a summary of option activity for all of our stock
option plans from December 31, 2006 through December 31, 2008.






F-40
 Table of Contents




CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007




Weighted
                            
                            
                            Weighted
                            
                            
                            AggregateAverage
                            
                            
                            Average
                            
                            
                            IntrinsicExercise
                            
                            
                            Remaining
                            
                            
                            Value
      atPrice
      per
                            
                            
                            Contractual
                            
                            
                            DateOptions
                            
                            
                            Share
                            
                            
                            Term
      (years)
                            
                            
                            IndicatedOptions
      outstanding at December 31, 2006
                            
                            
                            22,408,770
                            
                            
                            
                            $0.576
                            
                            
                            
                            7.36
                            
                            
                            
                            $2,534Options
      granted - at less than market price
                            
                            
                            500,000
                            
                            
                            
                            $0.030Options
      granted - at market price
                            
                            
                            16,791,095
                            
                            
                            
                            $0.111Options
      exercised
                            
                            
                            (16,827
                            )
                            
                            
                            $0.010Options
      forfeited
                            
                            
                            (110,554
                            )
                            
                            
                            $0.234Options
      expired
                            
                            
                            (7,709,130
                            )
                            
                            
                            $0.550Options
      outstanding at December 31, 2007
                            
                            
                            31,863,354
                            
                            
                            
                            $0.331
                            
                            
                            
                            8.01
                            
                            
                            
                            $39,784Options
      granted - at market price
                            
                            
                            21,020,000
                            
                            
                            
                            $0.064Options
      exercised
                            
                            
                            (24,038
                            )
                            
                            
                            $0.010Options
      forfeited
                            
                            
                            (8,415,387
                            )
                            
                            
                            $0.072Options
      expired
                            
                            
                            (10,347,346
                            )
                            
                            
                            $0.613Options
      outstanding at December 31, 2008
                            
                            
                            34,096,583
                            
                            
                            
                            $0.145
                            
                            
                            
                            4.34
                            
                            
                            
                            $0Options
      vested and exercisable at December 31, 2007
                            
                            
                            24,275,855
                            
                            
                            
                            $0.399
                            
                            
                            
                            7.43
                            
                            
                            
                            $39,784Options
      vested and exercisable at December 31, 2008
                            
                            
                            30,596,583
                            
                            
                            
                            $0.145
                            
                            
                            
                            3.81
                            
                            
                            
                            $0




The following table summarizes
information about stock options outstanding under all of our option plans at
December 31, 2008.






Options
      Outstanding
                                  
                                  
                                  Options
      ExercisableWeightedAverage
                                  
                                  
                                  Weighted
                                  
                                  
                                  
                                  
                                  
                                  WeightedRange
      of
                                  
                                  
                                  
                                  
                                  Remaining
                                  
                                  
                                  Average
                                  
                                  
                                  
                                  
                                  
                                  AverageExercise
                                  
                                  Number
                                  
                                  
                                  Years
      to
                                  
                                  
                                  Exercise
                                  
                                  
                                  Number
                                  
                                  
                                  ExercisePrices
                                  
                                  Outstanding
                                  
                                  
                                  Expiration
                                  
                                  
                                  Price
                                  
                                  
                                  Exercisable
                                  
                                  
                                  Price$0.03
      to $0.047
                                  
                                  
                                  1,000,000
                                  
                                  
                                  
                                  4.27
                                  
                                  
                                  $
                                  0.039
                                  
                                  
                                  
                                  1,000,000
                                  
                                  
                                  $
                                  0.039$0.065
                                  
                                  
                                  13,605,307
                                  
                                  
                                  
                                  1.76
                                  
                                  
                                  $
                                  0.065
                                  
                                  
                                  
                                  13,105,307
                                  
                                  
                                  $
                                  0.065$0.11
                                  
                                  
                                  14,308,402
                                  
                                  
                                  
                                  7.90
                                  
                                  
                                  $
                                  0.110
                                  
                                  
                                  
                                  11,308,402
                                  
                                  
                                  $
                                  0.110$0.13
      to $0.38
                                  
                                  
                                  3,668,265
                                  
                                  
                                  
