Overview

During the second quarter of 2009, we continued to focus on restructuring our operations and debt. Our ability to obtain a small stream of funding through private placements of common stock has enabled us to continue rebuilding our operations. However, we do not have any definitive agreements for continued funding, and there is no assurance that any such continued funding will be available to us on acceptable terms, or at all. If such additional funding is not available to us when required or is not available to us on acceptable terms, our liquidity and financial condition will be adversely affected and we will likely be unable to continue our operations.

In the event we continue to receive funding, we will continue our limited marketing and sales efforts. Such efforts will continue to be concentrated in Africa, the Middle East, Asia, India and the Caribbean. Our marketing efforts and sales to date have primarily been in the professional market, but we intend to expand our marketing efforts to the over-the-counter market too. We continue to work with our distributors, local agencies and governmental bodies in South Africa, Kenya and Uganda to increase our sales in those countries. We continue to make progress with new Non-Governmental Organizations ("NGOs") in Africa as well. We continue to make progress in our efforts to establish distributorships in the Caribbean and the United Arab Emirates.

In the second quarter of 2009, we shipped all our remaining inventory of AwareTMHIV-1/2 Rapid Test and AwareTMBED Incidence Test to customers. Our newly hired research and development team, which is comprised of a scientist and a laboratory technician, has started working with our manufacturing contractors to restart production of both these products. We have a backlog of orders for both these products.

At June 30, 2009, we had $11,056,000 in outstanding secured debt, including accrued interest, which became due and payable on April 3, 2009, in addition to approximately $5.3 million in other current liabilities. At June 30, 2009, we had a cash balance of $0.1 million.

Beijing Marr

Since receiving approval from the State Food and Drug Administration of China ("SFDA") in April 2008to market and sell our AwareTM HIV-1/2 OMT rapid test in China, Beijing Marr has sold over 7,000 tests, including 2,000 for distribution in Hong Kong, through its exclusive distributor, DiagnosticBio. Beijing Marr has sold tests to the Chinese police, NGOs, medical institutions and small distributors.

In order to resume industrial production of tests in its facility, Beijing Marr will need to test and calibrate some equipment and do some repair work to the building, in addition to hiring more staff capable of manufacturing the tests. Due to the lack of funding, Beijing Marr is not able to do this at this time. Without additional funding, Beijing Marr will not be able to produce additional tests to meet demand, once it has sold its existing inventory. This would have a material adverse affect on our and Beijing Marr's business and on our and its ability to continue operations.

In March 2009, Beijing Marr filed an application with the SFDA to market AwareTM HIV-1/2 OTC (a single use version sold over-the-counter). Beijing Marr has received preliminary communication from the SFDA that this application may be rejected due to an incompatibility between the swab and the test. Beijing Marr, working with an agent, has submitted additional supporting materials and an anticipatory appeal of this outcome. We expect the SFDA to review these documents in the fourth quarter of 2009. There can be no assurance that the SFDA will rule in our favor or that we will eventually get approval to market this product. While this occurrence has impeded Beijing Marr's negotiations with a potential distributor for sales of AwareTM HIV 1/2 Oral in China, it will not impede marketing efforts underway in Hong Kong and Macau, through Diagnostic Bio, Beijing Marr's exclusive distributor in those territories since July 2009.

In September 2008, Beijing Marr terminated the employment of its former chief executive officer for cause under his employment agreement based on misconduct, incompetence and failure to adequately perform the duties of chief executive officer under his employment agreement and relevant Chinese law. The former chief executive officer had intentionally failed to enter into written employment contracts with the employees of Beijing Marr as required by Chinese labor laws. Moreover, he intentionally failed to pay wages and other obligations when due, and generally was physically absent from work for extended periods of time. This caused major setbacks for Beijing Marr in the development of its business, in terms of losing employees, not developing a market for our products and ultimately causing lawsuits with the former chief executive officer, two other former employees and some creditors and diverting scarce resources to the defense of these claims. Since September 2008, Beijing Marr has a new chief executive officer who has been engaging in turn-around efforts. His efforts have included causing Beijing Marr to comply with Chinese laws, restructuring the corporation to focus on marketing and sales of products and lowering costs.

