##### Table of Contents

---




SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-K/A(No.2)





(Mark One)x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2001 or ̈

TRANSITION REPORT PURSUANT TO 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


(Exact name of registrant as specified in its charter)





Delaware (State or other
jurisdiction of incorporation or organization)

06-1226727 (I.R.S. Employer
Identification Number)





1265 Harbor Bay Parkway, Alameda, California 94502


(Address of principal executive offices) (Zip Code)





(510) 749-5100


(Registrants telephone number, including area code)





Securities registered pursuant to Section 12(b) of the Act:None





Securities registered pursuant to Section 12(g) of the Act:





Common
Stock, $.001 par value


(Title of Class)





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





Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, 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.  ̈





As of March 8, 2002, 43,539,974 shares of the registrants common stock, $.001 par value, were outstanding. The aggregate market value of the common stock held by
non-affiliates of the registrant (i.e., excluding shares held by executive officers, directors, and control persons as defined in Rule 405) on that date was $8,592,802 computed at the closing price of the common stock on that date on the Over the
Counter Bulletin Board.





---



---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION


FORM 10-K/A (No.2)


INDEX





Page No.PART I.Item 1.

Business

3Item 2.

Properties

21Item 3.

Legal Proceedings

21Item 4.

Submission of Matters to a Vote of Security Holders

21PART II.Item 5.

Market for the Registrants Common Equity and Related Stockholder Matters

22Item 6.

Selected Consolidated Financial Data

28Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

29Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

56Item 8.

Financial Statements and Supplementary Data

57Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

58PART III.Item 10.

Executive Officers and Directors of the Registrant

59Item 11.

Executive Compensation

61Item 12.

Security Ownership of Certain Beneficial Owners and Management

66Item 13.

Certain Relationships and Related Transactions

67PART IV.Item 14.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

69Signatures

II-1





Except for the historical information contained in this annual
report on Form 10-K/A (No.2), the matters discussed herein contain forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, uncertain market acceptance of our proprietary method of determining the presence of HIV antibodies, our limited experience selling and marketing our HIV-1 urine-based tests, limited operating history,
and our ability to obtain additional financing, as well as the other risks and uncertainties described under Risk Factors and elsewhere in this Annual Report on Form 10-K/A (No.2). The Company assumes no obligation to update any
forward-looking statements contained herein.







---

##### Table of Contents

PART I





Item 1.    Business





The Company





Calypte Biomedical Corporation (Calypte or the Company) believes that it is a leader in the development of a
urine-based screening test for the detection of antibodies to the Human Immunodeficiency Virus, Type-1 (HIV-1), the putative cause of Acquired Immunodeficiency Syndrome (AIDS) as Calypte is the only company that has obtained
Food and Drug Administration (FDA) approval for the marketing and sale of urine-based screening tests for the detection of antibodies to the HIV-1. The Company has integrated several proprietary technologies to develop a test (the
Calypte urine-based HIV-1 screening test) which, in clinical trials, detected the presence of HIV antibodies in urine with 99.7% sensitivity in subjects previously identified as HIV-1 infected through blood-based (serum/plasma) screening
tests. In subjects at low risk for HIV, the specificity of the Calypte urine-based HIV-1 screening test used with a companion urine-based Western Blot supplemental test was 100%. Specificity and sensitivity in other populations, including those at
high risk and those with other medical conditions, has been shown to be reduced in other clinical trials when compared to testing with blood specimens. Calypte believes that its proprietary urine-based HIV-1 screening test offers significant
advantages compared with existing blood-based tests, including ease-of-use, lower costs, and significantly reduced risk of infection from collecting and handling specimens. In contrast to blood, urine collection is non-invasive and painless, and
urine is the most commonly collected body fluid. Consequently, the Company expects that most businesses and organizations that conduct HIV-1 testing will find the cost of collecting, handling, testing and disposing of urine specimens to be
significantly less than that of blood specimens. In addition, independent studies report that the likelihood of finding infectious HIV virus in urine is extremely low, greatly reducing the risk and cost of accidental exposure to health care workers,
laboratory personnel, and patients being tested.





The Company was incorporated in California in 1989 and
subsequently reincorporated in Delaware in 1996 at the time of its initial public offering. In August 1996, the Company received a product license and an establishment license from the Food & Drug Administration (FDA) to manufacture
and sell, in interstate and foreign commerce, the Companys urine-based HIV-1 screening test for use in professional laboratory settings. In May 1998, Cambridge Biotech Corporation (Cambridge Biotech), the manufacturer of the
companion urine-based HIV-1 Western Blot supplemental test, also received the product and establishment licenses from the FDA with respect to its urine-based Western Blot test. Calypte uses the Cambridge Biotech Western Blot urine-based test as a
supplemental test on samples that have been repeatedly reactive in Calyptes urine-based HIV-1 antibody screening test. As a result of the regulatory approvals, Calyptes screening test, when used with the Western Blot urine-based
supplemental test for HIV-1, became, and remains, the only complete FDA-approved urine-based HIV testing method. Alternatively, Cambridge Biotechs serum-based Western Blot HIV-1 test can also be used as a supplemental confirmatory test for
subjects whose urine samples have been reactive in Calyptes urine-based screening test. As the Companys urine-based HIV-1 screening test is marketed and used in conjunction with the Cambridge Biotech Western Blot supplemental test, and
the Western Blot test did not receive establishment licenses from the FDA until 1998, the Company did not actively begin to market and sell its urine-based HIV-1 screening test until 1999.





In December 1998, Calypte acquired from Cambridge Biotech certain assets relating to Cambridge Biotechs Western Blot product line for certain infectious diseases. The
acquisition included Cambridge Biotechs urine-based and serum-based HIV-1 Western Blot products, as well as a supplemental test for Lyme Disease and Human T-Lymphotropic Virus (HTLV). The Company has discontinued both the Lyme Disease and HTLV
tests.





In November 1999, Calypte received FDA approval of a Day Assay format for its Cambridge
Biotech HIV-1 serum Western Blot assay. The FDA approval permits use of the supplemental serum-based Western Blot test in either a Day Assay (five hour) or overnight format, and allows more rapid test results for customers and
their patients who need the results of their HIV tests as rapidly as possible.




3




---

##### Table of Contents




In 1995, the Company purchased a 49% equity interest in Pepgen Corporation
(Pepgen). Pepgen is a privately held development stage company engaged in research and development with respect to therapeutic products. In 2001, the Company divested its ownership in Pepgen.





The Company intends to develop additional or improved urine and bloodbased tests for other infectious and viral diseases. The
Company will also continue to explore the potential for an overthecounter inhome urine collection kit.





Calypte markets its urinebased HIV1 screening test and its Cambridge Biotech confirmatory tests through direct sales personnel and distributors depending upon the market segment and the location of the market. There can
be no assurance that the Companys planned products will receive or maintain FDA clearance or approval and become commercially available or that the Companys FDA-approved products will maintain FDA clearance or approval and remain
commercially available.





In order for us to successfully implement our business plan, we must overcome certain
impediments. Specifically, in April of 2002, we announced the winding down of our business operations in that we lacked sufficient capital to continue to successfully implement our business model. Subsequently, in May of 2002, we announced an
arrangement for new funding, which allowed for Calypte to resume and recommence regular business operations. Based upon our tenuous financial condition, our independent auditors have issued an opinion that raises substantial doubt about our ability
to continue our business operations as a going concern. We continue to reassess our business plan and capital requirements as a result of the wind-down and subsequent restart of our operations. We do not believe that our currently available
financing will be adequate to sustain operations at current levels through the remainder of 2002 unless new financing is arranged. Although, as of May 31, 2002 we have completed new financings against an initial $5 million new funding commitment
more fully discussed in Part II, Item 5., Subsequent Events, we do not know if we will succeed in raising enough additional funds through further offerings of debt or equity. We must achieve profitability for our business model to succeed.
Prior to accomplishing this goal, we believe that we will need to arrange additional financing of at least $5 million in the next twelve months in addition to the Cataldo Investment Group (CIG) commitment. There can be no assurance that
subsequent additional financings will be made available to the Company on a timely basis or that the additional capital that the Company requires will be available on acceptable terms, if at all. The terms of a subsequent financing may involve a
change of control and/or require stockholder approval, or require the Company to obtain waivers of certain covenants that are contained in existing agreements.





We are actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. We would consider strategic
opportunities, including investment in the Company, a merger or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurance
that such opportunity will be available to us on acceptable terms, or at all. If additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, it will place
the Company in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.





Background





HIV is the putative cause of AIDS, which is a leading cause of death for
persons ages 25 to 44 in the U.S. Those infected with HIV generally do not show symptoms of AIDS until several years after HIV infection, if at all. Because most persons infected with HIV are asymptomatic for AIDS and are unaware of their HIV
status, such persons do not avail themselves of medical treatment and may unknowingly expose others to the risk of infection. Prior exposure to HIV can be detected in laboratory tests even though the individual infected with HIV is asymptomatic.





According to the December 2001 AIDS Epidemic Update published jointly by the Joint United Nations Programme on
HIV/AIDS and the World Health Organization, at the end of 2001 an estimated 40 million people




4




---

##### Table of Contents

globally were living with HIV; over 21 million people had already died from the disease, and an estimated 5 million people were newly infected with HIV during 2001. The Update reported that about
3 million people died of AIDS during 2001. The publication also noted that about one-third of those currently living with HIV/AIDS are aged 15-24 years and that most of them do not know they carry the virus. HIV is spread by a transfer of bodily
fluids, primarily through sexual contact, blood transfusions, sharing intravenous needles, accidental needle sticks or transmission from infected mothers to newborns.





The discovery in 1984 of circulating HIV antibodies in the blood led to the development and widespread use of HIV blood screening tests. Testing by blood banks of blood
used in transfusions soon followed in an effort to maintain and protect the integrity of the blood supply. Most HIV antibody screening tests are enzyme immunoassays (EIAs). These tests operate on the principle that antibodies will react
with a known antigen. This reaction is detected by using enzymes as indicators. Outside of blood bank screening, physicians, the life insurance industry, the military, the criminal justice system, and the Immigration and Naturalization Service
generate the largest domestic demand for HIV testing.





To minimize the risk of incorrectly reporting that an
individual is infected with HIV (a false positive result), most countries require a strict testing protocol. The protocol is to first test a sample for the presence of HIV. Any sample found to be reactive in the initial screen is then retested in
duplicate. If either of the retests are reactive, the same sample is tested again using a more precise and expensive supplemental test. The presence of HIV antibodies, based on the results of the supplemental test, is considered diagnostic for HIV
infection.





The human immune system typically requires a number of weeks or months to begin producing antibodies
following exposure to HIV. There is no consensus in the scientific community as to whether antibodies can first be detected in blood, urine or oral fluid.





HIV blood testing can be expensive and poses risk of infection to health care personnel. The typical HIV screening test requires a trained health care worker or phlebotomist to draw and centrifuge a
blood sample, which is then tested for the presence of HIV antibodies. Blood is typically drawn at physician offices, clinics, hospitals or blood draw stations, where trained personnel are available, and then sent to a laboratory for HIV testing.
Blood samples and related blood-sampling equipment require careful handling if healthcare personnel are to avoid accidental exposure to blood-borne pathogens, including HIV. In addition, the use of blood-based tests has become increasingly costly
because of the costs of disposing of potentially infected specimens, syringes, needles and transfer tubes. The overall cost of blood-based testing has precluded large public health screening programs, particularly in less developed countries, many
of which have significantly higher rates of HIV infection than that of the U.S. Even in the United States, certain populations are not routinely screened due to the high cost of blood-based testing.





In December 1994, the FDA approved the first non-invasive method for HIV-1 testing, an oral fluid-based screening test and collection
device. Collection of oral fluid is technique dependent, and detailed instructions on the proper use of the oral fluid collection device need to be carefully followed. In addition, oral fluid is not commonly collected and is rarely tested for other
diagnostic purposes. In June 1996, one manufacturer received approval from the FDA for a Western Blot oral-fluid supplemental test.





HIV screening can also be performed by using a dried blood spot (DBS) specimen. DBS sampling, which was developed in the late 1980s, is a variant of blood sampling initially designed for the testing of
newborns. The DBS sampling method involves sticking a babys heel or an adults finger with a sharp lancet and collecting five or six drops of blood onto filter paper. The laboratory punches the dried blood spots out of the filter paper,
and the non-cellular components of the blood spot are eluted back in liquid form by soaking the punches in diluent. The resulting fluid is then assayed by one of several traditional serum/plasma enzyme immunoassays licensed for use with DBS.





The DBS method, which is comparable in cost to traditional serum tests, is susceptible to problems in sample
variability, the adequacy of volume for testing, pain on blood sampling and invasiveness.




5




---

##### Table of Contents




The Calypte Urine-Based HIV-1 Screening and Supplemental Tests





Calyptes proprietary urine-based HIV-1 screening test is non-invasive, easy to use, reliable and avoids many of the costs and risks
associated with blood-based testing. The Companys screening test, when used with the Western Blot supplemental test for urine provides the only complete urine-based HIV testing method. Laboratories using the Companys method can complete
the entire testing profile for HIV-1 antibody using a single urine specimen. The Company believes that the benefits of its testing method will enable it to penetrate existing markets and expand into new markets that are not served currently by the
more expensive blood and oral fluid-based HIV test systems. Key benefits of the Companys test include:





Ease of Use/Non-Invasive Collection.    Urine is the most commonly collected bodily fluid for laboratory testing as it is already being collected for testing purposes other than the detection of the HIV-1
antibody. Collection of the urine can take place any time of day, and the test does not require a 24-hour voided specimen or a midstream, clean-catch sample. Because it requires no special preservatives or containers, it is also easier to collect,
handle, and discard than blood. Furthermore, the Companys test is in standard EIA format and is designed to be used with standard laboratory equipment. Blood sampling is invasive and, for many patients, stressful and painful. The ability to
screen non-invasively for HIV in all types of patients, including injection drug users and newborns, will enhance patient comfort and may significantly increase the voluntary testing rates in patients who might otherwise decline testing. Moreover,
unlike urine collection, obtaining an oral fluid specimen is highly technique-dependent, requiring specific placement of a collection device in the mouth, rubbing the collection device along the gum line, and holding it in place for no less than two
and no more than five minutes. Unlike oral fluid, the collection of urine does not require specially trained personnel, nor is its collection restricted to patients of certain ages.





Lower Overall Cost.    The Companys urine-based screening test may lower significantly the overall cost of testing for HIV infection
because the cost of collecting, transporting, testing and disposing of urine specimens can be significantly less than that of blood specimens, and less than the cost of an oral fluid screening test. Additional cost savings may accrue as a function
of reduced needlestick incidents and their associated counseling, testing and lost productivity. With respect to oral fluid screening tests, the Company believes that each oral fluid collection device costs between $3.00 to $5.00, while a urine
collection cup costs between $0.05 and $0.50. Moreover, since urine is often already being collected for other testing purposes, the incremental cost of collecting urine samples is likely to be lower than collecting oral fluids. Nonetheless, the
total cost of deploying urine, blood or oral-based HIV screening tests or a combination thereof will vary according to the testing purpose and protocol and whether other diagnostic tests are performed simultaneously. The ancillary costs (such as
collection method, accidental exposure to HIV and sample disposal) associated with blood testing are more expensive than urine testing.





All of the Companys current products qualify for insurance reimbursement coverage. The Company sells its current urine-based products primarily to reference laboratories utilized by various life insurance companies who
in turn receive compensation from the insurance companies who order the tests. Consequently, the reimbursement payments are not made directly to Calypte. Even with reimbursement approvals, there can be no assurance that the Companys
urine-based screening and supplemental tests will gain any significant degree of market acceptance among physicians, patients, or healthcare payors. As the Company seeks to develop other products and obtain FDA approval for them in the future,
insurance reimbursements will be necessary to facilitate their market acceptance.





Safety.    Independent studies have concluded that the likelihood of finding infectious HIV virus in urine is extremely low. There have been no reported cases of transmission of HIV virus through contact
with urine of HIV-infected patients. Accordingly, the risk of HIV infection to health care and laboratory workers accidentally exposed to urine samples is negligible. Since no needles are used in the Calypte urine sampling process, the test
eliminates this route of accidental infection. In developing countries, where the supply of sterile needles and syringes cannot be guaranteed, the safety benefits of using urine sampling extend to patients as well as to health care workers.





Reliability.    The Company has performed clinical studies demonstrating the
effectiveness of using urine as a reliable and clinically valid sample for HIV testing. In Company-funded clinical trials conducted by or on




6




---

##### Table of Contents

behalf of the Company, for the HIV-1 urine EIA and the urine Western Blot supplemental test, more than 11,000 paired blood and urine specimens were tested. Two measures of the reliability of our
urine-based HIV test were employed-specificity and sensitivity. Specificity is the ability of an assay or method to identify all non-HIV infected individuals correctly. Sensitivity is the ability of the assay or method to detect truly HIV-infected
individuals. In recent studies where specificity was assessed by testing specimens from a combined subset of low risk subjects, the resulting specificity was 100% for the screening test in conjunction with the supplemental test. Specificity and
sensitivity in other populations, including those at high risk and those with other medical conditions, is reduced compared to testing with blood specimens. Sensitivity (correlation to blood tests) of the urine testing method was estimated by
testing samples from a subset of individuals known to be infected with HIV-1, including those with a clinical diagnosis of AIDS. The sensitivity in that subset was measured at 99.7%.





In spite of the benefits of the Companys urine-based screening and supplemental tests, such tests represent a new method of determining the presence of HIV
antibodies. Blood-based and oral fluid based tests, which constitute competitive products, have the advantage of already being commercially marketed and have gained acceptance from the medical community. Furthermore, both blood-based and oral fluid
based tests have been shown to be reliable media for detection of HIV. Some blood-based kits have been proven effective in testing for both HIV-1 and HIV-2 strains of HIV. The Companys urine-based screening test is currently limited to testing
for the HIV-1 strain of HIV. Although HIV-1 is the predominant strain of the virus, there are certain regions of the world, such as western Africa where the HIV-2 strain also exists. There can be no assurance that the Companys urine-based
screening test will gain any significant degree of market acceptance among physicians, patients or health care payors, or that the current HIV-1 screening limitation will not have an adverse impact on the Companys ability to market its
screening test. To date, although the Companys urine-based screening test is limited to HIV-1, it has not had a materially adverse effect on operations and revenues. However, there can be no assurances that the HIV-1 screening limitation will
not adversely effect the Company in the future if another strain of HIV that is not detectable by the Companys urine-based screening test develops or the HIV-2 strain becomes more prevalent.





Calyptes HIV-1 antibody test is a much-needed alternative for people who fail to get tested for HIV because they are afraid of
needles.    It is critical for all people at potential risk for HIV infection to learn their status because early detection and treatment have been shown to prevent debilitating opportunistic infections and to extend life.
Studies have shown that between 21% to 50% of people would prefer a urine test rather than a blood test, and up to 80% of these individuals cited fear of needles as the reason for preferring a urine test. Between 800,000 to 900,000 Americans are
living with HIV, and an estimated one in three do not know they are infected.





Test
Methodology.    The Companys urine-based screening test uses an industry-standard 96 well microtiter plate to detect antibodies to HIV-1 in urine. The HIV-1 antibodies, when present in urine, bind to Calyptes
proprietary antigen coated on prepared microtiter plates. A subsequent enzymatic reaction produces a color change revealing the presence of HIV-1 antibodies.





The screening test requires only 200 microliters of urine (approximately four drops) and can be performed using standard laboratory equipment. Samples can be shipped and stored at 15 to 30 degrees
centigrade for up to 55 days, or for up to 1 year at 2 to 8 degrees centigrade, before testing. The laboratory protocol for testing urine is nearly identical to that of blood, and therefore requires few, if any, modifications to existing laboratory
protocols.





The Cambridge Biotech HIV-1 Western Blot is an in vitro qualitative assay for the detection and
identification of antibodies to HIV-1. This more specific assay is used as a supplemental test with specimens (serum, plasma or urine) that tested repeatedly reactive using an EIA screening procedure.





The Cambridge Biotech HIV-1 Western Blot is manufactured from HIV-1 propagated in an H9/HTLV-IIIB T-Lymphocyte cell line. The virus is
inactivated and specific HIV-1 proteins are bound to a nitrocellulose strip. Each strip contains all of the proteins and glycoproteins of HIV arranged in bands across the strip in order of molecular weight. If HIV-1 antibodies are present in the
specimen, they will bind to the viral antigens present on




7




---

##### Table of Contents

the nitrocellulose strip. The position of bands on the nitrocellulose strips allows this antibody reactivity to be associated with specific viral antigens.





The Companys Cambridge Biotech urine-based supplemental test uses the same commercially available Western Blot kit components as
provided for the blood based Cambridge Biotech supplemental test. The test procedure is virtually identical as well, except that the urine-based supplemental test requires 1.0 milliliter of urine added directly to the standard kit diluent and the
urine-based test requires additional times of incubation for the two detection steps. The same laboratory equipment is used for both the blood and urine supplemental tests.





Additionally, the Cambridge Biotech urine-based Western Blot kit is differentiated for urine-based testing by virtue of the urine Western Blot controls included with the
Western Blot blood kit and a different blot interpretation criterion. For urine, blots showing the presence of a single band, gp160, equal to or greater intensity than the low positive urine Western Blot control are interpreted as a positive HIV-1
result. Urine blots have a lower indeterminate rate than blood, allowing more definitive negative or positive results.





In December 1998, Calypte acquired from Cambridge Biotech certain assets relating to the Western Blot product line for HIV-1 and certain other infectious diseases. The acquisition included Cambridge Biotechs urine-based and
serum-based HIV-1 Western Blot products, as well as a supplemental test for Lyme Disease and Human T-Lymphotropic Virus (HTLV). Since the acquisition, the Company has made significant investments in the Rockville facility to enhance manufacturing
capability and establish quality system compliance as a core competency. It has also discontinued production of the tests for Lyme Disease and HTLV.





The Cambridge Biotech Serum-Based HIV-1 Supplemental Test





As the first of the four
supplemental blot tests for blood HIV-1 antibodies to be FDA-licensed, the serum-based Cambridge Biotech HIV-1 Western Blot kit has been in commercial distribution for more than 9 years. Since the FDAs November 1999 approval of a Day
Assay format, the supplemental test is available in both five-hour and an overnight format. Calypte sells The Cambridge Biotech serum-based Western Blot test for HIV-1 as a supplemental test to HIV-1 screening tests produced by other
manufacturers.





The only known production methods for serum based supplemental testing is inherently inefficient
and has in the part resulted in up to 60% of the product in a given batch that can not be sold. The cost to the Company of the low yields in the production process is not material. Due to the inefficient methods, of production, in addition to the
Company, there is only one other known FDA-approved manufacturer of serum based supplemental testing.





The Sentinel Testing Service





In May 2000, the Company launched its participation in a new national urine-based testing service for HIV-1
antibody, chlamydia, and gonorrhea. The service, called Sentinel  (Sentinel), was
initially a collaboration between the Company, Wampole Laboratories, a division of Carter-Wallace, Inc. and Clinical Reference Laboratory. In August 2001, modifications were made to the service to strengthen the product offering. Sentinel is now a
collaboration between the Company and Center for Disease Detection, a reference laboratory licensed for diagnostic testing throughout the United States. The service offers a painless, non- invasive, urine-based sampling method designed to identify
HIV-1 antibody, and chlamydia and gonorrhea sexually transmitted diseases (STDs). The Sentinel service provides a four-day response and for the testing of all three STDs on urine, Sentinel is priced below the Medicaid reimbursement level
in most states. The service is targeted primarily to community-based and AIDS service organizations. The Company manufactures the HIV-1 antibody tests used in the Sentinel service. Sentinel screening sales were not significant in either 2001 or 2000
as a result of:





| |  |  | The release of Sentinel not occurring until June 2000.
| | - |  | ------------------------------------------------------




| |  |  | The market for the Sentinel product being extremely fragmented as the product is directed toward small local laboratories.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



8




---

##### Table of Contents




| |  |  | The Company encountering significant start-up costs in launching the Sentinel product.
| | - |  | --------------------------------------------------------------------------------------




| |  |  | The Company lacking the required resources to market the product based upon the fragmented marketplace.
| | - |  | -------------------------------------------------------------------------------------------------------




The Company entered into a joint venture with Wampole Laboratories, a division of Carter-Wallace, to utilize their resources in an effort
to obtain market share given the Companys lack of resources which were required to launch Sentinel. The venture with Wampole Laboratories was not successful and was terminated during 2001. Although the Company continues to focus on expanding
the U.S. diagnostic and Sentinel business during 2002, sales have remained immaterial.





HIV Viral Lysate Stock





HIV viral lysate is a component that Calypte uses in the manufacture of its Cambridge Biotech Western Blot supplemental test
products. Although Calypte does not actively market HIV viral lysate as a distinct product line, it does make sporadic sales of its HIV viral lysate stock from time to time. During 2001, viral lysate sales accounted for approximately 20% of
Calyptes revenues. The largest customer for viral lysate in 2001 and Calyptes second largest single customer was the Murex Division of Abbott Laboratories Inc. We believe that the large percentage of revenue attributed to the sale of our
HIV viral lysate in 2001 may have resulted from Murexs decision to stockpile larger than normal quantities of viral lysate in light our tenuous financial condition in an effort to avoid a potential interruption of supply. Subsequent to the
restart of our operations in May 2002, we have not sold any viral lysate. We expect HIV viral lysate sales to remain low for the balance of 2002. We are seeking new customers for this product but have no expectation of near-term demand for this
product from Murex or others. However, as we view our HIV viral lysate as a component material, its sale is not considered to be a major component of our anticipated future revenue but rather a supplemental revenue source.





Products Under Development





The Companys research and development efforts are directed toward process improvements and the development of select high-priority new diagnostic products. Priority is determined on the basis of feasibility, probable cost to
develop, regulatory complexity, market size and competition.





Rapid Test.    The
Company has investigated the feasibility of a rapid test in response to the reports by the Center for Disease Control and Prevention (CDC) on the value of immediate HIV antibody test results and development is in an early stage. The high number of
individuals who do not return for test results and counseling constitutes a threat to the public health. In addition, in emergency rooms, delivery rooms and other settings, there is an urgent need to know the HIV status of the patient. Since
azidothymidine (AZT) treatment of pregnant mothers, even at delivery and for the newborn, has been shown to result in a substantial decrease in HIV transmission, there appears to be a new market for the reliable rapid test format. At
this time, the Company believes it would be premature to issue predictions as to the products reliability and cost or the likelihood of success and timing of product development.





Other Diagnostics.    The Company intends to develop additional or improved urine tests for other infectious and viral diseases. The Company is
focusing development on products which are complementary to its existing product line and market opportunities. These may include development of urine-based tests for assessment of liver and cardiac risk for use in the insurance underwriting
industry and tests for additional sexually transmitted diseases.





OTC.    The Company
will continue to explore the potential for an over-the-counter in-home urine collection kit for use in HIV diagnosis. However, due to regulatory approval uncertainties and cost concerns, this is not a near-term priority development for the Company.





Research and Development Spending.    The Company continues to invest the funds in
research and development that it believes are necessary and appropriate to ensure that its HIV-1 urine-based screening test




9




---

##### Table of Contents

meets customer requirements and to explore the potential for other new urine-based diagnostic products. The Company spent $1.5 million, $2.3 million and $4.1 million on product research and
development in 2001, 2000 and 1999, respectively. Future spending will be devoted to product and process improvements for its existing products, as well as to new product development. Spending for 2002 is expected to approximate that of 2001, but is
substantially dependent on the success of the Companys financing activities during the year.





Sales, Marketing and Distribution





The Companys marketing strategy is to use distributors and focused direct selling to penetrate certain
targeted domestic markets. The Company maintains a small direct sales force to sell the Companys HIV-1 screening test and potential future products to community-based organizations, public health laboratories, reference laboratories and the
life insurance market. International and other U.S. markets have been addressed utilizing diagnostic product distributors. In late summer of 1998, the Company began selling its urine-based HIV-1 screening test with the Western Blot supplemental test
in the U.S. To date, the Company has received approval for the sale of its product outside of the U.S. in Indonesia, the Republic of South Africa, the Peoples Republic of China, and Malaysia. Several international approvals are pending, and
the Company is working collaboratively with its distributors to obtain regulatory approval to market and promote the products in their local markets.





The Company anticipates that a portion of its revenues for the next several years will be derived from international distributor sales. International sales and operations involve a number of inherent
risks and may be limited or disrupted by the imposition of government controls, export license requirements, political instability, trade restrictions, changes in tariffs, difficulties in managing international operations and fluctuations in foreign
currency exchange rates. Distributors of medical products in developing countries where the need for cost-effective HIV diagnostic tests may be the most acute often find it difficult to establish and maintain the necessary transportation, storage,
and credit facilities. Certain of the Companys distributors have limited international marketing experience, and there can be no assurance that the Companys distributors will be able to successfully market the Companys products in
any international market.




10




---

##### Table of Contents




The following table summarizes the markets and geographic regions covered by the
Company and its distributors for its HIV-1 tests. It includes distribution arrangements that were in effect during 2001 and/or will be come effective in the first half of 2002. Material terms of the respective distribution arrangements are described
in more detail below.





Company

Effective Date of Arrangement

Term of Arrangement

Geographic Region

Markets/Products

Type of Arrangement (2)Calypte





United States

Community-based organizations, Public Health and Reference Laboratories, Life Insurance testingCalypte





Canada

Serum Western Blot  all markets; EIA and urine Western Blot  Life Insurance testingbioMerieux

(1)

Month-to-month

Worldwide

Serum Western Blot products

Non-exclusiveOtsukaPharmaceutical

12/98

Evergreen

Japan

Urine only

ExclusiveTeva Medical Ltd.

12/94

Evergreen

Israel

Urine only

ExclusivePacific Business Development, Inc.

7/99

3 years, with 2 year renewal option

South Korea

All

Exclusive - urine Non-exclusive -serumUni-Health Services Sdn. Bhd.

10/99

1 year following registration, with renewal option

Malaysia

All

ExclusiveBioBras S. A.

5/00

3 years; 2 year renewal option

Brazil

All

Exclusive - urine Non-exclusive -serumBeijing Hua Ai Science and Technology Development Co., Ltd.

5/00

30 months following registration; 3 year renewal option

Peoples Republic of China

Urine EIA only

ExclusiveMedicure, Inc.

3/01

3 years with 2 year renewal option

Philippines

All

Exclusive - urine Non-exclusive - serumPCN Healthcare

6/01

3 years with 2 year renewal option

Thailand

All

Exclusive - urine Non-exclusive - serumCentrum Promontora Internacional

2/02

3 years with 2 year renewal option

Mexico

All

Exclusive - urineNon-exclusive - serumREM Industria E. Comerica LTDA

12/01

3 years with 2 year renewal option

Brazil

Serum only

Non-Exclusive




11




---

##### Table of Contents

---

|(1) |  | Previous arrangement with Organon-Teknika was assumed by bioMerieux upon their acquisition of Organon-Teknika in 2000. bioMerieux did not resume their
relationship with Calypte subsequent to the restart of operations in May 2002 and was replaced by Adaltis, Inc. in June 2002
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | All serum products are sold on a non-exclusive basis. Urine EIA (screening) and supplemental tests are distributed on the basis of country or territory
exclusivity.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




In 2001, the Companys revenue from product sales totaled $6.8 million.
Approximately 95% of Calyptes 2001 product sales revenues arose from sales to customers in the United States. The Company had a $68,000 backlog of unfilled orders at December 31, 2001.





The Company is currently negotiating with other potential distributors of its HIV product line in various countries, including Taiwan, India, and Russia and is
investigating possibilities for expanding its distribution in China.





Manufacturing





The manufacture of the Companys urine-based HIV test involves antigen production, plate processing and preparation of certain washes
and other reagents. All processes are carried out under FDA Good Manufacturing Practices (GMP) regulations. Antigen production involves cell culture, antigen expression and purification. Following purification, the antigen is tested
extensively and optimized for plate coating. The coating of standard 96 well microtiter plates with antigen is completed using industry standard plate coating equipment. Following binding of the antigen to the plates, the plates are blocked and
stabilized to prevent nonspecific binding of the antigen. The plates are then dried and packaged in foil pouches. The washes and reagents are produced using standard solution preparation techniques.





In January 2001, Calyptes Alameda, California manufacturing facility was granted pre-market approval (PMA) by the U.S.
Food and Drug Administration (FDA) following a zero-observation pre-approval inspection. The capacity of the Alameda facility is approximately 20 million tests per year and is expected to significantly increase the Companys production and
distribution capabilities. The Company closed its original Berkeley site in February 2001. The Companys other manufacturing site, located in Rockville, Maryland, remains in operation.





In December 1998, the Company acquired certain assets of Cambridge Biotech Corporation, including the manufacturing facilities for its HIV-1 product line in Rockville,
Maryland. The Rockville facility also has an approved Biologics License (BL) from the FDA for the urine and blood-based Western Blots.





Between April 3 and April 11, 2001, the FDA conducted an inspection of the Rockville facility that resulted in a few minor observations requiring corrective actions or response from the Company. The
Company responded in writing to the FDA on April 23, 2001 addressing these observations.





Although the FDA
indicates it is currently satisfied with the Companys responses, if the FDA subsequently determines that it is not satisfied with the Companys responses and corrective actions regarding these matters at its Rockville facility, or if the
FDA observes new conditions requiring corrective actions which remain unresolved following inspections at either the Alameda or Rockville facilities, the FDA could take regulatory actions against the Company, including license suspension,
revocation, and/or denial, seizure of products and/or injunction, and/or civil penalties or criminal sanctions. Any such FDA action would likely have a material adverse effect upon the Companys ability to conduct operations.





Calypte purchases raw materials and uses components in the manufacture of its products that it obtains from various suppliers.
The Company uses some single-source components, and any delay or interruption in supply of these components could significantly impair the Companys ability to manufacture products in sufficient




12




---

##### Table of Contents

quantities to meet established and increasing commercial demand because establishment of additional or replacement suppliers for single-source components cannot be accomplished quickly.





Calypte also has limited experience in the commercial-scale manufacture of its products. The Company currently
manufactures its products for sale, for submission to FDA for ongoing compliance, for clinical trials, and for building its inventory. Calypte may encounter difficulties in scaling-up production of its products, including problems involving
production yields, quality control and assurance, raw material supply and shortages of qualified personnel. Due to Calyptes limited manufacturing experience, its estimates with regard to these and other operational requirements may be
incomplete or inaccurate and unanticipated events and circumstances are likely to occur. Difficulties encountered by the Company in manufacturing scale-up to meet demand could have a material adverse effect on its business, financial condition and
results of operations.





Due to the nature of its manufacturing processes, the Company is 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. There can be no assurance that the Company will not
be required to incur significant costs to comply with land use and environmental regulations as manufacturing is scaled-up to commercial levels, nor that the operations, business or financial condition of the Company will not be materially and
adversely affected by current or future environmental laws, rules, regulations and policies. There can be no assurance that the Company will be able to obtain and maintain all required permits in connection with the operation of its manufacturing
facilities. As the Company manufactures its products on a larger commercial scale, it is a significant user and disposer of water. The disposal of water used in the Companys manufacturing processes must comply with applicable federal, state
and local environmental protection laws, and compliance with these laws may be costly and difficult.





The
manufacturing facility in Maryland is a specialized facility incorporating Biosafety Level 3 controls for the manipulation of potentially infectious biological agents (HIV viruses) as well as the use of hazardous chemical materials. As such, this
facility and the products manufactured there are subject to rigorous Federal, State and local regulatory controls including registration, licensing and specific material use permits. Should it become necessary to move the Maryland operations to a
different location in the future, significant costs, time and resources would likely be required to validate such a transfer and obtain the required regulatory clearances.





Technology





The Companys HIV-1 urine-based test is
based on the discovery by scientists at the New York University Medical Center in 1988 that antibodies to HIV-1 could be found in urine. Prior to this discovery, it was commonly held that antibodies to systemic infections could not pass through the
kidneys, and thus, could not be found in the urine of infected individuals. The researchers showed that antibodies to HIV-1 envelope antigens were present in all urine samples from HIV-1 seropositive subjects. Building on this discovery, the Company
developed an HIV-1 urine enzyme immunoassay (EIA) to detect antibodies to HIV-1 in urine. There are two proprietary features of the Companys HIV-1 urine-based EIA that result in a format sensitive enough to detect the low levels of
HIV antibodies in urine: the antigen target and the sample buffer in the assay.





Recognizing the prominence of
envelope antibodies in urine, the antigen target in the assay is a full length, recombinant glycosylated HIV-1 envelope protein, rgp160. Although this antigen is a recombinant glycoprotein, it is identical to the viral envelope protein gp160 in
amino acid sequence and in the presence of carbohydrate at glycosylation sites. This kind of antigen target can efficiently capture the full range of HIV-1 envelope specific antibodies produced in the human polyclonal response to the virus. The
microwell assay format permits the high availability of epitopes of the recombinant envelope glycoprotein for antibody binding. This availability of epitopes results in the sensitivity verified in clinical trials.