                                  1.72
                                  
                                  
                                  $
                                  0.253
                                  
                                  
                                  
                                  3,668,265
                                  
                                  
                                  $
                                  0.253$0.585
      to $120.00
                                  
                                  
                                  1,514,609
                                  
                                  
                                  
                                  0.21
                                  
                                  
                                  $
                                  1.000
                                  
                                  
                                  
                                  1,514,609
                                  
                                  
                                  $
                                  1.00034,096,583
                                  
                                  
                                  
                                  4.34
                                  
                                  
                                  $
                                  0.145
                                  
                                  
                                  
                                  30,596,583
                                  
                                  
                                  $
                                  0.150




There was
no intrinsic value associated with any of our outstanding options at December
31, 2008, as the exercise prices for all outstanding or exercisable options
exceeded the $0.007 per share quoted market price of our common stock at that
date.  The aggregate intrinsic value of options exercised on the dates
the options were exercised was approximately $3,000 and $2,000 for the years
ended December 31, 2008 and 2007, respectively.




At
December 31, 2008, the expected compensation cost of options outstanding but not
yet vested was approximately $673,000, net of expected
forfeitures.  We expect to recognize this cost over a weighted average
period of approximately 11 months.  We did not record any income tax
benefits for stock-based compensation arrangements for the years ended December
31, 2008 or 2007, as we have cumulative operating losses and have established
full valuation allowances for our income tax benefits.





F-41
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


We
granted options to purchase 2,000,000 shares and 557,693 shares of our common
stock to consultants in 2008 and 2007, respectively.  We re-measure
these options until they vest, using the Black-Scholes option pricing model, and
we recognize the resulting value over the period in which we receive the
services.  During the years ended December 31, 2008 and 2007, we
recognized approximately $36,000 and $45,000, respectively, in compensation
expense for options granted to consultants.





In
January 2008, we granted stock bonus awards from the 2000 Incentive Plan for an
aggregate of 200,000 shares to certain employees and recognized $28,000 of
research and development expense.  In June 2008, we also granted a
stock bonus award of 1,000,000 shares from our 2004 Incentive Plan to our new
President and Chief Executive Officer  The weighted average price of
the shares issued as stock bonuses in 2008 was $0.065 per share.  In
2007, we granted stock bonus awards from the 2004 Plan for an aggregate of
3,381,534 shares of our common stock.  The weighted average price of
the shares issued as stock bonuses was $0.069 and we recognized $42,000 in
research and development expense (net of accruals) and $150,000 in selling
general and administrative expense attributable to these awards in
2007.





(13)    Section
401(k) Plan




Effective January 1, 1995, we adopted a
Retirement Savings and Investment Plan (the “401(k) Plan”) covering our
full-time employees located in the United States.  The 401(k) Plan is
intended to qualify under Section 401(k) of the Internal Revenue
Code.  Under the terms of the 401(k) Plan, employees may elect to
reduce their current compensation by up to the statutorily prescribed annual
limit and to have the amount of such reduction contributed to the 401(k)
Plan.  The 401(k) plan permits us to make contributions which become
vested to our employees over terms as described in the plan, but we made no such
contributions in either 2008 or 2007.





(14)    Income
Taxes





The
provision for income taxes is based upon our loss before provision for income
taxes for the years ended December 31, 2008 and 2007, as follows (in
thousands):




2008
                      
                      
                      2007Loss
      before income taxes:Domestic
                      
                      $
                      (8,852
                      )
                      
                      $
                      (7,013
                      )International
                      
                      
                      (325
                      )
                      
                      
                      (1,255
                      )Total
      loss before income taxes
                      
                      $
                      (9,177
                      )
                      
                      $
                      (8,268
                      )




The
provision for income taxes for the year ended December 31, 2007 presented in the
Consolidated Statements of Operations represents minimum California franchise
taxes. For the years ended December 31, 2008 and 2007, income tax expense
differed from the amounts computed by applying the U.S. federal income tax rate
of 34% to domestic pretax losses as a result of the following:




2008
                    
                    
                    2007Computed
      expected tax expense
                    
                    $
                    (3,120
                    )
                    
