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, as well. 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 U.S. Food and Drug Administration ("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 for the foreseeable future 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 nine months ended September 30, 2009, our total revenues were $56.1 million, which represents a 4% increase from the same period in 2008. Our net loss for the nine months ended September 30, 2009 was $5.0 million or $0.11 per share, compared to a net loss of $2.0 million or $0.04 per share for the nine months ended September 30, 2008. Our net loss for the first nine 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 nine months of 2008 includes a $4.9 million pre-tax payment received from Schering-Plough Healthcare Products, Inc. ("Schering-Plough") to resolve a patent infringement lawsuit.

Cash flow provided by operating activities for the nine months ended September 30, 2009 was $2.7 million, an improvement of $6.4 million compared to the $3.7 million used in operating activities for the nine months ended September 30, 2008. As of September 30, 2009, we had $83.0 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 FDA for our OraQuick® rapid 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.

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 new clinical studies 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 studies mandated by the FDA in order to obtain approved claims for oral fluid, venous whole blood, and fingerstick whole blood. In September 2009, we commenced the additional clinical testing required in support of these claims. We expect these clinical studies to be completed during the first half of 2010.

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.

During the quarter ended June 30, 2009, the FDA 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 intend to present a proposal regarding this clinical program at the BPAC's meeting scheduled for November 2009.

OraQuick ® HIV Manufacturing

During the quarter ended June 30, 2009, we experienced difficulty manufacturing a component for our OraQuick® rapid HIV-1/2 antibody test in accordance with 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 second 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.

Early in the third quarter, we identified the root cause of the manufacturing issue and implemented corrective action. As a result, during the three months ended September 30, 2009, we resumed full-scale production of our OraQuick® rapid HIV-1/2 antibody test, fulfilled the $2.2 million backlog which existed at June 30, 2009, and restored our supply of finished goods inventories for this product.

Our revenues for the third quarter of 2009 included the elimination of the $2.2 million backlog, which was largely responsible for the 40% increase in OraQuick ® sales to the U.S. public health market during this period. Our gross margin for the quarter ended September 30, 2009 increased to 64%, as compared to 58% experienced during the second quarter of 2009. Gross margin for the third quarter of 2009 benefited from the higher revenues and increased absorption of our fixed costs as a result of resuming full-scale production of our OraQuick ® HIV product.

Availability of HIV-1 Antigen and Screening Test

In past years, bioMérieux, Inc. ("BMX") manufactured and sold the only oral fluid HIV-1 enzyme immunoassay screening test ("EIA") that had received FDA approval for use in detecting HIV-1 in an oral fluid specimen collected with our OraSure® collection device. BMX also supplied the HIV-1 antigen used to manufacture our oral fluid Western blot HIV-1 confirmatory test and was the exclusive world-wide distributor of that product. BMX discontinued manufacturing their HIV-1 EIA screening test during 2007 and our agreement with BMX for the supply of HIV-1 antigen terminated on December 31, 2007. As a result, we purchased a two-year supply of the antigen from BMX as permitted under the agreement.

During the third quarter of 2009, we made arrangements to purchase additional HIV-1 antigen from a third party subcontractor that had historically been used by BMX to manufacture this product for resale to us by BMX. We believe this subcontractor can supply our future requirements for the HIV-1 antigen, and we intend to negotiate a long-term supply contract with this party in the near future.

As previously disclosed, we had initially planned to conduct clinical trials and seek FDA approval of an alternate HIV-1 EIA for use in testing oral fluid samples collected with our OraSure ® collection device. However, we recently learned that a third party called Avioq Inc., who had acquired a license from BMX to produce a new HIV-1 EIA test originally developed by BMX, recently obtained FDA approval of this product for use with our OraSure® collection device. As a result, we now believe that we will not need to conduct our own clinical trials or seek FDA approval for an alternate HIV-1 EIA, as originally planned.

Termination of Royalty Agreement

In July 2009, we entered into a termination and release agreement with the third party from whom we purchased certain patents, trademarks, copyrights and technology related to our Histofreezer® product line. Pursuant to this agreement, we made a one-time payment of $643,050 to this third party in full consideration of the termination of the original asset purchase agreement we executed with this third party in June 1998, and its related royalty obligations, which would have extended until December 2011. We recorded this payment, net of the royalties previously accrued, as prepaid royalties, which will be expensed in relation to Histofreezer® revenues through December 31, 2011.