The Company has non-exclusive rights to the proprietary process used to express the recombinant HIV-1 envelope glycoprotein from Texas
A&M University. This proprietary process for manufacture of rgp160 begins




13




---

##### Table of Contents

with the baculovirus expression vector system established in an insect cell culture. The consistent and high levels of rgp160 expression in baculovirus infected insect cell culture is a critical
step in the overall manufacturing of rgp160. The Company improved and upgraded the Repligen Corporation (Repligen) process with a proprietary process which uses a system in which the HIV-1 envelope protein is produced in the insect cell
membrane rather than typical tissue culture systems where the protein is secreted into insect cell culture media. Rgp160 is an insoluble protein and requires detergent based extraction and purification procedures which are proprietary. The Company
developed and has obtained a U.S. patent claiming a sample buffer formulation, which is used in the HIV-1 urine test. This sample buffer acts as a diluent for urine in the assay procedure and significantly increases test specificity by reducing
non-specific binding of immunoglobulins (non-specific antibodies) and other substances in urine that would decrease specificity and sensitivity of HIV-1 antibody binding. Sample buffer is manufactured in the Companys Alameda, California
facility.





The Companys products incorporate established immunoassay technology based on antibody-antigen
reactions. Antibodies are immune system proteins produced as a result of an organisms immune response to substances (antigens) foreign to the body and specifically bind to antigens and signal the immune system to assist in eliminating them.
Immunoassays are used for diagnostic applications where the presence or absence of a specific analyte is being evaluated and allow the detection of some analytes at levels as low as one part per billion. Antigens include viruses, bacteria,
parasites, chemical toxins and other foreign substances and hormones.





The HIV-1 urine assay format includes a
standard 96 well microtiter plate which is compatible with standard laboratory instrumentation. The microwell plates are coated with proprietary recombinant HIV-1 envelope protein antigen. Patient urine and the unique specimen diluent are introduced
to the microwell simultaneously. If HIV-1 antibodies are present, they bind to the antigen coated well and remain during the subsequent wash steps. An enzyme labeled conjugate is added to the well. This conjugate binds specifically to human antibody
which remains from the previous step. Following another wash, substrate reagent is added and color development occurs due to the presence of the enzyme conjugate in the well. This color is measured spectrophotometrically on a standard laboratory
microwell plate reader. The presence of HIV antibody in the specimen is indicated by the development of color in the microwell, and the intensity of the color is proportional to the amount of antibody.





The Companys HIV-1 urine-based supplemental test uses the Cambridge Biotech HIV-1 Western Blot kit with a procedure developed by
Calypte for testing urine specimens. The Cambridge Biotech HIV-1 Western Blot kit is based on the combination of electrophoretic separation of complex mixtures of proteins with the highly sensitive immunoblotting technique. This method has been
highly useful in characterizing the antigenic profile of HIV-1 and describing the immune response to HIV-1 in the serum/plasma of exposed or infected persons.





There are now two products available for the supplemental Cambridge Biotech HIV-1 Western Blot kit. One is used for testing blood and the other for testing urine specimens. The manufacture of these
kits involves the production of an inactivated, partially purified HIV-1 lysate from HIV-1 propagated in an H9/HTLV-III b T-lymphcyte cell line. HIV-1 proteins are separated by molecular size using gel electrophoresis of the lysate in the presence of detergent (sodium dodecylsulfate). The separated HIV-1 proteins are electrotransferred from
gel to a nitrocellulose membrane that is washed, blocked to minimize non-specific immunoglobulin binding and packaged. These kits provide controls and components which enable the detection and visualization of HIV-1 antibodies present in the
specimen incubated with individual nitrocellulose membrane strips. Bands corresponding to specific location of HIV-1 proteins are used to interpret a positive, negative or indeterminate result.





Patents, Proprietary Rights and Licenses





The
Company believes that its future success will depend in large part on its ability to protect its patents and proprietary rights. Accordingly, the Companys ability to compete effectively will depend in part on its ability to develop and
maintain proprietary aspects of its technology. The Company has two U.S. patents, one pending U.S.




14




---

##### Table of Contents

patent application, six foreign patents, and eight pending foreign patent applications. In addition, the Company currently has the right to utilize certain patents and proprietary rights under
licensing agreements with New York University (NYU), Cambridge Biotech Corporation, Repligen, and Texas A&M University System. These license arrangements secure intellectual property rights for the manufacture and sale of the
Companys products.





The Company has licensed from NYU, on an exclusive basis, a U.S. patent for the
detection of antibodies to HIV in urine. The rights under the license extend until the expiration of the U.S. patent in 2009. The Company has the right to make, use, sell and sublicense products utilizing the technology described in the patent and
is obligated to make certain fixed and royalty payments based on sales of its EIA screening test products utilizing the licensed technology, with a minimum annual royalty to NYU to maintain exclusivity of the license. Should the Company fail to meet
the minimum annual royalty threshold based on its covered sales, it will be required to compensate NYU for any shortfalls up to the amount of the minimum royalty to maintain exclusivity under the agreement. The Company had failed to pay the minimum
royalties attributable to fiscal years 2000 and 2001, however NYU has accepted 750,000 shares of restricted common stock with registration rights in consideration for those past due amounts to maintain the exclusivity portion of the agreement
through 2002. The Company has agreed to use its best efforts to effectuate a registration statement for the underlying shares, however the agreement with NYU does not provide for a specific penalty in the event the Company fails to file and/or
maintain an effective registration statement within a reasonable period of time. In connection with the NYU license, the Company also funded research at NYU through 1999. The Company has exclusive worldwide license to NYU inventions that arise from
the research funded by the Company.





The Company has sublicensed from Cambridge Biotech Corporation proprietary
technology related to the HIV envelope glycoprotein. The sublicense grants to the Company a non-exclusive worldwide sublicense to make, have made, use and sell products that relate to the licensed technology. The Company is required to pay Cambridge
Biotech Corporation royalties on products incorporating the licensed technology. The license extends until the expiration of the licensed patents in 2005, although the Company can terminate the agreement at any time upon 30 days written
notice.





The Company has been granted other less significant licenses, including a non-exclusive license from
Texas A&M University to make, have made, use and sell products based on its proprietary recombinant expression systems. The Company is required to pay a fixed minimum and royalty payments to Texas A&M University on net sales varying with the
content of Texas A&M technology in the Companys EIA screening test product. To date, the Company has made all required annual minimum payments required under the terms of this agreement.





The Company licensed from Repligen HIV-1 gp160 recombinant virus seed stock. The Company has been granted (i) an exclusive license to
make, have made, use and sell products incorporating this material for diagnostic purposes, and (ii) non-exclusive license to make, have made, use and sell the gp160 seed stock for research purposes. For seven years beginning on the date the Company
first realizes net sales from products incorporating gp160, the Company must pay to Repligen certain royalties on net sales derived from such products and certain royalties on net sublicensing revenue derived from sales of products incorporating
gp160.





In conjunction with Calyptes acquisition of certain assets of Cambridge Biotech related to Cambridge
Biotechs Western Blot supplemental tests for HIV-1, Calypte assumed certain patent and proprietary rights material to the manufacture and sale of the serum-based Western Blot test under a licensing agreement with the National Institutes of
Health (NIH).





In the event that the Company does not develop alternate sources of revenues, its
obligation to make minimum royalty payments under licenses requiring such payments could have a material adverse impact on the Companys results of operations. Failure to make required minimum royalty payments might also result in the loss by
the Company of exclusivity under, or termination of, such certain licenses. In February 2002, the Company reached agreements with NYU with respect to past due royalty payments whereby NYU agreed to accept 750,000 shares of the Companys
restricted common stock with registration rights in satisfaction of the




15




---

##### Table of Contents

Companys minimum royalty payments (required to maintain exclusivity) for both 2000 and 2001 and any shortfall between the percentage royalty rate on EIA sales and the annual minimum royalty
payment for 2002. The agreement does not provide for the issuance of any additional shares to NYU in the event of any future shortfalls. The Company has also reached agreements with bioMerieux and NIH regarding past due payments under their
respective license agreements. To date, the Company has made two of the three agreed-upon payments to NIH to satisfy all past due payments under that license agreement. The final payment of the remaining one-third of the agreed liability is due on
December 31, 2002. The Company and bioMerieux have reached agreement regarding the amount of past due royalties attributable to 1998 through the first quarter of 2002 under that license agreement, and during the second and third quarters of 2002,
the Company has made payments in satisfaction of the entire liability.





The HIV testing industry has been
characterized by extensive litigation regarding patents and other intellectual property rights. Litigation or interference proceedings could result in significant diversion of efforts by the Companys management and technical personnel. There
are a number of filed and issued patents involved with the detection of HIV antibodies. One such patent is currently owned by Chiron Corporation. While the Company, based on the opinion of its patent counsel, believes that its urine-based HIV-1
screening test does not infringe the Chiron patent, there can be no assurances that Chiron will not assert such claims against the Company. In addition, Calypte has received correspondence from NIH alleging that the Companys urine-based test
products are also subject to the patent under which the Company licenses its serum-based Western Blot supplemental test and requesting the payment of additional license fees on both past and future product shipments. Calypte has informed NIH that it
does not agree with NIHs analysis of the patent in question and the parties are continuing discussion. Patent litigation can be costly and protracted. The expense of litigating a claim against the Company for patent infringement could have a
material adverse effect on the Companys business, financial condition and results of operations. In the event that the Company was found to be infringing a validly issued patent, and the Company could not obtain a license to such patent on
reasonable terms, the Company could be forced to pay damages, obtain a license to such patent at a significantly higher rate or, possibly, remove its urine-based HIV-1 screening test from the market. Such an event would have a material adverse
effect on the Companys business, financial condition and results of operations.





In addition, there can be
no assurance that competitors, many of which have substantial resources and have made substantial investments in competing technologies, do not have, or will not seek to apply for and obtain, patents that will prevent, limit or interfere with the
Companys ability to make, use or sell its products either in the U.S. or in international markets. There can be no assurance that the Company will not be required to obtain additional cross licenses in the future or that the Company will not
in the future become subject to patent infringement claims and litigation or interference proceedings declared by the U.S. Patent and Trademark Office (USPTO) to determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal and administrative proceedings are both costly and time consuming. Litigation may be necessary to enforce patents issued to or licensed by the Company, to protect trade
secrets or know-how owned by the Company or to determine the enforceability, scope and validity of the proprietary rights of others.





Although patent and intellectual property disputes in the medical diagnostic area have often been settled through licensing or similar arrangements, costs associated with such arrangements may be substantial and could
include ongoing royalties. Furthermore, there can be no assurance that necessary licenses would be available to the Company on satisfactory terms if at all. Adverse determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent the Company from manufacturing and selling its products, which would have a material adverse effect on the Companys business, financial condition and results of operations. There can be no assurance that the
Company will be able to maintain exclusivity under or maintain its current license agreements. Termination of any of these licenses could have a material adverse effect on the Companys business, financial condition and results of operations.





The Company relies on trade secrets and proprietary know-how, which it seeks to protect, in part, through
appropriate confidentiality and proprietary information agreements. These agreements generally provide that all




16




---

##### Table of Contents

confidential information developed or made known to the individual by the Company during the course of the individuals relationship with the Company is to be kept confidential and not
disclosed to third parties, except in specific circumstances. The agreements generally provide that all inventions conceived by the individual in the course of rendering services to the Company shall be the exclusive property of the Company.
However, certain of the Companys agreements with consultants, who typically are employed on a full-time basis by academic institutions or hospitals, do not contain assignment of invention provisions. There can be no assurance that proprietary
information or confidentiality agreements with employees, consultants and others will not be breached, that the Company would have adequate remedies for any breach, or that the Companys trade secrets will not otherwise become known to or
independently developed by competitors.





Government Regulation





Overview





The Companys products are subject to
extensive regulation by the FDA and, to varying degrees, by state and foreign regulatory agencies. The Companys products are regulated by the FDA under the Federal Food, Drug, and Cosmetic Act (the Act), as amended by the Medical
Device Amendments of 1976, the Safe Medical Devices Act of 1990, and the FDA Modernization Act of 1997 among other laws. Under the Act, the FDA regulates the preclinical and clinical testing, manufacturing, labeling, distribution, sale and promotion
of medical devices in the U.S. The FDA prohibits a device, whether or not cleared under a 510(k) premarket notification, or approved under a pre-market approval (PMA) or a biologics license application, from being marketed for unapproved
uses. If the FDA believes that a company is not in compliance with the regulations, it can institute proceedings to detain or seize a product, issue a recall, prohibit marketing and sales of the companys products and assess civil and criminal
penalties against the company, its officers or its employees. Furthermore, the Company plans to sell products in certain foreign countries which impose local regulatory requirements. The preparation of required applications and subsequent FDA and
foreign regulatory approval process is expensive, lengthy and uncertain. Failure to comply with FDA and foreign regulatory requirements could result in civil monetary penalties or criminal sanctions, restrictions on or injunctions against marketing
of the Companys products. Additional enforcement actions may potentially include seizure or recall of the Companys products, and other regulatory action. There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances in a timely manner or at all, and delays in receipt of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, or failure to comply with existing or future
regulatory requirements would have a material adverse effect on the Companys business, financial condition and results of operations.





HIV-1 Screening and Supplemental Tests





The Companys HIV-1 screening and supplemental
tests are regulated by the FDA Center for Biologics Evaluation and Research. When the screening test was submitted to the FDA in September 1992, the FDA required a product license application (PLA) and an establishment licensing
application (ELA) for the Companys Berkeley, California manufacturing facility. In August 1996, the Company received a product license and an establishment license from the FDA to manufacture and sell, in interstate and foreign
commerce, the Companys urine-based HIV-1 screening test for use in laboratory settings.





In December 1998,
Calypte acquired the assets relating to the Western Blot product line of Cambridge Biotech Corporation for HIV-1. Both the urine and serum-based HIV-1 Western Blot products have received a product license and an establishment license from the FDA.
In March 1999, the licenses were transferred from Cambridge Biotech Corporation to Calypte and replaced with a Biologics License (BL). In January 2001, the HIV-1 screening test was transferred from the biologics license to an approved
PMA application concurrent with the approval of the Companys Alameda, California manufacturing facility. In June 2001, the urine HIV supplemental Western Blot product, manufactured in the Companys Rockville Maryland facility, was
transferred from the biologics license to an approved PMA application.







17




---

##### Table of Contents

Clinical Laboratory





The Company has not established a clinical reference laboratory and its customers depend upon the services and facilities of independent clinical reference laboratories to process the Companys tests.





Manufacturing Facilities





The FDA requires the Companys products to be manufactured in compliance with Good Manufacturing Practices (GMP) regulations. In addition, the Company is subject to certain additional manufacturing
regulations imposed by the State of California for the Alameda facility and the State of Maryland for the Rockville facility where the blots are manufactured. These regulations require that the Company manufacture its products and maintain related
documentation for testing and control activities. The Companys facilities and manufacturing processes have been periodically inspected by the FDA and other agencies and remain subject to audit from time to time. The Company believes that it is
in substantial compliance with all applicable federal and state regulations. Nevertheless, there can be no assurance that Calyptes manufacturing facilities will satisfy FDA, GMP or California and Maryland manufacturing requirements.
Enforcement of the GMP regulations has increased significantly in the last several years, and the FDA has publicly stated that compliance will be more strictly enforced. In the event that the FDA determines the Company to be out of compliance with
its regulations and to the extent that the Company is unable to convince the FDA of the adequacy of its compliance, the FDA has the power to assert penalties, including injunctions or temporary suspension of shipment until compliance is achieved. In
addition, the FDA will not approve a biologics license or PMA if the facility is found in noncompliance with GMPs. Such penalties could have a material adverse effect on the Companys business, financial condition and results of operations.





Also, the manufacturing facility in Maryland is a specialized facility incorporating Biosafety Level 3 controls
for the manipulation of potentially infectious biological agents (HIV viruses) as well as the use of hazardous chemical materials. As such, this facility and the products manufactured there are subject to rigorous federal, state and local regulatory
controls including registration, licensing and specific material use permits. Should it become necessary to move the Maryland operations to a different location in the future, significant costs, time and resources would likely be required to
validate such a transfer and obtain the required regulatory clearances.





In addition, the manufacture, sale or use
of the Companys products are subject to regulation by other federal entities, such as the Occupational Safety and Health Agency, the Environmental Protection Agency, and by various state agencies, including the California Environmental
Protection Agency. Federal and state regulations regarding the manufacture, sale or use of the Companys products are subject to future change, and these changes could have a material adverse effect on the Companys business, financial
condition and results of operations.





Product Liability and Recall Risk; Limited Insurance
Coverage.    The manufacture and sale of medical diagnostic products subjects Calypte 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 $10,000,000 claims made policy of product liability insurance against which no claims have been
made. 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.





International





The Companys Alameda, California manufacturing site was awarded ISO 9001/EN 46001/ ISO 13485 certification on March 14, 2001.
Distribution of the Companys products outside the United States is subject to regulatory requirements that vary from country to country. In a number of foreign countries, FDA approval is required prior to approval in that country. The export
by the Company of certain of its products that have not yet




18




---

##### Table of Contents

been approved for domestic commercial distribution may be subject to FDA export restrictions. Approval and registration processes are underway in several countries including Brazil, South Korea,
Hungary, Philippines, and Mexico. To date, in countries operating their own agencies for the evaluation and registration of HIV testing kits, the Company has received approval in Malaysia and The Peoples Republic of China. Additionally, the
HIV screening test has been authorized for importation into The Republic of South Africa. Failure to obtain additional regulatory approvals or failure to comply with regulatory requirements would have a material adverse effect on the Companys
business, financial condition and results of operations.





Competition





Competition in the in vitro diagnostic market is intense and expected to increase. Within the United States, the Company will face competition from a number of
well-established manufacturers of blood-based HIV tests, plus at least one system for the detection of HIV antibodies using oral fluid samples. In addition, the Company may face intense competition from competitors with significantly greater
financial, marketing and distribution resources than the Company.





The suppliers of blood-based HIV tests in the
United States include Abbott Laboratories (Abbott), Biomerieux, Ortho Clinical Diagnostics (Ortho), a division of Johnson & Johnson, and Bio-Rad Laboratories (Bio-Rad). All of these companies have many years
of HIV market experience, and they typically offer a number of different testing products. Abbott, Bio-Rad and Ortho currently sell FDA-licensed blood-based HIV-1/HIV-2 combination tests on the market in the United States, and other companies may be
developing HIV-1/HIV-2 products. Calyptes current urine-based screening test does not include testing for HIV-2 and the Company does not currently plan to add HIV-2 screening capability to this test. The Company is exploring the introduction
of a urine-based test that includes HIV-2 as part of its rapid test development, as discussed earlier in Products Under Development. In addition nucleic acid amplification testing (NAT), has received approval for screening
plasma donations. There is no consensus at this time on the use of serological testing in the NAT algorithm.





The
Company believes that HIV screening tests designed to use oral fluid may offer significant competition to the Companys urine-based HIV-1 screening test. The OraSure  collection device manufactured by OraSure, Inc., used in conjunction with an HIV-1 EIA manufactured by Biomerieux
received FDA approval for marketing in the United States in December 1994. In June 1996, Epitope, Inc., the predecessor to OraSure, Inc., received approval from the FDA for a Western Blot oral-fluid confirmatory test.





In addition, market dynamics are expected to change with the approval and full-scale launch of Rapid HIV tests. The Centers for Disease
Control and the World Health Organization are strong proponents of the benefits of rapid testing in the fight against the spread of HIV and AIDS. While not expected to eliminate the need for current HIV screening tests, it is anticipated that rapid
tests will ultimately control a significant share of the worldwide testing market





The Company is not aware of any
competitors which have submitted urine-based HIV screening tests to the FDA, but there can be no assurance that such tests will not be submitted in the future for approval by the FDA. The Company is aware of only one other manufacturer, Murex
Corporation (Murex), now owned by Abbott Laboratories which has publicly announced urine capability for an HIV test. Murex manufactures a number of HIV assays in microtiter format. The Company is not aware that any of these assays have
been submitted to the FDA for review. One such microtiter assay, gacelisa, is intended for use on saliva and urine samples but is marketed only outside of the U.S. primarily as a research assay. Murex markets one HIV product in the U.S.,
the FDA-licensed Single Use Diagnostic System (SUDS) rapid test, which is intended for use on serum and plasma only. Although urine capability for this test has been reported in scientific literature, the Company is not aware of any
applications for expanded sampling claims for this assay. In addition, the SUDS assay format is not conducive to high-volume testing. Murex is also a significant customer of Calyptes, purchasing HIV viral lysate for use in its serum-based
diagnostic tests.




19




---

##### Table of Contents




Essentially all of the Companys competitors actively market their
diagnostic products outside of the U.S. In addition, outside of the U.S., where the regulatory requirements for HIV screening tests are less demanding than those of the FDA, a much wider range of competitors can be found. Manufacturers from Japan,
Canada, Europe, and Australia offer a number of HIV screening tests in those markets including HIV-1/HIV-2 tests, rapid tests and other non-EIA format tests, which are not approved for sale in the U.S. market. There can be no assurances that the
Companys products will compete effectively against these products in foreign markets, or that these competing products will not achieve FDA approval.





Employees





As of December 31, 2001, the Company had 66 full time employees, three
of whom were engaged in or directly supported the Companys research and development activities, 43 of whom were in manufacturing, facilities and quality assurance, ten of whom were in marketing and sales and ten of whom were in administration.
The Companys employees are not represented by a union or collective bargaining entity. The Company believes its relations with its employees are good.





Scientific Advisory Board





The Scientific Advisory Board is composed of certain of
the Companys scientists and other leading scientists who have been actively involved in pioneering HIV research. Scientific Advisory Board members meet as a group and individually with management and key scientific employees of the Company on
an as-needed basis. Scientific Advisory Board members have taken an active role in helping the Company identify scientific and product development opportunities and recruiting and evaluating the Companys scientific staff. The Company has
granted options to acquire its Common Stock to members of the Scientific Advisory Board.





The members of the
Scientific Advisory Board and their experience are set forth below:





Abul K. Abbas, M.D., Professor,
Chairman, Department of Pathology, University of California, San Francisco Medical Center. Dr. Abul Abbas is an expert in the cellular interactions and cytokine regulation of the immune response. Professor Abbas received his M.D. in India in 1968
and interned at Harvard Medical School in 1970. He held the position of Professor of Pathology at Harvard University Medical School from 1991 to 1999. Professor Abbas has also received the Parke-Davis Award for Experimental Pathology (1987).





Mario Clerici, M.D., Associate Professor, Department of Immunology, University of Milan, Italy. Dr.
Clerici is a medical researcher with expertise in the field of AIDS and HIV research. He is listed in Science Magazine as one of the top ten quoted AIDS researchers from 1993-1995, and as a co-discoverer of individuals with natural resistance to
HIV. Dr. Clerici graduated in 1985 from the University of Milan.





Alvin Friedman-Kien, M.D., Professor, New
York University Medical Center, New York. Since 1994, Dr. Friedman-Kien has been a Professor of Microbiology and Dermatology at New York University Medical Center and Bellevue Hospital. Dr. Friedman-Kien is a clinician and researcher with expertise
in the field of AIDS and AIDS related opportunistic infections. In particular, Professor Friedman-Kien is an expert in the etiological relationship between HIV and other human viruses. Dr. Freidman-Kein was the first to report the detection of
antibodies to HIV in urine. Friedman-Kien. Dr. Friedman-Kien graduated in 1956 with a B.A. degree from Brown University and received an M.D. degree from Yale University Medical School in 1960.





Toby D. Gottfried, Ph.D. served as the Companys Director of Research and Development from the time she joined the Company in 1988 until June 2001. Since
June 2001, she has served as the Companys Chief Science Officer. From 1983 until 1988 she was a founding Senior Scientist of Carcinex Corporation, a cancer therapeutic company. From 1978 until 1980, Dr. Gottfried was a scientist at the
Hepatitis Research Laboratory of the University of California, San Francisco Medical Center. Her post-doctoral fellowship from 1980 until 1983 at the University of California, Berkeley, was in the area of monoclonal antibody attachment to toxins for
targeting




20




---

##### Table of Contents

cancer cells. Dr. Gottfried received her Ph.D. in Biochemistry from the University of Pennsylvania and her B.S. from Cornell University.





Norman Klinman, M.D., Ph.D., Member, Department of Immunology, The Scripps Research Institute, La Jolla, California. Dr. Klinman received his M.D. in 1962 and Ph.D.
in Microbiology in 1965 from the University of Pennsylvania. He served on the faculty of the Department of Pathology and Microbiology at the University of Pennsylvania for 10 years before accepting his current position in 1978 in the Department of
Immunology at Scripps.





Daniel Landers, M.D., Director for the Division of Reproductive and Infectious
Diseases and Immunology, Department of Obstetrics, Gynecology & Reproductive Sciences, Magee-Womens Hospital at the University of Pittsburgh. From 1992 to 1995, Dr. Landers was Associate Professor for the Department of Obstetrics, Gynecology and
Reproductive Sciences at UCSF. He is a well-known expert in sexually transmitted diseases in women and the recipient of numerous awards, including the Susman Memorial Award for the Infectious Diseases Society of America, Young Investigator Award for
Infectious Disease Society for OB/GYN, an NIH Physician-Scientist Award, and the Pediatric AIDS Foundation Scholar Award. He received his M.D. in 1980 at UCSF.





Luc Montagnier, M.D., Director of Viral Oncology, Pasteur Institute, Paris, France. Professor Montagnier began his career as a researcher at the Centre National de la Recherche Scientifique. In
1972, he joined the Pasteur Institute and formed the Division of Viral Oncology. In 1983, he discovered the HIV virus and showed its etiologic role in AIDS. In 1985, his research team isolated the second human AIDS virus (HIV-2) from West African
patients. In 1998, Professor Montagnier expanded his research efforts to the United States by accepting an endowed professorship at Queens College, New York. He is in charge of the Center for Molecular and Cellular Biology, where research efforts
are focused on HIV therapeutics and vaccines. Professor Montagnier also continues his research efforts in Paris at both the Pasteur Institute and his World Foundation AIDS Research and Prevention. Among the numerous honors and prizes received by
Professor Montagnier are the Rosen Price (1971), The Gallien Prize (1985), the Lasker Prize (1986), the Gairdner Price (1987), the Japan Prize (1988), and the Amsterdam Prize (1994). He is also a Comandeur de lOrdre National merite and is a
Director of the French National Center of Scientific Research.





Risk Factors





See Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.





Item 2.    Properties





The Company leases approximately 22,000
square feet of office, research, and manufacturing space in Alameda, California under a lease that expires in November 2003 and includes an option to renew for one five-year period.





Calypte also subleases properties in Rockville, Maryland. The subleases of approximately 42,000 square feet of office and manufacturing space expire in October 2006. In
January 2002, the Company notified its landlord that it planned to vacate approximately 13,000 square feet of its space by April 1, 2002 and consolidate its operations to a single floor of the leased facility.





The Company believes that its existing facilities, including the impact of the consolidated space at the Rockville facility, are adequate
to support its expected activities and production requirements for the foreseeable future.





Item 3.    Legal Proceedings





None.





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





For
a discussion on the submission of matters to a vote of the security holders at the Companys 2001 annual meeting, please see the Companys quarterly report on Form 10-Q for the period ended September 30, 2001.




21




---

##### Table of Contents

PART II





Item 5.    Market for the Registrants Common Equity and Related Stockholder Matters





The Companys Common Stock commenced trading on the Nasdaq SmallCap Market on July 26, 1996 under the symbol CALY. The Companys stock was removed from listing on the Nasdaq Small Cap Market on July 13,
2001 as a result of the Companys failure to meet the markets listing maintenance requirements. Beginning on July 13, 2001 and thereafter, the Companys stock has traded on the Over the Counter Bulletin Board under the symbol
CALY.OB. High and low sales prices reported by the Over the Counter Bulletin Board and by Nasdaq during the periods indicated are shown below.





Fiscal Year

Quarter

High

Low2001

4th

$
0.320

$
0.1402001

3rd


0.580


0.0902001

2nd


0.690


0.1502001

1st


1.469


0.6202000

4th


2.875


1.0002000

3rd


5.125


1.2812000

2nd


3.250


1.7502000

1st


7.250


2.188





On February 28, 2002, there were 349 holders of record of the
Common Stock, and the closing price of the Common Stock was $0.185. The Company has never paid any cash dividends, and the Board of Directors does not anticipate paying cash dividends in the foreseeable future. The Company intends to retain any
future earnings to provide funds for the operation and expansion of its business.





Sales of Common Stock





Private Placement of Common Stock





In January 1999, the Company completed a private placement of 3,102,500 shares of Common Stock under Regulation D to institutional investors at $1.00 per share. Calypte received net proceeds of
approximately $3.1 million after deducting placement agent commissions and additional expenses associated with the private placement.





In April 1999, the Company completed a private placement of 3,398,000 shares of its Common Stock under Regulation D to institutional investors at $2.25 per share. Calypte received net proceeds of approximately $6.8 million
after deducting agent commissions and additional expenses associated with the private placement.





In April 2000,
the Company completed a private placement of 4,096,000 shares of its Common Stock at $2.05 per share under Regulation D. The Company received proceeds of approximately $8.3 million, after deducting expenses associated with the transaction. In
connection with a bridge loan of $1 million from one of the investors, Calypte also issued warrants for 100,000 shares of Common Stock with an exercise price of $3.62 per share. The bridge loan was converted to equity upon closing of the private
placement.





On January 22, 2001, the Company signed an agreement to place up to $1.1 million in convertible
short-term debentures. Under this arrangement, the Company issued two convertible debentures to the debenture holders in the principal amount of $550,000, pursuant to Regulation S . Each debenture had an interest rate of 6% and was issued at an
original issue discount of 9.1%. The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001. Each debenture matured 90 days from the date of issuance, or on April 26, 2001 and June 11, 2001, respectively. Under the
terms of the debentures, the debenture holder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Companys Common Stock at a fixed price that represented a 5% discount to the
average trading price of the shares for the 10 trading days preceding the issuance of each debenture. If the Company chose not to redeem the debentures upon maturity, as in the case of the second debenture, the conversion discount to the debenture
holder increased




22




---

##### Table of Contents

to 15% of the average low bid price for the Companys Common Stock for any three of the 22 trading days prior to the date of conversion. Concurrent with the issuance of the first debenture,
the Company also issued a warrant to the debenture holder for 200,000 shares of Common Stock at an exercise price of $1.50. The shares underlying the debentures and warrant were registered using a Form S-3 Registration Statement. The Company
received aggregate net proceeds from the issuance of the two debentures of $925,000 during the first quarter of 2001.





On January 24, 2001, the Company amended a Common Stock purchase agreement for the issuance and purchase of its Common Stock. The initial closing of the transaction took place on November 2, 2000. The stock purchase agreement
established what is sometimes termed an equity line of credit or an equity draw down facility. The facility generally operated as follows. The investor committed up to $25 million or up to 20% of the Companys outstanding shares to purchase the
Companys Common Stock over a twelve-month period. Once during each draw down pricing period, the Company could request a draw, subject to a formula based on the Companys average stock price and average trading volume setting the maximum
amount of the request for any given draw. The amount of money that the investor provided to the Company and the number of shares the Company issued to the investor in return for that money was settled during a 22 day trading period following the
draw down request based on the formula in the stock purchase agreement. The investor received a 5% discount to the market price for the 22 day period and the Company received the settled amount of the draw down. By June 30, 2001, the Company had
issued 5,085,018 shares of its Common Stock, the total number registered for the equity line with the Securities and Exchange Commission, at an average price of $0.42 per share and had received net proceeds of approximately $2,014,000 after
deducting expenses of the transaction. There are no further funds available to the Company under this equity line.





In August 2001, the Company and a private investment fund signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of the Companys Common Stock over a twenty-four month period. The
initial closing of the transaction occurred in October 2001. Under this arrangement, the Company, at its sole discretion, may draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund is obligated to
purchase shares of the Companys Common Stock. The purchase price of the Common Stock purchased pursuant to any draw down will be equal to 88% of the daily volume weighted average price of the Companys Common Stock on the applicable date.
In conjunction with the signing of the stock purchase agreement, in October 2001, the Company issued a 7-year fully-vested warrant to the investment fund to purchase up to 4,192,286 shares of common Stock at an exercise price of $0.2743 per share.
The private placement of the related warrants was exempt from registration pursuant to Regulation S. Since the Registration statement became effective in November 2001 through December 31, 2001, the Company issued a total of 2,182,144 shares of its
common stock at an average price of $0.197 per share and received proceeds of approximately $406,000 after deducting expenses of the transactions.





In November 2001, the Company sold 1,575,855 shares of Common Stock under Regulation D of the Securities Act of 1933 (the Securities Act), to various investors in a private placement at
$0.19 per share, receiving net proceeds of $295,000. The private placement did not include registration rights. Therefore, pursuant to Rule 144 of the Securities Act, the transfer of the securities purchased by the investors will be restricted for
twelve months from the date of purchase. Three members of the Companys Board of Directors, David Collins, Nancy Katz, and Mark Novitch, purchased an aggregate of 721,154 shares of this offering. The proceeds of this offering have been used to
fund the Companys current operations. The purchase transactions by the Companys Board members were on a fair and reasonable basis and on terms more favorable to the Company than could have been obtained with non-affiliated parties as a
result of the tenuous financial condition of the Company at the time.





Subsequent Events





Subsequent Financings





Between January 1 and May 31, 2002, the Company issued 5,618,567 shares of its common stock under its equity line facility at an average price of $0.177 and received net proceeds of $939,000 after
deducting expenses.




23




---

##### Table of Contents




On May 9, 2002, the Company entered into a letter agreement with the Cataldo
Investment Group (CIG) whereby CIG agreed to provide approximately $1.5 million within 90 days and an aggregate of at least $5 million over the next 12 months to fund Calyptes operations.





CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony Cataldo, the Companys executive chairman to
facilitate investments in the Company. Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG. As a condition precedent to the initial investment, it was requested that Mr. Cataldo
be appointed Executive Chairman in connection with the restart of the Companys operation. Additionally, Mr. Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of
Directors. During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of the resignation of a director during the limited time period. The Company initially came into contact with individual investors
that comprise CIG via certain existing security holders of the Company who were concerned about the Company winding down its business affairs and their investment (holdings) in the Company. Thereafter, Mr. Cataldo arranged for new financings, which
were categorized under the acronym CIG. The individual investors that comprise the de facto entity referred to as CIG are not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that
comprise CIG. To the best of the Companys knowledge, the individual investors of CIG are not affiliated with each other. Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time
of the new financing. He continues to actively pursue raising the necessary capital to fund the Companys on-going operations. There are no defined terms with respect to investments that can be attributed to CIG and as such all financing
arrangements must be negotiated on an individual basis. To date, to the best of the Companys knowledge, all investors that have been aggregated under the acronym CIG are offshore residents. Additional new investors not a part of the original
CIG investment in the Company may be referred to going forward under the acronym CIG.





There can be no assurance
that the terms of such capital will be made available to the Company on a timely basis and there can be no assurance that the additional capital that the Company requires will be available on acceptable terms, if at all. Any failure to secure
additional financing on a timely basis will place the Company in significant financial jeopardy.





In conjunction
with the acceptance of the CIG financing proposal, the Companys Board of Directors appointed Anthony J. Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an aggregate of 7,966,666 stock options pursuant to an employment
agreement negotiated between Mr. Cataldo and the independent members of the Board of Directors. Mr. Cataldo was appointed to the Board replacing David E. Collins, who resigned as Chairman of the Board and from the Board of Directors. On May 10,
2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo was granted fully-vested options to purchase 1,966,666 shares of the Companys common stock at $0.015 per share and options to purchase 6,000,000 shares of the
Companys common stock at $0.03 per share, with the option to purchase 3,000,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant. The options have a five-year term.





The components of the financing through May 31, 2002 include the following:





On May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to the private investment fund Bristol Investment Fund Ltd.
under an exemption provided by Regulation S. This debenture has the same terms as those of the initial debenture and related warrants as more fully disclosed later in this section. The closing price for Calypte stock on May 10, 2002 was $0.03.





On May 14, 2002, Calypte issued a $150,000 10% convertible promissory note pursuant to Regulation S to BNC Bach
International Ltd., an investor who is a related party to Townsbury Ltd., the investor that provides the Companys existing equity line of credit. The closing price for Calypte Common Stock on May 14, 2002 was $0.14. This note is convertible
into shares of the Companys common stock at $0.05 per share and is due on the




24




---

##### Table of Contents

earlier of July 14, 2002 or the settlement date of Calyptes next drawdown under the equity line. In conjunction with the issuance of this note, Calypte repriced from $0.27 to $0.015 the 4.2
million-share warrant issued pursuant to the equity line. Townsbury has exercised the warrant for the entire 4.2 million shares and Calypte received $63,000 in proceeds.





Calypte has reduced the exercise price of the Townsbury warrant as permitted by the originally negotiated terms of the warrant. The reduced exercise price has served as an
inducement for Townsbury to exercise the warrant as Calypte was in need of additional funds for the resumption and continuation of its business operations. In light of Calyptes precarious financial condition and the Company being in danger of
ceasing operations, the exercise price was modified to allow for the Company to receive additional financing. The Company viewed modification of the exercise price as fair and reasonable under the circumstances. Townsbury was and is viewed as an
unaffiliated party of the Company.





Pursuant to Regulation S, Calypte has issued a series of 8% convertible notes
in the aggregate principal amount of $2.225 million. These notes have a 24 month term and are convertible into shares of the Companys common stock at the lesser of $.10 or 70% of the average of the three lowest trades during the 30 day period
preceding conversion and are convertible at any time prior to maturity. Calypte has received approximately $1.9 million in proceeds after deducting fees and costs associated with these notes. Under the terms of the subscription agreement, Calypte
agreed to file a registration statement for the shares of common stock underlying the notes and use its reasonable commercial efforts to cause the registration statement to be declared effective within ninety days of the closing date. In the event
there is a registration default under the agreement, the Company shall pay, at the subscribers option, in cash or stock, as liquidated damages an amount equal to 2% of the note principal per month.