                    $
                    (2,384
                    )Losses
      and credits for which no benefits have been recognized
                    
                    
                    2,551
                    
                    
                    
                    2,376Expense
      related to amortization of financing discounts in interest
      expense
                    
                    
                    467
                    
                    
                    
                    -Expense
      related to warrant modification
                    
                    
                    119Other,
      net
                    
                    
                    (17
                    )
                    
                    
                    10$
                    -
                    
                    
                    $
                    2





F-42
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


The tax
effect of temporary differences that give rise to significant portions of the
deferred tax asset is presented below:





December
      31,­­­­­­­­2008
                
                
                2007Deferred
      tax assets:Net
      operating loss carryovers
                
                $
                34,005
                
                
                $
                31,197Research
      and development credits
                
                
                1,142
                
                
                
                1,073Other
                
                
                2,893
                
                
                
                2,789Total
      gross deferred tax assets
                
                
                38,040
                
                
                
                35,059Valuation
      allowance
                
                
                (38,040
                )
                
                
                (35,059
                )Net
      deferred tax assets
                
                $
                -
                
                
                $
                -





The net
change in the valuation allowance for the years ended December 31, 2008 and 2007
was an increase of $2,981,000 and $4,574,000, respectively.  Because
there is uncertainty regarding our ability to realize our deferred tax assets, a
100% valuation allowance has been established.  In accordance with
SFAS 123(R), we have excluded certain tax benefits resulting from employee stock
option exercises from our deferred tax asset at December 31, 2008 and
2007.  In the future, if and when such tax benefits are ultimately
realized, the amount of excess tax benefits will be credited to additional
paid-in capital in our Consolidated Statements of Stockholders’
Deficit.




As of
December 31, 2008, we had federal net operating loss carryforwards of $94.3
million and federal research and development credit carryforwards of $482,000,
which will expire in the years 2009 through 2028. We also have state net
operating loss carryforwards of $36.5 million and state research and development
credit carryforwards of $1.0 million as of December 31, 2008. The state net
operating loss carryforwards will expire in the years 2009 through 2018 and the
state research and development credits will carryforward
indefinitely.  The state net operating loss carryforwards have been
suspended for two years and will be available to offset taxable income, if any,
commencing in 2011.  Approximately $3.1 million of federal and state
net operating loss carryforwards represent stock option deductions arising from
activity under our stock option plans, the benefits of which will increase
additional paid-in capital when realized.




Federal
and state laws limit the use of net operating loss and tax credit carryforwards
in certain situations where changes occur in the stock ownership of a company.
We conducted a preliminary analysis of our stock ownership changes under
Internal Revenue Code Section 382 from our inception through December 31, 2007
and have reported our deferred tax assets related to net operating loss and
research credit carryforwards after recognizing change of control limitations
that may have occurred in 2003 and 2004.  This limitation resulted in
a reduction of deferred tax assets and a corresponding reduction in the
valuation allowance. The Company has not updated its Section 382 analysis to
assess whether any additional ownerhsip changes have occurred due to costs
associated with such analysis. If the Company has experienced any additional
changes of control, utilization of its NOL or tax credit carryforwards would be
subject to annual limitations under Section 382.  Such additional annual
limitations could result in the expiration of our reported net operating loss
and credit carryforwards available as of December 31, 2008 before their
utilization.




We
adopted the provisions of FIN 48 effective January 1, 2007 (see Note 2, Summary
of Significant Accounting Policies).  Upon adoption of FIN 48, we
determined that we did not have any unrecognized tax benefits and there was no
effect on our consolidated financial condition or results of operations as a
result of implementing FIN 48.





We file
income tax returns in the U.S. federal jurisdiction and in various state and
foreign jurisdictions. We are subject to U.S. federal and state income tax
examinations by tax authorities for tax years 1993 through 2008 due to net
operating losses that are being carried forward for tax
purposes.


F-43
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


Our
policy is to recognize interest and penalties related to income tax matters in
income tax expense. We had no accrual for interest or penalties on our
Consolidated Balance Sheets at December 31, 2008 and 2007, and have not
recognized interest or penalties in our Consolidated Statements of Operations
for the years ended December 31, 2008 and 2007.





