**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**





**(Mark One)**x
            
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the fiscal year ended December 31, 2006**
              **or** ̈
            
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934****For
                the transition period from********to******
              
              **Commission
                file number: 000-20985**





**CALYPTE
      BIOMEDICAL CORPORATION**


**(Name
      of small business issuer in its charter)**




**DELAWARE**
            
            **06-1226727****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            **(I.R.S.
                Employer**
              **Identification
                Number)****5
                Centerpointe Drive, Suite 400, Lake Oswego, OR**
            
            **97035****(Address
                of principal executive offices)**
            
            **(Zip
                Code)**




**Issuer’s
      Telephone Number: (971) 204-0282**




**Securities
      registered under Section 12(b) of the Exchange Act:**




**None**




**Securities
      registered under Section 12(g) of the Exchange Act:**




**Common
      Stock, $.03 par value per share**




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act o





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




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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-KSB or any
      amendment to this Form 10-KSB. x




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





State
      issuer’s revenues for its most recent fiscal year. $547,000




As
      of March
      29,
      2007, 340,733,645 shares of the
      registrant’s common stock, $.03 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 approximately $17,841,000 based on
      the $0.071 per
      share closing price of the common stock on that date reported on the NASD Over
      the Counter Bulletin Board.




**DOCUMENTS
      INCORPORATED BY REFERENCE**




Portions
      of the issuer’s definitive proxy statement on Schedule 14A to be filed with the
      Securities and Exchange Commission relative to the issuer’s 2007 Annual Meeting
      of Shareholders are incorporated by reference into Part III of this Form 10-KSB.




Transitional
      Small Business Disclosure Format (Check one):  Yes  o No x





**CALYPTE
      BIOMEDICAL CORPORATION******


**FORM
      10-KSB**


**INDEX**


**Page
                  No.****PART I.**Item
                  1.
              
              Business
              
              1Item
                  2.
              
              Properties
              
              19Item
                  3.
              
              Legal
                  Proceedings
              
              19Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              20**PART
                  II.**Item
                  5.
              
              Market
                  for the Registrant’s Common Equity and Related Stockholder
                  Matters
              
              21Item
                  6.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              31Item
                  7.
              
              Financial
                  Statements and Supplementary Data
              
              56Item
                  8.
              
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              
              56Item
                  8A.
              
              Controls
                  and Procedures
              
              56**PART
                  III.**Item
                  9.
              
              Executive
                  Officers and Directors of the Registrant
              
              58Item
                  10.
              
              Executive
                  Compensation
              
              61Item
                  11.
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              65Item
                  12.
              
              Certain
                  Relationships and Related Transactions
              
              67Item
                  13.
              
              Exhibits
                  and Reports on Form 8-K
              
              69Item
                  14.
              
              Principal
                  Accountant Fees and Services
              
              75Signatures
              
              S-1Certifications
              
              IV-1




*Except
      for the historical information contained in this annual report on Form 10-KSB,
      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, our ability to obtain additional financing if and when needed,
      uncertain market acceptance of current and prospective new products for
      determining the presence of HIV antibodies and our limited experience selling
      and marketing HIV diagnostic tests, as well as the other risks and uncertainties
      described under “Additional Factors that May Affect Future Results” beginning on
      page 45 and elsewhere in this Annual Report on Form 10-KSB. The Company assumes
      no obligation to update any forward-looking statements contained herein.*










**FACTORS
      THAT MAY AFFECT FUTURE RESULTS**





This
      Annual Report on Form 10-KSB contains forward-looking statements, within
      the meaning of the Federal securities laws, about our business and prospects,
      including without limitation statements regarding our expected revenues or
      revenue growth rate in 2007. The forward-looking statements do not include
      the
      potential impact of any mergers, acquisitions, divestitures or business
      combinations that may be completed after the date hereof. Any statements
      contained herein that are not statements of historical fact may be deemed to
      be
      forward-looking statements. Without limiting the foregoing, the words “believe,”
“plan,” “intend,” “expect,” “goals” and similar expressions are intended to
      identify forward-looking statements, although not all forward-looking statements
      contain these words. Our future results may differ materially from our past
      results and from those projected in the forward-looking statements due to
      various uncertainties and risks, including those described in the section of
      this report titled *“Management’s
      Discussion and Analysis of Financial Condition and Results of Operations-Factors
      That May Affect Future Results.”* We
      disclaim any obligation to update any forward-looking statements contained
      herein after the date of this Annual Report.





**PART
      I**




**Item
      1. Business**





**(a)
      Business Development.**




Calypte
      Biomedical Corporation (the “Company”) develops, manufactures, and distributes *in
      vitro* diagnostic tests, primarily for the diagnosis of Human Immunodeficiency Virus
      (“HIV”) infection. We were incorporated in California in 1989 and reincorporated
      in Delaware in 1996 at the time of our initial public offering. Since September
      8, 2006, our common stock has traded on the NASD Over the Counter Bulletin
      Board
      under the symbol “CBMC.” Prior to that date, our stock had traded on the
      American Stock Exchange under the symbol “HIV”. Our administrative offices are
      located in Lake Oswego, Oregon, a suburb of Portland. We have research
      operations in Vancouver, Washington. Through our 51%-owned joint ventures,
      we
      have manufacturing and marketing operations in Beijing, China.





Historically,
      we manufactured and marketed urine-based HIV-1 diagnostic screening tests and
      urine and serum-based Western Blot supplemental (sometimes called
“confirmatory”) tests for use in high-volume laboratories, which we refer to as
      our “Legacy Business.” After consolidating our Legacy Business operations into
      our Rockville, Maryland facility in 2004, on April 18, 2005, we entered into
      a
      non-binding letter of intent to sell the Legacy Business to Maxim Biomedical,
      Inc. (“Maxim”). Effective May 1, 2005, we entered into a manufacturing services
      and management agreement (the “Manufacturing Services Agreement”) with Maxim
      under which Maxim manufactured, shipped and performed quality control procedures
      for us in connection with the Legacy Business. Under the terms of the
      Manufacturing Services Agreement, Maxim hired some of our ex-employees and
      we
      transferred our inventory to Maxim for use under the agreement. Effective
      November 15, 2005, under the terms of an Asset Purchase and License Agreement
      (the “Agreement”), we sold the Legacy Business to Maxim.





Our
      current emphasis is the commercialization of our HIV-1/2 Rapid Tests, test
      products for the rapid detection of antibodies to HIV-1 and HIV Type 2, a second
      type of HIV (“HIV-2”), in oral fluid and blood samples using a lateral flow
      dipstick design (the “HIV-1/2 Rapid Tests”). Rapid tests provide diagnostic
      results in less than 20 minutes and are particularly suitable for point-of-care
      testing in both the professional sector, such as in developing countries that
      lack the medical infrastructure to support laboratory based testing, and, for
      the first time, in the over-the-counter or “OTC” market. We have completed field
      trials or product evaluations of our HIV-1/2 Rapid Tests covering an aggregate
      of over 5,000 samples in China, South Africa and elsewhere and believe that
      the
      results of these studies and evaluations have validated the tests. In our
      studies, the tests have averaged 99.6% accuracy. We have obtained regulatory
      approvals in parts of Africa, Southeast Asia, the Middle East, and, most
      recently, in Russia, and we expect to expand our market reach on a steady basis.
      We plan to develop a complementary oral fluid test using an alternative antigen
      that will enable us to market a completely non-invasive screening and
      confirmation testing system for HIV-1/2.





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




1




As
      a
      result of discontinuing our Legacy Business, we have significantly reduced
      our
      monthly operating burn rate as compared with historical levels. Consequently,
      however, the revenue stream from the Legacy Business products has also been
      eliminated, requiring that we rely on revenue from sales of the BED Incidence
      Test and international sales of our HIV-1/2 Rapid Tests as well as external
      financing sources to pursue our business milestones and achieve profitability.
      Although we are focusing our efforts on commercializing the HIV-1/2 Rapid Tests
      to generate the revenue stream necessary to support our operations and achieve
      our financial objectives of sustained profitable operations and increased
      stockholder value, t here
      can
      be no assurance that we will achieve expanded acceptance of or realize
      significant revenues from the sale of the BED Incidence Test or the HIV-1/2
      Rapid Tests or other new products that we may develop or market, or that we
      will
      achieve and sustain profitability and positive cash flows in the
      future.




In
      November 2003, we became the 51% owner of a joint venture, Beijing Calypte
      Biomedical Technology Ltd. (“Beijing Calypte”), created to market our rapid test
      products in China. The remaining 49% of the joint venture is owned by Marr
      Technologies Limited, an affiliate of Marr Technologies BV (“Marr”), our largest
      stockholder, which holds approximately 19% of our outstanding stock as of March
      29, 2007. Through 2006, the operations of Beijing Calypte were primarily
      organizational and financially insignificant.





Effective
      in January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceutical
      Co.,
      Ltd. (“Beijing Marr”). We purchased our equity interest from Marr Technologies
      Asia Limited (“Marr Asia”), an affiliate of Marr. Marr Asia continues to own the
      remaining 49% interest in Beijing Marr. Through the acquisition of Beijing
      Marr,
      we have acquired rights to manufacturing
      facilities and other assets necessary to
      manufacture our HIV-1/2
      Rapid Test products
      in China. Beijing Marr has
      recently renovated the manufacturing facilities and is pursuing the necessary
      governmental approvals to begin production and sale of our HIV-1/2 rapid oral
      fluid (OMT) diagnostic test, which is currently being evaluated by the Chinese
      State Food and Drug Administration (“SFDA”). We expect that this facility will
      also support the manufacturing of our products for export to other
      countries.





The
      financial statements included in Item 7 in this Form 10-KSB reflect the
      consolidated operations of and our ownership interests in Beijing Calypte and
      in
      Beijing Marr beginning in January 2006. They also reflect the 2005 results
      of
      the Legacy Business as a discontinued operation.





**Financial
      Considerations**





To
      successfully implement our business plans, we must obtain sustainable positive
      cash flow and profitability. Our future liquidity and capital requirements
      will
      depend on numerous factors, including successful commercialization of our
      HIV-1/2 Rapid Tests, protection of intellectual property rights, costs of
      developing our new products, including obtaining and maintaining the necessary
      intellectual property rights, our ability to transfer technology, set up and
      scale up manufacturing and obtain regulatory approvals of our new rapid tests,
      market acceptance of our products, existence of competing products in our
      current and anticipated markets, actions by the FDA and other international
      regulatory bodies, and the ability to raise additional capital, if and as
      needed, in a timely manner.





During
      2006, we incurred a net loss of $13.8 million and a negative cash flow of $5.0
      million to fund our operations. At December 31, 2006, we had a working capital
      deficit of $12.6 million and our stockholders’ deficit was $9.4 million. Our
      cash balance at December 31, 2006 was $0.4 million. Based upon our financial
      condition at December 31, 2006, as well as our recurring losses and our negative
      cash flows from operations, our independent accountants issued an opinion on
      our
      December 31, 2006 financial statements citing substantial doubt about our
      ability to continue our business operations as a going concern.  During
      March 2007, we entered into Subscription Agreements for a private placement
      transaction with four accredited investors for the sale of an aggregate of
      100
      million shares of our common stock plus warrants and received an aggregate
      of
      $5.2 million in cash. The investors received immediately exercisable warrants
      to
      purchase an aggregate of 150 million additional shares of our common stock.
      The
      warrants to purchase 100 million shares have an exercise price of $0.08 per
      share and are exercisable through June 2008. Warrants to purchase 50 million
      shares have an exercise price of $0.11 per share and are exercisable through
      September 2008. If fully exercised, the warrants would provide us with an
      additional $13.5 million in cash. We consider the exercise of these warrants
      as
      a potential source of medium-term financing that would finance the growth plans
      described in Trends, Events and Uncertainties in Part II, Item 6 of this Form
      10-KSB, as well as fund operating losses and working capital requirements during
      the expected growth phase of our business, beginning in 2007 and continuing
      into
      2008. We entered into agreements for a total of $617,800 in other financings
      in
      the first quarter of 2007 that served as a bridge to this PIPE transaction.
      Certain of these transactions, totaling $250,000 were bridge financings and
      are
      to be repaid from the proceeds of the PIPE. At March 29, 2007, we also had
      outstanding the unpaid balance of the April 2005 Secured 8% Convertible Notes
      and related interest notes and the 7% Promissory Notes issued under the 2005
      Marr Credit Facility, aggregating $9,433,000, all of which were due in April
      2007. In March 2007 we extended the maturity date of an aggregate of $9,183,000
      of these notes to April 2009. With the exercise of the warrants uncertain,
      we do
      not believe that our current cash resources are sufficient to allow us to fully
      attain our business milestones and achieve positive cash flow. Based on our
      current obligations and our 2007 operating plans, we do not believe that we
      can
      sustain our operations throughout 2007 without obtaining additional financing
      or
      in the absence of an early exercise of a significant portion of the 150 million
      warrants described above. There can
      be no
      assurance that the warrants will be exercised prior to their expiration, or
      at
      all, or that additional financing will be available, or if it is available,
      that
      it will be available on acceptable terms. We would,
      or
      might be required to, consider strategic opportunities, including merger,
      consolidation, sale or other comparable transactions, to sustain our operations.
      As we expand in the U.S., we expect to form strategic partnerships with
      companies that have greater strength than we do to penetrate the potential
      OTC
      testing market. We do not currently have any definitive agreements with respect
      to any such additional financing or strategic opportunity, and there can be
      no
      assurance that any such opportunity will be available to us on acceptable terms,
      or at all. If additional financing is not available or is not available on
      acceptable terms, or if we are unable to arrange a suitable strategic
      opportunity, we will be in significant financial jeopardy and may be unable
      to
      continue our operations at current levels, or at all .  The
      terms
      of a subsequent financing may involve a change of control and/or require
      stockholder approval. Further, our pledge of the rights to our assets as
      collateral security for the 8% Convertible Notes issued in April 2005, as
      amended, and the 7% Promissory Notes issued under the 2005 Credit Facility
      with
      Marr, as amended, may inhibit our ability to secure financing in the future.
      Although we expect to be able to raise additional capital, there can be no
      assurance that we will secure such financing or enter into such strategic
      agreements, or that our stockholders would approve the terms of such agreements
      or financing, if so required.




2




Our
      longer-term liquidity and capital requirements are dependent on constraints
      similar to those which impact our current liquidity and capital resource
      considerations and which will be critical in validating our business model
      during 2007. In
      the
      absence of adequate resources from current working capital and existing
      financing arrangements, we may be required to raise additional capital to
      sustain our operations. There can be no assurance that additional financing
      would be available, or if it is available, be on acceptable terms.
      We would,
      or might be required to, consider strategic opportunities, including merger,
      consolidation, sale or other comparable transaction, to sustain our operations.
      We do not currently have any agreements in place with respect to any such
      additional financing or strategic opportunity, and there can be no assurance
      that any such opportunity will be available to us on acceptable terms, or at
      all. If additional financing is not available to us if and when we require
      it or
      if it is not available to us on acceptable terms, or if we are unable to arrange
      a suitable strategic opportunity, we will be in significant financial jeopardy
      and we may be unable to continue our operations at current levels, or at
      all .  The
      terms
      of a subsequent financing may involve a change of control and/or require
      stockholder approval. There can be no assurance that we will enter into such
      strategic agreements or secure such financing, or that our stockholders will
      approve the terms of such agreements or financing, if so required. If such
      additional financing is not available to us when required or is not available
      to
      us on acceptable terms, or we are unable to arrange a suitable strategic
      opportunity, we will be in significant financial jeopardy and we may be unable
      to continue our operations at current levels, or at all .





3




**(b)**  **Business
      of issuer.**





**Background
      on HIV**





HIV,
      the
      virus that causes Acquired Immunodeficiency Syndrome (“AIDS”), continues to be a
      leading cause of death for persons aged 25 to 44 in the U.S. and for persons
      of
      all ages in many international locales. 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 unaware of their HIV status and
      are
      asymptomatic for AIDS, they do not avail themselves of medical treatment and
      may
      unknowingly expose others to the risk of HIV infection. 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.





Prior
      exposure to HIV can be detected in laboratory and point-of-care tests even
      though the infected individual is asymptomatic. Although 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, oral fluid or
      urine.




The
      December 2006 AIDS
      Epidemic Update published jointly by the Joint United Nations Programme on HIV/AIDS (“UNAIDS”)
      and the World Health Organization (the “WHO”) provides the following assessment
      of the worldwide AIDS epidemic:





“...the
      number of people living with HIV continues to grow, as does the number of deaths
      due to AIDS. A total of 39.5 million [34.1 - 47.1] people were living with
      HIV
      in 2006 - 2.6 million more than in 2004. This figure includes the estimated
      4.3
      million [3.6 million - 6.6 million] adults and children who were newly infected
      with HIV in 2006, which is about 400,000 more than in 2004.





In
      many
      regions of the world, new HIV infections are heavily concentrated among young
      people (15-24 years of age). Among adults 15 years and older, young people
      accounted for 40% of new HIV infections in 2006.





Sub-Saharan
      Africa continues to bear the brunt of the global epidemic. Two thirds (63%)
      of
      all adults and children with HIV globally live in sub-Saharan Africa, with
      its
      epicenter in southern Africa. One third (32%) of all people with HIV globally
      live in southern Africa and 34% of all deaths due to AIDS in 2006 occurred
      there. Almost three quarters (72%) of all adult and child deaths due to AIDS
      in
      2006 occurred in sub-Saharan Africa: 2.1 million [1.8 million - 2.4 million]
      of
      the global total of 2.9 million [2.5 million - 3.5 million]. Overall sub-Saharan
      Africa is home to an estimated 24.7 million [21.8 million - 27.2 million] adults
      and children infected with HIV - 1.1 million more than in 2004.”





The Update further
      reported that in the past two years the number of people living with HIV
      increased in every region of the world. The Update cited
      East Asia (including China, India, Thailand, and Viet Nam) and Eastern Europe
      and Central Asia (including the Russian Federation, Ukraine, and Uzbekistan)
      as
      having the most significant increases. In Eastern Europe and Central Asia,
      for
      example, the number of people living with HIV in 2006 was 21% higher than in
      2004.





The
      Bill
& Melinda Gates Foundation (the “Gates Foundation”) cites the following
      statistics in its Global
      Health website
      presentation:





“Nearly
      40 million people around the world are infected with HIV, the virus that causes
      AIDS. Almost 2.8 million die of the disease each year, 95 percent of them in
      the
      developing world. Close to five million people become infected with HIV each
      year.





Sub-Saharan
      Africa is the hardest hit region so far. But HIV is spreading rapidly in other
      areas, including India, China, and Russia. By 2010, experts estimate that these
      three countries alone may add as many as 40 million more HIV infections among
      their populations.”




4




These
      countries have been referred to as the “next wave” of the HIV/AIDS
      pandemic.





**HIV
      Testing -The First Step in a Treatment Protocol**





Experts
      agree that the most important actions that can be taken to stem the spread
      of
      the HIV/AIDS epidemic are education and testing. However, countries in which
      HIV
      is spreading most rapidly have generally had the lowest testing rates. These
      include countries in Sub-Saharan Africa where the prevalence of HIV infection
      is
      the highest and the “next wave” countries.





HIV
      was
      first diagnosed in the early 1980’s. The discovery in 1984 of HIV antibodies
      circulating in the blood led to the development and widespread use of blood
      screening tests for the detection of HIV antibodies. Blood banks began testing
      their supplies of blood in an effort to maintain and protect the integrity
      of
      the blood. Essentially all current HIV diagnostic tests operate on the principle
      that antibodies react with antigens. Antibodies are produced by the human body
      in response to the presence of an infectious disease, such as HIV. Antigens
      are
      substances that stimulate production of antibodies. Antibody screening
      (diagnostic) tests provide an antigen base that will react with HIV antibodies,
      if such antibodies are present. Enzymes or other color-coated particles are
      used
      to detect the reaction between the antigens and antibodies.





Since
      1984, laboratory-based blood screening tests have been considered the gold
      standard of HIV testing. Such HIV
      blood
      tests can be expensive, requiring trained personnel and blood-sampling
      equipment. Additionally, blood-based testing has become increasingly more costly
      as the costs of disposing of potentially infected specimens, syringes, needles
      and transfer tubes has increased. The cost of blood-based testing is prohibitive
      to many large public health screening programs, particularly in lesser-developed
      countries, many of which have high rates of HIV infection. Even in the United
      States, certain populations are not routinely screened due to the high cost
      of
      blood-based testing.





In
      the
      United States, laboratory testing for the HIV antibody follows the same general
      testing protocol regardless of the sample type being used. The protocol is
      to
      first test a sample for the presence of HIV antibodies. Any sample found to
      be
      reactive is then retested in duplicate. If either of the retests is 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 a positive diagnosis of HIV infection. This protocol
      minimizes the risk of incorrectly reporting a false positive result that an
      individual is infected with HIV.





*The
      International Testing Gap*





In
      its HIV/AIDS
      Surveillance Report, Volume 17, 2005 issued
      in 2006, the CDC reported an HIV prevalence rate of approximately 0.14% in
      the
      United States. The AIDS
      Epidemic Update estimates the prevalence rate of adults (ages 15 to 49 years of age) living
      with
      HIV at the end of 2006 at 5.9% and 0.9%, respectively, for sub-Saharan Africa
      and Eastern Europe and Central Asia. In many countries and sub-regions, and
      particularly among women, the prevalence rates are even higher. The size of
      the
      market for HIV diagnostic tests in the United States is not related to the
      prevalence of HIV infection, but to the significant percentage of the population
      that is tested for one or more purposes.





The
      following table provides a summary of our internal estimates of testing rates
      compiled from a combination of sources including industry reports, published
      articles and local distributors. The data clearly indicate that countries or
      regions in which the prevalence of HIV is greatest currently have the lowest
      testing rates.





5




**Developed
                  Countries**
              
              **Annual
                  Testing Rate, Adults 15-64**USA
              
              
              25
              %Western
                  Europe
              
              
              17
              %Other
                  developed countries
              
              
              13
              %**Average:**
              
              
              **19**
              **%**




**Developing
                  Countries**
              
              **Annual
                  Testing Rate, Adults 15-64**China
              
              
              2
              %India
              
              
              2
              %Southeast
                  Asia
              
              
              2
              %Sub-Saharan
                  Africa
              
              
              7
              %Russia/Eastern
                  Europe
              
              
              13
              %North
                  Africa/Middle East
              
              
              2
              %Latin
                  America
              
              
              2
              %Other
                  developing countries
              
              
              2
              %**Average:**
              
              
              **3**
              **%**




In
      his
      August 2006 speech at the 16 th International AIDS Conference in Toronto, Kevin M. DeCock, M.D., the Director
      of
      the Department of HIV/AIDS for the World Health Organization, made the following
      comments underscoring the need for access to HIV testing and subsequent
      treatment:





“The
      fact
      that 21 years after the HIV test was introduced only about 10% of infected
      persons worldwide know their status is an indictment of our commitment to public
      health and to affected communities, whose most basic rights, life and health,
      are compromised by the unforgiving natural history of undiagnosed and untreated
      HIV infection. And as the data indicate, too often, treatment delayed is
      treatment denied.”





China,
      Sub-Saharan Africa, Russia, Southeast Asia, India and Brazil all face explosive
      and deadly growth in both the number and rate of HIV infections. Many of the
      countries where HIV/AIDS is currently most prevalent do not have the economic
      ability or medical infrastructure to adequately diagnose and provide therapy
      to
      persons already infected or to provide education or take other steps to prevent
      the spread of the epidemic. However the Global Fund, UNAIDS, WHO, the World
      Bank, the United Nations, the Gates Foundation and many other humanitarian
      and
      governmental organizations, including the Unites States, through its
      recently-enhanced President's Emergency Plan for AIDS Relief (PEPFAR), have
      all
      recognized the importance of mitigating the advance of the HIV/AIDS epidemic
      and
      have made significant contributions to combat the crisis through funding,
      science, testing and treatment implementation.





Other
      countries, such as China, that have the internal resources to respond to the
      threat of HIV/AIDS have only recently recognized HIV/AIDS as a serious problem.
      However, the growing prevalence of HIV/AIDS in those countries and the
      devastating human and economic toll of HIV/AIDS on Africa are changing
      attitudes. In China, HIV/AIDS is now openly acknowledged at all levels of
      government as a serious threat to the future prosperity of the country and
      resources are being mobilized to provide comprehensive education, testing and
      treatment. Recent developments in China include the institution of mandatory
      testing of all military recruits and students, prominent HIV/AIDS awareness
      and
      education programs, and establishment of programs to guarantee universal access
      to treatment.





We
      expect
      that the continuing worldwide response to the HIV/AIDS crisis will significantly
      increase spending on HIV diagnostics. We project that the worldwide market
      for
      HIV diagnostic tests will grow from approximately $513 million in 2003 to
      approximately $1 billion in 2010, driven largely by expansion of testing
      programs in developing countries. Our estimate is based in part on the February
      2004 report HIV/AIDS
      Testing - A Global Strategic Report by
      Global Industry Analysts and in part on our internal research.


6


The
      following table describes the primary purchasers and recipients of HIV
      diagnostics acquired to meet the challenges of the worldwide HIV/AIDS
      epidemic.





**Providers**
            **Organization**
            **Description**
            **Examples**International
                Coordinating Agencies
            Agencies
                with the dual role of providing funds and technical/operational advice
                to
                African nations. Their roles include:
              
              ·Technical
                guidance on available AIDS testing products
              
              ·Operational
                guidance (procurement guidelines, advice on setting up testing
                programs)
              
              ·Funding
                (e.g. World Bank loans) and test donations
            ·WHO
              
              ·UNAIDS
              
              ·World
                BankDeveloped
                World Countries
            First
                World government organizations that provide bilateral support to
                African
                Governments and Non- Governmental Organization (“NGO”) programs. Support
                may include:
              
              ·Funding
              
              ·Advice
              
              ·Involvement
                in setting up and running HIV test programs
            ·US:
                USAID, PEPFAR;CDC
              
              ·Norway:
                NORAD
              
              ·Japan:
                JICAPure
                Funds
            ·Organizations
                whose primary purpose is to grant large funds to governments of developing
                nations and local and international NGOs
              
              ·Pure
                funds do not typically run HIV testing programs in recipient countries
                or
                provide technical/operations advise on running HIV testing programs.
            ·The
                Global Fund
              
              ·Gates
                Foundation**Recipients**
            Governments
                of Developing Nations
            Various
                departments (Ministry of Health, President’s Office, National Lab) within
                the local government that supervise, coordinate and regulate lab
                and
                field-based HIV testing programs.
            ·Governments
                of all countriesLocal
                NGOs
            ·Private
                or community organizations which operate locally and run local testing
                program, including voluntary counseling and testing
              
              ·Raise
                some funds on their own, but are typically given funding and advice
                by
                out-of-country organizations
            ·AIDS
                Information Centre
              
              ·Family Planning Association UgandaInternational
                NGOs
            ·Internationally-based
                organizations that operate HIV testing programs in needy
                countries
              
              ·These
                organizations are partially self-funded and partially funded by larger
                fund organizations (e.g. Global Fund, Gates Foundation, World Bank,
                etc.)
            ·Multi-Country
                AIDS Project
              
              ·Family
                Health International
              
              ·AIDS
                Campaign Team
              
              ·Catholic
                Mission Board




**Our
      Products**




Following
      the disposition of our Legacy Business, our product line now includes our
      Aware TM line of
      low cost rapid tests and our HIV-1 BED Incidence test. At present our rapid
      tests are designed for use in international applications. Our business model
      calls for us to introduce rapid tests for the domestic market in the future.




***Th*** ***e
      Aware*** ***Ô*** ***Rapid Test Product Line***




The
      largest numbers of HIV infections are found in sub-Saharan Africa and Asia.
      The
      epidemic is growing in China, India, and in the countries of Northern Africa
      and
      Eastern Europe. The characteristics of these markets do not lend themselves
      to
      the use of traditional laboratory-based tests. In portions of Africa and Asia
      in
      particular, the lack of properly equipped laboratories, properly trained
      technologists, or even reliable electricity and water make the logistics
      associated with traditional laboratory-based testing algorithms slow,
      impractical and unreliable. Accurate, self-contained rapid tests that are easy
      to perform even in remote locations offer tremendous promise in these high-risk
      settings.





Additionally,
      one of the challenges faced by HIV clinicians worldwide is that of getting
      patients to return to the clinic for the results of their HIV test following
      the
      initial counseling and testing session. The CDC has reported that up to 30%
      of
      the people who attend HIV clinics in the United States do not return for their
      results. Whether this is caused by fear or by the inconvenience of revisiting
      the clinic, the result is the same - lost opportunities to further counsel,
      and
      if necessary, treat the patient. The problem is at least as difficult in the
      developing world.




7




There,
      HIV testing often requires a more comprehensive solution than a reliable
      point-of-care blood test. Cultural taboos about giving blood, the fear of
      painful blood collection, potential risks associated with the re-use of or
      accidents involving needles and lancets, and the stigma of being seen at an
      HIV
      clinic are all factors that can limit the utility and effectiveness of rapid
      HIV
      blood tests.





The
      ability to perform HIV testing without the need for a blood sample has been
      shown in the past to significantly increase voluntary testing rates. Moreover,
      the elimination of needles and lancets from the testing process simultaneously
      eliminates the risk of accidental infection through needle re-use or
      needle-stick accident. To address the needs of developing world markets in
      Africa and parts of Southeast Asia, as well as the Middle East and Eastern
      Europe, we have developed our Aware TM line of
      low cost rapid tests in a simple, easy to use format suitable for use in point
      of care settings in remote locations. We have developed rapid tests for the
      detection of antibodies to HIV-1 and HIV-2 that can use either oral fluid or
      blood or as a specimen sample. We are primarily concentrating on introducing
      our
      oral fluid rapid tests into international markets.





Regardless
      of the specimen sample, both versions of these immunochromatographic tests
      employ a lateral flow “dipstick” design, free of plastic housings to reduce cost
      and waste. After dropping the dipstick into a disposable test tube that contains
      the sample, the sample migrates up the strip. Along the way, the sample will
      wet
      a Protein A: gold conjugate pad. The reconstituted conjugate is reddish in
      color, and will bind with IgG in the sample. So bound, the sample and conjugate
      will continue to migrate up the dipstick. As this complex of sample and gold
      conjugate migrates, it will encounter a line of HIV proteins (recombinant or
      synthetic peptide, depending on the assay). At this point, the anti-HIV IgG
      in
      an antibody-positive sample will form a classical antigen:antibody:conjugate
      complex which is visually discernable as a red line. Further up the dipstick,
      the sample and conjugate complex will encounter a line of anti-human IgG
      antibody. Human IgG that is present in the sample will form a visible
      antibody:antibody:conjugate line. This second line acts as a control line that
      indicates not only that the reagents imbedded in the test device are functional,
      but that a valid, adequate sample was introduced to the test. For both the
      oral
      fluid and blood tests, positive results are generally visible within 5 minutes,
      although we advise users to allow 20 minutes before interpreting a result a
      negative.





Oral
      fluid samples are collected by wiping a swab across upper and lower gums, and
      then releasing the material collected by the swab into a dropper-full (1mL)
      of
      diluent. The blood/serum/plasma test requires just 5 μL of sample in a
      dropper-full (200 μL) of diluent.





Our
      current Aware Ô line
      includes the following products:





***Aware*** ***Ô*** ***HIV-1/2 OMT (Oral fluid) PRO (Professional)***




We
      developed the Aware Ô HIV-1/2
      OMT test to address the drawbacks of blood testing. We believe this test is
      ideally suited to clinical or professional settings in the developing world.
      Although the range of other assays that can presently be performed on OMT
      samples is limited, OMT samples can be easily collected anywhere, including
      public settings, giving the test a unique advantage over tests using other
      sample media. Evaluations suggest that the accuracy of our OMT test is only
      slightly less than a test using a laboratory blood sample and on a par with
      the
      best of rapid blood tests. The strengths of the Aware Ô HIV-1/2
      OMT test are:




·
            It
                has a true IgG control line that indicates not only that the device
                is
                functional but that a human sample has been added (some assays feature
                a
                control line that appears even if the correct sample is not
                added)





·
            Kit
                packaging is designed to permit multiple users to use the kit
                simultaneously





·
            Unlike
                its primary competitor, the AwareTM OMT sample preparation step produces
                surplus sample, which can be used to repeat the test, or to perform
                a
                confirmatory assay such as an oral fluid Western Blot
                test





·
            AwareTM
                OMT testing is painless, safe, and
                non-invasive





·
            Although
                more expensive than blood tests, the all-in costs (including costs
                of
                handling and disposal of blood) are less. Further, we expect the
                AwareTM
                OMT to have a cost advantage over its primary current oral fluid
                competitor




8




***Aware*** ***Ô*** ***HIV-1/2 OMT OTC***




The
      Aware Ô HIV-1/2
      OMT OTC test is an over-the-counter version of our oral fluid rapid test. The
      test was designed for markets in which we see substantial demand for a low-cost
      self-administered, over-the-counter HIV test, including the Middle East, Russia
      and other Eastern European and Central Asian countries. The Aware Ô HIV-1/2
      OMT OTC has the same performance attributes as the PRO version but is packaged
      for individual sale and includes simplified usage instructions tailored for
      the
      non-professional consumer.





***Aware*** ***Ô*** ***HIV-1/2 BSP PRO***




Although
      we are committed to non-blood testing, we developed the AwareTM HIV-1/2 BSP
      (blood/serum/plasma) test to offer a full range of testing solutions. The BSP
      test allows us to participate in tenders that specify blood and in markets
      where
      blood testing remains the norm. The BSP test also demonstrates our ability
      to
      develop and manufacture a rapid HIV test that meets uniform international
      standards and performs well in international evaluations. Further, it allows
      us
      to provide one-stop shopping and standardized methods for customers wanting
      to
      use both blood and non-blood tests. The strengths of the Aware Ô HIV-1/2
      BSP test are:




·
            It
                has a true IgG control line that indicates not only that the device
                is
                functional but that a human sample has been added (some assays feature
                a
                control line that appears even if the correct sample is not
                added)





·
            Kit
                packaging is designed to permit multiple users to use the kit
                simultaneously





·
            The
                test can be used on all types of blood: serum, plasma, venous whole
                blood
                and finger-stick whole blood. This flexibility is not found in all
                rapid
                HIV blood tests





·
            Its
                clinical performance effectively competes with the top brands of
                rapid
                blood HIV test





·
            As
                with all rapid blood tests, the sampling procedure can be easily
                modified
                to permit routine and convenient sample collection for epidemiology
                purposes (BED Incidence EIA)




***HIV-1
      BED Incidence EIA***





The
      HIV-1
      BED Incidence EIA Test (the “Incidence Test”) is designed to estimate the rate
      of new HIV infections in a population by determining what proportion of a
      population of HIV infected people were infected recently (e.g. within
      approximately the past 6 months.) Under a license from the CDC, we serve as
      the
      contract manufacturer of this test and have the right to market it worldwide.
      We
      did not participate in the development or validation of the Incidence Test
      or
      the development of the guidelines for its use. The guidelines that dictate
      how
      the test is to be interpreted and how the data generated by the test are to
      be
      used are determined by the CDC and other authoritative public health entities
      such as UNAIDS.





We
      believe that the capability of this test is significant because a critical
      element of reducing HIV transmission rates is identifying where the increased
      rates are occurring and instituting prevention programs accordingly. The
      Incidence Test is useful as an epidemiological measurement tool to track the
      expansion of HIV infection into susceptible populations, which will allow public
      health agencies to more efficiently use their resources by focusing their
      prevention efforts on those groups having the greatest need. We believe that
      the
      Incidence Test can also provide policy makers and program managers with valuable
      insights regarding the success of their prevention programs and a scientific
      approach to both human and financial resource allocation. Incidence estimates
      help determine the effectiveness of prevention programs from both a disease
      spread and financial resource perspective and allow managers to evaluate areas
      appropriate for alternative therapeutic media, such as vaccine trials.





During
      2005, the CDC conducted workshops to train representatives from various domestic
      governmental public health and humanitarian organizations to use the test and
      announced that the Incidence Test is the exclusive HIV surveillance test in
      the
      United States. Outside of the United States, the CDC actively promoted the
      use
      of the Incidence Test through advocacy and conducting “train-the-trainer”
workshops.





In
      February 2006, the CDC issued an Information Sheet: Using
      the BED HIV-1 Capture EIA Assay to Estimate Incidence Using STARHS in the
      Context of Surveillance in the U.S. addressing a December 2005 UNAIDS report regarding studies in Africa and
      Thailand indicating that the Incidence Test apparently over-estimated the
      incidence rate.  The Information Sheet acknowledges that the assay may
      cause over-estimation under certain conditions and suggests expanding current
      protocols. The Information Sheet notes, “[T]he [Incidence Test] in combination
      with the appropriate estimator is the preferred approach to calculating
      incidence of HIV infection in the U.S...in the context of a case-based
      surveillance system where additional clinical and epidemiological information
      is
      available for interpretation and estimation.  It may be less successful in
      a specimen-based system where these critical data cannot be ascertained.”
 During 2006, working groups within the CDC reviewed the results from
      studies conducted in various countries to address the concerns identified by
      UNAIDS. In November 2006, the CDC issued new recommendations and adjustment
      factors for using the Incidence Test. We believe that use of the test and
      interpretation of its results will continue to evolve as public health agencies
      and the CDC gain experience with it. We also believe that the Incidence Test
      is
      a valuable technology in the fight against the spread of HIV/AIDS and expect
      that the process of refining its applications will continue as its use expands.
      There can be no assurance, however, that the Incidence Test will achieve
      widespread acceptance, either in the United States or
      internationally.





9





**New
      Products**





***HIV-1/2
      OMT Test using a recombinant antigen***




In
      an
      effort to provide a complete oral fluid diagnostic testing solution, and to
      comply with the WHO’s rapid testing algorithm requiring two rapid tests having
      different antigens and/or platforms, we have begun the development of a second
      OMT screening test using a recombinant antigen, for use in conjunction with
      our
      AwareTM OMT test, which employs a synthetic antigen. This product is designed to
      utilize the same sample collected for our current AwareTM HIV-1/2 OMT rapid test,
      resulting in a completely non-invasive real-time testing solution. We expect
      to
      complete the development of this product during the first half of 2007 and
      anticipate approval processes similar to those for the AwareTM product line,
      depending on the country of interest.





***Aware*** ***Ô*** ***II (The Ani Platform)***




Our
      current Aware Ô product
      line is a rapid testing solution that is well suited for developing countries.
      However, in developed countries, the design of the original Aware Ô product
      line may infringe on certain lateral flow technology patents for which we have
      been unable to obtain licenses. Further, a cassette-enclosed format may be
      more
      acceptable in markets like the U.S. We plan to introduce the Aware Ô II
      product line for these markets.





The
      Aware Ô II line
      provides a cassette-housed strip in a unique two-step platform that we have
      licensed from Ani Biotech Oy (the
“Ani
      Platform”). To perform the test, the
      sample applicator is first placed in the specimen— oral fluid or blood. The end
      of the sample applicator stick is then placed in the sample inlet of the test
      device. The sample and the mobilized conjugate thereafter move through the
      porous carrier in the test device by capillary action, to the detection and
      control zones. In all instances, the labeled conjugate is retained in the
      control zone, producing a color indicating that the test is valid; any HIV-1/2
      antibody in the sample forms a complex with the labeled conjugate and is
      retained in the detection zone, producing a visible color there if HIV-1/2
      antibody is present in the sample.





We
      believe the Ani Platform avoids infringing the traditional lateral flow patents
      by moving a critical test component known as the conjugate from the test strip
      to another part of the system. A conjugate of some kind is used in all lateral
      flow tests and, in most cases, it is impregnated into the test strip during
      manufacture as a patented one-step process. Ani Biotech’s technology moved the
      conjugate from the test strip to a plastic swizzle stick. To comply with the
      WHO
      rapid testing guidelines, we plan to offer this test using two different
      antigens.





Further,
      while there are currently no U.S. FDA-approved over-the-counter HIV tests,
      at
      least one of our competitors has expressed its intent to develop such a test
      and
      has announced that it has commenced pre-clinical trials. An FDA advisory panel
      has recommended that the FDA consider an approval protocol for such a test.
      We
      believe that OTC tests would be advantageous in the battle against HIV
      transmission and that a rapid test platform such as the one acquired from Ani
      is
      appropriate for use in an FDA-approved OTC application, potentially coupled
      with
      tests such as a rapid incidence test and tests for other STD’s or conditions. We
      are monitoring the FDA’s progress on this subject and expect to commence
      the regulatory approval process for an OTC test in the U. S. during 2007.




10




***Rapid
      Incidence Test***




In
      April
      2004, we executed a CRADA (a Cooperative Research and Development Agreement)
      with the CDC to develop a new HIV-1 rapid incidence blood test. This new test
      is
      intended to be part of a diagnostic protocol used to both detect HIV-1
      antibodies and to determine the rate of new HIV-1 infections in populations.
      If
      successful, this dual capability would strongly distinguish the rapid incidence
      blood test in a “me-too marketplace” by providing a test having a more complete
      diagnostic protocol. We believe that the test will provide a simplified rapid
      format that can be performed in resource poor settings and remote outreach
      locations for both diagnostic and surveillance purposes. Further, as a
      diagnostic tool, this test can direct treatment protocols, which are generally
      more aggressive in young infections.




We
      plan
      to introduce this product initially for international use on the current
      Aware Ô platform
      and manufacture it overseas. We subsequently plan to transfer it to the
      Aware Ô
II platform,
      potentially serving as the lead product for that platform in the US. Although
      we
      believe that we have demonstrated feasibility for this product, there remains
      significant effort, including obtaining regulatory approvals, before it will
      be
      ready for market.





**Future
      Products**





We
      believe that the Ani Platform provides us with an alternative product format
      having potential applicability in both the professional and OTC markets
      worldwide. It also gives us strategic opportunities. We are in the early stages
      of evaluating the feasibility of potential future products employing this
      technology. The development of a rapid test for the detection of syphilis is
      potentially the first non-HIV project that we may undertake.





We
      believe that we must prove the viability of the Ani Platform by completing
      development of the Aware Ô II
      product line, filing an IDE for those tests in the U.S. and establishing
      domestic manufacturing capacity with which to begin the FDA clinical trials,
      initially for an HIV test, before we will be able to exploit any of these
      opportunities.





As
      development of this platform expands, we anticipate developing multi-channel
      tests combining logical testing sets for 2 to 8 conditions in a single
      rapid-test device.





**Marketing,
      Sales and Distribution**





We
      generally rely upon local distributors to explain local market conditions,
      to
      pursue sales opportunities, follow up on leads we provide, to train and support
      local customers and to assist in the regulatory approval process. The notable
      exception to this practice is in China where our products will be marketed,
      distributed and sold through our joint venture with Marr. Additionally, we
      work
      with the CDC to distribute the Incidence Test in the US and
      internationally.





Traditionally,
      we have preferred to appoint exclusive distributors in which ongoing exclusivity
      is predicated upon the distributor’s purchase of mutually agreed minimum volumes
      of product. The distributors may, in turn, appoint sub-distributors. Where
      appropriate, we will also consider more direct routes to market, or in the
      case
      of OTC, private sector or charity-backed programs, strategic relationships.
      On
      an individual distributor basis, agreement terms are typically set at 1, 2,
      or 3
      years, and with a few exceptions, all purchases must be at least 50% prepaid.





The
      following table lists our current distributors.





**Distributor**
            
            **Territory**PCN
                Healthcare Co. Ltd.
            
            ThailandEnfield
                Medical Co. Ltd.
            
            TaiwanWisma
                BST
            
            MalaysiaMarsman
                Drysdale Medical Products, Inc.
            
            PhilippinesSumit
                Exports & Trades Pvt. Ltd.
            
            IndiaDaison
                Development & Investment Company
            
            VietnamImpex
                Speedways
            
            NepalJoseph
                & Gionis LLC
            
            United
                Arab Emirates, Saudi Arabia, Kuwait, Egypt, Turkey and 16 other Middle
                East countriesScientific
                Group
            
            South
                Africa, Lesotho, Swaziland, BotswanaLily-Max
                (PTY) Ltd.
            
            Uganda,
                DRC, Rwanda, BurundiBioweb
                (PTY) Ltd.
            
            Kenya,
                Tanzania, Cameroon, ChadNational
                Diagnostics (PVT) Ltd.
            
            ZimbabweGestlab
                LDA
            
            MozambiqueGolden
                Technologies Inc.
            
            Ghana,
                MaliMTA
                Healthcare.
            
            Nigeria




11




We
      expect
      to concentrate on the following primary markets during 2007:





**China**




When
      it
      is approved, we expect that our Aware TM HIV-1/2
      OMT test will be the only **** alternative
      fluid rapid test available in China. We expect to capture a meaningful share
      of
      the Chinese market for diagnostic screening tests within two years following
      approval while maintaining strong margins. We believe that to meet the Chinese
      government’s goal of universal testing in its fight against HIV/AIDS only a
      non-blood test, such as ours can be safely distributed and administered on
      a
      sufficiently wide scale. As noted, we plan to manufacture and market our
      Aware TM HIV-1/2
      OMT test through our Chinese joint venture. We expect to make significant
      investments in our Chinese operations in 2007 and 2008 to scale up the
      manufacturing operation and support marketing activities following approval
      of
      our rapid test.





**Russia
      and Eastern Europe**




While
      testing is already extensive in Russia and Eastern Europe due to
      institutionalized programs originally established in the Soviet era, these
      programs are failing to reach those population groups most affected by HIV/AIDS.
      Russia’s HIV epidemic is now the largest in Europe and the fastest growing in
      the world. There is a strong need in Russia and Eastern Europe to expand testing
      among groups that are at the highest risk of contracting HIV/AIDS. Blood-based
      tests have limited utility among these groups, however. We believe that our
      AwareTM line of oral fluid rapid tests, which enable private, non-invasive
      testing, are uniquely suited for overcoming obstacles to broader testing in
      the
      region. Our Aware TM HIV-1/2
      OMT PRO and OTC rapid tests have been registered in Russia we expect shipments
      to begin in the first half of 2007. We are working with Marr, our strategic
      partner and largest stockholder, to maximize the opportunity in Russia and
      Eastern Europe. Among the marketing initiatives being developed is a novel
      humanitarian program involving corporate sponsorship of regional HIV/AIDS
      intervention programs in Russia that is currently being piloted in Chelyabinsk
      oblast.





**India**




The
      December 2006 AIDS
      Epidemic Update reports
      that India has an estimated 5.7 million HIV infections, making it a rival to
      South Africa for the highest number of HIV/AIDS infected people. We expect
      the
      market for HIV diagnostic testing in India to grow significantly in the next
      few
      years. We are targeting three primary markets in India: the private sector,
      which requires approval by the National AIDS Control Program (“NACO”); the
      government sector, which requires approval by both NACO and the Drug Control
      Authority of India (“DCAI”); and the military, which requires that our tests be
      evaluated by the Armed Forces Medical Services (“AFMS”). We have successfully
      completed field evaluations of our Aware TM HIV-1/2
      OMT test in India and expect to file for approval in all three markets, with
      initial sales beginning in the second half of 2007. As in China, we expect
      the
      Aware TM HIV-1/2
      OMT test to be the only alternative fluid HIV rapid test available in India.
      Given the resources and potential opportunities in this region, we also expect
      to consider placing research and manufacturing operations in India in 2007.





