Overview and Outlook

We focused significant effort during the third quarter of 2008 on sales and marketing relationships and initiatives. At the same time, our new product development and our rapid test manufacturing support efforts continued. A significant highlight for the third quarter was the September 2008 regulatory approval permitting sales of our HIV-1/2 OMT Rapid Test in Cote d'Ivoire (Ivory Coast). This approval is our first in French-speaking West Africa, where there is a significant prevalence of adult HIV infection and a large unmet testing need. Our representatives in West Africa are now working aggressively to leverage the approval to obtain sales in the territory.

We are concentrating on commercializing our AwareTM HIV-1/2 Rapid Tests in international markets, particularly in those countries in which we currently have regulatory approval or expect we will soon receive such approval. The approval in Cote D'Ivoire was the culmination of significant effort over a period of many months. Such efforts to expand the marketing and sales of our HIV-1/2 Rapid Tests have been on-going throughout 2008 in the United Arab Emirates (the "UAE"), India, and Russia, and countries in eastern Africa, while we have continued to sell our rapid tests in Africa, primarily through our South African distributor.

In the Middle East, we have continued to pursue business opportunities through our representative office in Dubai, primarily targeting the UAE, which granted our first approval in that region. Again, following many months of effort, early in the fourth quarter of 2008, we announced that we received a relatively significant order for our AwareTM HIV-1/2 Rapid Tests from LifeLine Scientific, our new distributor for the UAE and other countries in the region. LifeLine Scientific is affiliated with a leading healthcare provider in Abu Dhabi and has access to a large network of hospitals and pharmacies through which it expects to distribute our test. We shipped the order to LifeLine in early November 2008.

In India, our representatives continue to pursue additional sales of our rapid test to paramilitary organizations within the Indian government. Further, we continue to evaluate additional in-country markets and distribution options to position our HIV-1/2 OMT Rapid test as a non-invasive alternative to the exclusive use of blood tests for HIV diagnosis within the general population.

In China, after a regulatory approval process that began in January 2006, the Chinese State Food and Drug Administration ("SFDA") notified us in April 2008 that our AwareTM HIV-1/2 oral fluid (OMT) rapid test had received registration and marketing approval. With the medical devices manufacturing permit received earlier this year, our Beijing Marr joint venture is now able to manufacture, market, distribute and sell the Aware™ HIV-1/2 OMT test throughout China. Beijing Marr will handle the product launch in China, and its sales force is actively marketing the test. There can, however, be no assurance that we will be able to manufacture, market, distribute or sell our test in China for numerous reasons, including various barriers to entry into the market, as well as language and cultural differences and our lack of experience in the Chinese market. This could have a material adverse effect on our business, results of operations, liquidity and financial condition.

The Chinese registration and marketing approval, along with the manufacturing permit, received from the SFDA also provides us with approval of our AwareTM HIV-1/2 OMT rapid test "in the country of manufacture." This is an important milestone since many countries require that imported products have regulatory approval in the country in which they are manufactured. Absence of this approval has hampered our ability to register and market our test in a number of countries, a hurdle we believe we can now overcome by producing the domestically approved Aware™ product in our Chinese factory for export. There can, however, be no assurance that we will be able to successfully register and market the test in those countries now because we may, nonetheless, face other registration and marketing hurdles. If this were to occur, it could have a material adverse effect on our business, results of operations, liquidity and financial condition.

Our scientists continue their efforts 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. Our current AwareTM HIV-1/2 OMT rapid test is based on a recombinant protein antigen. We are engaged in preclinical development and evaluation activities for a second oral fluid test using a synthetic peptide antigen. This second test will provide us with a fully non-invasive testing protocol in accordance with the WHO rapid testing algorithm, which requires two distinct non-invasive rapid tests. We believe that such a protocol will benefit current diagnostic and treatment efforts, while helping us to achieve sales in regions that adhere to the WHO testing algorithm. We expect to be able to produce this new test from all sites that manufacture our current AwareTM products. There can, however, be no assurance that we will be able to successfully develop, produce or market the alternative antigen test due to regulatory, technological or marketing hurdles. If we are unsuccessful in this endeavor, it could have a material adverse affect on our business, results of operations, liquidity and financial condition.

We continue to pursue pre-clinical development activities for an oral fluid HIV rapid test product using an alternative lateral flow platform for which we plan to file an IDE with the U.S. CDC. Our plans also include developing and commercializing a similar 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 non-invasive diagnostic tests for other sexually transmitted diseases or diseases such as tuberculosis, malaria and hepatitis. There can, however, be no assurance that we will be able to develop, produce or market the alternative lateral flow test due to intellectual property, regulatory, technological or marketing hurdles. If we are unsuccessful in this endeavor, it could have a material adverse affect on our business, results of operations, liquidity and financial condition.