The following table sets forth the individual investors who have subscribed to the 8% convertible notes:





Investor

Amount

Transaction Date

Calypte Closing Price

Shares Issued/ Converted8% Convertible Notes

$
500,000

5/24/02

$
0.12

0Alpha Capital Aktiengesellshaft Stonestreet Limited Partnership

$
500,000

5/24/02

$
0.12

0Filter International Ltd.

$
150,000

5/24/02

$
0.12

0Camden International Ltd.

$
250,000

5/24/02

$
0.12

0Camden International Ltd.

$
100,000

5/24/02

$
0.12

0Domino International Ltd.

$
150,000

5/24/02

$
0.12

0Thunderbird Global Corporation

$
75,000

5/24/02

$
0.12

0BNC Bach International Ltd.

$
200,000

5/24/02

$
0.12

0Excalibur Limited Partnership

$
200,000

5/24/02

$
0.12

0Standard Resources Ltd.

$
100,000

5/24/02

$
0.12

0$
2,225,000





At this time we are currently in the registration process for
$525,000 of the Bristol Debentures and have not begun the process for any CIG financing.





Calypte has issued
warrants and options to purchase 19,000,000 shares of its Common Stock under agreements with consultants to perform legal, financial and business advisory services associated with the restart of its operations. The warrants were issued at $0.015 per
share on May 9, 2002 when the market price of our common stock was $0.03 per share. The option was granted at $0.03 per share on May 10, 2002, when the market price of our common stock was $0.03 per share. All of the warrant and option grants were
non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8.




25




---

##### Table of Contents




The consultants have exercised warrants and options aggregating 13,333,333 shares
as of May 31, 2002 and Calypte has received proceeds of $200,000.





Prior to the CIG investment commitment, the
Company had announced on April 17, 2002 that it would begin winding down its business due to insufficient funds to continue its operations. The Company also announced that it might file for bankruptcy protection. At that time, the Company furloughed
most of its employees and notified its customers of a likely cessation of operations. As a result of the CIG investment commitment, the Company announced that it would not complete the wind down of its business as previously announced. Furthermore,
the Company discontinued any plans to file for bankruptcy protection at the current time. The Company has begun to call back some of its furloughed employees and has restarted the business. The Company can give no assurance that it will be able to
successfully recall all of its furloughed key employees or that its revenues and customer base will not be negatively impacted by the announcement and commencement of the wind down of the Companys business.





On February 11, 2002, the Company signed a securities purchase agreement with Bristol pursuant to which the fund agreed to purchase an
aggregate of $850,000 of 12% secured convertible debentures maturing two years after issuance. As of May 31, 2002, the Company has issued $525,000 of debentures and has received net proceeds of $470,000. Since the Company is not including the shares
underlying the remaining $325,000 of the debenture commitment in its current registration statement, Bristol is not obligated to purchase the $325,000 of the remaining debenture until such time as the underlying shares are registered. The Company
will not register the shares underlying the $325,000 remaining debenture until it has been issued and is at market risk. The outstanding debentures bear interest at the annual rate of 12% payable quarterly in common stock or cash at Bristols
option. Under the terms of the debenture, Bristol can elect at any time prior to maturity to convert the balance outstanding on the debenture into shares of the Companys common stock. The conversion price for the debentures is equal to the
lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to the conversion date discounted by 30% and (ii) $0.115. On May 31, 2002, Bristol converted approximately $60,000 of principal plus accrued
interest and the Company issued approximately 4,462,000 shares of its Common Stock at $0.014 per share. In addition, upon effectiveness of the registration statement, Bristol is required to convert the debentures at a monthly rate equal to 5% of the
aggregate trading volume of the Companys common stock for the 60 trading days immediately preceding such conversions.





In conjunction with this transaction, the Company issued Bristol a Class A warrant to purchase up to 1,700,000 shares of its common stock. The Class A warrant is exercisable for a period of seven years after issuance at a price per
share equal to the conversion price. Bristol has sole discretion with respect to when and if it chooses to exercise any or all of the Class A warrant prior to its expiration.





The Company also issued Bristol a Class B warrant to purchase an additional 12,000,000 shares of its common stock. Upon the effectiveness of the related registration
statement, Bristol is required to exercise the Class B warrant in conjunction with the mandatory monthly conversion of its debentures so that each month the Company will issue to the investment fund, pursuant to the Class B warrant, a number of
shares equal to 150% of the shares issued to the fund pursuant to the monthly conversion of the debentures. Because the fund is required to convert the debentures for a minimum number of shares equal to 5% of the Companys aggregate trading
volume for the preceding 60 trading days, this means that the fund must exercise the Class B warrant during each monthly conversion period for a number of shares equal to 7.5% of such trading volume, provided that more than 2 million shares will not
be issued per month pursuant to such conversion and exercise without the Companys consent. The term of the Class B warrant is 12 months from the effective date of the related registration statement. The exercise price for the Class B warrant
is the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to exercise discounted by 25%; and (ii) $0.215 per share.





Restructure of Trade Debt





On February 12, 2002, the
Company completed a restructuring of approximately $1.7 million of its past due accounts payable and certain 2002 obligations with 27 of its trade creditors. Under the restructuring, the




26




---

##### Table of Contents

Company issued approximately 1.4 million shares of its Common Stock at various negotiated prices per share with the trade creditors in satisfaction of the specified debt. The issuance of shares
was exempt from registration pursuant to Regulation D of the Securities Act. The Company agreed to use its best efforts to register the shares within 45 business days of the closing date. As of the current date, the Company has not filed the
registration statement, however, the agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period.





On February 21, 2002, the Company renegotiated the terms of repayment under its Promissory Note with the parent company of its largest stockholder at year-end. The Note now
requires payments of $17,500 at the end of February and March 2002, increasing to $35,000 monthly thereafter unless and until the Company raises at least $2 million in external financing, not including the convertible debentures and warrants
discussed above. If there is a remaining balance under the Note upon the Companys obtaining proceeds of at least $2 million of external financing, the Company is obligated to repay $200,000 on the note and should any balance on the Note remain
thereafter, the Company is obligated to continue monthly payments of $35,000 until the Note is repaid in full. The Company made the required $17,500 payment on February 28, 2002. On March 28, 2002, the Company again renegotiated the payment terms of
this note, suspending any required principal or interest payments until the Companys registration statement for the convertible debentures becomes effective, at which time the Company is required to resume making monthly payments of $35,000.
No payments have been made on this note since February 2002. The Company renegotiated the terms of the note due to a lack of available funds and to avoid a default.




27




---

##### Table of Contents




Item 6.    Selected Consolidated Financial Data





Presented below is
the selected consolidated financial data for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 (in thousands).





Year Ended December 31,2001


2000


1999


1998


1997Consolidated Statement of Operations Data:Revenues:Product sales

$
6,826


$
3,296


$
3,728


$
951


$
376Total revenue


6,826



3,296



3,728



951



376Operating expenses:Product costs


6,986



5,891



4,721



1,912



2,305Research and development


1,546



2,254



4,123



3,881



3,685Selling, general and administrative


6,740



7,568



5,081



3,925



2,317Total expenses


15,272



15,713



13,925



9,718



8,307Loss from operations


(8,446
)


(12,417
)


(10,197
)


(8,767
)


(7,931
)Interest income (expense), net


(1,364
)


166



171



308



139Other income


539



9



2



1



Loss before income taxes and extraordinary item


(9,271
)


(12,242
)


(10,024
)


(8,458
)


(7,792
)Income taxes


(2
)


(2
)


(2
)


(2
)


(2
)Net loss before extraordinary item


(9,273
)


(12,244
)


(10,026
)


(8,460
)


(7,794
)Extraordinary gain on repurchase of beneficial conversion feature, net of income taxes


145















Net loss


(9,128
)


(12,244
)


(10,026
)


(8,460
)


(7,794
)Less dividend on mandatorily redeemable Series A preferred stock


(120
)


(120
)


(120
)


(120
)


(120
)Net loss attributable to common stockholders

$
(9,248
)

$
(12,364
)

$
(10,146
)

$
(8,580
)

$
(7,914
)Net loss per share attributable to common stockholders

$
(0.30
)

$
(0.52
)

$
(0.52
)

$
(0.64
)

$
(0.72
)Weighted average shares used to compute net loss per share attributable to common stockholders


30,928



23,859



19,333



13,432



11,0282001


2000


1999


1998


1997Consolidated Balance Sheet Data:Cash and cash equivalents

$
287


$
723


$
2,652


$
3,121


$
10,820Securities available for sale










503



650



Working capital (deficit)


(4,289
)


(875
)


1,860



4,444



8,917Total assets


4,262



5,006



7,821



9,945



12,950Long-term portion of capital lease obligations and notes payable


22



78



50



23



282Mandatorily redeemable Series A preferred stock


2,456



2,336



2,216



2,096



1,976Accumulated deficit


(88,153
)


(79,025
)


(66,781
)


(56,755
)


(48,295
)Total stockholders equity (deficit)


(5,500
)


(1,531
)


1,330



4,631



8,069




28




---

##### Table of Contents




Item 7.    Managements Discussion and Analysis of Financial Condition and Results of Operations





The following information should be read in conjunction with the consolidated financial statements and related notes that are provided under Part II, Item 8 of this Annual Report on Form 10-K/A
(No.2).





The forward-looking information set forth in this Annual Report on Form 10-K/A (No.2) is as of May
31, 2002, and Calypte undertakes no duty to update this information. Should events occur subsequent to May 31, 2002 that make it necessary to update the forward-looking information contained in this Form 10-K/A (No.2), the updated forward-looking
information will be filed with the SEC in a Quarterly Report on Form 10-Q or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the SECs website at www.sec.gov. More information about potential
factors that could affect Calyptes business and financial results is included in the section entitled Risk Factors beginning on page 36 of this Form 10-K/A (No.2).





Overview and Outlook





Calyptes efforts are currently
focused on expanding the sales and marketing of its HIV-1 urine-based and serum-based diagnostic tests and on improving those products and their related manufacturing processes. The Company is also continuing its efforts to develop a urine-based HIV
screening test in a rapid-test format and is investigating potential urine-based diagnostic tests for other diseases. Since the summer of 1998, when the Company received a license for both its screening and supplemental tests, the Company has been
marketing and selling in the U.S. the only available FDA-approved urine-based HIV test method. The Company has also received regulatory approval to sell its urine-based screening test in the Peoples Republic of China, Malaysia, and the
Republic of South Africa. In conjunction with its distributors, the Company is actively working to obtain requisite regulatory approvals to expand the distribution of its products in selected additional international markets. There can be no
assurance that the Company will achieve or sustain significant revenues from sales of the HIV-1 urine screening assay or the supplemental test.





In 2001 the Company more than doubled its full-year 2000 revenues, but due to the wind-down and restart (see Subsequent Financings) it expects negative growth in revenue in 2002. The
Companys marketing strategy is to use focused direct selling, distributors, and marketing partners to penetrate targeted domestic markets. For some time, the Company has maintained a small direct sales force to market its urine-based HIV-1
tests to reference laboratories serving the life insurance market. Beginning in the first quarter of 2001, the Company expanded its direct sales force to target other domestic sectors, including public health clinics and laboratories and community
based advocacy and service groups. The Company addresses international markets utilizing resident diagnostic product distributors. The Company expects operating losses to continue during 2002 and 2003 as it is restarting its operations and as it
continues to expand its sales and marketing activities for its current products domestically and internationally and conducts additional research and development for process improvements and new products. Depending on the success of international
introductions of its current HIV screening and supplemental tests and the timing of new product development and regulatory testing cycles, the Company expects to achieve a small operating profit no earlier than mid-2004. There can, however, be no
assurance that the Companys current or potential new products will be successfully commercialized or that the Company will achieve significant product revenues. In addition, there can be no assurance that the Company will achieve or sustain
profitability in the future.





In order for us to successfully implement our business plan, we must overcome
certain impediments. Specifically, in April of 2002, we announced the winding down of our business operations in that we lacked sufficient capital to continue to successfully implement our business model. Subsequently, in May of 2002, we announced
an arrangement for new funding, which allowed for Calypte to resume and recommence regular business operations. Based upon our tenuous financial condition, our independent auditors have issued an opinion that raises substantial doubt about our
ability to continue our business operations as a going concern. We continue to reassess our business plan and capital requirements as a result of the wind-down and subsequent restart of our operations. We do not believe that our currently available
financing will be adequate to sustain




29




---

##### Table of Contents

operations at current levels through the remainder of 2002 unless new financing is arranged. Although, as of May 31, 2002 we have completed new financings against an initial $5 million new
funding commitment more fully discussed in Part II, Item 5., Subsequent Events, we do not know if we will succeed in raising enough additional funds through further offerings of debt or equity. We must achieve profitability for our business
model to succeed. Prior to accomplishing this goal, we believe that we will need to arrange additional financing of at least $5 million in the next twelve months in addition to the Cataldo Investment Group (CIG) commitment. There can be
no assurance that subsequent additional financings will be made available to the Company on a timely basis or that the additional capital that the Company requires will be available on acceptable terms, if at all. The terms of a subsequent financing
may involve a change of control and/or require stockholder approval, or require the Company to obtain waivers of certain covenants that are contained in existing agreements.





We are actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. We
would consider strategic opportunities, including investment in the Company, a merger or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and
there can be no assurance that such opportunity will be available to us on acceptable terms, or at all. If additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange a suitable strategic
opportunity, it will place the Company in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.





Critical Accounting Policies and Estimates





Calyptes discussion and analysis of its
financial condition and results of operations are based upon Calyptes consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of
these financial statements requires Calypte 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, Calypte
evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, restructuring costs, and contingencies and litigation. Calypte bases its estimates on historical experience and on various
other factors that are believed 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.





Calypte believes the following
critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Calypte recognizes revenue from product sales upon shipment to customers and when all
requirements related to the shipments have occurred. Should changes in terms cause Calypte to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Calypte
maintains an allowance for doubtful accounts on a specific account identification basis for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Calyptes customers were to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Calypte adjusts the value of its 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. Further, as the company has continued to incur negative gross profits on an annual basis, with high fixed manufacturing costs, Calypte
also reviews its inventories for lower of cost or market valuation. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Calypte records a full valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be realized. While Calypte has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance,
in the event Calypte were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was
made.




30




---

##### Table of Contents




Customer Trends





HIV-1 Urine Test Sales





Sales of our urine HIV-1 screening
test accounted for 29% and 37% of our total sales for the years ended December 31, 2001 and 2000, respectively, and increased by $736,000 or 60% from $1,228,000 in 2000 to $1,964,000 in 2001. Sales of our urine Western Blot supplemental test
accounted for approximately 2% of calendar year 2001 revenue and approximately 3% of calendar year 2000 revenue, increasing by $63,000 or 70%, from $90,000 in 2000 to $153,000 in 2001.





Domestic Sales.    Sales of our HIV-1 screening test to domestic life insurance reference labs accounted for 85% of screening test revenue for
calendar year 2001 and for 94% of screening test revenue in 2000. These reference lab sales were distributed between five labs in both 2001 and 2000. LabOne acquired Osborn Laboratories during 2001, reducing to four the number of reference lab
customers on a prospective basis. The individual lab sales as a percentage of total reference lab sales range from 6% to 50% in 2001 and from 2% to 37% in 2001, with LabOne being the largest of the four in both periods. The combination of LabOne and
Osborn accounted for We market our HIV-1 urine screening test to both the reference labs and to over 100 life insurance companies who have committed to urine testing for HIV screening of at least some of their policy applicants and who employ the
labs to conduct their applicant testing. Individual life insurance companies can and do move their business from one lab to another based on a number of considerations, including the availability of urine testing. As the only supplier of an
FDA-approved urine based testing algorithm for HIV-1, reference labs must use our testing products to satisfy the demand of insurance companies desiring urine testing. Although Calypte does not expect to lose LabOne or any other reference lab as a
customer, should such a loss occur, its impact would be only short-term, while the insurance companies using urine-based testing in their policy underwriting determinations realigned themselves with another lab offering our urine-based testing
algorithm. Direct or distributor sales of our screening test to domestic diagnostic clinics, public health agencies or community-based organizations were not material in 2001 or 2000. Sales of our urine Western Blot test are generally made to the
same reference lab customers who purchase the urine-based screening test.





International
Sales.    International sales of our urine-based screening test are not currently a material component of our revenue, but we see significant potential for international distribution of our urine-based testing algorithm. Our
primary focus is currently on developing distribution relationships in China and Africa and qualifying our products through the World Health Organization (WHO). We plan to qualify all of our urine-based testing products for WHO, which
serves as both a quasi-regulatory body and a potential funding source for many countries that might not otherwise possess the regulatory infrastructure or financial resources to avail themselves of our products.





Serum Western Blot Sales





Sales of our serum based Cambridge Biotech HIV-1 serum Western Blot supplemental test kit accounted for 42% of our revenues for the year ended December 31, 2001 and 38% of our revenues for the year ended December 31, 2000. Serum blot
sales increased $1.6 million or 127% from $1.3 million in 2000 to $2.8 million in 2001. Sales of this product to bioMerieux Inc. accounted for approximately 25% of our total revenues for the year ended December 31, 2001. Ortho Clinical Diagnostics,
a division of Johnson & Johnson Inc., had been our primary serum Western Blot distributor during 2000, accounting for approximately 28% of our total revenue for 2000. Calypte and Ortho terminated their distribution relationship early in 2001 and
Calypte engaged Organon-Teknika as our primary serum blot distributor. BioMerieux subsequently acquired Organon-Teknika later in 2001, but the distribution relationship remained unchanged. Subsequent to the restart of our operations in May 2002, we
have not sold to bioMerieux. We have, however, signed a new distributor for this product. We believe that the loss of serum Western Blot sales to bioMerieux will only impact revenues on a short-term basis. Since there is limited competition in the
supplemental testing market, we anticipate that we will be able to rebuild market share and revenues to previous levels.




31




---

##### Table of Contents




Viral Lysate Sales





Sales of viral lysate accounted for approximately 20% of our revenue for the year ended December 31, 2001 and approximately 7% for the year ended December 31, 2000. Lysate
sales increased by $1.1 million or more than 5 times, from $230,000 in 2000 to $1,351,000 in 2001. The HIV viral lysate which we sell is a component of the production of our urine based screening tests. There is a limited and sporadic demand for our
HIV viral lysate. The largest customer for our viral lysate in both 2001 and 2000 was the Murex division of Abbott Laboratories, Inc. We believe that the large percentage of revenue attributed to the sale of our HIV viral lysate in 2001 may have
resulted from Murexs decision to stockpile larger than normal quantities of viral lysate in light our tenuous financial condition in an effort to avoid a potential interruption of supply. We sold an additional $220,000 of lysate to Murex
during the second quarter of 2002, presumably based on the same motivation. Subsequent to the restart of our operations in May 2002, we have not sold any viral lysate. We expect HIV viral lysate sales to remain low for the balance of 2002. We are
seeking new customers for this product but have no expectation of near-term demand for this product from Murex or others. However, as we view our HIV viral lysate as a component material, its sale is not considered to be a major component of our
anticipated future revenue but rather a supplemental revenue source.





Results of Operations





Years Ended December 31, 2001 and 2000





Calyptes 2001 revenues totaled $6.8 million compared with $3.3 million for 2000, an increase of $3.5 million or 107%, making 2001 the Companys record revenue year. Screening test revenues increased by $736.000 or
60%. Sales of the screening test to insurance company reference labs increased by $510,000 or 44% due to an increase in the number of insurance companies using urine testing and, in some cases, the broadening of policy limits for which underwriters
accept urine testing.





International sales accounted for approximately $250,000 in screening test sales in 2001,
compared to an insignificant amount in 2000. The initial screening test sales to Calyptes Sub Saharan Africa and Chinese distributors occurred in the first quarter of 2001 and its initial sale to its Malaysian distributor in the third quarter
of 2001. A larger sale to the Chinese distributor occurred in the fourth quarter of 2001. The company completed its first South African sale in the third quarter of 2000, its only international screening test sale that year. The Company has
completed a subsequent sale to its Chinese distributor early in the first quarter of 2002; however future sales to South and sub-Saharan Africa will be dependent on either the consummation of a change in ownership for the distributor, or replacement
of the distributor. U.S. distributor, direct and Sentinel screening sales were not significant in either 2001 or 2000. The Company is focusing on expanding the US Diagnostic and Sentinel business during 2002.





Sales of supplemental tests and viral lysate increased $2.8 million or 135% in 2001 compared with 2000 revenues. Urine Western Blot sales
increased $63,000 or 70%, but from $90,000 in 2000 to $153,000. Serum Western Blot sales increased by 130% or nearly $1.5 million compared to 2000 levels. The increase in serum blot sales is attributable to a combination of new business from
bioMerieux, which acquired Organon-Teknika shortly after Organon-Teknika discontinued production of its Western Blot product and switched its customers to Calyptes blot, as well as to the impact of a significant price increase the third
quarter of 2001. Serum Western Blot test volume increased 121% year over year and bioMerieux became Calyptes largest customer in 2001.





Sales of the Companys HIV viral lysate, a component Calypte uses in the production of its Western Blot products and which it sporadically sells to another manufacturer of serum-based HIV
diagnostic tests and other parties, increased by $1.1 million or more than 5 times compared to 2000 levels and accounted for approximately 20% of 2001 revenues. During the second quarter of 2001, the primary customer for the viral lysate expressed
concern regarding the viability of Calypte as a continuing supplier and increased its orders with the intent of stockpiling. Although Calypte continues to expect orders for viral lysate from this customer in the future, potentially as early as the
second quarter of 2002, it does not expect 2002 orders to be at the level of 2001 orders.




32




---

##### Table of Contents

As a result of the increased viral lysate orders, this customer became Calyptes second largest in 2001. In total, Calyptes significant, greater than 10% customers, accounted for 57%
(3 customers) of total sales in 2001, compared with 42% (3 customers) in 2000.





Gross margin improved steadily
throughout 2001, culminating in a full-year loss of 2% for 2001 compared with a loss of 79% in 2000. A number of factors contributed to this critical improvement in Calyptes operations. First, the increased level of sales of both screening and
supplemental tests helped to mitigate the effect of underutilized facilities burdened with high fixed costs. Once fixed manufacturing costs are covered, the company enjoys a significant contribution margin on the incremental volume. That phenomenon
was demonstrated during 2001 at both manufacturing facilities. Second, the closure of the Berkeley facility in February 2001 contributed to the improvement, avoiding approximately $300,000 in redundant facility costs, as did general reductions in
other controllable costs, including payroll costs, in response to the companys difficult financial situation. Additionally, a reduction in validation and calibration costs at the Alameda facility following FDA inspection and approval compared
to the 2000 level also contributed to the margin improvement. Third, a significant price increase on serum blots at the beginning of the third quarter contributed to improved margins during the last half of the year. Last, the increase in viral
lysate sales, and their accompanying higher margins compared with those achieved from sales of either screening or supplemental tests, significantly improved the overall margin on sales compared to prior year. As noted previously, the impact of
viral lysate sales will not recur in 2002 at the level experienced in 2001, however the facility consolidation project at Rockville in the first quarter of 2002 will have an impact similar to that of the closure of the redundant Berkeley facility in
2001 to partially mitigate the absence of viral lysate sales.





As more fully discussed in Note 14 in the
accompanying financial statements, the Company pays royalties on all of its sales. These amounts are included in product costs. At December 31, 2001, the Company is approximately $1,052,000 in arrears on the payment of royalties under certain of its
licensing agreements. Under certain of the Companys licensing agreements, the patent holder or other organization granting rights to the Company has the right to revoke the license for non-payment of royalties. Should the patent holder or
other granting organization take that step, the Company could find it necessary to modify its manufacturing practices or change its business plan. Refer to Notes 18 and 19 (unaudited) in the accompanying financial statements for recent developments
regarding certain of the Companys license agreements. Since December 31, 2001 and in conjunction with the Subsequent Financings discussed in Note 19, the Company has contacted its major licensors and is attempting to satisfy its
royalty obligations either through restructuring of its debt by issuing shares of its common stock, as also discussed in Note 19 (unaudited), or by arranging payment schedules to eliminate the royalty payment arrearages by the end of calendar 2002.





R&D costs decreased $708,000 or 31% from $2,254,000 in 2000 to $1,546,000 in 2001. Approximately one third of
the decrease is attributable to the discontinuation of the pure research function early in 2001 when Calyptes founder left the Company to pursue his interests in a genomics venture. Approximately half of the decrease is attributable to the
cessation of the facility validation and related consulting expenses incurred in 2000 in preparation for the FDA inspection of the Alameda facility. The remainder of the reduction is attributable to lower contract and consultant fees for the
development of potential new products. Because of the Companys cash flow constraints during 2001, only the in-house development and collaboration on the HIV rapid test was pursued. Collaboration with a university on a urine-based screening
test for another infectious disease that had commenced in 2000 was not pursued in 2001.





Selling, general and
administrative costs decreased from $7,568,000 in 2000 to $6,740,000 in 2001, a decrease of $828,000 or 11%. The 2001 figures include a $156,000 provision for the uncollectibility of the South African distributor receivable arising from a first
quarter 2001 sale. Absent this one-time charge, the decrease would have been 13%. Expense for 2001 reflects the increased compensation costs attributable to the Companys expanded domestic sales force, replacing the distributor organization
utilized in 2000. As a result of the significant reduction in spending beginning in the second quarter of 2001, full-year marketing consultants expense has decreased by 37% versus 2000. The company continued its efforts to stimulate awareness of its




33




---

##### Table of Contents

presence and products among Community Based and AIDS Service Organizations through limited educator and outreach programs, but essentially eliminated all other outside programs and advertising
during the last three quarters of 2001. Administrative consultants, including public relations, government relations, and investor relations efforts were also eliminated or assumed in-house in an effort to minimize expenses. Further contributing to
the 2001 decrease in selling, general and administrative expenses is a reduction in the Alameda facility cost recognized as an administrative expense; since that facility has achieved FDA approval, a larger share of costs are recognized as a
component of manufacturing expense.





The loss from operations for 2001, at $8,446,000, reflects a 32% reduction of
the $12,417,000 loss reported for 2000.





Interest income decreased by $280,000 or 97% in 2001 compared to 2000.
The Company had completed an $8.4 million private placement of its common stock early in the second quarter of 2000 and had considerably higher invested cash balances in 2000 than during 2001. Interest expense increased $1,250,000 or more than
tenfold from $123,000 in 2000 to $1,373,000 for 2001. Interest expense increased from $123,000 in 2000 to $1,373,000 for 2001. Of the 2001 interest expense, $1,318,000 reflects non-cash charges relating to amortization of equity line offering costs,
conversion feature and original issue discount costs attributable to the convertible debentures and similar costs of the financing vehicles the Company employed in the first half of 2001. Other income in 2001 relates to the $500,000 gain on the
second quarter sale of the Companys equity interest in Pepgen Corporation, a privately-held development-stage therapeutic research and drug development company, and the gain on the sale of fully depreciated assets from the Berkeley facility
upon its closure and in anticipation of the Rockville space consolidation project.





Years Ended December 31, 2000 and 1999





Calyptes sales revenues decreased $0.4 million or 12% from $3.7 million for the year ended December 31,
1999 to $3.3 million for the year ended December 31, 2000. Sales of Calyptes screening test were essentially unchanged between years. The impact of so-called Triple X legislation, which essentially eliminated the availability of
30-year life insurance policies after 1999, caused noticeable increases in fourth quarter 1999 and first quarter 2000 revenues as testing associated with final applications for 30-year policies was completed. International sales of the
Companys screening test were insignificant in 2000. Sales of the Companys Western Blot supplemental tests declined in 2000 versus 1999, following a trend experienced for the past few years. Increased sensitivity and specificity of
screening tests and international testing algorithms that do not always require a supplemental test continue to make the supplemental test market a declining one.





Product costs increased from $4.7 million in 1999 to $5.9 million in 2000, an increase of $1.2 million or 25%. Product costs for the Companys screening test decreased
slightly versus 1999 levels, primarily due to the requirement to produce non-saleable validation inventory at the Companys Alameda manufacturing facility in 1999 in anticipation of the facilitys inspection and approval. Although the
facility did not produce non-saleable validation inventory in 2000, the Company did incur duplicative costs for the operation of both its Alameda and Berkeley screening test production facilities throughout 2000. Product costs at the Companys
supplemental test manufacturing facility increased noticeably in 2000 compared to 1999 as the Company added personnel and made significant expenditures to correct FDA inspection observation conditions and ensure compliance with FDA and good
manufacturing practices requirements.





Research and development expenses decreased from $4.1 million in 1999 to
$2.3 million in 2000, a decrease of $1.8 million or 45% decrease. Included in 1999 research and development expense was the $1.0 million write-off of a note receivable and accrued interest from Pepgen. In 2000, the Company also renegotiated one of
its license agreements, significantly reducing the minimum annual payment under the agreement that had been expensed as research and development. The Company also experienced a reduction in the cost of clinical studies applicable to the FDA approval
for its Alameda facility during 2000.




34




---

##### Table of Contents




Selling, general and administrative expenses increased in 2000 by $2.5 million or
49% compared to 1999, from $5.1 million to $7.6 million. The increase was primarily attributable to beginning commercialization initiatives designed to increase awareness of the Company and its products among targeted audiences, including government
agencies and programs, public health, AIDS activist, and communitybased outreach groups, and within the investment community. The Company also increased its use of consultants and other outside service providers in projects as diverse as
developing a new website to defining its most attractive potential international markets. In conjunction with securing new international distribution agreements, the Company also incurred an increased level of travel and related costs in 2000.





Interest income decreased slightly in 2000 as a result of lower invested cash balances compared to 1999. Interest
expense also decreased slightly in 2000 as a result of scheduled principal repayments under the bank term loan agreement and the capital lease obligations.





Liquidity and Capital Resources





Financing Activities





The Company has financed its operations from its inception primarily through the private placement of preferred stock and common stock,
its Initial Public Offering (IPO) of common stock and, to a lesser extent, from payments related to research and development agreements, a bank line of credit, equipment lease financings and borrowings from notes payable.





In January 1999, the Company completed a private placement of 3,102,500 shares of Common Stock to institutional investors at $1.00 per
share. Calypte received net proceeds of approximately $3.1 million after deducting placement agent commissions and additional expenses associated with the private placement.





In April 1999, the Company completed a private placement of 3,398,000 shares of its Common Stock to institutional investors at $2.25 per share. Calypte received net
proceeds of approximately $6.8 million after deducting agent commissions and additional expenses associated with the private placement.





In January 1999, the Company entered into a loan agreement with a bank to borrow up to $2.0 million at an interest rate of prime plus 1 1 / 4 %. The agreement required the Company to
maintain certain financial covenants and comply with certain reporting and other requirements. In addition, the Companys assets secured its borrowings under the agreement. In January 2000, the loan was modified to extend the repayment term
through August 2000. In May 2000, the loan was again modified to increase the then outstanding principal balance by $250,000. At December 31, 2000 the Company had $471,000 outstanding under this facility. The loan was repaid in full in January 2001.





In April 2000, the Company completed a private placement of 4,096,000 shares of its Common Stock at $2.05 per
share. The Company received proceeds of approximately $8.3 million, after deducting expenses associated with the transaction. In connection with a bridge loan of $1 million from one of the investors, Calypte also issued warrants for 100,000 shares
of Common Stock with an exercise price of $3.62 per share. The bridge loan was converted to equity upon closing of the private placement.





On January 22, 2001, the Company signed an agreement to place up to $1.1 million in convertible short-term debentures. Under this arrangement, the Company issued two convertible debentures to the debenture holder in the
principal amount of $550,000 each. Each debenture had an interest rate of 6% and was issued at an original issue discount of 9.1%. The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001. Each debenture matured 90
days from the date of issuance, or on April 26, 2001 and June 11, 2001, respectively. Under the terms of the debentures, the debenture holder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares
of the Companys common stock at a fixed price that represented a 5% discount to the average trading price of the shares for the 10 trading days




35




---

##### Table of Contents

preceding the issuance of each debenture. If the Company chose not to redeem the debentures upon maturity, as in the case of the second debenture, the conversion discount to the debenture holder
increased to 15% of the average low bid price for the Companys common stock for any three of the 22 trading days prior to the date of conversion. Concurrent with the issuance of the first debenture, the Company also issued a warrant to the
debenture holder for 200,000 shares of common stock at an exercise price of $1.50. The Company received aggregate net proceeds from the issuance of the two debentures of $925,000 during the first quarter of 2001. The Company redeemed the first
debenture, plus accrued interest, prior to its contractual maturity using the proceeds from the sales of its common stock. The Company also redeemed a portion of the second debenture prior to its contractual maturity. On June 12, 2001, the debenture
holder converted the remaining $168,000 balance on the second debenture plus accrued interest into 1,008,525 shares of the Companys Common Stock, in accordance with the conversion provisions of the debenture. On August 17, 2001, the Company
modified the warrant that it had issued to the debenture holder pursuant to the terms of the warrant, reducing its exercise price to $0.15 per share, and the debenture holder exercised it for the entire 200,000 shares. The Company received $28,500
in net proceeds from the exercise of the warrants.





On January 24, 2001 the Company amended a common stock
purchase agreement for the issuance and purchase of its common stock. The initial closing of the transaction took place on November 2, 2000. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw
down facility. The facility generally operated as follows. The investor committed up to $25 million or up to 20% of the Companys outstanding shares to purchase the Companys common stock over a twelve-month period. Once during each draw
down pricing period, the Company could request a draw, subject to a formula based on the Companys average stock price and average trading volume setting the maximum amount of the request for any given draw. The amount of money that the
investor provided to the Company and the number of shares the Company issued to the investor in return for that money was settled during a 22 day trading period following the draw down request based on the formula in the stock purchase agreement.
The investor received a 5% discount to the market price for the 22-day period and the Company received the settled amount of the draw down. By June 30, 2001, the Company had issued 5,085,018 shares of its common stock, the total number registered
for the equity line with the Securities and Exchange Commission, at an average price of $0.42 per share and had received net proceeds of approximately $2,014,000 after deducting expenses of the transactions. This equity line transaction is now
completed. The terms of the convertible debentures discussed earlier required that 50% of the net proceeds of any equity sales, including sales under the equity draw down facility, be used to repay the debentures and related accrued interest.
Accordingly, approximately $938,000 of the net proceeds from sales under the equity draw down facility was used to pay down the debentures. In conjunction with the agreement, the Company issued a 3-year warrant to the investor to purchase up to
1,000,000 shares of its stock at an exercise price of $1.55 per share. On August 2 and August 8, 2001, the Company modified the exercise price for 300,000 shares each of the warrants pursuant to the terms of the warrant, to $0.20 per share, and the
investor exercised it for an aggregate of 600,000 shares. The Company received $114,000 in net proceeds from the exercise of these warrants. On August 21, 2001, the Company modified the exercise price for the remaining 400,000 shares of the warrant
to $0.15 per share. The investor exercised the remaining balance of the warrant and the Company received net proceeds of $57,000 after deducting expenses of the transaction.





In April 2001, the Company announced that it had concluded negotiations to sell its 29% minority interest in the stock of Pepgen Corporation, a privately held therapeutic
company, for $500,000. The Company received the proceeds from the sale in two installments in April and May 2001.





In August 2001, the Company executed a promissory note in the amount of $400,000 to the parent company of its then-largest stockholder. The note required interest at 8.5% per annum and principal plus accrued interest was due no later
than September 14, 2001. In December 2001, the parties agreed to execute a new note in the amount of $411,000, representing the unpaid principal and accrued but unpaid interest on the previous note. This note bears interest at 8.5% and was due in
installments of $200,000 on February 28, 2002 and $35,000 per month thereafter until paid in full, plus accrued interest. The repayment terms of the Note were renegotiated in February 2002. The Note now requires payments of $17,500 at the end of
February and March 2002, increasing to $35,000




36




---

##### Table of Contents

monthly thereafter unless and until the Company raises at least $2 million in external financing, not including the convertible debentures and warrants discussed below. If there is a remaining
balance under the Note upon the Companys obtaining proceeds of at least $2 million of external financing, the Company is obligated to repay $200,000 on the note and should any balance on the Note remain thereafter, the Company is obligated to
continue monthly payments of $35,000 until the Note is repaid in full. The Company made the required $17,500 payment on February 28, 2002.





On August 23, 2001, the Company and a private investment fund signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of the Companys Common Stock over a twenty-four month
period. The initial closing of the transaction occurred on October 19, 2001. Under this arrangement, the Company, at its sole discretion, may draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund is
obligated to purchase shares of the Companys Common Stock. The new facility operates similarly to the previous equity line facility employed earlier in the year. The purchase price of the Common Stock purchased pursuant to any draw down under
this facility will be equal to 88% of the daily volume weighted average price of the Companys Common Stock on the applicable date. In conjunction with the signing of the stock purchase agreement, on October 19, 2001, the Company issued a
7-year warrant pursuant to Regulation S to the investment fund to purchase up to 4,192,286 shares of Common Stock at an exercise price of $0.2743 per share. Since the Registration Statement became effective in November 2001 through December 31,
2001, the Company issued a total of 2,182,144 shares of its common stock at an average price of $0.197 per share and received net proceeds of approximately $406,000 after deducting expenses of the transactions. Between January 1 and March 1, 2002,
the Company has issued an additional 4,094,461 shares of its common stock at an average price of $0.176 and received net proceeds of $679,000 after deducting expenses.