(15)    Royalty
and License Agreements




We have
entered into arrangements with various organizations for the rights to utilize
certain patents and proprietary rights under licensing agreements in exchange
for royalty payments based on our sales of certain products.  As discussed
in Note 5, Intangible Assets, during 2004 we entered into license agreements for
technology and materials required to commercialize our rapid tests and the BED
Incidence test.  In addition to the initial or base license payments
we have recorded as intangible assets, the agreements also contain a royalty on
sales component based on sales of our rapid test products.  The underlying
patents expire between 2006 and 2017.  There are minimum payments required
by certain of the agreements that apply regardless of the amount of our
sales.   The royalty obligations are royalty payments under some
agreements.





We had
paid royalties to five entities on our Legacy Business products based on a
percentage of net sales of licensed products or annual minimum
amounts.  At December 31, 2008, we are approximately $190,000 in
arrears on the payment of royalties under certain of the licensing agreements
covering our former Legacy Business products.





(16)    Employment
and Consulting Agreements





In
February 2005, the Compensation Committee of the Board of Directors approved a
consulting contract under which the then-Chairman of the Board of Directors
provided certain strategic and advisory services to us through July 31, 2005
(the “Consulting Contract”).  Under the terms of the Consulting
Contract and concurrent with its approval by the Compensation Committee, we
granted the Chairman immediately exercisable options to purchase 850,000 shares
of our common stock at an exercise price of $0.35 per share, which was the
market price of our common stock on the date the option was
granted.  The options have a life of ten years and were granted
pursuant to the 2004 Incentive Plan.  On October 3, 2005, following
the resignation of the Company’s then-president and chief operating officer, the
Board of Directors appointed the Chairman as interim Chief Executive Officer,
effective immediately.  On January 4, 2006, the Compensation Committee
of the Board of Directors approved a letter agreement outlining the terms and
compensation of the Chairman’s additional service as interim Chief Executive
Officer.  Under the terms of the letter agreement, the Chairman was to
receive cash compensation of $15,000 per month, beginning October 3, 2005 and a
grant of 1,000,000 shares of our common stock, which we issued from the 2004
Plan in January 2006.  The Chairman continued to serve as interim
Chief Executive Officer through April 2006.  In February 2006, we
issued the Chairman 311,736 shares of our common stock valued at $60,000 in lieu
of cash payments under the letter agreement for the months of October 2005
through January 2006.  The Board of Directors subsequently appointed
the Chairman as Chief Executive Officer and, effective September 26, 2006, we
entered into a two year employment agreement (the “Employment Agreement”) with
automatic one-year renewal options that includes an annual salary of $350,000,
other cash payments as described in the agreement, a grant of 2,000,000 shares
of our common stock and a grant of 2,500,000 shares of restricted stock units
which vest in semi-annual installments.  At December 31, 2006, we had
not yet made the stock or restricted stock unit grants.  We granted
the stock bonus award in January 2007, but at December 31, 2007, had not made
the restricted stock unit or any other equity grant.  In lieu of the
restricted stock award, on April 1, 2008, the Compensation Committee of the
Board of Directors awarded the Chief Executive Officer an option to purchase
5,000,000 shares of the Company’s common stock at $0.065, the market price of
stock on the grant date. 50% of the options were immediately exercisable, with
an additional 25% becoming exercisable on the first anniversary of the grant and
the remaining 25% becoming exercisable on the second anniversary of the
grant.  Beginning in calendar year 2007, the Chief Executive Officer
became eligible for an annual performance-based bonus of up to 50% of his annual
base salary, payable in cash, equity or a combination of the two.  At
December 31, 2007 no such award had been earned or accrued.  As
described in Note 11, Stockholders’ Deficit, the Chief Executive Officer
participated in the March 2007 Private Placement by applying previously
subscribed funds and canceling our obligation to repay notes and accrued but
unpaid compensation under the Consulting Contract and the Employment Agreement
owed to him, aggregating approximately $430,000, in return for issuance of stock
and warrants under the same terms as those made available to the primary
investors in the March 2007 Private Placement.  On June 10, 2008, in
conjunction with an expected management change, the Compensation Committee of
the Board of Directors modified outstanding options previously issued to the
Chief Executive Officer, including the options granted on April 1, 2008, by
accelerating the vesting of all of his unvested options and extending the
post-employment exercise period during which he may exercise his options for two
years following the termination of his employment.  He resigned as
President and Chief Executive Officer on June 16, 2008, but continued his
service as Chairman of the Board of Directors.  He did not stand for
re-election to the Board of Directors and left the Board following the Annual
Meeting of Stockholders on December 10, 2008.