In the second quarter of 2008, we launched a range of Life Sciences products, including Aware MessengerTM, as well as a number of recombinant proteins and specialty assay reagents, which we are marketing through a web-portal at www.calyptelifesciences.com and a printed catalogue. We introduced Aware MessengerTM, our oral fluid sample collection device, in the first quarter of 2008. This collection device is based on the same collection principle as employed in our AwareTM HIV-1/2 OMT test and can be used to collect oral fluid analytes not only for HIV antibodies, but also for hepatitis antibodies, drugs of abuse and certain genetic screening applications, among others. Although we do not currently have approval to sell this device for diagnostic purposes, we can sell it for "research use only" in situations where assay developers and test laboratories can qualify the product for use with their own assays. There can, however, be no assurance that we will obtain approval to sell our collection device for diagnostic purposes or that a significant market will develop for it as a research use device or that a significant market will develop for our Life Sciences products.

Sales of our BED Incidence test accounted for 78% of our revenue during the first three quarters of 2008, with revenues of $311,000, a 1% increase compared to BED Incidence test sales in the first three quarters of 2007. We plan to complement the current product with a rapid test version which we anticipate to be more suitable for use in resource-poor international settings that do not have the infrastructure to perform the current test. We are developing the rapid incidence test in conjunction with the U.S. CDC; however our financial constraints have negatively impacted progress during the first three quarters of 2008.

Sales of our HIV-1/2 rapid diagnostic tests accounted for approximately 20% of our revenues in the first three quarters of 2008, compared with 34% in the first three quarters of 2007. Sales of our HIV-1/2 rapid tests are irregular during this commercialization period as we gain approvals for and begin distribution of those tests in various parts of the world. Although sales of these tests have been sporadic following initial regulatory approvals, we expect that our future near- and medium-term revenues will be derived primarily from selling them in both the professional and over-the-counter (OTC) international markets.

Our newly-introduced Life Sciences products have accounted for approximately 2% of our revenues for the first three quarters of 2008.

We have achieved a notable milestone with the receipt of approval in China earlier this year - regulatory approval in the four parts of the world having the greatest HIV/AIDS prevalence, namely Sub-Saharan Africa, where we have approval in South Africa, Uganda and Kenya, and in China, 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 there is significant demand for a simple, non-invasive test such as ours since it can be used as an integral part of a real-time treatment program. Although we are optimistic regarding the future sales prospects for our AwareTM HIV-1/2 OMT rapid test, experience has demonstrated that obtaining regulatory approval does not immediately result in product sales.

In many of our target markets, government Ministries of Health or similar agencies are the primary purchasers of HIV tests, typically through a "lowest-cost" tender process which currently requires the agency to purchase blood tests exclusively. The efficacy, safety and ease of use of our oral fluid tests are easily demonstrated, but cost comparisons based solely on "list price" neglect to account for the significant ancillary costs of a blood test, such as the costs of a professional to administer the test and the cost to dispose of bio-hazardous waste, beyond the absolute cost of the test. We have directed considerable effort, including product donations to key user agencies and lobbying for changes in tender regulations, to encourage the consideration and inclusion of our oral fluid tests in such tenders. We consider these efforts to be part of a strategy in which the "standard of care" for HIV diagnosis evolves from the exclusive use of blood tests to more widespread use of non-invasive oral fluid-based tests. If we can successfully change the standard of care, we expect that our revenue growth would increase significantly.

Our clinical trial and regulatory approval process will continue through 2008 and beyond. We are primarily targeting countries which have been selected for funding by PEPFAR, the 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. The waiver is based on a product evaluation performed by the U.S. CDC Global AIDS Program (GAP). Both our AwareTM HIV-1/2 OMT (oral fluid) rapid test and our AwareTM HIV-1/2 BSP (blood, serum and plasma) rapid test have been evaluated and are now included in the USAID waiver list. We believe that obtaining the USAID waiver for these tests was another important milestone in the process that we hope will ultimately lead to expanded international sales of our rapid tests.

Financial Considerations

Our consolidated operating cash burn rate for the first nine months of 2008 was approximately $451,000 per month, compared to $491,000 in the first nine months of 2007. Following the closing of the March 2007 private placement, we began to execute on an expanded operating strategy that resulted in incurring increased costs intended to accelerate the attainment of various milestones in our business plan, including:

· adding to our our research and development staff with the intent of expanding both our near-term and longer-term product range;

· continuing the clinical trial and regulatory approval process for our AwareTM HIV-1/2 oral fluid rapid test in a number of new regions and countries;

· expanding our sales and marketing efforts, including opening new offices in Geneva and Dubai, with new representation in India; and

· continuing to make financial, technological and human resources investments in Beijing Marr.

