Statements below regarding future events or performance are "forward-looking statements" within the meaning of the Federal securities laws. These may include statements about our expected revenues, earnings/loss per share, net income
(loss), expenses, cash flow or other financial performance or developments, expected regulatory filings and approvals, planned business transactions, views of future industry, competitive or market conditions, and other factors that could affect our future operations, results of operations or financial position. These statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," "may," "will," "should," "could," or similar expressions. Forward-looking statements are not guarantees of future performance or results. Known and unknown factors that could cause actual performance or results to be materially different from those expressed or implied in these statements include, but are not limited to: ability to market and sell products, whether through an internal, direct sales force or third parties; ability to manufacture products in accordance with applicable specifications, performance standards and quality requirements; changes in relationships, including disputes or disagreements, with strategic partners or other parties and reliance on strategic partners for the performance of critical activities under collaborative arrangements; failure of distributors or other customers to meet purchase forecasts or minimum purchase requirements for the Company's products; impact of replacing distributors and success of direct sales efforts; inventory levels at distributors and other customers; impact of competitors, competing products and technology changes; impact of the economic downturn, high unemployment and credit crisis; ability to develop, commercialize and market new products; market acceptance of oral fluid testing or other products; changes in market acceptance of products based on product performance and extended shelf life; continued bulk purchases by customers, including governmental agencies, and the ability to fully deploy those purchases in a timely manner; ability to fund research and development and other products and operations; ability to obtain and maintain new or existing product distribution channels; reliance on sole supply sources for critical product components; availability of related products produced by third parties or products required for use of our products; ability to obtain, and timing and cost of obtaining, necessary regulatory approvals for new products or new indications or applications for existing products; ability to comply with applicable regulatory requirements; history of losses and ability to achieve sustained profitability; ability to utilize net operating loss carry forwards or other deferred tax assets; volatility of our stock price; uncertainty relating to patent protection and potential patent infringement claims; uncertainty and costs of litigation relating to patents and other intellectual property; availability of licenses to patents or other technology; ability to enter into international manufacturing agreements; obstacles to international marketing and manufacturing of products; ability to sell products internationally, including the impact of changes in international funding sources; loss or impairment of sources of capital; ability to meet financial covenants in agreements with financial institutions; ability to retain qualified personnel; exposure to patent infringement, product liability, and other types of litigation; changes in international, federal or state laws and regulations; customer consolidations and inventory practices; equipment failures and ability to obtain needed raw materials and components; the impact of terrorist attacks and civil unrest; ability to identify, complete and realize the full benefits of potential acquisitions; and general political, business and economic conditions. These and other factors are discussed more fully in our Securities and Exchange Commission ("SEC") filings, including our registration statements, Annual Report on Form 10-K for the year ended December 31, 2008, Quarterly Reports on Form 10-Q, and other filings with the SEC. Although forward-looking statements help to provide information about future prospects, readers should keep in mind that forward-looking statements may not be reliable. The forward-looking statements are made as of the date of this Report and we undertake no duty to update these statements.

The following discussion should be read in conjunction with the financial statements contained herein and the notes thereto, along with the Section entitled "Critical Accounting Policies and Estimates," set forth below.

Overview

We operate primarily in the in vitro diagnostic business. Our business principally involves the development, manufacture, marketing and sale of oral fluid diagnostic products and specimen collection devices using our proprietary oral fluid technologies, as well as other diagnostic products including immunoassays and other in vitro diagnostic tests that are used on other specimen types, and other medical devices used for the removal of benign skin lesions by cryosurgery, or freezing. Our diagnostic products include tests which

are performed on a rapid basis at the point of care and tests which are processed in a laboratory. These products are sold in the United States and internationally to various clinical laboratories, hospitals, clinics, community-based organizations and other public health organizations, distributors, government agencies, physicians' offices, and commercial and industrial entities. One of our products is sold in the over-the-counter ("OTC") or consumer retail market in North America, Europe, Central and South America, and Australia.