F-44
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


On June
12, 2008, we entered into an employment agreement with Donald N. Taylor
appointing him as President and Chief Executive Officer effective on the date we
received a binding commitment for sufficient capital to fund our operations for
a two month period.  This occurred on June 16, 2008, after the four
primary investors in the March 2007 Private Placement agreed to exercise an
aggregate of $1,000,000 of Series A Warrants for which the exercise price had
been reduced, as described in Note 11, Stockholders’ Deficit, and upon the
resignation of the former President and Chief Executive Officer.  Mr.
Taylor was recommended to the Board of Directors by one of our directors, Mr.
Max Soulimov, acting on behalf of Marr.  Since February 2007, Mr.
Taylor has served as, and continues to serve as, Chief Executive Officer of
Swivel Secure Ltd., a United Kingdom-based company providing tokenless
authentication software and primarily owned by The Marr Group, which is an
affiliate of Marr.  Mr. Taylor’s employment agreement was for an
initial two-year term, with automatic annual renewals, unless terminated at
least 60 days prior to the end of an employment term.  The agreement
required that Mr. Taylor would be paid an annual base salary of
$150,000.  In addition, Mr. Taylor was granted an award of 1,000,000
shares of our common stock and a stock option to purchase 1,000,000 shares of
our common stock at an exercise price of $0.047, the closing market price of our
common stock on the date of grant.  The stock option was to vest 50%
on December 1, 2008 and 50% on June 1, 2009.  Mr. Taylor was also to
be entitled to an annual performance-based bonus of up to 50% of his annual base
salary.  Mr. Taylor was to be reimbursed for up to $15,000 of personal
travel expenses per year and up to $2,500 for legal and tax advice in connection
with his employment with the Company.  As a result of our financial
condition, Mr. Taylor’s employment agreement and his employment were terminated
by mutual consent on December 5, 2008.





In
January 2003, we entered into a twelve month employment agreement with an
officer, with automatic renewal options, that included a base salary of $200,000
and the grant of certain options.  In conjunction with the August 2005
relocation of our administrative headquarters to Lake Oswego, Oregon and our
October 2005 appointment of another officer, this officer was constructively
terminated under the terms of the employment agreement, triggering our liability
of $200,000 to him, which we had accrued but not paid as of December 31,
2006.  The officer assumed another position and continued his
employment with us through November 2007.  As described in Note 11,
Stockholders’ Deficit, this officer participated in the March 2007 Private
Placement by canceling our obligation to repay the $200,000 owed to him, in
return for issuance of stock and warrants under the same terms as those made
available to the primary investors in the March 2007 Private
Placement.





In August
2007, we entered into a six month employment agreement with an officer that
included an annual base salary of $125,000 and the grant of  an
immediately vested option to purchase 925,000 shares of our common stock at
$0.135 per share.  The option expires 30 months following the grant
date. The officer resigned from that position in November 2007.





(17)    Related
Party Transactions





As
described in Note 8, Notes and Debentures Payable, we entered into a Credit
Facility Agreement in April 2005 with Marr, our largest
stockholder.  The Credit Facility Agreement was subsequently modified
between 2005 and 2007, including an amendment in March 2007 to extend the
maturity of the 7% Notes issued under the Credit Facility from April 3, 2007 to
April 3, 2009 and an amendment in December 2007 granting a one-year conversion
option at $0.16 per share for Notes and related accrued interest outstanding
under the facility.  That option expired without exercise in December
2008.  At December 31, 2008, we have Promissory Notes in the face
amount of $4,200,000 and accrued interest of $740,000 outstanding under the
credit facility which are due on April 3, 2009.