**Africa**




In
      Africa, we are currently pursuing individual country markets for our
      Aware TM HIV-1/2
      OMT rapid test products where we expect growth rates for HIV testing to be
      the
      highest. We will add other target countries as we see their markets developing.
      We received our initial orders for the Aware TM HIV-1/2
      OMT test in 2006 from South Africa. Our distributor in South Africa, The
      Scientific Group, is forecasting a significant expansion in sales for 2007.
      Our
      Aware TM HIV-1/2
      OMT test is currently approved in South Africa, Kenya, and Uganda. We have
      also
      initiated registration in Nigeria, Tanzania and Cameroon and expect to receive
      approval in those countries during 2007 or early 2008.




12




**Middle
      East**




During
      2007, we expect to enter several country markets within the region. We have
      already completed registration of our Aware TM HIV-1/2
      OMT tests in the UAE and are actively pursuing additional registrations in
      Saudi
      Arabia, Kuwait, Iraq, Iran (pending U.S. government clearance), Morocco, Libya
      and Egypt. We shipped the first order of 100,000 tests for the UAE in November
      2006.




**Competition**





Throughout
      the world there are numerous manufacturers of rapid HIV antibody tests.
      Competitors include specialized biotechnology firms as well as pharmaceutical
      companies with biotechnology divisions and medical diagnostic companies. Many
      of
      the tests are manufactured in countries with emerging biotechnology industries
      such as India, China and Korea. In China, for example, there were as many as
      31
      domestic EIA tests and 12 domestic rapid tests on the market in 2004. With
      few
      exceptions, the products offered were blood tests and, while their quality
      varies, they are generally of adequate accuracy to pass local regulatory
      requirements. The tests are often marketed at very low prices to the end-user,
      which may indicate that the manufacturers are not paying royalties on certain
      key patents such as those for detection of HIV-2. While many of these
      manufacturers were initially established to supply products for their regional
      or domestic markets, many have now begun to expand into other regions having
      less-stringent regulatory and intellectual property environments and strong
      demand for low-cost HIV tests.





Among
      these manufacturers, there are a few that sell products meeting North American
      and Western European quality standards in developing countries. These global
      players typically have an established presence in more than one geographic
      region and their products set the performance standard for the industry. While
      these companies are primarily headquartered in Western Europe or the United
      States, they may manufacture in lower cost developing countries. Their HIV
      rapid
      diagnostic tests are considered to be the quality leaders in the market, with
      accuracies easily exceeding 99%.





The
      following table indicates the companies that we consider to be our primary
      competitors.





**Manufacturer**
            **Products**
            **Comments**Inverness
                Medical Innovations Inc.
            ·Determine
              
              
              ·Double
                Check Gold
            ·Determine
                is believed to be the number one HIV rapid test in the world (based
                on
                revenue)
              
              ·Inverness
                holds critical lateral flow intellectual property. Its stated strategy
                is
                to use those patents as barrier to limit competitionTrinity
                Biotech plc
            ·Uni-Gold
            ·Uni-Gold
                is the number two selling HIV rapid test behind Determine in
                AfricaOraSure
                Technologies Inc.
            ·OraQuick
              
              ·OraQuick
                Advance
            ·Only
                other company to offer alternative fluid rapid testsChemBio
                Diagnostics, Inc.
            ·Sure
                Check HIV
              
              ·HIV
                1/2 Stat Pak
            ·Established
                sales offices in Tanzania and Nigeria
              
              ·Offers
                quality “western products” at low price point




We
      believe that we have a number of competitive advantages. First, we believe
      we
      are well-positioned to meet the demands of testing in international markets
      with
      our menu of HIV-1/2 Rapid Tests designed for use with either oral fluid or
      blood. Second, we believe our OMT tests have unique advantages compared with
      blood based tests, as indicated below.




13




·
            Non-invasive
                and painless sampling. Studies show greater acceptance of HIV testing
                without the pain and risks of drawing blood, which translates into
                higher
                testing rates. Increasing testing rates is one of the keys to controlling
                the spread of HIV/AIDS




·
            Safer
                than blood tests. Eliminates the risk of infection through accidental
                needle or lancet stick injuries for both patients and health care
                workers




·
            Easier
                to use. Enables self sampling and self testing--no technicians, no
                needles, no lancets




·
            Sample
                can be collected anywhere, anytime, including open public
                settings




·
            More
                cost effective than blood diagnostic tests (considering the all-in
                costs
                of drawing, handling and disposing of venous
                blood)




·
            Risk
                of exposure to infectious agents during handling is minimal to
                non-existent




·
            The
                Over-The-Counter (OTC) version fosters increased use through increased
                privacy




·
            Unlike
                other oral fluid tests, the AwareTMsampling system allows for a sample to be tested multiple times with
                different test devices and stored for future
                use





**Research
      and Development Spending**





We
      continue to invest funds in research and development that we believe are
      necessary and appropriate to bring our HIV-1/2 Rapid Tests to market and to
      develop the next generation of those tests. To a lesser extent, we are also
      exploring the potential for other new diagnostic test products. Our product
      research and development spending decreased from
      $2.2
      million in 2005 to $1.7 million in 2006. Domestic R&D expense decreased by
      $1.0 million, primarily due to the elimination of our Rockville, Maryland
      facility-based R&D staff and their related operations in the business
      restructuring we implemented during the second quarter of 2005. We continued
      to
      incur travel and other costs related to the transfer of our manufacturing
      technology to our Thailand contract manufacturer and our Chinese joint venture
      and for various international clinical trials of our rapid tests during 2006;
      but those expenses decreased compared with the expense associated with similar
      activities during 2005. Offsetting the decrease in domestic R&D spending is
      $0.5 million of research and development expense related to our rapid tests
      and
      incurred primarily by our Beijing Marr joint venture, which did not exist in
      2005.




We
      expect
      our R&D costs to remain fairly constant in 2007 as we continue the
      commercialization of our Aware TM dipstick-format HIV-1/2 Rapid Tests and continue to develop tests using the
      Ani
      Platform or other new products. Depending on the timing of certain clinical
      trials and the availability of both human and financial resources, our R&D
      costs may increase in the latter part of 2007.




**Component
      Supply**




Our
      manufacturing operations employ a number of component s,
      including antigens and recombinants that we purchase from various suppliers
      for
      our various tests. We also use some single-source components. Any delay or
      interruption in the supply of these components, especially with respect to
      single-source components, could significantly impair our ability to manufacture
      products in sufficient quantities to meet demand because additional or
      replacement suppliers cannot be quickly established. Certain
      antigens and recombinants used in our HIV 1/2 Rapid Tests are provided by single
      contract suppliers pursuant to supply agreements. If for any reason these
      suppliers were no longer able to supply our antigen or recombinant needs, we
      believe that alternative supplies could be obtained at competitive costs.
      However, a change in any antigen or recombinant might require additional changes
      to our products. Any changes would require significant time to complete and
      could disrupt our ability to manufacture and sell our HIV 1/2 Rapid
      Tests.




14




**Intellectual
      Property**





We
      have
      acquired patent and other intellectual property rights to protect and preserve
      our proprietary technology and our right to capitalize on the results of our
      research and development activities. We also rely on trade secrets, know-how,
      continuing technological innovations and licensing opportunities to provide
      competitive advantages for our products in our markets and to develop new
      products.




***Rapid
      Tests***





We
      believe we have secured rights to intellectual property and related materials
      necessary for the manufacture and worldwide sale of our HIV-1/2 Rapid Tests.





**Recombinant
      Antigen (Adaltis, Inc.):**




In
      April
      2004, we entered into a license and supply agreement with Adaltis, Inc. under
      which Adaltis will supply us with HIV-1/2 peptides for use in our HIV-1/2 Rapid
      Tests.





**Guire/Swanson
      Patent Suite (Abbott Laboratories, Inc.):**




In
      June
      2004, we entered into a sublicense agreement with Abbott Laboratories, Inc.
      for
      certain worldwide rights to patents relating to the design, manufacture and
      sale
      of lateral-flow rapid diagnostic tests. Under the terms of the agreement, we
      were granted certain worldwide rights to use a family of patents known as the
      “Guire/Swanson” patents in both the professional and OTC markets. The technology
      underlying these patents is fundamental to nearly all lateral-flow rapid
      diagnostic tests.





**HIV-2
      (Bio-Rad Laboratories):**




In
      September 2004, we entered into a worldwide, non-exclusive sub-license agreement
      with Bio-Rad Laboratories and Bio-Rad Pasteur for HIV-2 rights. This agreement
      permits us to commercialize and market our HIV-1/2 Rapid Tests in areas where
      HIV-2 is increasing in prevalence or where it is required to achieve regulatory
      approval for our tests.





**Ani
      Platform (Ani Biotech Oy):**




In
      September 2004, we acquired a license to the Ani Platform from Ani Biotech
      Oy.
      Under the terms of the license, we have the exclusive right to develop,
      manufacture and sell rapid diagnostic tests for sexually transmitted diseases,
      including HIV, HPV, Hepatitis B, Hepatitis C, Syphilis, Gonorrhea, and Chlamydia
      when urine or oral fluid are the sample media. Additionally, we have the
      non-exclusive right to develop, manufacture and sell the same sexually
      transmitted disease tests when blood, serum, plasma, or urogenital swabs are
      the
      sample media.





The
      following table summarizes the license acquired for the manufacture and sale
      of
      the Aware Ô rapid
      tests.





**Issuer
                of License**
            
            **Description**
            
            **Additional
                provisions**
            
            **Expiration**Adaltis,
                Inc.
            
            Non-exclusive
                license for use of HIV-1 and HIV-2 peptide sequences
            
            Right
                to make, have made, use and sell Calypte products throughout the
                world,
                except in Canada, utilizing the technology described in the
                patent
            
            2010
                - 2012Bio-Rad
                Laboratories/
              Bio-Rad
                Pasteur
              (Owner:
                Institute Pasteur)
            
            Non-exclusive
                license for detecting infections by the HIV-2 virus
            
            Right
                to make, have made, use and sell products utilizing the technology
                described in the patent
            
            2006
                - 2015Abbott
                Laboratories
              (Owner:
                Surmodics Corporation)
            
            Non-exclusive
                sublicense of the Swanson, et al and Guire et al lateral flow patent
                suite
            
            Right
                to make, have made, use and sell products utilizing the technology
                described in the patent
            
            2008
                - 2017Ani
                Biotech Oy
            
            Exclusive
                license for use of rapid test diagnostic platform and sample applicator
                for certain STDs when urine or oral fluid are sample media; non-exclusive
                license when blood, serum, plasma or urogenital swabs are sample
                media
            
            Right
                to make, have made, use and sell products utilizing the technology
                described in the patent
            
            Pending




15




***Incidence
      Test***





We
      initiated a technology transfer of the Incidence Test in April 2004
      from ** the
      laboratories at the National Center for HIV, STD and TB Prevention, a division
      of the Public Health Service (PHS).





The
      following table summarizes the licenses granted in connection with the Incidence
      Test.





**Issuer
                of License**
            
            **Description**
            
            **Additional
                provisions**
            
            **Expiration**PHS
                National Center for HIV, STD and TB Prevention
            
            Non-exclusive
                license for using the BED-biotin peptide, Controls and Calibrator
                and
                instructions for their use
            
            Right
                to make, use and sell products utilizing the technology described
                in the
                License Agreement
            
            2014




Although
      important, the issuance of a patent or existence of trademark or trade secret
      protection does not in itself ensure the success of our business. Competitors
      may be able to produce products competing with our products without infringing
      our licensed patent rights. The issuance of a patent is not conclusive as to
      validity or as to the enforceable scope of the patent that we license. Trade
      secret protection does not prevent independent discovery and exploitation of
      the
      secret product or technique.




We
      are
      not aware of any pending claims of infringement or other challenges to our
      rights to use this intellectual property or our rights to use our trademarks
      or
      trade secrets in the U. S. or in other countries.




We
      require our employees, consultants, outside collaborators, and other advisors
      to
      execute confidentiality agreements upon the commencement of employment or
      consulting relationships with us. These agreements provide that all confidential
      information developed by or made known to the individual during the course
      of
      the individual’s relationship with us is to be kept confidential and not
      disclosed to third parties except in specific circumstances. In the case of
      employees, the agreements provide that all inventions conceived by the
      individual during his or her tenure with us will be our exclusive property.




**Manufacturing**




To
      meet
      the challenges of testing for HIV in the developing world, we have adopted
      a
      manufacturing strategy for our rapid tests that capitalizes on the reduced
      labor
      and overhead rates typical of the regions in which we expect the tests will
      be
      sold. We have established manufacturing capabilities in the U. S. and Thailand
      and are in the process of establishing manufacturing operations in China through
      our joint venture. We are considering establishing research and manufacturing
      centers in other targeted markets. A key consideration in selecting
      manufacturing locations for the current Aware Ô product
      is that the design of the tests may infringe on certain lateral flow patents
      discussed previously. Accordingly, we plan to produce Aware Ô in
      countries that offer both low cost manufacturing and where we have technological
      freedom to operate. Thailand and China meet these criteria. We believe there
      are
      no intellectual property restrictions for the Incidence Test or for our Aware
      II TM Tests.




16




***Pacific
      Biotech***




We
      have
      outsourced production of our Aware Ô product
      line to Pacific Biotech in Thailand. Under the terms of the contract
      manufacturing agreement, we pay Pacific Biotech a volume-variable price per
      test
      for assembly of Aware Ô test
      kits. Either we or Pacific Biotech may source the component materials. Pacific
      Biotech charges back to us at cost the materials that they source. Product
      produced at Pacific Biotech is available for shipment into Africa, the Middle
      East, Eastern Europe and parts of Southeast Asia. Pacific Biotech is a GMP
      and
      ISO certified manufacturing facility.





***MML***




We
      have
      outsourced production of the Incidence Test to MML in Troutdale, Oregon. The
      terms of the MML agreement are similar to the Pacific Biotech agreement. MML
      charges us a flat price per test for assembly of Incidence test kits. We supply
      all materials to MML. MML is a GMP and ISO certified manufacturing
      facility.





***Beijing
      Marr***




Our
      joint
      venture, Beijing Marr, has acquired a manufacturing facility in the Huairou
      district of Beijing. The site currently houses about 2,100 square meters of
      manufacturing space with ample room to expand. Beijing Marr has recently
      renovated and upgraded the facility to meet the requirements for the production
      of our Aware TM rapid
      test product line. The facility is currently undergoing evaluations for GMP
      and
      ISO certification. Production capacity at this facility is planned for up to
      10
      million tests per month before a facility expansion is required. We would need
      to add additional personnel and equipment to achieve that production level.
      Product from this plant will be available for sale in China as well as for
      export.








**Government
      Regulation**




***Aware*** ***Ô*** ***Rapid Tests***





Regulatory
      approvals to sell products are characteristic of the diagnostic industry.
      Throughout the developing world, countries can generally be classified in one
      of
      the following three categories regarding regulatory approvals:





1.
            Those
                requiring no local approval;





2.
            Those
                requiring local approvals, and possibly clinical trials; or those
                requiring approval in the country of manufacture; or





3.
            Those
                that may or may not require local approvals, but that rely on
                organizations such as the United States Agency for International
                Development (USAID) “approval” as a proxy for their own and for access to
                U.S. PEPFAR funding.





Though
      few in number, countries with regulatory mechanisms represent the path of least
      resistance. Generally, however, these countries are less likely to make
      purchasing decisions based upon product quality and demonstrated performance,
      but rather, based upon price. We designed our Aware Ô products
      to be high in quality, which typically makes them ill-suited to compete with
      locally-produced tests based solely on price. The
      majority of our target markets, therefore, have a local or other regulatory
      process.





**Local
      Approvals**





The
      time,
      effort, and cost of market entry for non-blood tests is significantly higher
      than for blood tests. In many countries, blood HIV tests may be evaluated using
      archived sets of well characterized blood samples known as standardized panels.
      While readily available for blood, such panels do not exist for oral fluid
      tests. Consequently, we must demonstrate the clinical performance of our oral
      fluid tests through formal clinical trials. Regulatory requirements represent
      a
      potential barrier to our timely entry to certain markets due to the high cost
      and time required for clinical trials.





17





The
      following table summarizes the regulatory approvals that we have received for
      products in our Aware Ô product
      line as of March 2007.





**Aware
                OMT**
              
              ·Kenya
              
              ·Russia
              
              ·South
                Africa
              
              ·Uganda
              
              ·United
                Arab Emirates
            
            **Aware
                BSP**
              
              ·Kenya
              
              ·Malaysia
              
              ·South
                Africa
              
              ·Uganda
              
              ·Zimbabwe
              
              ·USAID




In
      China,
      regulatory approval for a product is generally granted only for products
      manufactured in China and only to the Chinese manufacturer of such product.
      As a
      result, we plan to manufacture our products in China, through our 51% owned
      subsidiary, Beijing Marr. Additionally, w e
      are
      actively pursuing regulatory approval in China, not only because of the
      significance of that market to the HIV/AIDS pandemic, but also because, with
      our
      manufacturing facility there, we will obtain approval in the country of
      manufacture. Such a “certificate of origin” is expected to facilitate approvals
      in several additional target countries.





**USAID
      Waiver**





Many
      international HIV intervention programs are supported by foreign funding. In
      the
      case of funding supplied by the United States, typically through USAID or
      PEPFAR, products that are not approved locally in the country of intended use
      or
      by the USFDA may be used, provided they have a waiver issued by the USAID and
      CDC. In late 2006, our Aware TM HIV-1/2 rapid blood test was added to the USAID
      waiver list. We expect to have our HIV-1/2 rapid oral fluid tests considered
      for
      inclusion on the USAID waiver list this year.




***BED
      Incidence Test***




Calypte’s
      Incidence Test is regulated by the FDA Center for Biologics Evaluation and
      Research. The FDA has
      classified the test as being “for surveillance use” and not for clinical
      diagnosis within in the U. S. and “for research use” internationally,
      simplifying its availability for use by both domestic and foreign public health
      organizations.




**Other
      Regulations**




We
      are
      subject to stringent federal, state and local laws, rules, regulations and
      policies governing the use, generation, manufacture, storage, air emission,
      discharge, handling and disposal of certain materials and wastes.




**Product
      Liability and Recall Risk; Limited Insurance Coverage**




The
      manufacture and sale of medical diagnostic products subjects us to risks of
      product liability claims or product recalls, particularly in the event of false
      positive or false negative reports. A product recall or a successful product
      liability claim or claims that exceed our insurance coverage could have a
      material adverse effect on us. We maintain a $10,000,000 claims-made
      products liability insurance policy. However, our insurance coverage may not
      adequately protect us from liability that we incur in connection with clinical
      trials or sales of our products.




**Employees**




As
      of
      March 15, 2007, we had  an
      aggregate of 9 full time
      employees in the U. S., three of whom were engaged in our research and
      development activities and six of
      whom
      were in marketing and administration. Our employees are not represented by
      a
      union or collective bargaining entity. We believe our relations with our
      employees are good.




18




**Where
      to get more information**





We
      file
      annual, quarterly and special reports, proxy statements and other information
      with the Securities and Exchange Commission (“SEC”). These reports are available
      on our website free of charge as soon as reasonably practicable after such
      material is electronically filed with, or furnished to, the SEC. Our website
      address is http://www.calypte.com .
      Our SEC
      filings are available to the public over the Internet at the SEC's web site
      at
      http://www.sec.gov. You may also read and copy any document we file at the
      SEC's
      public reference rooms in Washington, D.C. Please call the SEC at 1-800-SEC-0330
      for further information on the public reference room.





**Item
      2. Properties**




We
      lease approximately
      2,000 square feet of office space in Lake Oswego, Oregon on a month-to-month
      basis that houses our corporate administrative offices.





We
      also
      lease approximately 3,000 square feet of research and development laboratory
      space in Vancouver, Washington on a month-to-month basis.





Our
      joint
      venture subsidiary, Beijing Marr, has acquired land use rights in the Huairou
      district of Beijing, China to approximately 24,000 square meters that includes
      approximately 2,100 square meters of manufacturing facilities and other office
      and warehouse buildings. Beijing Marr has recently completed the expansion
      and
      renovation of the primary manufacturing facilities to bring them into compliance
      with recently upgraded Chinese GMP requirements and to ensure their adequacy
      for
      the manufacture of our Aware TM product
      line.





We
      believe our existing facilities are suitable; however, we plan to acquire
      facilities in the Portland, Oregon vicinity in which we can combine our
      administrative and research and development functions and provide manufacturing
      capacity for our planned Aware II line of products. We believe that our property
      is adequately covered by insurance.





We
      have
      sublet our former 26,000 square foot manufacturing, research and office site
      in
      Rockville, Maryland to Maxim. In connection with the disposition of our Legacy
      Business, Maxim has assumed our obligations as lessee under this lease, which
      expires in February 2009. We have also sublet to a third party approximately
      4,400 square feet of office space in Pleasanton, California that formerly housed
      our administrative offices. That lease expires in June 2007. Should the
      sub-tenants in either of these lease agreements fail to fulfill their monthly
      payment or other obligations under the terms of the subleases, the primary
      landlord has the right to look to us for satisfaction of the obligations under
      the primary leases.





**Item
      3. Legal Proceedings**




In
      January 2006, a complaint was filed against us and certain of our current and
      former officers by Logisticorp, Inc. and Southwest Resource Preservation, Inc.
      (collectively, the “Complainants”) in the Superior Court of the State of
      California in and for the County of Los Angeles - Central District seeking
      damages in the amount of approximately $1,100,000, plus interest, trading
      penalties of $5,000 per day and other damages. On December 12, 2006, the court
      entered a final judgment granting our summary judgment motion to dismiss the
      complaint for failure to state a cause of action.





In
      May
      2006, we were notified that on March 15, 2006, a complaint was filed against
      us
      in Beijing No. 1 Intermediate People’s Court by Beijing Zhong Yang Pute
      Biomedical Tech. Corporation (“Zypute”) seeking damages of approximately
      $350,000 relating to a distribution agreement dated October 10, 2002 (the
“Distribution Agreement”) and a Product Replacement and Donation Agreement
      signed March 25, 2004 (the “Replacement Agreement”) between Zypute and us.
      Pretrial discovery proceedings began in November 2006. Based upon the costs
      and
      uncertainties associated with defending ourselves in China, we determined that
      it was in the best interests of our stockholders to settle this matter with
      Zypute. In January 2007, we entered into a settlement agreement with Zypute
      pursuant to which we agreed to pay Zypute $100,000, which we paid in March
      2007.




19


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




We
      held
      our 2006 Annual Meeting of Stockholders on December 15, 2006, at which our
      stockholders voted on the following proposals:





1.
            
            To
                elect five directors of the Company to hold office until the next
                Annual
                Meeting of Stockholders or until their successors are elected.2.
            
            To
                ratify the appointment by the Audit Committee and the Board of Directors
                of Odenberg Ullakko Muranishi & Co. LLP as the independent registered
                public accounting firm to audit the Company’s financial statements for the
                fiscal year ending December 31,
                2006.





The
      record date for determining stockholders eligible to vote at the meeting was
      October 30, 2006. On the record date, there were 220,954,738 shares of our
      common stock outstanding and eligible to vote. There were present at the
      meeting, in person or by proxy, holders of 181,749,580 shares, representing
      82.3% of the common stock outstanding.





Each
      nominee for the Board of Directors was re-elected at the 2006 Annual Meeting.
      The following number of votes was cast for and against each nominee:





**For**
            
            **Against**Roger
                I. Gale
            
            
            180,356,325
            
            
            1,393,255John
                J. DiPietro
            
            
            176,985,365
            
            
            4,764,215Paul
                E. Freiman
            
            
            180,347,579
            
            
            1,402,001Julius
                R. Krevans, M.D.
            
            
            180,357,022
            
            
            1,392,558Maxim
                A. Soulimov.
            
            
            179,203,741
            
            
            2,545,839





The
      stockholders also approved the other proposal. The following votes were
      tabulated:





**For**
            
            **Against**
            
            **Abstain**Proposal
                2
            
            
            179,982,354
            
            
            1,611,567
            
            
            155,658




20


**PART
      II**




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




***Trading
      Market and Stock Split***





Since
      September 8, 2006 our common stock, par value $0.03 per share, has traded on
      the NASD
      OTC
      Bulletin Board  under
      the
      symbol “CBMC”. Between August
      17, 2004 and September 7, 2006, our stock traded
      on
      the American Stock Exchange under the symbol “HIV.” Prior to August 17, 2004, it
      traded on the NASD OTC Bulletin Board  under
      the
      symbol “CYPT.” High
      and
      low quotations reported by the NASD
      OTC
      Bulletin Board  or
      the
      American Stock Exchange, as applicable, during the periods indicated are shown
      below. These quotations reflect inter-dealer prices, without retail mark-ups,
      mark-downs or commissions and may not represent actual transactions.





**Fiscal
                Year (reflects stock split)**
            
            **Quarter**
            
            **High**
            
            **Low**2007
                - through March 29, 2007
            
            
            1st
            
            $
            0.08
            
            $
            0.052006
            
            
            4th
            
            
            0.11
            
            
            0.062006
            
            
            3rd
            
            
            0.22
            
            
            0.092006
            
            
            2nd
            
            
            0.24
            
            
            0.172006
            
            
            1st
            
            
            0.33
            
            
            0.162005
            
            
            4th
            
            
            0.24
            
            
            0.162005
            
            
            3rd
            
            
            0.35
            
            
            0.132005
            
            
            2nd
            
            
            0.28
            
            
            0.152005
            
            
            1st
            
            
            0.49
            
            
            0.252004
            
            
            4th
            
            
            0.44
            
            
            0.182004
            
            
            3rd
            
            
            0.74
            
            
            0.362004
            
            
            2nd
            
            
            0.67
            
            
            0.382004
            
            
            1st
            
            
            0.90
            
            
            0.35




On
      March
      29, 2007, there were approximately 250 holders of record of our common stock.
      The closing price of our common stock on March 29, 2007 was $0.071 per share.
      We
      have never paid any cash dividends, and our Board of Directors does not
      anticipate paying cash dividends in the foreseeable future. We intend to retain
      any future earnings to provide funds for the operation and expansion of our
      business.




21


The
      following table summarizes our financings since the beginning of 2004 by major
      category and the subsequent table provides the details of these financings. All
      amounts are in thousands, except share price and per share data in the second
      table. All financing proceeds have been used for general corporate purposes,
      including for investment in our joint venture operations, and to facilitate
      the
      development and commercialization of our rapid HIV diagnostic
      tests.





**SUMMARY
      OF RECENT FINANCINGS - JANUARY 2004 THROUGH MARCH 2007**





**Financing
                Source**
            
            **Gross****Proceeds**
            
            **Net**
              **Proceeds**
            
            **Total
                Shares****Issued**May
                2004 PIPE (1)(5)
            
            
            9,300
            
            
            8,769
            
            
            29,353.1July
                2004 PIPE (2)(5)
            
            
            1,488
            
            
            1,384
            
            
            4,696.5April
                2005 8% Convertible Notes and Warrants (3)(5)
            
            
            8,000
            
            
            7,667
            
            
            10,438.0July
                2006 PIPE (4)
            
            
            495
            
            
            495
            
            
            2,750.0February
                2007 PIPE
            
            
            225
            
            
            216
            
            
            3,750.0March
                2007 PIPE
            
            
            5,830
            
            
            5,830
            
            
            112,118.0Total
            
            $
            25,338
            
            $
            24,361
            
            
            163,105.6





(1)
            Shares
                issued includes 6,103,125 shares issued in June 2005 pursuant to
                anti-dilution provisions triggered by the April 2005 Convertible
                Notes and
                Warrants transaction.





(2)
            Shares
                issued includes 976,501 shares issued in June 2005
                pursuant to anti-dilution provisions triggered by the April 2005
                Convertible Notes and Warrants
                transaction.





(3)
            We
                have issued approximately 10.4 million shares upon the conversion
                of
                approximately $3,131,000 face amount of the 8% Convertible notes,
                including interest notes, and no shares upon the exercise of the
                originally-priced warrants. See Note (5) regarding the repayment
                of
                certain notes from the exercise of re-priced warrants. The remaining
                notes, following the repayments described in Note (5) and notes issued
                in
                payment of interest, are convertible at $0.30 per share into an aggregate
                of approximately 16.6 million shares of common stock; the Series
                A
                warrants are currently exercisable at $0.325 per share to purchase
                an
                aggregate of 15.8 million shares of common stock and the Series B
                warrants
                are currently exercisable at $0.325 per share to purchase an aggregate
                of
                8.2 million shares of common stock. We have issued an aggregate of
                $976,000 face amount of 8% Convertible Notes in payment of interest
                in
                July and October 2005, January, April, July and October 2006, and
                January
                2007. In March 2007, we repriced the Series A and Series B warrants
                to
                purchase an aggregate of 19.3 million shares of our common stock
                and
                additional warrants held by one stockholder in return for the
                stockholder’s agreement to extend the maturity of $1.6 million of our 8%
                Convertible Notes by two years. We repriced Series A warrants to
                purchase
                7.7 million shares to $0.03 per share and Series A and Series B warrants
                to purchase an aggregate of 11.6 million shares to $0.10 per share.


(4)
            In
                June 2006, we entered into subscription agreements with two accredited
                investors who agreed to purchase an aggregate of 16,666,666 shares
                of the
                Company’s common stock at a price of $0.18 per share, for an aggregate of
                $3,000,000, in private placement transactions, of which $495,000
                has been
                received to-date from one investor. (5)
              During
                July 2006, we amended to $0.15 per share the exercise price of warrants
                issued in conjunction with our May and July 2004 PIPEs, our April
                2005 8%
                Convertible Notes and our Credit Facility Agreements with Marr for
                those
                warrant holders agreeing to exercise all or a portion of their warrants
                by
                July 21, 2006. We also agreed to issue to warrant holders exercising
                their
                re-priced warrants new warrants exercisable at a price of $0.25 per
                share
                (the “Additional Warrants”), equal in amount to 50% of the warrants
                exercised. Warrant holders exercised warrants to purchase an aggregate
                of
                25,080,000 shares of our stock at the reduced exercise price. We
                received
                approximately $258,000 in cash proceeds from the exercises and entered
                into agreements with certain warrant holders for the cancellation
                of our
                obligations to repay an aggregate of $959,000 of our 8% Convertible
                Notes
                and accrued interest and $2,545,000 of our 7% Promissory Notes and
                accrued
                interest issued under the 2005 Marr Credit Facility in lieu of cash
                payments for the warrant exercises. As a further incentive to this
                repricing, we issued Additional Warrants to purchase approximately
                12.5
                million shares of our common stock on August 3, 2006. The Additional
                Warrants became exercisable six months after their issuance, on February
                3, 2007, and expire on August 2, 2007. In addition to the 19.3 million
                Series A and Series B warrrants repriced as described in Note (3),
                we
                repriced warrants to purchase an aggregate of 11.7 million shares
                of our
                common stock held by three investors who agreed to extend the maturity
                of
                the 8% Convertible Notes and the 7% Notes issued under the 2005 Marr
                Credit Facility for two years, until April 3, 2009. We repriced warrants
                to purchase an aggregate of 3.8 million shares to $0.03 per share
                and
                warrants to purchase an aggregate of 7.9 million shares to $0.10
                per
                share.  22


**DETAIL
      OF RECENT FINANCINGS - JANUARY 2004 THROUGH MARCH
      2007**




**Financing
                Type and**
              **Investor
                (1)**
            
            **Conversion****Feature**
            
            **Gross**
              **Proceeds**
            
            **Net**
              **Proceeds**
            
            **Transaction**
              **Date**
            
            **Calypte**
              **Closing**
              **Price**
            
            **Shares**
              **Issued/
                $****Converted (2)****May
                2004 Private Placement****PIPE
                at $0.40 per share**(3)(5)
            
            
            UnitsSF
                Capital Partners Ltd.
            
            
            issued
                at
            
            $
            4,000
            
            $
            3,720
            
            
            5/28/04
            
            $
            0.50
            
            
            12,625.0Marr
                Technologies BV
            
            
            $0.40,
            
            
            3,000
            
            
            2,910
            
            
            5/28/04
            
            $
            0.50
            
            
            9,468.8Proximity
                Fund LP
            
            
            including
            
            
            500
            
            
            465
            
            
            5/28/04
            
            $
            0.50
            
            
            1,578.1Proximity
                Partners LP
            
            
            shares
                plus
            
            
            500
            
            
            465
            
            
            5/28/04
            
            $
            0.50
            
            
            1,578.1MTB
                Small Cap Growth Fund
            
            
            35%
                -5 year
            
            
            500
            
            
            465
            
            
            5/28/04
            
            $
            0.50
            
            
            1,578.1MTB
                Multi Cap Growth Fund
            
            
            warrant
            
            
            500
            
            
            465
            
            
            5/28/04
            
            $
            0.50
            
            
            1,578.1Bridges
                & PIPES LLC
            
            
            exercisable
                at
              $0.50
              per
            
            
            300
            
            
            279
            
            
            5/28/04
            
            $
            0.50
            
            
            946.9Total
                May 2004 PIPE
            
            
            share
            
            $
            9,300
            
            $
            8,769
            
            
            
            
            
            
            
            
            29,353.1**July
                2004 Private Placement****PIPE
                at $0.40 per share**(3)(5)
            
            
            UnitsSunrise
                Equity Partners, L.P.
            
            
            issued
                at
            
            $
            750
            
            $
            698
            
            
            7/9/04
            
            $
            0.615
            
            
            2,367.2Amnon
                Mandelbaum
            
            $
            0.40,
            
            
            80
            
            
            74
            
            
            7/9/04
            
            $
            0.615
            
            
            252.5David
                I. Goodfriend
            
            
            including
            
            
            8
            
            
            7
            
            
            7/9/04
            
            $
            0.615
            
            
            25.3TCMP3
                Partners
            
            
            Shares
                plus
            
            
            150
            
            
            140
            
            
            7/9/04
            
            $
            0.615
            
            
            473.4United
                Capital Partners, LLC
            
            
            70%
                -5 year warrant
            
            
            500
            
            
            465
            
            
            7/9/04
            
            $
            0.615
            
            
            1,578.1Total
                July 2004 PIPE
            
            
            exercisable
                at
              $0.50
                per
              share
            
            $
            1,488
            
            $
            1,384
            
            
            
            
            
            
            
            
            4,696.5**April
                2005 Secured 8% Convertible Notes and Warrants**(4)(9)SF
                Capital Partners Ltd.
            
            
            Notes
            
            $
            4,000
            
            $
            3,720
            
            
            4/4/05
            
            $
            0.27
            
            
            7,791.8/$2,000Marr
                Technologies BV
            
            
            convertible
            
            
            2,800
            
            
            2,800
            
            
            4/4/05
            
            $
            0.27
            
            
            -
                / -Morningtown
                Limited
            
            
            at
                $0.30 per
            
            
            450
            
            
            450
            
            
            4/4/05
            
            $
            0.27
            
            
            -
                / -Smithfield
                Fiduciary LLC
            
            
            share
                plus
            
            
            500
            
            
            465
            
            
            4/4/05
            
            $
            0.27
            
            
            1,759.7/$
                500Iroquois
                Master Fund Ltd.
            
            
            145%
                - 5 year
            
            
            250
            
            
            232
            
            
            4/4/05
            
            $
            0.27
            
            
            886.5/$
                250warrants
              exercisable at
              $0.325 per
              share
            
            $
            8,000
            
            $
            7,667
            
            
            
            
            
            
            
            
            10,438.0/$2,750**June
                2006 Private Placement****PIPE
                at $0.18 per share**(6)Tanfield
                International Limited
            
            
            
            
            $
            495
            
            $
            495
            
            
            6/19/06
            
            $
            0.21
            
            
            2,750.0**February
                2007 PIPE**(7)
            
            
            Units
                issued atHarry
                Strulovici, M.D.
            
            
            $0.06
                  per
            
            $
            100
            
            $
            94
            
            
            2/23/07
            
            $
            0.064
            
            
            1,666.7Harry
                Strulovici, M.D.
            
            
            share plus
            
            
            50
            
            
            47
            
            
            3/23/07
            
            $
            0.067
            
            
            833.3Duran
                Family Trust
            
            
            100%
                or
            
            
            50
            
            
            50
            
            
            3/23/07
            
            $
            0.062
            
            
            833.3WMF
                Wiley
            
            
            125%
              - 5 year
            
            
            25
            
            
            25
            
            
            3/23/07
            
            $
            0.062
            
            
            416.7warrants
            
            $
            225
            
            $
            216
            
            
            
            
            
            
            
            
            3,750.0exercisableat
              $0.12
                per
              share




23




**Financing
                Type and**
              **Investor
                (1)**
            
            
            **Conversion****Feature**
            
            
            **Gross**
              **Proceeds**
            
            
            **Net**
              **Proceeds**
            
            
            **Transaction**
              **Date**
            
            
            **Calypte**
              **Closing**
              **Price**
            
            
            **Shares**
              **Issued/
                $****Converted (2)****March
                2007 PIPE**(8)
            
            
            Units
                issued atDavid
                Khidasheli
            
            
            $0.052
                  per
            
            $
            1,560
            
            $
            1,560
            
            
            3/28/07
            
            $
            0.063
            
            
            30,000.0Mohamed
                Yousif Ahmed Saleh Sulaiman
            
            
            share
                plus
              100%
                -
            
            
            1,456
            
            
            1,456
            
            
            3/28/07
            
            $
            0.063
            
            
            28,000.0Mohamed
                Ahmed
            
            
            15
                month
            
            
            1,144
            
            
            1,144
            
            
            3/28/07
            
            $
            0.063
            
            
            22,000.0Ahmed
                Abdalla Deemas
              Alsuwaidi
            
            
            warrants
              exercisable
                at
            
            
            1,040
            
            
            1,040
            
            
            3/28/07
            
            $
            0.063
            
            
            20,000.0Roger
                I. Gale
            
            
            $0.08
                  per
            
            
            430
            
            
            430
            
            
            3/28/07
            
            $
            0.063
            
            
            8,271.9Richard
                D. Brounstein
            
            
            share
                and
            
            
            200
            
            
            200
            
            
            3/28/07
            
            $
            0.063
            
            
            3,846.250%
                - 18month
            
            $
            5,830
            
            $
            5,830
            
            
            
            
            
            
            
            
            112,118.0warrants
              exercisable
                at
                $0.11
                  per
                  share





(1)
      The
      May 2004 and the July 2004 PIPEs and their related warrants; the April 2005
      Secured 8% Convertible Notes and Warrants, and the June 2006, February 2007
      and
      March 2007 PIPE’s were issued under exemptions provided by Regulation S or
      Regulation D. With the exception of Marr Technologies B.V. (“MTBV” or “Marr”),
      which has identified itself as an affiliate of the Company in public filings
      with the SEC, and
      the primary investors in the March 2007 PIPE ,
      none of
      the entities listed above is currently an affiliate (greater
      than 5% stockholder) of
      Calypte. Other than MTBV and
      the primary investors in the March 2007 PIPE ,
      all of
      the listed investors were subject to ownership limitations restricting their
      ownership of our stock to a maximum of 4.9% or 9.9%, depending on the specific
      agreement. MTBV currently owns approximately 19% of our outstanding common
      stock
      and we are unaware of any other stockholders who own 10% or more of our
      outstanding common stock.




(2)
      On
      July 8, 2004, the registration statement for 83,056,050 shares underlying 2003
      private placements with MTBV, the May 2004 PIPE, certain 12% Convertible
      Debentures issued in 2003, approximately 12.2 million additional shares
      attributable to financings included in our July 2003 registration statement
      (File No, 333-106862) and approximately 3.3 million shares issued or issuable
      to
      vendors consultants and other parties who agreed to accept shares of our Common
      Stock in lieu of cash became effective (File No. 333-116491). On July 28, 2004,
      the registration statement for 6,472,800 shares of our Common Stock underlying
      the July 2004 PIPE and related warrants became effective (File No. 333-117439).
      On July 1, 2005, the registration statement for 73,198,583 shares of our Common
      Stock underlying the April 2005 Convertible Notes and Warrants transaction
      and
      the 2005 Marr Credit Facility warrants and other related warrants became
      effective (File No. 333-125051). On July 22, 2005, the registration statement
      for 8,332,803 shares of our Common Stock underlying the anti-dilution
      entitlements (both Common Stock and additional warrants) of our May 2004 and
      July 2004 PIPEs triggered by the April 2005 Notes and Warrants transaction
      became effective (File No. 333-126460). At March 29, 2007, the shares issued
      and/or underlying the securities issued in the June 2006 PIPE, the Additional
      Warrants issued in August 2006 , the February 2007 PIPE and the March 2007
      PIPE
      have not been registered.





(3)
      In
      conjunction with the May 2004 PIPE, we issued to each investor 5-year warrants
      at $0.50 per share to purchase shares of our common stock in an amount equal
      to
      35% of the number of shares purchased by the investor. In conjunction with
      the
      July 2004 PIPE, we issued to each investor 5-year warrants at $0.50 per share
      to
      purchase shares of our common stock in an amount equal to 70% of the number
      of
      shares purchased by the investor. The shares issued pursuant to the May 2004
      PIPE and the July 2004 PIPE and the related warrants for each have an
      anti-dilution feature that require us to issue additional shares to the PIPE
      investors and modify their warrants if we subsequently issue additional equity
      at a per share price of less than $0.40 for a period of one year from the
      respective closing dates, except under the provisions of previously outstanding
      convertible debt, option plans, or option or warrant agreements. See Note (5)
      and Issuance, Repricing and Exercise of Warrants below.





(4)
      Under
      the terms of the purchase agreements, we issued an aggregate of $8.0 million
      of
      Secured 8% Senior Convertible Notes having a term of two years and convertible
      into 26,666,667 shares of common stock at $0.30 per share; Series A warrants
      to
      purchase an aggregate of 26,666,667 Warrant Shares, with each Series A warrant
      exercisable after October 4, 2005 at an exercise price of $0.325 per share
      and
      having a 5 year term; and Series B warrants to purchase an aggregate of
      12,000,000 Warrant Shares, with each Series B warrant exercisable after October
      4, 2005 at an exercise price of $0.325 per share and having a term of 5 years.
      See Issuance, Repricing and Exercise of Warrants below.




24




As
      approved by our stockholders and under specified conditions, the Purchase
      Agreement and Series A Warrant provided for anti-dilution adjustments in the
      conversion price of the Notes and the exercise price of the Series A Warrant
      in
      the event we issued shares of common stock or common stock equivalents, as
      defined in the agreements, within one year of the closing date at a price less
      than $0.30 per share with respect to the Notes or at less than $0.325 with
      respect to the Series A Warrant. These adjustment provisions terminated (i)
      upon
      the earlier of one year or upon conversion of an investor’s Note and (ii) upon
      the earlier of one year or upon exercise of an investor’s Series A Warrant.





(5)
      On
      April 4, 2005, when the market price of our common stock was $0.27 per share,
      we
      and the investors who are parties to securities purchase agreements and warrants
      dated as of May 28, 2004 or July 9, 2004 (the 2004 PIPEs) agreed to amend the
      2004 PIPEs with respect to anti-dilution rights granted therein so that they
      did
      not become effective unless and until they were approved by our stockholders,
      which approval we received at our annual meeting of stockholders held on June
      30, 2005. In consideration of the amendment, we have issued to each investor
      in
      the 2004 PIPEs additional shares of common stock and a warrant to purchase
      additional shares of common stock for no additional consideration from the
      investor. Additionally, the exercise price of the aggregate of approximately
      10.7 million warrants issued in the 2004 PIPEs was reduced from $0.50 per share
      to $0.45 per share. On June 30, 2005, we issued approximately 7.1 million
      additional shares of common stock and additional warrants to purchase
      approximately 1.3 million additional shares of our Common Stock at an exercise
      price of $0.325 per share under the terms of the amendment. See Issuance,
      Repricing and Exercise of Warrants below.





(6) On
      June
      19, 2006, when the market price of our common stock was $0.21 per share, we
      entered into subscription agreements with Tanfield International and
      International Credit Bank, two accredited investors, who agreed to purchase
      an
      aggregate of 16,666,666 shares of the Company’s common stock at a price of $0.18
      per share, for an investment of $1,500,000 each. We have granted piggyback
      registration rights for the 2,750,000 shares issued to Tanfield International.
      The balance of the PIPE remains unfunded at March 29, 2007.





(7)
      On
      February 23, 2007, when the market price of our common stock was $0.064 per
      share, we entered into a subscription agreement with an accredited investor
      pursuant to which the investor agreed to purchase 1,666,667 shares of our common
      stock and five-year warrants exercisable at $0.12 per share to purchase
      1,666,667 shares of our common stock at a price of $0.06 per share, for an
      aggregate purchase price of $100,000, in a private placement transaction
      pursuant to Regulation D of the Securities Act of 1933, as amended. On March
      23,
      2007, when the market price of our common stock was $0.067 per share, we entered
      into a subscription agreement with the same investor pursuant to which the
      investor agreed to purchase 833,334 shares of our common stock and five-year
      warrants exercisable at $0.12 per share to purchase 1,041,668 shares of our
      common stock at a price of $0.06 per share, for an aggregate purchase price
      of
      $50,000. On March 27 , 2007, when the market price of our common stock was
      $0.062 per share, we entered into subscription agreements with two
      additional investors pursuant to which the investors agreed to purchase an
      aggregate of 1,250,001 shares of our common stock and five-year warrant
      exercisable at $0.12 per share to purchase 1,250,001 shares of our common stock
      at a price of $0.06 per share, for an aggregate purchase price of
      $75,000. Each of the subscription agreements contains an anti-dilution
      clause providing that we will issue the investor additional shares of our common
      stock for no additional consideration if we issue shares of our common stock
      in
      a subsequent financing transaction at a lower price per share in the year
      following the investors’ purchase of our common stock. The warrants also have an
      anti-dilution provision which reduces the exercise price proportionally in
      relation to the adjusted purchase price of the shares. The terms of the March
      2007 PIPE, described in Note (8) below, triggered the anti-dilution provisions
      of these subscription agreements. We will be required to issue the investors
      576,923 additional shares under the terms of the anti-dilution provisions and
      reduce the exercise price of the warrants from $0.12 per share to $0.104 per
      share. We granted the investor piggyback registration rights for the shares
      issued and for the shares underlying the warrants. We plan to use the proceeds
      received for general corporate purposes.





(8)
      On
      March 28, 2007, when the market price of our common stock was $0.063 per share,
      we completed a private placement transaction with four accredited investors
      for
      the sale of an aggregate of 100 million shares of our common stock plus warrants
      and received an aggregate of $5.2 million in cash, which we plan to use for
      general corporate purposes. The investors received immediately exercisable
      warrants to purchase an aggregate of 150 million additional shares of our common
      stock. The warrants to purchase 100 million shares have an exercise price of
      $0.08 per share and are exercisable through June 2008. Warrants to purchase
      50
      million shares have an exercise price of $0.11 per share and are exercisable
      through September 2008. If fully exercised, the warrants would provide us with
      an additional $13.5 million in cash. We agreed to file a registration statement
      for the resale of the shares purchased and the shares underlying the warrants
      within 45 days of the closing and use our best efforts to obtain its
      effectiveness. Two of our named executive officers also participated in
      this PIPE for an aggregate value of $630,000, in exchange for the
      cancellation of our obligation to repay notes and other amounts owed to
      them aggregating $630,000. (See Item 12. Certain Relationships and Related
      Transactions)




25




(9)
      At
      March 28, 2007, we had an aggregate of $4,983,000 Secured 8% Convertible Notes
      and Interest Notes outstanding. On March 28, 2007, we entered into an agreement
      with the holders of the 8% Convertible Notes to extend the due dates of all
      of
      the 8% Convertible Notes and Interest Notes from April 3, 2007 until April
      3,
      2009. In conjunction with the extension of the maturity dates, we agreed to
      re-price the note holders’ outstanding warrants under a formula of 40% of their
      total warrants re-priced to $0.03 per share and 60% re-priced to $0.10 per
      share. The warrants had original exercise prices of $0.325 and $0.25 per share.
      We also eliminated the piggyback registration rights originally granted to
      the
      8% Convertible note holders with respect to the Additional Warrants issued
      in
      August 2006 (see *Issuance,
      Repricing and Exercise of Warrants, below* )
      and
      extended the maturity of those warrants from August 3, 2007 until April 3,
      2009.