In November 2001, the Company sold 1,575,855 shares of Common Stock under Regulation D of the Securities Act to various investors in a private placement at $0.19 per share,
receiving net proceeds of $295,000. The private placement did not include registration rights. Therefore, pursuant to Rule 144 of the Securities Act, the transfer of the securities purchased by the investors will be restricted for twelve months from
the date of purchase. Three members of the Companys Board of Directors purchased an aggregate of 721,154 shares of this offering.





On November 28, 2001, Calypte announced that it intended to offer up to $10 million of shares of its common stock to international investors pursuant to Regulation S of the Securities Act. There was no investor interest in
the proposed offering, and consequently, the Company elected not to proceed with it.





Subsequent Events





Subsequent Financings





Between January 1 and May 31, 2002, the Company issued 5,618,567 shares of its common stock under its equity line facility at an average price of $0.177 and received net proceeds of $939,000 after
deducting expenses.





On May 9, 2002, the Company entered into a letter agreement with the Cataldo Investment Group
(CIG) whereby CIG agreed to provide approximately $1.5 million within 90 days and an aggregate of at least $5 million over the next 12 months to fund Calyptes operations.





CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony Cataldo, the Companys executive chairman to facilitate
investments in the Company. Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG. As a condition precedent to the initial investment, it was requested that Mr. Cataldo be
appointed Executive Chairman in connection with the restart of the Companys operation. Additionally, Mr. Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of Directors.
During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of the




37




---

##### Table of Contents

resignation of a director during the limited time period. The Company initially came into contact with individual investors that comprise CIG via certain existing security holders of the Company
who were concerned about the Company winding down its business affairs and their investment (holdings) in the Company. Thereafter, Mr. Cataldo arranged for new financings, which were categorized under the acronym CIG. The individual investors that
comprise the de facto entity referred to as CIG are not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that comprise CIG. To the best of the Companys knowledge, the individual
investors of CIG are not affiliated with each other. Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time of the new financing. He continues to actively pursue raising the
necessary capital to fund the Companys on-going operations. There are no defined terms with respect to investments that can be attributed to CIG and as such all financing arrangements must be negotiated on an individual basis. To date, to the
best of the Companys knowledge, all investors that have been aggregated under the acronym CIG are offshore residents. Additional new investors not a part of the original CIG investment in the Company may be referred to going forward under the
acronym CIG.





There can be no assurance that the terms of such capital will be made available to the Company on a
timely basis and there can be no assurance that the additional capital that the Company requires will be available on acceptable terms, if at all. Any failure to secure additional financing on a timely basis will place the Company in significant
financial jeopardy.





In conjunction with the acceptance of the CIG financing proposal, the Companys Board of
Directors appointed Anthony J. Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an aggregate of 7,966,666 stock options pursuant to an employment agreement negotiated between Mr. Cataldo and the independent members of the
Board of Directors. Mr. Cataldo was appointed to the Board replacing David E. Collins, who resigned as Chairman of the Board and from the Board of Directors. On May 10, 2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo
was granted fully-vested options to purchase 1,966,666 shares of the Companys common stock at $0.015 per share and options to purchase 6,000,000 shares of the Companys common stock at $0.03 per share, with the option to purchase
3,000,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant. The options have a five-year term.





The components of the financing through May 31, 2002 include the following:





On May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to the private investment fund Bristol Investment Fund Ltd. under an exemption provided by Regulation S. This debenture has
the same terms as those of the initial debenture and related warrants as more fully disclosed later in this section. The closing price for Calypte stock on May 10, 2002 was $0.03.





On May 14, 2002, Calypte issued a $150,000 10% convertible promissory note pursuant to Regulation S to BNC Bach International Ltd., an investor who is a related party to
Townsbury Ltd., the investor that provides the Companys existing equity line of credit. The closing price for Calypte Common Stock on May 14, 2002 was $0.14. This note is convertible into shares of the Companys common stock at $0.05 per
share and is due on the earlier of July 14, 2002 or the settlement date of Calyptes next drawdown under the equity line. In conjunction with the issuance of this note, Calypte repriced from $0.27 to $0.015 the 4.2 million-share warrant issued
pursuant to the equity line. Townsbury has exercised the warrant for the entire 4.2 million shares and Calypte received $63,000 in proceeds.





Calypte has reduced the exercise price of the Townsbury warrant as permitted by the originally negotiated terms of the warrant. The reduced exercise price has served as an inducement for Townsbury to
exercise the warrant as Calypte was in need of additional funds for the resumption and continuation of its business operations. In light of Calyptes precarious financial condition and the Company being in danger of ceasing operations, the
exercise price was modified to allow for the Company to receive additional financing. The Company viewed modification of the exercise price as fair and reasonable under the circumstances. Townsbury was and is viewed as an unaffiliated party of the
Company.




38




---

##### Table of Contents




Pursuant to Regulation S, Calypte has issued a series of 8% convertible notes in
the aggregate principal amount of $2.225 million. These notes have a 24 month term and are convertible into shares of the Companys common stock at the lesser of $.10 or 70% of the average of the three lowest trades during the 30 day period
preceding conversion and are convertible at any time prior to maturity. Calypte has received approximately $1.9 million in proceeds after deducting fees and costs associated with these notes. Under the terms of the subscription agreement, Calypte
agreed to file a registration statement for the shares of common stock underlying the notes and use its reasonable commercial efforts to cause the registration statement to be declared effective within ninety days of the closing date. In the event
there is a registration default under the agreement, the Company shall pay, at the subscribers option, in cash or stock, as liquidated damages an amount equal to 2% of the note principal per month.





The following table sets forth the individual investors who have subscribed to the 8% convertible notes:





Investor

Amount

Transaction Date

Calypte Closing Price

Shares Issued/ Converted8% Convertible Notes

$
500,000

5/24/02

$
0.12

0Alpha Capital Aktiengesellshaft Stonestreet LimitedPartnership

$
500,000

5/24/02

$
0.12

0Filter International Ltd.

$
150,000

5/24/02

$
0.12

0Camden International Ltd.

$
250,000

5/24/02

$
0.12

0Camden International Ltd.

$
100,000

5/24/02

$
0.12

0Domino International Ltd.

$
150,000

5/24/02

$
0.12

0Thunderbird Global Corporation

$
75,000

5/24/02

$
0.12

0BNC Bach International Ltd.

$
200,000

5/24/02

$
0.12

0Excalibur Limited Partnership

$
200,000

5/24/02

$
0.12

0Standard Resources Ltd.

$
100,000

5/24/02

$
0.12

0$
2,225,000





At this time we are currently in the registration process for the
Bristol Debentures and have not begun the process for any CIG financing.





In May, 2002, Calypte issued warrants
and options to purchase 19,000,000 shares of its Common Stock under agreements with consultants to perform legal, financial and business advisory services associated with the restart of its operations. The warrants were issued at $0.015 per share on
May 9, 2002 when the market price of our common stock was $0.03 per share. The option was granted at $0.03 per share on May 10, 2002, when the market price of our common stock was $0.03 per share. All of the warrant and option grants were
non-forfeitable and fully-vested at the date of issuance and were registered for resale by the consultants under Form S-8.





The consultants have exercised warrants and options aggregating 13,333,333 shares as of May 31, 2002 and Calypte has received proceeds of $200,000. We may continue to issue options and warrants at significant discounts to market or
issue direct stock grants in return for necessary consulting services. We would subsequently register the underlying shares on a Form S-8 for resale by the consultants.





Prior to the CIG investment commitment, the Company had announced on April 17, 2002 that it would begin winding down its business due to insufficient funds to continue its
operations. The Company also announced that it might file for bankruptcy protection. At that time, the Company furloughed most of its employees and notified its customers of a likely cessation of operations. As a result of the CIG investment
commitment, the Company announced that it would not complete the wind down of its business as previously announced. Furthermore, the Company discontinued any plans to file for bankruptcy protection at the current time. The Company has begun to call
back some of its furloughed employees and has restarted the business. The Company can give no assurance that it will be able to successfully recall all of its furloughed key employees or that its revenues and customer base will not be negatively
impacted by the announcement and commencement of the wind down of the Companys business.




39




---

##### Table of Contents




On February 11, 2002, the Company signed a securities purchase agreement with
Bristol pursuant to which the fund agreed to purchase an aggregate of $850,000 of 12% secured convertible debentures maturing two years after issuance. As of May 31, 2002, the Company has issued $525,000 of debentures and has received net proceeds
of $470,000. Since the Company is not including the shares underlying the remaining $325,000 of the debenture commitment in its current registration statement, Bristol is not obligated to purchase the $325,000 of the remaining debenture until such
time as the underlying shares are registered. The Company will not register the shares underlying the $325,000 remaining debenture until it has been issued and is at market risk. The outstanding debentures bear interest at the annual rate of 12%
payable quarterly in common stock or cash at Bristols option. Under the terms of the debenture, Bristol can elect at any time prior to maturity to convert the balance outstanding on the debenture into shares of the Companys common stock.
The conversion price for the debentures is equal to the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to the conversion date discounted by 30% and (ii) $0.115. On May 31, 2002, Bristol
converted approximately $60,000 of principal plus accrued interest and the Company issued approximately 4,462,000 shares of its Common Stock at $0.014 per share. In addition, upon effectiveness of the registration statement, Bristol is required to
convert the debentures at a monthly rate equal to 5% of the aggregate trading volume of the Companys common stock for the 60 trading days immediately preceding such conversions.





In conjunction with this transaction, the Company issued Bristol a Class A warrant to purchase up to 1,700,000 shares of its common stock. The Class A warrant is
exercisable for a period of seven years after issuance at a price per share equal to the conversion price. Bristol has sole discretion with respect to when and if it chooses to exercise any or all of the Class A warrant prior to its expiration. The
warrant was valued on the date of issue at $0.21 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.7%, the contractual life of 7 years, and volatility
of 80%.





The Company also issued Bristol a Class B warrant to purchase an additional 12,000,000 shares of its
common stock. Upon the effectiveness of the related registration statement, Bristol is required to exercise the Class B warrant in conjunction with the mandatory monthly conversion of its debentures so that each month the Company will issue to the
investment fund, pursuant to the Class B warrant, a number of shares equal to 150% of the shares issued to the fund pursuant to the monthly conversion of the debentures. Because the fund is required to convert the debentures for a minimum number of
shares equal to 5% of the Companys aggregate trading volume for the preceding 60 trading days, this means that the fund must exercise the Class B warrant during each monthly conversion period for a number of shares equal to 7.5% of such
trading volume, provided that more than 2 million shares will not be issued per month pursuant to such conversion and exercise without the Companys consent. The term of the Class B warrant is 12 months from the effective date of the related
registration statement. The exercise price for the Class B warrant is the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to exercise discounted by 25%; and (ii) $0.215 per share. The warrant
was valued on the date of issue at $0.14 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 2.2%, the contractual life of 1 year, and volatility of 80%.





Restructure of Trade Debt





On February 12, 2002, the Company completed a restructuring of approximately $1.6 million of its past due accounts payable and certain 2002 obligations with 28 of its trade creditors. Under the
restructuring, the Company issued approximately 1.4 million shares of its Common Stock at various negotiated prices per share with the trade creditors in satisfaction of the specified debt. The issuance of shares was exempt from registration
pursuant to Regulation D of the Securities Act. The Company agreed to use its best efforts to register the shares within 45 business days of the closing date. As of the current date, the Company has not filed the registration statement, however, the
agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period.





On February 21, 2002, the Company renegotiated the terms of repayment under its Promissory Note with the parent company of its largest stockholder at year-end. The Note now requires payments of $17,500
at the end




40




---

##### Table of Contents

of February and March 2002, increasing to $35,000 monthly thereafter unless and until the Company raises at least $2 million in external financing, not including the convertible debentures and
warrants discussed above. If there is a remaining balance under the Note upon the Companys obtaining proceeds of at least $2 million of external financing, the Company is obligated to repay $200,000 on the note and should any balance on the
Note remain thereafter, the Company is obligated to continue monthly payments of $35,000 until the Note is repaid in full. The Company made the required $17,500 payment on February 28, 2002. On March 28, 2002, the Company again renegotiated the
payment terms of this note, suspending any required principal or interest payments until the Companys registration statement for the convertible debentures becomes effective, at which time the Company is required to resume making monthly
payments of $35,000. No payments have been made on this note since February 2002. The Company renegotiated the terms of the note due to a lack of available funds and to avoid a default.





The Company does not believe that its currently available financing will be adequate to sustain operations at current levels through the third quarter of 2002, or to permit
it to achieve the revenue and profitability guidance provided previously. The Company must achieve profitability for its business model to succeed. Prior to accomplishing this goal, it will need to raise additional funds, from equity or debt
sources. The Company believes that it may need to arrange additional financing of at least $5 million in the next twelve months in addition to the CIG commitment If additional financing is not available when required or is not available on
acceptable terms, the Company may be unable to continue its operations at current levels. As of December 31, 2001, the Company reported cash on-hand of $287,000. During the fourth quarter of 2001, cash receipts exceeded cash expenditures by
$239,000, but trade payables and accrued expenses increased by $274,000. The Company is actively engaged in seeking additional financing in a variety of venues and formats and continues to impose actions designed to minimize its operating losses.
The Company would consider strategic opportunities, including investment in the Company, a merger or other comparable transaction, to sustain its operations. The Company does not currently have any agreements in place with respect to any such
strategic opportunity, and there can be no assurance that additional capital will be available to the Company on acceptable terms, or at all. The Companys inability to obtain additional financing or to arrange a suitable strategic opportunity
will place it in significant financial jeopardy.





The Companys future liquidity and capital requirements
will depend on numerous factors, including the ability to raise additional capital in a timely manner through additional investment, a potential merger, or similar transaction, as well as expanded market acceptance of its current products,
improvements in the costs and efficiency of its manufacturing processes, its ability to develop and commercialize new products, regulatory actions by the FDA and other international regulatory bodies, and intellectual property protection.





There can be no assurance that the additional capital that the Company requires will be available on acceptable
terms, if at all. Any failure to secure additional financing will place the Company in significant financial jeopardy. Therefore, the Company cannot predict the adequacy of its capital resources on a long-term basis. There can be no assurance that
the Company will be able to achieve improvements in its manufacturing processes or that it will achieve significant product revenues from its current or potential new products. In addition, there can be no assurance that the Company will achieve or
sustain profitability in the future.





Operating Activities





For the years ended December 31, 2001 and 2000, the Companys cash used in operations was $4.1 million and $10.7 million, respectively. The $6.6 million reduction in
cash used in operations is the result of three primary factors:





| |  |  | specific cost reduction initiatives, including salary and headcount reductions, designed to reduce operating costs and expenses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------




| |  |  | the increase in revenues from product sales; and
| | - |  | ------------------------------------------------




| |  |  | a $3.3 million increase in accounts payable and accrued expenses resulting from the Companys delay in timely payment to its suppliers due to its limited
cash availability.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



41




---

##### Table of Contents




The cash used in operations was primarily for promoting and marketing the
companys complete urine HIV-1 testing method, for manufacturing, and for research, selling, and general and administrative expenses of the Company.





Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible Assets.





SFAS No. 141 addresses the accounting for and reporting of business combinations and requires that all business combinations be accounted for using the purchase method of
accounting for acquisitions and eliminates the use of the pooling method. This Statement applies to all business combinations initiated after June 30, 2001. The Company does not expect that the adoption of SFAS No. 141 will have a material effect on
its consolidated financial statements.





SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets. This Statement changes the accounting for goodwill from an amortization method to an impairment-only method. The amortization of goodwill, including goodwill recorded in past business combinations will cease
upon adoption of this Statement, which will begin with the Companys fiscal year beginning January 1, 2002. However, goodwill and intangible assets acquired after June 30, 2001 will be subject to immediate adoption of the Statement. The Company
does not expect that the adoption of SFAS No. 142 will have a material effect on its consolidated financial statements.





In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires liability recognition for obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is required to adopt the provisions of SFAS No. 143 beginning with its fiscal year that starts January 1, 2003. The Company does not expect that adoption of SFAS 143 will have a material effect on
its consolidated financial statements.





In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in that it removes goodwill from its impairment
scope and allows for different approaches in cash flow estimation. However, SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (a) recognition and measurement of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of. SFAS No. 144 also supersedes the business segment concept in APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, in that it permits presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS No.144 retains the requirement of
APB Opinion No. 30 to report discontinued operations separately from continuing operations. The Company is required to adopt the provision of SFAS No. 144 beginning with its fiscal year that starts January 1, 2002. The Company does not believe that
adoption of SFAS 144 will have a material effect on its consolidated financial statements.





Risk Factors





Calypte has identified a number of risk factors faced by the Company. These factors, among others, may cause actual results, events or
performance to differ materially from those expressed in any forward-looking statements made in this Form 10-K/A (No.2) or in press releases or other public disclosures. Investors should be aware of the existence of these factors.




42




---

##### Table of Contents




Risks Related to Our Financial Condition





If We are Unable to Obtain Additional Funds We May Have to Significantly Curtail the Scope of our Operations and Alter our Business
Model.





We do not believe that our currently available financing will be adequate to sustain operations at
current levels through 2002 unless new financing is arranged. Although, on May 10, 2002, we completed a new financing with a minimum $5 million one-year commitment from CIG, we do not know if we will succeed in raising additional funds through
further offerings of debt or equity. We must achieve profitability for our business model to succeed. Prior to accomplishing this goal, we believe that we will need to arrange additional financing of at least $5 million in addition to the CIG
commitment in the next twelve months. There can be no assurance that subsequent additional financings will be made available to the Company on a timely basis or that the additional capital that the Company requires will be available on acceptable
terms, if at all. The terms of a subsequent financing may involve a change of control and/or require stockholder approval, or require the Company to obtain waivers of certain covenants that are contained in existing agreements. As of December 31,
2001, our cash on-hand was $287,000. During the fourth quarter of 2001, cash receipts exceeded cash expenditures by $239,000, but trade payables and accrued expenses increased by $274,000. We are actively engaged in seeking additional financing in a
variety of venues and formats and we continue to impose actions designed to minimize its operating losses. We would consider strategic opportunities, including investment in the Company, a merger or other comparable transaction, to sustain its
operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurance that additional capital will be available to us on acceptable terms, or at all. If additional financing is not
available when required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, it will place the Company in significant financial jeopardy and we may be unable to continue our operations at current
levels, or at all.





Our Independent Auditors Have Stated that Our Recurring Losses from Operations and Our
Accumulated Deficit Raise Substantial Doubt about Our Ability to Continue as a Going Concern.





The report
of KPMG LLP dated February 8, 2002 covering the December 31, 2001 consolidated financial statements contains an explanatory paragraph that states that our recurring losses from operations and accumulated deficit raise substantial doubt about our
ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We will need to raise more money to continue to finance our operations. We may not
be able to obtain additional financing on acceptable terms, or at all. Any failure to raise additional financing will likely place us in significant financial jeopardy.





Our 2002 Announcement that We Would be Winding Down Our Business Operations May Have A Detrimental Effect on Our Business.





During the first quarter of fiscal year 2002, our financial condition and availability of operating funds deteriorated significantly to
the point that in early April 2002, it was determined that we would need to curtail our business operations and possibly consider filing for bankruptcy protection. We announced that our financial condition had reached a critical point in mid April
2002 at which time we publicly announced and began the process of furloughing employees as a part of the winding down of our business operations. We had announced that the complete cessation of our business operations was a likely possibility at
that time. Subsequently, in May of 2002, before we finalized the winding down process, we received a commitment for sufficient additional financing to allow us to resume our full operations. The winding down of operations and our subsequent
recommencement of our business did not have an adverse effect on the majority of our relationships with suppliers and customers, however, we did encounter certain non-recurring costs associated with the re-start of operations in our second quarter
and expect that these costs will continue through the remainder of 2002. Although, to date we have not seen a significant adverse effect from our prior announcement of winding down




43




---

##### Table of Contents

and our subsequent recommencement of our business, there can be no assurances that it will not have an adverse effect on our future revenues and customer base in the long term. If we are unable
to re-establish our manufacturing efficiency, including the ability to procure an orderly flow of manufacturing materials and supplies, we may subsequently have difficulty fulfilling orders and maintaining customers.





Our Financial Condition has Adversely Effected Our Ability to Pay Suppliers, Service Providers and Licensors on a Timely Basis which
May Jeopardize Our Ability to Continue Our Operations and Maintain License Rights Necessary to Continue Shipments and Sales of our Products





We have engaged in negotiations with our creditors to restructure and reschedule our payment of certain obligations. On February 12, 2002, we closed a restructuring of approximately of $1.7 million of
our trade debt, including approximately $1.0 million of royalty obligations, pursuant to which 27 creditors agreed to discharge such debt and minimum royalty obligations in exchange for a total of 1.4 million shares of our common stock. As of
December 31, 2001, our accounts payable totaled $4.1 million, of which $3.7 million were over 60 days old. We currently have arrangements with suppliers primarily on a cash basis as well as paying down certain outstanding amounts due when making a
current payment. As of December 31, 2001 we have accrued an aggregate of approximately $1,052,000 in past due royalty obligations to our key patent licensors. We anticipate that this amount will be brought current by the end of 2002 under agreed
payment plans that are in effect and are current. However, if we are unable to obtain additional financing on timely and acceptable terms, our ability to make timely payments to our critical suppliers, service providers and to licensors of
intellectual property used in our products will be jeopardized and we may be unable to obtain critical supplies and services and to maintain licenses necessary for us to continue to manufacture, ship and sell our products.





The Company and the Price of Our Shares May be Adversely Affected By the Public Sale of a Significant Number of the Shares Eligible
for Future Sale.





At December 31, 2001, approximately 36.2 million or 96%, of the outstanding shares of
our common stock are freely tradable. Sales of common stock in the public market could materially adversely affect the market price of our common stock. Such sales also may inhibit our ability to obtain future equity or equity-related financing on
acceptable terms.





From inception through December 31, 2001, we have issued approximately 38 million shares and
raised $83 million. At our Annual Meeting of Stockholders on September 20, 2001, our stockholders approved an increase in the number of authorized shares of the Companys common stock from 50 million to 200 million shares. The continuing need
to raise funds through the sale of equity in the Company will likely result in the issuance of a significant number of shares of common stock in relation to the number of shares currently outstanding. In the past, we have raised money through the
sale of shares of our common stock at a discount to the current market price. Such arrangements have included the private sale of shares to accredited investors on the condition that we register such shares for resale by the investors to the public.
These arrangements have taken various forms including private investments in public equities or PIPE transactions, equity lines of credit, and other transactions summarized in the table included in the Liquidity and Capital
Resources section of MD&A in this document.





We will continue to seek financing on an as needed basis on
terms that are negotiated in arms length transactions. Moreover, the perceived risk of dilution may cause holders of our common to sell shares, which would contribute to a decrease in our stock price. In this regard, significant downward pressure on
the trading price of our stock may also cause investors to engage in short sales, which would further contribute to significant downward pressure on the trading price of our stock.




44




---

##### Table of Contents




We Have Issued or Reserved for Issuance Under Certain Convertible
Securities a Large Portion of Our Currently Authorized Common Stock and Our Failure to Obtain Stockholder Approval for an Increase in Our Authorized Common Stock Will Have an Adverse Effect on Our Ability to Raise Working Capital to Fund Our
Business Operations





Our Amended Restated Certificate of Incorporation presently provides for 200,000,000
shares of common stock $.001 par value. Following the announced wind down of our business we commenced a restart of operations in May of 2002, and in order to do so, since the restart of our business operations we have issued a significant number of
warrants, debentures and notes convertible into shares of our common stock as described in Liquidity and Capital Resources section of MD&A herein.





Upon conversion or exercise of these warrants, debentures and notes, depending upon the trading price of our common stock at the time of a conversion, we may have
insufficient shares available for issuance or a limited number of remaining shares available for issuance from our current authorized shares of common stock. Essentially all of our 200 million authorized common shares are either issued and
outstanding or reserved or otherwise necessary for the CIG investments. In the event we fail to obtain shareholder approval to an amendment to our Amended Restated Certificate of Incorporation authorizing an increase in the number of authorized
shares of common stock, we may be compelled to change our business plans due to an inability to raise additional working capital through the issuance of available shares of common stock or we may fail to have a sufficient number of shares for
issuance upon exercise or conversion of issued and outstanding convertible securities.





We Have
Incurred Losses in the Past and We Expect to Incur Losses in the Future.





We have incurred losses in each
year since our inception. Our net loss for the year ended December 31, 2001 was $9.1 million and our accumulated deficit as of December 31, 2001 was $88.2 million. We expect operating losses to continue for up to the next seven quarters as we
continue our marketing and sales for our FDA-approved products and conduct additional research and development for product and process improvements and new products.





Risks Related to Our Recent FinancingsOur Equity Line of Credit with Townsbury, the Convertible Debentures and Warrants Agreement with Bristol and the CIG Financings





If the Price or the Trading Volume of Our Common Stock Does Not Reach Certain Levels, We Will Be Unable to Draw Down All
or Substantially All of the Expected Proceeds under the Recent Financings, Which May Force Us to Significantly Curtail the Scope of Our Operations and Alter our Business Plan.





The maximum amount of a draw down under the equity line facility is equal to a formula based upon the weighted average price for our Common Stock and its trading volume
during the 60 calendar day period immediately prior to the date that we deliver notice to the investor of our intention to exercise a draw down, multiplied by the number of days in the draw down period. We are allowed to exceed the maximum draw down
amount only if we agree to set the minimum threshold price of the draw down, which is the stock price below which we will not draw down on the equity line, at 80% of the average of the five daily volume weighted average prices immediately prior to
the issuance of the draw down notice. Days on which the price of our Common Stock is less than the minimum threshold price will be excluded from the calculation of the draw down amount and will therefore reduce the amount of funds that we may draw
down. Additionally, the investment fund is required to convert a portion of the debentures and exercise certain of the warrants each month based on a formula determined by the trading volume of our Common Stock for the preceding 60 days.





As a result, if our stock price and trading volume fall below certain levels, then either the maximum draw down
amount formula or the mandatory threshold price will probably prevent us from being able to draw down




45




---

##### Table of Contents

all $10 million pursuant to the equity line facility. We may also need to register additional shares above the current 30 million reserve. For example, during the 60-calendar day period ended
October 19, 2001, our weighted average stock price was $0.24 per share and our total trading volume was approximately 10.28 million shares. Based on those stock price and trading volume levels during such period, the maximum draw down amount
available to us over the two-year term of the equity line facility would be approximately $4.4 million. Even if we exceeded the maximum draw down amount available, the mandatory threshold price would be likely to reduce the amount actually purchased
at the end of the pricing period. Accordingly, our stock price and the trading volume of our stock will have to increase substantially in the future in order for us to have access to the full $10 million under the equity line. Additionally, if our
trading volume and stock price do not increase, the investment fund may not entirely convert the debentures or completely exercise the warrants, and we may not receive the expected proceeds from these transactions. If we are unable to draw down the
full $10 million under the equity line or realize the expected proceeds of the debentures and warrants, we may have to curtail the scope of our operations as contemplated by our business plan.





The amount of funds that we may receive upon exercise of the Class B Warrants issued in conjunction with the convertible debentures, once they are registered, is
likewise limited by our trading volume. The debentureholder is obligated to convert the debentures each month at a rate that will result in the exercise of a number of warrants equal to at least 7  1/2% of the
trading volume of our shares for the 60 days immediately preceding the conversion. Accordingly, if the trading volume of our shares does not reach certain levels and our stock price does not increase, it will reduce the number of warrants that the
debentureholder will exercise upon conversion and reduce the amount of funds that we may receive upon exercise of the warrants.





We May Be in Default In Payment of Principal and Interest Under the Terms of Our Previously Issued 8% Convertible Notes.





Under the terms of the subscription agreements for our 8% Convertible Notes, we agreed to file a registration statement for the shares of common stock underlying the notes and use our reasonable
commercial efforts to cause the registration statement for the shares to be declared effective within ninety days of the closing date. To date, despite our efforts, due to a prior pending registration statement, we have been unable to file a
registration statement for the shares of common stock underlying the 8% Convertible Notes. In the event of a registration default under the terms of the agreement, we may be required to pay, at the Holders option, in cash or stock, as
liquidated damages an amount equal to 2% of the note principal per month in addition to the principal amount of the note.





Our Recent Financings and the Issuance of Shares to the Investors Pursuant to the Recent Financings May Cause Significant Dilution to Our Stockholders and May Have a Negative Impact on the Market Price
of Our Common Stock.





The resale by Townsbury, Bristol and the investors through CIG of the common stock
that they purchase from us has increased and will continue to increase the number of our publicly traded shares, which could put downward pressure on the market price of our common stock. Moreover, as all the shares we sell to Townsbury will be
available for immediate resale, the mere prospect of our sales to the investor could depress the market price for our common stock. The shares of our common stock issuable to Townsbury under the equity line facility will be sold at 88% of the daily
volume weighted average price of our common stock on the date of purchase subject to adjustment if our market capitalization increases significantly. If we were to require Townsbury to purchase our common stock at a time when our stock price is low,
our existing stockholders would experience substantial dilution.





Similarly, the shares of our common stock
issuable to Bristol upon conversion of the debenture and exercise of the Class A warrant will be issued at a price equal to the lesser of 70% of the average of the 3 lowest trading prices of our common stock during the 20 trading days immediately
preceding the conversion or exercise or at $0.115 per share. The shares issuable pursuant to the exercise of the Class B warrant will be issued at an exercise




46




---

##### Table of Contents

price equal to the lesser of 75% of the average of the 3 lowest trading prices of our common stock during the same period or $0.215 per share. We are registering 16.0 million shares for resale
upon debenture conversions.





Further, the investors that have come to us through CIG have the ability to purchase
shares of new common stock or to convert their Notes and Debentures, and their related warrant shares, into an additional shares based upon the market price of our common stock. The common stock and the common stock underlying the notes and
debentures issued to CIG investors are unregistered and all of the agreements include ownership limitations by the investors that would prohibit a change of control. None of the Recent Financings permit ownership by the respective investors of more
than 9.9% of the Companys outstanding stock without the Companys agreement. These common shares as well as the notes and debentures are convertible at discounts to the market price of our common stock.





Consequently, the issuance of shares to Townsbury pursuant to the equity line facility and to Bristol upon conversion and exercise of the
debentures and warrants and to CIG investors on the purchase of their shares or the conversion of their Notes and Debentures will dilute the equity interest of existing stockholders and could have an adverse effect on the market price of our common
stock. In addition, depending on the price per share of our common stock during the life of these financings, we may need to register additional shares for resale to access the full amount of financing available, which could have a further dilutive
effect on the value of our common stock.





The perceived risk of dilution may cause our stockholders to sell their
shares, which would contribute to a downward movement in the stock price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our
common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.





We Cannot Determine the Precise Amount by Which the Interests of Other Security Holders Will Be Diluted by Draw Downs and Exercises Under the Recent Financings
Because the Number, Size and the Timing of Draw Downs, Debt and Warrant Conversions, and the Minimum Threshold Price for Each Depends Upon a Number of Factors.





We have substantial discretion as well as mandatory requirements over the number, size and timing of the draw downs and debt and warrant conversions that will occur under
the Recent Financings. In addition, when we are not subject to mandatory draw downs under the equity line, at the time we make a draw down request, we have the right to limit the amount of dilution that will occur by setting a minimum threshold
price below which shares may not be sold in that draw down. However, if we set the minimum threshold price at a level high enough to limit the sale of our shares, the amount of funds we can raise in that draw down will also be reduced. Some of the
factors that we will consider in determining the size and amount of each draw down and the minimum threshold price are:





| |  |  | our short-term and long-term operating capital requirements;
| | - |  | ------------------------------------------------------------




| |  |  | our actual and projected revenues and expenses;
| | - |  | -----------------------------------------------




| |  |  | our assessment of general market and economic conditions;
| | - |  | ---------------------------------------------------------




| |  |  | our assessment of risks and opportunities in our targeted markets;
| | - |  | ------------------------------------------------------------------




| |  |  | the availability and cost of alternative sources of financing; and
| | - |  | ------------------------------------------------------------------




| |  |  | the trading price of our Common Stock and our expectations with respect to its future trading price.
| | - |  | ----------------------------------------------------------------------------------------------------




Our discretion with respect to the number, size and timing of each draw down request is also subject to a number of contractual
limitations. Similarly, the debentureholder may be issued shares upon conversion of the debentures and exercise of the warrants at a minimum monthly rate equal to 5% and 7.5% respectively of the




47




---

##### Table of Contents

trading volume of our Common Stock for the 60 trading days equal to such conversion up to a maximum of 2 million shares per month, subject to waiver of such limitation by the Company.





We Cannot Determine the Precise Amount by Which the Interests of Other Security Holders Will be Diluted by
Our Sales Under the Recent Financings Because the Number of Shares We Will Sell Depends Upon the Trading Price of the Shares During Each Draw Down and Conversion Period.





The number of shares that we will sell is directly related to the trading price of our Common Stock during each draw down and debt conversion period. As the price of our
Common Stock decreases, and if we decide to or are required to draw down on the equity line of credit, we will be required to issue more shares of our Common Stock for any given dollar amount invested by the investor. Similarly, the number of shares
issuable under the debt conversion increases as the trading price of our Common Stock decreases although such number of shares is subject to a minimum equal to 5% and 7 1 /2% for the convertible debentures and Class B warrants, respectively, of the trading volume for the 60 trading days immediately preceding the date
of conversion and to a maximum of 2 million shares per month, for the Class B warrants, which maximum may be waived by the Company. Accordingly, investors may find it difficult to predict the number of shares of our Common Stock that will be sold on
the public market and which may adversely affect the market price of our Common Stock.





The Sale of Material
Amounts of Our Common Stock Could Reduce the Price of Our Common Stock and Encourage Short Sales.





As we
sell shares of our Common Stock to the investors pursuant to the Recent Financings and then the investors sell the Common Stock, our Common Stock price may decrease due to the additional shares in the market. As the price of our Common Stock
decreases, and if we or as we decide to draw down on the equity line of credit, and as we are required to convert from debt to equity under the Convertible Debt facility, we will be required to issue more shares of our Common Stock for any given
dollar amount invested by the investor. This may encourage short sales, which could place further downward pressure on the price of our Common Stock.





Because the Investors in the Recent Financings are Residents of a Foreign Country, It May be Difficult or Impossible to Obtain or Enforce Judgments Against Them and the Investors are Also Subject
to United States and Foreign Laws that Could Affect our Ability to Access the Funds.





Townsbury, Bristol,
and the unaffiliated investors who comprise CIG are off-shore residents and a substantial portion of their assets are located outside of the United States. As a result, it may be difficult or impossible to effect service of process on the Investors
within the United States. It may also be difficult or impossible to enforce judgments entered against the Investors in courts in the United States based on civil liability provisions of the securities laws of the United States. In addition,
judgments obtained in the United States, especially those awarding punitive damages, may not be enforceable in foreign countries.





As overseas investment funds, the investors are also subject to United States and foreign laws regulating the international flow of currency over which we have no control and which could affect the availability of the funds. Any
delay in our ability to receive funds under the Recent Financings when expected could prevent us from receiving necessary capital and place us in significant financial jeopardy.





We Have Recently Reduced the Exercise Price of Certain Warrants Issued to Investors Which In Turn May Result in Dilution to Existing Shareholders As Well As a
Downward Pressure on the Trading Price of Our Common Stock.





In accordance with the terms of previously
negotiated warrants, we had the ability to reduce the exercise price of certain outstanding warrants, which may induce the warrant holder to exercise the warrants. We re-priced from $0.27 to $0.015 a 4.2 million share warrant issued pursuant to our
equity line to Townsbury. The investor has exercised the warrant for 1.0 million shares of our common stock and we received $15,000 in net




48




---

##### Table of Contents

proceeds. The reduction in exercise price served as a stimulus for the exercise and issuance of underlying shares of our common stock, which may have a dilutive effect on existing shareholders
and place downward pressure on the trading price of our common stock otherwise known as a market overhang. We do not intend to issue securities that allow for reduction in the negotiated exercise price in the future unless the Company has no
alternative with respect to raising financing for its continued operations.





Under the Terms of Our Recent
Financings We Have or May Have to Grant Partial or Complete Liens On Substantially All of Our Assets





In
the event of a default under the terms of securities purchase agreements obtained as part our Recent Financings to date and in the future, the security holders can typically foreclose on the security interest in our assets. If this were to happen,
we may be required to file a petition under Chapter 11 of the Bankruptcy Code seeking protection, or file Chapter 7 and liquidate.





Risks Related to the Market for our Common Stock





We Have Been Removed From
the Nasdaq SmallCap Market and We Are Uncertain How Trading on the Over the Counter Bulletin Board Will Affect the Liquidity and Share Value of Our Stock.





On July 13, 2001 our stock was removed from trading on the Nasdaq SmallCap Market as a result of the failure to comply with the Nasdaq Stock Market rules that required the
minimum bid price for our Common Stock to exceed $1.00 per share and that we meet at least one of the following criteria:





| |  |  | have net tangible assets equal at least $2.0 million;
| | - |  | -----------------------------------------------------




| |  |  | have market capitalization is equal to $35.0 million in public float; or
| | - |  | ------------------------------------------------------------------------




| |  |  | recognize net income of at least $500,000 in our most recent fiscal year or in two of our three previous fiscal years.
| | - |  | ----------------------------------------------------------------------------------------------------------------------




Beginning on July 13, 2001, our stock has traded on the Over-the-Counter Bulletin Board. Although the per share price of our
Common Stock has declined since it was delisted from the Nasdaq SmallCap Market, trading volume in our stock has remained fairly constant. We are uncertain, however, about the long-term impact, if any, on trading volume and share value as a result
of trading on the Over-the-Counter Bulletin Board.





