The following discussion of our financial condition and results of operations should be read in conjunction with our "Selected Consolidated Financial Data" and the audited Consolidated Financial Statements and the notes thereto included elsewhere in this document.

General Overview and Trends

We are a genetics-focused personalized health company that develops preventive consumer products and genetic tests for sale to the emerging personalized health market. Our vision is to build a leading personalized health and wellness company using the science of applied genetics to empower people to understand the genetic components of their health, to provide physicians guidance on patient care and to provide drug developers the tools necessary to create new, innovative therapeutic products.

We currently have two primary business segments that include:

† Personalized Health Segment - this segment conducts, researches, develops, market and sells genetic test panels primarily in inflammatory and metabolic areas to provide better insight into health, wellness and disease.

† Consumer Products Segment - comprising the Alan James Group (AJG) business, is focused on developing, selling and marketing nutritional supplements and products into retail consumer channels.

These two segments contribute toward our overall mission of developing tests and products that can help individuals improve and maintain their health through preventive measures. We plan to pursue this by:

† developing genetic risk assessment tests for use in multiple indications, countries and various demographics in our Personalized Health Segment;

† processing genetic risk assessment tests in our Clinical Laboratory Improvement Act of 1988 (CLIA) certified lab or in those of sublicensees in our Personalized Health Segment; and

† developing and acquiring nutritional products to be distributed in multiple consumer channels in our Consumer Products Segment.

In 2006, sales of our personalized health products began under marketing and other business arrangements with Alticor. Alticor represents a significant customer representing virtually all of our Personalized Health Segment revenues and over 18% of consolidated revenues in the first quarter of 2009.

Our Consumer Products Segment sells branded nutritional products, including Ginsana®, Ginkoba™, and Venastat® through the nation's largest food, drug and mass retailers and contributed over 82% of the consolidated revenues to our business in the three months ended March 31, 2009. Customer concentration in our Consumer Products Segment is high and our largest customer accounted for approximately 59% of revenues in that segment.

We have traditionally spent approximately $3-4 million annually on research and development. We expect to continue spending at this level in 2009. We expect to complete our research agreements with Alticor in 2009 and dedicate more of our resources to our own product development efforts. Our current development programs focus on obesity, heart disease, osteoporosis, osteoarthritis, skin aging, sports nutrition and weight management genetic risk assessment tests, as well as new proprietary supplements for distribution through our Consumer Products Segment. We expect that these programs will also lead to the personalized selection of nutritional and therapeutic products and provide consumers and healthcare professionals with better preventive product alternatives. We are in the process of developing our own brand of genetic test

products for launch with partners and on our own. As a result, corporate selling, general, marketing and administrative expenses associated with the launch of this new brand of genetic test products is likely to increase in 2009. We currently have borrowings available under our credit line of $10.3 million, which permits borrowing any time prior to March 31, 2010. We expect to be able to fund our operations through at least the next twelve months with revenue from product sales and borrowings from our credit facility. Current unfavorable economic conditions have had a negative effect on our consumer product sales, which may impact the funding of projects in development. We continue to monitor our spending accordingly.

In March 2003, we entered into a research agreement with Alticor to develop genetic tests and software to assess personalized risk and develop and use screening technologies to validate the effectiveness of the nutrigenomic consumables Alticor is developing. In March 2005 and in March 2007, we entered into new agreements with Alticor to continue the research. In June 2004, we entered into another research agreement with Alticor to conduct research into the development of a test to identify individuals with specific genetic variations that affect how people gain and maintain weight. This project was completed during 2006. In June 2006, we entered into another research agreement with Alticor to perform association studies on composite genotypes to skin inflammatory response. As of December 31, 2008, the research agreements described above have been completed. See financial statement footnote 4 for a discussion of our strategic alliance with Alticor.

On February 25, 2008, we entered into a new research agreement with Access Business Group International LLC (ABG), a subsidiary of Alticor. The research agreement encompasses four primary areas: osteoporosis, cardiovascular disease, nutrigenomics, and dermagenomics. We will be conducting various clinical studies, which shall be fully funded by Alticor. On January 31, 2009, the Company entered into an amendment to research agreement (RA8) with ABG. The amendment extends the term from a maximum of six months to eight months terminating on September 30, 2009. The Company received an additional $200,316 on March 31, 2009 per the amendment to complete ongoing research.