F-45
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


As also
described in Note 8, Notes and Debentures Payable, in March 2007 we also
extended the due date of an aggregate of $4,983,000 of 8% Secured Convertible
Notes, of which $3,223,000 were held by Marr, and all subsequent Notes issued in
payment of quarterly interest from April 3, 2007 to April 3,
2009.  Additionally, in December 2007, we granted Marr the right to
convert any such Notes it holds at $0.16 per share, rather than $0.30 per share,
for a one-year period.  Marr did not exercise its right to convert any
of the Notes it held prior to the expiration of the right.  At
December 31, 2008, Marr holds an aggregate of $3,709,000 of the 8% Secured
Convertible Notes.  See Note 19, Subsequent Events regarding the
status of the 8% Secured Convertible Notes.





As
described in Note 8, Notes and Debentures Payable, and Note 11, Stockholders’
Deficit, during 2006 and 2007 we issued 8% Promissory Notes in the aggregate
face amount of $96,300 to our then-Chief Executive Officer and received $100,000
as an advance from him for participation in a future equity
financing.  In 2007, we repaid $6,300 in cash and our Chief Executive
Officer participated in the March 2007 Private Placement by applying the
previously subscribed funds and canceling our obligation to repay notes and
accrued but unpaid compensation under the Consulting Contract and the Employment
Agreement owed to him, aggregating approximately $430,000, in return for
issuance of stock and warrants under the same terms as those made available to
the primary investors in the March 2007 Private Placement.





As
described in Note 11, Stockholders’ Deficit, and Note 16, Employment and
Consulting Agreements, another of our officers participated in the March 2007
Private Placement by canceling our obligation to pay $200,000 of accrued but
unpaid compensation.  The officer was issued stock and warrants under
the same terms as those made available to the primary investors in the March
2007 Private Placement.





As
described in Note 8, Notes and Debentures Payable, on February 26, 2007, we
issued a 12% secured promissory note to an employee in the face amount of
$65,000.  We used the proceeds of the note to purchase materials to
produce our BED Incidence tests.  We granted the employee a purchase
money security interest in the tests produced.  We repaid the note and
accrued interest on May 18, 2007.





In July
2007, we entered into a 9-month lease with renewal options for office space in
Geneva, Switzerland.  The landlord is a relative of one of the
principals of Marr.





In
October 2005, prior to our acquisition of our 51% equity interest in Beijing
Marr, Beijing Marr received an unsecured, non-interest-bearing advance of
approximately $2,006,000 from Beijing Mobix, an affilate of Marr and Marr
Asia.  The proceeds of the advance were used by Beijing Marr in the
acquisition of its manufacturing facility and other assets.  We have
reflected this advance as a current liability in our Consolidated Balance Sheet
at December 31, 2008.





In
October 2005, Beijing Calypte received an unsecured, non-interest-bearing
advance in the amount of $177,000 from Beijing Mobix.  In November
2005, Beijing Calypte also received an unsecured, non-interest-bearing advance
in the amount of $25,000 from its Executive Chairman.  Beijing Calypte
used each of these advances to fund its general corporate
expenses.  We have reflected these advances as current liabilities in
our Consolidated Balance Sheet at December 31, 2008.




In
December 2005, we entered into an Equity Transfer Agreement with Marr Asia, an
affiliate of Marr Technologies BV.  Under the terms of the Equity
Transfer Agreement, we acquired from Marr Asia a 51% equity interest in Beijing
Marr.  The Equity Transfer Agreement became effective on January 18,
2006, the date it was approved by the Huairou County Commerce
Bureau.  By December 31, 2007, we had contributed $1,836,000 to the
registered capital of Beijing Marr and Marr Asia had contributed $1,764,000,
representing the full authorized capital contribution of each party pursuant to
the Equity Transfer Agreement.  The business purpose of Beijing Marr
is to pursue the manufacture, distribution, marketing and sale of our rapid test
products in China.