In vitro diagnostic testing is the process of analyzing oral fluid, blood, urine and other bodily fluids or tissue for the presence of specific substances or markers for infectious diseases, drugs of abuse or other conditions. However, we have targeted the use of oral fluid in our products as a differentiating factor and believe that it provides a significant competitive advantage over blood and urine. Our oral fluid tests have sensitivity and specificity comparable to blood and/or urine tests. In vitro diagnostic tests are performed outside the body, in contrast to in vivo tests, which are performed directly on or within the body. When combined with their ease of use, non-invasive and dignified nature, and cost effectiveness, our oral fluid tests represent a very competitive alternative to the more traditional testing methods in the diagnostic space.

We rely heavily on distributors to purchase and resell many of our products. For example, SSL International plc ("SSL") has exclusive rights to our wart removal product in the OTC footcare market in Europe, Australia and New Zealand and Genomma Labs ("Genomma") has exclusive rights in Mexico, Argentina, Brazil, and various other Central and South American countries. We have contracted with several distributors to sell our OraQuick ADVANCE® HIV-1/2 test to the U.S. physician office market and our Intercept® and OraSure® product lines are sold by several laboratory distributors. We expect to enter into additional distribution agreements for new and future products, for distribution in the U.S. and internationally. If our distributors are unable or unwilling to meet the minimum purchase commitments set forth in their agreements or otherwise substantially reduce the volume of their purchases, our revenues and results of operations could be adversely affected.

Because of the regulatory approvals needed for most of our products, we often are required to rely on sole source providers for critical components and materials and on related products supplied by third parties. This is particularly true for our OraQuick ADVANCE®HIV-1/2 test, our OraSure® oral fluid collection device and our oral fluid Western blot HIV-1 confirmatory product. If we are unable to obtain necessary components or materials from these sole sources, the time required to develop replacements and obtain the required FDA approvals could disrupt our ability to sell the affected products.

Competitive and Economic Outlook

Competition in the market for HIV testing is intense and is expected to increase. We believe that our principal competition will come from existing laboratory-based blood tests, point-of-care rapid blood tests, laboratory-based urine assays or other oral fluid-based tests that may be developed. Our competitors include specialized biotechnology firms, as well as pharmaceutical companies with biotechnology divisions and medical diagnostic companies.

The current economic downturn, including disruptions in the capital and credit markets, may continue indefinitely and intensify, and could adversely affect our financial performance and condition or those of our customers and suppliers. These circumstances could adversely affect our access to liquidity needed to conduct or expand our business or conduct acquisitions or make other discretionary investments. These circumstances may also adversely impact the capital needs of our customers and suppliers, which, in turn, could adversely affect their ability to purchase our products or supply us with necessary equipment, raw materials or components. In addition, demand for our products by consumers may also be adversely affected by the economic downturn.

Current Financial Results

During the six months ended June 30, 2009, our total revenues were $34.5 million, which represents a 7% decline from the same period in 2008. Our net loss for the six months ended June 30, 2009 was $6.8 million or $0.15 per share compared to a net loss of $242,000 or $0.01 per share for the six months ended June 30, 2008. Our net loss for the first six months of 2009 includes a $3.0

million pre-tax charge for the impairment of patents and product rights and our net loss for the first six months of 2008 includes a $4.9 million payment received from Schering-Plough Healthcare Products, Inc. ("Schering-Plough") to resolve a patent infringement lawsuit, which was recorded as other income.

Cash flows used in operating activities for the six months ended June 30, 2009 was $1.6 million, compared to $1.9 million for the six months ended June 30, 2008. As of June 30, 2009, we had $79.2 million in cash, cash equivalents and short-term investments, compared to $82.5 million at December 31, 2008.

Recent Developments

OraQuick® HCV Test

During the fourth quarter of 2008, we filed a premarket approval application ("PMA") with the U.S. Food and Drug Administration ("FDA") for our OraQuick® Hepatitis C ("HCV") test for use in the professional market. The application sought approval for use of the product with multiple specimen types, including venous whole blood, fingerstick whole blood, oral fluid and other sample types. The clinical study data submitted in the PMA showed a high degree of correlation to a comparator assay conducted at a central laboratory.