Beijing Marr is suffering from our inability to adequately fund its operations due to our lack of funding. Beijing Marr is exploring funding alternatives from other potential investors. However, there can be no assurance that such funding will be available on acceptable terms, or at all. If Beijing Marr is unable to secure additional funding soon, it will be in significant financial jeopardy, will likely be unable to continue its operations and may have to seek bankruptcy protection under Chinese law, which would have a material adverse affect on its and our business and on its and our ability to continue operations.

Outlook

In order to accomplish our business plan and meet our financial obligations, we must:

- Negotiate a termination, reduction or restructuring of our secured debt obligations.
- Raise additional capital to fund working capital requirements.
- Reduce accounts payable and other debt.
- Reduce certain fixed costs.
- Increase marketing and sales of our products through our current and new distribution network.
- Develop a larger international market presence.

We have been actively pursuing potential opportunities to address the above matters, the ultimate resolution of which is beyond our control, and will have a significant impact on our financial condition and ability to continue our operations. As a result, no assurances can be given that these transactions will be completed as contemplated or at all, which could have a detrimental effect on our ability to continue our operations.

We continue to run the substantial risk that we will not be able to carry out this business plan because of liquidity and capital resource obstacles. Our cash resources are insufficient to continue our operations through the near-term or to pay our debt and, given the current market price of our common stock, any financing transaction that we undertake to continue our operations and pay our debt will likely be highly dilutive to our stockholder and would require an amendment to our certificate of incorporation to increase our authorized shares. Moreover, our stock price is below its par value, which may make it difficult to raise capital through the issuance of equity securities. Additionally, the magnitude of our debt makes it highly unlikely that we will be able to raise additional capital. We do not have any definitive agreements with respect to additional financing or a strategic opportunity, and there is no assurance that any such financing or strategic opportunity will be available to us on acceptable terms, or at all. If such additional financing is not available to us when required or is not available to us on acceptable terms, or we are unable to arrange a suitable strategic opportunity, we will be in significant financial jeopardy and we will be unable to continue our operations.

Financial Considerations

Our consolidated operating cash burn rate for the first six months of 2009 was approximately $603,000 compared to $2,472,000 in the first six months of 2008. Our focus in this quarter was keeping a minimal level of operations so that we could continue shipping existing inventory of products, while we looked for options to fund the company.

During the first six months of 2009, we incurred a net loss of $2 million. At June 30, 2009, we had a working capital deficit of $15.7 million, including $11.1 million of 8% convertible notes and 7% notes payable to a related party, including accrued interest, all of which was due on April 3, 2009, and our stockholders' deficit was $13.8 million. Based upon our financial condition at December 31, 2008, as well as our recurring losses and our negative cash flows from operations, our independent accountants issued an opinion on our December 31, 2008 financial statements citing substantial doubt about our ability to continue our business operations as a going concern. Our cash balance at June 30, 2009 was $0.1 million, which we do not believe is sufficient to enable us to fund our operations through the remainder of 2009. 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 672,500,000 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. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

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, impairment of long-lived assets, 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.

Consistent with our policy on impairment of long-lived assets, given the June 30, 2009 operating loss and cash flow loss, the carrying values of Calypte and Beijing-Marr long-lived assets were compared against the undiscounted cash flows of the two entities over the remaining useful life of the primary assets. Cash flow projections were based on a combination of historical run-rates and future projections, depending on the markets where the products were registered and the related distribution channels. We concluded that no impairment was required.

The critical accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2008 have not changed materially since year-end.

Adoption of New Accounting Pronouncements

In June 2008, the FASB ratified the consensus reached on Emerging Issues Task Force (EITF) Issue No. 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock (EITF 07-05). EITF 07-05 clarifies the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which would qualify as a scope exception under Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. EITF 07-05 was effective for financial statements issued for fiscal years beginning after December 15, 2008 (our fiscal year 2009). We adopted EITF 07-05 on the first day of our fiscal year 2009 and determined that no balance sheet reclassifications were necessary at June 30, 2009.

On January 1, 2009, we adopted SFAS No. 160, Non-controlling Interests in Consolidated Financial Statements, which introduces changes in the accounting and reporting for business acquisitions and non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. In accordance with the requirements of SFAS 160, we have provided a new presentation on the face of the consolidated financial statements to separately classify non-controlling interests within the equity section of the consolidated balance sheets and to separately report the amounts attributable to controlling and non-controlling interests in the consolidated statements of operations and comprehensive loss for all periods presented. There were no changes in our ownership interests in previously existing subsidiaries or deconsolidation of subsidiaries for the six months ended June 30, 2009.