We embarked on this strategy with the expectation that the investors in the March 2007 private placement would exercise the warrants issued in that transaction during the second half of 2007 and early 2008 to provide the cash necessary to cover our expanded operations. Beginning in the fourth quarter of 2007, in response to both a slower than expected ramp-up in sales and in warrant exercises by the investors in the March 2007 private placement, we tightened our expenditure policies and implemented certain cost reduction initiatives, including restricting certain operations and making staffing adjustments at the senior level, intended to minimize our cash expenditures while permitting us to continue to achieve our business milestones and objectives, although at a slower pace. Beginning in the second quarter of 2008, we have subjected our operations to continual internal evaluation intended to further reduce our cash operating costs.

During the first nine months of 2008, we incurred a net loss of $7.3 million. At September 30, 2008, we had a working capital deficit of $13.2 million, including $10.5 million of 8% convertible notes and 7% notes payable to a related party, including accrued interest, all of which is due on April 3, 2009, and our stockholders' deficit was $10.4 million. Based upon our financial condition at December 31, 2007, as well as our recurring losses and our negative cash flows from operations, our independent accountants issued an opinion on our December 31, 2007 financial statements citing substantial doubt about our ability to continue our business operations as a going concern. Our cash balance at September 30, 2008 was $0.7 million, which we do not believe is sufficient to enable us to fund our operations through the remainder of 2008. If possible, we will need to raise additional capital to fund our operations in the near term.

We currently have 800,000,000 shares of common stock authorized, of which approximately 774,000,000 shares are issued and outstanding or are reserved for issuance under current financing arrangements and our incentive plans. If additional financing is available to us, it will likely be in the form of one or more equity or convertible debt transactions. At the current market price of our common stock, we do not have sufficient authorized common stock to raise more than a few hundred thousand dollars, which is not sufficient to permit us to execute our business plan and achieve self-sustaining cash flow. Accordingly, our Board of Directors has authorized, and we are requesting our stockholders to approve at our Annual Stockholders' Meeting in December 2008, a 1:20 reverse split of our common stock to make additional shares available for future financings and other purposes. If our stockholders do not approve the proposed reverse split, or if we are unable to obtain sufficient financing, we may be required to defer, reduce or discontinue our operations or we may not be able to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our condensed 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.

The critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2007 have not changed materially since year-end.

Results of Operations

The following represents selected financial data (in thousands):

                                         Three Months Ended         Nine Months Ended
                                           September 30,              September 30,
                                         2008          2007         2008          2007

 Total revenues                       $       117   $      131   $       400   $      465
 Cost of product sales                        130          145           393          396

 Gross Margin                                 (13 )        (14 )           7           69

 Operating expenses:
 Research and development                     461          274         1,208          869
 Selling, general and
 administrative                             1,124        1,541         4,902        4,000

  Total operating expenses                  1,585        1,815         6,110        4,869

 Loss from operations                      (1,598 )     (1,829 )      (6,103 )     (4,800 )

 Interest expense, net                       (572 )      1,063        (1,620 )        205
 Minority interest in losses of
 consolidated joint ventures                   77          145           317          333
 Other income, net                             67          (12 )          67           70

  Loss before income taxes            $    (2,026 ) $     (633 ) $    (7,339 ) $   (4,192 )

Quarter ended September 30, 2008 and 2007

Our revenue for the third quarter of 2008 totaled $117,000 compared with $131,000 for the third quarter of 2007, a decrease of $14,000 or 11%. Sales of our BED Incidence Test accounted for 77% of our sales in the third quarter of 2008, compared with 89% in the third quarter of 2007. Revenue from the sales of the BED Incidence Test decreased by 22% in 2008 compared with 2007. Such sales tend to be irregular as public health and research institutions begin or conclude various studies to monitor the incidence of HIV infection within their subject populations. Sales of our AwareTM HIV-1/2 rapid tests accounted for 18% and 12% of our sales in the third quarter of 2008 and 2007, respectively. Third quarter 2008 revenues from the sale of our rapid tests increased by 38% compared with rapid test revenues in the third quarter of 2007. Sales of our HIV-1/2 rapid tests are also irregular during this commercialization period as we gain approvals for and begin distribution of those tests in various parts of the world. Sales of our new Aware MessengerTM oral fluid sample collection device and our Life Sciences reagents accounted for the 5% balance of our sales in the third quarter of 2008.

Three customers accounted for approximately 69% of our third quarter 2008 revenue. The U.S. CDC's contract testing lab purchased BED Incidence tests representing 32% of our third quarter 2008 revenue. Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 27% of our third quarter 2008 revenue and a German research institution purchased BED Incidence Tests representing 10% of third quarter 2008 revenue. Two customers accounted for approximately 67% of our third quarter 2007 revenue. Our South African distributor purchased both BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 42% of our third quarter 2007 revenue. The CDC's contract testing lab purchased BED Incidence Tests representing 25% of our third quarter 2007 revenue.