Some of the clinical studies aim to correlate SNP gene variations to the risk of osteoporosis or cardiovascular disease in Asian populations. Other studies conducted in North American populations will seek to identify genetic factors that influence athletic performance (nutrigenomics) and skin health, such as wrinkles, elasticity, aging (dermagenomics), for the purpose of developing products to enhance healthy aging. Under the terms of the research agreement (RA8), ABG paid us $1.2 million during 2008 for the research. In addition, we recognized approximately $800,000 of deferred receipts which were unused from prior research agreements with Alticor.

In our Personalized Health Segment, the competition is in flux and the markets and customer base are not well established. Adoption of new technologies by consumers requires substantial market development and customer education. Historically we have placed a significant focus of this effort in our relationship with our primary customer, Alticor, a significant direct marketing company. Our challenge in 2009 and beyond will be to work to develop this market. We have begun to allocate considerable resources to our own brand of consumer products. We cannot predict any fluctuations we may experience in our test revenues or whether revenues derived from Alticor related to the heart health and general nutrition genetic tests will be sustained in future periods. As part of our strategy to partner with the companies in the pharmaceutical and biotechnology industries, we have recently entered into a research collaboration with a biotechnology company for biomarker research for an inflammatory disease.

In our Consumer Product Segment, the nutritional products and supplement industry is characterized by rapid and frequent changes in demand for products and new product introductions. The success of new product offerings depends upon a number of factors, including: the state of the economy; accurately anticipating customer needs; innovating and developing new products; successfully commercializing new products in a timely manner; pricing our products competitively; manufacturing and delivering our products in sufficient volumes and in a timely manner; and differentiating our product offerings from those of our competitors.

In the first quarter of 2009, the aggregate sales of our brand name nutritional products, including Ginkoba™, Ginsana®, and Venastat® in our Consumer Products Segment demonstrated a decrease from the same period in the prior year which we believe is due to current economic conditions. We believe that retailers are carrying lower inventory levels which have had a negative impact on our quarter sales figures. In addition, we believe that consumers are spending less. We face competition with private label offerings as well as other branded product introductions. Further, our opportunities for new distribution on the existing product lines are limited. Increased growth, we believe will be more dependent on our ability to adapt to changing consumer trends with the introduction of new products, making customers more aware of our products or improvements to existing products.

Liquidity and Capital Resources

As of March 31, 2009, we had cash and cash equivalents of $1.7 million and borrowings available under our credit

facilities of $10.3 million which permits borrowing at any time prior to March 31, 2010.

Cash used in operations was $2.7 million for the three months ended March 31, 2009 as compared to $2.5 million for the three months ended March 31, 2008. Cash used in operations is primarily impacted by operating results and changes in working capital, particularly the timing of the collection of receivables, inventory levels and the timing of payments to suppliers. A significant use of cash in the three months ended March 31, 2008 was a payment of $1.2 million, relating to the settlement of purchase obligations with the Alan James Group, $0.6 million of which had been accrued prior to 2008 and is reflected as being paid in net cash used in operating activities in the three months ended March 31, 2009. The remaining $0.6 million is reflected in net cash used in investing activities as described below. Net cash used in operations for the three months ended March 31, 2008 without the settlement payment of $0.6 million was $1.9 million. The increase of $0.8 million is primarily attributable to increased inventory resulting from a decrease in sales of our consumer products combined with increased costs relating to increased advertising and promotion in both of our segments as well as expenses relating to increased headcount. During the three months ended March 31, 2009 $0.2 million was added to inventory levels as compared to the three months ended March 31, 2008. The increase is primarily attributable to higher inventory levels resulting from a slow down in consumer product sales during the first quarter of 2009. We continue to monitor inventory levels and will adjust spending accordingly.

