Summary of ALPHA INNOTECH CORP

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

The information contained in this Form 10-Q is intended to update the information contained in our Annual Report on Form 10-KSB for the year ended December 31, 2007 and presumes that readers have access to, and will have read, the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other information contained in such Form 10-KSB. The following discussion and analysis also should be read together with our consolidated financial statements and the notes to the consolidated financial statements included elsewhere in this Form 10-Q.

Except for the historical information contained herein, this report contains forward-looking statements (identified by the words "estimate," "anticipate," "expect," "believe," and similar expressions), which are based upon management's current expectations and speak only as of the date made. These forward-looking statements are subject to risks, uncertainties and factors that could cause actual results to differ materially from the results anticipated in the forward-looking statements and include the factors discussed in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions 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. In addition, estimates and assumptions about future events and their effects cannot be determined with certainty. These estimates and assumptions may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have been included in the consolidated financial statements as soon as they became known. Actual results may differ from these estimates under different assumptions or conditions. In addition, we are periodically faced with uncertainties, the outcomes of which are not within our control and may not be known for extended periods of time.

Our critical accounting policies are set forth below.

Revenue Recognition - Our revenue is derived from the sale of digital imaging systems and other products, net of returns and allowances, and is recognized when a contract is executed, all delivery obligations have been met, the fee is fixed and determinable, and collection is probable. All products are sold with a one year standard warranty agreement and we record an associated reserve for estimated warranty costs.

For products sold where software is deemed to be more than incidental, we follow Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended. Revenue earned on software arrangements involving multiple elements is allocated to each element based on vendor-specific objective evidence, which is based on the price charged when the same element is sold separately. When a digital imaging system is sold, the multiple elements are software and maintenance and support. Revenue allocated to software is recognized when a contract is executed, all delivery obligations have been met, the fee is fixed and determinable, and collection is probable. Revenue allocated to maintenance and support is recognized ratably over the maintenance term, typically for a period of one year, beginning when a digital imaging system is considered sold or an extended maintenance and support contract is signed.

Revenue is recorded net of estimated returns. Our management makes estimates of potential future product returns related to current period revenue. We analyze historical returns, current economic trends and changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns and other allowances, such as allowance for bad debts, in any accounting period. As of June 30, 2008, our allowance for sales returns was $96,192 and our allowance for doubtful accounts was $5,000.

Inventory - We record inventories at the lower of cost or market value, with cost generally determined on a first-in, first-out basis. We perform periodic valuation assessments based on projected sales forecasts and analyzing upcoming changes in future configurations of our products and record inventory write-downs for excess and obsolete inventory. As of June 30, 2008, our allowance for excess and obsolete inventory was $42,295.

Deferred Taxes Valuation Allowance - We believe sufficient uncertainties exist regarding the future realization of deferred tax assets, and, accordingly, a full valuation allowance is required. In subsequent periods if and when we generate pre-tax income, a tax expense will not be recorded to the extent that the remaining valuation allowance can be used to offset that expense. Once a consistent pattern of pre-tax income is established or other events occur that indicate that the deferred tax assets will be realized, additional portions or all of the remaining valuation allowance will be reversed back to income. Should we generate pre-tax losses in subsequent periods, a tax benefit will not be recorded and the valuation allowance will be increased. Despite the valuation allowance, we retain the ability to utilize the benefits of net operating loss carryforwards and research and development credits.

Results of Operations

Revenues

Our revenues are primarily derived from sales of instruments, software, consumables, and service contracts. Total revenues were $4,243,667 and $3,611,820 for the three-month periods ended June 30, 2008 and 2007, respectively, representing an increase of $631,847 or 17%. Total revenues were $7,911,810 and $7,158,756 for the six-month periods ended June 30, 2008 and 2007, respectively, an increase of $753,054 or 11%. These increases were primarily due to increased sales of Company branded products, including the FluorChem® imaging system and the red™ personal imager. The increases were offset in part by lower sales under our OEM agreement with GE Healthcare.

For the three- and six- month periods ended June 30, 2008, revenues outside of the United States represented 55% and 53%, respectively, of our total revenues compared to 53% and 50% of our total revenues for the three- and six- month periods ended June 30, 2007. The increase was primarily due to increased sales of Company branded products in Europe and Asia, offset in part by decreased sales under our OEM agreement with GE Healthcare.

Sales to GE Healthcare accounted for 18% of revenues for the three months ended June 30, 2008 compared to 17% of revenues for the three months ended June 30, 2007. For the six months ended June 30, 2008 sales to GE Healthcare accounted for 18% of revenues compared to 21% of revenues for the six months ended June 30, 2007.