*Issuance,
      Repricing and Exercise of Warrants*





Our
      recent financings have generally included stock or debt plus warrants sold
      as a
      unit. Between July 7 and July 14, 2006, when the market price for our common
      stock ranged between $0.18 and $0.20 per share, we offered to amend to $0.15
      per
      share the exercise price of warrants issued in conjunction with our May and
      July
      2004 Private Placements, our April 2005 8% Convertible Notes and our Credit
      Facility Agreements with Marr for those warrant holders agreeing to exercise
      all
      or a portion of their warrants by July 21, 2006. We also agreed to issue to
      warrant holders exercising their re-priced warrants new warrants exercisable
      at
      a price of $0.25 per share (the “Additional Warrants”), equal in amount to 50%
      of the warrants exercised. We issued the Additional Warrants on August 3, 2006
      and they became exercisable 6 months after their issuance, on February 3, 2007,
      and have a term of one year after issuance. Warrant holders exercised warrants
      to purchase an aggregate of 25,080,000 shares of our stock at the reduced
      exercise price. We received approximately $258,000 in cash proceeds from the
      exercises and entered into agreements with certain warrant holders for the
      cancellation of our obligations to repay an aggregate of $959,000 of our 8%
      Convertible Notes and $2,545,000 of our 7% Promissory Notes issued under the
      2005 Marr Credit Facility in lieu of cash payments for the warrant exercises.
      We
      issued Additional Warrants to purchase approximately 12,540,000 shares of our
      common stock. See Note (9) in the preceding table regarding re-pricing of
      warrants in March 2007 .





The
      following tables summarize activity in our warrants by primary financing
      transaction from January 2004 through March 2007.


Outstanding
              
              
              
              
              
              
              
              Outstandingat
                  1/1/04
              
              Issued
              
              Exercised
              
              Expired
              
              at
                  12/31/04Warrants
                  issued to investors in connection with the 2004 PIPEs
              
              
              -
              
              
              10,741,500
              
              
              
              
              
              
              
              
              10,741,500Warrants
                  issued to placement agents in connection with the 2004 PIPEs
              
              
              -
              
              
              778,800
              
              
              
              
              
              
              
              
              778,800All
                  other, including under credit facility wth Marr
              
              
              116,950
              
              
              917,127
              
              
              
              
              
              
              
              
              1,034,077116,950
              
              
              12,437,427
              
              
              -
              
              
              -
              
              
              12,554,377


26


Outstanding
            
            
            
            
            
            
            
            Outstandingat
                1/1/05
            
            Issued
            
            Exercised
            
            Expired
            
            at
                12/31/05Warrants
                issued to investors in connection with the 2004 PIPEs
            
            
            10,741,500
            
            
            
            
            
            
            
            
            
            
            
            10,741,500Warrants
                issued to placement agents in connection with the 2004 PIPEs
            
            
            778,800
            
            
            
            
            
            
            
            
            
            
            
            778,800Series
                A and Series B warrants issued in connection with April 2005Placement,
                including warrants to placement agents
            
            
            -
            
            
            41,004,582
            
            
            
            
            
            
            
            
            41,004,582Anti-dilution
                warrants issued to investors in the 2004 PIPEs
            
            
            -
            
            
            1,253,177
            
            
            
            
            
            
            
            
            1,253,177All
                other, including under credit facility wth Marr
            
            
            1,034,077
            
            
            500,000
            
            
            (212,127
            )
            
            
            
            
            1,321,95012,554,377
            
            
            42,757,759
            
            
            (212,127
            )
            
            -
            
            
            55,100,009




Outstanding
              
              
              
              
              
              
              
              
              
              Outstandingat
                  1/1/06
              
              Issued
              
              Exercised
              
              
              
              Expired
              
              at
                  12/31/06Warrants
                  issued to investors in connection with the 2004 PIPEs
              
              
              10,741,500
              
              
              
              
              
              (6,650,000
              )
              
              (1)
              
              
              
              
              
              4,091,500Warrants
                  issued to placement agents in connection with the 2004 PIPEs
              
              
              778,800
              
              
              
              
              
              (600,000
              )
              
              (2)
              
              
              
              
              
              178,800Series
                  A and Series B warrants issued in connection with April 2005Placement,
                  including warrants to placement agents
              
              
              41,004,582
              
              
              
              
              
              (16,962,972
              )
              
              (3)
              
              
              
              
              
              24,041,610Anti-dilution
                  warrants issued to investors in the 2004 PIPEs
              
              
              1,253,177
              
              
              
              
              
              (367,500
              )
              
              (4)
              
              
              
              
              
              885,677Additional
                    Warrants issued to investors exercising previously issuedwarrants
                    in connection with July 2006 Warrant Re-pricing
              
              
              -
              
              
              12,540,238
              
              
              
              
              
              
              
              
              
              
              
              12,540,238Warrants
                  issued for investment banking services
              
              
              -
              
              
              500,000
              
              
              
              
              
              
              
              
              
              
              
              500,000All
                  other, including under credit facility wth Marr
              
              
              1,321,950
              
              
              
              
              
              (500,000
              )
              
              (5)
              
              
              (516,667
              )
              
              305,28355,100,009
              
              
              13,040,238
              
              
              (25,080,472
              )
              
              
              
              
              (516,667
              )
              
              42,543,108
  Outstanding
                
                
                
                
                
                
                
                Outstandingat
                    1/1/07
                
                Issued
                
                Exercised
                
                Expired
                
                at
                    3/29/07Warrants
                    issued to investors in connection with the 2004 PIPEs
                
                
                4,091,500
                
                
                -
                
                
                -
                
                
                -
                
                
                4,091,500Warrants
                    issued to placement agents in connection with the 2004 PIPEs
                
                
                178,800
                
                
                -
                
                
                -
                
                
                -
                
                
                178,800Series
                      A and Series B warrants issued in connection with April 2005Placement,
                      including warrants to placement agents
                
                
                24,041,610
                
                
                -
                
                
                -
                
                
                -
                
                
                24,041,610Anti-dilution
                    warrants issued to investors in the 2004 PIPEs
                
                
                885,677
                
                
                -
                
                
                -
                
                
                -
                
                
                885,677Additional
                      Warrants issued to investors exercising previously issuedwarrants
                      in connection with July 2006 Warrant Re-pricing
                
                
                12,540,238
                
                
                -
                
                
                -
                
                
                -
                
                
                12,540,238Warrants
                    issued for investment banking services
                
                
                500,000
                
                
                -
                
                
                -
                
                
                -
                
                
                500,000Warrants
                    issued to investors in February 2007 PIPE
                
                
                -
                
                
                3,958,336
                
                
                -
                
                
                -
                
                
                3,958,336Warrants
                    issued to investors in March 2007 PIPE
                
                
                -
                
                
                168,177,036
                
                
                -
                
                
                -
                
                
                168,177,036All
                    other, including under credit facility wth Marr
                
                
                305,283
                
                
                
                
                
                -
                
                
                -
                
                
                305,28342,543,108
                
                
                172,135,372
                
                
                -
                
                
                -
                
                
                214,678,480


(1)
            Warrants
                were repriced from $0.45 per share to $0.15 to induce exercise. We
                received $78,750 in cash and, in lieu of paying us the cash exercise
                price, certain holders of our 8% Secured Convertible Notes and our
                7%
                Notes issued under the 2005 Marr Credit Facility cancelled our obligation
                to repay $525,000 and $393,000 (including accrued interest),
                respectively.




(2)
            Warrants
                were repriced from $0.50 per share to $0.15 to induce exercise. We
                received $90,000 in cash proceeds.




(3)
            Warrants
                were repriced from $0.325 per share to $0.15 to induce exercise.
                We
                received $80,000 in cash and, in lieu of paying us the cash exercise
                price, certain holders of our 8% Secured Convertible Notes and our
                7%
                Notes issued under the 2005 Marr Credit Facility cancelled our obligation
                to repay $434,446 and $2,030.000 (including accrued interest),
                respectively.




(4)
            Warrants
                were repriced from $0.325 per share to $0.15 to induce exercise.
                We
                received $9,188 in cash and, in lieu of paying us the cash exercise
                price,
                the holder of our 7% Notes issued under the 2005 Marr Credit Facility
                cancelled our obligation to repay $45,938 (including accrued interest).




(5)
            Warrants
                were repriced from $0.40 per share to $0.15 to induce exercise. In
                lieu of
                paying us the cash exercise price, the holder of our 7% Notes issued
                under
                the 2005 Marr Credit Facility cancelled our obligation to repay $75,000
                (including accrued interest).




*2005
      Marr Credit Facility*





On
      April
      4, 2005, when the market price of our common stock was $0.27 per share, we
      entered into a 2005 Credit Facility Agreement (the “2005 Credit Facility”) with
      Marr, pursuant to which we have access to $5.5 million from the issuance of
      9%
      promissory notes that we might issue through December 31, 2005, should our
      Board
      of Directors unanimously approve the issuance of one or more such notes before
      the commitment period ends. Marr continues to have two representatives serving
      on our Board of Directors. Any notes issued under this facility would become
      due
      and payable on the earlier of twelve months from the date of issue or May 31,
      2006. Any proceeds received from the exercise of the Series B Warrants issued
      in
      April 2005 or any other financing we might have completed prior to December
      31,
      2005 would reduce the availability of funds dollar for dollar under the 2005
      Credit Facility.




27




In
      connection with the 2005 Credit Facility, on April 4, 2005, we issued to Marr
      a
      5-year warrant, exercisable after October 4, 2005, to purchase 500,000 shares
      of
      our common stock at an exercise price of $0.40 per share. Under certain
      conditions, the warrant provides for anti-dilution and other adjustments to
      the
      exercise price of the warrant in the event we issue shares of common stock
      or
      common stock equivalents, as defined in the warrant, within one year of the
      issue date at a price less than the exercise price. This provision terminated
      on
      April 3, 2006. We also granted Marr a right of participation in any future
      offerings we may undertake within one year of the warrant issue date. Marr
      exercised this warrant in July 2006 in connection with the warrant re-pricing
      transactions discussed in Issuance, Repricing and Exercise of Warrants
      above.





On
      November 30, 2005, when the market price of our common stock was $0.16, we
      agreed with Marr to amend the 2005 Credit Facility to extend the term under
      which we may issue promissory notes from December 31, 2005 until April 3, 2006.
      The interest rate for promissory notes issued under the amendment was lowered
      to
      7% per annum from 9% per annum. The term of any promissory notes issued under
      the amendment was extended so that such promissory notes will become due on
      April 3, 2007, instead of the later of twelve months from the issuance date
      or
      May 31, 2006. The issuance of promissory notes under the terms of the amendment
      now requires approval by a majority of a quorum of our Board of Directors,
      instead of the entire Board of Directors. We granted Marr a security interest
      in
      our assets, up to an aggregate maximum of $6,000,000, to secure the repayment
      of
      monies borrowed under the terms of the amended agreement. We may use the
      proceeds from the issuance of promissory notes under the amended agreement
      for
      general corporate purposes, including investments in our international
      subsidiaries. Effective on February 22, 2006, when the market price of our
      common stock was $0.21 per share, we again amended the 2005 Credit Facility
      to
      extend the period in which we may issue promissory notes through July 31, 2006.
      Effective on July 26, 2006, when the market price of our common stock was $0.17
      per share, we again amended the 2005 Credit Facility to extend the period in
      which we may issue promissory notes through August 31, 2006. In conjunction
      with
      the warrant re-pricing and exercise transaction discussed in Issuance, Repricing
      and Exercise of Warrants above, on July 21, 2006, Marr cancelled our obligation
      to repay approximately $2,545,000 of notes issued and accrued interest under
      the
      2005 Credit Facility in lieu of paying cash to us for the exercise of their
      warrants.





Effective
      on December 22, 2006, we again amended the 2005 Credit Facility to further
      extend the period during which we could issue promissory notes under the 2005
      Credit Facility through December 29, 2006. We issued a promissory note to Marr
      in the face amount of $1,000,000 on December 22, 2006. The promissory note
      bears
      interest at a rate of 7% per annum and is payable in full on April 3, 2007.





On
      February 7, 2007, we agreed with Marr to further amend the terms of the 2005
      Credit Facility to extend the period in which we may issue promissory notes
      under the facility and to reduce the minimum size of notes issuable under the
      facility. On February 7, 2007, we issued a promissory note in the face amount
      of
      $142,800 to Marr, the proceeds of which we used to make a capital contribution
      to Beijing Marr. On February 23, 2007 and on March 7, 2007, we issued additional
      promissory notes to Marr in the face amount of $100,000 and $150,000,
      respectively. Each promissory note bears interest at a rate of 7% per annum.
      The
      February 7, 2007 note is payable in full on April 3, 2007 and the two later
      notes are payable on the earlier of our completion of an equity financing
      transaction of at least $3,000,000 or April 3, 2007. At March 28, 2007, we
      had
      notes totaling $4,450,000 outstanding under the 2005 Credit Facility. On March
      28, 2007, we entered into an agreement with Marr to extend the due dates of
      the
      7% Promissory Notes issued under the 2005 Credit Facility prior to February
      23,
      2007, aggregating $4,200,000, from April 3, 2007 until April 3, 2009. In
      conjunction with the extension of the maturity dates of the 7% Promissory Notes
      issued under this facility and the April 2005 Secured 8% Convertible Notes,
      we
      agreed to re-price Marr’s outstanding warrants under a formula of 40% of their
      total warrants re-priced to $0.03 per share and 60% re-priced to $0.10 per
      share. The warrants had original exercise prices of $0.25 per share. We also
      eliminated the piggyback registration rights originally granted to Marr with
      respect to the Additional Warrants issued in August 2006 (see Note 7 in the
      immediately preceding table) and extended the maturity of those warrants from
      August 3, 2007 until April 3, 2009.





28





*Warrants,
      Options and Stock Grants to Consultants*





Since
      January 2004, we have entered into and/or extended various contracts and
      agreements with consultants and others who have agreed to accept payment for
      their services in the form of warrants, options and/or stock grants. We have
      obtained various services under these arrangements, including legal, financial,
      business advisory, and other services. We have, from January 2004 through
      December 31, 2006, issued approximately 7.9 million shares of our common stock
      as a result of warrant or option exercises and stock grants related to these
      consulting agreements, of which approximately 1.7 million shares were issued
      in
      2004, 3.9 million shares were issued in 2005 and 2.3 million shares were issued
      in 2006. We have issued approximately 1.7 million shares of our common stock
      to
      consultants as compensation for services during the first quarter of
      2007.





In
      February 2004, when the price of our stock was $0.67 per share, we issued
      500,000 shares of our common stock to a consultant who had agreed to accept
      shares of stock as a portion of its compensation under a consulting agreement.
      We issued approximately 67,000 additional shares of our common stock during
      the
      first quarter of 2004 to another consultant under the terms of a long-term
      consulting agreement.





In
      May
      2004, when the price of our stock was $0.465 per share, we issued warrants
      to
      purchase 150,000 shares of our common stock at an exercise price of $0.50 as
      a
      portion of the compensation under a consulting contract. The warrants were
      immediately exercisable, have a five year term, and, at March 29 2007, have
      not
      been exercised.





In
      June
      2004, when the price of our stock was $0.52 per share, we issued 250,000 shares
      of our common stock to a consultant who had agreed to accept shares of stock
      as
      compensation under a consulting agreement.





Between
      January and October 2004, we issued an aggregate of 127,984 shares of our common
      stock as a portion of the monthly compensation under a consulting contract
      at
      prices ranging from $0.38 to $0.695 per share, based on the then-current market
      price of our stock.





During
      2005, we issued an aggregate of 695,972 shares of our common stock at prices
      ranging from $0.13 to $0.31 per share to four consultants under the terms of
      their agreements. Additionally, we issued options to consultants providing
      legal, investor relations and manufacturing services to purchase an aggregate
      of
      1,629,365 shares of our common stock at prices between $0.14 and $0.34 per
      share
      as partial compensation for these services. In September 2005, one of the
      consultants exercised its options to purchase 857,143 shares of our common
      stock
      and we received proceeds of $120,000. Additionally, in February 2005, we granted
      options to purchase 850,000 shares of our common stock at an exercise price
      of
      $0.35 per share to our Chairman of the Board of Directors pursuant to a
      consulting contract under which he provided certain strategic and advisory
      services through July 31, 2005. In January 2005, our former executive chairman
      exercised previously issued and vested options to purchase 1,625,000 shares
      of
      our common stock in the amount of the $520,000.




On
      October 3, 2005, our Board of Directors appointed its Chairman as interim Chief
      Executive Officer, effective immediately, upon the resignation of our former
      President and Chief Executive Officer. On January 4, 2006, when the market
      price
      of our common stock was $0.17 per share, the Compensation Committee of the
      Board
      of Directors approved a letter agreement outlining the terms and compensation
      of
      the Chairman’s additional service as interim Chief Executive Officer. Under the
      terms of the contract, we granted the Chairman 1,000,000 shares of our common
      stock as partial compensation for service as the interim Chief Executive
      Officer. Additionally, the Chairman was to receive cash compensation of $15,000
      per month, beginning October 3, 2005. In February 2006, as approved by the
      Compensation Committee, we issued 311,736 shares of our common stock in lieu
      of
      cash payments for the period October 2005 through January 2006.





During
      2006, we issued an aggregate of 683,894 shares of our common stock as
      compensation under a consulting contract at prices ranging from $0.077 to $0.22
      per share, based on the then-current market price of our stock. Additionally,
      during the second quarter of 2006, when the market price of our common stock
      was
      $0.20 per share, we issued 270,000 shares of our common stock to a service
      provider assisting us with our public company obligations. On October 31, 2006,
      when the market price of our common stock was $0.085 per share, we issued an
      immediately exercisable warrant to purchase 500,000 shares of our common stock
      as compensation for investment banking services. We recorded $42,000 of non-cash
      selling, general and administrative expense in connection with this warrant.
      We
      did not grant registration rights for the shares underlying this warrant.




29




During
      the first quarter of 2007, we issued an aggregate of 1,719,963 shares of our
      common stock as compensation under consulting contracts at prices ranging from
      $0.059 to $0.075 per share, based on the then-current market price of our stock.
      We have not issued any warrants or options to consultants for services during
      2007.





To
      conserve cash and to obtain goods and services, we may continue to issue direct
      stock grants or issue options and warrants at market or at discounts to market.
      In the event that we issue additional options and warrants, it is anticipated
      that the securities will contain cost-free registration rights which will be
      granted to holders of the options and warrants, and that there may be dilution
      to our existing stockholders.





*Capital
      Lease*





In
      September 2004, when the price of our stock was $0.38 per share, we entered
      into
      a lease for $500,000 of equipment to be used in our Rockville, Maryland
      manufacturing facility. The lease has a minimum term of 3 years with an
      extension option of 3 months, and requires monthly payments of $17,250 during
      the initial term and extension periods. In conjunction with the lease, we issued
      to the lessor a three-year warrant to purchase 55,000 shares of our common
      stock
      at a price of $0.406 per share.





*Intellectual
      Property and Equipment Purchase Using Stock*





On
      September 30, 2004, when the market price of our common stock was $0.39 per
      share and pursuant to Regulation S, we entered into a License Agreement and
      Technology Transfer Agreement (the “License Agreement”) pursuant to which we
      were required to pay an aggregate of 1,232,840 Euros (approximately US
      $1,500,000) in either our common stock or cash to acquire certain licenses
      and
      manufacturing equipment. On September 30, 2004, we issued to the licensor
      1,172,205 restricted shares of our common stock having a value of approximately
      $469,000, representing approximately $373,000 attributable to the technology
      license and approximately $96,000 attributable to the equipment purchase. We
      included these shares in a registration statement that became effective on
      December 29, 2004. We paid the subsequent installments in cash.


30


**Item
      6. Management’s Discussion and Analysis of Financial Condition and Results of
      Operations**




Information
      we provide in this Annual Report on Form 10-KSB or statements made by our
      directors, officers or employees may constitute “forward-looking” statements and
      may be subject to numerous risks and uncertainties. Any statements made in
      this
      Form 10-KSB, including any statements incorporated herein by reference, that
      are
      not statements of historical fact are forward-looking statements (including,
      but
      not limited to, statements concerning the characteristics and growth of our
      market and customers, our objectives and plans for future operations and
      products and our liquidity and capital resources). Such forward-looking
      statements are based on current expectations and are subject to uncertainties
      and other factors which may involve known and unknown risks that could cause
      actual results of operations to differ materially from those projected or
      implied. Further, certain forward-looking statements are based upon assumptions
      about future events which may not prove to be accurate. Risks and uncertainties
      inherent in forward looking statements include, but are not limited to:





·
            fluctuations
                in our operating results;





·
            announcements
                of technological innovations or new products which we or our competitors
                      make;





·
            FDA
                and international regulatory
                actions;





·
            developments
                with respect to patents or proprietary
                rights;





·
            changes
                in stock market analysts’ recommendations regarding Calypte, other medical
                products companies or the medical product industry
                generally;





·
            changes
                in domestic or international conditions beyond our control that may
                disrupt our or our customers’ or distributors’ ability to meet contractual
                obligations;





·
            changes
                in health care policy in the United States or
                abroad;





·
            our
                ability to obtain additional financing as necessary to fund both
                our long-
                and short-term business plans;





·
            fluctuations
                in market demand for and supply of our
                products;





·
            public
                concern as to the safety and reliability of products that we or others
                develop and public concern regarding HIV and
                AIDS;





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





·
            price
                and volume fluctuations in the stock market at large which do not
                relate
                to our operating performance.





The
      forward-looking information set forth in this Annual Report
      on
      Form 10-KSB is as of March 29, 2007, and we undertake no duty to update this
      information. Should events occur subsequent to March 29, 2007 that
      make
      it necessary to update the forward-looking information contained in this Form
      10-KSB, the
      updated forward-looking information will be filed with the SEC in a Quarterly
      Report on Form 10-QSB ,
      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 or our
      website at www.calypte.com .
      More
      information about potential factors that could affect Calypte’s business and
      financial results is included in the section entitled “Additional Factors That
      May Affect Future Results” beginning on page 43  of
      this
      Form 10-KSB.




**Overview
      and Outlook**





Our
      current focus is on commercializing our diagnostic test products for the rapid
      detection of antibodies to HIV-1 and HIV Type 2, a second type of HIV (“HIV-2”),
      in oral fluid and blood and samples using a lateral flow dipstick design (the
      “HIV-1/2 Rapid Tests”), primarily in international markets. Our plans also
      include developing and commercializing a second lateral flow platform design
      suitable for over-the-counter applications, permitting our entry into the HIV
      rapid test market in the United States and capable of expanding our product
      line
      beyond HIV to a broader set of diagnostic tests for other sexually transmitted
      diseases.





We
      significantly reduced our monthly operating burn rate as compared with
      historical levels by discontinuing and then selling our Legacy Business in
      2005.
      Consequently, however, the revenue stream from the Legacy Business products
      was
      also eliminated, requiring us to rely on revenues from sales of the BED
      Incidence Test and international sales of the HIV-1/2 Rapid Tests, as well
      as
      external financing sources, to pursue our business milestones and achieve
      profitability. We are focusing on expediting the procedures necessary to
      commercialize our HIV-1/2 Rapid Tests and begin generating the revenue stream
      necessary to support our operations and achieve our financial objectives of
      sustained profitable operations and increased stockholder value.




31




**Trends,
      Events and Uncertainties**





*BED
      Incidence Test*  Sales
      of
      our BED Incidence Test, a serum (blood) enzyme immunoassay (HIV 1-EIA) that
      can
      be used to estimate the proportion of HIV infections that have occurred within
      approximately the last 6 months in a subject population, began in the fourth
      quarter of 2004 and accounted for essentially all of our sales from continuing
      operations in 2005 and approximately 44% of our sales in 2006. Sales of our
      Incidence Test during 2006 decreased by approximately 41% compared with sales
      in
      2005. Incidence Test sales during 2005 reflected the impact of the initial
      sales
      ramp-up phase, with sequential increases in quarterly sales during the first
      three quarters of 2005. Sales decreased during the fourth quarter of 2005 and
      posted sequential decreases through the first half of 2006. Although sales
      increased by 26% in the second half of 2006 compared with sales in the first
      half, second half 2006 Incidence Test sales were 52% below the level of the
      second half of 2005.





We
      believe the decrease in sales is attributable to negative publicity regarding
      the usefulness of the BED Incidence Test. In February 2006, the CDC issued
      an
      Information Sheet: Using
      the BED HIV-1 Capture EIA Assay to Estimate Incidence Using STARHS in the
      Context of Surveillance in the U.S. addressing a December 2005 UNAIDS report regarding studies in Africa and
      Thailand indicating that the Incidence Test apparently over-estimated the
      incidence rate.  The Information Sheet acknowledges that the assay may
      cause over-estimation under certain conditions, suggests expanding current
      protocols, and indicates that data derived from its use in certain international
      settings may not be appropriate. During the second quarter of 2006, the CDC
      and
      UNAIDS agreed on a set of “Recommendations for Use” to address certain
      conditions that may have resulted in over-estimation of incidence. We believe
      that the test’s design and use and the interpretation of its results will
      continue to evolve as public health agencies and the CDC gain experience with
      it.  We continue to believe that the Incidence Test is a valuable
      technology in the fight against the spread of HIV/AIDS and that it will remain
      a
      viable epidemiological surveillance test.





We
      plan
      to develop a blood-based rapid HIV incidence test for diagnostic and
      surveillance purposes under the terms of a Cooperative Research and Development
      Agreement (CRADA) with the CDC. We expect the completion of the March 2007
      PIPE
      will permit us to increase our development resources and expand our product
      offerings. We continue to view our collaborative relationship with the CDC
      as
      very significant and we view the CDC as an important partner in our planned
      efforts to jointly introduce additional products. We expect that much of our
      new-product development will center on our Aware II platform as a result of
      its
      OTC-suitable design and the licenses which permit sale of those products in
      all
      of our target markets, particularly in the U.S.





*Rapid
      Tests*  We
      expect
      that our near- and medium-term future revenues will be derived primarily from
      the sale of our HIV-1/2 rapid diagnostic tests both to the professional and
      over-the-counter (OTC) markets, and potentially from the sales of diagnostic
      tests for other STDs or synergistic tests, such as tuberculosis or malaria,
      in
      the longer term.





Our
      focus
      for 2007 continues to be on commercializing the HIV-1/2 rapid tests, initially
      in a dipstick-format and produced in Thailand, from which we believe we can
      source certain African, Middle East and Southeast Asian markets. The testing
      protocol in many countries includes HIV and one or more of the following tests:
      tuberculosis, hepatitis B or C, and malaria.





We
      plan
      to utilize regional manufacturing to take advantage of local market
      opportunities. These sites could also be used to manufacture product for export
      to other markets. Our first such site is in China, with our joint venture,
      Beijing Marr. We also envision manufacturing operations in India and in the
      Middle East and intend to use a portion of the proceeds from the March 2007
      PIPE
      to accelerate this effort. The objectives are better customer service and
      stronger margins for all parties concerned. These sites are also logical bases
      for research and development centers to take advantage of local talent and
      to
      accelerate our ability to bring new products, technologies and platforms to
      market.





We
      submitted our Aware TM HIV-1/2
      oral fluid (OMT) rapid test for approval to the Chinese State Food and Drug
      Administration (“SFDA”) in January 2006 and during 2006 the test passed a number
      of critical milestones essential to its ultimate approval. We were in routine
      contact with the SFDA during the second half of 2006 and provided additional
      or
      clarifying information as requested during their general review process. Our
      test was reviewed by an SFDA expert panel in December 2006 and subsequent to
      the
      meeting, in January 2007, we received a formal request from the SFDA for
      additional information. Some of the information requested was informally
      presented to the SFDA in the December 2006 technical review, and is readily
      available. In response to the request, we are conducting an additional clinical
      trial of approximately 1,000 subjects randomly collected from the general
      (low-risk) population. We expect to complete this trial and assemble the other
      required information on or before May 10, 2007, the date by which the SFDA
      requires our response.




32




Beijing
      Marr, our joint venture with an affiliate of Marr Technologies BV, our largest
      stockholder, will manage the Chinese oral fluid test product launch. There
      are
      several large markets in China, such as those created by laws requiring HIV
      testing of military recruits and university students as part of their admissions
      process, as well as a publicly-announced commitment by the Chinese government
      to
      offer voluntary HIV testing to its entire 1.36 billion person population. With
      trained non-professionals and a safe, non-invasive oral fluid test, we expect
      strong demand for our initial test.





Beijing
      Marr has recently completed upgrading and renovating its manufacturing
      operations to facilitate the production of our Aware TM HIV-1/2
      rapid oral fluid (OMT) test. We are undergoing evaluation of our procedures
      to
      renew our Chinese GMP certificate and to ensure our compliance with
      ISO
      9001 and ISO 13485 standards. Compliance with these standards will enable us
      to
      manufacture for both the Chinese market and for export
      from China to our other international markets. W e
      have manufacturing
      equipment and personnel in place and expect to have GMP approval and/or ISO
      certification in sufficient time to produce inventory for commercial sales
      upon
      the expected third quarter 2007 SFDA approval of our OMT rapid test.





We
      expect
      China to be one of our three largest markets, along with India and Russia.
      These
      focus areas mirror the areas predicted to have the greatest increase in HIV
      infections over the next few years. We believe that a simple, non-invasive
      test
      will have significant demand as it can be used as an integral part of a
      real-time treatment program. We have received approval to sell our tests in
      Russia and we are completing our clinical and product evaluations in India.
      We
      believe that our tests continue to perform well and consistently in all trials
      to-date.




We
      have
      completed the regulatory approval process for our Aware TM HIV-1/2
      BSP test in South Africa, Uganda, Zimbabwe and Kenya and for our
      Aware TM HIV-1/2
      OMT test in South Africa, Uganda and Kenya, providing opportunities for
      humanitarian organizations to sponsor our product in their testing programs.
      We
      believe that cooperating with humanitarian organizations to help fight the
      HIV/AIDS pandemic in critical areas where we are obtaining regulatory approval,
      particularly in South Africa, will be an important trend in 2007 as we seek
      to
      achieve significant sales growth of our AwareTM HIV-1/2 rapid OMT test.





We
      plan
      to release a second OMT test later this year using a recombinant antigen. This
      will provide us with a full non-invasive testing algorithm in accordance with
      WHO rapid-testing guidelines. Not only will this benefit current diagnostic
      and
      treatment efforts, we believe it will help us to increase our sales in regions
      that adhere to the WHO testing algorithm. We expect to be able to produce this
      test from all sites that manufacture our current Aware TM products.





We
      continue to pursue business opportunities in the Middle East, targeting the UAE
      as our first market. We shipped 100,000 Aware TM HIV-1/2
      OMT rapid tests to our distributor in the UAE during the fourth quarter of
      2006
      and anticipate additional orders. A local manufacturing site, when and if
      completed, will further enhance our strength, not only in the UAE, but in Saudi
      Arabia, Kuwait, and throughout the GCC. Our distributor has informed us that
      regulatory approvals are progressing in several additional countries within
      the
      region.




During
      the third quarter of 2006, we received approval for our AwareTM HIV-1/2 OMT rapid
      test for both the professional and OTC markets in the Russian Federation. We
      expect to utilize Marr’s expertise and contacts in the Russian Federation as we
      establish our distribution system and our sales and marketing activities in
      that
      region. Additionally, one of the investors in the March 2007 PIPE has extensive
      relationships in both Russia and in the Middle East that we expect will be
      of
      value in expanding our sales reach. We have initiated contacts in the private
      sector, where a number of large corporations are focusing a portion of their
      social budgets on the HIV/AIDS problem in their communities. Russia currently
      has the fastest growing rate of increase in HIV/AIDS infection worldwide. We
      expect significant sales in this market in 2007.




33




In
      India,
      we have conducted product evaluations for the military and private sectors
      and
      are awaiting the results of those evaluations. The culmination of this process
      is expected to result in sales in this important region during 2007. By the
      end
      of 2007, we expect to have achieved our initial sales and marketing milestone
      -
      regulatory approvals and distribution networks consummating sales in the four
      parts of the world having the greatest HIV/AIDS prevalence, namely Sub-Saharan
      Africa, China, India and Russia.





We
      are in
      the process of developing additional distribution channels and plan to conduct
      additional trials in several African and Asian countries. The clinical trial
      and
      regulatory approval process will be on-going through 2007 and beyond. We are
      primarily targeting countries which have been selected for funding by PEPFAR,
      the recently expanded President’s Emergency Plan for AIDS Relief, and currently
      have representation in more than half of them. Many HIV intervention programs
      in
      developing countries are supported by foreign funding. In the case of funding
      from the United States, typically through PEPFAR or USAID, products that are
      not
      approved locally or by the USFDA may be used provided they have a waiver issued
      by the USAID and CDC. We have compiled the required data in terms of
“manufacturer’s claims” and independent trials for both our OMT and blood, serum
      and plasma HIV-1/2 rapid tests. We have recently been notified that our blood,
      serum and plasma product has been evaluated and is approved for addition to
      the
      USAID waiver list. We are actively pursuing a USAID waiver for our OMT product
      as well. As a result of its uniqueness compared to a blood rapid test, it is
      necessary for us to conduct a clinical trial of our OMT test as a part of its
      USAID evaluation. That trial is currently in progress. We believe that obtaining
      a USAID waiver is another important milestone in facilitating international
      sales of our rapid tests.





**Financial
      Considerations**





Our
      operating cash burn rate has been trending downward since 2004. Our burn rate
      for the year ended December 31, 2005 declined to approximately $0.7 million
      per
      month from $1.1 million per month in 2004. Our consolidated operating cash
      burn
      rate for 2006 averaged less than $0.5 million per month, including the impact
      of
      our Chinese joint venture operations. Our domestic burn rate decreased primarily
      as a result of the restructuring of our business and the discontinuation of
      our
      Legacy Business.





During
      2006, we incurred a net loss of $13.8 million, including a charge for $8.2
      million in non-cash interest expense primarily attributable to the accounting
      for our convertible debt and related derivatives and the re-pricing of certain
      warrants and we incurred a $5.0 million negative cash flow to fund our
      operations. At December 31, 2006, we had a working capital deficit of $12.6
      million and our stockholders’ deficit was $9.4 million. Our cash balance at
      December 31, 2006 was $0.4 million. Based upon our financial condition at
      December 31, 2006, as well as our recurring losses and our negative cash flows
      from operations, our independent accountants issued an opinion on our December
      31, 2006 financial statements citing substantial doubt about our ability to
      continue our business operations as a going concern.  During
      March 2007, we entered into Subscription Agreements for a private placement
      transaction with four accredited investors for the sale of an aggregate of
      100
      million shares of our common stock plus warrants and received an aggregate
      of
      $5.2 million in cash. The investors received immediately exercisable warrants
      to
      purchase an aggregate of 150 million additional shares of our common stock.
      The
      warrants to purchase 100 million shares have an exercise price of $0.08 per
      share and are exercisable through June 2008. Warrants to purchase 50 million
      shares have an exercise price of $0.11 per share and are exercisable through
      September 2008. If fully exercised, the warrants would provide us with an
      additional $13.5 million in cash. We consider the exercise of these warrants
      as
      a potential source of medium-term financing that would finance the growth plans
      described in Trends, Events and Uncertainties above, as well as fund operating
      losses and working capital requirements during the expected growth phase of
      our
      business, beginning in 2007 and continuing into 2008. We entered into agreements
      for a total of $617,800 in other financings in the first quarter of 2007 that
      served as a bridge to this PIPE transaction. Certain of these transactions,
      totaling $250,000 were bridge financings and are to be repaid from the proceeds
      of the PIPE. At March 29, 2007, we also had outstanding the unpaid balance
      of
      the April 2005 Secured 8% Convertible Notes and related interest notes and
      the
      7% Promissory Notes issued under the 2005 Marr Credit Facility, aggregating
      $9,433,000, all of which were due in April 2007. In March 2007 we extended
      the
      maturity date of an aggregate of $9,183,000 of these notes to April 2009. With
      the exercise of the warrants uncertain, we do not believe that our current
      cash
      resources are sufficient to allow us to fully attain our business milestones
      and
      achieve positive cash flow. Based on our current obligations and our 2007
      operating plans, we do not believe that we can sustain our operations throughout
      2007 without obtaining additional financing or in the absence of an early
      exercise of a significant portion of the 150 million warrants described above.
      There can
      be no
      assurance that the warrants will be exercised prior to their expiration, or
      at
      all, or that additional financing will be available, or if it is available,
      that
      it will be available on acceptable terms. We would,
      or
      might be required to, consider strategic opportunities, including merger,
      consolidation, sale or other comparable transactions, to sustain our operations.
      As we expand in the U.S., we expect to form strategic partnerships with
      companies that have greater strength than we to penetrate the potential OTC
      testing market. We do not currently have any definitive agreements with respect
      to any such additional financing or strategic opportunity, and there can be
      no
      assurance that any such opportunity will be available to us on acceptable terms,
      or at all. If additional financing is not available or is not available on
      acceptable terms, or if we are unable to arrange a suitable strategic
      opportunity, we will be in significant financial jeopardy and may be unable
      to
      continue our operations at current levels, or at all .  The
      terms
      of a subsequent financing may involve a change of control and/or require
      stockholder approval. Further, our pledge of the rights to our assets as
      collateral security for the 8% Convertible Notes issued in April 2005, as
      amended, and the 7% Promissory Notes issued under the 2005 Credit Facility
      with
      Marr, as amended, may inhibit our ability to secure financing in the future.
      Although we expect to be able to raise additional capital, there can be no
      assurance that we will secure such financing or enter into such strategic
      agreements, or that our stockholders would approve the terms of such agreements
      or financing, if so required.




34




Our
      longer-term liquidity and capital requirements are dependent on constraints
      similar to those which impact our current liquidity and capital resource
      considerations and which will be critical in validating our business model
      during 2007. In
      the
      absence of adequate resources from current working capital and existing
      financing arrangements, we will be required to raise additional capital to
      sustain our operations.




**Off-Balance
      Sheet Arrangements**  ** The
      Company does not have any off-balance sheet arrangements, as defined in Item
      303(a)(4)(ii).




**Critical
      Accounting Policies and Estimates**




Management’s
      Discussion and Analysis of Financial Condition and Results of Operations is
      based upon Calypte’s consolidated financial statements, which have been prepared
      in accordance with U.S generally accepted accounting principles. The preparation
      of these financial statements requires us to make estimates and judgments that
      affect the reported amounts of assets, liabilities, revenues and expenses,
      and
      related disclosure of contingent assets and liabilities. On an on-going basis,
      we evaluate our estimates and judgments, including those related to bad debts,
      inventories, intangible assets, income taxes, restructuring costs, derivative
      and anti-dilution liabilities and contingencies and litigation. We base our
      estimates on historical experience and on various other factors that we believe
      to be reasonable under the circumstances, the results of which form the basis
      for making judgments about the carrying values of assets and liabilities that
      are not readily apparent from other sources. Actual results may differ from
      these estimates under different assumptions or conditions.




We
      believe the following critical accounting policies and estimates, among others,
      reflect our more significant judgments used in the preparation of our
      consolidated financial statements.





·
            Revenue
                RecognitionWe
                recognize revenue from product sales upon shipment to customers and
                when
                all requirements related to the shipments have occurred. Should changes
                in
                terms cause us to determine these criteria are not met for certain
                future
                transactions, revenue recognized for any reporting period could be
                adversely affected.





·
            Allowance
                for Doubtful AccountsWe
                maintain an allowance for doubtful accounts on a specific account
                identification basis for estimated losses resulting from the inability
                of
                our customers to make required payments. If the financial condition
                of our
                customers were to deteriorate, resulting in an impairment of their
                ability
                to make payments, or regulatory issues with our products were raised,
                additional allowances may be required.




35




·
            Inventory
                ValuationWe
                adjust the value of our inventory for estimated obsolescence or
                unmarketable inventory equal to the difference between the cost of
                inventory and the estimated market value based upon assumptions about
                future demand and market conditions and development of new products
                by our
                competitors. Further, since our Legacy Business products historically
                incurred negative gross profit on an annual basis, and had high fixed
                manufacturing costs, we also review our inventories for lower of
                cost or
                market valuation. At December 31, 2006 and 2005, our inventories
                consisted
                of only BED Incidence Test and HIV-1/2 rapid test raw materials,
                components and finished products.





·
            Deferred
                Tax Asset RealizationWe
                record a full valuation allowance to reduce our deferred tax assets
                to the
                amount that is more likely than not to be realized. While we have
                considered future taxable income and ongoing prudent and feasible
                tax
                planning strategies in assessing the need for the valuation allowance,
                in
                the event we were to determine that we would be able to realize our
                deferred tax assets in the future in excess of its net recorded amount,
                an
                adjustment to the deferred tax asset would increase income in the
                period
                such determination was made.





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





·
            Stock
                based compensationWe
                adopted*Statement
                of Financial Accounting Standards No. 123 (revised 2004), Share-Based
                Payment*(“SFAS 123R”) effective January 1, 2006. We adopted SFAS 123R using
                the modified prospective method. Under this method, the provisions
                of SFAS
                123R are applied to all awards granted or modified after the date
                of
                adoption. The unrecognized expense attributable to awards not yet
                vested
                at the January 1, 2006 date of adoption is recognized in net income
                (loss)
                in the periods after the date of adoption using the same valuation
                method
                (i.e. Black-Scholes) and assumptions determined under the original
                provisions of SFAS 123, “Accounting for Stock-Based Compensation,” as
                disclosed on a pro-forma basis in our previous finaicial statements.
                Following the provisions of the modified prospective method, we have
                not
                restated our consolidated statement of operations for periods prior
                to
                2006 to reflect the adoption of SFAS 123R. Accordingly, the results
                reported in the statment of operations for 2006 are not directly
                comparable to the results for 2005. Under the fair value recognition
                provisions of SFAS 123R, we recognize stock-based compensation, net
                of an
                estimated forfeiture rate, which results in recognizing compensation
                expense for only those awards expected to vest over the service period
                of
                the award.  Prior to adopting SFAS 123R, we accounted for share-based
                payments under APB 25 and, accordingly, generally recognized compensation
                expense related to employee stock options for only those options
                granted
                with intrinsic value and we accounted for forfeitures as they
                occurred.




Although
      we did not grant any stock options to employees during 2006, we recorded stock
      compensation expense attributable to previously granted options under the terms
      of SFAS 123R in selling, general and administrative expenses in our Statement
      of
      Operations for the year ended December 31, 2006. When granted, we plan to estimate
      the fair value of options granted using the Black-Scholes option pricing model.
      We plan to estimate the expected life of options granted in the future based
      on
      the simplified method provided in Staff Accounting Bulletin No. 107 for “plain
      vanilla” options.  We estimate the volatility of our common stock at the
      date of grant based on its historical volatility over a period generally
      equivalent to the expected term of the grant. We estimate the expected
      pre-vesting forfeiture rate and recognize expense for only those shares expected
      to vest.  We have estimated our forfeiture rate based on our historical
      experience with stock-based awards that are granted, exercised and
      cancelled.  If the actual forfeiture rate is materially different from the
      estimate, the stock-based compensation expense could also differ from what
      we
      have recorded in the current period.  The assumptions used in calculating
      the fair value of stock-based awards represent our best estimates, but these
      estimates involve inherent uncertainties and the application of management
      judgment.  As required under SFAS 123R, we will review our valuation
      assumptions at each grant date and, as a result, may periodically change the
      valuation assumptions used to value employee stock-based awards granted in
      future periods. The
      guidance in SFAS 123R is relatively new and best practices are still developing.
      The application of the various valuation assumptions may be subject to further
      interpretation and refinement over time. There are significant differences
      among
      valuation models and there is a possibility that we will adopt different
      valuation models and assumptions in the future. This may result in a lack of
      comparability with other companies that use different models, methods and
      assumptions and in a lack of consistency in future periods.




36


**Results
      of Operations**





The
      following represents selected financial data (in thousands):


Year
                  Ended December 31,2006
              
              2005Product
                  sales revenue
              
              $
              547
              
              $
              427Cost
                  of product sales
              
              
              395
              
              
              133Gross
                  Margin
              
              
              152
              
              
              294Operating
                  costs and expenses:Research
                  and development expenses
              
              
              1,700
              
              
              2,211Selling,
                  general and administrative expenses
              
              
              4,322
              
              
              5,363Total
                  operating expenses
              
              
              6,022
              
              
              7,574Loss
                  from operations
              
              
              (5,870
              )
              
              (7,280
              )Interest
                  income (expense), net
              
              
              (8,500
              )
              
              1,952Minority
                  interest in losses of consolidated joint ventures
              
              
              517
              
              
              -Other
                  income (expense), net
              
              
              105
              
              
              (335
              )Loss
                  from continuing operations before income taxes
              
              
              (13,748
              )
              
              (5,663
              )Income
                  taxes
              
              
              (2
              )
              
              (2
              )Net
                  loss from continuing operations
              
              
              (13,750
              )
              
              (5,665
              )Discontinued
                  operationsLoss
                  from operations of Legacy Business, includingloss
                  on disposal of $425 in 2005, net of income taxes
              
              
              -
              
              
              (3,098
              )Net
                  Loss
              
              $
              (13,750
              )
              $
              (8,763
              )
  *Years
        ended December 31, 2006 and 2005*





Our
      revenue for 2006 totaled $547,000 compared with $427,000 in revenue from
      continuing operations for 2005, an increase of $120,000 or 28%. In 2005, we
      also
      recorded $2,105,000 of revenue attributable to sales of our Legacy Business
      products. The revenues and costs attributable to the Legacy Business have been
      classified as discontinued operations upon the sale of that business in November
      2005 and, accordingly, are not discussed here.





We
      began
      selling our BED incidence test in the fourth quarter of 2004 and its sales
      accounted for approximately 95% of our sales from continuing operations for
      2005
      and approximately 44% of our sales for 2006. The balance of our revenue in
      both
      periods is from sales of our HIV-1/2 oral fluid rapid test to our Middle Eastern
      and South African distributors. The following table summarizes our revenues
      by
      product for 2006 and 2005 (in thousands):





2006
            
            2005BED
                Incidence tests
            
            $
            241
            
            $
            406AwareTMRapid HIV diagnostic tests
            
            
            306
            
            
            21Revenues
                from product sales
            
            $
            547
            
            $
            427





Sales
      of
      the BED Incidence Test in 2006 decreased by 41% compared with sales in 2005.
      We
      believe the decrease stemmed primarily from concerns developing in late 2005
      indicating that the Incidence Test might over-estimate the HIV-1 incidence
      rate.  In the first quarter of 2006, the U.S. CDC, the test’s designer,
      issued an information sheet acknowledging that the assay may cause
      over-estimation under certain conditions. During the second quarter of 2006,
      the
      CDC developed revised protocols that were subsequently accepted by UNAIDS and
      the WHO to address certain conditions that may have resulted in over-estimation
      of incidence. Sales of the Incidence test resumed modestly during the second
      half of 2006 as the concerns regarding over-estimation and interpretation of
      test results decreased. The increase in sales of our Aware TM Rapid
      tests is almost exclusively a result of 2006 sales to our Middle East
      distributor of the oral fluid test in its over-the-counter format.