Cash used in investing activities was $0.5 million for the three months ended March 31, 2009 compared to $0.7 million for the three months ended March 31, 2008. The most significant use of cash in investing activities during the three months ended March 31, 2008 was the settlement of claims related to the acquisition of the assets and business of the Alan James Group as described above. As a result of the settlement, we paid additional consideration of $0.6 million. Capital additions were $0.5 million for the three months ended March 31, 2009 compared to $9 thousand for the three months ended March 31, 2008. The increase in capital additions primarily consists of new commercial laboratory equipment installed and validated in the first three months of 2009 allowing high volume processing of genetic test samples.

Cash provided by financing activities was $40 thousand for the three months ended March 31, 2009 compared to $2 thousand for the three months ended March 31, 2008. We received $40 thousand from the exercise of stock options and stock purchases through the employee stock purchase plan.

On December 23, 2008, we were notified of our failure to comply with the NYSE Amex, LLC's (the Exchange) continued listing standards under section 1003 of the Company Guide. Specifically, the Exchange noted our failure to comply with section 1003(a)(iii) of the Company Guide because our stockholders' equity was less than $6,000,000 and we had losses from continuing operations and net losses in our five most recent fiscal years. The notice was based on a review by the Exchange of publicly available information, including the Company's quarterly report on From 10-Q for the quarter ended September 30, 2008. As of December 31, 2008 the Company's stockholders equity was $4.5 million. On January 27, 2009 we submitted a plan to the exchange to meet the continued listing requirements. The plan consists of several elements, but is primarily focused on increasing the sales of our products and services and raising additional equity capital. On March 27, 2009, we were notified that the Exchange found our plan to regain compliance with the continued listing standards to be unacceptable. We filed an appeal for an oral hearing and submitted a revised plan to the Exchange. On May 11, 2009 the Exchange notified us that the Exchange accepted our redrafted plan of compliance, without a hearing, and granted us an extension until December 31, 2009 to regain compliance with the continued listing standards. The Exchange will periodically review our progress. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension could result in delisting from the Exchange.

We currently do not have any commitments for any additional material capital purchases.

We currently generate operating cash by sales of consumer products, genetic tests, royalties, and reimbursements for funded research. The amount of operating cash we generate is not currently sufficient to continue to fund and grow our operations. In addition to funds generated by our income, we have available a $10.3 million credit line with Alticor, our major investor. Cash we receive from customers and pay to vendors is relatively stable from period to period due to the nature of our consumer products business. Clinical studies and other research and development activities may require cash outflows that depend on the timing of activities.

We believe that our cash on hand and line of credit availability from Alticor will be sufficient to fund our operations and meet our overall strategic plan for at least the next twelve months. We will need to raise additional capital, if market conditions permit, to continue investment in new product development, to improve our distribution channels, to maintain our listing on the NYSE Alternext US, and other aspects of our overall strategic plan. The current status of the financial markets may adversely affect our ability to raise additional capital in the markets.

We have no financial covenants as part of our credit facility with Alticor. We currently have $4.0 million outstanding under the credit facility, which is reflected as long term debt on our balance sheet and is convertible, at the option of Pyxis into shares of our common stock. We anticipate drawing down additional funds available under our credit facility in the foreseeable future.

Results of Operations (000's)



                                     Three Months Ended March 31,
                                       2009               2008
Personalized Health:
Genetic Testing                   $       137,511    $       101,752
Contract research & development           203,687            537,013
Other                                       6,266              3,107
Segment Total                             347,464            641,872
Consumer Products                       1,547,531          2,012,651
Total Revenue                     $     1,894,995    $     2,654,523
Cost of revenue                   $     1,042,699    $     1,335,972
Gross margin                      $       852,296    $     1,318,551
Gross margin percent                         45.0 %             49.7 %