Cost of Goods Sold

Cost of goods sold includes direct material, labor and manufacturing overhead. Cost of goods sold were $1,857,435 and $1,619,770 for the three-month periods ended June 30, 2008 and 2007, respectively, representing an increase of $237,665 or 15%. Cost of goods sold was $3,414,228 and $3,195,087 for the six month periods ended June 30, 2008 and 2007, respectively, representing an increase of $219,141 or 7%. Cost of goods sold increased primarily due to increased shipments, offset in part by an evolution of our product mix towards more complex products which have higher margins.

Gross Profit

Gross profit was $2,386,232 and $1,992,050 for the three-month periods ended June 30, 2008 and 2007, respectively, representing an increase of $394,182 or 20%. The gross profit was $4,497,582 and $3,963,669 for the six-month periods ended June 30, 2008 and 2007, respectively, representing an increase of $533,913 or 13%. The gross profit as a percentage of revenues increased to 56% from 55% for the three-month periods ended June 30, 2008 and 2007, respectively. The gross profit as a percentage of revenues improved to 57% from 55% for the six- months ended June 30, 2008 and 2007, respectively. These improvements in gross profit are attributable primarily to to the beginning of a transition in product mix towards more complex products which have a higher gross profit.

Sales and Marketing Expenses

Sales and marketing expenses were $1,312,771 and $1,162,826 for the three month periods ended June 30, 2008 and 2007, respectively, representing an increase of $149,945 or 13%. Sales and marketing expenses were $2,497,492 and $2,217,395 for the six month periods ended June 30, 2008 and 2007, respectively, representing an increase of $280,097 or 13%. These increases in sales and marketing expenses were primarily due to increased international commissions on higher sales, increased wages and related cost of international sales staff, and increased international travel and entertainment expenses. Domestic wages and related costs increased as we moved to a direct sales force, but these increases were more than offset by decreases in commissions paid to manufacturer's representatives and a decline in recruiting fees and relocations costs. Sales and marketing expenses as a percentage of revenues decreased from 32% for the three month period ended June 30, 2007 to 31% for the three month period ended June 30, 2008. Sales and marketing expenses as a percentage of revenues increased from 31% for the six- month period ended June 30, 2007 to 32% for the six month period ended June 30, 2008. We anticipate sales and marketing expenses to increase as sales increase but to remain constant or decrease as a percent of sales.

Research and Development Expenses

Research and development expenses were $272,802 and $343,996 for the three month periods ended June 30, 2008 and 2007, respectively, representing a decrease of $71,194 or 21%. These decreases in research and development spending resulted primarily from decreased purchases of materials for new product development Research and development expenses were $648,077 and $647,490 for the six month periods ended June 30, 2008 and 2007, respectively, representing an increase of $587 or less than 1%. These increases resulted primarily from increased payments to outside developers and increased wages and stock based compensation, offset in part by a decrease in bonus accruals. Research and development expenses as a percentage of revenues decreased from 10% for the three month period ended June 30, 2007 to 6% for the three month period ended June 30, 2008. Research and development expenses as a percentage of revenues decreased from 9% for the six- month period ended June 30, 2007 to 8% for the six month period ended June 30, 2008.

General and Administrative Expenses

General and administrative expenses were $603,583 and $753,297 for the three month periods ended June 30, 2008 and 2007, respectively, representing a decrease of $149,714 or 20%. General and administrative expenses were $1,170,425 and $1,285,295 for the six month period ended June 30, 2008 and 2007, respectively, representing a decrease of $114,870 or 9%. These decreases resulted primarily from a decrease in the Founders Bonus, which was accrued last year, offset in part by recruiting fees to place our corporate controller, and increased stock based compensation. The general and administrative expenses as a percentage of revenues decreased from 21% for the three-month period ended June 30, 2007 to 14% for the three-month period ended June 30,2008. The general and administrative expenses as a percentage of revenues decreased from 18% for the six-month period ended June 30, 2007 to 15% for the six-month period ended June 30, 2008.

Other Income (Expense)

Interest expenses were $174,796 and $66,693 for the three-month periods ended June 30, 2008 and 2007, respectively, representing an increase of $108,103 or 162%. Interest expenses were $258,086 and $149,145 for the six month periods ended June 30, 2008 and 2007, respectively, representing an increase of $108,941 or 73%. The increased expenses were attributable primarily to interest paid and warrant amortization in connection with new debt facility from Agility Capital LLC and Montage Capital LLC.