The Price of Our Common Stock Has Been Highly Volatile
Due to Several Factors Which Will Continue to Affect the Price of Our Stock.





Our Common Stock has traded
as low as $0.09 per share and as high as $1.47 per share in the twelve months ended December 31, 2001. Some of the factors leading to the volatility include:





| |  |  | price and volume fluctuations in the stock market at large which do not relate to our operating performance;
| | - |  | ------------------------------------------------------------------------------------------------------------




| |  |  | fluctuations in our operating results;
| | - |  | --------------------------------------




| |  |  | introductions of alternative means for testing for HIV by competitors.introductions of alternative means for testing for HIV by competitors.concerns about our
ability to finance our continuing operations;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | financing arrangements, including the Recent Financings, and other financings we may enter which require the issuance of a significant number of shares in
relation to the number of shares currently outstanding;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | announcements of technological innovations or new products which we or our competitors make;
| | - |  | --------------------------------------------------------------------------------------------




| |  |  | FDA and international regulatory actions;
| | - |  | -----------------------------------------



49




---

##### Table of Contents




| |  |  | availability of reimbursement for use of our products from private health insurers, governmental health administration authorities and other third-party payors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | developments with respect to patents or proprietary rights;
| | - |  | -----------------------------------------------------------




| |  |  | public concern as to the safety of products that we or others develop;
| | - |  | ----------------------------------------------------------------------




| |  |  | changes in health care policy in the United States or abroad;
| | - |  | -------------------------------------------------------------




| |  |  | changes in stock market analysts recommendations regarding Calypte, other medical products companies or the medical product industry generally, and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | fluctuations in market demand for and supply of our products.
| | - |  | -------------------------------------------------------------




An Investors Ability to Trade Our Common Stock May Be Limited By Trading Volume.





The trading volume in our common shares has been relatively limited. A consistently active trading market for our Common Stock may not continue on the Over the Counter
Bulletin Board. The average daily trading volume in our Common Stock on the Over the Counter Bulletin Board from the start of trading on July 13, 2001 through December 31, 2001 was approximately 260,000 shares. Daily volume during that period ranged
from 13,200 shares to 1,065,300 shares. The average daily trading volume in our Common Stock on the Nasdaq SmallCap Market was approximately 386,000 shares for the twelve months ended July 12, 2001. Our daily volume during that period ranged from
33,800 to 22,257,600 shares.





Our Issuance of Warrants and Options to Consultants for Services May Have a
Negative Effect on the Trading Price of Our Common Stock.





As we continue to look for ways to minimize our
use of cash while obtaining required services, we plan to issue warrants and options at or below the current market price. In addition to the potential dilutive effect of a large number of shares and a low exercise price for the warrants and
options, there is the potential that a large number of the underlying shares may be sold on the open market at any given time, which could place downward pressure on the trading price of our common stock.





Our Common Stock is Subject to the Penny Stock Rules of the SEC and the Trading Market In Our Securities is Limited,
Which Makes Transaction in Our Stock Cumbersome and May Reduce the Value of an Investment in Our Stock.





Shares of our common stock are penny stocks as defined in the Exchange Act, which are traded in the Over-The-Counter Market on the OTC Bulletin Board. As a result, investors may find it more difficult to dispose of or
obtain accurate quotations as to the price of the shares of the common stock being registered hereby. In addition, the penny stock rules adopted by the Commission under the Exchange Act subject the sale of the shares of our common stock
to certain regulations which impose sales practice requirements on broker/dealers. For example, brokers/dealers selling such securities must, prior to effecting the transaction, provide their customers with a document that discloses the risks of
investing in such securities. Included in this documents are the following:





| |  |  | the bid and offer price quotes in and for the penny stock, and the number of shares to which the quoted prices apply.
| | - |  | -----------------------------------------------------------------------------------------------------------------------




| |  |  | the brokerage firms compensation for the trade.
| | - |  | ------------------------------------------------




| |  |  | the compensation received by the brokerage firms sales person for the trade.
| | - |  | -----------------------------------------------------------------------------




In addition, the brokerage firm must send the investor:





| |  |  | a monthly account statement that gives an estimate of the value of each penny stock in the investors account.
| | - |  | ----------------------------------------------------------------------------------------------------------------




| |  |  | a written statement of the investors financial situation and investment goals.
| | - |  | -------------------------------------------------------------------------------



50




---

##### Table of Contents




Legal remedies, which may be available to you as an investor in penny
stocks, are as follows:





| |  |  | if penny stock is sold to you in violation of your rights listed above, or other federal or states securities laws, you may be able to cancel your
purchase and get your money back.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | if the stocks are sold in a fraudulent manner, you may be able to sue the persons and firms that caused the fraud for damages.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------




| |  |  | if you have signed an arbitration agreement, however, you may have to pursue your claim through arbitration.
| | - |  | ------------------------------------------------------------------------------------------------------------




If the person purchasing the securities is someone other than an accredited investor or an established customer of the broker/dealer, the
broker/dealer must also approve the potential customers account by obtaining information concerning the customers financial situation, investment experience and investment objectives. The broker/dealer must also make a determination
whether the transaction is suitable for the customer and whether the customer has sufficient knowledge and experience in financial matters to be reasonably expected to be capable of evaluating the risk of transactions in such securities.
Accordingly, the Commissions rules may limit the number of potential purchasers of the shares of our common stock.





Resale restrictions on transferring penny stocks are sometimes imposed by some states, which may make transaction in our stock more difficult and may reduce the value of the investment. Various state securities laws pose
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.





Risks Related to our Business





Our Quarterly Results May Fluctuate Due to Certain Regulatory, Marketing 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 our products;
| | - |  | -------------------------------------------------------------------------------




| |  |  | the extent to which our products and our HIV and STD testing service gain market acceptance;
| | - |  | --------------------------------------------------------------------------------------------




| |  |  | the timing and size of distributor purchases; and
| | - |  | -------------------------------------------------




| |  |  | introductions of alternative means for testing for HIV by competitors.
| | - |  | ----------------------------------------------------------------------




We Have Limited Experience Selling and Marketing Our HIV-1 Urine-Based Screening Test .





Our urine-based products incorporate a unique method of determining the presence of HIV antibodies and we have limited experience marketing and selling them either directly
or through our distributors. Calyptes success depends upon the ability of domestic marketing efforts to penetrate expanded markets and upon alliances with third-party international distributors. There can be no assurance that:





| |  |  | our direct selling efforts will be effective;
| | - |  | ---------------------------------------------




| |  |  | we will obtain any expanded degree of market acceptance among physicians, patients or health care payors; or others in the medical or public health community
which are essential for expanded market acceptance of the products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | our international distributors will successfully market our products; or
| | - |  | ------------------------------------------------------------------------




| |  |  | if our relationships with distributors terminate, we will be able to establish relationships with other distributors on satisfactory terms, if at all.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



51




---

##### Table of Contents




We have had FDA approval to market our urine HIV-1 screening and supplemental
tests in the United States and have been marketing these products since July 1998. We have achieved significant market penetration within the domestic life insurance industry. Based upon our internal estimates, we believe that as of the end of 2001,
out of approximately 7 million HIV-1 tests given by the domestic life insurance industry in 2001, approximately 0.7 million were administered with our urine based tests. However, we have not achieved significant market penetration in domestic public
health agency or international markets. A disruption in our distribution, sales or marketing network could reduce our sales revenues and cause us to either cease operations or expend more resources on market penetration.





Our Distribution and Sales Network for U.S. Hospitals, Public Health and Reference Laboratory Markets Has Thus Far Failed to Yield
Significant Sales and Revenues.





Domestic health agencies are a fragmented market place with many small
outlets which makes achieving market acceptance difficult. In that we lack sufficient working capital, we have experienced difficulty in penetrating independent public health markets and agencies, as sales to public agencies require direct selling
efforts. As a result, we entered into distribution agreements with distributors of medical products to domestic health care markets including the distribution agreement announced in September 1999 with Carter Wallace Inc. and the SENTINEL HIV-1 and
STD Testing Services announced in May 2000. Due to the fragmented nature of the domestic health care market place, among other factors that may have been encountered by the distributor, these agreements did not yield significant sales and revenues
and we terminated the agreement with Carter Wallace Inc. effective March 31, 2001. We have expanded our own direct sales force to penetrate the domestic health care markets and in conjunction with other business partners, have re-launched Sentinel.
If our efforts to market our product to domestic hospitals, public health and reference laboratories fail to yield significant amounts of revenues, we may have to cease operations.





We Depend Upon the Viability of Three Primary Products  Our HIV-1 Urine-Based Screening Test and Our Urine and Blood Based Supplemental Tests.





Our HIV-1 urine-based screening test and urine and blood-based supplemental tests are our only products.
In addition, we have from time to time been able to make significant sales of our HIV viral lysate that we use in producing our Western Blot tests. Accordingly, we may have to cease operations if our screening and supplemental tests fail to achieve
market acceptance or generate significant revenues.





We Have Experienced a Decrease in the Sale of Our
Cambridge Biotech Serum Western Blot Test.





Our Cambridge Biotech HIV-1 Serum Western Blot kit is
the first of four supplemental blot tests for blood HIV-1 antibodies licensed by the FDA. The Western Blot test has been in commercial distribution for more than nine years. We sell the serum based Western Blot test for HIV-1 as a supplemental test
to HIV-1 screening test products made by other manufacturers. In the year ended December 31, 2001, Western Blot sales accounted for 42% of our revenues. Sales to bioMerieux Inc. of our Western Blot test accounted for a total 25% of our sales
revenues. Subsequent to our re-start of operations in May 2002, we have not sold any of our Western Blot test to bioMerieux although we have signed several new customers. As there is limited competition in the supplemental testing market and the
cost and time attributed to the only known production process makes it unlikely that additional companies will seek to qualify and engage in the production of these supplemental tests, we expect to regain our market share. Until this occurs, the
loss in sales to bioMerieux will have a detrimental impact on our cash flow and may (1) delay or disrupt our plans to expand the Companys business and (2) require us to raise additional equity capital, thereby further increasing dilution,
which could place further downward pressure on the price of our common stock.





We May Not be Able to
Successfully Develop and Market New Products That We Plan to Introduce





We plan to develop other
urine-based diagnostic products including a rapid HIV screening test and tests for other infectious diseases or health conditions. There are numerous developmental and regulatory issues that may




52




---

##### Table of Contents

preclude the introduction of these products into commercial sale. If we are unable to demonstrate the feasibility of these products or meet regulatory requirements with respect to their
marketing, we may have to abandon them and alter our business plan. Such modifications to our business plan will likely delay achievement of milestones related to revenue increases and achievement of profitability.





Our Products Depend Upon Rights To Technology That We Have Licensed From Third Party Patent Holders and There Can Be No Assurance
That the Rights We Have Under These Licensing Agreements Are Sufficient or That We Can Adequately Protect Those Rights.





We currently have the right to use patent and proprietary rights which are material to the manufacture and sale of our HIV-1 urine-based screening test under licensing agreements with New York University, Cambridge Biotech
Corporation, Repligen Corporation, and the Texas A&M University System. We also have the right to use patent and proprietary rights material to the manufacture and sale of our HIV-1 serum-based supplemental test under a licensing agreement with
National Institutes of Health. Also, if our financial condition reduces our ability to make royalty payments due under our license agreement, our rights to use those licenses could be jeopardized. Specifically, during the year, revenues subject to
the New York University, Cambridge Biotech, Repligen and Texas A&M license agreements were $2.0 million and revenues subject to the National Institutes of Health agreement were $4.3 million. The loss of any of the foregoing licenses could have a
materially adverse effect on our ability to continue to produce our products in that the license agreements provide necessary proprietary processes or components for the manufacture of our products. As of December 31, 2001 we had accrued an
aggregate of approximately $1,052,000 in past due royalty obligations to our patent licensors.





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 sole qualified source suppliers are various conjugates, fetal bovine serum, and HIV-positive and HIV-negative urine samples. Any delay or interruption in the supply of these sole source
components could have a material adverse effect on us by significantly impairing our ability to manufacture products in sufficient quantities, particularly as we increase our manufacturing activities in support of commercial sales. In addition, if
our financial condition reduces 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 impair our ability to manufacture. We typically do not have long-term
supply agreements with these suppliers, instead using purchase orders to arrange for our purchases of materials.





We Have Limited Experience in Manufacturing Our Products and Little Experience in Manufacturing Our Products In Commercial Quantities.





Our lack of working capital has resulted in material production difficulties in the past including problems involving:





| |  |  | scaling up production of new products;
| | - |  | --------------------------------------




| |  |  | developing market acceptance for new product;
| | - |  | ---------------------------------------------




| |  |  | production yields;
| | - |  | ------------------




| |  |  | quality control and assurance;
| | - |  | ------------------------------




| |  |  | raw material supply; and
| | - |  | ------------------------




| |  |  | shortages of qualified personnel.
| | - |  | ---------------------------------




These difficulties that we have and may experience in the future could effect our ability to meet increases in demand should our products gain market acceptance and reduce growth in our sales revenues.




53




---

##### Table of Contents




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.





We anticipate that sales to international distributors will generate a significant portion of our revenues for the next several years. We believe that our urine-based test can provide significant benefits in countries that do not
have the facilities or personnel to safely and effectively collect and test blood or other bodily fluid samples. However, sales to international customers in our fiscal year ended December 31, 2001 and 2000 accounted for 5% and less than 1%
respectively of our revenue. A majority of the companies we compete with in the sale of HIV screening test actively market their diagnostic products outside of U.S. In addition, as regulatory requirements for HIV screening tests outside the U.S. are
less demanding of those of the FDA, we compete with our EIA products against a much wider range of competitors that may not be FDA approved. Manufacturers from Japan, Canada, Europe and Australia offer a number of HIV screening tests in those
markets including HIV-1/HIV-2 tests, rapid tests and other non-EIA format tests, which are not approved for sale in the U.S. market. There can be no assurances that our products will compete effectively against these products in foreign markets, or
that these competing products will not achieve FDA approval. The following risks may limit or disrupt our international sales:





| |  |  | the imposition of government controls;
| | - |  | --------------------------------------




| |  |  | export license requirements;
| | - |  | ----------------------------




| |  |  | political instability;
| | - |  | ----------------------




| |  |  | trade restrictions;
| | - |  | -------------------




| |  |  | changes in tariffs;
| | - |  | -------------------




| |  |  | difficulties in managing international operations (difficulty in establishing a relationship with a foreign distributor with the financial and logistical
ability to maintain quality control of product);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | fluctuations in foreign currency exchanges rates;
| | - |  | -------------------------------------------------




| |  |  | the financial stability of our distributors;
| | - |  | --------------------------------------------




| |  |  | 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 purchase commitments; and
| | - |  | ------------------------------------------------------------------------------------------------------




| |  |  | establishing market awareness.
| | - |  | ------------------------------




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 the Companys business.





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. The marketplace where we sell our products is divided into two segments: (i) screening and (ii) confirmatory testing. Within the United States, our competitors for screening tests are a number of well
established manufacturers of HIV tests using blood samples, plus at least one system for the detection of HIV antibodies using all fluid samples sold by Orasure Technologies, Inc. With the confirmatory segment on the market, we offer the only FDA
approved urine-based test in conjunction with a blood-based test. Bio-RAD Laboratories, Inc. is the only other company that offers a confirmatory blood test. In addition to our urine and blood-based confirmation test, Orasure also offers a saliva
based confirmatory test that competes with our test. Many of our competitors have significantly greater financial, marketing and distribution resources that we do. Our competitors may succeed in developing or marketing technologies and products that
are more effective than ours. These development could render our technologies or products obsolete or non-competitive or otherwise effect our ability to increase or maintain our products market share.




54




---

##### Table of Contents




Our Ability to Market Our Product Depends Upon Obtaining and Maintaining
FDA and Foreign Regulatory Approvals.





Numerous governmental authorities in the United States and other
countries regulate our products. The FDA regulates our products under federal statutes and regulations related to pre-clinical and clinical testing, manufacturing, labeling, distribution, sale and promotion of medical devices in the United States.
In addition, our facilities are inspected periodically by the FDA with regard to the sufficiency of our manufacturing records and production procedures and we must continue to satisfy the FDAs concerns in order to avoid regulatory action
against us.





If we fail to comply with FDA regulations, or if the FDA believes that we are not in compliance with
such regulations, the FDA can:





| |  |  | detain or seize our products;
| | - |  | -----------------------------




| |  |  | issue a recall of our products;
| | - |  | -------------------------------




| |  |  | prohibit marketing and sales of our products; and
| | - |  | -------------------------------------------------




| |  |  | assess civil and criminal penalties against us, our officers or our employees.
| | - |  | ------------------------------------------------------------------------------




We also plan to sell our products in certain foreign countries where they may be subject to similar local regulatory requirements. The imposition of any of the sanctions
described above could have a material adverse effect on us by delaying or reducing the growth in our sales revenue or causing us to expend more resources to penetrate our target markets. The regulatory approval process in the United States and other
countries is expensive, lengthy and uncertain. We may not obtain necessary regulatory approvals or clearances in a timely manner, if at all. We may lose previously obtained approvals or clearances or fail to comply with regulatory requirements. The
occurrence of any of these events would be likely to have a material adverse effect on Calypte by disrupting our marketing and sales efforts.





Our Research and Development of HIV Urine Tests Involves the Controlled Use of Hazardous Materials.





There can be no assurance that the Companys safety procedures for handling and disposing of hazardous materials such as azide will comply with applicable regulations. In addition, we cannot
eliminate the risk of accidental contamination or injury from these materials. We may be held liable for damages from such an accident and that liability could have a material adverse effect on the Company.





We May Not Be Able to Retain Our Key Executives and Research and Development Personnel.





As a small company, our success depends on the services of key employees in executive and research and development positions. The loss of
the services of one or more of such employees could have a material adverse effect on us.





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 $10,000,000 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.




55




---

##### Table of Contents




Our Charter Documents May Inhibit a Takeover.





Certain provisions of our Certificate of Incorporation and Bylaws could:





| |  |  | discourage potential acquisition proposals (i.e. shareholder rights plan, also known as a poison pill);
| | - |  | ---------------------------------------------------------------------------------------------------------




| |  |  | delay or prevent a change in control;
| | - |  | -------------------------------------




| |  |  | diminish stockholders opportunities to participate in tender offers for our common stock, including tender offers at prices above the then current market
price;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | inhibit increases in the market price of our common stock that would result from takeover attempts; or
| | - |  | ------------------------------------------------------------------------------------------------------




| |  |  | grant to the Board of Directors discretionary rights to designate specific rights and preferences of preferred stock greater than those of our common stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------




We Have Adopted a Stockholder Rights Plan That Has Certain Anti-takeover Effects.





On December 15, 1998, the Board of Directors of Calypte declared a dividend distribution of one preferred
share purchase right (Right) for each outstanding share of Common Stock of the Company. The dividend was payable to the stockholders of record on January 5, 1999 with respect to each share of Common Stock issued thereafter until a
subsequent distribution date defined in a Rights Agreement and, in certain circumstances, with respect to shares of Common Stock issued after the Distribution Date.





The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the
offer on the Rights being redeemed or a substantial number of Rights being acquired. However, the Rights should not interfere with any tender offer, or merger, which is approved by the Company because the Rights do not become exercisable in the
event of an offer or other acquisition exempted by Calyptes Board of Directors.





Our of Board of
Directors has Certain Discretionary Rights with Respect to Our Preferred Shares that may Adversely Effects the Rights of Our Common Stockholders.





Our Board may without shareholder approval designate and issue our preferred stock in one or more series. Additionally, our Board may designate the rights and preferences of each series of preferred
stock it designates which may be greater than the rights of our common stock. Potential effects on our common stock may include among other things:





| |  |  | restricted dividends;
| | - |  | ---------------------




| |  |  | dilution of voting power;
| | - |  | -------------------------




| |  |  | impairment of liquidation rights; and
| | - |  | -------------------------------------




| |  |  | delay or preventing a change in control of the Company.
| | - |  | -------------------------------------------------------




Item 7A.    Quantitative and Qualitative Disclosures About Market Risk





The primary objective of the Companys investment activities is to preserve principal while at the same time maximizing the income received from investments without significantly increasing risk. Some of the securities that the
Company may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if the Company purchases a security that was issued with a fixed interest
rate and the prevailing interest rate later rises, the value of our investment will probably decline. To minimize this risk in the future, the Company intends to maintain its portfolio of cash equivalents and short-term investments in a variety of
securities including commercial paper, money market funds and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing
interest rate. As of




56




---

##### Table of Contents

December 1, 2001, the Company neither had any holdings of derivative financial or commodity instruments, nor any foreign currency denominated transactions, and all of its cash and cash
equivalents were in money market and checking funds.





The Company had a Promissory Note outstanding at December
31, 2001, which is carried at cost (see Note 6 to the Consolidated Financial Statements) with a fixed interest rate that is based on current market rates. Interest rate changes generally do not affect the fair value of variable rate debt
instruments, but do impact future earnings and cash flows. Holding debt levels constant, a one percentage point increase in interest rates would decrease earnings and cash flows for variable rate debt by approximately $4,000.





The Companys Series A redeemable preferred stock is carried at its redemption value which approximates fair value and it
is not subject to interest rate risk.





Item 8.    Financial Statements and Supplementary Data





The
Companys Consolidated Financial Statements are included on pages F-1 through F-38 of this Annual Report on Form 10-K/A (No.2).





The following table presents summarized historical quarterly results of operations for each of the fiscal quarters in the Companys fiscal years ended December 31, 2001 and 2000. These quarterly results are unaudited,
but, in the opinion of management, have been prepared on the same basis as the Companys audited financial information and include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the
information set forth therein. The data should be read in conjunction with the Financial Statements and related notes included on pages F-1 through F-38 of this Annual Report on Form 10-K/A (No.2).





The Company expects that its revenues and results of operations may fluctuate significantly from quarter to quarter and will depend on a
number of factors, many of which are outside the Companys control. These factors include actions relating to regulatory matters, the extent to which the Companys products gain market acceptance, the timing and size of distributor
purchases, introduction of alternative means for testing for HIV, competition, the timing and cost of new product introductions, and general economic conditions.





HISTORICAL QUARTERLY RESULTS OF OPERATIONS


(in thousands, except per share data)


(UNAUDITED)





Year ended December 31, 2001

First Quarter


Second Quarter


Third Quarter


Fourth QuarterTotal revenue

$
1,402


$
1,612


$
1,465


$
2,347Products costs


1,990



1,743



1,487



1,766Gross profit (loss)


(588
)


(131
)


(22
)


581Operating expenses


2,452



2,492



1,599



1,743Interest income (expense) and other income


(484
)


(336
)


(5
)


Income taxes


(2
)










Extraordinary gain on repurchase of beneficial conversion feature






145







Dividend on mandatorily redeemable Series A preferred stock


(30
)


(30
)


(30
)


(30
)Net loss attributable to common stockholders

$
(3,556
)

$
(2,844
)

$
(1,656
)

$
(1,192
)Net loss per share attributable to common stockholders*

$
(0.14
)

$
(0.10
)

$
(0.05
)

$
(0.03
)




57




---

##### Table of Contents




Year ended December 31, 2000

First Quarter


Second Quarter


Third Quarter


Fourth QuarterTotal revenue

$
1,098


$
787


$
835


$
576Product costs


1,417



1,307



1,588



1,579Gross profit (loss)


(319
)


(520
)


(753
)


(1,003
)Operating expenses


1,853



2,785



2,411



2,773Interest income (expense) and other income


(3
)


100



61



17Income taxes


(2
)










Dividend on mandatorily redeemable Series A preferred stock


(30
)


(30
)


(30
)


(30
)Net loss attributable to common stockholders

$
(2,207
)

$
(3,235
)

$
(3,133
)

$
(3,789
)Net loss per share attributable to common stockholders

$
(0.11
)

$
(0.13
)

$
(0.13
)

$
(0.15
)


---

|* |  | The sum of earnings per share for the four quarters is different from the full year amount as a result of computing the quarterly and full year amounts on the
weighted average number of common shares outstanding in the respective periods.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure





None.




58




---

##### Table of Contents

PART III





Item 10.    Executive Officers and Directors of the Registrant





The
following table sets forth certain information with respect to the executive officers and directors of the Company as of February 28, 2002:





Name

Age

PositionDavid E. Collins(3)(4)

68

Chairman of the Board of DirectorsNancy E. Katz(5)

43

President, Chief Executive Officer and Member of the Board of DirectorsRichard D. Brounstein

52

Executive Vice President, Chief Financial Officer and Member of the Board of
DirectorsJohn J. DiPietro (1)(4)

44

Member of the Board of DirectorsPaul Freiman(1)(2)(3)

68

Member of the Board of DirectorsJulius R. Krevans, M.D.(1)(2)(4)(5)

78

Member of the Board of DirectorsMark Novitch, M.D.(1)(3)(4)

70

Member of the Board of DirectorsZafar Randawa, Ph.D(5)

54

Member of the Board of DirectorsClaudie E. Williams(2)(3)

51

Member of the Board of Directors


---

|(1) |  | Member of the Audit Committee
|--- |  | -----------------------------

|(2) |  | Member of the Compensation Committee
|--- |  | ------------------------------------

|(3) |  | Member of the Nominating Committee
|--- |  | ----------------------------------

|(4) |  | Member of the Compliance Committee
|--- |  | ----------------------------------

|(5) |  | Member of the Technology Committee
|--- |  | ----------------------------------




David E. Collins was elected as the Companys Chairman of the Board in June 2000. He served as the Companys Vice Chairman of the Board of Directors from December 1997 until June 2000,
and has been a member of the Board of Directors since December 1995. From October 1999 until June 2000 he also served as the Companys Chief Executive Officer. From September 1989 until September 1994 he served as Executive Vice President with
Schering-Plough Corporation, a pharmaceutical company, and President of the HealthCare Products division, responsible for all over-the-counter (OTC) and consumer health care products. From February 1988 to August 1989, he was a founding
partner of Galen Partners, a venture capital firm. From July 1962 to February 1988, he held several positions at Johnson & Johnson, including Vice Chairman of the Board of Directors for Public Affairs & Planning and Vice Chairman for the
Executive Committee & Chairman of the Consumer Sector. Mr. Collins is also a member of the Board of Directors of Claneil Enterprises, Inc., a private company that is the parent company of Trilobite Lakes Corp., the largest shareholder in
Calypte. Mr. Collins received his L.L.B. at Harvard Law School and his B.A. at the University of Notre Dame.





Nancy E. Katz has served as the Companys President and Chief Executive Officer since December 2001. From June 2000 through December 2001 she was the Companys President, Chief Executive Officer and Chief Financial
Officer. From October 1999 until June 2000 she was President, Chief Operating Officer and Chief Financial Officer of the Company. She has been a member of the Board since October 1999. Prior to joining Calypte, Ms. Katz served as president of Zila
Pharm Inc., a prescription and non-prescription oral health care products company. From 1995 to 1998, Ms. Katz led sales and marketing efforts for LifeScan, the diabetes testing division of Johnson & Johnson. Ms. Katz also served as vice
president of U.S. marketing, directing LifeScans marketing and customer call center departments. During her seven-year career at Schering-Plough Healthcare Products from 1987 to 1994, she held numerous positions including senior director, and
general manager, marketing director, Footcare New Products, and product director, OTC New Products. Ms. Katz also held various product management positions at Whitehall Laboratories, a division of American Home Products, from 1981 to 1987. Ms. Katz
is a member of the Board of Directors of Neoprobe Corporation. Ms. Katz received her B.A. from the University of South Florida.




59




---

##### Table of Contents




Richard D. Brounstein, CPA was elected as a member of the Board in
December 2001, concurrent with joining the Company as its Executive Vice President and Chief Financial Officer. Mr. Brounstein served the Company as a financial consultant from July 2001 through December 2001. Prior to joining Calypte,
Mr. Brounstein served as Senior Vice President and Chief Financial Officer of Certicom Corporation, a public mobile and wireless software security company from 2000 to 2001. From 1997 to 2000, Mr. Brounstein served as Vice President, Finance
and Chief Financial Officer for VidaMed, Inc., a public growth-stage medical device company. From 1989 to 1997, Mr. Brounstein served as Vice President, Finance and Administration and Chief Financial Officer of MedaSonics, Inc., a manufacturer of
non-invasive medical ultrasound devices. Mr. Brounstein received both his MBA in Finance and his BA in Accounting from Michigan State University.





John J. DiPietro was elected to the Companys Board of Directors in October 1999. He is presently the Chief Financial Officer and Vice PresidentFinance and Administration of TriPath
Technology, Inc., a semi-conductor manufacturing company. He had served as the Companys Chief Operating Officer, Vice President of Finance, Chief Financial Officer and Secretary from 1997 to 1999. From October 1995 until December 1997, he
served as the Vice President of Finance, Chief Financial Officer and Secretary. Prior to joining the Company, he was Vice President of Finance, Chief Financial Officer and Secretary of Meris Laboratories, Inc., a full service clinical laboratory,
from 1991 until 1995. 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 Freiman has served as a member of the Companys 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. From 1962 until 1994, he held several other positions at Syntex
Corporation, including President and Chief Operating Officer. Mr. Freiman is currently serving on the board of Penwest Pharmaceuticals Corp., 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.





Julius R. Krevans, M.D. has served on the Companys Board of Directors since March 1995. Dr. Krevans has been Chancellor Emeritus and Director of International Medical Care at University of California at San Francisco
since 1993. From 1982 until 1993, Dr. Krevans served as Chancellor at UCSF, and was Dean of the School of Medicine at UCSF from 1971 until 1982. Prior to this, Dr. Krevans served as Dean for Academic Affairs at Johns Hopkins University School of
Medicine where he also served on the faculty for 18 years and was Professor of Medicine from 1968 until 1971. He is also Chairman of the Board of Directors of Neoprobe Corporation. 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.





Mark Novitch,
M.D. has served on the Companys Board of Directors since September 1995. Since 1993, Dr. Novitch has been a private consultant in the pharmaceutical industry. Dr. Novitch was an Adjunct Professor at George Washington University Medical
Center from July 1997 to June 2001. From October 1994 to June 1997 Dr. Novitch served as a Professor of Health Care Sciences at George Washington University Medical Center. From 1985 until 1993, he served in senior executive positions with the
Upjohn Company, a medical products company, including Vice Chairman of the Board of Directors, Corporate Executive Vice President, Corporate Senior Vice President for Scientific Administration and Corporate Vice President. Prior to this, for 14
years, Dr. Novitch served with the FDA where from 1983 until 1984 he was Acting Commissioner. For seven years, Dr. Novitch was on the faculty at Harvard Medical School. He is a member of the Board of Directors of Alteon, Inc., Neurogen
Corporation, Guidant Corporation, and Kos Pharmaceutical. Dr. Novitch received his A.B. from Yale University, and his M.D. from the New York Medical College.





Zafar Randawa, Ph.D. has served on the Companys Board of Directors since December 1996. Dr. Randawa is currently the Director of the New Technology Evaluation Division of Otsuka
America Pharmaceutical, Inc. and has served in this capacity since September 1995. From 1989 until September 1995,




60




---

##### Table of Contents

Dr. Randawa served as a Chief Scientist at Otsuka America Pharmaceutical, Inc. Dr. Randawa received his Ph.D. in Biochemistry at Oregon Health Sciences University, his Master of Science degree in
Biochemistry at Karachi University in Karachi, Pakistan, his B.S. in Biochemistry from Karachi University and his B.S. in Chemistry from Panjab University in Lahore, Pakistan.





Claudie E. Williams was elected to the Board was elected to the Companys Board of Directors in April 2000. Ms. Williams is currently Executive Vice President,
Mergers and Acquisitions of Claneil Enterprises, Inc., a private holding company. Pursuant to an agreement in April, 2000 by which Trilobite Lakes Corp., a wholly owned subsidiary of Claneil, purchased 1,951,220 shares of Common Stock of Calypte,
Ms. Williams was designated by Trilobite to be nominated for election to the Calypte Board of Directors. Prior to joining Claneil in January 2000, Ms. Williams spent 24 years with Johnson & Johnson, Inc., where she worked in both the
pharmaceutical and consumer products businesses. From 1975 to 1992, Ms. Williams worked with McNeil Pharmaceutical, a Johnson & Johnson company, where she held a variety of positions in domestic and international marketing and sales. She served
as Vice President of Product Management and as a member of the Management Board from 1988 to 1992. From 1992 to 1999, Ms. Williams held various marketing and business development positions with Johnson & Johnson Worldwide Consumer Franchises.
From 1997 to 1998, she served as Vice President, General Manager of the Rx-to OTC Skincare Business Unit at Johnson & Johnson Consumer products and was a member of the operating companys Management Board. Ms. Williams received her B.A.
degree from the University of California at Irvine.





Compliance with Section 16(a) of the Exchange Act





Section 16(a) of the Securities Exchange Act of 1934 requires the Companys executive officers, directors, and persons who own more
than 10% of a registered class of the Companys equity securities, to file report of ownership on Form 3 and changes in ownership on Form 4 or 5 with the Securities and Exchange Commission and the National Association of Securities Dealers.
Such officers, directors and ten percent stockholders are also required by the Securities and Exchange Commission rules to furnish the Company with copies of all Section 16(a) forms that they file.





The Company believes that during fiscal year 2001, all the Reporting Persons complied with all applicable filing requirements subject to
the following exceptions: Mr. Brounstein had one late filing of a report on Form 3 with respect to an option to purchase Calypte Common Stock granted prior to the time he became subject to reporting under Section 16.





Item 11.    Executive Compensation





Director Compensation





The Companys directors are reimbursed for their out-of-pocket travel expenses associated with their attendance at Board meetings.
Under the Companys 1995 Director Option Plan, non-employee directors of the Company are eligible to receive grants of options to purchase shares of Common Stock.





The Companys Board of Directors adopted the Director Option Plan in December 1995 and the stockholders approved it in 1996. It was most recently amended at the
Companys September 2001 Annual Stockholders Meeting to increase the number of shares authorized for issuance under the Plan. Under the Director Option Plan, the Company has reserved 2,850,000 shares of common stock for issuance to the
directors of the Company in the form of nonstatutory stock options. The Companys Board of Directors determines the number of shares of the Companys stock that will be granted each year to newly-elected and re-elected directors. Options
may be granted under this plan to non-employee directors or directors who also serve consultants of the Company. Each option granted under the Director Option Plan shall be exercisable at 100% of the fair market value of the Companys common
stock on the date such option was granted. Each grant under the plan will vest monthly over the twelve month period commencing with the directors date of election or re- election, provided




61




---

##### Table of Contents

that the option will become vested and fully exercisable on the date of the next annual meeting of stockholders if such meeting occurs less than one year after the date of the grant. The plan
shall be in effect for a term of ten years unless sooner terminated under the Director Option Plan.





There were
350,000 Common Stock options granted in 2001 under the Director Option Plan.





Executive Compensation





The following table sets forth certain compensation awarded or paid by the Company during the years ended December 31, 2001, 2000 and 1999
to its Chief Executive Officer and each of the other executive officers of the Company (collectively, the Named Executive Officers). With the exception of entries for Mr. Brounstein, who joined the Company in 2001, the compensation table
excludes other compensation in the form of perquisites and other personal benefits that constitute the lesser of $50,000 or 10% of the total salary and bonus earned by each of the named Executive Officers in each fiscal year.