Three Months Ended March 31, 2009 and March 31, 2008

Total revenue for the three months ended March 31, 2009 was $1.9 million compared to $2.7 million for the three months ended March 31, 2008. The decrease of $0.8 million, or 28.6%, is primarily attributable to a decrease in consumer product revenue and a decrease in contract research revenue, offset by an increase in genetic test revenue and royalty revenue. During the three months ended March 31, 2009, sales of consumer products were impacted negatively by current unfavorable economic conditions. We believe retailers are stocking less inventory and consumers continue to monitor their spending patterns more aggressively than in recent years. Contract research revenue decreased to $0.2 million in the three months ended March 31, 2009 compared to $0.5 million in the three months ended March 31, 2008. The decrease is primarily attributable to timing of our reimbursable research projects. Genetic testing revenue increased to $0.14 million, or 35.1%, in the three months ended March 31, 2009, compared to $0.10 million in the three months ended March 31, 2008. The increase is primarily attributable to a health and wellness pilot program that incorporates genetic testing into a customer's benefit plan for their employees completed in the first quarter of 2009. Genetic testing revenue is a result of tests sold and processed which is driven by consumer demand. Contract research revenue is recognized when Alticor sponsored research expenses are incurred.

We have two significant customers. In our Personalized Health Segment, our significant customer, Alticor, which is our principal shareholder, represented approximately 96% and 99%, respectively, of revenues in the three months ended March 31, 2009 and 2008. In our Consumer Products Segment, our other significant customer represented approximately 59% and 48%, respectively of revenues at March 31, 2009 and 2008.

Cost of revenue for the three months ended March 31, 2009 was $1.0 million or 55.0% of revenue compared to $1.3 million or 50.3% for the three months ended March 31, 2008. In our Personalized Health Segment, cost of revenue for the three months ended March 31, 2009 was $0.3 million, or 87.8% of its revenue, compared to $0.2 million, or 36.6% of its revenue, for the three months ended March 31, 2008. The significant increase in the cost of revenue as a percentage of revenue in our Personalized Health Segment is primarily attributable to fixed costs associated with our genetic testing laboratory not withstanding changes in our revenue. Fixed costs were impacted during the three months ended March 31, 2009 by the purchase and installation of new high volume genetic testing equipment. Increased costs associated with this equipment are recognized in the first quarter of 2009 where no such costs were recognized in the first quarter of 2008. The equipment will allow for higher volume processing, which will be absorbed with changes in volume of tests performed. In our Consumer Products Segment, cost of revenue for the three months ended March 31, 2009 was $0.7 million or 47.7% of its revenue, compared to $1.1 million, or 54.7% of its revenue, for the three months ended March 31, 2008. The decrease of $0.4 million is primarily attributable to decreased consumer product sales which we believe is attributable to current unfavorable economic conditions. The corresponding decrease in cost of revenue as a percentage of revenue in our Consumer Products Segment is attributable to the mix of products sold having a lower cost in the three months ended March 31, 2009 compared with the same period in 2008.

Gross margin for the three months ended March 31, 2009, was $0.9 million, or 45.0%, compared to $1.3 million, or 49.7%, for the three months ended March 31, 2008. In our Personalized Health Segment gross margin for the three months ended March 31, 2009, was $0.04 million, or 12.2%, compared to $0.4 million, or 63.4%, for the three months ended March 31, 2008. The decrease in gross margin of $0.3 million is primarily attributable to the fixed costs associated with our genetic testing laboratory which remain constant with changes in revenue. In addition gross margin in our Personalized Health Segment was affected by lower research reimbursement revenue. In our Consumer Products Segment gross margin was $0.8 million, or 52.3%, for the three months ended March 31, 2009, compared to $0.9 million, or 45.3%, for the three months ended March 31, 2008. The decrease of $0.1 million is primarily attributable to decreased sales of our consumer products. Gross margin as a percentage of revenue increased as a result of the mix of products sold having a lower cost in the three months ended March 31, 2009 compared with the same period in 2008.

Research and development expenses were $0.9 million for the three months ended march 31, 2009 compared to $0.8 million for the three months ended March 31, 2008. The increase of $0.1 million is primarily attributable to expenses relating to our patent portfolio.

Selling, general and administrative expenses were $2.0 million for the three months ended March 31, 2009, compared to $2.1 million for the three months ended March 31, 2008. The decrease of $0.1 million is primarily attributable to reduced expenses relating to administrative support consultants offset by increased promotional and advertising expenses in both our Personalized Health Segment and Consumer Products Segment, plus additional compensation expenses due to our increased headcount.