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The adoption of this FSP effective June 30, 2009 did not have any effect on our financial position, results of operations or cash flows.

In April 2009, the FASB issued FSP No. FAS157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, and emphasizes that, even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP amends SFAS No. 157 to require disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires that entities define major categories for equity and debt securities in accordance with paragraph 19 of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. The adoption of this FSP effective June 30, 2009 did not have any effect on our financial position, results of operations or cash flows.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events. SFAS No. 165 defines subsequent events as transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 defines two types of subsequent events: (i) events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements (that is, recognized subsequent events); and (ii) events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date (that is, non-recognized subsequent events). In addition, SFAS No. 165 requires an entity to disclose the date through which subsequent events have been evaluated, as well as whether that date is the date the financial statements were issued or the date the financial statements were available to be issued. SFAS No. 165 is effective for periods ending after June 15, 2009. The adoption of SFAS No. 165 effective June 30, 2009 did not have any effect on our financial position, results of operations or cash flows.

Results of Operations

The following represents selected financial data (in thousands):

                                        Three Months Ended                 Six Months Ended
                                     June 30,                          June 30,
                                       2009             2008             2009            2008

 Total revenues                    $        202      $        95     $        378     $       283
 Cost of product sales                      109               64              184             263

 Gross Margin                                93               31              194              20

 Operating expenses:
 Research and development                     2              383               45             747
 Selling, general and
administrative                              575            2,501            1,330           3,778

 Total operating expenses                   577            2,884            1,375           4,525

 Loss from operations                      (484 )         (2,853 )         (1,181 )        (4,505 )

 Interest expense, net                     (456 )           (607 )         (1,076 )        (1,048 )
 Other income, net                          111                -              186               -

 Net loss before income taxes      $       (829 )    $    (3,460 )   $     (2,071 )   $    (5,553 )

 Less: Loss attributed to
noncontrolling interests in
consolidated entities                        31              123               95             240

 Less: Deemed dividend
attributable to modifications of
warrants                                     (1 )         (2,941 )             (1 )        (2,941 )

 Net loss attributed to Calypte
Biomedical Corporation             $       (799 )    $    (6,278 )   $     (1,977 )   $    (8,254 )

Quarter ended June 30, 2009 and 2008

Our revenue for the second quarter of 2009 totaled $202,000 compared with $95,000 for the second quarter of 2008, an increase of $107,000, or 113%. Sales of our AwareTMBED Incidence Test accounted for 92% of our sales in the second quarter of 2009, compared with 73% in the second quarter of 2008. Revenue from the sales of the AwareTMBED Incidence Test increased by 170% in 2009 compared with 2008. 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 7% and 27% of our sales in the second quarter of 2009 and 2008, respectively. Second quarter 2009 revenues from the sale of our rapid tests decreased by 46% compared with rapid test revenues in the second quarter of 2008. Sales of our AwareTMHIV-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.

Four customers accounted for approximately 63% of our second quarter 2009 revenue. A New York research institution and the Nigerian and Chinese Centers for Disease Control and Prevention purchased AwareTMBED Incidence tests representing 9%, 16% and 30%, respectively, of our second quarter 2009 revenue. Our South African distributor purchased both AwareTMBED Incidence Tests and our AwareTMHIV-1/2 oral fluid rapid tests representing 8% of our second quarter 2009 revenue. Three customers accounted for approximately 71% of our second quarter 2008 revenue. Our South African distributor purchased both AwareTM BED Incidence Tests and our AwareTM HIV-1/2 oral fluid rapid tests representing 27% of our second quarter 2008 revenue. A domestic educational institution and a domestic association of public health laboratories purchased AwareTM BED Incidence Tests representing 24% and 20%, respectively, of second quarter 2008 revenues for use in their international research projects.

We reported gross margins of 46% and 33% of sales in the second quarter of 2009 and 2008, respectively. The margins we reported in both 2009 and 2008, 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.

Given our financial condition we have eliminated most of our research and development costs, which decreased by $381,000, or 99%, from $383,000 in the second quarter of 2008 to $2,000 in the second quarter of 2009. Research and development costs consists of salary and benefits as well as consulting and legal expenses.