We reported a negative gross margin of 11% of sales in the third quarter of both 2008 and 2007. Although the 2008 product mix reflects a higher proportion of BED Incidence Test sales, which currently generate a higher margin than our HIV 1/2 rapid tests, we have experienced materials cost increases for our tests since the third quarter of 2007 and we treat as a component of product costs a portion of the expense attributable to staffing specifically dedicated to our manufacturing quality systems, a portion of which was not added until the fourth quarter of 2007. The margins we reported in both 2008 and 2007, however, are not typical of our expected future results because of the relatively nominal amounts of revenues and product quantities over which certain fixed expenses, like annual royalty minimum payments, have been allocated. Product costs in both periods are based on resource-constrained purchasing patterns and pilot-plant-sized production lots, and do not reflect the economies of scale that we anticipate when we achieve true commercial scale operations.

Research and development costs increased by $187,000 or 68%, from $274,000 in the third quarter of 2007 to $461,000 in the third quarter of 2008. Domestic R&D expense increased in the third quarter of 2008 by $219,000 compared with the third quarter of 2007 primarily due to salary, benefits and related employee expenses attributable to new R&D staff added during the second half of 2007, non-cash expense related to employee stock options granted in the second quarter of 2008, and costs incurred relating to patent and trademark applications for our AwareTM HIV-1/2 oral fluid rapid tests and our Aware MessengerTM sampling device. Offsetting these increases were reductions in expenses related to clinical trials, travel and cash consulting expenses and non-cash expense attributable to options granted to a consultant. A reduction of $32,000 in 2008 R&D expenses incurred by our Beijing Marr joint venture accounted for the remainder of the change compared with 2007.

Selling, general and administrative costs decreased by $417,000 or 27%, from $1,541,000 in the third quarter of 2007 to $1,124,000 in the third quarter of 2008. The primary components of the net decrease include the following:

· a decrease of $170,000 in salary and benefits expenses attributable to the elimination of certain senior administrative and sales management positions in the fourth quarter of 2007, a reduction in the compensation paid to a new officer and a decrease in non-cash stock based employee compensation expense in 2008; offset by a non-cash charge of $50,000 attributable to a stock grant to a new officer;

· a decrease of approximately $95,000 in administrative consultant and public company expenses;

· decreases in consulting and occupancy expenses aggregating approximately $10,000 related to the representative offices opened in Dubai and Geneva during 2007; and

· reductions in travel expenses of approximately $177,000.

Our loss from operations for the third quarter of 2008, at $1,598,000, reflects a reduction of 13% compared with the loss of $1,829,000 reported for the third quarter of 2007.

We recorded net interest expense of $572,000 for the third quarter of 2008 compared with $1,063,000 of net interest income in the third quarter of 2007. The difference results primarily from the accounting for the anti-dilution obligations related to our February 2007 and March 2007 Private Placements which expired 12 months after the respective transactions. Additionally, the increased expense in 2008 relates to amortization of discounts and derivative obligations associated with the March 2007 extension of the maturity of the 8% Convertible Notes and the 7% Marr Credit Facility Notes until April 3, 2009, which are being amortized over the period from March 2007 through April 2009, and the additional discounts resulting from the December 2007 restructuring of the 8% Convertible Notes held by Marr and the Marr Credit Facility Notes, which are being amortized over the period from December 2007 through December 2008.

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

                                                                                     (Increase)
                                                Three Months ended September 30,      Decrease
                                                     2008               2007          Expense

Interest expense on debt instruments paid or
payable in cash                                 $           (77 )   $        (75 ) $          (2 )
Non-cash income (expense) composed of:
Accrued interest on 8% Convertible Notes
(paid by issuing additional Notes)                         (115 )           (106 )            (9 )
Amortization of discounts associated with
March 2007 extension and December 2007
restructuring of 8% convertible notes and
Marr Credit Facility notes                                 (351 )           (116 )          (235 )
Mark to market adjustment of and intrinsic
value of shares issued under anti-dilution
obligations arising from the February and
March 2007 Private Placements                                 -            1,377          (1,377 )
Expense attributable to dividends on
mandatorily redeemable Series A preferred
stock                                                       (30 )            (30 )             -

Total non-cash items                                       (496 )          1,125          (1,621 )

Total interest (expense) income                            (573 )          1,050          (1,623 )

Interest income                                               1               13             (12 )

Net interest (expense) income                   $          (572 )   $      1,063   $      (1,635 )

Nine Months Ended September 30, 2008 and 2007

Our revenue for the first three quarters of 2008 totaled $400,000 compared with $465,000 for the first three quarters of 2007, a decrease of $65,000 or 14%. Sales of our BED Incidence Test accounted for 78% of our sales in the first three quarters of 2008, compared with 66% in the first three quarters of 2007. Revenue from the sales of the BED Incidence Test increased by 1% in 2008 . . .