Amortization of intangible assets remained unchanged at $0.3 million for the three months ended March 31, 2009 and 2008. Amortization expense is associated with the basis of intangible assets we acquired from the Alan James Group combined with patents relating to our technology in development.

Total other expense was $36,000 for the three months ended March 31, 2009 as compared to other income of $52,000 for the three months ended March 31, 2008. The increase in expense of $88,000 is primarily attributable to interest expense associated with borrowings on our credit line with Alticor and lower interest being earned on available cash balances. Financial market conditions have significantly reduced the interest rate we earn on our cash and cash equivalent balances.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements. The preparation of these financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires us to
(i) make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenue and expenses; and (ii) disclose contingent assets and liabilities. A critical accounting estimate is an assumption that could have a material effect on our consolidated financial statements if another, also reasonable, amount were used or a change in the estimates is reasonably likely from period to period. We base our accounting estimates on historical experience and other factors that we consider reasonable under the circumstances. However, actual results may differ from these estimates. To the extent there are material differences between our estimates and the actual results, our future financial condition and results of operations will be affected. Our most critical accounting policies and estimates upon which our financial condition depends, and which involve the most complex or subjective decisions or assessments are the following:

Strategic alliance with Alticor:

We account for our strategic alliance with Alticor in accordance with Emerging Issues Task Force (EITF) No. 01-1, Accounting for Convertible Instruments Granted or Issued to a Nonemployee for Goods or Services or a Combination of Goods or Services and Cash (EITF No. 01-1). Under EITF No. 01-1, the proceeds received from Alticor in connection with the March 5, 2003 transaction must first be allocated to the fair value of the convertible instruments issued. As of March 5, 2003, the fair value of the convertible instruments issued was $23.7 million; therefore proceeds received from Alticor in connection with the March 5, 2003 transaction, up to $23.7 million, have been recorded as equity.

Revenue Recognition:

Revenue from genetic testing services is recognized when there is persuasive evidence of an arrangement, service has been rendered, the sales price is determinable and collectability is reasonably assured. Service is deemed to be rendered when the results have been reported to the individual who ordered the test.

Revenue from product sales is recognized when there is persuasive evidence of an arrangement, delivery has occurred and title and risk of loss have transferred to the customer, the sales price is determinable and collectability is reasonably assured. We have no consignment sales. Product revenue is reduced for allowances and adjustments, including returns, discontinued items, discounts, trade promotions and slotting fees.

Revenue from contract research and development is recognized over the term of the contract as we perform our obligations under the contract.

Allowance for Sales Returns:

Our recognition of revenue from sales to retailers is impacted by giving them rights to return damaged and outdated products as well as the fact that as a practical business matter, our sales force, along with our customers, is constantly working to ensure profitability of our products within retailers by rotating slow moving items out of stores and replacing those products with what we and the retailer expect will be more profitable, faster selling items. For product sales, we believe we can reasonably and reliably estimate future returns, therefore we recognize revenue at the time of sale. For product sales which we cannot estimate future returns, particularly new products, we defer revenue recognition until the return privilege has substantially expired or the amount of future returns can be reasonably estimated. An adverse change in any of these factors may result in the need for additional sales returns.

We analyze sales returns in accordance with Statement of Financial Accounting Standards (SFAS) No. 48, Revenue Recognition When Right of Return Exists. We are able to make reasonable and reliable estimates based on history. We also monitor the buying patterns of the end-users of our products based on sales data received. We review our estimated product returns based on expected data communicated by our customers. We also monitor the levels of inventory at our largest customers to avoid excessive customer stocking of merchandise. We believe we have sufficient interaction and knowledge of our customers and of the industry trends and conditions to adjust the accrual for returns when necessary. We believe that this analysis creates appropriate estimates of expected future returns. There is no guarantee that future returns will not increase to, or exceed, the levels experienced in the past. Furthermore, the possibility exists that should we lose a major account, we may agree to accept a substantial amount of returns.

Trade Promotions:

We use objective procedures for estimating our allowance for trade promotions. The allowance for trade promotions offered to customers is based on contracted terms or other arrangements agreed in advance, as well as historical experience. The Company may adjust its estimate based on these factors to more accurately reflect trade promotion costs.

Inventory: . . .