Since filing the PMA, we have been in frequent communications with the FDA and have received a number of questions and requests for additional information from the agency. During its review of the PMA, the FDA indicated that our clinical data could potentially have been affected by bias because the same operators performed the test and interpreted the results on multiple specimen types derived from the same patient. The FDA had previously reviewed and concurred with our original clinical trial protocol, which had stated that the study would not be blinded to prevent an operator from seeing the results of multiple devices used on the same patient, but would be blinded as to central laboratory results using the FDA-approved comparator assay.

However, late in the second quarter of 2009 the FDA concluded that additional clinical testing will be required to obtain approval of the PMA for a venous whole blood claim, and that a new clinical study will be required for approval of claims for oral fluid and other sample types. Although we believe the clinical data originally submitted to the FDA is sufficient to support approval of our PMA, we have agreed to conduct the additional clinical testing and study mandated by the FDA in order to obtain approved claims for oral fluid, venous whole blood, and fingerstick whole blood. The exact timing and costs associated with this work will not be fully determined until after the clinical protocols are reviewed by the FDA, which should occur in the near future.

OraQuick® HIV OTC Test

In August 2008, we submitted the results of our observed use study to the FDA as part of our efforts to obtain approval for an OraQuick® rapid HIV OTC test. The observed use study was designed to assess an individual's ability to interact with the product packaging, comprehend the instructions for use, take the test and interpret the results while a trained professional observed those activities. The observed use study was stopped after testing was completed for the first 1,000 subjects, because data from the study met the success criteria initially established in the study protocol for this phase of the trials.

The FDA recently reviewed the data from the observed use study at a meeting of its senior management. Following this meeting, the FDA contacted us and indicated that both the results of the observed use study and our remaining clinical activities should also be reviewed and approved by the Blood Products Advisory Committee ("BPAC"), an advisory committee to the FDA, before proceeding.

We are discussing plans for the upcoming BPAC meeting with the FDA and intend to gain alignment with the agency on the next steps required to complete and file a PMA application, before presenting a proposal at the BPAC's meeting scheduled for November 2009.

OraQuick® HIV Manufacturing

During the quarter ended June 30, 2009, we began experiencing difficulty manufacturing a component for our OraQuick® rapid HIV-1/2 antibody test that met our internal quality requirements. A multi-functional team was immediately organized and began working aggressively with the assistance of outside consultants to resolve this manufacturing issue. While this issue initially resulted in lower production yields, we were still able to meet existing customer demand by supplementing production levels with existing finished goods inventories. As the quarter progressed, however, this manufacturing issue remained unresolved. As a result, inventory levels depleted rapidly and we began allocating available product across our customer base. We also provided some customers with free OraSure® oral fluid collection devices in order to help them meet their HIV testing needs.

Our revenues for the second quarter of 2009 were negatively impacted by this manufacturing issue which was largely responsible for the 16% decrease in OraQuick® sales to the U.S. public health market during this period. In addition, gross margin for the second quarter was negatively impacted by the decline in revenues and an increase in product support costs. Gross margin for the second quarter ended June 30, 2009 declined to 57% compared to 64% during the first quarter ended March 31, 2009.

Early in the third quarter, we identified the root cause for the manufacturing issue and implemented corrective action. As a result, we have resumed full scale production of the OraQuick® HIV product. We expect to eliminate the backlog in product orders resulting from the reduced production and return to normal inventory levels over the next several months.

Results of Operations

Three months ended June 30, 2009 compared to June 30, 2008

Total revenues decreased 9% to $17.3 million in the second quarter of 2009 from $18.9 million in the comparable quarter in 2008. Increased sales of our OTC cryosurgical products were more than offset by decreased sales of our OraQuick ADVANCE® rapid HIV-1/2 antibody test, our professional cryosurgical products and our substance abuse testing products. We also experienced a decrease in revenue from sales into the insurance risk assessment market, as well as a decrease in licensing and product development revenues. Revenues derived from products sold to customers outside the U.S. were $3.4 million and $3.3 million, or 20% and 17% of total revenues, in the second quarters of 2009 and 2008, respectively. Because the majority of our international sales are denominated in U.S. dollars, the impact of fluctuating foreign currency exchange rates has not been material to our operating results.