37




Purchases
      by three customers accounted for approximately 67% of our revenue during 2006.
      Our distributor for the Middle East, Joseph & Gionis, purchased oral fluid
      OTC rapid tests representing for approximately 51% of our revenues for 2006.
      Two
      customers purchasing the BED Incidence Test, the
      New
      York State Health Department’s Wadsworth Laboratory ,
      the
      U.S. CDC’s BED contract lab, and the Chinese CDC accounted for approximately 9%
      and 7%, of revenues for 2005 and 2006, respectively. During 2005,
      three customers accounted for approximately 36% of revenue from continuing
      operations. The New York State Health Department’s Wadsworth Laboratory, the
      U.S. CDC, and our South African distributor purchased BED Incidence tests
      representing approximately 13%, 13% and 10%, respectively, of our revenues
      from
      continuing operations.




Gross
      margin decreased from approximately 69% of sales in 2005 to approximately 28%
      of
      sales in 2006. Among the factors contributing to the decreased margin are the
      change in the product mix and the significantly higher royalty rate attributable
      to rapid test sales compared to Incidence Test sales; the inclusion in cost
      of
      sales for 2006 of certain annual minimum payments and disputed royalty amounts
      expensed during 2006 that were not a part of 2005 expense; increases in certain
      of our materials costs due to financial constraints that limit our ability
      to
      purchase in the most economical order quantities and increased costs incurred
      to
      transfer domestically purchased materials to international manufacturing
      locations in Thailand and China. Royalty expense and margin rates for 2006
      are
      not typical of the results we expect in the future because of the nominal
      amounts of revenue and product quantities over which certain fixed expenses,
      like annual royalty minimums, have been allocated. Additionally, our current
      product costs are based on uneconomic purchasing patterns and pilot-plant-sized
      production lots, and do not reflect the economies of scale that we expect to
      achieve in commercial scale manufacturing operations.




Research
      and development costs decreased by $511,000 or 23%, from $2,211,000 in 2005
      to
      $1,700,000 in 2006. Domestic R&D expense decreased by $1,018,000, primarily
      due to the elimination of our Rockville, Maryland facility-based R&D staff
      and their related operations in the business restructuring we implemented during
      the second quarter of 2005. We have continued to incur travel and other costs
      related to the transfer of our manufacturing technology to our Thailand contract
      manufacturer and our Chinese joint venture and for various international
      clinical trials of our rapid tests during 2006; but those expenses have
      decreased compared with the expense associated with similar activities during
      2005. Offsetting the decrease in domestic R&D spending is $507,000 of
      research and development expense related to our rapid tests and incurred
      primarily by our Beijing Marr joint venture, which did not exist in 2005.




Selling,
      general and administrative costs decreased by $1,041,000 or 19%, from $5,363,000
      in 2005 to $4,322,000 in 2006. The primary components of the net decrease
      include the following:




·
            a
                decrease of approximately $535,000 related to the second quarter
                2005
                charge for restructuring our operations and closing our Maryland
                and
                California facilities;





·
            a
                decrease of approximately $590,000 in marketing consulting
                expenses;





·
            a
                decrease of approximately $342,000 in investor relations, public
                company
                and legal expenses, including approximately $257,000 of non-cash
                expense;
                and





·
            a
                decrease of approximately $110,000 in salary and benefits expenses;
                offset
                by





·
            an
                increase of approximately $565,000 of general and administrative
                expenses
                incurred by our Chinese joint ventures that were not consolidated
                nor
                significant in 2005.




Our
      loss
      from operations for 2006, at $5,870,000, reflects a 19% decrease compared with
      the $7,280,000 loss from continuing operations reported for 2005.





We
      recorded net interest expense of $8,500,000 for 2006 compared with $1,952,000
      of
      net interest income in 2005, principally due to the accounting for the
      derivative and anti-dilution obligations of our 2005 convertible note financing
      which were required to be adjusted to their fair value during 2005, with the
      change in value being recognized in interest expense, the write-off of such
      amounts during 2006 in proportion to the conversion or repayment of such debt
      and the third quarter 2006 expense associated with warrant re-pricing and
      exercise and the related debt cancellation.




38




The
      following table summarizes the components of interest income (expense) (in
      thousands):


(Increase)Year
                  ended December 31,
              
              Decrease2006
              
              2005
              
              ExpenseInterest
                  on debt instruments paid or payable in cash
              
              $
              (284
              )
              $
              (123
              )
              $
              (161
              )Non-cash
                  expense composed of:Accrued
                  interest on 8% Convertible Notes (paid by issuing
                  additionalNotes)
              
              
              (481
              )
              
              (498
              )
              
              17Amortization
                  and proportional write-off upon conversion of notediscounts
                  and deferred offering costs
              
              
              (5,694
              )
              
              (1,502
              )
              
              (4,192
              )Mark
                  to market adjustment of derivative and anti-dilutionobligations
                  arising from the April 2005 financing
              
              
              (375
              )
              
              3,803
              
              
              (4,178
              )Expense
                  attributable to extinguishment of 7% Promissory Notes andinduced
                  conversion of 8% Convertible Notes resulting fromwarrant
                  re-pricing and exercise, and debt cancellation
              
              
              (1,549
              )
              
              -
              
              
              (1,549
              )Mark
                  to market adjustment of anti-dilution obligations arising
                  fromthe
                  May and July 2004 equity financings
              
              
              -
              
              
              506
              
              
              (506
              )Expense
                  attributable to warrants issued in conjunction with the2005
                  Marr Credit Facility
              
              
              -
              
              
              (71
              )
              
              71Expense
                  attributable to warrants issued in conjunction with the2004
                  anti-dilution obligation
              
              
              -
              
              
              (82
              )
              
              82Expense
                  attributable to dividends on mandatorily redeemable SeriesA
                  preferred stock
              
              
              (120
              )
              
              (120
              )
              
              -Total
                  non-cash items
              
              
              (8,219
              )
              
              2,036
              
              
              (10,255
              )Total
                  interest expense
              
              
              (8,503
              )
              
              1,913
              
              
              (10,416
              )Interest
                  income
              
              
              3
              
              
              39
              
              
              (36
              )Net
                  interest (expense) income
              
              $
              (8,500
              )
              $
              1,952
              
              $
              (10,452
              )





*Restructuring
      and Severance*




We
      have
      charged restructuring-related costs to date as incurred in accordance with
      SFAS
      No. 146, “Accounting for the Costs Associated with Exit or Disposal
      Activities.” Severance
      charges associated with the elimination of positions were recognized ratably
      over the future service period, if any, in accordance with SFAS No. 146. We
      measured the total termination benefits at the communication date based on
      the
      fair value of the liability as of the termination date.  Any change
      resulting from a revision to either the timing or the amount of estimated cash
      over the future service period will be measured using the credit-adjusted
      risk-free rate that was used to initially measure the liability.  The
      cumulative effect of the change will be recognized as an adjustment to the
      liability in the period of the change.





**Liquidity
      and Capital Resources**




*Financing
      Activities*




We
      have
      financed our operations from our inception primarily through the private
      placements of preferred stock and common stock, our Initial Public Offering
      (IPO) and the issuance of convertible notes and debentures. On May 20, 2003,
      our
      stockholders approved a 1:30 reverse split of our common stock, which became
      effective on May 28, 2003. All references to the number of shares issued or
      the
      issue, exercise or conversion price of any transaction described in this Annual
      Report on Form 10-KSB reflect the $0.03 par value post-split basis of our common
      stock.





39




Please
      refer to the tables entitled “Summary of Recent Financings - January 2004
      through March 29, 2007” and “Detail of Recent Financings - January 2004 through
      March 29, 2007” in **Part
      II, Item 5. Market for the Registrant’s Common Equity and Related Stockholder
      Matters** for a
      summary of our financings for the most recent three years and our current
      financing arrangements.





*Operating
      Activities*





During,
      2006 and 2005, we used cash of $5.0 million and $8.1 million, respectively,
      in
      our operations. In both periods, the cash used in operations was primarily
      for
      development and commercialization of our rapid tests, as well as for our
      selling, general and administrative expenses. In 2006, we also used cash to
      fund
      the the research and development and administrative operations of our Chinese
      joint ventures, which were not consolidated in 2005. Through the first half
      of
      2005, we also used cash in manufacturing our Legacy Business products.





*Recent
      Accounting Pronouncements*





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





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





In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB No. 108 addresses how the effects of prior year uncorrected
      misstatements should be considered when quantifying misstatements in current
      year financial statements and is effective for fiscal years ending after
      November 15, 2006. SAB No. 108 requires companies to quantify misstatements
      using a balance sheet and income statement approach and to evaluate whether
      either approach results in quantifying an error that is material in light of
      relevant quantitative and qualitative factors. SAB No. 108 permits existing
      public companies to initially apply its provisions either by (i) restating
      prior
      financial statements as if the “dual approach” had always been used or (ii)
      recording the cumulative effect of initially applying the “dual approach” as
      adjustments to the carrying value of assets and liabilities as of January 1,
      2006 with an offsetting adjustment recorded to the opening balance of retained
      earnings. The adoption of the provisions of SAB No. 108 on December 31, 2006
      had
      no impact on our consolidated results of operations or financial
      position.





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” ** (“FIN
      48”). This Interpretation clarifies the accounting for uncertainty in income
      taxes recognized in a company’s financial statements in accordance with FASB
      Statement No. 109, *Accounting
      for Income Taxes.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The evaluation of a tax position in
      accordance with FIN 48 is a two-step process. The first step is recognition:
      The
      entity determines whether it is “more-likely-than-not” that a tax position will
      be sustained upon examination, including resolution of any related appeals
      or
      litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the “more-likely-than-not” recognition
      threshold, the entity presumes that the position will be examined by the
      appropriate taxing authority that would have full knowledge of all relevant
      information. The second step is measurement: A tax position that meets the
      “more-likely-than-not” recognition threshold is measured to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50 percent likely
      to be realized upon ultimate settlement. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. We do not believe that t he
      adoption of F IN
      48
      will have a
      material impact on our consolidated results of operations or financial
      condition.






40




In
      February 2006, the FASB issued Statement No. 155 **“** Accounting
      for Certain Hybrid Financial Instruments” (“FAS 155”). This Statement amends
      FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging
      Activities *,”* and No.
      140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities.”  This Statement resolves issues addressed
      in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to
      Beneficial Interests in Securitized Financial Assets.” FAS 155: (i) permits fair
      value re-measurement for any hybrid financial instrument that contains an
      embedded derivative that otherwise would require bifurcation; (ii) clarifies
      which interest-only strips and principal-only strips are not subject to the
      requirements of Statement 133, (iii) establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation; (iv) clarifies that concentrations
      of credit risk in the form of subordination are not embedded derivatives; and
      (v) amends Statement 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for fiscal years beginning after
      September 15, 2006.  We do not believe that the adoption of FAS 155 will
      have a material impact on our consolidated results of operations or financial
      condition.





In
      June
      2005, the FASB issued Statement No. 154, “Accounting Changes and Error
      Corrections” (“FAS 154”), a replacement of APB No. 20, “Accounting Changes” and
      FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements”. FAS 154 applies to all voluntary changes in accounting principle
      and changes the requirements for accounting for and reporting of a change in
      accounting principle. This statement establishes that unless impracticable,
      retrospective application is the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements specific
      to the newly adopted accounting principle. It also requires the reporting of
      an
      error correction which involves adjustments to previously-issued financial
      statements similar to those generally applicable to reporting an accounting
      change retrospectively. FAS 154 became effective for accounting changes and
      corrections of errors made in our fiscal year beginning on January 1, 2006.
      The
      adoption of FAS 154 has not had a material impact on our consolidated results
      of
      operations or financial condition.





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, An Amendment of
      ARB No. 43, Chapter 4” (“SFAS 151”).  SFAS 151 amends ARB 43, Chapter 4, to
      clarify that abnormal amounts of idle facility expense, freight, handling costs
      and wasted materials (spoilage) be recognized as current period charges. It
      also
      requires that allocation of fixed production overheads to the costs of
      conversion be based on the normal capacity of the production facilities. 
SFAS 151 became effective for us beginning with our 2006 fiscal year. The
      adoption of SFAS 151 has not had a material impact on our consolidated results
      of operations or financial position.





In
      December 2004, the FASB issued SFAS 123R which addresses the accounting for
      share-based payments to employees, including grants of employee stock
      options.  Under the new standard, companies will no longer be able to
      account for share-based compensation transactions using the intrinsic method
      in
      accordance with APB Opinion No. 25, *Accounting
      For Stock Issued To Employees* . 
      Instead, we are required to account for such transactions using a fair-value
      method and recognize the expense in the consolidated statement of
      operations.  We adopted SFAS 123R in our fiscal year beginning on January
      1, 2006. See *Stock-Based
      Compensation* earlier
      in **Critical
      Accounting Policies and Estimates.**


41


**Additional
      Factors That May Affect Future Results**





The
      following risk factors and other information included in this Annual Report
      on
      Form 10-KSB should be carefully considered. The risks and uncertainties
      described below are not the only ones we face. Additional risks and
      uncertainties not presently known to us or which we currently deem immaterial
      also may impair our business operations. If any of the following risks occur,
      our business, financial condition, operating results, and cash flows could
      be
      materially adversely affected. We disclaim any obligation to update any
      forward-looking statements contained herein after the date of this Annual
      Report.





***Risks
      Related to Our Financial Condition***





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





Although
      we have extended the maturity of the 7% notes we have outstanding under
      the
      2005 Marr Credit Facility Agreement at
      December 31, 2006, totaling $4,057,000, as
      well
      as the unconverted Secured 8% Convertible Notes, totaling $4,883,000 at December
      31, 2006, from April 3, 2007 until April 3, 2009, we do not believe that our
      cash balance of $372,000 at December 31, 2006 and the additional financing
      arrangements we have completed since year-end will be adequate to sustain our
      operations at expected levels throughout 2007. We
      believe we will need to arrange additional equity-based financing to fund our
      operations and make the investments necessary to continue to execute our
      business plan in 2007. In addition, there can be no assurance that we will
      achieve or sustain profitability or positive cash flows in the future.





In
      the
      absence of adequate resources from current working capital and existing
      financing arrangements, we will be required to raise additional capital to
      sustain our operations. There can be no assurance that additional financing
      will
      be available, or if it is available, that it will be on acceptable terms.
      W e
      would
      or might be required to consider strategic opportunities, including merger,
      consolidation, sale or other comparable transaction, to sustain our operations.
      We do not currently have any agreements in place with respect to any such
      additional financing or strategic opportunity, and there can be no assurance
      that any such opportunity will be available to us on acceptable terms, or at
      all. If additional financing is not available to us if and when required or
      is
      not available to us on acceptable terms, or we are unable to arrange a suitable
      strategic opportunity, we will be in significant financial jeopardy and we
      may
      be unable to continue our operations at current levels, or at all .  The
      terms
      of a subsequent financing may involve a change of control or require stockholder
      approval and could result in substantial dilution to our existing stockholders.
      Further, our outstanding pledges of the rights to our assets as collateral
      security for our Notes and other indebtedness may inhibit our ability to secure
      financing in the future. There can be no assurance that we will enter into
      such
      agreements or secure such financing, or that our stockholders will approve
      the
      terms of such financing, if so required. If such additional financing is not
      available to us when required or is not available to us on acceptable terms,
      or
      we are unable to arrange a suitable strategic opportunity, we will be in
      significant financial jeopardy and we may be unable to continue our operations
      at current levels, or at all .





*We
      Rely On the Support of Our Largest Stockholder to Maintain Our Financial
      Viability Until Such Time as Our Products Can Generate Positive Cash
      Flow.*





Marr
      Technologies BV (“Marr”) is our largest stockholder, holding 65.3 million
      shares, or approximately 30%, of our outstanding common stock at December 31,
      2006. In addition to that relationship, Marr holds $4,057,000 of our secured
      7%
      Promissory Notes under the 2005 Credit Facility and $3,159,000 of our Secured
      8%
      Convertible Notes, convertible into an additional 10.5 million shares, at
      December 31, 2006. Marr also holds immediately exercisable warrants to purchase
      approximately 8.5 million shares of our common stock. Furthermore, Marr
      affiliates are our 49% joint venture partners in China and we are working with
      Marr to distribute our rapid test products in Russia. As a result of their
      initial 2003 investment, Marr is entitled to nominate two representatives to
      our
      Board of Directors and their two nominees have served on our Board since 2004.
      Although Marr is subject to trading rules applicable to significant
      stockholders, its decision to either sell a significant portion of its shares
      or
      acquire additional shares could adversely impact the liquidity and/or market
      price of our stock. Further, if Marr chose to increase its ownership of Calypte,
      such a change might trigger change of control provisions in certain of our
      intellectual property license agreements, potentially resulting in the loss
      of
      one or more of the licenses necessary for the production of our rapid tests
      and
      our need to revise our business model.




42




We
      incurred negative cash flows from operations of $5.0 million and $8.1 million
      during 2006 and 2005, respectively. Our ability to issue 7% Promissory Notes
      under the 2005 Credit Facility and Marr’s participation in our other financings
      since 2003 has been critical to funding our operations. Due to its significance,
      if Marr were to withdraw its support of the Company and its operations, we
      could
      be in significant financial jeopardy and have to curtail our operations and
      seek
      other sources of financing or strategic partnerships, or discontinue our
      operations.





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





At
      December 31, 2006, our domestic trade accounts payable totaled $1.5 million,
      of
      which approximately $1.3 million was over sixty days past due. Further, we
      currently have a number of cash-only arrangements with suppliers. Certain
      vendors and service providers may choose to bring legal action against us to
      recover amounts they deem due and owing. While we may dispute certain of these
      claims, should a creditor prevail, we may be required to pay all amounts due
      to
      the creditor. If the working capital that enables us to make payments is not
      available when required, we will be placed in significant financial jeopardy
      and
      we may be unable to continue our operations at current levels, or at all.
      Additionally, our financial condition has prevented us from ordering certain
      materials in the most economical order quantities, which increases the cost
      of
      our products and reduces our margins.





*We
      Have 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 years
      ended December 31, 2006 and 2005 was $13.8 million and $8.8 million,
      respectively . Our accumulated deficit at December 31, 2006 was $168 million.
      We
      expect operating losses to continue through 2007, as we complete the
      commercialization of our rapid tests, complete our international technology
      transfers, and conduct additional research and development and clinical trials
      for current and potential new products.





*We
      Have Federal Net Operating Losses Which May Expire Before We Can Utilize
      Them.*





At
      December 31, 2006, we had a federal net operating loss carryforward of
      approximately $160
      million .
       Section 382 of the Internal Revenue Code imposes an annual limitation on
      the utilization of net operating loss carryforward following a “change in
      ownership.”  The amount of the limitation is based on a statutory rate of
      return and the value of the corporation at the time of the change of ownership.
       Our private placements and other sales of our equity securities can
      potentially cause a change of ownership either individually or in the aggregate.
      If a change of ownership occurs and an annual limitation is imposed, a portion
      of these carryforwards may expire before we are able to utilize
      them.





***Risks
      Related to the Market for Our Common Stock***





*Our
      Registration of a Significant Amount of Our Stock Under the Terms of Recent
      Financings May Have a Negative Effect on the Trading Price of Our
      Stock.*





Under
      the terms of the private placements we completed in February and March 2007,
      we
      are required to file a registration statement for the resale of over 100 million
      shares of common stock that we issued plus the more than 150 million shares
      underlying immediately exercisable warrants. During
      July 2006, we issued approximately 25 million registered shares of our common
      stock upon the exercise of re-priced warrants and issued warrants to purchase
      approximately 12.5 million shares which have not yet been registered. Our 8%
      Secured Convertible Notes are immediately convertible into approximately 16.3
      million registered shares at December 31, 2006 and there remain approximately
      30
      million registered shares underlying immediately exercisable warrants granted
      in
      the April 2005 Placement and in the May and July 2004 PIPEs. Upon the
      effectiveness of the registration statement or the conversion of the notes
      or
      exercise of the warrants, the investors will hold freely tradable shares.
      Essentially all but 2.75 million of the 221 million shares of our common stock
      outstanding at December 31, 2006 are freely tradable. If investors holding
      a
      significant number of freely tradable shares decided to sell them in a short
      period of time, such sales could contribute significant downward pressure on
      the
      trading price of our stock. Such sales might also inhibit our ability to obtain
      future equity or equity-related financing on acceptable terms.




43




*We
      May Need our Stockholders to Authorize Additional Shares of or a Reverse Split
      of our Common Stock in the Near Future.*





From
      inception through March 29, 2007, we have issued approximately 340 million
      shares of our common stock and raised approximately $164 million. We have 800
      million shares of our common stock authorized for issuance. After considering
      the share reserves required for our benefit plans and our recent financings,
      we
      have the ability to issue approximately 150 million shares of our common stock
      for future financings or for other purposes. In addition to the potential
      dilutive effect of issuing such a large number of shares at current prices,
      there is the potential that a large number of the shares may be sold on the
      open
      market at any given time, which could place additional downward pressure on
      the
      trading price of our common stock. 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.





At
      the
      current market price of our stock, the remaining amount of authorized common
      stock may not permit us to complete a financing of sufficient size to achieve
      cash flow self-sufficiency. We may find it necessary to request that our
      stockholders approve an increase in the number of authorized shares to provide
      us with the flexibility to continue to finance our opertions. Alternatively,
      we
      may consider a reverse split of our common stock. At current prices, our stock
      is considered a “penny stock,” which precludes it from trading on a stock
      exchange or other major trading market and prevents major institutional
      investors from holding it in their portfolios. If our stockholders are requested
      to, and approve, a reverse split, the number of authorized shares will remain
      unchanged, providing us with greater flexibility to issue stock for future
      financings or for other purposes. There can be no assurance, however, that
      the
      post-reverse split trading price of our common stock will reflect the ratio
      used
      in a reverse split, should such a split be approved by our stockholders. While
      there is no impending announcement of a reverse split, such an announcement
      may
      also cause certain investors to engage in short sales, which would further
      contribute to significant downward pressure on the trading price of our stock.
      There can be no assurance that our stockholders will, if so requested, approve
      either of these alternatives. If they do not, we may not be able to continue
      financing our operations and we have to revise our business plan, curtail our
      operations, or both.





*Our
      Issuance of Warrants, Options and Stock Grants to Consultants for Services
      and
      the Granting of Registration Rights for the Underlying Shares of Common Stock
      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 expect to continue to issue stock bonus grants and/or warrants
      and
      options at or below the current market price. During 2005, we issued
      approximately 0.7 million shares and approximately 1.6 million options at market
      in payment of consulting services. In 2006, we issued approximately 2.3 million
      shares in payment of consulting and other services. In addition to the potential
      dilutive effect of issuing a large number of shares or options, there is the
      potential that a large number of the shares may be sold on the open market
      at
      any given time, which could place additional downward pressure on the trading
      price of our common stock.




44




*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 $0.052 per share and as high as $0.30 per
      share in the twelve months ended March 29, 2007. We believe that 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;·
            concerns
                about our ability to finance our continuing operations;·
            concerns
                about the liquidity of our stock;·
            concerns
                about the stability of our stock as a result of delisting from the
                American Stock Exchange;·
            financing
                arrangements which may require the issuance of a significant number
                of
                shares in relation to the number of shares currently outstanding,
                including anti-dilution provisions;·
            announcements
                of technological innovations or new products which we or our competitors
                make;·
            FDA,
                SEC and international regulatory actions;·
            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;·
            fluctuations
                in market demand for and supply of our products;·
            certain
                world conditions, such as an economic downturn, natural disasters
                or
                terrorist attacks; and·
            anti-American
                sentiment in certain international markets where we market or anticipate
                marketing our products.




*Failure
      to Achieve and Maintain Internal Controls in Accordance With Sections 302 and
      404 of the Sarbanes-Oxley Act of 2002 Could Have A Material Adverse Effect
      on
      Our Business and Stock Price.*





We
      have
      begun examining and evaluating our internal control procedures to satisfy the
      requirements of Section 404 of the Sarbanes-Oxley Act (“SOA”), as required for
      our Annual Report on Form 10-KSB for the year ending December 31, 2007. While
      we
      expect to meet the requirements of the SEC’s Guidelines under SOA, there can be
      no assurance that we will do so, nor can we estimate at this time the cost
      of
      achieving compliance under the rules - which for many smaller companies has
      been
      a significant cost. In addition, if we fail to maintain the adequacy of our
      internal controls or fail to implement required new or improved controls, as
      such control standards are modified, supplemented or amended from time to time,
      we may not be able to assert that we can conclude on an ongoing basis that
      we
      have effective internal controls over financial reporting. Effective internal
      controls are necessary for us to produce reliable financial reports and are
      important in the prevention of financial fraud. If we cannot produce reliable
      financial reports or prevent fraud, our business and operating results could
      be
      harmed, investors could lose confidence in our reported financial information,
      and there could be a material adverse effect on our stock price.





45





*Our
      Charter Documents May Inhibit a Takeover.*





Certain
      provisions of our Certificate of Incorporation and Bylaws could:




·
            discourage
                potential acquisition proposals (i.e. stockholder rights plan also
                known
                as a “poison pill”);·
            delay
                or prevent a change in control;·
            diminish
                stockholders’ 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 could result
                from
                takeover attempts; or·
            grant
                to the Board of Directors the discretionary right to designate specific
                rights and preferences of preferred stock greater than those of our
                common
                stock.





Furthermore,
      we are subject to the provisions of Section 203 of the General Corporation
      Law
      of the State of Delaware (DGCL). In general, the DGCL prohibits a publicly-held
      Delaware corporation from engaging in a “business combination” with an
“interested stockholder” for a period of three years after the date of the
      transaction in which the person becomes an interested stockholder, unless the
      business combination is approved in a prescribed manner. An “interested
      stockholder” is a person who, together with affiliates and associates, owns, or
      within the prior three years did own, 15% or more of the corporation's voting
      stock. This provision could make it more difficult for an “interested
      stockholder” to obtain control of us without the approval of the Board of
      Directors.





*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 our common stock. 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 us 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 we approve because the Rights do not become exercisable in the
      event of an offer or other acquisition exempted by our Board of Directors.





*Our
      Board of Directors has Certain Discretionary Rights With Respect to Our
      Preferred Shares That May Adversely Affect the Rights of our Common
      Stockholders.*





Our
      Board
      may, without stockholder 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:




·
            restricting
                dividends;·
            dilution
                of voting power;·
            impairment
                of liquidation rights; and·
            delaying
                or preventing a change in control of the Company.





Additionally,
      we currently have approximately 150 million shares of common stock that could
      be
      issued for financing or other purposes. Dilution resulting from such issuance
      could also adversely affect the rights of our current common stockholders.
      Further restructuring, if approved by the stockholders, would further increase
      the number of shares available for future financings and would result in
      additional dilution to the current common stockholders.





46





*Our
      Common Stock is Subject to the “Penny Stock” Rules of the SEC and the Trading
      Market In Our Securities is Limited, Which Makes Transactions 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. 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.





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 impose restrictions
      on transferring “penny stocks” and as a result, investors in our common stock
      may have the ability to sell their shares of our common stock impaired.





***Risks
      Related to Our Business***





*We
      May Not Be Able to Successfully Develop and Market New Products That We Plan
      to
      Introduce.*





We
      sold
      our HIV-1 urine-based screening test and urine and blood-based supplemental
      tests in November 2005 as a part of our restructuring plan and will not derive
      any revenue from the sale of these products in the future. The HIV-1 BED
      Incidence Test is available for sale, but we have little experience marketing
      that test and sales to-date have been modest. Further, there has been concern
      that the BED Incidence Test apparently over-estimates the incidence rate based
      on studies conducted in Thailand and Africa. The CDC has issued an Information
      Sheet acknowledging that the assay may cause over-estimation under certain
      conditions and recently issued revised recommendations and protocols for its
      use. Although we believe that the Incidence Test is a valuable technology in
      the
      fight against the spread of HIV/AIDS and expect that the process of refining
      its
      applications will continue as its use expands, there can be no assurance that
      the Incidence Test will achieve widespread acceptance, either in the United
      States or internationally.




47




In
      addition to our rapid HIV-1/2 diagnostic tests, we plan to develop and/or
      commercialize other diagnostic products for other infectious diseases or health
      conditions, some potentially in combination with each other (i.e. multi-channel
      tests). We, along with the U.S. CDC, plan to develop a blood-based rapid HIV
      test for diagnostic and surveillance purposes and are considering the
      feasibility of a rapid syphilis diagnostic test. There are numerous
      developmental and regulatory issues that may preclude the introduction of these
      products into commercial sale. If we are unable to demonstrate the feasibility
      of these products, successfully transfer the technology for commercial-scale
      manufacturing to either internal, joint venture or outsourced manufacturers
      or
      meet regulatory requirements or resolve potential patent licensing or government
      distribution or licensing requirements with respect to their marketing,





Additionally,
      neither we nor our marketing partners have experience marketing and selling
      rapid diagnostic tests. Our success depends upon alliances with third-party
      international distributors and joint venture partners and upon our ability
      to
      penetrate expanded markets with such distributors and partners. There can be
      no
      assurance that:




·
            our
                international distributors and joint ventures will successfully market
                our
                products;·
            our
                future selling efforts will be effective, as we have not yet introduced
                in
                significant volume either an HIV-1/2 product or other point of care
                test;·
            we
                will obtain market acceptance in the medical or public health community,
                including government and humanitarian funding sources critical in
                many
                international markets, which are essential for acceptance of our
                products;
                or that the relationships we develop with humanitarian agencies or
                their
                intermediaries will prove to be reliable and sustainable; or·
            if
                our relationships with distributors terminate, we will be able to
                establish relationships with other distributors or marketing partners
                on
                satisfactory terms, if at all.





If
      our
      current tests fail to achieve market acceptance or generate significant
      revenues, or we are unable to introduce significant new products, we may have
      to
      abandon them and alter our business plan. Such modifications to our business
      plan will likely delay achievement of sustainable cash flow from product sales
      and profitability. As a result, we may have to seek additional financing, which
      may not be available on the timetable required or on acceptable terms, or we
      may
      have to curtail our operations, or both.





*A
      Viable Market for Our Products May Not Develop.*




Our
      future success will depend, in part, on the market acceptance, and the timing
      of
      such acceptance, of new products such as our rapid HIV tests currently being
      commercialized, rapid HIV tests that we expect to develop and other new products
      or technologies that we may develop or acquire. To achieve market acceptance,
      we
      must make substantial marketing efforts and spend significant funds to inform
      potential customers and the public of the perceived benefits of these products.
      We currently have limited resources with which to stimulate market interest
      in
      and demand for our products and limited evidence on which to evaluate the
      market’s reaction to products that may be developed. Consequently, there can be
      no assurance that any of our products will obtain market acceptance and fill
      the
      market need that is perceived to exist. Additionally, although we plan to
      introduce an over the counter HIV diagnostic test for the domestic over the
      counter market, there can be no assurance regarding the timeline for which
      or
      certainty that the FDA will develop protocols for evaluation and approval of
      such a product.




48




*We
      are Dependent Upon Patents, Licenses and Other Proprietary Rights From Third
      Parties.*





To
      facilitate the development and commercialization of a proprietary technology
      base for our rapid test products, we have obtained licenses to patents or other
      proprietary rights from other parties. Obtaining such licenses has required
      the
      payment of substantial amounts and will require the payment of royalties to
      maintain them in the future. We believe that the licenses to the technologies
      we
      have acquired are critical to our ability to sell our rapid tests currently
      being commercialized and other rapid tests that we may plan to develop and/or
      commercialize in the future.





There
      are
      numerous patents in the United States and other countries which claim lateral
      flow assay methods and related devices, some of which cover the technology
      used
      in our rapid test products and are in force in the United States and other
      countries. In 2004, we entered into a non-exclusive sublicense agreement with
      Abbott Laboratories that grants us worldwide rights related to patents for
      lateral flow assay methods and related devices. We believe that the acquisition
      of these rights will enable us to make or sell our rapid test products in
      countries where these patents are in force. In 2004, we also acquired a
      sublicense from Bio-Rad Laboratories and Bio-Rad Pasteur for patents related
      to
      the detection of the HIV-2 virus. HIV-2 is a type of the HIV virus estimated
      to
      represent a small fraction of the known HIV cases worldwide. Nevertheless,
      HIV-2
      is considered to be an important component in the testing regimen for HIV in
      many markets. We believe that this sub-license agreement makes it possible
      for
      us to sell HIV-2 tests in countries where such patents are in force, or to
      manufacture in countries where such patents are in force and then sell into
      non-patent markets. Additionally, in 2003 we licensed an antigen necessary
      for
      certain of our rapid HIV-1/2 products from Adaltis, Inc., and in 2004, we
      acquired rights from Ani Biotech for its rapid test diagnostic platform and
      sample applicator, which we believe is a viable alternative to current lateral
      flow technologies and with potentially worldwide applicability. The loss of
      any
      one of these licenses or challenges to the patents would be detrimental to
      the
      commercialization of our rapid tests by delaying or limiting our ability to
      sell
      our rapid test products, which would adversely affect our results of operations,
      cash flows and business.





In
      the
      event that our financial condition inhibits our ability to pay license fees
      or
      royalty payments due under our license agreements, our rights to use, transfer
      or sublicense those licenses could be jeopardized in the event of a default
      in
      payment of fees or royalties. The loss of any of the foregoing licenses could
      have a materially adverse effect on our ability to produce our products or
      introduce new HIV diagnostic products in countries covered by those patents
      since the license agreements provide necessary proprietary processes or
      components for the manufacture of our products.





*Our
      Success Depends on Our Ability to Protect Our Proprietary Technologies.*




The
      medical diagnostics test industry places considerable importance on obtaining
      patent, trademark, and trade secret protection, as well as other intellectual
      property rights, for new technologies, products and processes. Our success
      depends, in part, on our ability to develop and maintain a strong intellectual
      property portfolio or to obtain licenses to patents for products and
      technologies, both in the United States and in other countries.




As
      appropriate, we intend to file patent applications and obtain patent protection
      for our proprietary technology. These patent applications and patents, when
      filed, are intended to cover, as applicable, compositions of matter for our
      products, methods of making those products, methods of using those products,
      and
      apparatus relating to the use or manufacture of those products. We will also
      rely on trade secrets, know-how, and continuing technological advancements
      to
      protect our proprietary technology. There is, however, no assurance that we
      will
      be successful in obtaining the required patent protection or that such
      protection will be enforced in certain countries in which we
      compete.




We
      have
      entered, and will continue to enter, into confidentiality agreements with our
      employees, consultants, advisors and collaborators. However, these parties
      may
      not honor these agreements and we may not be able to successfully protect our
      rights to unpatented trade secrets and know-how. Others may independently
      develop substantially equivalent proprietary information and techniques or
      otherwise gain access to our trade secrets and know-how.




49




Certain
      of our employees, including scientific and management personnel, were previously
      employed by competing companies. Although we encourage and expect all of our
      employees to abide by any confidentiality agreement with a prior employer,
      competing companies may allege trade secret violations and similar claims
      against us.




We
      have
      collaborated in the past and expect to collaborate in the future with
      universities and governmental research organizations which, as a result, may
      acquire part of the rights to any inventions or technical information derived
      from collaboration with them.




We
      may
      incur substantial costs and be required to expend substantial resources in
      asserting or protecting our intellectual property rights, or in defending suits
      against us related to intellectual property rights. Disputes regarding
      intellectual property rights could substantially delay product development
      or
      commercialization activities. Disputes regarding intellectual property rights
      might include state, federal or foreign court litigation as well as patent
      interference, patent reexamination, patent reissue, or trademark opposition
      proceedings in the United States Patent and Trademark Office. Opposition or
      revocation proceedings could be instituted in a foreign patent office. An
      adverse decision in any proceeding regarding intellectual property rights could
      result in the loss or limitation of our rights to a patent, an invention or
      trademark.





*We
      May Need to Establish Additional Collaborative Agreements, and this Could Have
      a
      Negative Effect on Our Freedom to Operate Our Business or Profit Fully from
      Sales of Our Products.*





We
      may
      seek to collaborate with other companies to gain access to their research and
      development, manufacturing, marketing and financial resources. However, we
      may
      not be able to negotiate arrangements with any collaborative partners on
      acceptable terms. Any collaborative relationships that we enter into may include
      restrictions on our freedom to operate our business or to profit fully from
      the
      sales of our products.





Once
      a
      collaborative arrangement is established, the collaborative partner may
      discontinue funding any particular program or may, either alone or with others,
      pursue alternative technologies for the protects or diseases we are targeting.
      Competing products, developed by a collaborative partner or to which a
      collaborative partner has rights, may result in the collaborative partner
      withdrawing support as to all or a portion of our technology.





Without
      collaborative arrangements, we must fund our own research and development
      activities, accelerating the depletion of our financing resources and requiring
      us to develop our own marketing capabilities. Therefore, if we are unable to
      establish and maintain collaborative arrangements, we could experience a
      material adverse effect on our ability to develop products and, once developed,
      to market them successfully.





*The
      Time Needed to Obtain Regulatory Approvals and Respond to Changes in Regulatory
      Requirements Could Adversely Affect Our Business.*




Our
      existing and proposed products are subject to regulation by the Chinese FDA
      (the
      SFDA), the FDA, Russian and Indian regulatory bodies and other governmental
      or
      public health agencies. In particular, we are subject to strict governmental
      controls on the development, manufacture, labeling, distribution and marketing
      of our products. In addition, we are often required to obtain approval or
      registration with other foreign governments or regulatory bodies before we
      can
      import and sell our products in these countries.




The
      process of obtaining required approvals or clearances from governmental or
      public health agencies can involve lengthy and detailed laboratory testing,
      human clinical trials, sampling activities and other costly, time-consuming
      procedures. The submission of an application to the SFDA, the FDA or other
      regulatory authority does not guarantee that an approval or clearance to market
      a product will be received. Each authority may impose its own requirements
      and
      delay or refuse to grant approval or clearance, even though a product has been
      approved in another country or by another agency.




Moreover,
      the approval or clearance process for a new product can be complex and lengthy.
      This time span increases our costs to develop new products as well as the risk
      that we will not succeed in introducing or selling.




50




Newly
      promulgated or changed regulations could also require us to undergo additional
      trials or procedures, or could make it impractical or impossible for us to
      market our products for certain uses, in certain markets, or at all.





*Failure
      to Comply With SFDA, FDA or Similar International Regulatory Bodies or Other
      Requirements May Require Us to Suspend Production of Our
      Products* ****** *Which
      Could Result in a Loss of Revenues.*




We
      can
      manufacture and sell products, both in China, the United States and elsewhere
      abroad, only if we comply with regulations of government agencies such as the
      SFDA and the FDA. We have implemented or plan to implement quality assurance
      and
      other systems that are intended to comply with applicable government regulations
      with regard to both our planned manufacturing in China and our contract
      manufacturing operations.




The
      SFDA,
      the FDA, or another government or public health agency could force us to stop
      manufacturing our products if it concludes that we are out of compliance with
      applicable regulations. They could also require us to recall products if we
      fail
      to comply with applicable regulations, which could force us to stop
      manufacturing such products. Either of these events would result in a material
      adverse effect on our business.





*We
      Engage Contract Manufacturers and Plan to Conduct International Manufacturing
      Operations to Produce Some of Our Products, Including Our Rapid Tests Currently
      Being Commercialized.*




We
      have
      engaged a domestic contract manufacturer to produce our BED incidence tests
      and
      another in Thailand to produce our rapid HIV tests and we are establishing
      manufacturing operations in China through our affiliate and plan to do so
      elsewhere. We intend to subsequently introduce a new line of products using
      the
      recently acquired Ani technology platform, and again expect to rely on
      outsourced or overseas manufacturing organizations. Initially, none of these
      entities will have more than limited experience, if any, in manufacturing our
      products and will have no experience in manufacturing them in commercial
      quantities. Furthermore, our rapid tests are not yet approved for sale in
      Thailand, which precludes us from selling them in countries in which approval
      in
      the country of manufacture, i.e. a “Certificate of Origin,” is a prerequisite to
      local product approval. While outsourcing our manufacturing processes to
      contract manufacturers may permit us to expand our manufacturing capacity more
      quickly, it may also subject us to problems in such areas as:




·
            transferring
                the technology from the laboratory or pilot operation to the contract
                manufacturer on a commercial scale;·
            lack
                of technical knowledge regarding regulated proceduresand the ability
                of
                the contract manufacturer to obtain and maintain the nbecessary GMP
                or
                other regulatory certifications;·
            uncertain
                or unreliable production yields;·
            maintaining
                quality control and assurance;·
            regulatory
                compliance, since most rapid test manufacturers do not produce products
                that are as stringently controlled as HIV diagnostics;·
            misappropriation
                of intellectual property, particularly in foreign countries where
                patent
                protection is less stringent, and depending on the extent of manufacturing
                processes that are outsourced;·
            developing
                market acceptance for new product;·
            production
                yields;·
            Quality
                control and assurance;·
            raw
                material supply;·
            shortages
                of qualified personnel; and·
            maintaining
                appropriate financial controls and
                procedures.




51




Any
      of
      these problems could affect our ability to meet increases in demand should
      our
      products gain market acceptance and could impede the growth of our sales
      revenues.





*We
      Rely on Sole Source Suppliers that We Cannot Quickly Replace for Certain
      Components Critical to the Manufacture of Our Products.*





Among
      the
      critical items we purchase from qualified sole source suppliers are various
      conjugates, and HIV-positive and HIV-negative testing samples. Any delay or
      interruption in the supply of these or other sole source components could have
      a
      material adverse effect on us by significantly impairing our or our contract
      manufacturer’s ability to manufacture products in sufficient quantities,
      particularly as we increase our manufacturing activities in support of
      commercial sales. Further, price increases imposed by these suppliers may result
      in increased costs and reduced margins to us, if we are unable to pass the
      increased costs on to our customers. In addition, if our financial condition
      impairs our ability to pay for critical components on a timely basis, our
      suppliers may delay or cease selling critical components to us, which could
      also
      restrict our ability to manufacture. We typically do not have long-term supply
      agreements with these suppliers, relying instead on periodic purchase orders
      to
      acquire materials with the result that suppliers could delay or decline to
      ship
      components until payment is made in advance or on a COD basis.





*We
      May Not Be Able to Retain and/or Attract Key Executives and Other Personnel.*





As
      a
      result of the restructuring plan we implemented in 2005, a number of our key
      executives and senior administrative, marketing, quality systems and research
      and development personel and staff left the company rather than transition
      to
      the new operation in Oregon when we closed our Rockville and Pleasanton
      facilities. Further, two of our senior executives resigned in late 2005 and
      certain senior employees have left the Company during 2006 and 2007. As a small
      company, our success depends on the services of key employees in these
      positions. Our inability to replace or attract key employees in certain
      positions as a result of our financial condition or for other reasons could
      have
      a material adverse effect on our operations.




*Our
      Research, Development and Commercialization Efforts May Not Succeed or Our
      Competitors May Develop and Commercialize More Effective or Successful
      Diagnostic Products.*




In
      order
      to remain competitive, we must regularly commit substantial resources to
      research and development and the commercialization of new products.




The
      research and development process generally takes a significant amount of time
      and money from inception to commercial product launch. This process is conducted
      in various stages. During each stage there is a substantial risk that we will
      not achieve our goals on a timely basis, or at all, and we may have to abandon
      a
      product in which we have invested substantial amounts of money.




During
      the years ended December 31, 2006 and 2005, we incurred $1.7 million and $2.2
      million, respectively, in research and development expenses. We expect to
      continue to incur significant costs as a result of our research and development
      activities in the future.




A
      primary
      focus of our efforts has been, and is expected to continue to be, rapid HIV
      tests that we are commercializing or that are in the process of being developed.
      We plan to expand our product line to include tests for other STD’s or
      synergistic diseases or conditions. However, there can be no assurance that
      we
      will succeed in our commercialization of these tests or in our research and
      development efforts with respect to rapid tests or other technologies or
      products.




Successful
      products require significant development and investment, including testing,
      to
      demonstrate their cost-effectiveness or other benefits prior to
      commercialization. In addition, regulatory approval must be obtained before
      most
      products may be sold. Regulatory authorities may not approve these products
      for
      commercial sale. In addition, even if a product is developed and all applicable
      regulatory approvals are obtained, there may be little or no market for the
      product at a price that will allow us to earn a reasonable profit, or we may
      be
      unable to obtain the requisite licenses to sell the product or to qualify for
      a
      government tender, which are often requirements in third world countries where
      the greatest need and largest market for HIV diagnostic testing exists.
      Accordingly, if we fail to develop commercially successful products, or if
      competitors develop more effective products or a greater number of successful
      new products, or there are governmental limitations affecting our ability to
      sell our products, customers may decide to use products developed by our
      competitors. This would result in a loss of current or anticipated future
      revenues and adversely affect our results of operations, cash flows and
      business.





52





*We
      Face Intense Competition in the Medical Diagnostic Products Market and Rapid
      Technological Advances by Competitors.*





Competition
      in our diagnostic market is intense and we expect it to increase. Many of our
      competitors have significantly greater financial, marketing and distribution
      resources than we do. Our competitors may succeed in developing or marketing
      technologies and products that are more effective than ours. In addition, if
      acceptance for oral fluid testing expands, we may experience competition from
      companies in areas where intellectual property rights may not be as stringent
      as
      in the United States. These developments could render our technologies or
      products obsolete or noncompetitive or otherwise affect our ability to increase
      or maintain our products’ market share. Further, the greater resources of our
      competitors could enable them to develop competing products more quickly so
      as
      to make it difficult for us to develop a share of the market for these products.
      By having greater resources, our competitors may also be able to respond more
      quickly to technology changes in the marketplace and may be able to obtain
      regulatory approval for products more quickly than we can. Our future success
      will depend on our ability to remain competitive with other developers of
      medical devices and therapies.





*Our
      Quarterly Results May Fluctuate Due to Certain Regulatory, Marketing and
      Competitive Factors Over Which We Have Little or No Control.*





The
      factors listed below, some of which we cannot control, may cause our revenues
      and results of operations to fluctuate significantly:




·
            actions
                taken by the FDA or foreign regulatory bodies relating to products
                we are
                commercializing or seeking to develop;·
            the
                extent to which our current or proposed new products gain market
                acceptance;·
            the
                timing and size of purchases by our customers, distributors or joint
                venture partners;·
            introductions
                of alternative means for testing for HIV by competitors;·
            Changes
                in the way regulatory authorities evaluate HIV testing, including
                supplemental testing of the results of a rapid HIV screening test;
                and·
            customer
                concerns about the stability of our business which could cause them
                to
                seek alternatives to our product.




*The
      Success of Our Plans to Enter International Markets May Be Limited or Disrupted
      Due to Risks Related to International Trade and Marketing and the Capabilities
      of Our Distributors, Manufacturers and Joint Venture Partners.*





Having
      completed our restructuring plan, we must now rely on revenues to be generated
      from sales of our current or planned incidence and rapid tests, largely to
      international distributors and/or joint ventures. We believe that our
      alternative fluid-based tests can provide significant benefits in countries
      that
      do not have the facilities or personnel to safely and effectively collect and
      test blood samples. To date, however, sales to international customers have
      resulted in relatively insignificant revenues. A majority of the companies
      with
      which we compete in the sale of HIV screening tests actively market their
      diagnostic products outside of the United States. Manufacturers from Japan,
      Canada, Europe, and Australia offer a number of HIV screening tests in those
      markets, including HIV-1/2 rapid tests, which are not approved for sale in
      the
      U.S. market. There can be no assurance that our products will compete
      effectively against these products in foreign markets. The following risks
      may
      limit or disrupt the success of our international efforts:




·
            the
                imposition of government controls (regulatory
                approval);




53




·
            export
                license requirements;·
            political
                and economic instability;·
            trade
                restrictions;·
            changes
                in tariffs;·
            difficulties
                in managing international operations (difficulty in establishing
                a
                relationship with a foreign distributor, joint venture partner, or
                contract manufacturer with the financial and logistical ability to
                maintain quality control of product);·
            the
                ability to secure licenses for intellectual property or technology
                that
                are necessary to manufacture or sell our products in the selected
                countries;·
            fluctuations
                in foreign currency exchanges rates;·
            the
                financial stability of our distributors and/or their expertise in
                obtaining local country regulatory approvals;·
            the
                financial capabilities of potential customers in lesser-developed
                countries or, alternatively, our inability to obtain approvals which
                would
                enable such countries access to outside financing, such as the World
                Bank;·
            the
                ability of our distributors to successfully sell into their contractual
                market territory or to successfully cover their entire territory;·
            the
                possibility that a distributor may be unable to meet minimum contractual
                commitments;·
            establishing
                market awareness; and·
            external
                conditions such as regional conflicts, health crises or natural
                disasters.