Liquidity and Capital Resources

From inception through June 30, 2008, Alpha Innotech Corporation has raised a total of $1,956,076, net of offering costs, in convertible notes that were converted into redeemable convertible preferred stock in 2004, a total of $7,615,319, net of offering costs, from the sale of redeemable convertible preferred stock, and $107,137, net of offering costs, from the issuance of common stock. As a result of the closing of the merger with Xtrana, on October 3, 2005 Alpha Innotech Corporation received an additional $2,033,000 in cash. As described below, the Company also raised a total of $375,000 from the sale of convertible notes and $142,500 in proceeds from the sale of restricted stock. As of June 30, 2008, we had $749,260 in cash and a working capital deficit.

At June 30, 2008, we had the following capital resources available:

? ETP/FBR Venture Capital II, L.L.C. Convertible Note - On July 21, 2006, pursuant to a Securities Purchase Agreement between the Company and ETP/FBR Venture Capital II, L.L.C., the Company completed a private placement offering of subordinated Senior Convertible Note with the principal amount of $375,000 due in 2011 (the "Note"). The Note bears interest at a rate of 3% per year and is due on July 20, 2011. During the occurrence of an "Event of Default" under the Note, the Note will bear interest at a rate of 10% per year. The Note is convertible into shares of common stock of the Company at an initial conversion price of $1.60 per share. As of June 30, 2008, $200,000 of the principal amount of the note had been repaid.

? BFI Business Finance Line of Credit - On March 9, 2004, Alpha Innotech Corporation established a line of credit in the maximum amount of $1 million with BFI Business Finance ("BFI"). As of October, 2007, the line of credit was increased to $1.5 million. As of June 30, 2008, the Company had drawn $978,877 leaving $521,123 available to draw. The interest rate is variable. As of June 30, 2008, the interest rate was 8.25% and the outstanding balance was subject to a 0.50% per month administrative fee.

? Loans from Agility Capital LLC and Montage Capital LLC - On May 9, 2008, the Company entered into a loan agreement ("Loan Agreement") with Montage Capital, LLC ("Montage") and Agility Capital, LLC ("Agility", and together with Montage, the "Lenders"). Under the Loan Agreement, the Company requested one advance of $1,500,000 from the Lenders which will bear interest at a rate of 13% per year and is due on October 31, 2009 (the "Maturity Date").

Operating activities used $218,391 cash in the six month period ending June 30, 2008 compared to $430,900 cash provided in the six month period ending June 30, 2007. During the current year, accounts payable, accrued liabilities, deferred revenue, and other liabilities used $529,471. Additionally, inventory, accounts receivable, loan fees and other current assets used $216,837. Net income for the six months ended June 30, 2008 and non-cash adjustments provided $527,917. During the six month period ending June 30, 2007, accounts payable, accrued liabilities, deferred revenue, and other liabilities provided $312,098. Also, inventory, accounts receivable and other current assets provided $20,983. Net loss net of non-cash adjustments provided $97,819.

Cash used in investing activities was $169,496 and $184,428 for the six- month periods ending June 30, 2008 and 2007, respectively, to purchase property and equipment needed to support our operations. These amounts include costs of demonstration systems used by our sales teams and which, in some cases, are ultimately sold to customers.

Net cash provided by (used in) financing activities was $969,409 and $(292,872) for the six month periods ending June 30, 2008 and 2007, respectively. In the six month period ending June 30, 2008, we borrowed a total of $1,500,000 from Agility Capital LLC and Montage Capital LLC, repaid a total of $673,091 on outstanding loans including ending our term loan with Alexandria, and received $142,500 from the exercise of options. In the six month period ending June 30, 2007, we repaid $300,000 on the term loan from Alexandria, and borrowed an additional $7,128 under the BFI line of credit.

While management believes the Company has sufficient cash to fund its operating, investing, and financing activities in the near term, additional working capital may be needed if the Company experiences growth above that currently foreseen by management. For example, the Company's existing line of credit may prove to be insufficient should higher inventory levels be required. Additional working capital would likely be needed to expand our operations in Asia. If our capital resources are unable to meet our capital requirements, we will have to raise additional funds. We may be unable to raise sufficient additional capital when we need it or to raise capital on favorable terms. The sale of equity or convertible debt securities in the future may be dilutive to our stockholders, and debt financing arrangements may require us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further indebtedness and may contain other terms that are not favorable to us or our stockholders. If we are unable to obtain adequate funds on reasonable terms, we may be required to curtail operations significantly or to obtain funds by entering into financing agreements on unattractive terms.