The table below shows the amount of total revenues (in thousands, except %) generated in each of our principal markets and by licensing and product development activities.

                                                            Three Months Ended June 30,
                                                                                    Percentage of Total
                                                Dollars                                  Revenues
Market                                      2009        2008      % Change         2009            2008

Infectious disease testing                $  9,417    $ 10,033          (6 )%          54 %            53 %
Substance abuse testing                      2,932       3,697         (21 )           17              20
Cryosurgical systems                         2,901       2,719           7             17              14
Insurance risk assessment                    1,499       1,693         (11 )            9               9

Product revenues                            16,749      18,142          (8 )           97              96
Licensing and product development              525         804         (35 )            3               4

Total revenues                            $ 17,274    $ 18,946          (9 )%         100 %           100 %

Infectious Disease Testing Market

Sales to the infectious disease testing market decreased 6% to $9.4 million in the second quarter of 2009. OraQuick ® sales totaled $8.8 million and $9.3 million in the second quarters of 2009 and 2008, respectively. Sales of our OraSure ® oral fluid collection device totaled $630,000 and $735,000 in the second quarters of 2009 and 2008, respectively.

The table below shows a breakdown of our total OraQuick® revenues (in thousands, except %) during the second quarters of 2009 and 2008.

                                            Three Months Ended June 30,
          Customers                         2009         2008     % Change

          Direct to U.S. Public Health   $    5,790    $  6,899        (16 )%
          Hospital Market                     2,501       1,698         47
          International                         496         701        (29 )


          Total OraQuick®revenues        $    8,787    $  9,298         (5 )%

During the second quarter of 2009, OraQuick® revenue derived from direct sales to the U.S. public health market decreased by 16% as compared to 2008. This decrease is directly related to inventory shortages we experienced in the current quarter as a result of an issue related to manufacturing a component required for our OraQuick®Rapid HIV-1/2 antibody test. As the quarter progressed, the manufacturing issue remained unresolved, inventory levels were depleted rapidly and we began allocating available product across our customer base. We also provided some customers with free OraSure® oral fluid collection devices during the quarter in order to help them meet their HIV testing needs. As a result of this issue, as of June 30, 2009 we had a $1.8 million backlog of orders for our OraQuick ADVANCE® test from our public health customers.

Sales into the hospital market increased 47% to $2.5 million during the second quarter of 2009 as compared to $1.7 million in 2008. On January 1, 2009, we switched to a direct sales model for the U.S. hospital market as a result of the termination of our distribution agreement with Abbott Laboratories at the end of 2008. The increase in revenues in the U.S. hospital market during the current period is due to higher average selling prices realized under our direct sales model. As a result of the OraQuick® manufacturing issue described above, as of June 30, 2009 we had a $400,000 backlog of orders from our hospital customers for our OraQuick ADVANCE ® Rapid HIV-1/2 antibody test.

Early in the third quarter, we identified the root cause for the manufacturing issue and implemented corrective action. As a result, we have resumed full scale production of the OraQuick ® HIV product. We expect to eliminate the backlog in product orders resulting from the reduced production and return to normal inventory levels over the next several months.

International sales of our OraQuick® test decreased to $496,000 for the three months ended June 30, 2009 from $701,000 for the three months ended June 30, 2008. This 29% decline reflects decreased sales into Africa, primarily due to the timing of certain testing initiatives and placement of the related OraQuick® product orders. We expect sales in Africa to improve from current levels during the remaining six months of 2009.