· a decrease of $371,000 in salary and benefits expenses attributable to the elimination of certain senior administrative and sales management positions in the fourth quarter of 2008;

· a decrease of approximately $223,000 in marketing and administrative consultant expenses as well as redundant consulting and legal expenses relating to public company compliance issues;
· a decrease of $775,000attributable to non-cash stock based employee compensation expense primarily related to the fair value of April 2008 option grants to employees and November 2007 option grants to members of our Board of Directors;

· a decrease of $400,000 resulting from non-cash charges recorded in the second quarter of 2008 related to the modification of warrants as part of a severance agreement and a stock grant due to a management change;

Our loss from operations for the second quarter of 2009, at $484,000, reflects a reduction of 83% compared with the loss of $2,853,000 reported for the second quarter of 2008.

We recorded net interest expense of $456,000 for the second quarter of 2009 compared with $607,000 of net interest expense in the second quarter of 2008. The decreased expense in 2009 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 were amortized over the period from March 2007 through April 2009.

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

                                                                                    (Increase)
                                                   Quarter ended June 30,            Decrease
                                                   2009               2008            Expense

Interest expense on debt instruments paid or
payable in cash                                $        (79 )     $        (74 )   $          (5 )
Non-cash income (expense) composed of:
Accrued interest on 8% Convertible Notes
(paid by issuing additional
  Notes)                                               (121 )             (112 )              (9 )
Amortization of discounts associated with
extension of 8%
  convertible notes and Marr Credit Facility
notes                                                  (227 )             (392 )             165
Expense attributable to dividends on
mandatorily redeemable Series
  A preferred stock                                     (30 )              (30 )               -

Total non-cash items                                   (378 )             (534 )             156

 Total interest income (expense)                       (457 )             (608 )             151

Interest income                                           1                  1                 -

Net interest income (expense)                  $       (456 )     $       (607 )   $         151

Six Months Ended June 30, 2009 and 2008

Our revenue for the six month period ended June 30, 2009 totaled $378,000 compared with $283,000 for the six month period ended June 30, 2008, an increase of $95,000, or 34%. Sales of our AwareTMBED Incidence Test accounted for 81% of our sales in the six month period ended June 30, 2009, compared with 74% in the six month period ended June 30, 2008. Revenue from the sales of the AwareTMBED Incidence Test increased by 38% in 2009 compared with 2008. Sales of our AwareTM HIV-1/2 rapid tests accounted for the balance of the revenue for the six months period ended June 30, 2009. Revenues for the six month period ended June 30, 2009 from the sale of our HIV-1/2 rapid tests increased5% compared with revenues in the six month period ended June 30, 2008.

Five customers accounted for approximately 60% of our revenue for the six month period ended June 30, 2009. A New York research institution and the Nigerian and Chinese Centers for Disease Control and Prevention purchased AwareTMBED Incidence tests representing 15%, 8% and 16% of our revenue, respectively, for the six month period ended June 30, 2009. Our South African distributor purchased both AwareTMBED Incidence Tests and our AwareTMHIV-1/2 oral fluid rapid tests representing 12% of our revenue for the six month period ended June 30, 2009. Our Indian distributor purchased our AwareTMHIV-1/2 oral fluid rapid tests representing 8% of our six month period ended June 30, 2009 revenue. Three customers accounted for approximately 53% of our revenue for the six month period ended June 30, 2008. Our South African distributor purchased both AwareTMBED Incidence Tests and our AwareTMHIV-1/2 oral fluid rapid tests representing 21% of our revenue for the six month period ended June 30, 2008. The Chinese CDC purchased AwareTMBED Incidence Tests representing 18% of our six month period ended June 30, 2008 revenue. The New York State Department of Health purchased AwareTMBED Incidence Tests representing 14% of our six month period ended June 30, 2008 revenue.

We reported gross margins of 51% and 7% of sales in the six month periods ended June 30, 2009 and 2008, respectively. The margins we reported in both 2009 and 2008, 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.

Given our financial condition we have eliminated most of our research and development and such costs decreased by $702,000, or 94%, from $747,000 in the six month period ended June 30, 2008 to $45,000 in the six month period ended June 30, 2009. Research and development costs consists of salary and benefits as well as consulting and legal expenses.

Selling, general and administrative costs decreased by $2,448,000, or 65%, from $3,778,000 in the six month period ended June 30, 2008 to $1,330,000 in the six month period ended June 30, 2009. The primary components of the net decrease . . .