Some
      of
      our distributors have limited international marketing experience. There can
      be
      no assurance that these distributors will be able to successfully market our
      products in foreign markets. Any such failure will delay or disrupt our plans
      to
      expand our business.





*The
      Chinese Government Could Change Its Policies Toward Private Enterprises or
      Even
      Nationalize or Expropriate Them, Which Could Result in the Total Loss of
      Business in That Country.*





We
      have
      established joint ventures in China with an entity related to our largest
      stockholder through which we plan to manufacture and sell our products. Our
      business in China is subject to political or economic uncertainties and may
      be
      adversely affected by political, economic and social developments in China.
      Over
      the past decade, the Chinese government has pursued economic reform policies,
      including the encouragement of private economic activity and greater economic
      decentralization. The Chinese government may choose to end these policies or
      alter them significantly to our detriment with little, if any, notice.





Changes
      in policies, laws and regulations or in their interpretation or the imposition
      of taxation, restrictions on currency conversion, restrictions or devaluations
      of currency, nationalization or other expropriation of private enterprises
      could
      have a material adverse effect on our business in China. Nationalization or
      expropriation could result in the total loss of business in China.





54




*An
      Economic Downturn, Terrorist Attacks or Other Conditions Beyond Our Control
      May
      Adversely Affect Our Business or Our Customers May Not Be Able to Satisfy Their
      Contractual Obligations and We May Not Be Able to Deliver Our Products as a
      Result of the Impact of Conditions Such as Certain World Events or Natural
      Disasters.*





Changes
      in economic conditions could adversely affect our business. For example, in
      a
      difficult economic environment, customers may be unwilling or unable to invest
      in new diagnostic products, may elect to reduce the amount of their purchases
      or
      may perform less HIV testing. A weakening business climate could also cause
      longer sales cycles and slower growth, and could expose us to increased business
      or credit risk in dealing with customers adversely affected by economic
      conditions.




Terrorist
      attacks or regional conflicts and subsequent governmental responses to these
      attacks could cause further economic instability or lead to further acts of
      terrorism in the United States and elsewhere. These actions could adversely
      affect economic conditions outside the United States and reduce demand for
      our
      products internationally. Terrorist attacks could also cause regulatory
      agencies, such as the FDA or agencies that perform similar functions outside
      the
      United States, to focus their resources on vaccines or other products intended
      to address the threat of biological or chemical warfare. This diversion of
      resources could delay our ability to obtain regulatory approvals required to
      manufacture, market or sell our products in the United States and other
      countries.





Our
      business model and future revenue forecasts call for a significant expansion
      of
      sales in the People’s Republic of China as well as in Africa, India and
      elsewhere upon successful commercialization of our rapid test products. Should
      conditions beyond our control, such as disease outbreaks, natural disasters,
      war
      or political unrest, redirect attention from the worldwide HIV/AIDS epidemic
      or
      concern for other STD’s, if and when we are able to develop and introduce such
      diagnostic products, our customers’ ability to meet their contractual purchase
      obligations and/or our ability to supply product internationally for either
      evaluation or commercial use may prevent us from achieving the revenues we
      have
      projected. As a result, we may have to seek additional financing beyond that
      which we have projected, which may not be available on the timetable required
      or
      on acceptable terms that are not substantially dilutive to our stockholders,
      or
      we may have to curtail our operations, or both.





*As
      a
      Small Manufacturer of Medical Diagnostic Products, We Are Exposed to Product
      Liability and Recall Risks For Which Insurance Coverage is Expensive, Limited
      and Potentially Inadequate.*





We
      manufacture medical diagnostic products, which subjects us to risks of product
      liability claims or product recalls, particularly in the event of false positive
      or false negative reports. A product recall or a successful product liability
      claim or claims that exceed our insurance coverage could have a material adverse
      effect on us. We maintain a $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





**Item
      7. Financial Statements and Supplementary Data**




The
      Company’s Consolidated Financial Statements are included on pages F-1 through
      F-41 of this Annual Report on Form 10-KSB.





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




None.




**Item
      8A. Controls and Procedures**





(1)  *Disclosure
      Controls and Procedures* -- We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms, and that such information is accumulated and communicated to management,
      including our Chief Executive Officer (“CEO”) and Vice-President - Finance and
      Administration (“VP-Finance”), as appropriate, to allow timely decisions
      regarding required disclosure. Our quarterly evaluation of disclosure controls
      and procedures includes an evaluation of some components of our internal control
      over financial reporting. Internal control over financial reporting is also
      separately evaluated for purposes of providing management’s report which is set
      forth below in paragraph (2). In designing and evaluating the disclosure
      controls and procedures, management recognized that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving the desired control objectives, as they are designed to do, and
      management necessarily was required to apply its judgment in evaluating the
      cost-benefit relationship of possible controls and procedures.





In
      connection with the preparation of this Annual Report on Form 10-KSB, as of
      December 31, 2006, an evaluation was performed under the supervision and with
      the participation of our management, including our CEO and VP-Finance, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
      Act).
      This evaluation identified a deficiency in our internal control over financial
      reporting and is discussed below in Management’s Report on Internal Control over
      Financial Reporting. Based on this evaluation, our CEO and VP-Finance concluded
      that our disclosure controls and procedures were not effective as of December
      31, 2006.





(2)  *Management’s
      Report on Internal Control over Financial Reporting* - Under
      Section 13(b)(2) of the Exchange Act, we are required to access whether our
      internal accounting controls are sufficient to meet applicable requirements
      under federal securities laws. We have evaluated, with the participation of
      our
      CEO and VP-Finance, our internal control over financial reporting as of December
      31, 2006, as required under Section 13(b)(2) and the applicable provisions
      of
      Rules 13a-15 and 15d-15. In performing our evaluation of internal control over
      financial reporting, management used the criteria set forth by the Committee
      of
      Sponsoring Organization (“COSO”) of the Treadway Commission in *Internal
      Control - Integrated Framework* .
      Based
      on our evaluation of our internal controls over financial reporting, we
      concluded that, as of December 31, 2006, our internal control over financial
      reporting is effective.





We
      recorded a significant adjustment to our financial statements for the quarter
      and year ended December 31, 2005, related to inventory values and quantities
      reported by a contract manufacturer in Thailand. Based on our evaluation, we
      determined that this adjustment was caused by the following: the contract
      manufacturer’s inventory control system is not automated, its staff responsible
      for reporting inventory was inexperienced and we had insufficient and improperly
      trained resources for inventory control and reporting. We concluded that our
      lack of properly trained resources resulted in an ineffective review, monitoring
      and analysis of inventory reports from this contract manufacturer, which
      resulted in the adjustment to our 2005 financial statements. During 2006 we
      provided additional guidance to our contract manufacturer regarding inventory
      procedures and accounting and expanded our internal procedures for review of
      information provided by the contract manufacturer. As a result, we did not
      have
      any material adjustments to inventory values or quantities in 2006.




56


(3) *Remediation
      Steps*- In conjunction with the planning for making our Section 404(a)
      assertions, we are evaluating and implementing appropriate disclosure controls
      and procedures and internal controls over financial reporting, which include
      clearly defining roles and responsibilities in our accounting and finance
      organization and training both our staff and our contract manufacturer and
      joint
      venture partners to use our computerized accounting and control system.





(4)  *Change
      in Internal Control Over Financial Reporting* - There
      has been no change in our internal control over financial reporting during
      our
      last fiscal quarter that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial
      reporting.


57


**PART
      III**





**Item
      9. Executive Officers and Directors of the Registrant**





Following
      is a list of our Directors and Executive Officers as of March 29, 2007.





**Name**
            
            **Age**
            
            **Calypte
                Position; Principal Occupation**
            
            **Director
                Since**Roger
                I. Gale
            
            54
            
            Chairman,
                President and Chief Executive Officer; Calypte Biomedical Corporation
            
            11/04John
                J. DiPietro
            
            48
            
            Director;
                Chief Financial Officer, Chronix Biomedical, Inc.
            
            10/99Paul
                E. Freiman
            
            72
            
            Director;
                President and Chief Executive Officer, Neurobiological Technologies,
                Inc.
            
            12/97Julius
                R. Krevans, M.D.
            
            82
            
            Director;
                Retired Chancellor Emeritus, Director of International Medical Services,
                University of California, San Francisco
            
            3/95Maxim
                A. Soulimov
            
            34
            
            Director;
                Director of Legal Affairs, Global Corporate Ventures,
                Limited
            
            4/04Richard
                D. Brounstein
            
            56
            
            Executive
                Vice President, Calypte Biomedical Corporation
            
            N/AJerrold
                D. Dotson
            
            53
            
            Vice
                President, Finance and Administration, Calypte Biomedical
                Corporation
            
            N/A





**Roger
      I. Gale** was
      appointed to the Company’s Board of Directors and elected its Chairman in
      November 2004. On May 2, 2006, the Company’s Board of Directors appointed him as
      President and Chief Executive Officer, effective immediately. Mr. Gale had
      been
      serving in that capacity on an interim basis since October 2005. Mr. Gale served
      from October 2001 until May 2006 as Executive Chairman of the Board of Directors
      of Wavecrest Group Enterprises Limited, a United Kingdom-based communications
      service provider. He is also a founder and director of Starnorth Limited, a
      communications and media consultancy. From 1999 to 2001, he was Chairman and
      co-founder of End2End Wireless Limited, a UK wireless access services provider.
      He has previously held senior positions with the Asian Development Bank (ADB,
      Manila) and the International Finance Corporation (IFC), the private sector
      arm
      of the World Bank in Washington, D.C. Mr. Gale has also lectured in economics
      at
      the University of New England (Australia) and Lincoln College (New Zealand).
      He
      serves as a Director and a member of the Audit Committee of Mechel Steel Group,
      (NYSE: MTL). Mr. Gale holds a Master of Economics degree from the University
      of
      New England, Australia, and a Higher National Diploma from the Royal
      Agricultural College, Cirencester, Gloucestershire, England. Mr. Gale is one
      of
      two Directors appointed to the Company’s Board pursuant
      to an August 2003 agreement between the Company and Marr Technologies BV
      (“Marr”). Marr is currently the Company’s largest stockholder, holding
      approximately 30% of the Company’s outstanding common stock.




**John
      J. DiPietro** was
      elected to the Company’s Board of Directors in October 1999. Since September
      2002, he has served as the Chief Financial Officer of Chronix Biomedical Inc,
      a
      private biotechnology company. Mr. DiPietro was a member of the Board of Chronix
      Biomedical from February 2003 through July 2006. From September 1999 to
      September 2002 he was the Chief Financial Officer and Vice President-Finance
      and
      Administration of Tripath Technology, Inc., a semi-conductor manufacturing
      company. He served as Calypte’s Chief Operating Officer, Vice President of
      Finance, Chief Financial Officer and Secretary from December 1997 through
      September 1999. From October 1995 until December 1997, he served as Calypte’s
      Vice President of Finance, Chief Financial Officer and Secretary. He is a
      Certified Public Accountant and received his M.B.A. from the University of
      Chicago, Graduate School of Business and a B.S. in Accounting from Lehigh
      University.




58




**Paul
      E. 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. Mr. Freiman is currently serving on the board of Penwest
      Pharmaceuticals Inc. and Neurobiological Technologies, Inc. and several private
      biotechnology companies. He has been chairman of the Pharmaceutical
      Manufacturers Association of America (PhARMA) and has also chaired a number
      of
      key PhARMA committees. Mr. Freiman is also an advisor to Burrill & Co., a
      San Francisco merchant bank.




**Julius
      R. Krevans, M.D.** has
      served on the Company’s Board of Directors since March 1995. Dr. Krevans served
      as Chancellor Emeritus and Director of International Medical Care at University
      of California at San Francisco from 1993 until his retirement in June 2002.
      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.




**Maxim
      A. Soulimov** was
      appointed to the Company’s Board of Directors in April 2004. S ince
      November 2002, Mr. Soulimov has served as Director of Legal Affairs of Global
      Corporate Ventures Limited (“GCVL”) of London, a company providing consultancy
      services to a variety of private investors including Marr and its affiliates.
      From April 2000 through October 2002, Mr. Soulimov served as in-house legal
      counsel for Lukoil Europe Limited and Lukoil Europe Holdings Limited, private
      companies involved in the management of all Lukoil downstream companies outside
      the Russian Federation. From September 1997 to April 2000, Mr. Soulimov served
      as Trainee and then as Assistant Solicitor in the London firm of Norton Rose
      Solicitors. Mr. Soulimov holds a Degree in Modern Languages from Tver State
      University in Russia and an LLB Law degree from University of Hertfordshire
      in
      the United Kingdom. Mr. Soulimov is one of two Directors appointed to the
      Company’s Board pursuant
      to an August 2003 agreement between the Company and Marr.





**Richard
      D. Brounstein** served
      as
      Executive Vice President and Chief Financial Officer **** since **** joining
      Calypte in December 2001 through October 2005. Since October 2005, he has served
      as Executive Vice President. He served as a financial consultant and interim
      CFO
      from July 2001 until joining the Company in December 2001. He served as a member
      of the Board of Directors from December 2001 until May 2003, when he did not
      stand for re-election.  Prior to joining Calypte, Mr. Brounstein served as
      Chief Financial Officer for Certicom Corporation, a mobile and wireless software
      security company from 2000 to 2001.  From 1997 to 2000, Mr. Brounstein
      served as Chief Financial Officer for VidaMed, Inc., a growth-stage medical
      device company.  Mr. Brounstein is a CPA; he received both his MBA in
      Finance and his BA in Accounting from Michigan State University.





**Jerrold
      D. Dotson** has
      served as Vice
      President, Finance and Administration (principal financial and accounting
      officer) since
      February 1, 2007 .
      Mr.
      Dotson has served as the Company’s Corporate Secretary since 2001. Mr. Dotson
      also served as the Company’s Director of Finance from January 2000 through July
      2005 and was a financial consultant to the Company from August 2005 through
      January 2007. Prior to joining the Company, from 1988 through 1999, Mr. Dotson
      worked in various financial management positions, including Chief Financial
      Officer, for California & Hawaiian Sugar Company. Mr. Dotson is a CPA and
      received his BS degree in Business Administration with a concentration in
      accounting from Abilene Christian College.





**Board
      Committees**




Our
      Board
      of Directors directs the management of our business and affairs as provided
      by
      Delaware law and conducts its business through meetings of the full board of
      directors and three standing committees: the Audit Committee, the Compensation
      Committee and the Nominating Committee. From time to time when necessary, the
      Board may establish other committees under its direction to address specific
      issues.




The
      Audit
      Committee currently includes our three independent Directors, Mr. Freiman as
      Chairman, Mr. DiPietro and Dr. Krevans. As described in its Charter, the duties
      and responsibilities of the Audit Committee include recommending to the Board
      of
      Directors the appointment or termination of the engagement of our independent
      public accountants, otherwise overseeing the independent auditor relationship,
      reviewing our significant accounting policies and internal controls and
      reporting its recommendations and findings to the full Board of Directors.
      The
      Board has determined that Messrs. Freiman and DiPietro are Audit Committee
      financial experts as defined by Item 401(e) of Regulation S-B of the Securities
      Exchange Act of 1934 (the “Exchange Act”) and are independent within the meeting
      of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.




59




The
      Compensation Committee currently includes Dr. Krevans as Chairman and Mr.
      Freiman. As described in its Charter, the Compensation Committee reviews and
      approves the compensation of our Chief Executive Officer and Principal Financial
      and Accounting Officer, recommends to the Board the compensation of members
      of
      the Board and administers our stock option and other benefit plans.





The Nominating
      Committee currently includes Mr. Freiman as Chairman and Dr. Krevans. As
      described in its Charter, the Nominating Committee assists
      the Board in fulfilling its oversight responsibilities relating to the Company's
      corporate governance matters, including the determination of the independence
      status of current and prospective Board members, periodic evaluation of the
      Board of Directors, its committees and individual directors, and the
      identification and selection of director nominees.





**Compliance
      with Section 16(a) of the Exchange Act**




Section
      16(a) of the Exchange Act (“Section 16(a)”) requires the Company’s executive
      officers, directors, and persons who own more than 10% of the Company’s common
      stock (collectively, “Reporting Persons”) to file initial reports of ownership
      and reports on changes in ownership with the Securities and Exchange Commission
      (the “Commission”). Such Reporting Persons are also required by Commission rules
      to furnish the Company with copies of all Section 16(a) forms that they file.
      To
      the Company’s knowledge, based solely on the review of copies of such reports
      furnished to the Company and written representations that no other reports
      were
      required during the fiscal year ended December 31, 2005, all of the Company’s
      Reporting Persons complied with all applicable Section 16(a) filing
      requirements.





**Code
      of Business Conduct**





We
      have
      adopted a Code of Business Conduct that applies to all of our employees,
      including our Chief Executive Officer and Principal Financial and Accounting
      Officer, and to the members of our Board of Directors. The Code of Business
      Conduct is posted on our website at www.calypte.com .





**Compensation
      Committee Interlocks and Insider Participation**




During
      2006, the Compensation Committee consisted of Dr. Krevans and Mr. Freiman,
      each
      of whom is a non-employee director. Neither member of the Compensation Committee
      has a relationship that would constitute an interlocking relationship with
      executive officers or directors of another entity.


60


**Item
      10. Executive Compensation**





**EXECUTIVE
      COMPENSATION**




The
      following table sets forth compensation we awarded or paid to persons who served
      as our Chief Executive Officer and as our other most highly compensated
      executive officers in 2006 (collectively, the “Named Executive Officers”) for
      the years ended December 31, 2006 and 2005.





**SUMMARY
      COMPENSATION TABLE**


Name
                  and Principal Position
              
              Year
              
              Salary
                  ($)
              
              Bonus
                  ($)
              
              Stock
                  Awards ($)
              
              Option
                  Awards ($)
              
              Non-Equity
                  Incentive Plan Compensation ($)
              
              Non-Qualified
                  Deferred Compensation Earnings ($)
              
              All
                  Other Compensation
              
              Total
                  ($)(a)
              
              (b)
              
              (c
                  )
              
              (d)
              
              (e)
              
              (f)(1)
              
              (g)
              
              (h)
              
              (i)(2)
              
              (j)Roger
                  I. Gale, Chief Executive Officer, President and Chairman of the
                  Board
                  (3)
              
              
              2006
              
              $
              264,167
              
              
              (4)
              
              $
              -
              
              $
              265,000
              
              
              (5)
              
              $
              -
              
              
              
              
              $
              -
              
              $
              -
              
              $
              37,537
              
              
              (6)
              
              $
              566,7042005
              
              $
              -
              
              
              
              
              $
              -
              
              $
              45,000
              
              
              (5)
              
              $
              359,185
              
              
              (7)
              
              $
              -
              
              $
              -
              
              $
              -
              
              
              
              
              $
              404,185Richard
                  D. Brounstein, Executive Vice President, former Chief Financial
                  Officer
                  through September 2005 (8)
              
              
              2006
              
              $
              204,800
              
              
              
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              $
              -
              
              $
              -
              
              
              
              
              $
              204,8002005
              
              $
              204,800
              
              
              
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              $
              -
              
              $
              200,000
              
              
              (9)
              
              $
              404,800Theodore
                  R. Gwin, Chief Financial Officer (10)
              
              
              2006
              
              $
              200,000
              
              
              
              
              $
              -
              
              $
              -
              
              
              
              
              $
              -
              
              
              
              
              $
              -
              
              $
              -
              
              $
              -
              
              
              
              
              $
              200,0002005
              
              $
              116,154
              
              
              
              
              $
              -
              
              $
              -
              
              
              
              
              $
              101,900
              
              
              (11)
              
              $
              -
              
              $
              -
              
              $
              -
              
              
              
              
              $
              218,054







(1)
            
            The
                assumptions used to derive the fair value of the stock option awards
                noted
                in this column are discussed in Footnote 2 to the Consolidated Financial
                Statements included in Item 7 of this Form 10-KSB.(2)
            
            Does
                not include the value of perquisites and other personal benefits
                that do
                not aggregate at least $10,000 in each fiscal year for each Named
                Executive Officer.(3)
            
            Mr.
                Gale has served as Chairman of the Board since his appointment to
                the
                Board in November 2004. Effective as of October 3, 2005, Mr. Gale
                has
                served as interim Chief Executive Officer and, as of September 26,
                2006,
                as President and Chief Executive Officer.(4)
            
            Salary
                2006: This amount represents $264,167 due to Mr. Gale, $105,000 of
                which
                has been paid to Mr. Gale, and $159,167 which has been accrued, but
                not
                paid.(5)
            
            2006:
                This represents the dollar amount recognized for financial statement
                reporting purposes with respect to the 2005 and 2006 fiscal years
                of
                311,736 shares of our of common stock issued in lieu of $60,000 of
                cash
                compensation, $45,000 of which had been accrued in 2005 and $15,000
                of
                which had been accrued in 2006, in accordance with SFAS 123R. This
                also
                represents $250,000 recognized for financial statement reporting
                purposes
                with respect to the 2006 fiscal year of 1,000,000 shares of our common
                stock issued to Mr. Gale.
              
              2005:
                This represents the dollar amount recognized for financial statement
                reporting purposes with respect to the 2005 fiscal year of shares
                of our
                common stock which were issued in lieu of $45,000 of cash compensation
                which had been accrued in the 2005 fiscal year.(6)
            
            2006:
                We paid, on Mr. Gale’s behalf, $24,310 for relocation expenses incurred in
                his move from Great Britain to Lake Oswego, Oregon. This amount also
                represents $10,442 accrued, but not paid, for Mr. Gale’s housing allowance
                and $2,785 accrued, but not paid, for Mr. Gale’s automobile allowance.(7)
            
            2005:
                This represents the fair value of a fully-vested option to purchase
                200,000 shares at an exercise price of $0.31 per share, the market
                price
                of the Company’s common stock on the January 6, 2005 grant date, which was
                granted to Mr. Gale for his service as a member of the Board pursuant
                to
                the Company’s 1995 Director Option Plan. This also represents the fair
                value of a fully vested option to purchase 850,000 shares at an exercise
                price of $0.35 per share, the market price of the Company’s common stock
                on the February 9, 2005 date of grant.




61




(8)
            
            Mr.
                Brounstein served as Executive Vice President and Chief Financial
                Officer
                since joining the Company in December 2001 through September 2005.
                He has
                served as Executive Vice President since October 2005.(9)
            
            This
                represents the dollar amount recognized for financial statement reporting
                purposes with respect to the 2005 fiscal year that became due to
                Mr.
                Brounstein upon the constructive termination of his employment agreement
                on June 30, 2005. As of this date, this amount has been accrued but
                not
                paid.(10)
            
            Mr.
                Gwin served as Chief Financial Officer from October 2005 until he
                left the
                Company in January 2007. He joined the Company as Controller in April
                2005.(11)
            
            This
                amount represents the fair value of an option to purchase 200,000
                shares
                at an exercise price of $0.21 per share, the market price of our
                common
                stock on the April 26, 2005 grant date and an option to purchase
                300,000
                shares at an exercise price of $0.20 per share, the market price
                of our
                common stock on the October 6, 2005 grant date. Each option was granted
                under the terms of our 2004 Incentive Plan. Approximately one-half
                of the
                April 2005 option has vested. The October 2005 options are completely
                vested.





**Employment
      Agreements**




**Roger
      Gale**





Consulting
      Contract .
      On
      February 9, 2005, we entered into a consulting contract with Mr. Gale pursuant
      to which Mr. Gale provided certain strategic and advisory services to us through
      July 31, 2005 (the “Consulting Contract”). Pursuant to the terms of the
      Consulting Contract, we granted Mr. Gale immediately exercisable options to
      purchase 850,000 shares of our common stock at an exercise price of $0.35 per
      share, which was the market price of our common stock on the date the option
      was
      granted. The options have a term of ten years and were granted pursuant to
      the
      2004 Incentive Plan.





Interim
      CEO Agreement .
      Effective as of October 3, 2005, following the resignation of our former
      president and chief executive officer, we entered into an agreement with Mr.
      Gale (the “Interim CEO Agreement”) pursuant to which Mr. Gale was engaged as
      interim Chief Executive Officer. Under the terms of the Interim CEO Agreement,
      Mr. Gale was to receive cash compensation of $15,000 per month, beginning
      October 3, 2005 and was awarded 1,000,000 shares of our common stock pursuant
      to
      the 2004 Incentive Plan. As of June 1, 2006, Mr. Gale’s cash compensation was
      increased to $350,000 per annum.





Employment
      Agreement .
      Effective as of September 26, 2006, we entered into an employment agreement
      with
      Mr. Gale (the “Employment Agreement”), pursuant to which Mr. Gale was employed
      as President and Chief Executive Officer for a two year term. The Employment
      Agreement will automatically renew for one-year terms, unless otherwise
      terminated. The Employment Agreement provides for an annual base salary of
      $350,000, housing and automobile allowances of $3,000 and $800 per month,
      respectively, personal travel allowance of $15,000 per year and certain other
      cash allowances and reimbursements relating to relocation, repatriation and
      U.S.
      tax advise, as described in the Employment Agreement; an award of 2,000,000
      shares of our common stock and an award of 2,500,000 shares of restricted stock
      units which will vest 50% on June 30, 2007 and 50% on January 2, 2008. Beginning
      in the calendar year 2007, Mr. Gale is entitled to receive an annual
      performance-based bonus of up to 50% of his annual base salary, payable in
      cash,
      equity or a combination of the two. All entitlements under the agreement cease
      upon termination for “cause” by the Company, termination without cause by Mr.
      Gale and Mr. Gale’s death or disability. Termination for “cause” is defined as
      personal dishonesty, incompetence, failure to adequately perform duties, willful
      misconduct, breach of fiduciary duty involving personal profit, willful
      violation of any law, rule or regulation, conviction of a felony or any material
      breach of the agreement. If the agreement is terminated for any other reason,
      including, without limitation, termination without cause by the Company,
      termination due to change of control of the Company and constructive
      termination, Mr. Gale will be entitled to receive an amount equal to his base
      salary for a 12-month period, payable in 12 equal monthly installments.




62




**Richard
      Brounstein**





Employment
      Agreement. In January 2003, we entered into a twelve month employment agreement
      with Mr. Brounstein, with automatic renewal options, that included a base salary
      of $200,000 and fully vested options to purchase 108,333 shares of our common
      stock at $0.32 per share on May 29, 2003. All entitlements under the agreement
      cease upon termination for “cause” by the Company or termination without cause
      by Mr. Brounstein or Mr. Brounstein’s disability for a period exceeding 3 months
      in aggregate. Should the agreement terminate upon Mr. Brounsteins’s death, we
      must pay his estate an amount equal to his base salary for a 3-month period.
      Termination for “cause” is defined as personal dishonesty, incompetence, failure
      to adequately perform duties, willful misconduct, excessive absenteeism, breach
      of fiduciary duty involving personal profit, willful violation of any law,
      rule
      or regulation, conviction of a felony or any material breach of the agreement.
      If the agreement is terminated for any other reason, including, without
      limitation, termination without cause by the Company, termination due to change
      of control of the Company and constructive termination, Mr. Brounstein is
      entitled to receive an amount equal to his base salary for a 12-month period
      and
      continuation of his medical insurance coverage for a 12-month period. In
      conjunction with the August 2005 relocation of our headquarters to Lake Oswego,
      Oregon, Mr. Brounstein’s employment was constructively terminated.




**Theodore
      Gwin**





Mr.
      Gwin
      did not have an employment agreement with us.








**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





The
      following table sets forth information concerning stock options granted to
      the
      Named Executive Officers that are outstanding at December 31, 2006.




Name
              
              Number
                  of Securities Underlying Unexercised Options (#)
                  Exercisable
              
              Number
                  of Securities Underlying Unexercised Options (#) Unexercisable
              
              Option
                Exercise Price ($)
              
              Option
                  Expiration Date
              
              Market
                  Value of Shares or Units of Stock That Have Not Yet Vested ($)(a)
              
              (b)
              
              (c
                  )
              
              (e)
              
              (f)
              
              (h)(1)Roger
                  I Gale
              
              
              200,000
              
              
              -
              
              $
              0.31
              
              
              1/6/2015
              
              $
              -850,000
              
              
              -
              
              $
              0.35
              
              
              2/9/2015
              
              $
              -Richard
                  D. Brounstein
              
              
              24,038
              
              
              -
              
              $
              0.01
              
              
              5/29/2013
              
              $
              -83,333
              
              
              -
              
              $
              0.32
              
              
              5/29/2013
              
              $
              -25,000
              
              
              -
              
              $
              0.32
              
              
              5/29/2013
              
              $
              -625,000
              
              
              -
              
              $
              0.32
              
              
              5/29/2013
              
              $
              -1,500,000
              
              
              -
              
              $
              0.585
              
              
              6/22/2014
              
              $
              -Theodore
                  R. Gwin
              
              
              111,112
              (2)
              
              88,888
              (2)
              $
              0.21
              
              
              4/26/2015
              
              $
              6,400300,000
              
              
              -
              
              $
              0.20
              
              
              10/6/2015
              
              $
              -







(1) 
       based on the market price of our common stock of $0.072 per share on
      December 29, 2006


(2)  
represents
      an option granted to Mr.
      Gwin on April 26, 2005 to purchase 200,000 shares of the Company's common stock.
      The option vests ratably over a 36 month vesting period, with 33,333 shares
      cliff vested on the sixth-month anniversary of the date of
      grant.


63




**DIRECTOR
      COMPENSATION**




We
      have
      no compensation arrangements with our directors. Directors are reimbursed for
      out-of-pocket travel expenses associated with their attendance at board and
      committee meetings.




In
      connection with their service as members of our Board of Directors, at December
      31, 2006, Mr. Gale and Mr. Soulimov each had options outstanding to purchase
      200,000 shares of our common stock and Mr. DiPietro, Mr. Freiman and Dr. Krevans
      had options outstanding to purchase 305,000, 309,901 and 307,934 shares,
      respectively. All of the options are fully exercisable, with exercise prices
      ranging from $0.32 to $170.60 per share.


64





**Item
      11. Security Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters**





Except
      as
      set forth in the footnotes to this table, the following table sets forth
      information known to the Company with respect to the beneficial ownership of
      its
      common stock as of March 29, 2007 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)**Marr
                Technologies BV (3)Strawinskylaan
                14311077XX,
                AmsterdamThe
                Netherlands
            
            
            84,787,722
            
            
            23.54David
                Khidasheli (4)Sheikh
                Zayed Road, Fairmont BuildingApartment
                #3104Dubai,
                United Arab Emirates
            
            
            75,000,000
            
            
            19.44Mohamed
                Yousif Ahmed Saleh Sulaiman (5)P.O.
                Box 19533Sharjah,
                United Arab Emirates
            
            
            70,000,000
            
            
            18.29Mohamed
                Ahmed (6)P.O.
                Box 33280Dubai,
                United Arab Emirates
            
            
            55,000,000
            
            
            14.72Ahmed
                Abdalla Deemas Alsuwaidi (7)P.O.
                Box 681Sharjah,
                United Arab Emirates
            
            
            50,000,000
            
            
            13.49SF
                Capital Partners Ltd. (8)3600
                South Lake DriveSt.
                Francis, WI 53235
            
            
            27,754,968
            
            
            7.55Roger
                I. Gale (9)
            
            
            25,206,411
            
            
            7.12Richard
                D. Brounstein(10)
            
            
            11,872,756
            
            
            3.40John
                J. DiPietro (11)
            
            
            305,243
            
            
            *Jerrold
                D. Dotson (12)
            
            
            2,132,010
            
            
            *Paul
                E. Freiman (13)
            
            
            309,901
            
            
            *Theodore
                R. Gwin (14)
            
            
            500,000
            
            
            *Julius
                R. Krevans, M.D.(15)
            
            
            308,401
            
            
            *Maxim
                A. Soulimov (16)
            
            
            200,000
            
            
            *All
                current directors and executive officers as a group (7
                persons)
            
            
            40,334,721
            
            
            11.04





*
            
            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, Five Centerpointe Drive, Suite
              400,
              Lake Oswego, OR 97035.(2)
            
            Based
                on340,733,645shares
                outstanding as of March 29, 2007.(3)
            
            Based
                on holdings reported in Amendment No. 5 to Schedule 13D dated October
                10,
                2006 filed with the Securities and Exchange Commission plus 10,529,182
                shares subject to the Secured 8% Convertible Notes issued on April
                4, 2005
                and seven related Notes issued in payment of interest through January
                4,
                2007, all of which are immediately convertible. Marr Technologies
                BV is
                not subject to any percentage ownership limitations. Marat Safin
                has
                voting and investment control over shares held by Marr Technologies
                BV.




65




(4)
            
            Includes
                45,000,000 shares subject to warrants exercisable within 60 days.
                Mr.
                Khidasheli is not subject to any percentage ownership
                limitations.(5)
            
            Includes
                42,000,000 shares subject to warrants exercisable within 60 days.
                Mr.
                Sulaiman is not subject to any percentage ownership
                limitations.(6)
            
            Includes
                33,000,000 shares subject to warrants exercisable within 60 days.
                Mr.
                Ahmed is not subject to any percentage ownership
                limitations.(7)
            
            Includes
                30,000,000 shares subject to warrants exercisable within 60 days.
                Mr.
                Alsuwaidi is not subject to any percentage ownership
                limitations.(8)
            
            Based
                on holdings reported in Amendment No. 4 to Schedule 13G dated December
                31,
                2006 filed with the Securities and Exchange Commission on February
                14,
                2007 plus shares subject to Secured 8% Convertible Notes issued in
                payment
                of interest through January 4, 2007 that are immediately convertible.
                The
                Secured 8% Convertible Notes which are immediately convertible and
                the
                immediately exercisable warrants contain conversion caps that preclude
                SF
                Capital Partners Ltd. from utilizing its exercise rights within 60
                days to
                the extent that it would beneficially own (determined in accordance
                with
                Section 13(d) of the Securities Act of 1934) in excess of 9.999%
                of the
                Company’s common stock, giving effect to such exercise. Those conversion
                caps are currently not applicable. Michael A. Roth and Brian J. Stark
                possess voting and dispositive power over all of the shares owned
                by SF
                Capital Partners Ltd.(9)
            
            Includes
                1,050,000 shares subject to options exercisable within 60 days and
                12,407,805 shares subject to warrants exercisable within 60 days
                . Marr
                Technologies BV (“Marr”), the beneficial owner of 84,787,722 shares of
                Calypte Common stock (the “Marr Holdings”), was granted the right to
                nominate two (2) mutually-agreeable candidates for appointment to
                the
                Calypte Board of Directors pursuant to an August 2003 agreement.
                Mr. Gale
                was nominated by Marr and subsequently appointed as a Director on
                November
                15, 2004 upon the recommendation of the Nominating Committee and
                the
                approval of the Calypte Board of Directors. He was re-elected as
                a
                director at the Annual Meeting of Stockholders on June 30, 2005 and
                December 15, 2006. Mr. Gale disclaims any direct or indirect beneficial
                ownership of Marr Holdings and does not exercise any control nor
                does he
                take part in any investment decisions undertaken by Marr and does
                not have
                a direct or indirect pecuniary interest in Marr Holdings.(10)
            
            Includes
                2,257,371 shares subject to options exercisable within 60 days and
                5,769,231 shares subject to warrants exercisable within 60 days..(11)
            
            Includes
                305,000 shares subject to options exercisable within 60 days.(12)
            
            Includes
                2,111,266 shares subject to options exercisable within 60
                days.(13)
            
            Includes
                309,901 shares subject to options exercisable within 60 days.(14)
            
            Includes
                500,000 shares subject to options exercisable within 60
                days.(15)
            
            Includes
                307,934 shares subject to options exercisable within 60 days.(16)
            
            Includes
                200,000 shares subject to options exercisable within 60 days.Marr
                Technologies BV (“Marr”), the beneficial owner of 84,787,722 shares of
                Calypte Common stock (the “Marr Holdings”) was granted the right to
                nominate two (2) mutually agreeable candidates for appointment to
                the
                Calypte Board of Directors pursuant to an August 2003 agreement.
                Mr.
                Soulimov was nominated by Marr and subsequently appointed as a director
                on
                April 2, 2004 upon the recommendation of the Nominating Committee
                and the
                approval of the Calypte Board of Directors. He was re-elected as
                a
                Director at the annual Meetings of Stockholders held on June 22,
                2004, on
                June 30, 2005 and on December 15, 2006. Mr. Soulimov disclaims any
                direct
                or indirect beneficial ownership of Marr Holdings and does not exercise
                any control nor does he take part in any investment decisions undertaken
                by Marr and does not have a direct or indirect pecuniary interest
                in Marr
                Holdings.




66




**Item
      12. Certain Relationships and Related Transactions**





We
      entered into a Credit Facility Agreement with Marr in April 2005 that has
      subsequently been amended. At March 29, 2007, we had an aggregate of $4,450,000
      of promissory notes outstanding to Marr under the amended 2005 Credit Facility.
      Each promissory note under the 2005 Credit Facility was originally payable
      in
      full on April 3, 2007. On March 28, 2007, we entered into an agreement with
      Marr
      to extend the due dates of the promissory notes issued prior to
      February 23, 2007 from April 3, 2007 until April 3, 2009 and in consideration
      for this extension, we lowered the exercise price of the warrants to purchase
      our common stock held by Marr.




In
      December 2005, we entered into an Equity Transfer Agreement with Marr Asia,
      an
      affiliate of Marr. Under the terms of the Equity Transfer Agreement, we acquired
      from Marr Asia a 51% equity interest in Beijing Marr. The Equity Transfer
      Agreement became effective on January 18, 2006, the date it was approved by
      the
      Huairou County Commerce Bureau. Pursuant to the Equity Transfer Agreement,
      we
      will contribute $1,836,000 to the registered capital of Beijing Marr and Marr
      Asia will contribute USD $1,764,000. At March 29, 2007, we have contributed
      $1,312,800 and Marr Asia has contributed $1,254,000 of our respective capital
      contributions. The business purpose of Beijing Marr is to pursue the
      manufacture, distribution, marketing and sale of our rapid test products in
      China.




On
      November 10 and November 30, 2006, we issued 8% promissory notes to Roger I.
      Gale, our Chief Executive Officer, in the face amount of $6,300 and $40,000,
      respectively, for loans Mr. Gale made to us. The notes are due six months from
      their date of issuance, on May 10, 2007 and May 31, 2007, respectively. Interest
      is payable in cash at maturity. On February 6, 2007, we issued an additional
      8%
      promissory note in the face amount of $50,000 to Mr. Gale for an additional
      loan
      made to us by Mr. Gale. This note is payable in full on March 31, 2007. On
      November 15, 2006, we entered into a letter agreement with Mr. Gale under which
      he advanced $100,000 to us as an investment in a prospective equity financing
      that we had not completed at December 31, 2006. On March 28, 2007, when the
      price of our common stock was $0.063 per share, we recognized Mr. Gale’s
      $100,000 advance as participation in the March 2007 PIPE on the same terms
      and
      conditions granted to the primary PIPE investors. Additionally, on that
      date Mr. Gale cancelled our obligation to repay our November 30, 2006 and
      February 6, 2007 promissory notes, aggregating $90,000, and other unpaid amounts
      due him under his Interim CEO Agreement and his Employment Agreement,
      aggregating $238,275, in return for his participation in those amounts in the
      March 2007 PIPE on the same terms and conditions granted to the
      primary PIPE investors. (See Notes (3) and (5) to the Summary Compensation
      Table in Part II, Item 10 of this Form 10-KSB.) As a result, we issued 8,271,870
      shares of our common stock to Mr. Gale. We used the proceeds of the 8%
      promissory notes issued to Mr. Gale and the funds received in November 2006
      from
      Mr. Gale for general corporate purposes.




67




On
      March
      28, 2007, when the price of our common stock was $0.063 per share, Mr.
      Brounstein cancelled our obligation to pay to him $200,000 owed to him as a
      result of his constructive termination under the terms of his Employment
      Agreement in return for his participation in that amount in the March 2007
      PIPE
      on the same terms and conditions granted to the primary PIPE investors.
      (See Employment Agreements in Part II, Item 10 of this Form 10-KSB.) We issued
      3,846,154 shares of our common stock to Mr. Brounstein.


68





**Item
      13. Exhibits and Reports on Form 8-K**




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




1.
            The
                Company’s Consolidated Financial Statements are included on pages F-1
                through F-41of this Annual Report on Form 10-KSB.