Summary Compensation Table





Name and Principal Position

Year

Salary($)


Bonus($)


LongTerm Compensation Securities Underlying Options Granted (1)


All Other Compensation($)David E. Collins(2)

2001

60,000
(3)

0


350,000
(4)

0Former Chairman of the Board of

2000

65,750
(5)

0


82,000
(6)

3,750
(7)Directors, Former Chief Executive Officer

1999

26,500
(5)

0


170,000
(8)

7,083
(9)Nancy E. Katz(10)

2001

239,039


0


900,000


0President, Chief Executive Officer, Chief

2000

240,962


98,775
(11)

300,000


0Financial Officer and Member of the Board of Directors

1999

42,308


0


450,000


0Richard D. Brounstein(12)

2001

4,808


0


750,000
(13)

26,000
(14)Executive Vice President, Chief Financial Officer and Member of the Board of Directors


---

|(1) |  | All figures in this column represent options to purchase the Companys common stock.
|--- |  | ------------------------------------------------------------------------------------




|(2) |  | Mr. Collins has served as Chairman of the Board since June 2000. He served as Vice Chairman of the Board of Directors from December 1997 through May 2000 and as
member of the Board of Directors since December 1995. Mr. Collins also served as Chief Executive Officer from October 1999 to June 2000.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(3) |  | Represents amounts paid pursuant to the October 2000 Consulting Agreement between Mr. Collins and the Company. Payment was made in the form of 43,636 shares of
Calypte Common Stock granted to Mr.Collins at par value of $0.001 per share and which were valued at $1.375 per share on the date of the share grant.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(4) |  | Represents option grant for 50,000 shares pursuant to service as a Director of the Company and an option grant for 300,000 shares pursuant to the October 2001
Consulting Agreement between Mr. Collins and the Company under which he serves as Chairman of the Board.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(5) |  | Represents amounts paid or accrued pursuant to the October 1999 Consulting Agreement between Mr.Collins and the Company.
|--- |  | ------------------------------------------------------------------------------------------------------------------------




|(6) |  | Reflects option grant for 12,000 shares for service as a Director of the Company, option grant for 20,000 shares for service as Chairman of the Board of
Directors of the Company, and an option grant for 50,000 shares made upon cancellation of certain options previously granted, and re-issuance at the same price as the cancelled grant.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



62




---

##### Table of Contents




|(7) |  | Represents Directors fees for services rendered in 1999 and 2000.
|--- |  | -----------------------------------------------------------------







|(8) |  | Reflects option grant for 150,000 shares under the terms of the October 1999 Consulting Agreement between Mr. Collins and the Company and an option grant for
20,000 shares pursuant to service as a Director of the Company.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(9) |  | Represents Directors fees for services rendered in 1998 and 1999.
|--- |  | ------------------------------------------------------------------




|(10) |  | Ms. Katz has served as President and Chief Executive Officer since December 2001. From June 2000 through December 2001, she served as President, Chief Executive
Officer and Chief Financial Officer. She joined the Company in October 1999 as President, Chief Operating Officer, and Chief Financial Officer.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(11) |  | Represents stock bonus of 25,000 shares valued at $50,000 plus grossup for payment of income taxes.
|---- |  | ----------------------------------------------------------------------------------------------------




|(12) |  | Mr. Brounstein joined the Company in December 2001 as Executive Vice President and Chief Financial Officer. He had served the Company as a Financial Consultant
from July 2001 through December 2001.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(13) |  | Represents option grant for 500,000 shares pursuant to Employment Agreement between Mr. Brounstein and the Company and an option grant for 250,000 shares made
pursuant to the July 2001 Consulting Contract between Mr. Brounstein and the Company.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(14) |  | Represents cash payments made pursuant to the July 2001 Consulting Contract between Mr. Brounstein and the Company.
|---- |  | -------------------------------------------------------------------------------------------------------------------




The following table sets forth information concerning stock options granted to the Named Executive Officers during the fiscal year ended
December 31, 2001:





Stock Option Grants in Last Fiscal Year


Individual Grants





Number of Securities Underlying Options Granted


Percent of Total Options Granted to Employees
in Fiscal Year(1)


Exercise Price ($/sh)(2)


Expiration Date

Potential Realizable Value at
Assumed Annual Rates of Stock Price Appreciation for Option Term(3)Name





5%($)

10%($)David E. Collins

50,000
(4)

0.60
%

0.2000


9/20/11

6,289

15,937300,000
(5)

3.59
%

0.2200


12/11/11

41,507

105,187Nancy E. Katz

36,184
(6)

0.43
%

0.3800
(7)

4/24/11

8,647

21,91482,500
(8)

0.99
%

0.2700
(7)

6/21/11

14,009

35,50179,024
(9)

0.95
%

0.2900


7/16/11

14,412

36,524123,750
(10)

1.48
%

0.1600


9/24/11

12,452

31,556578,542
(11)

6.92
%

0.2400


10/31/11

87,322

221,291Richard D Brounstein

250,000
(12)

2.99
%

0.2000


8/16/11

31,445

79,687500,000
(13)

5.98
%

0.2200


12/11/11

69,178

175,312


---

|(1) |  | Based on the aggregate of 8,007,522 options granted under the Companys 2000 Equity Incentive Plan to employees and consultants to the Company and 350,000
options granted to Consultant Directors under the Companys 1995 Director Option Plan during the year ended December 31, 2001, including the Named Executive Officers.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(2) |  | The exercise price was based on the closing price of the stock on the date of grant as reported on the Over the Counter Bulletin Board, except as otherwise
indicated.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(3) |  | The assumed 5% and 10% compound rates of annual stock appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the
Companys estimate or projection of future common stock prices. Assuming a ten-year option term, annual compounding results in total appreciation of 62.9% (at 5% per year) and 159.4% (at 10% per year).
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



63




---

##### Table of Contents




|(4) |  | Options granted under the Director Option Plan become exercisable at the rate of 4,166 shares per month beginning October 20, 2001, continuing at that rate on
each monthly anniversary thereafter through the earlier of September 20, 2002, or the date of the next stockholders meeting, at which time all unvested options will vest. The options expire ten years from the date of grant. The grant was made
pursuant to service as a Director of the Company.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(5) |  | Represents option grant for 300,000 shares pursuant to October 2001 Consulting Agreement between Mr. Collins and the Company under which he serves as
Chairman of the Board of Directors. The options become exercisable ratably each month over the twelve-month term of the Consulting Agreement. The options expire ten years from the date of grant.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(6) |  | Options became exercisable six months following the April 24, 2001 grant date. The options expire ten years from the date of grant.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------




|(7) |  | The exercise price was based on the closing price of the stock on the date of grant as reported on the Nasdaq SmallCap Market.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------




|(8) |  | Options became exercisable three months following the June 24, 2001 grant date. The options expire ten years from the date of grant.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------




|(9) |  | Options became exercisable at the rate of 15,805 shares per month beginning on August 16, 2001, continuing at that rate on each monthly anniversary thereafter
through November 16, 2001. The options expire ten years from the date of grant.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(10) |  | Options become exercisable at the rate of 20,625 shares per month beginning on October 24, 2001, continuing at that rate on each monthly anniversary thereafter
through February 24, 2002. The options expire ten years from the date of grant.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(11) |  | Options for 192,848 shares were immediately exercisable on the grant date, October 31, 2001. Options for an additional 192,847 shares become exercisable on the
first anniversary of the grant date and options for the remaining 192,847 shares become exercisable on the second anniversary of the grant date. The options expire ten years from the date of grant.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(12) |  | Options were immediately exercisable at the date of grant, August 16, 2001. The options expire ten years from the date of grant. The grant was made pursuant to
the Consulting Agreement between Mr. Brounstein and the Company.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(13) |  | Options for 166,667 shares were immediately exercisable on the grant date, December 11, 2001. Options for an additional 166,667 shares become exercisable on the
first anniversary of the grant date and options for the remaining 166,666 shares become exercisable on the second anniversary of the grant date. The options expire ten years from the date of grant. The grant was made in conjunction with the hiring
of Mr. Brounstein as an employee of the Company.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



64




---

##### Table of Contents




The following table sets forth information concerning option exercises for the
year ended December 31, 2001, with respect to each of the Named Executive Officers.





Aggregated Option Exercises in
2001


and December 31, 2001 Option Values





Name

Shares Acquired on Exercise (#)

Value Realized ($)(2)

Number of Securities Underlying Unexercisable Options at Fiscal Year End (#) (Exercisable/Unexercisable)(1)

Value of Unexercised In-the-Money Options at Fiscal Year End ($) (Exercisable/ Unexercisable)(1)(3)David E. Collins

100,000

34,380

0/0

0/0Nancy E. Katz

162,204

40,551

61,875/61,875

1,856/1,856Richard D. Brounstein

0

0

0/0

0/0


---

|(1) |  | Reflects in-the-money options granted under the 2000 Equity Incentive Plan.
|--- |  | ---------------------------------------------------------------------------




|(2) |  | Value realized is based on the fair market value of the shares on the date of exercise as reported on the Nasdaq SmallCap Market minus the exercise price
multiplied by the number of shares acquired on exercise.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(3) |  | Value of unexercised in-the-money options is based on a value of $0.1900 per share of the Companys Common Stock, the closing price on December 31, 2001 as
quoted on the Over the Counter Bulletin Board. Amounts reflect such fair market value minus the exercise price multiplied by the number of shares to be acquired on exercise and do not indicate that the optionee actually sold such stock.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Compensation Committee Interlocks and Insider Participation





The Compensation Committee is responsible for determining salaries, incentives and other forms of compensation for directors, officers and
other employees of the Company and administers various incentive compensation and benefit plans. The Compensation Committee consists of Mr. Freiman, Dr. Krevans, and Ms. Williams.





David E. Collins, Chairman of the Board of Calypte, is a member of the Board of Directors of Claneil Enterprises, Inc. and serves on Claneils Compensation Committee.
Claudie E. Williams, a member of Calyptes Board of Directors also serves on Calyptes Compensation Committee. Ms. Williams is Executive Vice President, Mergers and Acquisitions, of Claneil.





Employment Agreements





In October 1999, the Company entered into an employment agreement with Nancy E. Katz as the President, Chief Operating Officer, and Chief Financial Officer of the Company, which provided for an annual salary of $220,000. In addition,
Ms. Katz was granted 450,000 stock options, 150,000 of which vested immediately and the balance of which vest over 24 months. Ms. Katz is also entitled to a bonus upon the achievement of milestones mutually agreed to by the officer and the Board of
Directors. In October 2000, Ms. Katz was granted a stock bonus of 25,000 shares valued at $50,000 at the time of grant, plus a gross-up for payment of income taxes. During 2001, Ms. Katz received option grants aggregating 900,000 shares and having
vesting periods between 3 months and 24 months. In the event Ms. Katz employment is terminated by the Company other than for cause, she will receive her base salary for twelve months. In the event of a change in control, any unvested stock
options will become fully vested.





In October 1999, the Company entered into a consulting agreement with David E.
Collins, then Vice-Chairman of the Board of Directors and currently Chairman of the Board, to serve as Chief Executive Officer effective from October 1999 through October 2000. Under the terms of the agreement, Mr. Collins received




65




---

##### Table of Contents

compensation of $1,000 for each day devoted to the Companys business and was granted options to purchase 150,000 shares of the Companys stock. In January 2001, Mr. Collins received a
stock grant of 43,636 shares of the Companys stock valued at $60,000 under the terms of the consulting agreement effective October 2000 for service as a consultant and as Chairman of the Board from October 2000 through September 2001.
Additionally, in December 2001, Mr. Collins was granted options to purchase 300,000 shares of the Companys stock under the terms of the consulting agreement effective October 2001 for service as a consultant and as Chairman of the Board from
October 2001 through September 2002. Under the terms of the 1999, 2000 and 2001 agreements, Mr.Collins commits to spend not less than 5 days per month on Company business and is entitled to receive cash compensation of $1,000 per day for days in
excess of 5 per month devoted to the Companys business. No such compensation has been paid to Mr. Collins since July 2000 nor has he been reimbursed for expenses incurred in his capacity as a member of the Board of Directors since September
2000.





Item 12.    Security Ownership of Certain Beneficial Owners and Management





Except as set forth in the footnotes to this table, the following table sets forth information known to the Company with respect to the beneficial ownership of its Common Stock as of March 1, 2002 for (i) all persons known by the
Company to own beneficially more than 5% of its outstanding Common Stock, (ii) each of the Companys directors, (iii) each Named Executive Officer and (iv) all directors and executive officers of the Company as a group.





5% Stockholders, Directors and Officers(1)

Shares Beneficially Owned


% of Total(2)Trilobite Lakes Corp.(3)

2,099,886
(4)

5.0
%Silverside Carr Executive Center, Suite 14 501 Silverside Road Wilmington, DE 19809Claudie E. Williams(3)(4)

2,099,886
(5)

5.0
%Zafar Randawa, Ph.D.(6)

1,367,313


3.3
%David E. Collins(7)

3,144,097


7.6
%Nancy E. Katz(8)

1,405,433


3.3
%Richard D. Brounstein(9)

416,667


*John DiPietro(10)

233,514


*Mark Novitch, M.D.(11)

231,763


*Paul Freiman(12)

126,166


*Julius Krevans, M.D.(13)

83,166


*All directors and executive officers as a group (9 persons)

6,978,119


15.7
%


---

|* |  | 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, 1265
Harbor Bay Parkway, Alameda, California 94502.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(2) |  | Based on 41,958,480 shares outstanding as of March 1, 2002.
|--- |  | -----------------------------------------------------------




|(3) |  | David E. Collins, the Chairman of the Board of Calypte serves on the Board of Directors of Claneil Enterprises, Inc. and is a member of Claneils
Compensation Committee. Claudie E. Williams is the designated nominee of Trilobite Lakes Corp. a wholly-owned subsidiary of Claneil. Ms. Williams is Executive Vice President, Mergers and Acquisitions of Claneil.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(4) |  | Includes 100,000 shares issuable pursuant to a warrant for the purchase of common stock and 48,666 shares subject to options exercisable within 60 days granted
with respect to Ms. Williams service as a
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



66




---

##### Table of Contents

| | director of Calypte. All shares listed are held by Trilobite Lakes Corporation. Ms. Williams disclaims beneficial ownership of these shares.
| | --------------------------------------------------------------------------------------------------------------------------------------------




|(5) |  | Includes 2,051,220 shares held by Trilobite Lakes Corporation. Ms. Williams is the designated nominee of Trilobite Lakes Corporation, a wholly-owned subsidiary
of Claneil Enterprises, Inc. Ms. Williams is Executive Vice President, Mergers and Acquisitions of Claneil. Ms. Williams disclaims beneficial ownership of these shares.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(6) |  | Includes 74,166 shares subject to options exercisable within 60 days. Dr. Randawa is a director of the Company and an affiliate of Otsuka Pharmaceutical Co.,
Ltd. All shares listed are held by Otsuka. Dr.Randawa disclaims beneficial ownership of the shares except to the extent of his affiliation with Otsuka.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(7) |  | Mr. Collins directly owns 773,574 shares. The figure reported includes 240,637 shares subject to options exercisable within 60 days and 2,099,886 shares held by
Trilobite Lakes Corp. Claneil Enterprises, Inc. is an affiliate of Trilobite Lakes Corp. and Mr. Collins is a member of the Board of Directors of Claneil Enterprises, Inc. Mr. Collins disclaims beneficial ownership of these shares except to the
extent of his affiliation with Claneil. Mr. Collins has abstained in the past and intends to abstain in the future from participating when matters involving these shares are addressed by the Board of Directors of Claneil Enterprises, Inc.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|(8) |  | Includes 1,110,536 shares subject to options exercisable within 60 days.
|--- |  | ------------------------------------------------------------------------




|(9) |  | Includes 416,667 shares subject to options exercisable within 60 days.
|--- |  | ----------------------------------------------------------------------




|(10) |  | Includes 226,166 shares subject to options exercisable within 60 days.
|---- |  | ----------------------------------------------------------------------




|(11) |  | Includes 84,166 shares subject to options exercisable within 60 days.
|---- |  | ---------------------------------------------------------------------




|(12) |  | Includes 126,166 shares subject to options exercisable within 60 days.
|---- |  | ----------------------------------------------------------------------




|(13) |  | Includes 69,166 shares subject to options exercisable within 60 days.
|---- |  | ---------------------------------------------------------------------




Item 13.    Certain Relationships and Related Transactions





In
August 2001, the Company executed a promissory note in the amount of $400,000 to LHC Corporation, the parent company of Trilobite Lakes Corporation, its largest stockholder. Trilobite Lakes Corporation (Trilobite). Trilobite is an
affiliate of Claneil Enterprises, Inc. David Collins, the Chairman of the Board of Calypte serves on the Board of Directors of Claneil and is a member of Claneils Compensation Committee. Pursuant to the Common Stock Purchase Agreement dated
March 2, 2000, Claudie Williams, a representative designated by Trilobite was elected to Calyptes Board of Directors. The Calypte Board will nominate a representative selected by Trilobite for election to the Calypte Board for so long as
Trilobite holds one-half of the shares it acquired through the Common Stock Purchase Agreement. The note required interest at 8.5% per annum and principal plus accrued interest was due no later than September 14, 2001. The note was secured by
certain inventory and accounts receivable. In December 2001, the parties agreed to execute a new note in the amount of $411,000, representing the unpaid principal and accrued but unpaid interest on the previous note. This note bears interest at 8.5%
and was due in installments of $200,000 on February 28, 2002 and $35,000 per month thereafter until paid in full, plus accrued interest. The repayment terms of the Note were renegotiated in February 2002. The Note now requires payments of $17,500 at
the end of February and March 2002, increasing to $35,000 monthly thereafter unless and until the Company raises at least $2 million in external financing, not including the convertible debentures and warrants agreement entered into on February 11,
2002 and discussed more fully under Liquidity and Capital Resources in Item 7 of this Form 10-K. If there is a remaining balance under the Note upon the Companys obtaining proceeds of at least $2 million of external financing, the
Company is obligated to repay $200,000 on the note and should any balance on the Note remain thereafter, the Company is obligated to continue monthly payments of $35,000 until the Note is repaid in full. The Company made the required $17,500 payment
on February 28, 2002.





In November 2001, the Company sold 1,575,855 shares of Common Stock under Regulation D to
various investors in a private placement at $0.19 per share, receiving net proceeds of $295,000. The private placement




67




---

##### Table of Contents

did not include registration rights. Therefore, pursuant to Rule 144 of the Securities Act, the transfer of the securities purchased by the investors will be restricted for twelve months from the
date of purchase. Three members of the Companys Board of Directors, David Collins, Nancy Katz, and Mark Novitch, purchased an aggregate of 721,154 shares of this offering. The purchase transactions by the Companys board members were on a
fair and reasonable basis and on terms more favorable to the Company than could have been obtained with non-affiliated parties as a result of the financial condition of the Company at the time.




68




---

##### Table of Contents

PART IV





Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K





| | (a) |  | Certain Documents Filed as Part of the Form 10-K
| | --- |  | ------------------------------------------------




1. Financial Statements





2. Financial Statement Schedules





The following financial statement schedule of Calypte Biomedical Corporation for the years ended December 31,
2001, 2000 and 1999 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Calypte Biomedical Corporation.





Schedule

PagesIndependent Auditors Report on Financial Statement Schedule

S1II. Valuation and Qualifying Accounts

S2





Other schedules not listed have been omitted because the
information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto.





3. Exhibits





2.1^^

Asset Purchase Agreement, dated as of November 18, 1998, between Calypte and Cambridge.3.1%

Bylaws of the Registrant, as amended on April 19, 2000.3.2**

Restated Certificate of Incorporation of Calypte Biomedical Corporation, a Delaware corporation, filed July 31, 1996.3.3

Certificate of Amendment of the Amended and Restated Certificate of Incorporation of Calypte Biomedical Corporation effective as of September 28,
2001.4.1^^^^

Rights Agreement between the Registrant and ChaseMellon Shareholders L.L.C. as Rights Agents dated December 15, 1998.10.1*

Form of Indemnification Agreement between the Company and each of its directors and officers.10.2

2000 Incentive Stock Plan, as amended.10.3####

1995 Director Option Plan, as amended.10.4

1995 Employee Stock Purchase Plan.10.5*

Lease Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated as of November 30, 1990.10.6*

Second Lease Extension Agreement between Registrant and Charles A. Grant and Mark Greenberg, dated as of May 14, 1991.10.7*

Lease Extension Agreement between Registrant and Charles A. Grant and Mark Greenberg, dated as of February 5, 1992.10.8*

Lease Extension Agreement between Registrant and Charles A. Grant and Mark Greenberg, dated as of April 15, 1993.10.9*

Standard Form Lease 12551275 Harbor Bay Parkway Harbor Bay Business Park between Commercial Center Bank and the Registrant, dated as of August 22,
1992.10.12*

Employment Agreement between the Registrant and Howard B. Urnovitz, dated as of January 25, 1995.10.15^*

License Agreement between the Registrant and New York University, dated as of August 13, 1993.




69




---

##### Table of Contents

10.16*

First Amendment to License Agreement between the Registrant and New York University, dated as of January 11, 1995.10.17*

Second Amendment to License Agreement between the Registrant and New York University, dated as of October 15, 1995.10.18^*

Third Amendment to License Agreement between the Registrant and New York University, dated as of January 31, 1996.10.19^*

Research Agreement between the Registrant and New York University, dated August 12, 1993.10.20^*

First Amendment to Research Agreement between the Registrant and New York University, dated as of January 11, 1995.10.21^*

Sublicense Agreement between the Registrant and Cambridge Biotech Corporation, dated as of March 31, 1992.10.22^*

Master Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996.10.23^*

SubLicense Agreement between the Registrant and Cambridge Biotech Corporation, dated as of April 12, 1996.10.24^*

Agreement between the Registrant and Repligen Corporation, dated as of March 8, 1993.10.25^*

NonExclusive License Agreement between the Registrant and The Texas A&M University System, dated as of September 12, 1993.10.27^*

Distribution Agreement between the Registrant and Otsuka Pharmaceutical Co., Ltd., dated as of August 7, 1994.10.29^*

Distribution Agreement between the Registrant and Travenol Laboratories (Israel), Ltd., dated as of December 31, 1994.10.33*

Form of Option Agreement for Stockholders of Pepgen Corporation, dated as of October 12, 1995.10.35*

Equipment Lease Agreement between the Registrant and Phoenix Leasing, dated as of August 20, 1993.10.36*

Equipment Lease Agreement between the Registrant and Meier Mitchell/GATX, dated as of August 20, 1993.10.37**

Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated as of February 3, 1997.10.39**

Equipment Lease Agreement between the Registrant and MMC/GATX, dated September 30, 1996.10.40^**

Joint Venture Agreement between the Registrant and Trinity Biotech plc10.41***

Second Addendum to Lease between the Registrant and Commercial Center Bank dated as of July 21, 1997.10.42***

Lease extension agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated December 9, 1997.10.45^^

Lease extension agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated April 25, 1998.10.46****

Employment Agreement between the Registrant and William A. Boeger dated as of October 28, 1998.10.47****

Employment Agreement between the Registrant and John J. DiPietro dated as of October 28, 1998.




70




---

##### Table of Contents

10.48****

Guaranty made by Chih Ping Liu for the benefit of the Registrant dated September 30, 1998.10.49#

Loan and Security Agreement between the Registrant and Silicon Valley Bank, dated December 21, 199810.50#

Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated February 26, 199910.51##

NonExclusive Patent and License Agreement between the Registrant and Public Health Service, dated June 30, 199910.52##

Distribution Agreement between the Registrant and CarterWallace, Inc., dated as of September 9, 199910.53##

Letter Agreement between the Registrant and John J. DiPietro, dated as of September 17, 199910.54##

Consulting Agreement between the Registrant and John J. DiPietro, dated as of September 17, 199910.55*****

Master Lease Agreement between Aquila Biopharmaceuticals, Inc., Landlord, and Biomerieux Vitek, Inc., Tenant, dated as of October 22, 199610.56*****

First Amendment to Lease between Aquila Biopharmaceuticals, Inc. Landlord, and Biomerieux Vitek, Inc., Tenant, dated October 2, 199710.57*****

Sublease Agreement between Registrant and Cambridge Biotech Corporation, assignee of Biomerieux, Inc. dated as of December 17, 199810.58*****

Sublease Agreement between Registrant and Cambridge Biotech Corporation, sublessee of DynCorp, dated as of December 17, 199810.59*****

Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated October 12, 199910.60*****

Consulting Agreement between the Registrant and William A. Boeger dated as of October 18, 199910.61*****

Consulting Agreement between the Registrant and David Collins dated as of October 18, 199910.62*****

Employment Agreement between the Registrant and Nancy E. Katz, dated as of October 18, 199910.63*****

Letter of Intent re Modification of Distribution Agreement between Registrant and Otsuka Pharmaceutical Co., Ltd. dated as of December 10, 199810.64###

Loan Modification Agreement between Registrant and Silicon Valley Bank dated as of November 15, 1999.10.65###

Loan Modification Agreement between Registrant and Silicon Valley Bank dated as of January 30, 2000.10.66###

Restated Technology Rights Agreement between Registrant and Howard B. Urnovitz, Ph.D. dated as of March 1, 2000.10.67###

Technology Rights Agreement between Registrant and Chronix Biomedical dated as of March 1, 2000.10.68^ ###

Exclusive Independent Contractor Agreement for Project Sentinel between Clinical Reference Laboratory, Inc. and Registrant dated as of January 21,
2000.10.69^####

Distribution Agreement between the Registrant and American Edge Medical, dated as of May 1, 2000.10.70^####

Distribution Agreement between the Registrant and Biobras S.A., dated as of May 11, 2000.10.71^####

Distribution Agreement between the Registrant and Beijing Hua Ai Science and Technology Development Co. Ltd, dated as of May 16, 2000.




71




---

##### Table of Contents

10.72####

Loan Modification Agreement between the Registrant and Silicon Valley Bank, dated as of May 24, 2000.10.73^####

Fourth Amendment to the License Agreement between the Registrant and New York University, dated as of June 1, 2000.


10.74####

2000 Equity Incentive Plan.10.75####

Lease Extension Agreement between the Registrant and Charles A. Grant and Mark Greenberg, dated June 26, 2000.10.76####

Secured Promissory Note between the Registrant and Howard B. Urnovitz, dated June 30, 2000.10.77^#####

Temporary Distribution Agreement between the Registrant and American Edge Medical Company effective August 1, 2000.10.78#####

Extension of Consulting Agreement between Registrant and John DiPietro effective as of September 17, 2000.10.79

Convertible Debentures and Warrants Purchase Agreement between the Registrant and AMRO International, S.A. dated January 22, 2001.10.80%

Extension of Consulting Agreement between the Registrant and William A. Boeger dated as of October 19, 2000.10.81%

Second Amendment to Employment Agreement between the Registrant and Howard B. Urnovitz dated October 31, 2000.10.82%

Consulting Agreement between the Registrant and David Collins dated as of October 19, 2000.10.83^%

Agreement between the Registrant and CarterWallace, Inc. dated December 12, 2000.10.84

Stock Purchase Warrant to purchase common stock dated January 24, 2001 issued to Townsbury Investments Limited.10.85

Common Stock Purchase Agreement between Calypte and Townsbury Investments Limited dated November 2, 2000.10.86

Registration Rights Agreement between Calypte and Townsbury Investments Limited dated November 2, 2000.10.87

Escrow Agreement among Calypte, Townsbury Investments Limited and Epstein, Becker & Green, P.C. dated November 2, 2000.10.88

Amendment to Common Stock Purchase Agreement between Calypte and Townsbury Investments Limited dated January 24, 2001.10.89%%

Agreement for Purchase and Sale of Preferred Stock of Pepgen Corporation between Registrant and Biotechnology Development Fund, L.P. and Biotechnology Fund
II, L.P. dated April 17, 200110.90<

Consulting Agreement between the Registrant and David Collins dated as of October 19, 200110.91<

Third Addendum to Lease between the Registrant and Gee-Aspora LLC dated as of October 31, 200110.92

Registration Rights Agreement between the Registrant and AMRO International, S.A. dated January 22, 2001.10.93

Escrow Agreement between the Registrant and AMRO International, S.A. dated January 22, 2001.10.94

Stock Purchase Warrant to purchase common stock issued to AMRO International, S.A. on January 24, 2001.10.95

6% Convertible Debenture in the principal amount of $550,000, due April 26, 2001, issued to AMRO International, S.A.




72




---

##### Table of Contents

10.96

6% Convertible Debenture in the principal amount of $550,000, due June 11, 2001, issued to AMRO International, S.A.10.97

Common Stock Purchase Agreement between Calypte and Townsbury Investments Limited dated August 23, 2001.10.98

Registration Rights Agreement between Calypte and Townsbury Investments Limited dated August 23, 2001.10.99

Escrow Agreement among Calypte, Townsbury Investments Limited and New York Escrow Services, LLC dated August 23, 2001.10.100

Stock Purchase Warrant to purchase Common Stock dated October 19, 2001 issued to Townsbury Investments Limited.10.101^^^^^

Securities Purchase Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002.10.102^^^^^

Registration Rights Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002.10.103^^^^^

Security Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11, 2002.10.104^^^^^

Form of Secured Convertible Debenture Securities Purchase Agreement between the Registrant and Bristol Investment Fund, Ltd. dated as of February 11,
2002.10.105^^^^^

Class A Stock Purchase Warrant for 1,700,000 shares of Common Stock issued to Bristol Investment Fund, Ltd.10.106^^^^^

Class B Stock Purchase Warrant for 12,000,000 shares of Common Stock issued to Bristol Investment Fund, Ltd.10.107^^^^^

Stock Purchase Warrant for 8,500 shares of Common Stock issued to Alexander Dunham Capital Group, Inc.10.108^^^^^

Stock Purchase Warrant for 76,500 shares of Common Stock issued to Bristol Capital, LLC.10.109<

Form of Common Stock Purchase Agreement between the Registrant and certain Purchasers dated November 13, 2001.10.110<

Form of Common Stock Purchase Agreement with certain trade creditors issued pursuant to a private placement completed on February 12, 2002.21.1*

Subsidiaries of the Registrant.23.1

Consent of KPMG LLP, Independent Auditors.24.1

Power of Attorney (see page II-1).99.1

Certification Pursuant to the Sarbanes-Oxley Act of 2002 by Anthony J. Cataldo, Executive Chairman99.2

Certification Pursuant to the Sarbanes-Oxley Act of 2002 by Nancy E. Katz, President and Chief Executive Officer99.3

Certification Pursuant to the Sarbanes-Oxley Act of 2002 by Richard D. Brounstein, Executive Vice President and Chief Financial Officer


---

*

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.**

Incorporated by reference from exhibits filed with the Companys Report on Form 10-K dated March 28, 1997.




73




---

##### Table of Contents

***

Incorporated by reference from exhibits filed with the Companys Report on Form 10-K dated March 25, 1998.****

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-K dated March 25, 1999.*****

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-K dated March 30, 2000.^

Confidential treatment has been granted as to certain portions of this exhibit.^^

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated August 12, 1998.^^^

Incorporated by reference from an exhibit filed with the Companys Report on Form 8-K dated January 4, 1999.^^^^

Incorporated by reference from an exhibit filed with the Companys Report on Form 8-K dated December 16, 1998.^^^^^

Incorporated by reference from an exhibit filed with the Companys Report on Form 8-K dated February 15, 2002.




Incorporated by reference from an exhibit filed with the Companys Registration Statement on Form S-2 (File No. 333-54316) filed on January 25, 2001, as
amended on February 9, 2001.

Incorporated by reference from an exhibit filed with the Companys Registration Statement on Form S-3 (File No. 333-58960) filed on April 13,
2001.

Incorporated by reference from an exhibit filed with the Companys Registration Statement on Form S-2 (File No. 333-72268) filed on October 26,
2001.

Incorporated by reference from an exhibit filed with the Companys Registration Statement on Form S-8 (File No. 333-70890) file on October 3,
2001.#

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated May 15, 1999.##

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated November 15, 1999.###

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated May 12, 2000.####

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated August 10, 2000.#####

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated November 7, 2000.%

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-K dated March 5, 2001.%%

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-Q dated August 14, 2001.<

Incorporated by reference from an exhibit filed with the Companys Report on Form 10-K dated March 11, 2002.


---




(b)   Reports on Form 8-K


Form 8-K regarding Other Material Events, filed November 29, 2001  Announcement
of Completion of a Private Placement of Equity including Participation by Members of Board of Directors and Management





Form 8-K regarding Other Material Events, filed November 29, 2001  Announcement of Equity Offering to International Investors




74




---

##### Table of Contents

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





Independent Auditors Report

F-2Consolidated Balance Sheets

F-3Consolidated Statements of Operations

F-4Consolidated Statements of Stockholders Equity (Deficit)

F-5Consolidated Statements of Cash Flows

F-8Notes to Consolidated Financial Statements

F-10




F-1




---

##### Table of Contents

INDEPENDENT AUDITORS REPORT





The Board of Directors


Calypte Biomedical Corporation:





We have audited the accompanying consolidated balance
sheets of Calypte Biomedical Corporation and subsidiary (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.





We conducted our audits in accordance with auditing standards generally accepted in the United States of America.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.





In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Calypte Biomedical Corporation and subsidiary as of December 31, 2001 and 2000, and the consolidated results of their operations and cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.





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 losses from operations and has an accumulated deficit that raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.





KPMG LLP





San Francisco, California


February 8,
2002







F-2




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





CONSOLIDATED BALANCE SHEETS





(in thousands, except share and per share data)





December 31,2001


2000ASSETSCurrent assets:Cash and cash equivalents

$
287


$
723Restricted cash






480Accounts receivable, net of allowance of $191 and $35 at December 31, 2001 and 2000, respectively


325



374Inventory


1,129



1,166Prepaid expenses


304



464Deferred offering costs, net of accumulated amortization of $40 at December 31, 2001


901



Other current assets


1



5Total current assets


2,947



3,212Property and equipment, net


1,187



1,577Intangibles, net






31Other assets


128



186$
4,262


$
5,006LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)Current liabilities:Accounts payable

$
4,120


$
1,718Accrued expenses


2,118



1,314Note payable


411



471Capital lease obligationscurrent portion


87



84Deferred revenue


500



500Total current liabilities


7,236



4,087Deferred rent obligation


48



36Capital lease obligationslongterm portion


22



78Total liabilities


7,306



4,201Mandatorily redeemable Series A preferred stock, $0.001 par value; no shares authorized at December 31, 2001 and 2000;
100,000 shares issued and outstanding at December 31, 2001 and 2000; aggregate redemption and liquidation value of $1,000 plus cumulative dividends


2,456



2,336Commitments and contingenciesStockholders equity (deficit):Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued or outstanding






Common stock, $0.001 par value; 200,000,000 and 50,000,000 shares authorized at December 31, 2001 and 2000,
respectively; 37,792,134 and 25,553,064 shares issued and outstanding as of December 31, 2001 and 2000, respectively


38



26Additional paidin capital


82,623



77,582Deferred compensation


(8
)


(114
)Accumulated deficit


(88,153
)


(79,025
)Total stockholders equity (deficit)


(5,500
)


(1,531
)$
4,262


$
5,006





See accompanying notes to consolidated financial statements.




F-3




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF OPERATIONS





(in thousands, except per share data)





Year Ended December 31,2001


2000


1999Revenues:Product sales

$
6,826


$
3,296


$
3,728Total revenue


6,826



3,296



3,728Operating expenses:Product costs


6,986



5,891



4,721Research and development


1,546



2,254



4,123Selling, general and administrative


6,740



7,568



5,081Total expenses


15,272



15,713



13,925Loss from operations


(8,446
)


(12,417
)


(10,197
)Interest income


9



289



353Interest expense ($1,325 non-cash in 2001)


(1,373
)


(123
)


(182
)Other income


539



9



2Loss before income taxes


(9,271
)


(12,242
)


(10,024
)Income taxes


(2
)


(2
)


(2
)Net loss before extraordinary item


(9,273
)


(12,244
)


(10,026
)Extraordinary gain on repurchase of beneficial conversion feature, net of tax expense


145







Net loss


(9,128
)


(12,244
)


(10,026
)Less dividend on mandatorily redeemable Series A preferred stock


(120
)


(120
)


(120
)Net loss attributable to common stockholders


(9,248
)


(12,364
)

$
(10,146
)Net loss per share attributable to common stockholders (basic and diluted)

$
(0.30
)

$
(0.52
)

$
(0.52
)Weighted average shares used to compute net loss per share attributable to common stockholders (basic and
diluted)


30,928



23,859



19,333








See accompanying notes to
consolidated financial statements.




F-4




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)





Years Ended December 31, 1999, 2000, and 2001


(in thousands, except share data)





Common Stock

Common Stock Subscribed


Additional Paid-in Capital


Deferred Compensation


Accumulated Deficit


Total Stockholders EquityBalances at December 31, 1998

$
14

$
3


$
61,476


$
(107
)

$
(56,755
)

$
4,631Exercise of stock options for 44,532 shares of common stock









35











35Common stock of 9,918 shares issued under the Employee Stock Purchase Plan









5











5Cost associated with purchase of certain assets of Cambridge Biotech Corporation









(68
)










(68
)Issuance of 3,102,500 shares of common stock subscribed through a private placement


3


(3
)














3,398,000 shares of common stock issued through a Private Placement


3






7,642











7,645Cost of issuance of common stock for Private Placement (including underwriters fees)









(854
)










(854
)Dividend requirements of mandatorily redeemable Series A preferred stock









(120
)










(120
)Compensation relating to granting of stock options









110



(110
)






Amortization of deferred compensation













82







82Net loss

















(10,026
)


(10,026
)Balances at December 31, 1999

$
20

$



$
68,226


$
(135
)

$
(66,781
)

$
1,330




F-5




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





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





Years Ended December 31, 1999, 2000 and 2001


(in thousands, except share data)





Common Stock

Common Stock Subscribed

Additional Paid-in Capital


Deferred Compensation


Accumulated Deficit


Total Stockholders EquityBalances at December 31, 1999

$
20

$


$
68,226


$
(135
)

$
(66,781
)

$
1,330Exercise of stock options for 913,527 shares of common stock


2





679











681Common stock of 39,801 shares issued under the Employee Stock Purchase Plan








46











46Common stock bonuses of 58,333 shares issued under the 2000 Employee Incentive Plan








100











1004,096,000 shares of common stock issued through a Private Placement


4





8,393











8,397Cost of issuance of common stock for Private Placement








(53
)










(53
)Dividend requirements of mandatorily redeemable Series A preferred stock








(120
)










(120
)Compensation relating to granting of stock options








311



(311
)






Amortization of deferred compensation












332







332Net loss
















(12,244
)


(12,244
)Balances at December 31, 2000

$
26

$


$
77,582


$
(114
)

$
(79,025
)

$
(1,531
)







F-6




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





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





Years Ended December 31, 1999, 2000 and 2001


(in thousands, except share data)





Common Stock

Common Stock Subscribed

Additional Paid-in Capital


Deferred Compensation


Accumulated Deficit


Total Stockholders EquityBalances at December 31, 2000

$
26

$


$
77,582


$
(114
)

$
(79,025
)

$
(1,531
)Exercise of stock options for 275,329 shares of common stock








211











211Common stock of 135,794 shares issued under the Employee Stock Purchase Plan








35











35Common stock bonuses of 681,405 shares issued under the 2000 Equity Incentive Plan


1





325











3267,267,162 shares of common stock issued under Equity Line agreements


7





2,552











2,559Cost of issuance of common stock under Equity Line agreements








(431
)










(431
)1,575,855 shares of common stock issued through a private placement


2





293











2951,008,525 shares of common stock issued upon conversion of debenture


1





174











175Fair value of warrants issued to Equity Line investor (treated as deferred offering costs)








1,676











1,676Amortization of deferred offering costs








(103
)










(103
)1,200,000 shares of common stock issued upon exercise of warrants


1





199











200Fair value of warrants and beneficial conversion feature granted in conjunction with issuance of convertible
debentures








471











471Repurchase of beneficial conversion feature








(145
)










(145
)Dividend requirements of mandatorily redeemable Series A preferred stock








(120
)










(120
)Compensation relating to granting of stock options








82



(82
)






Amortization of deferred compensation








(178
)


188







10Net loss
















(9,128
)


(9,128
)Balances at December 31, 2001

$
38

$


$
82,623


$
(8
)

$
(88,153
)

$
(5,500
)





See accompanying notes to consolidated financial statements.