F-46
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


In
December 2005, we also entered into an agreement with Marr Asia in connection
with the Equity Transfer Agreement that governs the relationship between Marr
Asia and us as shareholders of Beijing Marr.  The agreement provides
for certain protective provisions for Marr Asia, as the minority shareholder,
Board composition and voting, buy-sell, non-competition and other provisions
governing the other rights, duties and obligations of the shareholders (the
“Shareholders Agreement”) in connection with the operation of Beijing
Marr.





In
connection with the aggregate $12.5 million investments by Marr Technologies BV
during 2003, we signed a Memorandum Of Understanding to create a joint venture
in China to market our current and future products.  Additionally, the
Nominating Committee of our Board of Directors agreed to grant Marr the right to
nominate two mutually-agreeable representatives to our Board of
Directors.  During 2004, two directors initially nominated by Marr
were added to our Board of Directors.  Each of those directors
resigned from our Board during the fourth quarter of 2008.





In
November 2003, the joint venture, Beijing Calypte Biomedical Technology Ltd.,
was formed.  We own 51% of its stock.





(18)    Commitments
and Contingencies





We do
not, in the normal course of business, enter into significant purchase contracts
for materials or supplies.




On
September 28, 2008, David K. Harris, the former Chief Executive Officer of our
subsidiary, Beijing Marr, filed a labor dispute claim against Beijing Marr with
the Beijing Chaoyang District, China, Labor Dispute Arbitration Commission
claiming that he was wrongfully terminated by Beijing Marr and seeking
approximately $381,000 for unpaid salary, expense reimbursement, severance
payment and penalties.  In January 2009, Beijing Marr filed a
counterclaim against Mr. Harris for damages it suffered as a result of various
instances of misconduct and failure to perform his duties as chief executive
officer and seeking approximately RMB 493,346.  The matter so far has
been heard on November 28, 2008, February 2, 2009 and April 20,
2009.
 
 In late
2008, two former employees of Beijing Marr filed complaints against Beijing Marr
with the Labor Arbitration Committee of Chaoyang District, Beijing, claiming
that they are owed additional compensation as a result of noncompliance with
certain provisions of the Labor Contract Law of China.  Each is
claiming they are owed one month salary.  The total claimed is
approximately RMB 311,122.  The first hearing is scheduled for April
30, 2009.
 
 In late
2008, a complaint was filed by Fangcui Green Garden Project Co., Ltd. against
Beijing Marr in the Beijing Arbitration Committee in the amount of RMB
195,499.13 seeking payment for a construction project performed by Fangcui Green
Garden Project for Beijing Marr at its manufacturing facility. Beijing Marr has
counterclaimed for damages resulting from faulty workmanship in an amount in
excess of RMB 118,000.  The first hearing of the matter was held on
April 15, 2009.
 
 On March
2, 2009, Sun Deming filed a complaint against Beijing Marr in the People’s Court
of Chaoyang District, China, for breach of an apartment lease between Sun
Deming, as landlord, and Beijing Marr, as tenant, in the amount of RMB 70,000
for five months unpaid rental for the months of May 2008 through September 2008
plus penalties of RMB 1,418 and court costs equal to 10% of the claimed amount
for a total of RMB 80,000.  Arbitration was scheduled for April 8,
2009.  On April 7, 2009 the parties settled this matter out of court.
Beijing Marr agreed to pay Sun Deming RMB 70,000 by making a cash payment of RMB
56,000 and forfeiting the return of the deposit of RMB 14,000.
 
 In
January 2006, a complaint was filed against us and certain of our current and
former officers by Logisticorp, Inc. and Southwest Resource Preservation, Inc.
(collectively, the “Complainants”) in the Superior Court of the State of
California in and for the County of Los Angeles – Central District seeking
damages in the amount of approximately $1,100,000, plus interest, trading
penalties of $5,000 per day and other damages.  On April 17, 2007, the
Superior Court entered a final judgment dismissing the complaint with prejudice
for failure to state a cause of action and ordering the Complainants to pay us
our costs and attorneys’ fees in the aggregate amount of $106,304.  On
June 15, 2007, the Complainants filed a notice to appeal the judgment with the
Court of Appeal of the State of California, Second Appellate District, but
failed to file an opening brief by the statutory deadline date.  On
November 13, 2008, the Court of Appeal issued an opinion affirming the trial
court judgment.  Remittitur was issued on January 16, 2009. The
plaintiff/appellant did not file a petition for review with the California
Supreme Court.  As a result, the case has been finally determined in
our favor.