We continue to believe that sales of OraQuick ADVANCE® are negatively impacting sales of our OraSure® oral fluid collection device in the infectious disease testing market in the U.S. Our sales of OraSure® decreased from $735,000 in the second quarter of 2008 to $630,000 in the second quarter of 2009. Some customers who have purchased our OraSure® device for laboratory HIV-1 testing in the past are now electing to purchase our OraQuick ADVANCE® test. We believe this is the result of customers recognizing the benefits of rapid HIV testing, especially with oral fluid, and the CDC's efforts to increase rapid HIV testing in healthcare settings. While it is not possible at this time to estimate the extent of this ongoing change in purchasing patterns, we expect OraSure® sales will continue to decline in the future.

Substance Abuse Testing Market

Substance abuse testing revenues decreased 21% to $2.9 million in the second quarter of 2009 from $3.7 million in the second quarter of 2008, as sales of our Intercept® product for workplace testing were impacted by the continuing adverse economic conditions and high unemployment rates.

The table below shows a breakdown of our total Intercept® revenues (in thousands, except %) generated in each market during the second quarters of 2009 and 2008.

                                          Three Months Ended June 30,
            Market                        2009         2008     % Change

            Workplace testing          $      946    $  1,272        (26 )%
            Criminal justice                  630         708        (11 )
            International                     523         564         (7 )
            Direct                            195         330        (41 )


            Total Intercept®revenues   $    2,294    $  2,874        (20 )%

Our workplace testing business decreased 26% from $1.3 million in the second quarter of 2008 to $946,000 in the second quarter of 2009. Pre-employment drug screening represents over 50% of our workplace testing business and the current decline in the domestic economy and high unemployment levels have had a significant impact on this part of our business, as well as our direct sales results. We are also seeing a negative impact in our criminal justice market as a result of funding reductions at the state and local levels.

We do not expect renewed growth in Intercept® sales until employment conditions in the U.S. recover and overall economic conditions improve. In addition, our microplate oral fluid drug assays, which are sold for use with the Intercept® collection device, have come under increasing competitive pressure from "home-brew" assays developed internally by our laboratory customers. Our oral fluid microplate assays also compete with urine-based homogeneous assays that are run on fully-automated, random access analyzers. We believe our competitors are developing oral fluid tests suitable for use on these fully automated homogeneous assay systems and these assays, if and when they are developed and commercialized, could represent a significant competitive threat to our oral fluid microplate business. In order to meet this competition, we are jointly developing and intend to commercialize fully-automated homogeneous oral fluid drugs of abuse assays with Roche Diagnostics for use with our Intercept®device.

Cryosurgical Systems Market

Sales of our products in the cryosurgical systems market (which includes both the physicians' office and OTC markets) increased 7% to $2.9 million in the second quarter of 2009, compared to $2.7 million in the same period of the prior year.

The table below shows a breakdown of our total cryosurgical systems revenues (in thousands, except %) generated in each market during the second quarters of 2009 and 2008.

                                                Three Months Ended June 30,
       Market                                   2009         2008     % Change

       Professional domestic                 $      807    $  1,004        (20 )%
       Professional international                   636         665         (4 )
       OTC domestic                                 122          -         100
       OTC international                          1,336       1,050         27

       Total cryosurgical systems revenues   $    2,901    $  2,719          7 %

The overall increase in cryosurgical systems revenues was primarily the result of a 27% increase in sales of our international OTC products. Increased sales to our Latin American OTC distributor, Genomma, were partially offset by a decrease in sales to our European OTC distributor, SSL, during the current three-month period.

Genomma distributes our cryosurgical wart removal product in the OTC markets in Mexico, Argentina, Brazil, and various other Central and South American countries. During the second quarter of 2008, Genomma did not purchase any product from us, as they were working through a higher-than-expected level of returns from their retail customers experienced during the first quarter of 2008. Throughout the remainder of 2008 and the first quarter of 2009, Genomma worked to reduce its excess inventory position and did not purchase additional product. Genomma has worked through its excess inventory and purchased $596,000 of product during the second quarter of 2009. In addition, Genomma recently registered our OTC cryosurgical wart removal product in Brazil, which we believe will support continuing sales to Genomma during the remaining half of this year.

SSL distributes our cryosurgical wart removal product in the OTC market in Europe, Australia and New Zealand under SSL's Scholl and Dr. Scholl trademarks. . . .