F-7




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS





(in thousands)





Year Ended December 31,2001


2000


1999Cash flows from operating activities:Net loss

$
(9,128
)

$
(12,244
)

$
(10,026
)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization


527



563



622Amortization of deferred compensation


10



332



82Amortization of debenture discounts and charge for beneficial conversion feature


646







Amortization of deferred offering costs


672







Write-off of note and interest to research and development expense










890Expense related to common stock bonuses granted


203



100



Provision for doubtful accounts receivable


156







Extraordinary gain on repurchase of beneficial conversion feature


(145
)






Forgiveness of note receivable from officer






96



Gain on sale of Pepgen stock


(500
)






(Gain) loss on sale of equipment


(38
)


11



Changes in operating assets and liabilities:Accounts receivable


(107
)


209



(426
)Inventory


37



294



581Prepaid expenses and other current assets


164



(287
)


(133
)Other assets


58



(10
)


32Accounts payable, accrued expenses and deferred revenue


3,347



266



392Deferred rent obligation


12



11



(6
)Net cash used in operating activities


(4,086
)


(10,659
)


(7,992
)Cash flows from investing activities:Purchase of equipment


(72
)


(528
)


(370
)Proceeds from sale of equipment


38



27



Proceeds from sale of Pepgen stock


500







Notes receivable from officers and employees






584



(53
)Purchase of securities available for sale






(11
)


(1,454
)Sale of securities available for sale






514



1,601Net cash provided by (used in) investing activities


466



586



(276
)Cash flows from financing activities:Proceeds from sale of stock


3,305



8,624



7,682Expenses paid related to sale of stock


(435
)


(53
)


(585
)Proceeds from common stock subscribed










450Expenses related to subscription of common stock










(269
)Proceeds from issue of debentures, net


925







Repayment of debentures


(932
)






Expenses related to purchase of certain assets of Cambridge Biotech Corp.










(68
)Refund of cash pledged (cash pledged) to bank pursuant to loan agreement


480



(480
)


Principal payments on notes payable


(471
)


(623
)


(1,406
)Principal payments on capital lease obligations


(88
)


(74
)


(255
)Proceeds from notes payable


400



750



2,250Net cash provided by financing activities


3,184



8,144



7,799Net decrease in cash and cash equivalents


(436
)


(1,929
)


(469
)Cash and cash equivalents at beginning of year


723



2,652



3,121Cash and cash equivalents at end of year

$
287


$
723


$
2,652







F-8




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)





(in thousands)





Year Ended December 31,2001

2000

1999Supplemental disclosure of cash flow activities:Cash paid for interest

$
37

$
117

$
178Cash paid for income taxes


2


2


2Supplemental disclosure of non-cash activities:Refinance of capital lease obligation





96


82Acquisition of equipment through obligations under capital leases


35





Dividend on mandatorily redeemable Series A preferred stock


120


120


120Deferred compensation attributable to stock grants


82


311


110Common stock grants


326


100


Revaluation of acquisition of certain assets of Cambridge Biotech Corporation








293Original issue discount and expenses withheld from debenture proceeds


175





Conversion of debenture payable and accrued interest to common stock


175





Conversion of common stock subscribed to common stock








3Conversion of note payable to common stock





500


Deferred financing costs and expenses related to equity line, debentures and warrants issued


1,325





Accrued interest converted to Note Payable


11

















See accompanying notes to consolidated financial statements.




F-9




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





December 31, 2001, 2000 and 1999





(1)    The Company





Calypte Biomedical
Corporation (Calypte or the Company) is a public healthcare company dedicated to the development and commercialization of urinebased diagnostic products and services for Human Immunodeficiency Virus Type 1 (HIV-1), sexually transmitted diseases and
other infectious diseases. Calyptes products include its screening enzyme immunoassay (EIA) and supplemental Western Blot tests, the only two FDA-approved HIV-1 antibody tests that can be used on urine samples. The Company believes that accurate,
non-invasive urinebased testing methods for HIV and other infectious diseases may make important contributions to public health by helping to foster an environment in which testing may be done safely, economically, and painlessly.





Calypte commenced operations in 1989 and was incorporated as a Delaware corporation in June 1996, concurrent with the initial
public offering of its stock. On June 1, 1998, the Company ceased being a development stage enterprise when it announced that the FDA approved its urine HIV-1 Western Blot test. That test is used on samples that are repeatedly reactive in the
Companys HIV-1 urine antibody screening test. The supplemental test completed the only available urinebased HIV-1 test method. Calypte is headquartered in Alameda, California and manufactures its HIV-1 screening test there. The Company also
conducted screening test manufacturing operations at a facility in Berkeley, California through February 2001. The Company manufactures its urine and serum HIV-1 Western Blot and other products at its facilities in Rockville, Maryland. At December
31, 2000, both the Alameda and Rockville manufacturing facilities were FDA approved.





In December 1998, Calypte
acquired from Cambridge Biotech Corporation certain assets relating to the Western Blot product line for certain infectious diseases. The acquisition included the urine and serum HIV-1 Western Blot products, as well as a supplemental test for Human
T-Lymphotropic Virus (HTLV) that Calypte marketed through 2001. Calypte discontinued the production of that product in 2001 and will discontinue marketing it when current inventories are depleted.





Calypte and its distributors market its products in approximately a dozen countries worldwide. The Companys marketing strategy is to use
distributors, focused direct selling and marketing partners to penetrate targeted domestic and international markets. Calypte maintains a small direct sales force to sell its HIV-1 screening test and potential future products to laboratories serving
the domestic life insurance market, and has recently expanded its direct sales force to target other selected domestic markets. International markets are addressed utilizing diagnostic product distributors. To date, in countries that have an
approval process for diagnostic tests, the Company has received approval for the sale of its product in the Republic of South Africa, the Peoples Republic of China, Indonesia and Malaysia. Several additional international approvals are pending, and
the Company is collaborating with its distributors to obtain regulatory approval to market and promote its products in their local markets.





The Company has incurred net losses of $9.1 million, $ 12.2 million and $10.0 million in 2001, 2000, 1999, respectively. The accumulated deficit at December 31, 2001 was $88.2 million. The recurring
losses and accumulated deficit raise substantial doubt about the Companys ability to continue as a going concern. However, as described more completely in Note 19 (unaudited), since December 31, 2001, the Company has entered in to new
financing arrangements. However, we do not believe that our currently available financing will be adequate to sustain operations at current levels through 2002 unless new financing is arranged. The Companys future liquidity and capital
requirements will depend on numerous factors, including market acceptance of its products, regulatory actions by the FDA and other international regulatory bodies, intellectual property protection, and the ability to raise additional capital in a
timely manner. Management expects to be able to raise additional capital; however, the Company may not be able to obtain additional financing on acceptable terms, or at all.




F-10




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







(2)    Significant Accounting Policies





Principles of Consolidation





The accompanying consolidated financial statements include the results of operations of the Company and its wholly owned subsidiary, Calypte, Inc., and Calypte Biomedical Company (the Companys
predecessor entity). All significant intercompany accounts and transactions have been eliminated in consolidation.





Prior to the sale of its equity interest in Pepgen Corporation (Pepgen) in 2001, the Company accounted for its interest under the equity method (Note 12).





Cash and Cash Equivalents





Cash equivalents consist
primarily of investments in money market accounts and commercial paper with original maturities of three months or less.





Allowance
for Doubtful Accounts





The Company provides 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 customers inability to make the required payments.





Inventories





Inventories are stated at the lower of cost or market with cost determined
using the firstin, firstout method.





Property and Equipment





Property and equipment is stated at cost. Machinery and equipment, furniture and fixtures, and computer equipment are depreciated using the straight line method over the
estimated useful lives of the assets, generally as follows:





Computer equipment

3 yearsMachinery and equipment

5 yearsFurniture and fixtures

5 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.





Long-Lived
Assets





Long-lived assets are comprised of property and equipment and intangible assets. Long-lived assets are
reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. An estimate of undiscounted future cash flows produced by the asset, or by the appropriate grouping of assets,
is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if




F-11




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flow and
fundamental analysis. The Company reports an asset to be disposed of at the lower of its carrying value or its estimated net realizable value.





Intangibles





Intangibles consist of tradenames and trademarks related to the acquisition of
certain assets from Cambridge Biotech Corporation, and are carried at cost less accumulated amortization. During the fourth quarter of 2001, the Company determined that remaining value had suffered impairment and correspondingly wrote off the
remaining unamortized balance of $22,000.





Fair Value of Financial Instruments





Financial assets and liabilities 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 carrying amounts of all other financial instruments, including the note payable,
approximate fair value because of their short-term maturity.





Revenue Recognition





The Company records revenues only upon the occurrence of all of the following conditions:





| |  |  | The Company has 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.
| | - |  | ----------------------------------------------------------------------------




| |  |  | The Company has delivered the product from one of its manufacturing plants to a common carrier acceptable to the purchaser. The Companys customary shipping
terms are FOB shipping point. Because of the need for controlled conditions during shipment, the Company suggests, but leaves to the purchasers discretion, acquiring insurance for the value of the shipment. If the purchaser elects to insure the
shipment, the insurance is at the purchasers expense.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | The Company deems the collection of the amount invoiced is probable. The Company currently deals with a limited number of customers or distributors, with most
of whom it has had a relationship for a number of years. To eliminate the credit risk associated with international distributors with whom the Company has had little or no experience, the Company requires prepayment of the order or a letter of
credit before shipment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




The Company does not permit product returns. The Companys products
must be maintained under rigidly controlled conditions that it cannot control after the product has been shipped to the customer.





The Company provides no price protection. With the exception of sales to one distributor, revenue is recognized upon shipment of product. In the case of a single distributor, that distributor holds the Companys inventory on
consignment and reports monthly its usage of the products. The Company records revenue on sales to this distributor based on the distributors reported usage.





Deferred Revenue





Pursuant to a 1991 License and Supply Agreement, a Japanese
distributor made a payment of $500,000 to Calypte representing an advance creditable against royalties and other payments to be paid by the distributor to




F-12




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




Calypte under the terms of the Agreement. In a 1994 Distribution Agreement between Calypte and the distributor, the distributor agreed to waive its right to have the advance payment credited to
subsequent payments it might owe Calypte under the License and Supply Agreement or the Distribution Agreement in return for a 50% discount on products supplied by Calypte to the distributor, until such time as the distributor has received cumulative
discounts totaling $500,000. Pursuant to that agreement, Calypte recorded the $500,000 payment as deferred revenue that was to be recognized as product was sold at the stipulated 50% discount. As of this date, Calypte has sold no product to the
distributor under the terms of the Distribution Agreement and the deferred revenue balance remains unchanged.





The
Companys current sales practices do not require the deferral of revenues and no entries to record deferred revenue have been made during the period covered by this Form 10-K.





Income Taxes





The Company accounts for income taxes under
the 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, deferred tax assets and
liabilities are recognized 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. Deferred tax assets and liabilities are measured 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.





Stock-Based Compensation





Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, establishes a fair-value method of accounting for stock options and similar equity instruments. The fair-value method requires that compensation cost be measured on the value of the award at the grant
date, and recognized over the service period. SFAS No. 123 allows companies to either account for stock-based compensation to employees under the provisions of SFAS No. 123 or under the provisions of Accounting Principles Board (APB) Opinion No. 25
and its related interpretations. The Company accounts for its stock-based compensation to employees in accordance with the provisions of APB Opinion No. 25 and provides the pro forma disclosures required under SFAS No. 123.





The Company has recorded deferred compensation for the difference, if any, between the exercise price and the deemed fair market value of
the common stock for financial reporting purposes of stock options granted to employees. The compensation expense related to such grants is amortized over the vesting period of the related stock options on a straight-line basis.





The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force (EITF) Issue No. 96-18 Accounting for Equity Instruments that Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.








Net Loss Per Share Attributable to Common Stockholders





Basic net loss per share is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during
the year. The computation of diluted




F-13




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




earnings per common share is similar to the computation of basic net loss per share attributable to common stockholders, except that the denominator is increased for the assumed conversion of
convertible securities and the exercise of options 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 attributable to common stockholders were the same
for the three years ended December 31, 2001, 2000 and 1999. Options and warrants for 16,378,379 shares, 4,982,462 shares and 4,453,795 shares were excluded from the computation of loss per share at December 31, 2001, 2000 and 1999, respectively, as
their effect is antidilutive. The difference between net loss and net loss attributable to common stockholders relates to accrued dividends on the Companys Mandatorily Redeemable Series A Preferred Stock discussed in Note 8.





Concentrations of Credit Risk





Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts receivable. The Company has investment policies that limit investments
to short-term, low-risk investments. Concentration of credit risk with respect to trade accounts receivable are limited due to the fact that the Company sells its products primarily to established distributors and laboratories and requires
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 management 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





Calypte purchases certain raw materials and components used in manufacturing its products from a number of suppliers, but relies on single
sources for certain other components. Establishment of additional or replacement suppliers for these components cannot be accomplished quickly. Any delay or interruption in the supply of these components could have a material adverse effect on the
Company by significantly impairing its ability to manufacture products in sufficient quantities to meet commercial sales demand. Additionally, if our financial condition reduces our ability to pay for critical components or to make royalty payments
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.





As of December 31, 2001, our net liabilities were $5.5 million. Our market capitalization at December 31, 2001 was approximately $7.2
million. We also have not recognized net income in any of our previous fiscal years.





Comprehensive Loss





The Company has no components of other comprehensive loss other than its net loss, and, accordingly, its comprehensive loss is equivalent
to its net loss for all periods presented.




F-14




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







Segment and Geographic Information





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





Substantially all of the Companys sales through 2001 have been to United States customers. Sales to international customers
accounted for 5% and 4% of the Companys revenues in 2001 and 2000, respectively.





Sales to three major domestic
customers amounted to approximately 57% of total net sales for the year ended December 31, 2001. Sales to those customers accounted for 25%, 19% and 13%, respectively, in 2001. Sales to significant domestic customers accounted for 18%, 13%, and 11%
of revenues in 2000 and 19% and 12% of revenues in 1999.





Recent Accounting Pronouncements





In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141 Business
Combinations and SFAS No. 142 Goodwill and Other Intangible Assets.





SFAS No. 141 addresses the accounting for and
reporting of business combinations and requires that all business combinations be accounted for using the purchase method of accounting for acquisitions and eliminates the use of the pooling method. This Statement applies to all business
combinations initiated after June 30, 2001. The Company does not expect that the adoption of SFAS No. 141 will have a material effect on its consolidated financial statements.





SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets. This Statement changes the accounting for goodwill from an
amortization method to an impairment-only method. The amortization of goodwill, including goodwill recorded in past business combinations will cease upon adoption of this Statement, which will begin with the Companys fiscal year beginning January 1,
2002. However, goodwill and intangible assets acquired after June 30, 2001 will be subject to immediate adoption of the Statement. The Company does not expect that the adoption of SFAS No. 142 will have a material effect on its consolidated
financial statements.





In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations.
SFAS No. 143 requires liability recognition for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company is required to adopt the provisions of SFAS No. 143 beginning with its
fiscal year that starts January 1, 2003. The Company does not expect that adoption of SFAS No. 143 will have a material effect on its consolidated financial statements.





In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, in that it removes goodwill from its impairment scope and allows for different approaches in cash flow estimation. However, SFAS No. 144 retains the fundamental provisions
of SFAS No. 121 for (a) recognition and measurement of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of. SFAS No. 144 also supersedes the business segment concept in APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a




F-15




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, in that it permits
presentation of a component of an entity, whether classified as held for sale or disposed of, as a discontinued operation. However, SFAS No. 144 retains the requirement of APB Opinion No. 30 to report discontinued operations separately from
continuing operations. The Company is required to adopt the provision of SFAS No. 144 beginning with its fiscal year that starts January 1, 2002. The Company does not believe that adoption of SFAS 144 will have a material effect on its consolidated
financial statements.





(3)    Inventory





Inventory as of December 31, 2001 and 2000 consisted of the following:





2001

2000(in thousands)

(in thousands)Raw materials

$
243

$
221Work-in-process


544


777Finished goods


342


168Total inventory

$
1,129

$
1,166





(4)    Property and Equipment





Property and equipment as of December 31, 2001 and 2000 consisted of the following:





2001


2000(in thousands)


(in thousands)Computer equipment

$
762


$
717Machinery and equipment


3,302



3,335Furniture and fixtures


229



232Leasehold improvements


983



1,7285,276



6,012Accumulated depreciation and amortization


(4,089
)


(4,435
)Property and equipment, net

$
1,187


$
1,577





The Company recognized depreciation expense of $496,000, $552,000,
and $610,000 for the years ended December 2001, 2000 and 1999, respectively.





(5)    Accrued Expenses





Accrued expenses as of December 31, 2001 and 2000 consisted of the following:





2001

2000(in thousands)

(in thousands)Accrued royalty payments

$
1,536

$
742Accrued salary and vacation pay


274


253Other


308


319Total accrued expenses

$
2,118

$
1,314




F-16




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







(6)    Notes and Debentures Payable





In August 2001, the Company executed a promissory note in the amount of $400,000 to the parent company of its
then-largest stockholder. The note required interest at 8.5% per annum and principal plus accrued interest was due no later than September 14, 2001. In December 2001, the parties agreed to execute a new note in the amount of $411,000, representing
the unpaid principal and accrued but unpaid interest on the previous note. This note bears interest at 8.5% and is due in installments of $200,000 on February 28, 2002 and $35,000 per month thereafter until paid in full, plus accrued interest. See
Note 19, (unaudited) for recent developments related to this note.





In January 2001, the Company signed an
agreement to place up to $1.1 million in convertible short-term debentures. Under this arrangement, the Company issued two convertible debentures in the principal amount of $550,000 each. Each debenture had an interest rate of 6% and was issued at
an original issue discount of 9.1%. The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001. The Company received $925,000 in aggregate net cash proceeds from the issuance of the two debentures. Each debenture
matured 90 days from the date of issue, or on April 26, 2001 and June 11, 2001, respectively. The Company was contractually obligated to use no less than 50% of the proceeds from any equity financing to repay the debentures. The Company redeemed the
first debenture, plus accrued interest, prior to its contractual maturity using the proceeds from the sales of its common stock under the terms of its first equity line of credit (see Note 9). The Company also redeemed a portion of the second
debenture prior to its contractual maturity. On June 12, 2001, the debentureholder converted the remaining $168,000 balance on the debenture plus accrued interest of approximately $7,000 into 1,008,525 shares of the Companys Common Stock, in
accordance with the conversion provisions of the debenture.





Under the terms of the debentures, the
debentureholder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Companys common stock at a fixed price that represented a 5% discount to the average trading price of the shares for
the 10 trading days preceding the issuance of each debenture. If the Company chose not to redeem the debentures prior to maturity, as in the case of the second debenture, the conversion discount to the debentureholder increased to 15% of the average
low bid price for Calyptes common stock for any three of the 22 trading days prior to the date of conversion. The Company determined that its debentures were issued with a beneficial conversion feature. The beneficial conversion feature was
recognized by allocating an amount equal to the intrinsic value of that feature to additional paid-in capital. The intrinsic value was calculated at the date of issue as the difference between the conversion price of the debenture and the fair value
of the Companys common stock into which the debenture was convertible, multiplied by the number of common shares into which the debenture was convertible. Because each debenture was convertible into common stock at the option of the holder, the
entire $322,000 discount resulting from the allocation of proceeds to the beneficial conversion feature was recognized as interest expense at the issuance date of the debentures during the first quarter of 2001. During the second quarter of 2001,
the Companys payments to the debentureholder reduced the debenture balance and effectively repurchased a portion of the beneficial conversion feature. In situations in which a debt instrument containing an embedded beneficial conversion feature is
extinguished prior to conversion, a portion of the debt payment is allocated to the beneficial conversion feature using the intrinsic value of that conversion feature at the extinguishment date. Any residual amount is then allocated to the
convertible security with the Company recognizing a gain or loss to remove the remaining liability. The extinguishments of the debentures and the repurchase of the beneficial conversion feature resulted in an extraordinary gain of $145,000 during
the second quarter of 2001.





The Company issued a warrant for 200,000 shares of its common stock at an exercise
price of $1.50 with the first debenture. The warrant was valued on the date of issue at $0.75 per share using the Black-Scholes option-




F-17




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.8%, the contractual life of 3 years, and volatility of 80%. The expense associated with
the warrant was accounted for as interest expense and amortized over the term of the first debenture. The original issue discount was accounted for as interest expense and recognized using the effective interest method over the respective terms of
the debentures.





On August 17, 2001, the Company modified the warrant, reducing its exercise price to $0.15 per
share, and the debentureholder exercised it for the entire 200,000 shares. The Company received $28,500 in net proceeds from the exercise of the warrants. No additional interest expense was recorded as a result of the modification since the value of
the modified warrant at the date of modification was below that of the original warrant.





In January 1999, the
Company entered into a loan agreement with a bank to borrow up to $2.0 million at an interest rate of prime plus 1.25%. The Companys assets secured borrowings under the loan. The agreement called for the loan to be repaid in twelve equal monthly
installments of principal, plus accrued interest, beginning in August 1999. In January 2000, the loan was modified to extend the repayment term through August 2001. In May 2000, the loan was again modified to increase the then outstanding principal
balance by $250,000. At December 31, 2000, the Company had $471,000 outstanding under this facility and the prime rate was 9.5%.





The loan agreement required the Company to maintain certain financial conditions and comply with certain reporting and other requirements. At times during 2000, including at December 31, 2000, the Company was not in compliance with
certain of the financial covenants of the agreement. In the event of such non-compliance, the agreement required the Company to pledge cash to the bank in an amount equal to 105% of the outstanding loan balance. Upon the pledge of such cash, the
Company was deemed to have cured any default arising from any non-compliance with the financial covenants of the agreement. The Company repaid the note in full in January 2001, using the cash pledged under the agreement. The accompanying
Consolidated Balance Sheet as of December 31, 2000 and Statement of Cash Flows for the periods ended December 31, 2001 and 2000 reflect the $480,000 cash pledge to the bank that was required to cure the Companys non-compliance as of December 31,
2000 and the subsequent use of the pledged funds to repay the note during 2001.





(7)    Lease Commitments





Capital Leases





The Company has acquired equipment under three capital lease credit agreements that are collateralized by the related equipment. The lease agreements carry effective interest rates of approximately 18% per annum.





During 1993, the Company issued stock warrants for the purchase of 35,155 shares of the Companys common stock at
exercise prices ranging from $5.00 to $7.50 per share as partial consideration for obtaining two of the lease agreements. These warrants expire in 2003.





In 2000, the Company exercised its option to renew one of the capital leases for an additional three year term. In 2001, the Company acquired laboratory equipment under a capital lease having a
four-year term and an effective interest rate of approximately 17.5% per annum.




F-18




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







Equipment acquired under the lease lines of
credit and other capital leases included in property and equipment as of December 31, 2001 and 2000 consisted of the following:





2001


2000(in thousands)


(in thousands)Machinery and equipment

$
1,763


$
1,728Other


92



921,855



1,820Accumulated depreciation and amortization


(1,758
)


(1,726
)$
97


$
94








Future minimum lease
payments under capital leases as of December 31, 2001 were:





Year Ended December 31,

(in thousands)2002

$
1002003


122004


122005


2126Amount representing interest


(17
)Present value of capital lease obligations


109Current portion of capital lease obligations


(87
)Capital lease obligations long-term portion

$
22





Operating Leases





The Company leases office and manufacturing space in Alameda, California, under a noncancelable operating lease. The Company also leases space in Rockville, Maryland under
two operating subleases. The Company also leased manufacturing space in Berkeley, California through February 2001. Total rent expense under these leases was $1,062,000, $1,285,000 and $1,262,000, for the years ended December 2001, 2000, and 1999,
respectively. Future minimum rental payments under all noncancelable operating leases as of December 31, 2001 were:





Year Ended December 31,

(in thousands)2002

$
9332003


8662004


5642005


5562006


464Thereafter


Total

$
3,383





(8)    Mandatorily Redeemable Preferred Stock





At the time of its original incorporation, the Company issued both common stock and mandatorily redeemable Series A preferred
stock. The Company is required to redeem all shares of mandatorily redeemable Series A preferred stock within 60 days of any fiscal year end in which the Company attains $3,000,000 in




F-19




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




retained earnings, and funds are legally available. Based on losses accumulated through December 31, 2001, the Company must achieve in excess of $91,000,000 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 December 31, 2001, cumulative
preferred dividends totaling $1,456,000 have been charged to stockholders equity 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.





In anticipation of using a portion of the proceeds from its Initial Public Offering to
redeem the Series A preferred stock, the Company eliminated the Series A preferred stock from its articles of incorporation upon reincorporation of the Company in Delaware in July 1996. However, management subsequently chose not to redeem the Series
A preferred stock and as of December 31, 2001 it remains outstanding. The holders of such shares maintain the same rights as held before the reincorporation.





(9)    Stockholders Equity





Increase in Authorized Shares





On September 28, 2001, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of
State of Delaware that increased the number of shares of authorized Common Stock from 50 million to 200 million. The Companys stockholders approved the Certificate of Amendment at the Annual Meeting of Stockholders held on September 20, 2001. A
principal purpose for authorizing the additional shares was for issuance pursuant to arrangements to finance the Companys continuing operations.





Private Placements





The Company raised net proceeds of $3.1 million, $6.8 million, $8.3
million, and $0.3 million in private placement transactions of 3,102,500 shares, 3,398,000 shares, 4,096,000 shares, and 1,575,855 shares completed in January 1999, April 1999, April 2000, and November 2001, respectively.





Equity Lines of Credit





In August 2001, the Company and a private investment fund signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of the Companys Common Stock over a twenty-four month period. The initial
closing of the transaction occurred in October 2001. Under this arrangement, the Company, at its sole discretion, may draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund is obligated to purchase
shares of the Companys Common Stock. The purchase price of the Common Stock purchased pursuant to any draw down will be equal to 88% of the daily volume weighted average price of the Companys Common Stock on the applicable date. In conjunction with
the signing of the stock purchase agreement, in October 2001, the Company issued a 7-year fully-vested warrant to the investment fund to purchase up to 4,192,286 shares of common Stock at an exercise price of $0.2743 per share. The warrant was
valued on the date of issue at $0.22 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.3%, the contractual life of 7 years, and volatility of 80%. The
warrant was accounted for as a deferred offering cost and is recognized as a cost of the financing in proportion to the amount of each draw-down in relation to the $10 million nominal commitment amount. In October 2001, the Company filed a
Registration Statement on Form S-2 with the Securities and Exchange Commission to register for resale 30,000,000 shares of Common Stock that it may issue




F-20




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




in conjunction with the equity line facility and the warrant. During November and December 2001, the Company issued two draw down requests under this facility in the aggregate amount of $430,000.
The Company issued 2,182,144 shares of its common stock and received aggregate net proceeds of $406,000 after deducting fees and expenses in settling these two draw downs. The Company continues to use the equity line facility to fund its operations.





The Company and an investor signed a Common Stock Purchase Agreement on November 2, 2000, subsequently amended on
January 24, 2001 for the future issuance and purchase of the Companys common stock. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility. The draw down facility operated generally
as follows: The investor committed up to $25 million to purchase the Companys common stock over a twelve month period. Once during each draw down pricing period, the Company could request a draw of up to $6 million, subject to a formula based on the
Companys average stock price and trading volume setting the maximum amount of a request for any given draw. The amount of money that the investor provided to the Company and the number of shares the Company issued in return for that money was
settled during a 22 day trading period following the draw down request based on the formula in the stock purchase agreement. The investor received a 5% discount to the market price for the 22-day period and the Company received the settled amount of
the draw down. By the end of the second quarter of 2001, the Company had received net proceeds of $2,014,000 and had issued 5,085,018 shares of its common stock. This represented all of the shares the Company had registered for sale under the draw
down agreement, and the Company and the investor considered the agreement completed. As discussed in Note 6, the Company was obligated to apply no less than 50% of the net proceeds from this financing to repay the debentures.





In conjunction with this agreement, the Company issued to the investor a three-year fully-vested warrant to purchase 1,000,000
shares of the Companys common stock at an exercise price of $1.55 per share. The warrant was valued on the date of issue at $0.73 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%;
risk free interest rate of 4.8%, the contractual life of 3 years, and volatility of 80%. The warrant was accounted for as a deferred offering cost and was recognized as a cost of the financing in proportion to the amount of each draw-down in
relation to the $25 million nominal commitment amount. To the extent that not all of the $25 million commitment was drawn, the remaining deferred offering cost of $672,000 was charged as interest expense in the second quarter of 2001.





On July 31 and August 2, 2001, the Company modified the exercise price for 300,000 shares each of the warrant to $0.20 per
share, and the warrantholder exercised it for an aggregate of 600,000 shares. The Company received $114,000 in net proceeds from the exercise of these warrants. On August 17, 2001, the Company modified the exercise price for the remaining 400,000
shares of the warrant to $0.15 per share. The warrantholder exercised the remaining balance of the warrant and the Company received net proceeds of $57,000 after deducting expenses of the transaction. No additional interest expense was recorded as a
result of any of the modifications since the value of the modified warrant at the date of modification was below that of the original warrant.





Change of Control Provisions





Certain provisions of the Companys Certificate of
Incorporation and Bylaws may have the effect of preventing, discouraging or delaying any change in the control of the Company and may maintain the incumbency of the Board of Directors and management. The authorization of undesignated preferred stock
makes it possible for the Board of Directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of the Company. Additionally, in December 1998, the




F-21




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




Companys Board of Directors declared a dividend distribution of one preferred share purchase right (a Right) for each outstanding share of Common Stock of the Company. The dividend was payable to
the stockholders of record on January 5, 1999. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the Rights being
redeemed or a substantial number of Rights being acquired. However, the Rights should not interfere with any tender offer or merger approved by the Company because the Rights do not become exercisable in the event of a permitted offer or other
acquisition exempted by the Board.





(10)    Incentive Stock and Stock Options Plans





2000 Equity Incentive Plan





In June 2000, the Companys Board of Directors and stockholders approved the adoption of the Companys 2000 Equity Incentive Plan (the 2000 Incentive Plan) to replace the Companys 1991 Incentive Stock Plan, which expired in April 2001.
A total of 4,000,000 shares of common stock were initially reserved for issuance under the 2000 Incentive Plan. The Companys stockholders authorized an additional reserve of 13,000,000 shares at the Annual Stockholders Meeting in September 2001.
Additionally, all of the shares reserved but not issued or subject to options granted under the Companys 1991 Incentive Stock Plan are available for grant under the 2000 Incentive Plan. The Compensation Committee of the Companys Board of Directors
administers the Plan. The Board of Directors may amend or modify the 2000 Incentive Plan at any time. It will expire in June 2010, unless terminated earlier by the Board of Directors.





Under the terms of the 2000 Incentive Plan, nonstatutory stock options, restricted stock and stock bonuses may be granted to employees, including directors who are
employees, non-employee directors, and consultants. Incentive stock options may be granted only to employees.





Nonstatutory stock options may be granted under the 2000 Incentive Plan at a price not less than 85% of the fair market value of the common stock on the date the option is granted. Incentive stock options may be granted under the
2000 Incentive Plan at a price not less than 100% of the fair market value of the common stock on the date the option is granted.





Incentive and nonstatutory stock options granted to employees or consultants who, on the date of grant, own stock representing more than 10% of the voting power of all classes of stock of the Company are granted at an exercise price
not less than 110% of the fair market value of the common stock. Options granted under the 2000 Incentive 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.





Restricted stock awards may be granted to purchase stock either in addition to, or in tandem with, other awards under the 2000 Incentive Plan, under conditions determined by the Compensation Committee. The purchase price for such
awards must be no less than 85% of the fair market value of the Companys Common Stock on the date of the grant. The Compensation Committee may also grant stock bonus awards to employees or consultants for services rendered to the Company. Such
awards may also be granted either in addition to, or in tandem with, other awards under the 2000 Incentive Plan, under conditions determined by the Compensation Committee.





Deferred compensation is recorded related to options granted to non-employees and options granted to employees when the exercise price is below the fair market value of the
underlying common stock, if any. For the




F-22




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




year ended December 31, 2001, the Company recorded a deferred compensation credit of $8,000 attributable to common stock options granted under the 2000 Incentive Plan; the Company recorded no
deferred compensation attributable to options granted under the 2000 Incentive Plan for the year ended December 31, 2000. The Company recorded compensation expense of $326,000 and $100,000, respectively, attributable to stock bonus awards of 681,405
shares of common stock granted during 2001 and 58,333 shares of common stock granted during 2000. For stock bonuses, compensation expense is determined by multiplying the closing market price of the Companys common stock on the date of grant by the
number of shares granted. The weighted average price of shares issued as stock bonuses was $0.48 in 2001 and $1.71 in 2000.





The following table summarizes option grant activity under the 2000 Incentive Plan:





Options


WeightedAverageExercise PriceOutstanding as of December 31, 1999




$Granted

1,270,000



1.89ExercisedCanceledOutstanding as of December 31, 2000

1,270,000



1.89Granted

8,007,522



0.26ExercisedCanceled

(492,411
)


1.20Outstanding as of December 31, 2001

8,785,111


$
0.44Exercisable as of December 31, 2000

212,784


$
1.89Exercisable as of December 31, 2001

4,184,000


$
0.48





As of December 31, 2001, 8,583,973 shares of common stock were
available for grant under the 2000 Incentive Plan. The following table summarizes the per share weighted-average fair value of stock options granted during 2001 and 2000, on the date of grant using the Black-Scholes option-pricing model with the
indicated weighted-average assumptions:





2001


2000Per share weighted average fair value of options granted

$
0.13


$
1.00Expected dividend yield


0.00
%


0.00
%Riskfree interest rate


4.34
%


5.77
%Volatility


80
%


80
%Expected life


5.9 years



5.8 years





1991 Incentive Stock Plan





In April 1991, the Companys Board of Directors approved the adoption of the Companys Incentive Stock Plan (the Stock Plan). A total of 4,240,992 shares of
common stock have been 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 and all of the shares reserved but not issued or subject
to options granted under the Stock Plan are available for grant under the 2000 Incentive Plan.




F-23




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







Under the terms of the Stock Plan, nonstatutory
stock options were granted to employees, including directors who were employees, and consultants. Incentive stock options were granted only to employees.





Nonstatutory stock options were granted under the Stock Plan at a price not less than 85% of the fair market value of the common stock on the date the option was granted. Incentive stock options were
granted under the Stock Plan at a price not less than 100% of the fair market value of the common stock on the date the option was granted. Options granted under the Stock Plan generally vested monthly over three to five years. The term of the
nonstatutory and incentive stock options granted was 10 years or less from the date of the grant, as provided in the option agreements.








Incentive and nonstatutory stock options granted to employees and consultants who, on the date of grant, owned stock representing more than 10% of the voting power of all
classes of stock of the Company were granted at an exercise price not less than 110% of the fair market value of the common stock. Any options granted were exercisable at the time and under conditions as determined by the Compensation Committee of
the Companys Board of Directors.





Compensation is recorded on an intrinsic value basis related to options
granted to employees when the exercise price is below the fair market value of the underlying common stock, if any, or on a fair value basis for options granted to non-employees. For the years ended December 31, 2000 and 1999, the Company recorded
deferred compensation of $311,000, and $110,000, respectively, for certain of the Companys common stock options granted under the Stock Plan. This amount was amortized over the relevant period of service. The amortized compensation expense for
the years ended December 31, 2000 and 1999 was $332,000 and $82,000, respectively.