F-47
 Table of Contents
 CALYPTE
BIOMEDICAL CORPORATION AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
  December
31, 2008 and 2007


As
indicated in Note 9, Lease Commitments, we entered into a sublease with a third
party as the sublessor of our former manufacturing facilities in Rockville,
Maryland.  Should the sub-tenant not fulfill its monthly payment or
other obligations under the terms of the sublease, the primary landlord has the
right to look to us for satisfaction of the obligations under the primary
lease.





We have
product liability and general liability insurance policies in amounts that we
believe to be reasonable given our current level of business.  Although
historically we have not paid any product liability claims, it is conceivable
that we could incur claims for which we are not insured.





(19)    Subsequent
Events





Default under Note
Agreements


As of
April 3, 2009, we have not repaid the aggregate of $5,968,000 due to three note
holders, one of whom is Marr, under the terms of our Secured 8% Convertible
Promissory Notes dated April 4, 2005, including Interest Notes in the aggregate
amounts of $117,000 each that were issuable in payment of quarterly interest on
January 3, 2009 and April 3, 2009.  Additionally, we have not repaid
the aggregate of $5,015,000, including $815,000 of accrued interest through the
April 3, 2009 maturity, of the 7% Promissory Notes due under the terms of the
2005 Marr Credit Facility, as amended.  Consequently, we are in
default under the terms of each of these agreements.





We are
currently discussing termination, reduction or restructuring of our debt
obligations under the 2005 Marr Credit Facility and the 8% Convertible Notes
with each of the secured creditors. There can be no assurance that acceptable
terms, or any terms, will be reached between us and any of the
creditors.  These defaults, coupled with our significant working
capital deficit and limited cash resources, place a high degree of doubt on our
ability to continue our operations.





In light
of our existing operations and financial challenges, we are exploring strategic
and financing options in conjunction with our ongoing discussions with these
secured creditors to terminate, reduce or restructure our debt
obligations.  Failure to obtain additional financing and to resolve
the existing defaults with respect to the Credit Facility and the Convertible
Notes will likely cause us to seek bankruptcy protection under Chapter 7 of
Title 11 of the United States Code, 11 U.S.C. § 101 et seq., which would
have a material adverse effect on our business, on our ability to continue our
operations and on the value of our equity.





Advance from
Stockholder


During
the first quarter of 2009, one of the primary investors in the March 2007
Private Placement has advanced an aggregate of $325,000 to us in anticipation of
a financing agreement.  We have no definitive agreements with this or
any other investor regarding the terms of these advances or any subsequent
financings.  We have used the funds advanced to permit the limited
continuation of our operations.





F-48
 Table of Contents


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.




CALYPTE  BIOMEDICAL  CORPORATION

                      (Registrant)By:
                  /s/ Adel
      KarasAdel
      Karas
                    Chief
      Executive Officer, Chief Financial Officer and Secretary




Date:
August 19, 2009




POWER
OF ATTORNEY




Pursuant
to the requirement of the Securities and Exchange Act of 1934, this report has
been signed below, by the following persons on behalf of the registrant and in
the capacities indicated.




Signature
            
            Title
            
            Date/s/
      Adel Karas
              Adel
      Karas
            
            President,
      Chief Executive Officer, Chief Financial Officer (Principal Financial and
      Accounting Officer) and Secretary, Director
            
            August
      19, 2009/s/
      John J. DiPietro
              John
      J. DiPietro
            
            Director
            
            August
      19, 2009/s/
      Paul Freiman
              Paul
      Freiman
            
            Director
            
            August
      19, 2009/s/
      Julius R. Krevans, M.D.
              Julius
      R. Krevans, M.D.
            
            Director
            
            August
      19, 2009







S-1