2.
            Exhibits


2.1
              
              Asset
                  Purchase Agreement, dated as of November 18, 1998, between Calypte
                  and
                  Cambridge; incorporated by reference from an exhibit filed with
                  the
                  Company’s Report on Form 8-K dated December 16, 1998.3.1
              
              Bylaws
                  of the Registrant, as amended on March 7, 2005.3.2
              
              Restated
                  Certificate of Incorporation of Calypte Biomedical Corporation,
                  a Delaware
                  corporation, filed July 31, 1996; incorporated by reference from
                  an
                  exhibit filed with the Company’s Report on Form 10-K dated March 28,
                  1997.3.3
              
              Certificate
                  of Amendment of the Amended and Restated Certificate of Incorporation
                  of
                  Calypte Biomedical Corporation effective as of February 14, 2003
                  incorporated by reference from an exhibit filed with the Company’s Report
                  on Form 10-K dated March 26, 2003.3.4
              
              Certificate
                  of Amendment of the Amended and Restated Certificate of Incorporation
                  of
                  Calypte Biomedical Corporation, effective as of May 27,
                  2003.3.5
              
              Certificate
                  of Correction of Calypte Biomedical Corporation, effective as of
                  May 28,
                  2003.4.1
              
              Rights
                  Agreement between the Registrant and Chase Mellon Shareholders
                  L.L.C. as
                  Rights Agents dated December 15, 1998; incorporated by reference
                  from an
                  exhibit filed with the Company’s Report on Form 8-K dated December 16,
                  1998.10.1
              
              Form
                  of Indemnification Agreement between the Company and each of its
                  directors
                  and officers, as amended January 19, 2004.10.2
              
              1991
                  Incentive Stock Plan; incorporated by reference from exhibits filed
                  with
                  the Company’s Registration Statement on Form S-1 (File No. 333-04105)
                  filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996
                  and July
                  26, 1996.10.3
              
              1995
                  Director Option Plan, as amended effective May 20, 2003; incorporated
                  by
                  reference from an exhibit filed with the Company’s Registration Statement
                  on Form S-8 (File No. 333-106389) dated June 23, 2003.10.4
              
              1995
                  Employee Stock Purchase Plan, amended as of May 20, 2003; incorporated
                  by
                  reference from an exhibit filed with the Company’s Registration Statement
                  on Form S-8 (File No. 333-106389) dated June 23, 2003.10.15
                  ^
              
              License
                  Agreement between the Registrant and New York University, dated
                  as of
                  August 13, 1993; incorporated by reference from exhibits filed
                  with the
                  Company’s Registration Statement on Form S-1 (File No. 333-04105) filed
                  on
                  May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
                  26,
                  1996.10.16
              
              First
                  Amendment to License Agreement between the Registrant and New York
                  University, dated as of January 11, 1995; incorporated by reference
                  from
                  exhibits filed with the Company’s Registration Statement on Form S-1 (File
                  No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996,
                  July
                  15, 1996 and July 26, 1996.
  69
  10.17
              
              Second
                  Amendment to License Agreement between the Registrant and New York
                  University, dated as of October 15, 1995; incorporated by reference
                  from
                  exhibits filed with the Company’s Registration Statement on Form S-1 (File
                  No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996,
                  July
                  15, 1996 and July 26, 1996.10.18
                  ^
              
              Third
                  Amendment to License Agreement between the Registrant and New York
                  University, dated as of January 31, 1996; incorporated by reference
                  from
                  exhibits filed with the Company’s Registration Statement on Form S-1 (File
                  No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996,
                  July
                  15, 1996 and July 26, 1996.10.21
                  ^
              
              Sublicense
                  Agreement between the Registrant and Cambridge Biotech Corporation,
                  dated
                  as of March 31, 1992; incorporated by reference from exhibits filed
                  with
                  the Company’s Registration Statement on Form S-1 (File No. 333-04105)
                  filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996
                  and July
                  26, 1996.10.22
                  ^
              
              Master
                  Agreement between the Registrant and Cambridge Biotech Corporation,
                  dated
                  as of April 12, 1996; incorporated by reference from exhibits filed
                  with the Company’s Registration Statement on Form S-1 (File No. 333-04105)
                  filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996
                  and July
                  26, 1996.10.23
                  ^
              
              Sub-License
                  Agreement between the Registrant and Cambridge Biotech Corporation,
                  dated
                  as of April 12, 1996; incorporated by reference from exhibits filed
                  with
                  the Company’s Registration Statement on Form S-1 (File No. 333-04105)
                  filed on May 20, 1996, as amended to June 25, 1996, July 15, 1996
                  and July
                  26, 1996.10.24
                  ^
              
              Agreement
                  between the Registrant and Repligen Corporation, dated as of March
                  8,
                  1993; incorporated by reference from exhibits filed with the Company’s
                  Registration Statement on Form S-1 (File No. 333-04105) filed on
                  May 20,
                  1996, as amended to June 25, 1996, July 15, 1996 and July 26,
                  1996.10.25
                  ^
              
              Non-Exclusive
                  License Agreement between the Registrant and The Texas A&M University
                  System, dated as of September 12, 1993; incorporated by reference
                  from
                  exhibits filed with the Company’s Registration Statement on Form S-1 (File
                  No. 333-04105) filed on May 20, 1996, as amended to June 25, 1996,
                  July
                  15, 1996 and July 26, 1996.10.51
              
              Non-Exclusive
                  Patent and License Agreement between the Registrant and Public
                  Health
                  Service, dated June 30, 1999; incorporated by reference from an
                  exhibit
                  filed with the Company’s Report on Form 10-Q dated November 15,
                  1999.10.55
              
              Master
                  Lease Agreement between Aquila Biopharmaceuticals, Inc., Landlord,
                  and
                  Biomerieux Vitek, Inc., Tenant, dated as of October 22, 1996; incorporated
                  by reference from an exhibit filed with the Company’s Report on Form 10-K
                  dated March 30, 2000.10.56
              
              First
                  Amendment to Lease between Aquila Biopharmaceuticals, Inc. Landlord,
                  and
                  Biomerieux Vitek, Inc., Tenant, dated October 2, 1997; incorporated
                  by
                  reference from an exhibit filed with the Company’s Report on Form 10-K
                  dated March 30, 2000.10.57
              
              Sublease
                  Agreement between Registrant and Cambridge Biotech Corporation,
                  assignee
                  of Biomerieux, Inc. dated as of December 17, 1998; incorporated
                  by
                  reference from an exhibit filed with the Company’s Report on Form 10-K
                  dated March 30, 2000.10.58
              
              Sublease
                  Agreement between Registrant and Cambridge Biotech Corporation,
                  sub-lessee
                  of DynCorp, dated as of December 17, 1998; incorporated by reference
                  from
                  an exhibit filed with the Company’s Report on Form 10-K dated
                  March 30, 2000.10.73
                  ^
              
              Fourth
                  Amendment to the License Agreement between the Registrant and New
                  York
                  University, dated as of June 1, 2000; incorporated by reference
                  from an
                  exhibit filed with the Company’s Report on Form 10-Q dated August 10,
                  2000.10.74
              
              2000
                  Equity Incentive Plan, amended as of May 20, 2003; incorporated
                  by
                  reference from an exhibit filed with the Company’s Registration Statement
                  on Form S-8 (File No. 333-106389) dated June 23,
                  2003.
  70
  10.113
              
              Employment
                  Agreement between the Registrant and Anthony J. Cataldo dated May
                  10,
                  2002; incorporated
                  by reference from an exhibit filed with the Company’s Report on Form 10-Q
                  dated August 14, 2002.10.114
              
              Amendment
                  to Non-Exclusive Patent and License Agreement between Registrant
                  and
                  Public Health Service, dated April 5, 2002;incorporated by reference from an exhibit filed with the Company’s Report
                  on Form 10-Q dated August 14, 2002.10.116
              
              Term
                  Sheet for Mercator Momentum Fund LP and Form of Registration Rights
                  Agreement;incorporated
                  by reference from an exhibit filed with the Company’s Report on Form 8-K
                  dated November 12, 2002.10.121
              
              Distribution
                  Agreement between the Registrant and Zhong Yang Pute Co. dated
                  as of
                  October 10, 2002; incorporated
                  by reference from an exhibit filed with the Company’s Report on Form
                  10-Q/A (No.3) dated February 4, 2003.10.125
              
              Employment
                  Agreement between Registrant and Richard D. Brounstein dated as
                  of January
                  1, 2003; incorporated by reference from an exhibit filed with the
                  Company’s Annual Report on Form 10-K dated March 26,
                  2003.10.128
              
              2003
                  Non-Qualified Stock Option Plan; incorporated by reference from
                  an exhibit
                  filed with the Company’s Registration Statement on Form S-8 (File No.
                  333-106387) dated June 23, 2003.10.129
              
              Consulting
                  Agreement between Registrant and Junebug Enterprises effective
                  as of April
                  23, 2003; incorporated by reference from an exhibit filed with
                  the
                  Company’s Report on Form 10-QSB dated August 14, 2003.10.132
              
              Subscription
                  Agreement between Registrant and Marr Technologies B.V. dated as
                  of August
                  1, 2003 incorporated by reference from an exhibit filed with the
                  Company’s
                  Report on Form 10-QSB dated August 14, 2003.10.133
              
              Subscription
                  Agreement between the Company and Marr Technologies B.V. for 20,000,000
                  shares of Registrant’s Common Stock dated August 28, 2003; incorporated by
                  reference from an exhibit filed with the Company’s Report on Form 8-K
                  dated September 12, 2003.10.134
              
              Agreement
                  for Commitment to Purchase Aggregate of $10,000,000 of 5% Promissory
                  Notes
                  between the Company and Marr Technologies B.V. dated November 13,
                  2003;
                  incorporated by reference from an exhibit filed with the Company’s Report
                  on Form 10-QSB dated November 14, 2003.10.137
              
              Lease
                  Agreement between the Company and ARE-1500 East Gude LLC dated
                  as of March
                  1, 2004; incorporated by reference from an exhibit filed with the
                  Company’s Annual Report on Form 10-KSB dated March 29,
                  2004.10.141
              
              Form
                  of Securities Purchase Agreement between the Company and the investors
                  in
                  the May 2004 PIPE financing incorporated by reference from an exhibit
                  filed with the Company’s Report on Form 8-K on June 1,
                  2004.10.142
              
              Form
                  of Registration Rights Agreement between the Company and the investors
                  in
                  the May 2004 PIPE financing incorporated by reference from an exhibit
                  filed with the Company’s Report on Form 8-K on June 1,
                  2004.10.143
              
              Form
                  of Warrant between the Company and the investors in the May 2004
                  PIPE
                  financing incorporated by reference from an exhibit filed with
                  the
                  Company’s Report on Form 8-K on June 1, 2004.10.146
              
              2004
                  Incentive Plan, incorporated by reference from an exhibit filed
                  with the
                  Company’s Registration Statement on Form S-8 on June 25,
                  2004.10.147
              
              Form
                  of Securities Purchase Agreement between the Company and the investors
                  in
                  the July 2004 PIPE financing incorporated by reference from an
                  exhibit
                  filed with the Company’s Report on Form 8-K on July 13,
                  2004.
  71
  10.148
              
              Form
                  of Registration Rights Agreement between the Company and the investors
                  in
                  the July 2004 PIPE financing incorporated by reference from an
                  exhibit
                  filed with the Company’s Report on Form 8-K on July 13,
                  2004.10.149
              
              Form
                  of Warrant between the Company and the investors in the July 2004
                  PIPE
                  financing incorporated by reference from an exhibit filed with
                  the
                  Company’s Report on Form 8-K on July 13, 2004.10.150
              
              Sublicense
                  Agreement between the Company and Abbott Laboratories dated June
                  28, 2004
                  incorporated by reference from an exhibit filed with the Company’s
                  Quarterly Report on Form 10-QSB/A (No. 1) dated December 20, 2004.10.151
              
              License
                  Agreement and Technology Transfer Agreement between the Company
                  and Ani
                  Biotech Oy dated as of September 30, 2004 incorporated by referenced
                  from
                  an exhibit filed with the Company’s Report on Form 8-K/A (No.1) on
                  December 20, 2004.10.152
              
              License
                  Agreement between the Company and Bio-Rad Laboratories, Inc. and
                  Bio-Rad
                  Pasteur dated September 28, 2004, incorporated by reference from
                  an
                  exhibit filed with the Company’s Report on Form 8-K/A (No.1) on December
                  20, 2004.10.153
              
              Consulting
                  Contract between the Company and Roger Gale effective as of February
                  9,
                  2005, incorporated by reference from an exhibit filed with the
                  Company’s
                  Current Report on Form 8-K/A (No.1) on February 10,
                  2005.10.154
              
              Separation
                  and Consulting Agreement and Release of Claims between the Company
                  and
                  Anthony J. Cataldo effective as of November 15, 2004.10.155
              
              Form
                  of $2,000,000 7% Promissory Note issued by the Company to Marr
                  Technologies BV dated January 14, 2005 and form of Amendment thereto
                  incorporated by reference from an exhibit filed with the Company’s Annual
                  Report on Form 10-KSB on March 31, 2005.10.156
              
              Form
                  of Purchase Agreement between the Company and the investors in
                  the April
                  2005 financing dated April 4, 2005 incorporated by reference from
                  an
                  exhibit filed with the Company’s Current Report on Form 8-K on April 5,
                  2005.10.157
              
              Form
                  of Secured 8% Convertible Promissory Note between the Company and
                  the
                  investors in the April 2005 financing dated April 4, 2005 incorporated
                  by
                  reference from an exhibit filed with the Company’s Current Report on Form
                  8-K on April 5, 2005.10.158
              
              Form
                  of Registration Rights Agreement between the Company and the investors
                  in
                  the April 2005 financing dated April 4, 2005 incorporated by reference
                  from an exhibit filed with the Company’s Current Report on Form 8-K on
                  April 5, 2005.10.159
              
              Form
                  of Series A Warrant between the Company and the investors in the
                  April
                  2005 financing dated April 4, 2005 incorporated by reference from
                  an
                  exhibit filed with the Company’s Current Report on Form 8-K on April 5,
                  2005.10.160
              
              Form
                  of Series B Warrant between the Company and the investors in the
                  April
                  2005 financing dated April 4, 2005 incorporated by reference from
                  an
                  exhibit filed with the Company’s Current Report on Form 8-K on April 5,
                  2005.10.161
              
              Form
                  of Security Agreement between the Company and the investors in
                  the April
                  2005 financing dated April 4, 2005 incorporated by reference from
                  an
                  exhibit filed with the Company’s Current Report on Form 8-K on April 5,
                  2005.10.162
              
              Form
                  of Amendment to Securities Purchase Agreement between the Company
                  and the
                  investors in the May 2004 and July 2004 Private Placements dated
                  April 4,
                  2005 incorporated by reference from an exhibit filed with the Company’s
                  Current Report on Form 8-K on April 5, 2005.10.163
              
              2005
                  Credit Facility Agreement between the Company and Marr Technologies
                  BV
                  dated April 4, 2005 incorporated by reference from an exhibit filed
                  with
                  the Company’s Current Report on Form 8-K on April 5,
                  2005.
  72
  10.164
              
              Agreement
                  effective September 1, 2005 between the Company and Marr Technologies
                  Asia
                  Limited describing the rights, duties and obligations of the shareholders
                  of Beijing Calypte Biomedical Technology Ltd., a corporation organized
                  in
                  the Peoples’ Republic of China incorporated by reference from an exhibit
                  filed with the Company’s Quarterly Report on Form 10-QSB dated November
                  14, 2005.10.165
              
              Asset
                  Purchase and License Agreement dated November 15, 2005 by and between
                  the
                  Company and Maxim Biomedical, Inc. incorporated by reference from
                  an
                  exhibit filed with the Company’s Current Report on Form 8-K on November
                  21, 2005.10.166
              
              Amendment
                  to 2005 Credit Facility between the Company and Marr Technologies
                  BV
                  effective November 30, 2005 incorporated by reference from an exhibit
                  filed with the Company’s Current Report on Form 8-K on December 6,
                  2005.10.167
              
              Letter
                  Agreement between the Company and Roger I. Gale dated January 4,
                  2006
                  incorporated by reference from an exhibit filed with the Company’s Current
                  Report on Form 8-K/A (No. 1) on January 10, 2006.10.168
              
              Equity
                  Transfer Agreement between the Company and Marr Technologies Asia
                  Limited
                  dated December 21, 2005 incorporated by reference from an exhibit
                  filed
                  with the Company’s Current Report on Form 8-K on March 30, 2006.10.169
              
              Agreement
                  dated December 21, 2005 between the Company and Marr Technologies
                  Asia
                  Limited describing the rights, duties and obligations of the shareholders
                  of Beijing Marr Bio-Pharmaceutical Technology Ltd., incorporated
                  by
                  reference from an exhibit filed with the Company’s Current Report on Form
                  8-K on March 30, 2006.10.170
              
              Form
                  of Subscription Agreement between the Company and two investors
                  for the
                  purchase of an aggregate of $3 million of the Company’s common stock
                  effective June 19, 2006, incorporated by reference from an exhibit
                  filed
                  with the Company’s Quarterly Report on Form 10-QSB dated August 4, 2006.10.171
              
              Employment
                  Agreement between the Company and Roger I. Gale dated as of June
                  28, 2006,
                  incorporated by reference from an exhibit filed with the Company’s
                  Quarterly Report on Form 10-QSB dated August 4, 2006.10.172
              
              Form
                  of Subscription Agreement between the Company and the investors
                  in the
                  February 2007 PIPE financings, effective February 23, 2007 through
                  March
                  27, 2007.10.173
              
              Form
                  of Warrant between the Company and the investors in the February
                  2007 PIPE
                  financings, effective February 23, 2007 through March 27,
                  2007.10.174
              
              Form
                  of Subscription Agreement between the Company and the investors
                  in the
                  March 2007 PIPE financing, dated March 28, 2007.10.175
              
              Form
                  of Registration Rights Agreement between the Company and the investors
                  in
                  the March 2007 PIPE financing, dated March 28, 2007.10.176
              
              Form
                  of Series A Warrant between the Company and the investors in the
                  March
                  2007 PIPE financing, dated March 28, 2007.10.177
              
              Form
                  of Series B Warrant between the Company and the investors in the
                  March
                  2007 PIPE financing, dated March 28, 2007.10.178
              
              Form
                  of Amendment to 8% Secured Convertible Promissory Notes between
                  the
                  Company and SF Capital Partners Ltd., dated March 21, 2007, effective
                  March 28, 2007.10.179
              
              Form
                  of Sixth Amendment to 2005 Credit Facility between the Company
                  and Marr
                  Technologies BV dated March 21, 2007, effective March 28,
                  2007.10.180
              
              Form
                  of Amendment to 8% Secured Convertible
                  Promissory Notes between the Company and Marr Technologies BV dated
                  March
                  21, 2007, effective March 28, 2007.10.181
              
              Form of
                Amendment to 8%
                Secured Convertible Promissory Notes between the Company and Morningtown
                Limited dated March 21, 2007, effective March 28,
                2007.
  73
  21.1
              
              Subsidiaries
                  of the Registrant; incorporated by reference from exhibits filed
                  with the
                  Company’s Registration Statement on Form S-1 (File No. 333-04105) filed
                  on
                  May 20, 1996, as amended to June 25, 1996, July 15, 1996 and July
                  26,
                  1996.23.1
              
              Consent
                  of Odenberg Ullakko Muranishi & Co. LLP, Independent Registered Public
                  Accounting Firm.24.1
              
              Power
                  of Attorney (see page S-1).31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 200231.2
              
              Certification
                  of Vice President - Finance and Administration pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 200232.1
              
              Certification
                  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of
                  2002







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




(b)
            Reports
                on Form 8-K filed during the fourth quarter of 2006 and through March
                29,
                2007.





Form
      8-K
      regarding Item 7.01 Regulation FD Disclosure - filed November 20, 2006 -
      Providing the prepared remarks of Messrs. Roger Gale and Theodore Gwin for
      the
      Investor Webcast reporting the Company’s financial results for the third quarter
      ended September 30, 2006 held on November 15, 2006.





Form
      8-K
      regarding Item 7.01 Regulation FD Disclosure - filed December 18, 2006 -
      Announcing the results of the Company’s Annual Meeting of Stockholders held on
      December 15, 2007 and the remarks of Mr. Roger Gale presented at the meeting,
      including the Company’s press release dated December 18, 2006.





Form
      8-K
      regarding Item 5.02 Departure of Directors or Principal Officers; Election
      of
      Directors; Appointment of Principal Officers - filed January 19, 2007 -
      Announcing the departure of Theodore R. Gwin as Chief Financial Officer
      effective January 12, 2007.





Form
      8-K
      regarding Item 5.02 Departure of Directors or Principal Officers; Election
      of
      Directors; Appointment of Principal Officers - filed February 6, 2007 -
      Announcing the appointment of Jerrold D. Dotson as Vice President - Finance and
      Administration (Principal Financial and Accounting Officer) effective February
      1, 2007.


74





**Item
      14. Principal Accountant Fees and Services**




Odenberg
      Ullakko Muranishi & Co. LLP (“OUM”) is the independent accounting firm that
      audited the Company’s financial statements for the years ended December 31, 2006
      and 2005. The Audit Committee first engaged OUM in December 2003. OUM performed
      audit and review services for 2005 and 2006. The aggregate fees billed during
      2006 and 2005 for each of the following categories of services are set forth
      below:





2006
            
            2005Audit
                fees
            
            $
            176,882
            
            $
            211,242Audit-related
                fees
            
            
            -
            
            
            -Tax
                fees
            
            
            -
            
            
            -All
                other fees
            
            
            -
            
            
            -





“Audit
      fees” include fees invoiced in 2006 and 2005 for the audits of the Company’s
      annual financial statements for 2006 and 2005; fees for the quarterly review
      of
      the statements for the quarters ended March 31, June 30, and September 30,
      2006
      and 2005, as well as fees for consultation regarding accounting issues and
      their
      impact on or presentation in the Company’s financial statements; and fees for
      the review of registration statements and the issuance of related consents.
      OUM
      provided no “Audit-related services” to the Company. “Tax fees” include tax
      planning and the preparation of the Company’s tax returns. OUM does not provide
      any tax or financial information systems design or implementation services
      to
      the Company.




75





**INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS**




Report
                  of Independent Registered Public Accounting Firm
            
            F-2Consolidated
                  Balance Sheets
            
            F-3Consolidated
                Statements of Operations
            
            F-4Consolidated
                Statements of Stockholders’ Deficit
            
            F-5Consolidated
                  Statements of Cash Flows
            
            F-7Notes
                  to Consolidated Financial Statements
            
            F-8


F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Stockholders of


Calypte
      Biomedical Corporation





We
      have
      audited the accompanying consolidated balance sheets of Calypte Biomedical
      Corporation as of December 31, 2006 and 2005, and the related consolidated
      statements of operations, stockholders' deficit and cash flows for the years
      then ended. These financial statements are the responsibility of the Company's
      management. Our responsibility is to express an opinion on these financial
      statements based on our audits.





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





In
      our
      opinion, the financial statements audited by us present fairly, in all material
      respects, the consolidated financial position of Calypte Biomedical Corporation
      at December 31, 2006 and 2005, and the consolidated results of its operations
      and its cash flows for the years then ended, in conformity with U.S. generally
      accepted accounting principles.





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1, the Company has
      suffered recurring operating losses and negative cash flows from operations,
      and
      management believes that the Company’s cash resources will not be sufficient to
      sustain its operations through 2007 without additional financing. This raises
      substantial doubt about the Company’s ability to continue as a going concern.
      Management's plans in regard to these matters are also described in Note 1.
      The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.





As
      discussed in Note 2 to the consolidated financial statements, on January 1,
      2006, the Company adopted the provisions of Statement of Financial Accounting
      Standards No. 123 (revised), “Share-Based Payment.”





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





San
      Francisco, California


March
      30,
      2007


F-2


**CALYPTE
      BIOMEDICAL CORPORATION AND SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**




**(in
      thousands, except per share data)**


December
                  31,2006
              
              2005**ASSETS**Current
                  assets:Cash
                  and cash equivalents
              
              $
              372
              
              $
              492Accounts
                  receivable, net of allowance of $1and $17 at December 31, 2006 and2005,
                  respectively
              
              
              16
              
              
              53Inventory
              
              
              264
              
              
              147Prepaid
                  expenses
              
              
              244
              
              
              233Deferred
                  debt issuance costs, net of accumulated amortization of $725 and
                  $391
                  atDecember
                  31, 2006 and 2005, respectively
              
              
              64
              
              
              620Other
                  current assets
              
              
              10
              
              
              5Total
                  current assets
              
              
              970
              
              
              1,550Property
                  and equipment, net
              
              
              1,359
              
              
              136Intangible
                  assets, net of accumulated amortization of $218 at December 31,
                  2006
              
              
              2,716
              
              
              2,934Deposit
                  on China facility acquisition
              
              
              2,001
              
              
              -Other
                  assets
              
              
              972
              
              
              970$
              8,018
              
              $
              5,590**LIABILITIES
                  AND STOCKHOLDERS’ DEFICIT**Current
                  liabilities:Accounts
                  payable and accrued expenses
              
              $
              3,500
              
              $
              4,029Advances
                  from related parties
              
              
              1,871
              
              
              -8%
                  Notes payable to a related party
              
              
              46
              
              
              -12%
                  Convertible debentures payable
              
              
              60
              
              
              60Capital
                  lease obligations – current portion
              
              
              131
              
              
              174Current
                  liabilities of discontinued operations
              
              
              190
              
              
              321Total
                  current liabilities
              
              
              5,798
              
              
              4,5848%
                  Convertible notes payable, net of discount of $1,144and
                  $6,257 at December 31, 2006and
                  2005, respectively
              
              
              3,739
              
              
              1,9967%
                  Notes payable to a related party
              
              
              4,057
              
              
              1,500Note
                  derivative liability
              
              
              -
              
              
              1,594Capital
                  lease obligations – non-current portion
              
              
              -
              
              
              131Minority
                  interest in consolidated joint ventures
              
              
              766
              
              
              -Mandatorily
                  redeemable Series A preferred stock, $0.001 par value; no shares
                  authorized atDecember
                  31, 2006 and 2005; 100,000 shares issued and outstanding at December
                  31,
                  2006and
                  2005; aggregate redemption and liquidation value of $1,000 plus
                  cumulative
                  dividends
              
              
              3,056
              
              
              2,936Total
                  liabilities
              
              
              17,416
              
              
              12,741Commitments
                  and contingenciesStockholders’
                  deficit:Preferred
                  stock, $0.001 par value; 5,000,000 shares authorized; no shares
                  issued or
                  outstanding
              
              
              -
              
              
              -Common
                      stock, $0.03 par value; 800,000,000 shares authorized at December
                      31, 2006
                      and2005; 221,145,656 and 181,060,394 shares issued and
                      outstanding
                      as of December 31, 2006 September 30, 2006 and December 31,
                      2005,
                      respectively and December 31, 2005, respectively
              
              
              6,634
              
              
              5,432Common
                  stock subscribed
              
              
              100
              
              
              -Additional
                  paid–in capital
              
              
              151,502
              
              
              141,319Deferred
                  compensation
              
              
              9
              
              
              (9
              )Accumulated
                  deficit
              
              
              (167,643
              )
              
              (153,893
              )Total
                  stockholders’ deficit
              
              
              (9,398
              )
              
              (7,151
              )$
              8,018
              
              $
              5,590




See
      accompanying notes to consolidated financial statements.


F-3




**CALYPTE
      BIOMEDICAL CORPORATION AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF OPERATIONS**




**(in
      thousands, except per share data)**


Year
                  Ended December 31,2006
              
              2005Revenues:Product
                  sales
              
              $
              547
              
              $
              427Operating
                  costs and expenses:Cost
                  of product sales
              
              
              395
              
              
              133Research
                  and development expenses
              
              
              1,700
              
              
              2,211Selling,
                  general and administrative expenses (non-cash of $606 and $473in
                  2006 and 2005, respectively
              
              
              4,322
              
              
              5,363Total
                  operating expenses
              
              
              6,417
              
              
              7,707Loss
                  from operations
              
              
              (5,870
              )
              
              (7,280
              )Interest
                  income (expense), net (non-cash expense of $(8,219) in 2006 andnon-cash
                  income of $2,036 in 2005)
              
              
              (8,500
              )
              
              1,952Minority
                  interest in losses of consolidated joint ventures
              
              
              517
              
              
              -Other
                  income (expense), net
              
              
              105
              
              
              (335
              )Loss
                  from continuing operations before income taxes
              
              
              (13,748
              )
              
              (5,663
              )Income
                  taxes
              
              
              (2
              )
              
              (2
              )Net
                  loss from continuing operations
              
              
              (13,750
              )
              
              (5,665
              )Discontinued
                  operationsLoss
                  from operations of legacy business, including loss on disposalof
                  assets of $425, net of income taxes
              
              
              -
              
              
              (3,098
              )Net
                  Loss
              
              $
              (13,750
              )
              $
              (8,763
              )Net
                  loss per share from continuing operations (basic and diluted)
              
              $
              (0.07
              )
              $
              (0.03
              )Net
                  loss per share (basic and diluted)
              
              $
              (0.07
              )
              $
              (0.05
              )Weighted
                  average shares used to compute net loss per share(basic
                  and diluted)
              
              
              202,783
              
              
              175,842





See
      accompanying notes to consolidated financial statements.


F-4





**CALYPTE
      BIOMEDICAL CORPORATION AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ DEFICIT**




**Years
      Ended December 31, 2005 and 2006**





**(in
      thousands, except share data)**


Number
                    of Common Shares
                
                Common
                    Stock
                
                Common
                    Stock Subscribed
                
                Additional
                    Paid-in Capital
                
                Deferred
                    Compensation
                
                Accumulated
                    Deficit
                
                Total
                    Stockholders' DeficitBalances
                    at December 31, 2004
                
                
                169,456,112
                
                $
                5,084
                
                $
                -
                
                $
                136,757
                
                $
                (4
                )
                $
                (145,130
                )
                $
                (3,293
                )Shares
                    issued upon exercise ofwarrants
                    and options
                
                
                3,238,684
                
                
                97
                
                
                -
                
                
                612
                
                
                -
                
                
                -
                
                
                709Shares
                    and warrants issued pursuantto
                    anti-dilution provisions of2004
                    PIPE, net of expenses
                
                
                7,079,626
                
                
                212
                
                
                -
                
                
                992
                
                
                -
                
                
                -
                
                
                1,204Shares
                    issued upon conversion of 8%convertible
                    notes and write-off ofproportional
                    share of note derivativeliability
                
                
                590,000
                
                
                18
                
                
                -
                
                
                237
                
                
                -
                
                
                -
                
                
                255Fair
                    value of warrants and noteproceeds
                    allocated to warrantsissued
                    in connection with 8%convertible
                    notes financing
                
                
                -
                
                
                -
                
                
                -
                
                
                2,179
                
                
                -
                
                
                -
                
                
                2,179Fair
                    value of warrants issued inconnection
                    with 2005 Marr CreditFacility
                
                
                -
                
                
                -
                
                
                -
                
                
                71
                
                
                -
                
                
                -
                
                
                71Shares
                    issued in lieu of cash toconsultants
                    and service providers
                
                
                695,972
                
                
                21
                
                
                -
                
                
                173
                
                
                -
                
                
                -
                
                
                194Compensation
                    related to stock optiongrants
                
                
                -
                
                
                -
                
                
                -
                
                
                298
                
                
                (22
                )
                
                -
                
                
                276Amortization
                    of deferred compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                17
                
                
                -
                
                
                17Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (8,763
                )
                
                (8,763
                )Balances
                    at December 31, 2005
                
                
                181,060,394
                
                
                5,432
                
                
                -
                
                
                141,319
                
                
                (9
                )
                
                (153,893
                )
                
                (7,151
                )Shares
                    issued upon exercise ofemployee
                    options
                
                
                141,112
                
                
                4
                
                
                -
                
                
                14
                
                
                -
                
                
                -
                
                
                18Stock-based
                    employee compensation
                
                
                -
                
                
                -
                
                
                -
                
                
                149
                
                
                -
                
                
                -
                
                
                149Shares
                    issued in June 2006 PIPE
                
                
                2,750,000
                
                
                83
                
                
                -
                
                
                412
                
                
                -
                
                
                -
                
                
                495Shares
                    issued upon cash exercise ofre-priced
                    warrants
                
                
                1,719,583
                
                
                52
                
                
                -
                
                
                206
                
                
                -
                
                
                -
                
                
                258Shares
                    issued upon voluntaryconversion
                    of 8% convertible notes
                
                
                9,848,048
                
                
                295
                
                
                -
                
                
                2,659
                
                
                -
                
                
                -
                
                
                2,954Shares
                    issued upon induced conversionof
                    8% convertible notes
                
                
                6,396,306
                
                
                192
                
                
                -
                
                
                767
                
                
                -
                
                
                -
                
                
                959Write-off
                    of proportional share of notederivative
                    liability upon conversionof
                    8% convertible notes and uponderivative
                    expiration
                
                
                -
                
                
                -
                
                
                -
                
                
                1,994
                
                
                -
                
                
                -
                
                
                1,994Shares
                    issued upon extinguishment of7%
                    promissory notes and relatedaccrued
                    interest
                
                
                16,964,583
                
                
                509
                
                
                -
                
                
                2,036
                
                
                -
                
                
                -
                
                
                2,545Charge
                    for induced conversion of 8%convertible
                    notes and extinguishmentof
                    7% promissory notes
                
                
                -
                
                
                -
                
                
                -
                
                
                1,549
                
                
                -
                
                
                -
                
                
                1,549Shares
                    issued as compensation toconsultants
                    and service providers
                
                
                2,265,630
                
                
                67
                
                
                -
                
                
                386
                
                
                -
                
                
                -
                
                
                453Fair
                    value of warrants issued to consultants
                
                
                -
                
                
                -
                
                
                -
                
                
                42
                
                
                
                
                
                
                
                
                42Common
                    stock subscribed
                
                
                -
                
                
                -
                
                
                100
                
                
                -
                
                
                -
                
                
                -
                
                
                100Amortization
                    of deferred compensationand
                    mark to market adjustments
                
                
                -
                
                
                -
                
                
                -
                
                
                (31
                )
                
                18
                
                
                -
                
                
                (13
                )Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (13,750
                )
                
                (13,750
                )Balances
                    at December 31, 2006
                
                
                221,145,656
                
                $
                6,634
                
                $
                100
                
                $
                151,502
                
                $
                9
                
                $
                (167,643
                )
                $
                (9,398
                )




See
      accompanying notes to consolidated financial statements.


F-5


**CALYPTE
      BIOMEDICAL CORPORATION AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**




**(in
      thousands)**


Year
                  ended December 31,2006
              
              2005Cash
                  flows from operating activities:Net
                  loss
              
              $
              (13,750
              )
              $
              (8,763
              )Adjustments
                  to reconcile net loss to operating activities:Depreciation
                  and amortization
              
              
              363
              
              
              368Amortization
                  of deferred compensation
              
              
              2
              
              
              17Non-cash
                  interest expense attributable to:Amortization
                  and proportional write-off upon conversion of note discount
              
              
              5,138
              
              
              1,111Amortization
                  and proportional write-off upon conversion of deferred debtissuance
                  costs
              
              
              556
              
              
              391Extinguishment
                  of 7% Promissory Notes and induced conversion of 8%Convertible
                  Notes resulting from warrant re-pricing and exercise, anddebt
                  cancellation
              
              
              1,549
              
              
              -Dividends
                  on mandatorily redeemable Series A preferred stock
              
              
              120
              
              
              120Anti-dilution
                  obligation and note derivative liability
              
              
              375
              
              
              (4,308
              )Stock-based
                  employee compensation expense
              
              
              149
              
              
              -Fair
                  market value of common stock, warrants, options and bonuses granted
              
              
              455
              
              
              559Loss
                  on disposition of assets from discontnued operation
              
              
              -
              
              
              425Loss
                  on sale of equipment
              
              
              -
              
              
              20Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              37
              
              
              206Inventory
              
              
              (117
              )
              
              1,377Prepaid
                  expenses and other current assets
              
              
              (20
              )
              
              226Deferred
                  debt issuance costs and other non-current assets
              
              
              52
              
              
              (515
              )Accounts
                  payable, accrued expenses and other current liabilities
              
              
              2
              
              
              733Other
                  non-current liabilities
              
              
              100
              
              
              (52
              )Net
                  cash used in operating activities
              
              
              (4,989
              )
              
              (8,085
              )Cash
                  flows from investing activities:Consolidated
                  joint venture, net cash acquired
              
              
              799
              
              
              -Investment
                  in joint ventures by minority interest
              
              
              765
              
              
              198Payments
                  to acquire intellectual property licenses
              
              
              -
              
              
              (1,565
              )Deposit
                  on China manufacturing facility and related assets
              
              
              (1,554
              )
              
              -Proceeds
                  from sale of equipment
              
              
              
              
              
              50Purchases
                  of equipment
              
              
              (884
              )
              
              (93
              )Net
                  cash used in investing activities
              
              
              (874
              )
              
              (1,410
              )Cash
                  flows from financing activities:Proceeds
                  from sale of stock
              
              
              771
              
              
              183Proceeds
                  from common stock subscriptions
              
              
              100
              
              
              -Expenses
                  related to sales of stock
              
              
              -
              
              
              (9
              )Proceeds
                  from notes issued to related parties
              
              
              5,046
              
              
              3,500Repayment
                  of notes issued to a related party
              
              
              -
              
              
              (2,000
              )Proceeds
                  from issuance notes, derivatives and warrants, net
              
              
              -
              
              
              7,394Principal
                  payment on capital lease obligations
              
              
              (174
              )
              
              (156
              )Net
                  cash provided by financing activities
              
              
              5,743
              
              
              8,912Net
                  decrease in cash and cash equivalents
              
              
              (120
              )
              
              (583
              )Cash
                  and cash equivalents at beginning of period
              
              
              492
              
              
              1,075Cash
                  and cash equivalents at end of period
              
              $
              372
              
              $
              492




(continued)




F-6




**CALYPTE
      BIOMEDICAL CORPORATION AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (CONTINUED)**




**(in
      thousands)**


Year
                  ended December 31,2006
              
              2005Supplemental
                  disclosure of cash flow activities:Cash
                  paid for interest
              
              $
              282
              
              $
              114Cash
                  paid for income taxes
              
              
              2
              
              
              2Supplemental
                  disclosure of noncash activities:Conversion
                  of notes payable and accrued interest to common stock andproportional
                  share of note derivative liability
              
              
              6,477
              
              
              255Conversion
                  of accrued interest into notes payable
              
              
              544
              
              
              332Transfer
                  of note derivative liability to equity
              
              
              1,874
              
              
              -Common
                  stock issued in payment of accrued compensation
              
              
              -
              
              
              520Warrants
                  and notes payable issued to placement agents related to issuance
                  of8%
                  convertible notes
              
              
              -
              
              
              4052004
                  anti-dilution obligation transferred to equity
              
              
              -
              
              
              1,214




See
      accompanying notes to consolidated financial statements.





F-7




**CALYPTE
      BIOMEDICAL CORPORATION AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**December
      31, 2006 and 2005**


**(1)    The
      Company**




Calypte
      Biomedical Corporation (the “Company”) develops, manufactures, and distributes *in
      vitro* diagnostic tests, primarily for the diagnosis of Human Immunodeficiency Virus
      (“HIV”) infection. We were incorporated in California in 1989 and reincorporated
      in Delaware in 1996 at the time of our initial public offering. Since September
      8, 2006, our common stock has traded on the NASD Over the Counter Bulletin
      Board
      under the symbol “CBMC.” Prior to that date, our stock had traded on the
      American Stock Exchange under the symbol “HIV”. Since the third quarter of 2005,
      our corporate administrative offices have been located in Lake Oswego, Oregon,
      a
      suburb of Portland, near where our research and development operations are
      located. Through our 51%-owned joint ventures, we have manufacturing and
      marketing operations in Beijing, China.





Historically,
      we manufactured and marketed urine-based HIV-1 diagnostic screening tests and
      urine and serum-based Western Blot supplemental (sometimes called
“confirmatory”) tests for use in high-volume laboratories, which we refer to as
      our “Legacy Business.” After consolidating our Legacy Business operations into
      our Rockville, Maryland facility in 2004, on April 18, 2005, we entered into
      a
      non-binding letter of intent to sell the Legacy Business to Maxim Biomedical,
      Inc. (“Maxim”). Effective May 1, 2005, we entered into a manufacturing services
      and management agreement (the “Manufacturing Services Agreement”) with Maxim
      under which Maxim manufactured, shipped and performed quality control procedures
      for us in connection with the Legacy Business. Under the terms of the
      Manufacturing Services Agreement, Maxim hired some of our ex-employees and
      we
      transferred our inventory to Maxim for use under the agreement. Effective
      November 15, 2005, under the terms of an Asset Purchase and License Agreement
      (the “Agreement”), we sold the Legacy Business to Maxim.





Beginning
      in late 2004, we expanded our historical focus to include commercialization
      of
      our HIV-1/2 Rapid Tests, test products for the rapid detection of antibodies
      to
      HIV-1 and HIV Type 2, a second type of HIV (“HIV-2”), in blood and oral fluid
      samples using a lateral flow dipstick design (the “HIV-1/2 Rapid Tests”). Rapid
      tests provide diagnostic results in less than 20 minutes and are particularly
      suitable for point-of-care testing in both the professional sector, such as
      in
      developing countries that lack the medical infrastructure to support laboratory
      based testing, and, for the first time, in the over-the-counter or “OTC” market.
      We have completed field trials or product evaluations of our HIV-1/2 Rapid
      Tests
      covering an aggregate of over 5,000 samples in China, South Africa and elsewhere
      and believe that the results of these studies and evaluations have validated
      the
      tests. In our studies, the tests have averaged 99.9% accuracy. We have obtained
      regulatory approvals in parts of Africa, Southeast Asia, the Middle East, and,
      most recently, in Russia, and we expect to expand our market reach on a steady
      basis. Also, i n the
      fourth quarter of 2004, through an arrangement with the U. S. Centers for
      Disease Control and Prevention (the “CDC”), we introduced an HIV-1 BED incidence
      EIA test (the “BED Incidence Test”) that detects HIV-1 infections that have
      occurred within approximately the prior 6 months and that can be used by public
      health agencies to identify those regions and the populations within them where
      HIV transmission is occurring most recently. We are c urrently
      focusing on commercializing
      our HIV-1/2 Rapid Tests and the BED Incidence Test.





As
      a
      result of discontinuing our Legacy Business, we have significantly reduced
      our
      monthly operating burn rate as compared with historical levels. Consequently,
      however, the revenue stream from the Legacy Business products has also been
      eliminated, requiring that we rely on revenue from sales of the BED Incidence
      Test and international sales of our HIV-1/2 Rapid Tests as well as external
      financing sources to pursue our business milestones and achieve profitability.
      Although we are focusing our efforts on commercializing the HIV-1/2 Rapid Tests
      to generate the revenue stream necessary to support our operations and achieve
      our financial objectives of sustained profitable operations and increased
      stockholder value, t here
      can
      be no assurance that we will achieve expanded acceptance of or realize
      significant revenues from the sale of the BED Incidence Test or the HIV-1/2
      Rapid Tests or other new products that we may develop or market, or that we
      will
      achieve and sustain profitability and positive cash flows in the
      future.




In
      November 2003, we became the 51% owner of a joint venture, Beijing Calypte
      Biomedical Technology Ltd. (“Beijing Calypte”), created to market our rapid test
      products in China. The remaining 49% of the joint venture is owned by Marr
      Technologies Limited, an affiliate of Marr Technologies BV (“Marr”), our largest
      stockholder, which held approximately 30% of our outstanding stock as of
      December 31, 2006. Through 2006, the operations of Beijing Calypte were
      primarily organizational and financially insignificant.





F-8




**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**
 Effective
        in January 2006, we became the 51% owner of Beijing Marr Bio-Pharmaceutical
        Co.,
        Ltd. (“Beijing Marr”). We purchased our equity interest from Marr Technologies
        Asia Limited (“Marr Asia”), an affiliate of Marr. Marr Asia continues to own the
        remaining 49% interest in Beijing Marr. Through the acquisition of Beijing
        Marr,
        we have acquired rights to manufacturing facilities and other assets necessary
        to manufacture our HIV-1/2 Rapid Test products in China. Beijing Marr has
        recently renovated the manufacturing facilities and is pursuing the necessary
        governmental approvals to begin production and sale of our HIV-1/2 rapid
        oral
        fluid (OMT) diagnostic test, which is currently being evaluated by the Chinese
        State Food and Drug Administration (“SFDA”). We expect that this facility will
        also support the manufacturing of our products for export to other
        countries.





The
      accompanying financial statements reflect the consolidated operations of and
      our
      ownership interests in Beijing Calypte and in Beijing Marr beginning in January
      2006. They also reflect the 2005 results of the Legacy Business as a
      discontinued operation.





During
      2006, we incurred a net loss of $13.8 million and a negative cash flow of $5.0
      million to fund our operations. At December 31, 2006, we had a working capital
      deficit of $12.6 million and our stockholders’ deficit was $9.4 million. Our
      cash balance at December 31, 2006 was $0.4 million. Based upon our financial
      condition at December 31, 2006, as well as our recurring losses and our negative
      cash flows from operations, our independent accountants issued an opinion on
      our
      December 31, 2006 financial statements citing substantial doubt about our
      ability to continue our business operations as a going concern.  As
      described more completely in Note 20, Subsequent Events, we have entered into
      additional financing arrangements since December 31, 2006 which we believe
      will
      provide funds to sustain our operations through at least a portion of 2007.
      Additionally, we have extended the maturity of our April 2005 Secured 8%
      Convertible Notes and related interest notes and the 7% Promissory Notes issued
      under the 2005 Marr Credit Facility from April 2007 until April 2009.
      Nevertheless, we do not believe that our current cash resources and the new
      financing arrangements are sufficient to allow us to fully attain our business
      milestones and achieve positive cash flow. Based on our current obligations
      and
      our 2007 operating plans, we do not believe that we can sustain our operations
      throughout 2007 without obtaining additional financing, either from the exercise
      of warrants or from other sources. There can
      be no
      assurance that additional financing will be available, or if it is available,
      that it will be available on acceptable terms. We would,
      or
      might be required to, consider strategic opportunities, including merger,
      consolidation, sale or other comparable transactions, to sustain our operations.
      We do not currently have any definitive agreements with respect to any such
      additional financing or strategic opportunity, and there can be no assurance
      that any such opportunity will be available to us on acceptable terms, or at
      all. If additional financing is not available or is not available on acceptable
      terms, or if we are unable to arrange a suitable strategic opportunity, we
      will
      be in significant financial jeopardy and may be unable to continue our
      operations at current levels, or at all .  The
      terms
      of a subsequent financing may involve a change of control and/or require
      stockholder approval. Further, our pledge of the rights to our assets as
      collateral security for the 8% Convertible Notes issued in April 2005, as
      amended, and the 7% Promissory Notes issued under the 2005 Credit Facility
      with
      Marr, as amended, may inhibit our ability to secure financing in the future.
      Although we expect to be able to raise additional capital, there can be no
      assurance that we will secure such financing or enter into such strategic
      agreements, or that our stockholders would approve the terms of such agreements
      or financing, if so required.





**(2)    
      Significant Accounting Policies**




*Principles
      of Consolidation*




The
      accompanying consolidated financial statements include the results of operations
      of the Company, its wholly-owned subsidiary, Calypte, Inc., and its 51% ownerhip
      interests in both Beijing Calypte and Beijing Marr. All significant intercompany
      accounts and transactions have been eliminated in consolidation. Because Beijing
      Calypte was in its organizational stage and its results of operations were
      not
      material in 2005, we accounted for our ownership interest in Beijing Calypte
      using the equity method prior to 2006. We acquired our interest in Beijing
      Marr
      in the first quarter of 2006.





F-9


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




*Foreign
      Currency Translation*





The
      functional currency of our consolidated Chinese joint ventures is the local
      currency, the Chinese Yuan Renminbi. We translate the assets and liabilities
      of
      our foreign subsidiary to U.S. dollars at the rate of exchange in effect at
      the
      end of the reporting period. We translate revenues and expenses at the average
      rates of exchange for the accounting period. Translation adjustments
      attributable to our joint ventures were not material in 2006.





*Cash
      and Cash Equivalents*




Cash
      equivalents consist of investments in money market accounts.




*Allowance
      for Doubtful Accounts*




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





*Inventories*




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





*Property
      and Equipment*




Our
      property and equipment is stated at cost. Buildings, 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
                yearsBuildings
            
            20-40
                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. We review
      our long-lived assets for impairment whenever events or changes in circumstances
      indicate that the carrying amount of the asset may not be recoverable. We
      compare an estimate of undiscounted future cash flows produced by the asset,
      or
      by the appropriate grouping of assets, to the carrying value to determine
      whether impairment exists. If an asset is determined to be impaired, we measure
      the loss based on quoted market prices in active markets, if available. If
      quoted market prices are not available, we estimate the fair value based on
      various valuation techniques, including a discounted value of estimated future
      cash flow and fundamental analysis. We report an asset to be disposed of at
      the
      lower of its carrying value or its estimated net realizable value.





*Fair
      Value of Financial Instruments*




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




F-10


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




*Revenue
      Recognition*




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




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





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




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





*Deferred
      Revenue*




Our
      current sales practices do not require the deferral of revenues and we have
      made
      no entries to record deferred revenue during the periods included in the
      accompanying consolidated financial statements.




*Income
      Taxes*




We
      account for income taxes under Statement of Financial Accounting Standards
      (SFAS) No. 109, *Accounting
      for Income Taxes* .
      SFAS
      No. 109 requires an asset and liability approach for the financial reporting
      of
      income taxes. Under SFAS No. 109, we recognize deferred tax assets and
      liabilities for the future tax consequences attributable to differences between
      the financial statement carrying amounts of existing assets and liabilities
      and
      their respective tax bases and operating loss and tax credit carryforwards.
      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.




*Classification
      of Financial Instruments with Characteristics of both Liability and
      Equity*





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





F-11


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


*Stock-Based
      Compensation Expense* ****





We
      adopted *Statement
      of Financial Accounting Standards No. 123 (revised 2004), Share-Based
      Payment* (“SFAS
      123R”) effective January 1, 2006. We adopted SFAS 123R using the modified
      prospective method. Under this method, the provisions of SFAS 123R are applied
      to all awards granted or modified after the date of adoption. The unrecognized
      expense attributable to awards not yet vested at the January 1, 2006 date of
      adoption is recognized in net income (loss) in the periods after the date of
      adoption using the same valuation method (i.e. Black-Scholes) and assumptions
      determined under the original provisions of SFAS 123, “Accounting for
      Stock-Based Compensation,” as disclosed on a pro-forma basis in our previous
      finaicial statements. Following the provisions of the modified prospective
      method, we have not restated our consolidated statement of operations for
      periods prior to 2006 to reflect the adoption of SFAS 123R. Accordingly, the
      results reported in the statment of operations for 2006 are not directly
      comparable to the results for 2005. Under the fair value recognition provisions
      of SFAS 123R, we recognize stock-based compensation, net of an estimated
      forfeiture rate, which results in recognizing compensation expense for only
      those awards expected to vest over the service period of the award.  Prior
      to adopting SFAS 123R, we accounted for share-based payments under APB 25 and,
      accordingly, generally recognized compensation expense related to employee
      stock
      options for only those options granted with intrinsic value and we accounted
      for
      forfeitures as they occurred.




Although
      we did not grant any stock options to employees during 2006, we recorded
      $149,000 of stock compensation expense attributable to previously granted
      options under the terms of SFAS 123R in selling, general and administrative
      expenses in our Statement of Operations for the year ended December 31, 2006.
      When granted, we plan to estimate
      the fair value of options granted using the Black-Scholes option pricing model.
      Calculating stock-based compensation expense under the provisions of SFAS 123R
      requires the input of highly subjective assumptions, including the expected
      term
      of the stock-based awards, stock price volatility, and pre-vesting option
      forfeitures.  We plan to estimate the expected life of options granted in
      the future based on the simplified method provided in Staff Accounting Bulletin
      No. 107 for “plain vanilla” options.  We estimate the volatility of our
      common stock at the date of grant based on its historical volatility over a
      period generally equivalent to the expected term of the grant. We estimate
      the
      expected pre-vesting forfeiture rate and recognize expense for only those shares
      expected to vest.  We have estimated our forfeiture rate based on our
      historical experience with stock-based awards that are granted, exercised and
      cancelled.  If the actual forfeiture rate is materially different from the
      estimate, the stock-based compensation expense could also differ from what
      we
      have recorded in the current period.  The assumptions used in calculating
      the fair value of stock-based awards represent our best estimates, but these
      estimates involve inherent uncertainties and the application of management
      judgment.  As required under SFAS 123R, we will review our valuation
      assumptions at each grant date and, as a result, may periodically change the
      valuation assumptions used to value employee stock-based awards granted in
      future periods. The
      guidance in SFAS 123R is relatively new and best practices are still developing.
      The application of the various valuation assumptions may be subject to further
      interpretation and refinement over time. There are significant differences
      among
      valuation models and there is a possibility that we will adopt different
      valuation models and assumptions in the future. This may result in a lack of
      comparability with other companies that use different models, methods and
      assumptions and in a lack of consistency in future periods.





F-12


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


In
      November 2005, the FASB issued FASB Staff Position No. FAS 123(R)-3
“Transition Election Related to Accounting for Tax Effects of Share-Based
      Payment Awards” (“FSP 123R-3”). We adopted the alternative transition method
      provided in the FASB Staff Position for calculating the tax effects of
      stock-based compensation pursuant to SFAS 123(R) in the fourth quarter of fiscal
      2006. The alternative transition method includes simplified methods to establish
      the beginning balance of the additional paid-in capital pool (the “APIC pool”)
      related to the tax effects of employee stock-based compensation, and to
      determine the subsequent impact on the APIC pool and Consolidated Statements
      of
      Cash Flows of the tax effects of employee stock-based compensation awards that
      were outstanding upon our adoption of SFAS 123R. The adoption of FSP 123R-3did
      not have a material impact on our consolidated results of operations or
      financial condition.