The following table summarizes
activity under the Stock Plan:





Options


Weighted Average Exercise PriceOutstanding as of December 31, 1998

2,558,006


$
1.09Granted

1,080,000



1.07Exercised

(44,532
)


0.80Canceled

(401,834
)


1.82Outstanding as of December 31, 1999

3,191,640



0.99Granted

469,800



2.09Exercised

(912,777
)


0.74Canceled

(487,856
)


1.19Outstanding as of December 31, 2000

2,260,807



1.37GrantedExercised

(275,329
)


0.77Canceled

(609,121
)


1.139Outstanding as of December 31, 2001

1,376,357


$
1.60Exercisable as of December 31, 1999

1,567,967


$
0.90Exercisable as of December 31, 2000

1,606,571


$
1.37Exercisable as of December 31, 2001

1,192,611


$
1.60





As of December 31, 2001, there were no shares of common stock were
available for grant under the Stock Plan. The following table summarizes the per share weighted-average fair value of stock options granted during




F-24




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




2000 and 1999 on the date of grant using the Black-Scholes option-pricing model with the indicated weighted-average assumptions:





2000


1999Per share weighted-average fair value of options granted

$
1.35


$
0.63Expected dividend yield


0.00
%


0.00
%Risk-free interest rate


6.46
%


6.03
%Volatility


80
%


80
%Expected life


8.4 years



6.6 years





1995 Director Option Plan





In December 1995, the Companys Board of Directors approved the Companys Director Option Plan (the Director Option Plan). During 2001 and 2000, the Board of Directors
and the stockholders approved an increase in the number of shares reserved for issuance under the Plan by 2,000,000 and 500,000, respectively, bringing the total number of shares of common stock reserved for issuance to the directors of the Company
pursuant to nonstatutory stock options to 2,850,000. Under the Director Option Plan, the Companys Board of Directors determines the number of shares of the Companys stock that will be granted each year to newly-elected and re-elected directors.
Options may be granted under this plan to non-employee directors or, pursuant to an agreement between the Company and another person, entity or affiliate with whom a non-employee director is associated, that other person, entity, or affiliate. Each
option granted under the Director Option Plan is exercisable at 100% of the fair market value of the Companys common stock on the date the option was granted. Each grant under the plan vests monthly over the twelve month period commencing with the
directors date of election or re-election, provided that the option will become vested and fully exercisable on the date of the next annual meeting of stockholders if such meeting occurs less than one year after the date of the grant. The plan will
expire in December 2005 unless terminated earlier in accordance with certain provisions of the Plan.





The Company
has not recorded any deferred compensation for the Companys common stock options granted under the Director Option Plan.




F-25




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







The following table summarizes activity under the
Director Option Plan:





Options


Weighted Average Exercise PriceOutstanding as of December 31, 1998

67,000



4.37Granted

140,000



1.56ExercisedCanceledOutstanding as of December 31, 1999

207,000



2.47Granted

101,500



2.41Exercised

(750
)


1.38CanceledOutstanding as of December 31, 2000

307,750



2.45Granted

350,000



0.20ExercisedCanceledOutstanding as of December 31, 2001

657,750


$
1.25Exercisable as of December 31, 1999

59,669


$
3.73Exercisable as of December 31, 2000

251,750


$
2.40Exercisable as of December 31, 2001

392,250


$
1.94





As of December 31, 2001, 2,191,500 shares of common stock were
available for grant under the Director Option Plan. The following table summarizes the per share weighted-average fair value of stock options granted during 2001, 2000, and 1999, on the date of grant using the Black-Scholes option-pricing model with
the indicated weighted-average assumptions:





2001


2000


1999Per share weighted-average fair value of options granted

$0.09


$1.14


$0.75Expected dividend yield

0.00
%

0.00
%

0.00
%Risk-free interest rate

4.12
%

6.30
%

6.00
%Volatility

80
%

80
%

80
%Expected life

2.2 years


2.1 years


2.2 years




F-26




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







The following table summarizes information about
stock options outstanding under the 2000 Equity Incentive Plan, the 1991 Incentive Stock Plan, and the 1995 Director Option Plan at December 31, 2001:





Options Outstanding

Options ExercisableRange of Exercise Prices

Number Outstanding at 12/31/01

Weighted-AverageRemaining Years to Expiration

Weighted-Average Exercise Price

Number Exercisable at 12/31/01

Weighted-Average Exercise Price$0.14-$0.20

2,401,458

9.72

$
0.17

1,208,232

$
0.17$0.22-$0.26

3,384,015

9.84

$
0.24

438,684

$
0.23$0.27-$0.64

2,193,580

9.45

$
0.32

1,986,698

$
0.30$0.78-$1.00

769,563

7.30

$
0.89

723,730

$
0.90$1.05-$2.00

1,231,527

8.58

$
1.53

784,633

$
1.53$2.06-$7.00

839,045

7.99

$
2.93

626,884

$
3.08$0.14-$7.00

10,819,188

9.27

$
0.64

5,768,861

$
0.81





1995 Employee Stock Purchase Plan





In December 1995, the Companys Board of Directors approved the Companys Employee Stock Purchase Plan (the Purchase Plan). The Purchase
Plan is intended to qualify under Section 423 of the Internal Revenue Code (the Code). The Company initially reserved 300,000 shares of common stock for issuance under the Purchase Plan. In 2001, the Board of Directors and stockholders authorized
reserving an additional 1,000,000 shares for issuance under the Purchase Plan. Under the Purchase Plan, an eligible employee may purchase shares of common stock from the Company through payroll deductions of up to 10% of his or her compensation, at
a price per share equal to 85% of the lower of (i) the fair market value of the Companys common stock on the first day of an offering period under the Purchase Plan or (ii) the fair market value of the common stock on the last day of the six month
purchase period during the offering period. Each offering period lasts for twenty-four months; stock purchases occur on April 30 and October 31 of each year. For the years ended December 31, 2001, 2000 and 1999, 135,794, 39,801, and 27,535, shares,
respectively, were purchased under the Purchase Plan. Cumulative purchases under the Purchase Plan at December 31, 2001 totaled 232,479 shares, leaving 1,067,521 shares reserved for subsequent purchase.





Under SFAS No. 123, compensation cost is recognized for the fair value of the employees purchase rights. The following table summarizes
the per share weighted-average fair value of purchase rights granted during 2001, 2000, and 1999, on the date of grant using the Black-Scholes option-pricing model with the indicated weighted-average assumptions:





2001

2000

1999Per share weighted-average fair value of purchase rights granted

$0.26

$0.72

$0.46Expected dividend yield

0.00%

0.00%

0.00%Risk-free interest rate

3.61%

6.13%

5.10%Volatility

80%

80%

80%Expected life

0.5 years

0.5 years

0.5 years




F-27




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







Pro Forma Disclosure





Had the Company determined compensation cost based on the fair value at the grant date for its stock options and purchase rights under
SFAS No. 123, the Companys net loss would have been increased to the pro forma amounts indicated below for the years ended December 31:





2001


2000


1999(in thousands)


(in thousands)


(in thousands)Net loss attributable to common stockholdersAs reported

$
(9,248
)

$
(12,364
)

$
(10,146
)Pro forma


(10,380
)


(13,442
)


(11,057
)Net loss per share attributable to common stockholdersAs reported

$
(0.30
)

$
(0.52
)

$
(0.52
)Pro forma

$
(0.34
)

$
(0.56
)


(0.57
)





Pro forma net loss reflects only options granted since 1995 as well
as purchase rights granted since 1996. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net loss amounts presented above because compensation cost is reflected over
the options vesting period and compensation cost for options granted prior to January 1, 1995 is not considered.





(11)    Section 401(k) Plan





Effective January 1, 1995, the Company
adopted a Retirement Savings and Investment Plan (the 401(k) Plan) covering the Companys 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 Company has not made any contributions to the
401(k) Plan.





(12)    Investment in Pepgen Corporation





In 1995, the Company purchased a 49% equity interest in Pepgen Corporation (Pepgen) for $2.5 million, comprised of $1.0 million paid at closing, a $1.0 million
promissory note and options to purchase the Companys common stock valued at $500,000. The $1.0 million promissory note balance was paid in 1996. The options were granted to Pepgens stockholders for the purchase of an aggregate of 475,000 shares of
the Companys common


stock at a price of $7.50 per share, of which 100,000 of such shares were immediately exercisable upon signing of the agreement and the remaining 375,000
shares become exercisable upon attainment of certain milestones. The Company valued the options utilizing the Black-Scholes option-pricing model which considered the terms of the options, other market assumptions consistent with those as determined
by an independent valuation appraiser, a volatility index for the biotechnology industry and certain other factors related to the probability and timing of attaining related milestones. The options expire at the earlier of September 2005 or three
years after becoming exercisable. During the second quarter of 2001, the Company sold its interest in Pepgen for $500,000, citing its short-term financial requirements and strategic commitment to diagnostic, rather than therapeutic, products.





During 1998, the Company loaned Pepgen $768,000 at an interest rate of 10%. The loan was subsequently written off
as research and development expense in 1999. The Company spent additional amounts totaling $63,000 on research and development related to Pepgen during 1999. In October 1999, Pepgen secured $3.8 million in a new round of financing, reducing the
Companys equity interest to 38%. In June 2000, Pepgen




F-28




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




secured an additional $2.0 million in another round of financing, further reducing the Companys equity interest to 29%.





Prior to the sale of its interest in 2001, the Company carried its investment in Pepgen at zero, as the proportionate losses recognized by the Company had reduced the
initial investment to that amount.





(13)    Income Taxes





The provision for income taxes for all periods presented in the accompanying consolidated statements of operations represents minimum California franchise taxes.
Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 34% to pretax losses as a result of the following:





December 31,2001


2000


1999(in thousands)Computed expected tax expense

$
(3,152
)

$
(4,163
)

$
(3,408
)Meals and entertainment expenses, and officers life insurance not deductible for income taxes


7



13



17Research expenses






39



39State tax expense, net of federal income tax benefit


1



1



1Losses and credits for which no benefits have been recognized


3,146



4,112



3,360Other










5$
2


$
2


$
2





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





December 31,2001


2000(in thousands)Deferred tax assets:Employee benefit reserves, including accrued vacation and bonuses

$
70


$
60Start-up and other capitalization


734



751Fixed assets, due to differences in depreciation


223



379Deferred rent and revenue


218



214Net operating loss carryovers


29,047



26,093Research and development credits


1,542



1,510Other operating reserves


81



75Other


412



301Total gross deferred tax assets


32,327



29,383Valuation allowance


(32,327
)


(29,383
)Net deferred tax asset

$



$





The net change in the valuation allowance for the years ended
December 2001, 2000, and 1999 was an increase of $2,944,000, $4,708,000, and $4,386,000, respectively. Because there is uncertainty regarding the




F-29




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




Companys ability to realize its deferred tax assets, a 100% valuation allowance has been established. When realized, approximately $171,000 of deferred tax assets will be creditable to
paid-in capital.





As of December 31, 2001, the Company had federal tax net operating loss carryforwards of
approximately $82,099,000, which will expire in the years 2004 through 2021. The Company also has federal research and development credit carryforwards as of December 31, 2001 of approximately $1,124,000, which will expire in the years 2005 through
2021.





State tax net operating loss carryforwards were approximately $34,548,000 and state research and
development credit carryforwards were $618,000 as of December 31, 2001. The state net operating loss carryforwards will expire in the years 2002 through 2011 and the state research and development credits will carryforward indefinitely.





The Companys ability to utilize its net operating loss and research and development tax credit
carryforwards may be limited in the future if it is determined that the Company experienced an ownership change, as defined in Section 382 of the Internal Revenue Code.





(14)    Royalty, License, and Research Agreements





Royalty
and License Agreements





The Company has entered into an agreement that provides for royalty payments to former
related parties based on sales of certain products conceived by the former related parties prior to March 30, 1989.





The Company has entered into arrangements with various organizations to receive the right to utilize certain patents and proprietary rights under licensing agreements in exchange for the Company making certain royalty payments based
on sales of certain products and services. The royalty obligations are based on a percentage of net sales of licensed products and include minimum annual royalty payments under some agreements. The Company pays royalties to five entities on its
urine-based screening test and to one entity on its serum- and urine-based Western Blot supplemental tests. The patents underlying the royalties expire between 2004 and 2009. There are minimum payments required by certain of the agreements that
apply regardless of the amount of actual sales. The Company did not make all of the required minimum and sales-based payments for 2000 or 2001.





At December 31, 2001, the Company is approximately $1,052,000 in arrears on the payment of royalties under certain of its licensing agreements. Under certain of the Companys licensing agreements,
the patent holder or other organization granting rights to the Company has the right to revoke the license for non-payment of royalties. Should the patent holder or other granting organization take that step, the Company could find it necessary to
modify its manufacturing practices or change its business plan. Refer to Notes 18 and 19 (unaudited) for recent developments regarding certain of the Companys license agreements. Since December 31, 2001 and in conjunction with the Subsequent
Financings discussed in Note 19 (unaudited), the Company has contacted its major license grantors and is attempting to satisfy its royalty obligations either through restructuring of its debt by issuing shares of its common stock, as also discussed
in Note 19 (unaudited), or by arranging payment schedules to eliminate the royalty payment arrearages by the end of calendar 2002.





Research Agreement





As amended in 1994, the Company entered into a research agreement that
allowed for a university to perform certain research on behalf of the Company for a seven-year period. Under the terms of the agreement,




F-30




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




the Company may negotiate certain license rights to the inventions made by the university resulting from this research. The Companys annual payment under this agreement was approximately
$150,000 through 1999. The Company made no payments attributable to this agreement in 2000 or 2001.





(15)    Distribution Agreements





United States





In September 1999, the Company appointed Wampole Laboratories, a division of Carter-Wallace Inc., as the exclusive U.S. distributor of its
HIV-1 urine-based screening test to all markets other than the insurance market. The agreement had an initial five-year term. Exclusivity for the full term of the agreement was predicated on the purchase of targeted volumes of the Companys
product over a two year period. The agreement was terminated as of March 31, 2001 and the Company hired its own sales force that now addresses the hospital, public health, and reference laboratory markets.





International





The
Company has entered into distribution agreements with ten international distributors granting them exclusive rights to distribute the Companys products in approximately one dozen countries. The agreements generally have terms of from one to
three years. Continuing exclusivity and agreement renewal or extension is typically dependent upon specified minimum purchases following successful local regulatory approval of the product. At December 31, 2001, the product was registered for sale
in the Republic of South Africa, the Peoples Republic of China, Indonesia, and Malaysia. Regulatory approvals in France, the Philippines, Korea and Brazil are in process.





(16)    Consulting and Employment Agreements





In January 1995, the Company entered into an employment agreement with an officer for the year ended December 31, 1995, which provided for an annual salary of $140,000 plus an annual bonus not to exceed $35,000 per year. The
agreement was amended in November 1999 to provide payment of the officers base salary through April 2000. The agreement was subsequently amended in 2000 to provide for payment of $100,000 in cash and stock for services from April 2000 through March
2001. The agreement was not extended or renewed thereafter.





In December 1997, the Company entered into a
consulting agreement with a Board member effective from December 1997 to June 1998. Under the agreement, the consultant received compensation of $6,000 per month and was granted 50,000 stock options, which vested over the period of the agreement.
The options were cancelled as of October 1999. A replacement grant was made in April 2000 at the same exercise price as for the original grant, which exceeded the April 2000 price. Other terms of the grant were the same as the original grant.





In December 1997, the Company entered into a consulting agreement with a Board member effective from January 1998
through June 1998. Under the agreement, the consultant received compensation of $2,500 per month and was granted 50,000 stock options, which vested over a 36 month period with the possibility of immediate vesting under certain conditions. The
options were cancelled as of October 1999. A replacement grant was made in April 2000 at the same exercise price as for the original grant, which exceeded the April 2000 price. Other terms of the grant were the same as the original grant.




F-31




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







In October 1998, the Company entered into
employment agreements with two officers. Those agreements expired upon the termination of employment and execution of Consulting Agreements that extended from 1999 to 2000 between the Company and each of the officers. Those agreements were
subsequently extended in 2000 for an additional twelve-month term, after which they expired and were not renewed.





In October 1999, the Company entered into an employment agreement with an officer and director of the Company that included a base salary, subject to annual review, and the grant of 450,000 stock options, which vest over 24 months.
The officer is also entitled to a bonus upon the achievement of milestones mutually agreed to by the officer and the Board of Directors. During 2000, the officer received a stock bonus of 25,000 shares of the Companys common stock and was granted
stock options that vest over 24 months to purchase an additional 300,000 shares of the Companys stock. During 2001, the officer was granted multiple options with vesting periods ranging from 3 to 36 months to purchase an aggregate of 900,000 shares
of the Companys stock. At December 31, 2001, options to purchase 452,431 shares of stock were exercisable based on grants made during 2001. In the event the Company terminates the officers employment other than for cause, the officer is entitled to
receive her base salary for twelve months.





In October 1999, the Company entered into a consulting agreement with
a Board member to serve as an officer of the Company effective from October 1999 through October 2000. Under the terms of the agreement, the director received compensation of $5,000 per month and was granted options to purchase 150,000 shares of the
Companys stock. The options for 50,000 shares of the Companys stock vested immediately upon execution of the Agreement, an additional 50,000 shares vested after six months, and the remaining 50,000 shares vested on the one year anniversary of the
agreement. The agreement was renewed for an additional twelve months through October 2001 to compensate the Board member for service as Chairman of the Board. The director received a restricted stock award valued at $60,000 that vests over the
twelve-month term of the agreement as compensation for the renewal. In 2001, the agreement was renewed for a subsequent twelve-month term. The director was granted options to purchase 300,000 shares of the Companys stock. The options vest ratably
over the twelve-month term of the agreement.





Stock bonuses and awards reflect shares of Calypte common stock to
employees. Compensation expense is recognized at the time of grant, and is determined based on the number of shares awarded and the closing market price at the date of the award, in accordance with APB 25.





Stock option grants to employees are generally issued with an exercise price equal to the market price at the grant date. To the extent
that the market price of the common stock exceeds the exercise price of the options, deferred compensation is recognized for the intrinsic value in accordance with APB 25 and FIN 44. This deferred compensation would be amortized on a straight-line
basis over the vesting period of the option.





Option grants to non-employees are valued at the date of grant using
the Black-Scholes option-pricing model in accordance with FAS 123. Option grants that do not include sufficient disincentive for non-performance are accounted for in accordance with EITFs 96-18 and 00-18. 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, the Company records 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 the Companys stock price.




F-32




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







(17)    Related Party Transactions





During 1997, in recognition of a Technology Rights Agreement entered into between the Company and an officer,
the Company partially funded the expenses of a research foundation started by the officer. The officer entered into a loan agreement with the Company to repay such funding to the Company. The principal amount and all accrued interest was originally
due on December 1, 1997, but the Companys Board of Directors extended the due date to December 31, 1999 and then to June 12, 2000. In June 2000, the Company accepted a new note from the officer that incorporated the principal and accrued interest
from the previous indebtedness. The June 2000 note was secured by the officers owned stock and vested stock options in the Company. The note required interest at the prime rate and was due on December 31, 2000. On September 12, 2000, the officer
repaid the note and accrued interest in full.





In April 2000, the Company sold 4,096,000 shares of Common Stock to
institutional investors in a private placement at $2.05 per share. The Company sold 1,951,220 of the shares to an investment company for which the Companys Chairman of the Board serves on the Board of Directors and as a member of the Compensation
Committee. Pursuant to the Common Stock Purchase Agreement dated March 2, 2000, a representative designated by the investment company was elected to and continues to serve on Calyptes Board of Directors. The Calypte Board will nominate a
representative selected by the investment company for election to the Calypte Board for so long as the investment company holds one-half of the shares it acquired through the Common Stock Purchase Agreement. In connection with the private placement,
the investment company extended a $1 million line of credit to Calypte and Calypte issued a warrant for the purchase of 100,000 shares of its common stock at $3.62 per share. The Company drew $500,000 under the line of credit, which balance was
converted into common stock at the rate of $2.05 per share, consistent with the purchase price for other shares in the private placement purchased by the investment fund.





As described in Note 6, in September 2001, the Company issued a $400,000 Promissory Note to the parent company of its largest stockholder.





In November 2001, the Company sold 1,575,855 shares of Common Stock under Regulation 144 to various investors in a private placement at
$0.19 per share, receiving net proceeds of $295,000. The investors are required to hold the shares purchased pursuant to this offering for twelve months from the date of purchase. Three members of the Companys Board of Directors purchased an
aggregate of 721,154 shares of this offering





(18)    Contingencies





The Company has received correspondence from the National Institutes of Health (NIH) alleging that its HIV-1 urine-based test products are
also subject to the patent under which it licenses its serum-based supplemental test and requesting the payment of additional license fees of approximately $300,000 for past shipments plus a royalty on future shipment of its urine-based products. At
December 31, 2001, the Company has accrued, but is delinquent in making, royalty payments to NIH for its serum-based product sales. The Company has informed the NIH that it does not agree with their analysis of the patent in question. The Company
cannot, however, assure that it will be successful if the matter is pursued further by NIH, or if it is litigated. If the Companys analysis of the patent does not prevail and if it becomes subject to royalty payments to the NIH for past and future
shipments of its urine-based test products, it would reduce the funds available to fund continuing operations and might result in a decrease in its gross margin on those products and/or cause it to increase the price of those products, which could
adversely affect the market share for its urine-based products.




F-33




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







(19)    Subsequent Events (Unaudited)





Contingencies





On March 6, 2002, the NIH notified the Company that it would classify Calyptes urine EIA test as a product that is not subject to earned royalties under the terms of the Companys license agreement. The Companys urine Western
Blot supplemental test is, however, subject to royalties under the license. This tentative agreement with the NIH will be formalized by executing an amendment to the Companys license agreement with NIH and an agreement regarding payment of past-due
royalties, and effectively resolves the contingency described in Note 18.





Restructure of Debt





On February 12, 2002, the Company completed a restructure of approximately $1.7 million of its past due accounts payable and certain
obligations with 27 of its trade creditors. Under the restructuring, the Company issued approximately 1.4 million restricted shares of common stock at various negotiated prices per share to trade creditors in satisfaction of specified debt. The
issuance of the shares was pursuant to Regulation D of the Securities Act. The Company agreed to use its best efforts to register the shares within 45 business days of the closing date. As of the current date, the Company has not filed the
registration statement, however, the agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period.





On February 21, 2002, the Company renegotiated the terms of repayment under its Promissory Note with the parent company of its largest stockholder at year-end. The Note now
requires payments of $17,500 at the end of February and March 2002, increasing to $35,000 monthly thereafter unless and until the Company raises at least $2 million in external financing, not including the convertible debentures and warrants
discussed above. If there is a remaining balance under the Note upon the Companys obtaining proceeds of at least $2 million of external financing, the Company is obligated to repay $200,000 on the note and should any balance on the Note remain
thereafter, the Company is obligated to continue monthly payments of $35,000 until the Note is repaid in full. The Company made the required $17,500 payment on February 28, 2002. On March 28, 2002, the Company again renegotiated the payment terms of
this note, suspending any required principal or interest payments until the Companys registration statement for the convertible debentures becomes effective, at which time the Company is required to resume making monthly payments of $35,000. No
payments have been made on this note since February 2002.





Subsequent Financings





Between January 1 and May 31, 2002, the Company issued 5,618,567 shares of its common stock under its equity line facility at an average
price of $0.177 and received net proceeds of $939,000 after deducting expenses.





On May 9, 2002, the Company
entered into a letter agreement with the Cataldo Investment Group (CIG) whereby CIG agreed to provide approximately $1.5 million within 90 days and an aggregate of at least $5 million over the next 12 months to fund Calyptes operations.





CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony
Cataldo, the Companys executive chairman to facilitate investments in the Company. Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG. As a




F-34




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




condition precedent to the initial investment, it was requested that Mr. Cataldo be appointed Executive Chairman in connection with the restart of the Companys operation. Additionally, Mr.
Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of Directors. During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of
the resignation of a director during the limited time period. The Company initially came into contact with individual investors that comprise CIG via certain existing security holders of the Company who were concerned about the Company winding down
its business affairs and their investment (holdings) in the Company. Thereafter, Mr. Cataldo arranged for new financings, which were categorized under the acronym CIG. The individual investors that comprise the de facto entity referred to as CIG are
not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that comprise CIG. To the best of the Companys knowledge, the individual investors of CIG are not affiliated with each other.
Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time of the new financing. He continues to actively pursue raising the necessary capital to fund the Companys on-going
operations. There are no defined terms with respect to investments that can be attributed to CIG and as such all financing arrangements must be negotiated on an individual basis. To date, to the best of the Companys knowledge, all investors
that have been aggregated under the acronym CIG are offshore residents. Additional new investors not a part of the original CIG investment in the Company may be referred to going forward under the acronym CIG.





There can be no assurance that the terms of such capital will be made available to the Company on a timely basis and there can be no
assurance that the additional capital that the Company requires will be available on acceptable terms, if at all. Any failure to secure additional financing on a timely basis will place the Company in significant financial jeopardy.





In conjunction with the acceptance of the CIG financing proposal, the Companys Board of Directors appointed Anthony J.
Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an aggregate of 7,966,666 stock options pursuant to an employment agreement negotiated between Mr. Cataldo and the independent members of the Board of Directors. Mr. Cataldo
was appointed to the Board replacing David E. Collins, who resigned as Chairman of the Board and from the Board of Directors. On May 10, 2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo was granted fully-vested
options to purchase 1,966,666 shares of the Companys common stock at $0.015 per share and options to purchase 6,000,000 shares of the Companys common stock at $0.03 per share, with the option to purchase 3,000,000 shares vested
immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant. The options have a five-year term. As options granted to an employee, Mr. Cataldos options were accounted for under the provisions of
APB 25 and FIN 44. The Company recognized compensation expense of $29,500 based on the intrinsic value of the below-market grant of 1,966,666 shares and no expense based on the at-market grant of 6,000,000 shares.





The components of the financing through May 31, 2002 include the following:





On May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to the private investment fund Bristol Investment Fund Ltd. under an exemption provided by
Regulation S. This debenture has the same terms as those of the initial debenture and related warrants as more fully disclosed later in this section. The closing price for Calypte stock on May 10, 2002 was $0.03.





On May 14, 2002, Calypte issued a $150,000 10% convertible promissory note pursuant to Regulation S to BNC Bach International Ltd., an
investor who is a related party to Townsbury Ltd., the investor that provides the Companys existing equity line of credit. The closing price for Calypte Common Stock on May 14, 2002 was




F-35




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




$0.14. This note is convertible into shares of the Companys common stock at $0.05 per share and is due on the earlier of July 14, 2002 or the settlement date of Calyptes next drawdown
under the equity line. In conjunction with the issuance of this note, Calypte repriced from $0.27 to $0.015 the 4.2 million-share warrant issued pursuant to the equity line. Townsbury has exercised the warrant for the entire 4.2 million shares and
Calypte received $63,000 in proceeds.





Calypte has reduced the exercise price of the Townsbury warrant as
permitted by the originally negotiated terms of the warrant. The reduced exercise price has served as an inducement for Townsbury to exercise the warrant as Calypte was in need of additional funds for the resumption and continuation of its business
operations. In light of Calyptes precarious financial condition and the Company being in danger of ceasing operations, the exercise price was modified to allow for the Company to receive additional financing. The Company viewed modification of
the exercise price as fair and reasonable under the circumstances. Townsbury was and is viewed as an unaffiliated party of the Company.





The value of the warrant had originally been treated as a deferred offering cost associated with the equity line. The value of the repriced warrant was less than that of the original warrant and no accounting adjustment
attributable to the repricing was required. Upon the exercise of the warrant, the Company reclassified the $807,000 unamortized balance of the deferred offering cost to additional paid-in capital.





Pursuant to Regulation S, Calypte has issued a series of 8% convertible notes in the aggregate principal amount of $2.225 million. These
notes have a 24 month term and are convertible into shares of the Companys common stock at the lesser of $.10 or 70% of the average of the three lowest trades during the 30 day period preceding conversion and are convertible at any time prior
to maturity. Calypte has received approximately $1.9 million in proceeds after deducting fees and costs associated with these notes. Under the terms of the subscription agreement, Calypte agreed to file a registration statement for the shares of
common stock underlying the notes and use its reasonable commercial efforts to cause the registration statement to be declared effective within ninety days of the closing date. In the event there is a registration default under the agreement, the
Company shall pay, at the subscribers option, in cash or stock, as liquidated damages an amount equal to 2% of the note principal per month.





The following table sets forth the individual investors who have subscribed to the 8% convertible notes:





Investor

Amount

Transaction Date

Calypte Closing Price

Shares Issued/Converted8% Convertible NotesAlpha Capital Aktiengesellshaft

$
500,000

5/24/02

$
0.12

0Stonestreet Limited Partnership

$
500,000

5/24/02

$
0.12

0Filter International Ltd.

$
150,000

5/24/02

$
0.12

0Camden International Ltd.

$
250,000

5/24/02

$
0.12

0Camden International Ltd.

$
100,000

5/24/02

$
0.12

0Domino International Ltd.

$
150,000

5/24/02

$
0.12

0Thunderbird Global Corporation

$
75,000

5/24/02

$
0.12

0BNC Bach International Ltd.

$
200,000

5/24/02

$
0.12

0Excalibur Limited Partnership

$
200,000

5/24/02

$
0.12

0Standard Resources Ltd.

$
100,000

5/24/02

$
0.12

0$
2,225,000




F-36




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999







The Company determined that the above convertible
notes were issued with a beneficial conversion feature. The beneficial conversion feature was recognized by allocating an amount equal to the intrinsic value of that feature to note discount to be amortized over the life of the note, subject to a
limitation of the face amount of the respective note. Upon earlier conversion, the proportionate share of unamortized discount is charged to additional paid-in capital. The intrinsic value was calculated at the date of issue as the difference
between the conversion price of the note and the fair value of the Companys common stock into which the note was convertible, multiplied by the number of common shares into which the note was convertible. In the case of the 8% convertible
notes, the beneficial conversion feature was generally limited by the face amount of the note. The Company has recorded approximately $81,000 of such discount amortization as non-cash interest expense through May 31, 2002.





At this time we are currently in the registration process for the Bristol Debentures and have not begun the process for any CIG financing.





Calypte has issued warrants and options to purchase 19,000,000 shares of its Common Stock under agreements with
consultants to perform legal, financial and business advisory services associated with the restart of its operations. The warrants were issued at $0.015 per share on May 9, 2002 when the market price of our common stock was $0.03 per share. The
option was granted at $0.03 per share on May 10, 2002, when the market price of our common stock was $0.03 per share. All of the warrant and option grants were non-forfeitable and fully-vested at the date of issuance and were registered for resale
by the consultants under Form S-8. The aggregate of 18,500,000 warrants were valued on the date of issue at $0.0155 per share using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield of 0.0%; risk free
interest rate of 5.2%, the contractual life of 4 months, and volatility of 80%. Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related to Accounting for Stock Based Compensation, the Company recognized approximately
$287,000 in expense attributable to these warrants in the second quarter of 2002. The Company valued 500,000 options on the date of issue at $0.0253 per share using the Black-Scholes option-pricing model with the following assumptions: expected
dividend yield of 0.0%; risk free interest rate of 5.16%, the contractual life of 10 years, and volatility of 80%. Pursuant to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18, the Company recognized approximately $13,000 in
expense attributable to these options during the second quarter of 2002.





The consultants have exercised warrants
and options aggregating 13,333,333 shares as of May 31, 2002 and Calypte has received proceeds of $200,000.





Prior
to the CIG investment commitment, the Company had announced on April 17, 2002 that it would begin winding down its business due to insufficient funds to continue its operations. The Company also announced that it might file for bankruptcy
protection. At that time, the Company furloughed most of its employees and notified its customers of a likely cessation of operations. As a result of the CIG investment commitment, the Company announced that it would not complete the wind down of
its business as previously announced. Furthermore, the Company discontinued any plans to file for bankruptcy protection at the current time. The Company has begun to call back some of its furloughed employees and has restarted the business. The
Company can give no assurance that it will be able to successfully recall all of its furloughed key employees or that its revenues and customer base will not be negatively impacted by the announcement and commencement of the wind down of the
Companys business.





On February 11, 2002, the Company signed a securities purchase agreement with Bristol pursuant
to which the fund agreed to purchase an aggregate of $850,000 of 12% secured convertible debentures maturing two years




F-37




---

##### Table of Contents



CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





December 31, 2001, 2000 and 1999




after issuance. As of May 31, 2002, the Company has issued $525,000 of debentures and has received net proceeds of $470,000. The Company expects to issue a debenture for the balance of $325,000
upon the effectiveness of a registration statement filed by the Company in March 2002. The outstanding debentures bear interest at the annual rate of 12% payable quarterly in common stock or cash at Bristols option. Under the terms of the debenture,
Bristol can elect at any time prior to maturity to convert the balance outstanding on the debenture into shares of the Companys Common Stock. The Conversion Price for the debentures is equal to the lesser of (i) the average of the lowest three
trading prices during the 20 trading days immediately prior to the conversion date discounted by 30% and (ii) $0.115. On May 31, 2002, Bristol converted approximately $60,000 of principal plus accrued interest and the Company issued approximately
4,462,000 shares of its common stock at $0.014 per share. In addition, upon effectiveness of the registration statement, Bristol is required to convert the debentures at a monthly rate equal to 5% of the aggregate trading volume of the Companys
common stock for the 60 trading days immediately preceding such conversions.





In conjunction with this
transaction, the Company issued Bristol a Class A warrant to purchase up to 1,700,000 shares of its Common Stock. The Class A warrant is exercisable for a period of seven years after issuance at a price per share equal to the Conversion Price.
Bristol has sole discretion with respect to when and if it chooses to exercise any or all of the Class A warrant prior to its expiration. The warrant was valued on the date of issue at $0.21 per share using the Black-Scholes option-pricing model
with the following assumptions: expected dividend yield of 0.0%; risk free interest rate of 4.7%, the contractual life of 7 years, and volatility of 80%.





The Company also issued Bristol a Class B warrant to purchase an additional 12,000,000 shares of its Common Stock. Upon the effectiveness of the related registration statement, Bristol is required to
exercise the Class B warrant in conjunction with the mandatory monthly conversion of its debentures so that each month the Company will issue to Bristol, pursuant to the Class B warrant, a number of shares equal to 150% of the shares issued to the
fund pursuant to the monthly conversion of the debentures. Because the fund is required to convert the debentures for a minimum number of shares equal to 5% of the Companys aggregate trading volume for the preceding 60 trading days, this means that
the fund must exercise the Class B warrant during each monthly conversion period for a number of shares equal to 7.5% of such trading volume, provided that more than 2 million shares will not be issued per month pursuant to such conversion and
exercise without the Companys consent. The term of the Class B warrant is 12 months from the effective date of the related registration statement. The exercise price for the Class B warrant is the lesser of (i) the average of the lowest three
trading prices during the 20 trading days immediately prior to exercise discounted by 25%; and (ii) $0.215 per share. The warrant was valued on the date of issue at $0.14 per share using the Black-Scholes option-pricing model with the following
assumptions: expected dividend yield of 0.0%; risk free interest rate of 2.2%, the contractual life of 1 year, and volatility of 80%.




F-38




---

##### 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/    NANCY E. KATZNancy E. KatzPresident and Chief Executive Officer





Date: December 20, 2002





POWER OF ATTORNEY





Each Director of the Registrant whose signature appears below, hereby appoints Nancy E. Katz as his or her attorney-in-fact to sign in his or her name and on his or her behalf as a Director of the Registrant, and to file with the
Commission any and all Amendments to this report on Form 10-K/A (No.2) to the same extent and with the same effect as if done personally.





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/    ANTHONY J. CATALDO Anthony J. Cataldo

Executive Chairman of the Board of Directors

December 20, 2002/s/    NANCY E. KATZ Nancy E. Katz

President, Chief Executive Officer and Director

December 20, 2002/s/    RICHARD D. BROUNSTEIN Richard D. Brounstein

Executive Vice President, Chief Financial Officer and Director (Principal Financial and Accounting Officer)

December 20, 2002/s/    JOHN J. DIPIETRO John J. DiPietro

Director

December 20, 2002/s/    PAUL FREIMAN Paul Freiman

Director

December 20, 2002/s/    JULIUS R. KREVANS, M.D Julius R. Krevans, M.D.

Director

December 20, 2002/s/    MARK NOVITCH, M.D. Mark Novitch, M.D.

Director

December 20, 2002/s/    ZAFAR I. RANDAWA, PH.D. Zafar I. Randawa, Ph.D.

Director

December 20, 2002




II-1




---

##### Table of Contents

INDEPENDENT AUDITORS REPORT ON


CONSOLIDATED FINANCIAL STATEMENT SCHEDULE





The Board of Directors


Calypte Biomedical Corporation:





Under date of February 8, 2002, we reported on the
consolidated balance sheets of Calypte Biomedical Corporation and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders equity (deficit), and cash flows for each of the years in the
three-year period ended December 31, 2001, which are included in this Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This
financial statement schedule is the responsibility of the Companys management. Our responsibility is to express an opinion on this financial statement schedule based on our audits.





In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.





The audit report on the consolidated
financial statements of Calypte Biomedical Corporation and subsidiary referred to above contains an explanatory paragraph that states that the Companys recurring losses from operations and accumulated deficit raise substantial doubt about the
entitys ability to continue as a going concern. The consolidated financial statement schedule included in this Form 10-K does not include any adjustments that might result from the outcome of this uncertainty.








/s/    KPMG LLP





San Francisco, California


February 8, 2002




S-1




---

##### Table of Contents

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY





Financial Statement Schedule





Schedule
II-Valuation and Qualifying Accounts





Balance at Beginning of Period

Additions Charged to Costs and Expenses

Charged to Other Accounts

Deductions

Balance at End of PeriodYear Ended December 31, 2001Allowance for doubtful accounts receivable

$
35

$
156





$
191Year Ended December 31, 2000Allowance for doubtful accounts receivable

$
35








$
35Year Ended December 31, 1999Allowance for doubtful accounts receivable




$
35





$
35







S-2