SFAS
      123R
      requires that we present pro forma information for the comparative period prior
      to our adoption as if we had accounted for all of our employee stock options
      under the fair value method of the original SFAS No. 123. Had we determined
      compensation cost based on the fair value at the grant date for our employee
      stock options under SFAS No. 123, our net loss would have been increased to
      the
      pro forma amount indicated below for the year ended December 31,
      2005:





Year
                ended
              December
                31,2005Net
                loss, as reported
            
            $
            (8,763
            )Add:
                Stock-based compensation expense included in reported net loss, net
                of
                related tax effects
            
            
            294Less:
                Stock-based compensation expense determined under fair value based
                method
                for all awards, net of related tax effects
            
            
            (2,744
            )Pro
                forma net loss
            
            $
            (11,213
            )Basic
                and diluted net loss per share:As
                reported
            
            $
            (0.05
            )Pro
                forma
            
            $
            (0.06
            )





We
      used
      the following weighted-average assumptions to estimate stock-based compensation
      expense for fiscal year 2005 under SFAS No. 123 using the Black-Scholes
      option-pricing model:




2005Per
                share weighted-average fair value of options granted
            
            $
            0.22Expected
                dividend yield
            
            
            0
            %Risk-free
                interest rate
            
            
            4.35
            %Volatility
            
            
            204.6
            %Expected
                option term
            
            
            10.0
                years





We
      assumed a dividend yield of zero based on the fact that we have never paid
      cash
      dividends and do not anticipate doing so in the near future. We
      derived the risk-free
      interest rate from the average U.S. Treasury Constant Maturity Rate during
      the
      period, which approximates the rate in effect at the time of the grant. We
      estimated the volatility of our common stock at the date of grant based on
      its
      historical volatility over a period generally equivalent to the contractual
      term
      of the grant. The
      expected option term is based on the contractual term of the grant. We accounted
      for forfeitures as they occurred in 2005 and prior years.





F-13


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


*Net
      Loss Per Share*




We
      compute basic net loss per share by dividing the net loss by the weighted
      average number of shares of common stock outstanding during the year. The
      computation of diluted earnings per common share is similar to the computation
      of basic net loss per share, except that the denominator is increased for the
      assumed conversion of convertible securities and the exercise of options and
      warrants, to the extent they are dilutive, using the treasury stock method.
      The
      weighted average shares used in computing basic and diluted net loss per share
      were the same for each computation for the two years ended December 31, 2006
      and
      2005. Options and warrants for 64,951,878 shares and 82,890,889 shares were
      excluded from the computation of loss per share at December 31, 2006 and 2005,
      respectively, as their effect is anti-dilutive. The computation of loss per
      share at December 31, 2006 and 2005 also excludes 16,277,646 shares and
      27,508,060 shares, respectively, issuable upon the conversion of 8% Convertible
      Notes as their effect is also anti-dilutive.




*Concentrations
      of Credit Risk*




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




*Use
      of Estimates*




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




*Risks
      and Uncertainties*




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




*Comprehensive
      Loss*




We
      have
      no components of other comprehensive loss other than our net loss, and,
      accordingly, our comprehensive loss is equivalent to our net loss for the
      periods presented.




*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). Our
      operations are currently confined to a single business segment, the development
      and sale of HIV diagnostics.





F-14


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


The
      following table summarizes our product sales revenues from continuing operations
      by product for the years ended December 31, 2006 and 2005 (in
      thousands).





2006
            
            2005BED
                Incidence tests
            
            $
            241
            
            $
            406AwareTMRapid HIV diagnostic tests
            
            
            306
            
            
            21Revenue
                from product sales
            
            $
            547
            
            $
            427





Sales
      to
      international customers accounted for approximately 88% of our revenues in
      2006
      and 75% of our revenues from continuing operations in 2005. At December 31,
      2006
      approximately $212,000, or 80%, of our inventory and $1,271,000, or 93%, of
      our
      property and equipment, net, was held in international locations.




Sales
      to
      our three largest customers accounted for approximately 67% of net sales for
      the
      year ended December 31, 2006 and 36% of net sales from continuing operations
      for
      the year ended December 31, 2005. Sales to those customers accounted for
      approximately 51%, 9% and 7% of our net sales in 2006 and 13%, 13% and 10%,
      respectively, of our net sales from continuing operations in 2005. Only one
      of
      our three largest customers in 2005 was also one of our three largest customers
      in 2006.




*Reclassifications*





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





*Recent
      Accounting Pronouncements*





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





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





In
      September 2006, the Securities and Exchange Commission (SEC) issued Staff
      Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year
      Misstatements when Quantifying Misstatements in Current Year Financial
      Statements.” SAB No. 108 addresses how the effects of prior year uncorrected
      misstatements should be considered when quantifying misstatements in current
      year financial statements and is effective for fiscal years ending after
      November 15, 2006. SAB No. 108 requires companies to quantify misstatements
      using a balance sheet and income statement approach and to evaluate whether
      either approach results in quantifying an error that is material in light of
      relevant quantitative and qualitative factors. SAB No. 108 permits existing
      public companies to initially apply its provisions either by (i) restating
      prior
      financial statements as if the “dual approach” had always been used or (ii)
      recording the cumulative effect of initially applying the “dual approach” as
      adjustments to the carrying value of assets and liabilities as of January 1,
      2006 with an offsetting adjustment recorded to the opening balance of retained
      earnings. The adoption of the provisions of SAB No. 108 on December 31, 2006
      had
      no impact on our consolidated results of operations or financial
      position.





F-15


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” ** (“FIN
      48”). This Interpretation clarifies the accounting for uncertainty in income
      taxes recognized in a company’s financial statements in accordance with FASB
      Statement No. 109, *Accounting
      for Income Taxes.* FIN 48
      prescribes a recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected to
      be
      taken in a tax return. This Interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. The evaluation of a tax position in
      accordance with FIN 48 is a two-step process. The first step is recognition:
      The
      entity determines whether it is “more-likely-than-not” that a tax position will
      be sustained upon examination, including resolution of any related appeals
      or
      litigation processes, based on the technical merits of the position. In
      evaluating whether a tax position has met the “more-likely-than-not” recognition
      threshold, the entity presumes that the position will be examined by the
      appropriate taxing authority that would have full knowledge of all relevant
      information. The second step is measurement: A tax position that meets the
      “more-likely-than-not” recognition threshold is measured to determine the amount
      of benefit to recognize in the financial statements. The tax position is
      measured at the largest amount of benefit that is greater than 50 percent likely
      to be realized upon ultimate settlement. FIN 48 is effective for fiscal years
      beginning after December 15, 2006. We do not believe that t he
      adoption of F IN
      48
      will have a
      material impact on our consolidated results of operations or financial
      condition.





In
      February 2006, the FASB issued Statement No. 155 **“** Accounting
      for Certain Hybrid Financial Instruments” (“FAS 155”). This Statement amends
      FASB Statements No. 133, “Accounting for Derivative Instruments and Hedging
      Activities *,”* and No.
      140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities.”  This Statement resolves issues addressed
      in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to
      Beneficial Interests in Securitized Financial Assets.” FAS 155: (i) permits fair
      value re-measurement for any hybrid financial instrument that contains an
      embedded derivative that otherwise would require bifurcation; (ii) clarifies
      which interest-only strips and principal-only strips are not subject to the
      requirements of Statement 133, (iii) establishes a requirement to evaluate
      interests in securitized financial assets to identify interests that are
      freestanding derivatives or that are hybrid financial instruments that contain
      an embedded derivative requiring bifurcation; (iv) clarifies that concentrations
      of credit risk in the form of subordination are not embedded derivatives; and
      (v) amends Statement 140 to eliminate the prohibition on a qualifying
      special-purpose entity from holding a derivative financial instrument that
      pertains to a beneficial interest other than another derivative financial
      instrument. This statement is effective for fiscal years beginning after
      September 15, 2006.  We do not believe that the adoption of FAS 155 will
      have a material impact on our consolidated results of operations or financial
      condition.





In
      June
      2005, the FASB issued Statement No. 154, “Accounting Changes and Error
      Corrections” (“FAS 154”), a replacement of APB No. 20, “Accounting Changes” and
      FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial
      Statements”. FAS 154 applies to all voluntary changes in accounting principle
      and changes the requirements for accounting for and reporting of a change in
      accounting principle. This statement establishes that unless impracticable,
      retrospective application is the required method for reporting a change in
      accounting principle in the absence of explicit transition requirements specific
      to the newly adopted accounting principle. It also requires the reporting of
      an
      error correction which involves adjustments to previously-issued financial
      statements similar to those generally applicable to reporting an accounting
      change retrospectively. FAS 154 became effective for accounting changes and
      corrections of errors made in our fiscal year beginning on January 1, 2006.
      The
      adoption of FAS 154 has not had a material impact on our consolidated results
      of
      operations or financial condition.





In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, An Amendment of
      ARB No. 43, Chapter 4” (“SFAS 151”).  SFAS 151 amends ARB 43, Chapter 4, to
      clarify that abnormal amounts of idle facility expense, freight, handling costs
      and wasted materials (spoilage) be recognized as current period charges. It
      also
      requires that allocation of fixed production overheads to the costs of
      conversion be based on the normal capacity of the production facilities. 
SFAS 151 became effective for us beginning with our 2006 fiscal year. The
      adoption of SFAS 151 has not had a material impact on our consolidated results
      of operations or financial position.





F-16


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




In
      December 2004, the FASB issued SFAS 123R which addresses the accounting for
      share-based payments to employees, including grants of employee stock
      options.  Under the new standard, companies will no longer be able to
      account for share-based compensation transactions using the intrinsic method
      in
      accordance with APB Opinion No. 25, *Accounting
      For Stock Issued To Employees* . 
      Instead, companies will be required to account for such transactions using
      a
      fair-value method and recognize the expense in the consolidated statement of
      operations.  We adopted SFAS 123R in our fiscal year beginning on January
      1, 2006. See *Stock-Based
      Compensation* earlier
      in this note and Note 13, Share Based Payments.





**(3)    Discontinued
      Operations**





On
      November 15, 2005, under the terms of an Asset Purchase and License Agreement
      (the Agreement), we sold our FDA-approved EIA and Western Blot HIV diagnostic
      test product lines, which included the following products: (i) urine EIA HIV-1
      diagnostic test, (ii) serum/blood Western Blot HIV-1 diagnostic test, and (iii)
      urine Western Blot HIV-1 diagnostic test (the Product Lines) to Maxim
      Biomedical, Inc. (Maxim). Under the terms of the Agreement, Maxim assumed
      certain liabilities related to the Product Lines, including two real property
      subleases in Rockville, Maryland, and lease obligations of certain equipment
      that is subject to our lease agreement with a third-party equipment lessor.
      (Refer to Note 10, Lease Commitments.) We received a 20% equity interest in
      Maxim and will receive 10% of the gross proceeds in the event (i) Maxim
      consummates a sale to a third party, including the acquisition of Maxim through
      reorganization, merger or consolidation, or the sale of all or substantially
      all
      of its assets; or (ii) Maxim merges with or into an entity controlling,
      controlled by or under common control with Maxim. We agreed to provide certain
      consulting services at no cost to Maxim for a period of twenty four months
      from
      the date of the Agreement and covenanted not to compete with the Product Lines,
      on a worldwide basis, for a period of 10 years from the date of the
      Agreement.




Summarized
      financial information of the discontinued operation is as follows for the year
      ended December 31, 2005 (in thousands).


Product
                  sales
              
              $
              2,105Product
                  costs
              
              
              4,798Selling,
                  general and administrative costs and other expenses
              
              
              (20
              )Loss
                  before income taxes
              
              
              (2,673
              )Income
                  taxes
              
              
              -Loss
                  from operations before loss on disposal
              
              
              (2,673
              )Loss
                  on disposal, net of income taxes of $0
              
              
              (425
              )Loss
                  from discontinued operation
              
              $
              (3,098
              )





Liabilities
      of the discontinued operation are as follows as of December 31, 2006 and 2005
      (in thousands):


2006
              
              2005Accounts
                  payable and accrued expenses
              
              $
              190
              
              $
              321Liabilities
                  of discontinued operation
              
              $
              190
              
              $
              321





F-17


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


**(4)
      Inventory**




Inventory
      as of December 31, 2006 and 2005 consisted of the following (in thousands):


2006
              
              2005Raw
                  materials
              
              $
              189
              
              $
              74Work-in-process
              
              
              12
              
              
              -Finished
                  goods
              
              
              63
              
              
              73Total
                  inventory
              
              $
              264
              
              $
              147


**(5)    Property
      and Equipment**




Property
      and equipment as of December 31, 2006 and 2005 consisted of the following (in
      thousands):


2006
              
              2005Computer
                  equipment
              
              $
              407
              
              $
              369Machinery
                  and equipment
              
              
              596
              
              
              149Furniture
                  and fixtures
              
              
              13
              
              
              3Leasehold
                  improvements
              
              
              17
              
              
              -Buildings
              
              
              575
              
              
              -Construction
                  in process
              
              
              284
              
              
              -1,892
              
              
              521Accumulated
                  depreciation
              
              
              (533
              )
              
              (385
              )$
              1,359
              
              $
              136




We
      recognized depreciation expense of $145,000 for the year ended December 31,
      2006
      and $368,000 attributable to both continuing and discontinued operations for
      the
      year ended December 31, 2005. We had no property and equipment applicable to
      discontinued operations at either December 31, 2006 or 2005. The increases
      in
      buildings, machinery and equipment and construction in process are primarily
      related to our consolidated Chinese joint venture manufacturing
      operations.





**(6)    Intangible
      assets**





During
      2004, we entered into various license agreements and similar arrangements under
      which we committed to invest approximately $2,700,000 to acquire the technology
      and materials necessary for the commercialization of our rapid tests. These
      licenses provide us with access to the HIV-2 antigen, to certain lateral flow
      technologies and to certain HIV-1/2 peptides to be used in our rapid tests.
      We
      recorded the license amount for each license agreement as an intangible asset.
      We began amortizing these intangible assets in 2006, when we began commercial
      sales of the products employing the licensed technology or materials and
      recognized $218,000 of amortization expense. Each of the license agreements
      also
      contains a royalty on sales component that takes into consideration the
      different pricing realities of markets around the world.





**(7)
      Deposit on China Facility Acquisition**





Deposit
      on China facility acquisition consists of payments and/or deposits made by
      Beijing Marr in conjunction with the acquisition of its manufacturing facility,
      certifications and licenses, and related assets, which are pending final
      approval and acceptance by various Chinese regulatory authorities. Upon final
      approval, we will complete the allocation of these payments to approporiate
      asset categories and evaluate them in conjunction with Statement of Financial
      Accounting Standards No. 144 - *Accounting
      for the Impairment or Disposal of Long-Lived Assets.*




F-18


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**
  **** **(8)    Accounts
      payable and accrued expenses**




Accounts
      payable and accrued expenses as of December 31, 2006 and, 2005 consisted of
      the
      following (in thousands):


2006
              
              2005Trade
                  accounts payable
              
              $
              1,519
              
              $
              1,404Accrued
                  royalties
              
              
              60
              
              
              48Accrued
                  salary, severance and vacation pay
              
              
              349
              
              
              463Accrued
                  restructuring expense
              
              
              2
              
              
              141Customer
                  prepayments on purchases
              
              
              162
              
              
              -Accrued
                  interest
              
              
              260
              
              
              184Accrued
                  consulting contract expenses
              
              
              500
              
              
              1,045Accrued
                  liabilities under intellectual property license agreements
              
              
              40
              
              
              275Accounts
                  payable and accrued expenses of consolidated joint
                  venturesventures
              
              
              251
              
              
              -Other
              
              
              357
              
              
              469Total
                  accounts payable and accrued expenses
              
              $
              3,500
              
              $
              4,029


**** **(9)    
      Notes and Debentures Payable**





We
      issued
      7% promissory notes and 8% secured convertible notes to finance our operations
      during 2005 and 2006. The
      following tables summarize the note and debenture activity for the years ended
      December 31, 2005 and 2006 (in thousands).




NetBalance
              
              
              
              
              
              
              
              Balance
              
              Discount
                  at
              
              Balance
                  at12/31/04
              
              Additions
              
              Conversions
              
              Repayments
              
              12/31/05
              
              12/31/05
              
              12/31/05**8%
                  Secured Convertible Notes –**April
                  4, 2005
              
              $
              -
              
              $
              8,098
              
              $
              (177
              )
              $
              -
              
              $
              7,921
              
              $
              (6,136
              )
              $
              1,785July
                  4, 2005 Interest
              
              
              -
              
              
              164
              
              
              -
              
              
              -
              
              
              164
              
              
              (61
              )
              
              103October
                  4, 2005 Interest
              
              
              -
              
              
              168
              
              
              -
              
              
              -
              
              
              168
              
              
              (60
              )
              
              108Total
                  8% Secured Convertible Notes
              
              $
              -
              
              $
              8,430
              
              $
              (177
              )
              $
              -
              
              $
              8,253
              
              $
              (6,257
              )
              $
              1,996**7%
                  Promissory Notes to related****party
                  -**Promissory
                  Note to Marr
              
              $
              -
              
              $
              2,000
              
              $
              -
              
              $
              (2,000
              )
              $
              -
              
              $
              -
              
              $
              -2005
                  Credit Facility with Marr
              
              
              -
              
              
              1,500
              
              
              -
              
              
              -
              
              
              1,500
              
              
              -
              
              
              1,500$
              -
              
              $
              3,500
              
              $
              -
              
              $
              (2,000
              )
              $
              1,500
              
              $
              -
              
              $
              1,500**12%
                  Convertible Debentures –**Mercator
                  assignees
              
              $
              60
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              60
              
              $
              -
              
              $
              60




F-19


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


NetBalance
              
              
              
              
              
              
              
              Balance
              
              Discount
                  at
              
              Balance
                  at12/31/05
              
              Additions
              
              Conversions
              
              Cancellations
              
              12/31/06
              
              12/31/06
              
              12/31/06**8%
                  Secured Convertible Notes –**April
                  4, 2005
              
              $
              7,921
              
              $
              -
              
              $
              (2,573
              )
              $
              (949
              )
              $
              4,399
              
              $
              (1,130
              )
              $
              3,269July
                  4, 2005 Interest
              
              
              164
              
              
              -
              
              
              (96
              )
              
              (2
              )
              
              66
              
              
              (6
              )
              
              60October
                  4, 2005 Interest
              
              
              168
              
              
              -
              
              
              (98
              )
              
              (2
              )
              
              68
              
              
              (6
              )
              
              62January
                  4, 2006 Interest
              
              
              -
              
              
              170
              
              
              (99
              )
              
              (2
              )
              
              69
              
              
              (2
              )
              
              67April
                  4, 2006 Interest
              
              
              -
              
              
              159
              
              
              (89
              )
              
              (2
              )
              
              68
              
              
              -
              
              
              68July
                  4 and 21, 2006 Interest
              
              
              -
              
              
              124
              
              
              -
              
              
              (2
              )
              
              122
              
              
              -
              
              
              122October
                  4, 2006 Interest
              
              
              -
              
              
              91
              
              
              -
              
              
              -
              
              
              91
              
              
              -
              
              
              91Total
                  8% Secured Convertible Notes
              
              $
              8,253
              
              $
              544
              
              $
              (2,955
              )
              $
              (959
              )
              $
              4,883
              
              $
              (1,144
              )
              $
              3,739**7%
                  Promissory Notes to related****party
                  -**2005
                  Credit Facility with Marr
              
              $
              1,500
              
              $
              5,000
              
              $
              -
              
              $
              (2,443
              )
              $
              4,057
              
              $
              -
              
              $
              4,057**8%
                  Promissory Notes to related****party
                  -**Chief
                  Executive Officer
              
              $
              -
              
              $
              46
              
              $
              -
              
              $
              -
              
              $
              46
              
              $
              -
              
              $
              46**12%
                  Convertible Debentures –**Mercator
                  assignees
              
              $
              60
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              60
              
              $
              -
              
              $
              60




*January
      2005 7% Promissory Note*




On
      January 14, 2005, when the market price of our common stock was $0.25 per share,
      we issued an unsecured $2,000,000 promissory note to Marr, which was funded
      on
      January 18, 2005. The promissory note required interest at a rate of 7% per
      annum and was payable in full no later than March 31, 2005. On March 30, 2005,
      we agreed with Marr to extend the maturity date of the note until April 30,
      2005. We used $2,000,000 from the proceeds of the April 2005 Secured 8% Senior
      Convertible Notes, described below, to repay the promissory note on April 4,
      2005. The effective interest rate on this note approximated the 7% stated rate.





*8%
      Secured Convertible Notes*




On
      April
      4, 2005, when the market price of our common stock was $0.27 per share, we
      concluded a private placement (the “April 2005 Placement”) to five institutional
      investors (the “2005 Investors”) of $8,000,000 of Secured 8% Convertible Notes
      due April 3, 2007 (the “Notes”). The Notes are convertible at $0.30 per share
      (the “Conversion Price”) into shares of our common stock. The Conversion Price
      of the Notes was subject to anti-dilution adjustments had we issued common
      stock
      or common stock equivalents for a price less than the Conversion Price prior
      to
      April 4, 2006, when the anti-dilution provisions expired. We also issued to
      the
      2005 Investors Series A common stock purchase warrants (the “Series A Warrants”)
      and Series B common stock purchase warrants (the “Series B Warrants), each
      exercisable after October 4, 2005 and expiring on April 3, 2010. The Series
      A
      Warrants are exercisable to purchase 26,666,667 shares of our common stock
      at
      $0.325 per share and the Series B Warrants are exercisable to purchase
      12,000,000 shares of our common stock at $0.325 per share. The Series A Warrants
      provided for anti-dilution and other adjustments of the issuable shares and
      the
      exercise prices thereof had we issued common stock or common stock equivalents
      for a price less than the exercise price of the Series A Warrants prior to
      April
      4, 2006.





In
      addition to repaying the January 2005 7% Promissory Note described above, we
      have used the proceeds from the issuance of the Notes for general working
      capital purposes as well as for the commercialization of our HIV-1/2 rapid
      tests. On June 27, 2005, we filed a registration statement for the resale of
      the
      shares of common stock underlying the Notes, the Series A Warrants, the Series
      B
      Warrants and additional Notes which may be issued in payment of interest. The
      registration statement became effective on July 1, 2005.





The
      Notes
      provide for quarterly interest to be paid in cash or by issuing additional
      Notes
      maturing on April 3, 2007. In July and October 2005, we issued an aggregate
      of
      approximately $164,000 and $168,000, respectively, of Secured 8% Convertible
      Notes convertible into an aggregate of 1,106,393 shares of common stock, in
      payment of quarterly interest (the “July and October 2005 Interest Notes”). On
      January 4, 2006, we issued an aggregate of approximately $170,000 of Secured
      8%
      Convertible Notes convertible into approximately 562,000 shares of common stock
      in payment of quarterly interest (the “January 2006 Interest Notes”) on the
      outstanding principal balance of the April 4, 2005 Notes and the July and
      October 2005 Interest Notes. On April 4, 2006, we issued an aggregate of
      approximately $159,000 of Secured 8% Convertible Notes convertible into
      approximately 520,000 shares of common stock in payment of quarterly interest
      (the “April 2006 Interest Notes”) on the outstanding principal balance of the
      April 4, 2005 Notes, the July and October 2005 Interest Notes and the January
      2006 Interest Notes. On July 4, 2006, we issued an aggregate of approximately
      $114,000 of Secured 8% Convertible Notes convertible into approximately 379,000
      shares of common stock in payment of quarterly interest (the “July 2006 Interest
      Notes”) on the outstanding principal balance of the April 4, 2005 Notes and on
      the July and October 2005 Interest Notes and the January and April 2006 Interest
      Notes. On October 4, 2006 we issued an aggregate of approximately $91,000 of
      Secured 8% Convertible Notes convertible into approximately 305,000 shares
      of
      common stock in payment of quarterly interest (the “October 2006 Interest
      Notes”) on the outstanding principal balance of the April 4, 2005 Notes and on
      the July and October 2005 Interest Notes and the January, April and July 2006
      Interest Notes (collectively, the “Interest Notes”).





F-20


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


The
      July
      and October 2005 Interest Notes and the January 2006 Interest Notes have the
      same terms and conditions, including anti-dilution provisions, as the Notes
      issued on April 4, 2005. The anti-dilution provisions of the April 4, 2005
      Notes
      and of the July and October 2005 and January 2006 Interest Notes and of the
      Series A Warrants issued in April 2005 expired on April 4, 2006 without being
      triggered. The April, July and October 2006 Interest Notes have the same terms
      and conditions as the Notes issued on April 4, 2005 and the earlier Interest
      Notes except that they do not contain anti-dilution provisions. We have not
      issued warrants in conjunction with any Interest Notes issued during 2005 or
      2006. Refer to Note 20, Subsequent Events, for information regarding additional
      notes issued in payment of interest in January 2007.





During
      September 2005, one of the 2005 Investors converted an aggregate of $177,000
      principal amount of Notes into 590,000 shares of common stock. Upon conversion,
      we wrote off to interest expense the proportional share of deferred offering
      costs (approximately $147,000) and note discount (approximately $16,000)
      attributable to the amount of the Notes converted.





During
      January 2006, two of the 2005 Investors converted Notes in the face amount
      of
      $573,000 original principal plus approximately $42,000 in related Interest
      Notes, including Notes issued in payment of interest between the most recent
      interest payment date and the conversion dates, into an aggregate of
      approximately 2,056,000 shares of the Company’s common stock. Upon conversion,
      we wrote off to interest expense the proportional share of deferred offering
      costs (approximately $40,000) and note discount (approximately $452,000)
      attributable to the amount of the Notes converted.





During
      April 2006, one of the 2005 Investors converted a Note in the face amount of
      $2,000,000 original principal plus approximately $338,000 in related Interest
      Notes, including a Note issued in payment of interest between the most recent
      interest payment date and the conversion date, into an aggregate of
      approximately 7,800,000 shares of the Company’s common stock. Upon conversion,
      we wrote off to interest expense the proportional share of deferred offering
      costs (approximately $115,000) and note discount (approximately $1,448,000)
      attributable to the amount of the Notes converted.





As
      described more completely in Note 12, Stockholders’ Deficit, during July 2006,
      we offered to amend to $0.15 per share the exercise price of the Series A
      Warrants and the Series B Warrants and other warrants issued in conjunction
      with
      certain of our previous financing arrangements for those warrant holders
      agreeing to exercise all or a portion of their warrants by July 21, 2006 (the
      “Warrant Re-pricing”). Certain of the warrant holders exercised their warrants
      to purchase an aggregate of approximately 6,396,000 shares at the reduced price
      and, in lieu of paying us cash, cancelled our obligation to repay an aggregate
      of $959,000 of our 8% Convertible Notes. We accounted for the Warrant Re-pricing
      and exercise, and the related cancellation of the 8% Convertible Notes, as
      an
      induced conversion in accordance with Statement of Financial Accounting
      Standards No. 84, “Induced Conversions of Convertible Debt” and, accordingly, we
      recognized non-cash interest expense of approximately $680,000 related to the
      excess of the fair value of the stock and additional warrants issued in the
      Warrant Re-pricing compared to the fair value of stock that would have been
      issued upon the conversion of the 8% Convertible Notes. In connection with
      the
      Warrant Re-pricing, we issued Interest Notes on July 21, 2006 in the face amount
      of approximately $10,000 for interest accrued between the July 4, 2006 interest
      payment date and the Warrant Re-pricing date and wrote off to interest expense
      the proportional share of deferred offering costs (approximately $68,000) and
      note discount (approximately $521,000) attributable to the amount of the
      Convertible Notes cancelled.





F-21


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




See
      Note
      20, Subsequent Events, for information regarding the extension of the maturity
      of the Notes and the Interest Notes.





At
      April
      4, 2005, we determined that, in addition to the anti-dilution provisions they
      contained, the Notes included a beneficial conversion feature. As a result
      of
      the anti-dilution provisions, however, the Notes were not considered
      conventional convertible debt under the provisions of Emerging Issues Task
      Force
      (EITF) Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock.* We
      further determined that the conversion feature was subject to the provisions
      of
      SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* and was
      an embedded derivative which should be bifurcated and accounted for separately.
      Accordingly, we accounted for the fair value of the derivative at inception
      as a
      discount to the face value of the Notes and a corresponding liability that
      was
      required to be marked to market at each balance sheet date. We recorded the
      change in the fair value of the derivative as interest expense. At April 4,
      2005, the date the Notes were issued, we valued the derivative at approximately
      $5,330,000 using a binomial pricing model to estimate future stock prices,
      assuming historical stock price volatility of 101.57%, a risk-free interest
      rate
      of 3.74%, an expected dividend rate of 0.00%, and a 90% probability of
      completing an additional round of equity financing during the one-year term
      of
      the derivative. As a result of changes in the market price of our stock between
      April 4, 2005 and December 31, 2005, the decrease in the remaining life of
      the
      derivative, and changes in other assumptions, our valuation of the derivative
      as
      of December 31, 2005 decreased to approximately $1,547,000, with the change
      in
      valuation being recorded as a credit to interest expense. The value of the
      derivative at December 31, 2005 was determined using a binomial pricing model
      to
      estimate future stock prices, assuming historical stock price volatility of
      101.28%, a risk-free interest rate of 4.38%, an expected dividend rate of 0.00%,
      and a 25% probability of completing an additional round of equity financing
      during the remaining term of the derivative.





The
      July
      and October 2005 Interest Notes and the January 2006 Interest Notes each
      contained the same beneficial conversion and anti-dilution features included
      in
      the Notes that were treated as an embedded derivative. Similarly, the fair
      value
      of the July and October 2005 Interest Notes and the January 2006 Interest Note
      derivatives were accounted for at inception as a discount to the face value
      of
      the Interest Notes, respectively, and a corresponding liability, and were
      required to be marked to market at each balance sheet date, with the change
      in
      the fair value of the derivative being recorded as interest expense. At July
      4,
      2005, the date the July 2005 Interest Notes were issued, we valued that
      derivative at approximately $77,000 using a binomial pricing model to estimate
      future stock prices, assuming historical stock price volatility of 101.08%,
      a
      risk-free interest rate of 3.79%, an expected dividend rate of 0.00%, and a
      90%
      probability of completing an additional round of equity financing during the
      remaining term of the derivative. At October 4, 2005, the date the October
      2005
      Interest Notes were issued, we valued that derivative at approximately $68,000
      using a binomial pricing model to estimate future stock prices, assuming
      historical stock price volatility of 105.57%, a risk-free interest rate of
      4.09%, an expected dividend rate of 0.00%, and a 50% probability of completing
      an additional round of equity financing during the remaining term of the
      derivative. As a result of changes in the market price of our stock between
      July
      4, 2005 or October, 4, 2005 and December 31, 2005, the decrease in the remaining
      life of the derivative, and changes in other assumptions, our aggregate
      valuation of those derivatives at December 31, 2005 decreased to approximately
      $47,000, with the change in valuation being recorded as a credit to interest
      expense. At January 4, 2006, the date the January Interest Notes were issued
      and
      when the market price of our common stock was $0.17 per share, we valued that
      derivative at approximately $25,000 using a binomial pricing model to estimate
      future stock prices, assuming historical stock price volatility of 101.06%,
      a
      risk-free interest rate of 4.35%, an expected dividend rate of 0.00%, and a
      25%
      probability of completing an additional round of equity financing during the
      remaining term of the derivative.





F-22


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




The
      April
      2006 Interest Notes were issued on April 4, 2006, when the market price of
      our
      common stock was $0.22 per share. The July 2006 Interest Notes were issued
      on
      July 4, 2006, when the market price of our common stock was $0.20 per share.
      The
      October 2006 Interest Notes were issued on October 4, 2006, when the market
      price of our common stock was $0.095 per share. Accordingly, there was no
      beneficial conversion feature associated with the issuance of any of these
      interest notes. As noted previously, these interest notes did not include
      anti-dilution provisions with respect to the issuance of additional equity
      instruments that we might issue in the future and, therefore, did not contain
      an
      embedded derivative requiring separate valuation or accounting treatment.





The
      effective interest rate on the interest notes ranges from approximately 8%
      to
      48% based on the stated interest rate, the amount of amortized discount, the
      amount of deferred offering costs attributable to the notes and the term of
      the
      notes.





Upon
      the
      September 2005 and January 2006 conversions of the Notes and Interest Notes,
      we
      reclassified the proportional share of the Note Derivative Liability of
      approximately $78,000 and $119,000, respectively, to additional paid-in capital.





As
      discussed more completely in the following section regarding the 2005 Marr
      Credit Facility, *7%
      Promissory Notes Payable to a Related Party* ,
      effective February 22, 2006, we agreed with Marr to extend the period in which
      we might issue promissory notes under the 2005 Credit Facility until July 31,
      2006. Based on that modification to the Credit Facility, we determined that
      we
      would intentionally not complete an additional round of financing prior to
      the
      April 4, 2006 expiration of the anti-dilution provisions of the Notes and the
      applicable Interest Notes. Accordingly, we valued the derivatives attributable
      to the April 4, 2005 Notes and the Interest Notes at February 22, 2006, when
      the
      market price of our common stock was $0.21 per share, at approximately
      $1,874,000 using a binomial pricing model to estimate future stock prices,
      assuming historical stock price volatility of 107.64%, a risk-free interest
      rate
      of 4.69%, an expected dividend rate of 0.00%, and a 0% probability of completing
      an additional round of equity financing during the remaining term of the
      derivative. We recognized this adjustment to the fair value of the derivatives
      with a charge to interest expense of approximately $375,000, and reclassified
      the note derivative liability to equity, since it was determined that no
      anti-dilution shares would be issued and all other shares issuable upon
      conversion of the Notes and the Interest Notes had been registered for resale.





At
      April
      4, 2005, we allocated the Note proceeds attributable to the fair value of the
      derivative described above to the derivative liability. In accordance with
      the
      provisions of EITF Issues No. 98-5, *Accounting
      for Convertible Securities with Beneficial Conversion Features or Contingently
      Adjustable Conversion Ratios,* and
      00-27, *Application
      of Issue No. 98-5 to Certain Convertible Instruments* ,
      we
      allocated the remaining Note proceeds of approximately $2,670,000 between the
      fair value of the Notes (determined without consideration of any anti-dilution
      or conversion features) and the fair value of the Series A Warrants and the
      Series B Warrants. We valued both the Series A Warrants and Series B Warrants
      at
      April 4, 2005 at $0.151 per share using the Black-Scholes option pricing model
      with the following assumptions: risk free interest rate of 3.90%; expected
      dividend rate of 0.00%; volatility of 103.16%; and expected term of 2.5 years.
      The relative fair value of the Series A Warrants and Series B Warrants at April
      4, 2005 was approximately $1,773,000, which we recorded as an additional
      discount to the Notes, with a corresponding credit to additional paid-in
      capital. The
      one-year anti-dilution provision contained in the Series A Warrants potentially
      reduced the exercise price but did not increase the number of shares issuable
      to
      the warrant holders. Accordingly, the Series A Warrants did not require
      liability treatment under the provisions of SFAS No. 150, *Accounting
      for Certain Financial Instruments with Characteristics of both Liabilities
      and
      Equity.* Furthermore,
      we determined that the proceeds allocated to the warrants should be treated
      as
      equity in accordance with the provisions of EITF 00-19. The
      aggregate amount of the discount to the Notes at April 4, 2005 was approximately
      $7,103,000, which we are amortizing to interest expense using the effective
      interest method prescribed by APB Opinion No. 21, *Interest
      on Receivable and Payables,* over the
      life of the Notes. The effective interest rate on these notes is approximately
      142% based on the stated interest rate, the amount of amortized discount, the
      amount of deferred offering costs attributable to the notes and their term.
      Upon
      conversion or repayment of any portion of the Notes or the Interest Notes,
      we
      have written off the proportional share of the remaining unamortized discount
      to
      interest expense.





F-23


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**
 *7%
        Promissory Notes Payable to a Related Party*




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





As
      consideration for the 2005 Credit Facility, on April 4, 2005, we issued to
      Marr
      a common stock purchase warrant (the “Marr Warrant”), expiring on April 3, 2010,
      exercisable to purchase 500,000 shares of our common stock at $0.40 per share.
      We valued the Marr Warrant on the date of grant at $0.141 per share using the
      Black-Scholes option pricing model with the following assumptions: risk free
      interest rate of 3.90%; expected dividend rate of 0.00%; volatility of 103.16%;
      and expected term of 2.5 years. We recorded the calculated value of the warrant
      as an immediate charge to interest expense and a corresponding credit to
      additional paid-in capital. The Marr Warrant provided for anti-dilution and
      other adjustments of the issuable shares and the exercise price thereof in
      the
      event that we issued common stock or common stock equivalents for a price less
      than the exercise price of the Marr Warrant within one year of its issue date.
      Had we issued additional common stock or common stock equivalents within one
      year of the issue date of the Marr Warrant, Marr would have had the right,
      but
      not the obligation, to participate in such issuance, upon the same terms as
      those offered. We registered for resale the shares of common stock underlying
      the Marr Warrant in conjunction with our registration of the shares underlying
      the common stock issuable in the April 2005 Placement.





On
      November 30, 2005, we agreed with Marr to amend the 2005 Credit Facility to
      extend the term under which we might issue promissory notes from December 31,
      2005 until April 3, 2006. The interest rate for promissory notes issued under
      the amendment was lowered to 7% per annum from 9% per annum. The term of any
      promissory notes issued under the amendment was extended so that such promissory
      notes will become due on April 3, 2007, instead of the later of twelve months
      from the issuance date or May 31, 2006. The issuance of promissory notes under
      the terms of the amendment now requires approval by a majority of a quorum
      of
      our Board of Directors, instead of the entire Board of Directors. We granted
      to
      a Marr a security interest in our assets, up to an aggregate maximum of
      $6,000,000, to secure the repayment of monies borrowed under the terms of the
      amended agreement. Proceeds from the issuance of promissory notes under the
      amended agreement may be used for general corporate purposes, including
      investments in our international subsidiaries or joint ventures. At December
      31,
      2005, we had issued Promissory Notes totaling $1,500,000 under the amended
      terms
      of the 2005 Credit Facility.





On
      January 19, 2006, we issued a $1,500,000 promissory note to Marr under the
      amended terms of the 2005 Credit Facility. Effective on February 22, 2006,
      we
      agreed with Marr to extend the period during which we could issue promissory
      notes under the 2005 Credit Facility through July 31, 2006. On February 23,
      2006, March 31, 2006, April 27, 2006 and May 29, 2006 we issued promissory
      notes
      to Marr, each in the face amount of $500,000, for an aggregate of $2,000,000.
      Effective on July 26, 2006, we agreed with Marr to further extend the period
      during which we could issue promissory notes under the 2005 Credit Facility
      through August 31, 2006. We advised Marr of our intent to issue a Note in the
      face amount of $500,000 prior to August 31, 2006, and the Note was funded on
      September 20, 2006. Each promissory note bears interest at a rate of 7% per
      annum and is payable in full on April 3, 2007. The effective interest rate
      on
      each of these notes approximates the 7% stated rate.





As
      described more completely in Note 12, Stockholders’ Deficit, during July 2006,
      we offered to amend to $0.15 per share the exercise price of warrants issued
      in
      conjunction with our May and July 2004 Private Placements, our April 2005 8%
      Convertible Notes and our Credit Facility Agreements with Marr for those warrant
      holders agreeing to exercise all or a portion of their warrants by July 21,
      2006
      (the “Warrant Re-pricing”). Marr exercised its warrants to purchase an aggregate
      of approximately 16,965,000 shares of our common stock. In lieu of paying us
      cash, Marr cancelled our obligation to repay an aggregate of $2,443,000 of
      our
      7% Promissory Notes issued under the 2005 Marr Credit Facility and $102,000
      of
      accrued interest on the 7% Promissory Notes. We accounted for the Warrant
      Re-pricing and exercise, and the related cancellation of the 7% Promissory
      Notes, as a debt extinguishment in accordance with Accounting Principles Board
      Opinion No. 26 “Early Extinguishment of Debt” and, accordingly, we recognized
      non-cash interest expense of approximately $869,000 related to the excess of
      the
      fair value of the stock and additional warrants issued in the Warrant Re-pricing
      compared to the carrying value of the 7% Promissory Notes cancelled.





F-24




**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




Effective
      on December 22, 2006, we agreed with Marr to further extend the period during
      which we could issue promissory notes under the 2005 Credit Facility through
      December 29, 2006. We issued a promissory note to Marr in the face amount of
      $1,000,000 on December 22, 2006. The promissory note bears interest at a rate
      of
      7% per annum and is payable in full on April 3, 2007. The effective interest
      rate on this promissory note approximates the 7% stated rate. See Note 20,
      Subsequent Events, regarding additional amendments to and notes issued under
      the
      2005 Credit Facility and the extension of the maturity date of the notes
      issued.





*8%
      Notes to a related party*




On
      November 10 and November 30, 2006, we issued 8% promissory notes to our Chief
      Executive Officer in the face amount of $6,300 and $40,000, respectively. The
      notes are due six months from their date of issuance, on May 10, 2007 and May
      31, 2007, respectively. Interest is payable in cash at maturity. We used the
      proceeds of the notes for general corporate purposes. See Note 20, Subsequent
      Events.





*12%
      Convertible Debentures*




On
      October 2, 2003, when the market price for our common stock was $1.31 per share,
      we issued the final $130,000 tranche of two-year debentures under a $2 million
      September 2002 12% convertible debenture commitment to four assignees of
      Mercator Momentum Fund and received net proceeds of $130,000. During October
      2003, two of these investors converted $70,000 of principal of these debentures
      at a price of $0.59 per share and we issued approximately 118,400 shares of
      our
      common stock. At December 31, 2005 and 2006, two debentures having an aggregate
      face value of $60,000 remained outstanding. We have not issued any shares with
      respect to these debentures. See Note 19, Commitments and Contingencies,
      regarding a lawsuit brought against us by the two holders of these debentures.


F-25


**CALYPTE
          BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
          31, 2006 and 2005**
 The
        following table summarizes the components of net
        interest income and (expense) related to the notes and debentures described
        above and other financing instruments reported in the consolidated statements
        of
        operations (in thousands)*.*


Year
                  ended December 31,2006
              
              
              2005Interest
                  on debt instruments paid or payable in cash
              
              $
              (284
              )
              $
              (123
              )Non-cash
                  expense composed of:Accrued
                  interest on 8% Convertible Notes (paid by issuing
                  additionalNotes)
              
              
              (481
              )
              
              (498
              )Amortization
                  and proportional write-off upon conversion of notediscounts
                  and deferred offering costs
              
              
              (5,694
              )
              
              (1,502
              )Mark
                  to market adjustment of derivative and anti-dilutionobligations
                  arising from the April 2005 financing
              
              
              (375
              )
              
              3,803Expense
                  attributable to extinguishment of 7% Promissory Notes andinduced
                  conversion of 8% Convertible Notes resulting fromwarrant
                  re-pricing and exercise, and debt cancellation
              
              
              (1,549
              )
              
              -Mark
                  to market adjustment of anti-dilution obligations arising
                  fromthe
                  May and July 2004 equity financings
              
              
              -
              
              
              506Expense
                  attributable to warrants issued in conjunction with the2005
                  Marr Credit Facility
              
              
              -
              
              
              (71
              )Expense
                  attributable to warrants issued in conjunction with the2004
                  anti-dilution obligation
              
              
              -
              
              
              (82
              )Expense
                  attributable to dividends on mandatorily redeemable SeriesA
                  preferred stock
              
              
              (120
              )
              
              (120
              )Total
                  non-cash items
              
              
              (8,219
              )
              
              2,036Total
                  interest expense
              
              
              (8,503
              )
              
              1,913Interest
                  income
              
              
              3
              
              
              39Net
                  interest (expense) income
              
              $
              (8,500
              )
              $
              1,952


**(10)    Lease
      Commitments**




*Capital
      Leases*




We
      have
      historically acquired equipment under capital lease agreements that are
      collateralized by the related equipment. During 2004, we entered into a 36
      month
      capital lease secured by machinery and equipment located at our former
      Rockville, Maryland location and having an agreed fair value of $500,000. The
      lease agreement carries an effective interest rate of approximately 18% per
      annum. In conjunction with our sale of the Legacy Business, we sold all of
      the
      assets subject to the capital lease to Maxim, but remain liable for its payment
      obligation under the lease, for which the monthly payments are reimbursed by
      Maxim. We have recorded a non-current asset for the fair value of the aggregate
      lease payments receivable from Maxim.





Future
      minimum lease payments under capital leases as of December 31, 2006 were (in
      thousands):





Year
                ended December 31, 2007
            
            $
            138Less
                amount representing interest
            
            
            (
                7
            )Present
                value of capital lease obligation
            
            
            131Capital
                lease obligations - current portion
            
            
            (131
            )Capital
                lease obligations - long-term portion
            
            $
            -




*Operating
      Leases*




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




F-26


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


Net
      rent
      expense under these leases was $195,000 and $566,000 for the years ended
      December 31, 2006 and 2005, respectively. Future minimum rental payments under
      all noncancelable operating leases, including the Rockville subleases, as of
      December 31, 2006 were (in thousands):




GrossPayments
            
            SubleasePayments
            
            Net
                RentalPaymentsYear
                ended December 31,2007
            
            $
            605
            
            $
            (602
            )
            $
            32008
            
            
            574
            
            
            (574
            )
            
            -2009
            
            
            96
            
            
            (96
            )
            
            -2010
            
            
            -
            
            
            -
            
            
            -2011
            
            
            -
            
            
            -
            
            
            -Thereafter
            
            
            -
            
            
            -
            
            
            -Total
            
            $
            1,275
            
            $
            (1,272
            )
            $
            3




**(11)    Mandatorily
      Redeemable Preferred Stock**




At
      the
      time of our original incorporation, we issued both common stock and $1,000,000
      of mandatorily redeemable Series A preferred stock. We are required to redeem
      all shares of mandatorily redeemable Series A preferred stock within 60 days
      of
      any fiscal year-end in which we attain $3,000,000 in retained earnings, and
      funds are legally available. Based on losses accumulated through December 31,
      2006, we must achieve approximately of $171,000,000 in future retained earnings
      before any repayment is required. The mandatorily redeemable Series A preferred
      stock is nonvoting and holders of these shares are entitled to receive
      cumulative dividends at the rate of $1.20 per share per annum. Through June
      30,
      2003, we had charged cumulative preferred dividends totaling $1,636,000 to
      stockholders’ deficit to accrete for the mandatorily redeemable Series A
      preferred stock redemption value with a corresponding increase in the recorded
      amount of the mandatorily redeemable Series A preferred stock. During each
      of
      the years ended December 31, 2006 and 2005, we charged cumulative preferred
      dividends totaling $120,000 to interest expense 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, we eliminated the Series A preferred
      stock from our articles of incorporation upon our reincorporation in Delaware
      in
      June 1996. However, we subsequently chose not to redeem the Series A preferred
      stock and as of December 31, 2006 it remains outstanding. The holders of such
      shares maintain the same rights as held before the reincorporation.





**(12)    Stockholders’
      Deficit**





*Amendment
      of Anti-Dilution Provisions of 2004 PIPEs*




During
      2004, we raised net proceeds of $10.0 million in two private placement
      transactions with accredited investors who purchased 26,970,000 shares of our
      common stock (the “2004 PIPEs”). The securities purchase agreements in the 2004
      PIPEs contained anti-dilution provisions that required us to issue additional
      shares of common stock to the investors if we raised additional equity financing
      at a price below $0.40 per share in the year following the closing of the
      transactions, except under the provisions of previously outstanding convertible
      debt, option or warrant agreements. The warrant agreements in the 2004 PIPEs
      also included anti-dilution provisions that called for repricing the shares
      issuable under the warrants and for a grant of additional warrants should we
      complete certain equity financing transactions at a price lower than $.40 per
      share within a one-year period.




F-27


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


The
      April
      2005 Placement described in Note 9, Notes and Debentures Payable, would have
      triggered the anti-dilution rights (the “2004 Anti-dilution Rights”) of the
      investors (the “2004 Investors”) in the 2004 PIPEs, which, if given effect
      before being approved by our stockholders, would have caused us to be in breach
      of our then-current listing agreement with the American Stock Exchange (the
      “AMEX”). To satisfy our need for additional working capital in early 2005 while
      remaining in compliance with the applicable AMEX requirements, on April 4,
      2005,
      when the market price of our common stock was $0.27 per share, we and the 2004
      Investors entered into an amendment agreement (the “Amendment”) to revise the
      2004 Anti-dilution Rights and grant the 2004 Investors additional rights.
      Further, the 2004 Investors agreed to subject the applicability of the 2004
      Anti-dilution Rights and the effectiveness of the Amendment to approval by
      our
      stockholders. Our stockholders approved the applicability of the 2004
      Anti-dilution Rights and the effectiveness of the Amendment at the Annual
      Meeting of Stockholders held on June 30, 2005. The Amendment modified the terms
      of the 2004 PIPEs to provide for the following cumulative changes in the
      securities issued to the 2004 Investors: (i) an increase to 7,079,625 (from
      6,742,500) in the number of shares of common stock to be issued, as a result
      of
      the April 2005 Placement, pursuant to the 2004 Anti-dilution Rights; (ii) an
      increase, as a result of the April 2005 Placement, in the number of shares
      issuable upon exercise of the warrants issued in the 2004 Transactions (the
      “2004 Warrants”) to purchase 1,253,177 (from 1,193,501) shares of common stock,
      at an exercise price of $0.325 (reduced from $0.45) per share of common stock;
      and (iii) an adjustment, as a result of the April 2005 Placement, of the $0.50
      per share exercise price of the original warrants issued in the 2004 PIPEs
      to
      $0.45 per share. We issued the additional shares of common stock and warrants
      and re-priced the 2004 Warrants on June 30, 2005, following stockholder
      approval.





As
      a
      result of issuing the additional anti-dilution shares and warrants, we
      reclassified the 2004 Anti-dilution Obligation of an aggregate of approximately
      $1,214,000 from liability to equity on the balance sheet at June 30, 2005.
      We
      valued the 2004 Warrants on June 30, 2005 at $0.065 per share using the
      Black-Scholes option pricing model with the following assumptions: risk free
      interest rate of 3.69%; expected dividend rate of 0.00%; volatility of 95.077%;
      and expected term of 2.5 years. We recorded the calculated value of the 2004
      Warrants as an immediate charge to interest expense and a corresponding credit
      to additional paid-in capital. The repricing of the original warrants did not
      have a material effect on their fair value. On July 8, 2005, we filed a
      registration statement for the resale of the common stock and warrants issued
      to
      the 2004 Investors on June 30, 2005.





*June
      2006 Subscription Agreements*




In
      June
      2006, we entered into subscription agreements with two accredited investors
      pursuant to which the investors agreed to purchase an aggregate of 16,666,666
      shares of our common stock at a price of $0.18 per share, for an aggregate
      of
      $3,000,000, in private placement transactions pursuant to Regulation S of the
      Securities Act of 1933, as amended. On
      July
      25, 2006, we received cash of $495,000 from one of the investors and issued
      2,750,000 shares of our common stock. We granted
      piggyback registration rights with respect to the shares issued and issuable
      under the Subscription Agreements.





*Repricing
      and exercise of Warrants, Settlement of Notes*




During
      July 2006, we offered to amend to $0.15 per share the exercise price of warrants
      issued in conjunction with the 2004 PIPEs, the April 2005 8% Convertible Notes
      and the 2005 Credit Facility with Marr for those warrant holders agreeing to
      exercise all or a portion of their warrants by July 21, 2006. We also agreed
      to
      issue to warrant holders exercising their re-priced warrants new warrants
      exercisable at a price of $0.25 per share (the “Additional Warrants”), equal in
      amount to 50% of the warrants exercised. On July 21, 2006, when the market
      price
      of our common stock was $0.19 per share, warrant holders exercised warrants
      to
      purchase an aggregate of 25,080,000 shares of our common stock at the reduced
      exercise price. Certain of the warrant holders exercised their warrants and,
      in
      lieu of paying us cash, cancelled our obligation to repay an aggregate of
      $959,000 of our 8% Convertible Notes and $2,443,000 of our 7% Promissory Notes
      issued under the 2005 Marr Credit Facility and $102,000 of accrued interest
      on
      the 7% Promissory Notes. We also received approximately $258,000 in cash
      proceeds from the exercises. The warrant holders who exercised the re-priced
      warrants received Additional Warrants to purchase an aggregate of approximately
      12,540,000 shares of our common stock. We issued the Additional Warrants on
      August 3, 2006 and they will become exercisable 6 months after their issuance,
      on February 3, 2007, and have a term of one year after issuance. We granted
      piggyback registration rights for the shares underlying the Additional Warrants.
      As indicated in Note 9, Notes and Debentures Payable, we recognized an aggregate
      of $1,549,000 in non-cash interest expense related to the warrant re-pricing
      and
      exercise and debt cancellation. See Note 20, Subsequent Events, for information
      regarding amendments to the Additional Warrants.




F-28


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


Marr
      exercised all of its outstanding warrants and purchased approximately 16,965,000
      shares of our common stock. Marr remains our largest stockholder, holding
      approximately 30% of our outstanding common stock at December 31, 2006.





*Common
      Stock Subscribed*




On
      November 15, 2006, we entered into a letter agreement with our Chief Executive
      Officer under which he advanced $100,000 to us as an investment in a prospective
      equity financing that we have not completed at December 31, 2006. We have not
      yet issued any shares of our common stock under the agreement. We used the
      funds
      received for general corporate purposes. See Note 20, Subsequent
      Events.





*Warrants,
      options and stock grants*




During
      2005, we issued stock grants for 695,972 registered shares of our common stock
      from our option plans and other registered share reserves to certain consultants
      and other vendors under various agreements and recorded non-cash selling,
      general and administrative expense of approximately $179,000, net of accrued
      and
      prepaid expenses relating to these grants.





During
      2005, we issued options to consultants providing legal, investor relations
      and
      manufacturing services to purchase an aggregate of 1,629,365 shares of our
      common stock as partial compensation for these services. These options were
      non-forfeitable and fully vested at the date of issuance and were valued using
      the Black-Scholes option pricing model using the following range of
      assumptions:





Low
            
            HighExercise
                price per share
            
            $
            0.14
            
            $
            0.34Market
                price of Calypte’s stock on date of issuance
            
            $
            0.14
            
            $
            0.34Assumptions:Expected
                dividend yield
            
            
            0.0
            %
            
            0.0
            %Risk
                free rate of return
            
            
            3.65
            %
            
            4.34
            %Contractual
                life
            
            
            5
                years
            
            
            10
                yearsVolatility
            
            
            204.94
            %
            
            245.07
            %Fair
                Market Value
            
            $
            0.14
            
            $
            0.34





Pursuant
      to the requirements of FASB Statement No. 123 and EITFs 96-18 and 00-18 related
      to accounting for stock-based compensation, we recognized non-cash selling,
      general and administrative expense in the amount of approximately $258,000
      attributable to these options at the date of grant in 2005. In September 2005,
      one of the consultants exercised an option to purchase 857,143 shares of our
      common stock at $0.14 per share and we received proceeds of
      $120,000.





On
      February 9, 2005, the Compensation Committee of our Board of Directors approved
      a consulting contract under which the Chairman of the Board of Directors
      provided us certain strategic and advisory services through July 31, 2005 (the
      “Consulting Contract”). Under the terms of the Consulting Contract and
      concurrent with its approval by the Compensation Committee, we granted to our
      Chairman immediately exercisable options to purchase 850,000 shares of our
      common stock at an exercise price of $0.35 per share, which was the market
      price
      of our common stock on the date the option was granted. The options have a
      life
      of ten years and were granted pursuant to our 2004 Incentive Plan. As permitted
      by FASB Interpretation No. 44, “Accounting for Certain Transactions involving
      Stock Compensation,” we did not recognize any expense in connection with the
      grant of this option.




F-29


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


During
      2006, we issued stock grants for 2,265,630 shares of our common stock to certain
      related parties and consultants under various agreements and recorded non-cash
      selling, general and administrative expense of approximately $457,000, net
      of
      accrued and prepaid expenses related to these grants. Included in these grants
      are:




· **
            1,000,000
                shares awarded to our Chairman under the terms of a letter agreement
                approved by the Compensation Committee of our Board of Directors
                on
                January 4, 2006 pursuant to which the Chairman served as our interim
                Chief
                Executive Officer from October 3, 2005 through September 30, 2006;





·
            311,736
                shares awarded to the Chairman in February 2006 in lieu of cash
                compensation to which he was entitled under the terms of the letter
                agreement for the period of October 2005 through January 2006; and





·
            953,894
                shares awarded to consultants and service providers for
                services.





On
      October 31, 2006, when the market price of our common stock was $0.085 per
      share, we issued an immediately exercisable warrant to purchase 500,000 shares
      of our common stock as compensation for investment banking services. We valued
      the warrant at $0.084 per share using the Black-Scholes option pricing model
      and
      the following assumptions: exercise price - $0.085 per share; contractual term
      -
      5 years, volatility - 220.56%; risk free interest rate - 4.69%, dividend yield
      -
      0%. We recorded $42,000 of non-cash selling, general and administrative expense
      in connection with this warrant. We did not grant registration rights for the
      shares underlying the warrant.





At
      December 31, 2006, we had warrants outstanding to purchase an aggregate of
      42,543,108 shares of our common stock at a weighted average price of $0.32
      per
      share, as summarized in the following table:


ExerciseNumber
                  of
              
              Price
                  perShares
              
              Share
              
              Expiration
                  DateSeries
                  A and Series B warrants issued in connection with April
                  2005Placement,
                  including warrants to placement agents
              
              
              24,041,610
              
              $
              0.325
              
              
              April
                  3, 2010Warrants
                  issued to investors in connection with the 2004 PIPEs
              
              
              4,091,500
              
              $
              0.45
              
              
              May
                  28, 2009 or July 9, 2009Anti-dilution
                  warrants issued to investors in the 2004 PIPEs
              
              
              885,677
              
              $
              0.325
              
              
              May
                  28, 2009 or July 9, 2009Warrants
                  issued to placement agents in connection with the 2004
                  PIPEs
              
              
              178,800
              
              $
              0.50
              
              
              May
                  28, 2009 or July 9, 2009Additional
                  Warrants issued to investors exercising previously issuedwarrants
                  in connection with July 2006 Warrant Re-pricing
              
              
              12,540,238
              
              $
              0.25
              
              
              August
                  3, 2007Warrants
                  issued for investment banking services
              
              
              500,000
              
              $
              0.085
              
              
              October
                  31, 2011All
                  other
              
              
              
              
              $
              0.406
                  to
              
              
              September
                  10, 2007 to305,283
              
              $
              3.45
              
              
              May
                  6, 200942,543,108


*Common
      Stock trades on the OTC Bulletin Board*




On
      July
      31, 2006, we notified the American Stock Exchange (“Amex”) that our Board of
      Directors had approved withdrawing our common stock from trading on the Amex.
      The Amex had previously informed us that we were not in compliance with the
      Exchange’s continued listing standards and would need to demonstrate that we had
      regained compliance with the standards by July 31, 2006 or the Amex would
      commence de-listing procedures. We were not in compliance with the continued
      listing standards at July 31, 2006. Effective September 8, 2006, our common
      stock began trading on the NASD Over-the-Counter Bulletin Board under trading
      symbol “CBMC”.





*Change
      of Control Provisions*




Certain
      provisions of our Certificate of Incorporation and Bylaws may have the effect
      of
      preventing, discouraging or delaying any change in the Company’s control 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, our Board of Directors declared a dividend
      distribution of one preferred share purchase right (a Right) for each
      outstanding share of our common stock. 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 we approve because
      the Rights do not become exercisable in the event of a permitted offer or other
      acquisition exempted by the Board.





F-30


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


**(13)    Share
      Based Payments**




We
      adopted *Statement
      of Financial Accounting Standards No. 123 (revised 2004), Share-Based
      Payment* (“SFAS
      123R”) effective January 1, 2006. SFAS 123R requires that we recogize the fair
      value of stock compensation, including stock options, in our net loss. We
      recognize stock compensation expense over the requisite service period of the
      individual grantees, which generally is the same as the vesting period of the
      grant. We account for all of our stock compensation as an equity instrument.
      Prior to January 1, 2006, we followed Accounting Principles Board Opinion
      25, “Accounting for Stock Issued to Employees,” (“APB 25”) and related
      interpretations in accounting for stock-based compensation for our employees.
      We
      adopted SFAS 123R using the modified prospective method. Under this method,
      we
      apply the provisions of SFAS 123R to all awards granted or modified after the
      date of adoption. We also recognize the unrecognized expense attributable to
      awards not yet vested at our January 1, 2006 date of adoption in net loss in
      the
      periods after the date of adoption using the same valuation method (i.e.
      Black-Scholes) and assumptions used under the original provisions of SFAS 123,
“Accounting for Stock-Based Compensation,” as disclosed on a pro-forma basis in
      our previous filings and earlier in Note 2, Significant Accounting Policies,
      in
      these financial statements. Although we have not granted any stock options
      to
      employees since our adoption of SFAS 123R, under its provisions, we recorded
      approximately $149,000 of stock based compensation expense in our statement
      of
      operations for the year ended December 31, 2006. We assumed an annual
      pre-vesting forfeiture rate of 7.75% in determining our 2006 stock compensation
      expense. Following the provisions of the modified prospective method, we have
      not restated our consolidated statement of operations for 2005 to reflect the
      adoption of SFAS 123R. Accordingly, the results reported in the statement of
      operations for 2006 are not directly comparable to the results for 2005.





We
      generally issue stock option grants to employees with an exercise price equal
      to
      the market price at the grant date. All options granted in 2005 were granted
      at
      market, at a weighted average price of $0.24 per share. Prior to our adoption
      of
      SFAS 123R, to the extent that the market price of the common stock exceeded
      the
      exercise price of the options, we recognized deferred compensation for the
      intrinsic value in accordance with APB 25 and FIN 44. We amortized deferred
      compensation on a straight-line basis over the vesting period of the option.




We
      value
      option grants to non-employees at the date of grant using the Black-Scholes
      option-pricing model. Option grants that do not include sufficient disincentive
      for non-performance are accounted for in accordance with 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, we record an adjustment to deferred compensation
      and consultant expense to reflect the impact of the fair value, as remeasured
      at
      quarter-end, of the options based on changes to our stock price.





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





At
      December 31, 2006, we had options to purchase shares of our common stock
      outstanding under each of the following plans:





*2004
      Incentive Plan*




At
      the
      annual stockholders’ meeting in June 2004, our stockholders approved the
      adoption of the 2004 Incentive Plan (the 2004 Plan) to replace our 2000 Equity
      Incentive Plan (the 2000 Incentive Plan), for which only a small number of
      authorized shares remained available for grant. The stockholders authorized
      30,000,000 shares for awards from the 2004 Plan. At the annual meeting of
      stockholders in June 2005, the stockholders authorized an additional 17,000,000
      shares for awards from the 2004 Plan and an increase from 8,000,000 shares
      to
      20,000,000 shares in the number of shares of our common stock which may be
      issued as restricted share or restricted share unit awards under the 2004 Plan.
      The Compensation Committee of our Board of Directors administers the Plan.
      The
      Board of Directors may amend or modify the 2004 Plan at any time. It will expire
      in June 2014, unless terminated earlier by the Board of Directors. At December
      31, 2006, there were 26,492,857 shares of our common stock available for grant
      under the 2004 Plan.





F-31


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


*2005
      Director Incentive Plan*




At
      the
      annual stockholders’ meeting in June 2005, our stockholders approved the
      adoption of the 2005 Director Incentive Plan (the 2005 Director Plan) to replace
      the 1995 Director Option Plan (the 1995 Director Plan), which was scheduled
      to
      expire in December 2005. The stockholders authorized 18,000,000 shares for
      awards from the 2005 Director Plan. The Compensation Committee of our Board
      of
      Directors administers the 2005 Director Plan. The Board of Directors may amend
      or modify the 2005 Director Plan at any time. It will expire in June 2015,
      unless terminated earlier by the Board of Directors. Through December 31, 2006,
      we have not granted any options or other awards under the 2005 Director Plan
      and, at that date, 18,000,000 shares of our common stock remained available
      for
      grant under the 2005 Director Plan.





*2000
      Equity Incentive Plan*




In
      June
      2000, our Board of Directors and stockholders approved the adoption of the
      2000
      Equity Incentive Plan (the “2000 Incentive Plan”) to replace the 1991 Incentive
      Stock Plan, which expired in April 2001. The Compensation Committee of our
      Board
      of Directors administers the Plan. The Board of Directors may amend or modify
      the 2000 Incentive Plan at any time. It has been replaced by the 2004 Plan,
      but
      has not been formally terminated by the Board of Directors. During 2005 and
      2006
      we granted only stock bonus awards from the 2000 Incentive Plan and we do not
      anticipate making additional option grants from the plan. We recorded
      compensation expense of $204,000 and $140,000 attributable to stock bonus awards
      of 1,265,630 and 629,305 shares of common stock granted from the 2000 Incentive
      Plan to consultants in lieu of cash compensation during 2006 and 2005,
      respectively. Compensation expense attributable to stock bonuses is determined
      by multiplying the closing market price of the Company’s common stock on the
      date of grant by the number of shares granted. The weighted average price of
      shares issued as stock bonuses was $0.16 in 2006 and $0.22 in 2005. At December
      31, 2006, there were 833,976 shares of our common stock available for grant
      under the 2000 Incentive Plan.




*1995
      Director Option Plan*




In
      December 1995, our Board of Directors approved the 1995 Director Option Plan
      (the Director Option Plan). At the annual meeting of stockholders in June 2005,
      our stockholders approved the 2005 Director Incentive Plan to replace the
      Director Option Plan, which expired in accordance with its terms in December
      2005. Under the Director Option Plan, the Board of Directors determined the
      number of options to purchase shares of our stock that were granted each year
      to
      newly-elected or re-elected directors. We granted non-statutory options under
      this plan to non-employee directors or, pursuant to an agreement between us
      and
      another person, entity or affiliate with whom a non-employee director was
      associated, to that other person, entity, or affiliate. Each option granted
      under the Director Option Plan was exercisable at 100% of the fair market value
      of our common stock on the date the option was granted and generally had a
      term
      of 10 years. Each grant under the plan vested monthly over the twelve month
      period commencing with the director’s date of election or re-election, provided
      that the option became vested and fully exercisable on the date of the next
      annual meeting of stockholders if such meeting occurred less than one year
      after
      the date of the grant. There are no shares of our common stock available for
      grant under the Director Option Plan at December 31, 2006.





*1991
      Incentive Stock Plan*




In
      April
      1991, our Board of Directors approved the adoption of the Incentive Stock Plan
      (the Stock Plan). A total of 141,366 shares of common stock were reserved for
      issuance under the Stock Plan. Since the adoption of the 2000 Equity Incentive
      Plan in June 2000, no additional shares have been granted from the Stock Plan.
      Other than the expiration of unexercised options during 2006, there was no
      activity in the Stock Plan during 2005 or 2006 and no shares are available
      for
      grant under the Stock Plan.





F-32


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


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





*Description
      of the 2004 Plan and the 2005 Director Plan*




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




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




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





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





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




F-33


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


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





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





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




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




The
      following table presents a summary of option activity for all of our stock
      option plans from December 31, 2004 through December 31, 2006.


Weighted
              
              Weighted
              
              AggregateAverage
              
              Average
              
              IntrinsicExercise
              
              Remaining
              
              Value
                  atPrice
                  per
              
              Contractual
              
              DateOptions
              
              Share
              
              Term
                  (years)
              
              IndicatedOptions
                  outstanding at December 31, 2004
              
              
              27,162,219
              
              $
              0.572Options
                  granted
              
              
              5,074,365
              
              $
              0.242Options
                  exercised
              
              
              (3,026,557
              )
              $
              0.232Options
                  forfeited or expired
              
              
              (1,819,148
              )
              $
              0.541Options
                  outstanding at December 31, 2005
              
              
              27,390,879
              
              $
              0.551
              
              
              7.99
              
              $
              12,500Options
                  granted
              
              
              -
              
              
              -Options
                  exercised
              
              
              (141,112
              )
              $
              0.126Options
                  forfeited or expired
              
              
              (4,840,997
              )
              $
              0.444Options
                  outstanding at December 31, 2006
              
              
              22,408,770
              
              $
              0.576
              
              
              7.36
              
              $
              2,534Options
                  vested and exercisable at December 31, 2005
              
              
              25,846,172
              
              $
              0.566
              
              
              7.93
              
              $
              10,739Options
                  vested and exercisable at December 31, 2006
              
              
              21,954,053
              
              $
              0.583
              
              
              7.34
              
              $
              2,534




F-34


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**




The
      following table summarizes information about stock options outstanding under
      all
      of our option plans at December 31, 2006.


Options
                  Outstanding
              
              Options
                  ExercisableWeightedAverage
              
              Weighted
              
              
              
              WeightedRange
                  of
              
              
              
              Remaining
              
              Average
              
              
              
              AverageExercise
              
              Number
              
              Years
                  to
              
              Exercise
              
              Number
              
              ExercisePrices
              
              Outstanding
              
              Expiration
              
              Price
              
              Exercisable
              
              Price$0.01
                  to $0.31
              
              
              1,900,865
              
              
              7.63
              
              $
              0.232
              
              
              1,508,924
              
              $
              0.238$0.32
                  to $0.56
              
              
              3,248,683
              
              
              6.86
              
              $
              0.344
              
              
              3,192,574
              
              $
              0.344$0.585
              
              
              16,600,000
              
              
              7.47
              
              $
              0.585
              
              
              16,600,000
              
              $
              0.585$0.60
                  to $170.63
              
              
              659,222
              
              
              6.34
              
              $
              2.494
              
              
              652,555
              
              $
              2.51322,408,770
              
              
              7.36
              
              $
              0.576
              
              
              21,954,053
              
              $
              0.583




The
      aggregate intrinsic value is the sum of the amounts by which the quoted market
      price of our common stock at December 31, 2006, $0.072 per share, exceeded
      the
      exercise price of the options, for those options for which the quoted market
      price exceeded the exercise price (“in-the-money-options”). The aggregate
      intrinsic value of options exercised on the dates the options were exercised
      was
      approximately $18,000 and $265,000 for the years ended December 31, 2006 and
      2005, respectively.





At
      December 31, 2006, the expected compensation cost of options outstanding but
      not
      yet vested was approximately $47,000 . We
      expect to recognize this cost over a weighted average period of approximately
      8
      months. We have not recorded any income tax benefits for stock-based
      compensation arrangements for the year ended December 31, 2006, as we have
      cumulative operating losses and have established full valuation allowances
      for
      our income tax benefits.





We
      record
      deferred compensation related to options granted to non-employees when the
      option is not immediately exercisable. For the year ended December 31, 2005,
      we
      recorded compensation expense of approximately $298,000 related to approximately
      1,629,000 options granted from the 2004 Plan to non-employees, of which 200,000
      were not granted as immediately exercisable. We recorded deferred compensation
      of approximately $22,000 for the options granted under the 2004 Plan that were
      not immediately exercisable. We amortized this amount over the relevant period
      of service and recognized $11,000 in amortized compensation expense for the
      year
      ended December 31, 2005 and $2,000 for the year ended December 31, 2006 after
      consideration of fair value remeasurements reflecting changes in the market
      price of our common stock.





In
      2006,
      we granted a stock bonus award of 1,000,000 shares of our common stock from
      the
      2004 Plan and recognized $250,000 in selling general and administrative expense.
      We granted no stock bonus or other forms of equity awards from the 2004 Plan
      during 2005 and, accordingly, recorded no compensation expense. We recorded
      $204,000 and $140,000 of compensation expense in 2006 and 2005, respectively,
      attributable to stock bonus awards of 1,265,630 and 629,305 shares of common
      stock granted from the 2000 Incentive Plan as compensation to consultants.
      We
      determine compensation expense attributable to stock bonuses by multiplying
      the
      closing market price of our common stock on the date of grant by the number of
      shares granted.





*1995
      Employee Stock Purchase Plan*




In
      April
      2005, our Board of Directors terminated our Employee Stock Purchase Plan (ESPP),
      which it had approved in December 1995. The ESPP was a qualifying plan under
      Section 423 of the Internal Revenue Code. Under the ESPP, an eligible employee
      could purchase shares of our common stock 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 our common stock on the first day of an offering
      period under the ESPP 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 lasted for twenty four months; stock purchases occurred on
      June
      30 and December 31 in 2004. There were no stock purchases in 2005 prior to
      the
      termination of the ESPP.




F-35


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


**(14)    Section
      401(k) Plan**




Effective
      January 1, 1995, we adopted a Retirement Savings and Investment Plan (the
“401(k) Plan”) covering our full-time employees located in the United States.
      The 401(k) Plan is intended to qualify under Section 401(k) of the Internal
      Revenue Code. Under the terms of the 401(k) Plan, employees may elect to reduce
      their current compensation by up to the statutorily prescribed annual limit
      and
      to have the amount of such reduction contributed to the 401(k) Plan. The 401(k)
      plan permits us to make contributions which become vested to our employees
      over
      terms as described in the plan, but we made no such contributions in either
      2005
      or 2006.







**(15)    Income
      Taxes**




The
      provision for income taxes for all periods presented in the 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:




2006
            
            2005Computed
                expected tax expense
            
            $
            (4,680
            )
            $
            (2,979
            )Losses
                and credits for which no benefits have been recognized
            
            
            4,677
            
            
            2,925Other
            
            
            5
            
            
            56$
            2
            
            $
            2





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





December
                31,2006
            
            2005Deferred
                tax assets:Net
                operating loss carryovers
            
            $
            56,611
            
            $
            49,639Research
                and development credits
            
            
            2,270
            
            
            2,207Other
            
            
            1,090
            
            
            3,599Total
                gross deferred tax assets
            
            
            59,971
            
            
            55,445Valuation
                allowance
            
            
            (59,971
            )
            
            (55,445
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





The
      net change in the valuation allowance for the years ended December 31, 2006
      and
      2005 was an increase of $4,526,000 and $3,259,000, respectively. Because there
      is uncertainty regarding our ability to realize our deferred tax assets, a
      100%
      valuation allowance has been established. When realized, deferred tax assets
      related to employee stock options will be credited to additional paid-in
      capital.




As
      of
      December 31, 2006, we had federal tax net operating loss carryforwards of
      approximately $159,556,000 which will expire in the years 2007 through 2026.
      We
      also had federal research and development credit carryforwards as of December
      31, 2006 of approximately $1,577,000, which will expire in the years 2007
      through 2026.




F-36


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


State
      tax
      net operating loss carryforwards were approximately $40,480,000 and state
      research and development credit carryforwards were $1,033,000 as of December
      31,
      2006. The state net operating loss carryforwards will expire in the years 2007
      through 2016 and the state research and development credits will carryforward
      indefinitely.




Our
      ability to utilize our net operating loss and research and development tax
      credit carryforwards may be limited in the future if it is determined that
      we
      experienced an ownership change, as defined in Section 382 of the Internal
      Revenue Code.





**(16)    Royalty
      and License Agreements**




We
      have
      entered into arrangements with various organizations for the rights to utilize
      certain patents and proprietary rights under licensing agreements in exchange
      for royalty payments based on our sales of certain products.  As discussed
      in Note 6, Intangible Assets, during 2004 we entered into license agreements
      for
      technology and materials required to commercialize our rapid tests and the
      BED
      Incidence test. In addition to the initial or base license payments we have
      recorded as intangible assets, the agreements also contain a royalty on sales
      component based on sales of our rapid test products.  The underlying
      patents expire between 2006 and 2017.  There are minimum payments required
      by certain of the agreements that apply regardless of the amount of our
      sales.   The royalty obligations are royalty payments under some
      agreements.





We
      had
      paid royalties based on a percentage of net sales of licensed products or annual
      minimum amounts to five entities on our Legacy Business products. At December
      31, 2006, we are approximately $190,000 in arrears on the payment of royalties
      under certain of the licensing agreements covering our former Legacy Business
      products.





**(17)    Employment
      and Consulting Agreements**





In
      February 2005, the Compensation Committee of the Board of Directors approved
      a
      consulting contract under which the Chairman of the Board of Directors provided
      certain strategic and advisory services to us through July 31, 2005 (the
“Consulting Contract”). Under the terms of the Consulting Contract and
      concurrent with its approval by the Compensation Committee, we granted the
      Chairman immediately exercisable options to purchase 850,000 shares of our
      common stock at an exercise price of $0.35 per share, which was the market
      price
      of our common stock on the date the option was granted. The options have a
      life
      of ten years and were granted pursuant to the 2004 Incentive Plan. As indicated
      in Note 12, we did not record any expense in conjunction with this option grant.
      On October 3, 2005, following the resignation of the Company’s president and
      chief operating officer, the Board of Directors appointed its Chairman as
      interim Chief Executive Officer, effective immediately. On January 4, 2006,
      the
      Compensation Committee of the Board of Directors approved a letter agreement
      outlining the terms and compensation of the Chairman’s additional service as
      interim Chief Executive Officer. Under the terms of the letter agreement, the
      Chairman was to receive cash compensation of $15,000 per month, beginning
      October 3, 2005 and a grant of 1,000,000 shares of our common stock. The
      Chairman continued to serve as interim Chief Executive Officer through April
      2006. In February 2006, we issued the Chairman 311,736 shares of our common
      stock valued at $60,000 in lieu of cash payments under the letter agreement
      for
      the months of October 2005 through January 2006. The Board of Directors
      appointed the Chairman as Chief Executive Officer and, effective September
      26,
      2006, we entered into a two year employment agreement with automatic
      one-year renewal options that includes an annual salary of $350,000, other
      cash
      payments as described in the agreement, a grant of 2,000,000 shares of our
      common stock and a grant of 2,500,000 shares of restricted stock units which
      vest in quarterly installments. At December 31, 2006, we had not yet made the
      stock or restricted stock unit grants.





In
      January 2004, we entered into a three year employment agreement with an officer
      that included an annual salary of $250,000. On February 24, 2004, subject to
      the
      approval of our stockholders of the 2004 Incentive Plan, the officer was also
      conditionally granted options to purchase 5,000,000 shares of our common stock
      at an exercise price of $0.585 per share, which was the market price on that
      date. Upon the stockholders’ approval of the 2004 Incentive Plan on June 22,
      2004, when the market price of our common stock was $0.52 per share, the grant
      became effective, with an exercise price of $0.585 per share. The
      options were exercisable 50% upon grant and 50% on the one year anniversary
      of
      the grant and have a ten year term. In April 2005, the Compensation Committee
      of
      the Board authorized an increase in the officer’s annual salary to $350,000 plus
      an annual housing allowance of $30,000. The officer resigned effective September
      29, 2005, but remains associated with us under a consulting agreement pursuant
      to which he is paid $14,000 per month for consulting services.




F-37


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


In
      January 2003, we entered into a twelve month employment agreement with an
      officer, with automatic renewal options, that included a base salary of $200,000
      and fully vested options to purchase 108,333 shares of our common stock at
      $0.32
      per share on May 29, 2003. Additionally, on May 29, 2003, the officer was also
      granted fully-exercisable options to purchase 24,038 shares of our common stock
      at $0.01 per share, in recognition of an earlier salary deferral arrangement,
      and options to purchase 625,000 shares of our stock at $0.32 per share. The
      latter options were exercisable 50% upon grant and 50% on the one year
      anniversary of the grant. On February 24, 2004, subject to the approval of
      our
      stockholders of the 2004 Incentive Plan, the officer was conditionally granted
      options to purchase 1,500,000 shares of our common stock at an exercise price
      of
      $0.585 per share, which was the market price on that date. Upon the
      stockholders’ approval of the 2004 Incentive Plan on June 22, 2004, when the
      market price of our common stock was $0.52 per share, the grant became
      effective, with an exercise price of $0.585 per share. The options were
      exercisable 50% upon grant and 50% on the one year anniversary of the grant
      and
      have a ten year term.  In
      conjunction with the August 2005 relocation of our administrative headquarters
      to Lake Oswego, Oregon and our October 2005 appointment of another officer,
      this
      officer was constructively terminated under the terms of the employment
      agreement, triggering our liability of $200,000 to him, which we had accrued
      but
      not paid as of December 31, 2006. See Note 20, Subsequent Events.





In
      May
      2002, in conjunction with a financing proposal, the independent members of
      the
      Board of Directors appointed a new Executive Chairman and entered into a five
      year employment agreement with him. The employment agreement specified an annual
      salary of $400,000 and allowed for annual increases subject to the Company’s
      performance and approval of the Compensation Committee of the Board of
      Directors. On
      February 24, 2004, subject to the approval of the stockholders of the 2004
      Incentive Plan, the Executive Chairman was conditionally granted options to
      purchase 5,000,000 shares of our common stock at an exercise price of $0.585
      per
      share, which was the market price on that date. Upon the stockholders’ approval
      of the 2004 Incentive Plan on June 22, 2004, when the market price of our common
      stock was $0.52 per share, the grant became effective, with an exercise price
      of
      $0.585 per share. The
      options were exercisable 50% upon grant and 50% on the one year anniversary
      of
      the grant and had a ten year term.  The
      Executive Chairman resigned effective November 15, 2004 as the Company’s
      Executive Chairman and as a member of the Company’s Board of Directors. Under
      the terms of a Separation and Consulting Agreement and Release of Claims, we
      entered into a consulting arrangement that extended through November 15, 2006
      under which we agreed to pay approximately $1 million and to accelerate vesting
      of all his then-unvested options. We accrued the liability under the terms
      of
      the Separation Agreement at December 31, 2004. In January 2005, the Executive
      Chairman exercised previously issued and vested options to purchase 1,625,000
      shares of our common stock in the amount of $520,000. During 2005 and 2006,
      we
      paid the amounts due under the Separation Agreement.





In
      April
      2003, we entered into a three-year consulting agreement for advisory and other
      services related to the marketing, distribution and sale of our products. The
      agreement obligated us to pay the consultant an aggregate of $3,000,000 in
      cash
      as follows: $750,000 in 2003, $1,000,000 in both 2004 and 2005, and $250,000
      in
      2006; and issue him an aggregate of 200,000 shares of our common stock. At
      December 31, 2004, we had paid an aggregate of $1,000,000 and issued 66,666
      shares of our common stock pursuant to the contract. During 2005, we
      renegotiated the contract with the consultant to reduce our obligation for
      cash
      payments to $1,250,000 and extend the payment period. Under the terms of the
      renegotiated contract, which obligation we accrued in 2005, we paid the
      consultant $250,000 and issued 66,667 shares of our common stock to him during
      2005. We paid the consultant $500,000 in 2006 and, at December 31, 2006, have
      a
      remaining liability of $500,000 due to him in 2007.





**(18)    Related
      Party Transactions**





In
      October 2005, prior to our acquisition of our 51% equity interest in Beijing
      Marr, Beijing Marr received an unsecured, non-interest-bearing advance of
      approximately $1,696,000 from Beijing Mobix, an affilate of Marr and Marr Asia.
      The proceeds of the advance were used by Beijing Marr in the acquisition of
      its
      manufacturing facility and other assets. We have reflected this advance as
      a
      current liability in our Consolidated Balance Sheet at December 31, 2006.




F-38


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


In
      October 2005, Beijing Calypte received an unsecured, non-interest-bearing
      advance in the amount of $150,000 from Beijing Mobix. In November 2005, Beijing
      Calypte also received an unsecured, non-interest-bearing advance in the amount
      of $25,000 from its Executive Chairman. Beijing Calypte used each of these
      advances to fund payroll and for other general corporate expenses. We have
      reflected these advances as current liabilities in our Consolidated Balance
      Sheet at December 31, 2006.





As
      described in Note 9, Notes and Debentures Payable, and Note 12, Stockholders’
Deficit, we issued 8% Promissory Notes in the aggregate amount of $46,300 to
      our
      Chief Executive Officer and received $100,000 as an advance from him for
      participation in a future equity financing during 2006. See Note 20, Subsequent
      Events.





As
      described in Note 9, Notes and Debentures Payable, we issued a Promissory Note
      in the face amount of $2,000,000 to our largest stockholder in January 2005
      and
      entered into a Credit Facility Agreement in April 2005 that was subsequently
      modified during 2005 and 2006. At December 31, 2006, we have Promissory Notes
      in
      the face amount of $4,057,000 outstanding under the credit facility. See Note
      20, Subsequent Events, for a description of additional borrowings under and
      amendments to the amended 2005 Credit Facility in 2007.




In
      December 2005, we entered into an Equity Transfer Agreement with Marr Asia,
      an
      affiliate of Marr Technologies BV. Under the terms of the Equity Transfer
      Agreement, we acquired from Marr Asia a 51% equity interest in Beijing Marr.
      The
      Equity Transfer Agreement became effective on January 18, 2006, the date it
      was
      approved by the Huairou County Commerce Bureau. Pursuant to the Equity Transfer
      Agreement, we will contribute $1,836,000 to the registered capital of Beijing
      Marr and Marr Asia will contribute $1,764,000. Through December 31, 2006,
      we had made $1,170,000 and Marr Asia had made $1,254,000 of our respective
      capital contributions. The business purpose of Beijing Marr is to pursue the
      manufacture, distribution, marketing and sale of our rapid test products in
      China.





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





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





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





**(19)    Commitments
      and Contingencies**





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





In
      January 2006, a complaint was filed against us and certain of our current and
      former officers by Logisticorp, Inc. and Southwest Resource Preservation, Inc.
      (collectively, the “Complainants”) in the Superior Court of the State of
      California in and for the County of Los Angeles - Central District seeking
      damages in the amount of approximately $1,100,000, plus interest, trading
      penalties of $5,000 per day and other damages. On December 12, 2006, the court
      entered a final judgment granting our summary judgment motion to dismiss the
      complaint for failure to state a cause of action.




F-39


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


In
      May
      2006, we were notified that on March 15, 2006, a complaint was filed against
      us
      in Beijing No. 1 Intermediate People’s Court by Beijing Zhong Yang Pute
      Biomedical Tech. Corporation (“Zypute”) seeking damages of approximately
      $350,000 relating to a distribution agreement dated October 10, 2002 (the
“Distribution Agreement”) and a Product Replacement and Donation Agreement
      signed March 25, 2004 (the “Replacement Agreement”) between Zypute and us.
      Pretrial discovery proceedings began in November 2006. Based upon the costs
      and
      uncertainties associated with defending ourselves in China, we determined that
      it was in the best interests of our stockholders to settle this matter with
      Zypute. In January 2007, we entered into a settlement agreement with Zypute
      pursuant to which we agreed to pay Zypute $100,000.





As
      indicated in Note 3, Discontinued Operations and Note 10, Lease Commitments,
      we
      entered into subleases with third parties as the sublessor of our former
      manufacturing facilities in Rockville, Maryland and our former administrative
      offices in Pleasanton, California. Should the sub-tenants in any of these
      agreements not fulfill their monthly payment or other obligations under the
      terms of the subleases, the primary landlord has the right to look to us for
      satisfaction of the obligations under the primary leases.





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





**(20)    Subsequent
      Events (Unaudited)**





**Financing
      Activities**





*Issuance
      of 8% Convertible Notes in payment of interest*




The
      terms
      of the April 2005 Placement permit interest payments on the Notes to be made
      in
      cash or by issuing additional Notes. Effective January 4, 2007, we issued an
      aggregate of approximately $100,000 of Secured 8% Senior Convertible Notes
      that
      are convertible into approximately 333,000 shares of common stock in payment
      of
      quarterly interest (the “January 2007 Interest Notes”) on the outstanding
      principal balance of approximately $4.9 million of the Notes issued on April
      4,
      2005 plus the subsequent Interest Notes. The January 2007 Interest Notes have
      the same terms and conditions, excluding anti-dilution provisions, as the Notes
      issued on April 4, 2005. We did not issue additional warrants in conjunction
      with the January 2007 Interest Notes. See *Extension
      of Note Maturity Dates* below.





*Issuance
      of Promissory Notes under Marr 2005 Credit Facility*




On
      February 7, 2007, we agreed with Marr to amend the terms of the 2005 Credit
      Facility to extend the period in which we may issue promissory notes under
      the
      facility and to reduce the minimum size of notes issuable under the facility.
      On
      February 7, 2007, we issued a promissory note in the face amount of $142,800
      to
      Marr, the proceeds of which we used to make a capital contribution to Beijing
      Marr. On February 23, 2007 and on March 7, 2007, we issued additional promissory
      notes to Marr in the face amount of $100,000 and $150,000, respectively. Each
      promissory note bears interest at a rate of 7% per annum. The February 7, 2007
      note is payable in full on April 3, 2007 and the two later notes are payable
      on
      the earlier of five days following our completion of an equity financing
      transaction of at least $3,000,000 or April 3, 2007. See *Extension
      of Note Maturity Dates* below





*Issuance
      of 8% Note to Related Party*




On
      February 6, 2007, when the market price of our common stock was $0.07 per share,
      we issued an 8% promissory note in the face amount of $50,000 to our Chairman
      and Chief Executive Officer. The note was payable in full on March 31, 2007.
      We
      used the proceeds received for general corporate purposes. On March 28, 2007,
      our chairman cancelled our obligation to repay the note in conjunction with
      his
      participation in the March 2007 PIPE described below.





*February
      2007 PIPE*




On
      February 23, 2006, when the market price of our common stock was $0.064 per
      share, we entered into a subscription agreement with an accredited investor
      pursuant to which the investor agreed to purchase 1,666,667 shares of our common
      stock and five-year warrants exercisable at $0.12 per share to purchase
      1,666,667 shares of our common stock at a price of $0.06 per share, for an
      aggregate purchase price of $100,000, in a private placement transaction
      pursuant to Regulation D of the Securities Act of 1933, as amended. On March
      23,
      2007, when the market price of our common stock was $0.067 per share, we entered
      into a subscription agreement with the same investor pursuant to which the
      investor agreed to purchase 833,334 shares of our common stock and five-year
      warrants exercisable at $0.12 per share to purchase 1,041,668 shares of our
      common stock at a price of $0.06 per share, for an aggregate purchase price
      of
      $50,000. On March 27, 2007, when the market price of our common stock was $0.062
      per share, we entered into subscription agreements with two additional investors
      pursuant to which the investors agreed to purchase an aggregate of 1,250,001
      shares of our common stock and five-year warrants exercisable at $0.12 per
      share
      to purchase 1,250,001 shares of our common stock at a price of $0.06 per share,
      for an aggregate purchase price of $75,000. Each of the subscription agreements
      contains an anti-dilution clause providing that we will issue the investors
      additional shares of our common stock for no additional consideration if we
      issue shares of our common stock in a subsequent financing transaction at a
      lower price per share in the year following the investors’ purchase of our
      common stock. The warrants also have an anti-dilution provision which reduces
      the exercise price proportionally in relation to the adjusted purchase price
      of
      the shares. The terms of the March 2007 PIPE, described below, triggered the
      anti-dilution provisions of these subscription agreements. We will be required
      to issue the investors 576,923 additional shares under the terms of the
      anti-dilution provisions and reduce the exercise price of the warrants from
      $0.12 per share to $0.104 per share. We granted the investors piggyback
      registration rights for the shares issued and for the shares underlying the
      warrants. We plan to use the proceeds received for general corporate
      purposes.




F-40


**CALYPTE
        BIOMEDICAL CORPORATION AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
  **December
        31, 2006 and 2005**


*March
      2007 PIPE*




On
      March
      28, 2007, when the market price of our common stock was $0.063 per share, we
      completed a private placement transaction with four accredited investors for
      the
      sale of an aggregate of 100 million shares of our common stock plus warrants
      and
      received an aggregate of $5.2 million in cash which we plan to use for general
      corporate purposes. The investors received immediately exercisable warrants
      to
      purchase an aggregate of 150 million additional shares of our common stock.
      The
      warrants to purchase 100 million shares have an exercise price of $0.08 per
      share and are exercisable through June 2008. Warrants to purchase 50 million
      shares have an exercise price of $0.11 per share and are exercisable through
      September 2008. If fully exercised, the warrants would provide us with an
      additional $13.5 million in cash. We agreed to file a registration statement
      for
      the resale of the shares purchased and the shares underlying the warrants within
      45 days of the closing and use our best efforts to obtain its effectiveness.
      Two
      of our officers also participated in this PIPE by applying previously subscribed
      funds and canceling our obligation to repay notes and other amounts owed to
      them, aggregating $630,000, in return for issuance of stock and warrants under
      the same terms as those made available to the primary investors in the March
      2007 PIPE.





*Extension
      of Note Maturity Dates*




Effective
      March 28, 2007, we entered into agreements with the holders of our outstanding
      Secured 8% Convertible Notes and with Marr to extend the due dates of all of
      the
      Secured 8% Convertible Notes and related Interest Notes and the 7% Promissory
      Notes issued under the 2005 Credit Facility prior to February 23, 2007,
      aggregating approximately $9,183,000, from April 3, 2007 until April 3, 2009.
      In
      conjunction with the extension of the maturity dates, we agreed to re-price
      the
      investors’ outstanding warrants under a formula of 40% of their total
      outstanding warrants re-priced to $0.03 per share and 60% re-priced to $0.10
      per
      share. The warrants had original exercise prices of $0.325 and $0.25 per share.
      We also eliminated the piggyback registration rights originally granted with
      respect to the Additional Warrants issued in August 2006 to current holders
      of
      our Secured 8% Convertible Notes and to Marr (see Note 12, Stockholders’
Deficit) and extended the maturity of those warrants from August 3, 2007 until
      April 3, 2009.




F-41




**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/
              Roger I. Gale**Roger
                I. Gale**
              **Chief
                Executive Officer**Date:
                March 30, 2007




**POWER
      OF ATTORNEY**




Each
      Director of the Registrant whose signature appears below, hereby appoints Roger
      I. Gale and Jerrold D. Dotson as his attorney-in-fact to sign in his name and
      on
      his behalf as a Director of the Registrant, and to file with the Securities
      and
      Exchange Commission any and all Amendments to this report on Form 10-KSB 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/
                Roger I. Gale
            
            Chairman
              of the Board of Directors,
            
            March
                30, 2007**Roger
                I. Gale**
            
            Interim
              Chief Executive Officer/s/
                Jerrold D. Dotson
            
            Vice
              President - Finance and Administration
            
            March
                30, 2007**Jerrold
                D. Dotson**
            
            (Principal
              Financial and Accounting Officer)/s/
                John J. DiPietro
            
            Director
            
            March
                30, 2007**John
                J. DiPietro**/s/
                Paul Freiman
            
            Director
            
            March
                30, 2007**Paul
                Freiman**/s/
                Julius R. Krevans, M.D.
            
            Director
            
            March
                30, 2007**Julius
                R. Krevans, M.D.**/s/
                Maxim A. Soulimov
            
            Director
            
            March
                30, 2007**Maxim
                A. Soulimov**




S-1