Results of Operations

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

Total revenues increased 28% to $21.6 million in the third quarter of 2009 from $16.9 million in the comparable quarter in 2008. We experienced double digit revenue increases for all of our product lines, with the exception of our substance abuse testing products, which declined 9%. Licensing and product development revenues remained flat when compared to the third quarter of 2008.

Revenues derived from products sold to customers outside the U.S. were $3.9 million and $2.6 million, or 18% and 16% of total revenues, in the third 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 September 30,
                                                                                   Percentage of Total
                                                Dollars                                 Revenues
Market                                      2009        2008      % Change        2009            2008

Infectious disease testing                $ 13,540    $  9,743          39 %          63 %            58 %
Substance abuse testing                      3,269       3,581          (9 )          15              21
Cryosurgical systems                         2,682       1,671          61            12              10
Insurance risk assessment                    1,416       1,163          22             7               7

Product revenues                            20,907      16,158          29            97              96
Licensing and product development              702         702           0             3               4

Total revenues                            $ 21,609    $ 16,860          28 %         100 %           100 %

Infectious Disease Testing Market

Sales to the infectious disease testing market increased 39% to $13.5 million in the third quarter of 2009. OraQuick ® sales totaled $13.2 million and $8.9 million in the third quarters of 2009 and 2008, respectively. Sales of our OraSure® oral fluid collection device totaled $358,000 and $830,000 in the third quarters of 2009 and 2008, respectively.

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

                                          Three Months Ended September 30,
        Customers                          2009           2008       % Change

        Direct to U.S. Public Health   $      8,611    $    6,157          40 %
        Hospital Market                       3,156         1,799          75
        International                         1,415           957          48


        Total OraQuick® revenues       $     13,182    $    8,913          48 %

Early in the third quarter, we identified the root cause of the manufacturing issues we had experienced with our OraQuick® rapid HIV-1/2 antibody test during the second quarter of 2009. We implemented corrective action and as a result, we resumed full-scale production of the OraQuick® HIV product during the third quarter and eliminated the backlog in product orders that existed at June 30, 2009.

During the three months ended September 30, 2009, direct sales of OraQuick® to the U.S. public health market increased by 40%, or $2.5 million, when compared to the same period in 2008. This increase is largely due to the elimination of the $1.8 million backlog of public health orders for our OraQuick ADVANCE® Rapid HIV-1/2 antibody test which existed at June 30, 2009. The remaining balance of the current period increase is the result of growth in our base business as certain of our public health customers have expanded their HIV testing programs.

Sales into the hospital market increased 75% to $3.2 million during the third quarter of 2009 as compared to $1.8 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 hospital market during the current period is primarily due to higher average selling prices realized under our direct sales model and the elimination of a $400,000 backlog of hospital orders for our OraQuick ADVANCE® Rapid HIV-1/2 antibody test, which existed at June 30, 2009.

International sales of our OraQuick® HIV-1/2 test increased 48% to $1.4 million for the three months ended September 30, 2009 from $957,000 for the three months ended September 30, 2008. This increase reflects a 28% increase in sales to Africa, as well as increased sales activity in various countries in Europe and Latin America.

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. Sales of OraSure® decreased from $830,000 in the third quarter of 2008 to $358,000 in the third 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 efforts of the Centers for Disease Control and Prevention ("CDC") to increase rapid HIV testing in healthcare settings. However, it is not possible at this time to estimate the full extent or impact of this change in purchasing patterns.

Substance Abuse Testing Market

Substance abuse testing revenues decreased 9% to $3.3 million in the third quarter of 2009 from $3.6 million in the third quarter of 2008, as lower sales in the forensics toxicology market and reduced sales of our Intercept®product for workplace testing caused by the continuing adverse economic conditions and high unemployment rates, offset higher sales in the U.S. criminal justice and international markets.

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

                                        Three Months Ended September 30,
         Market                         2009           2008        % Change

         Workplace testing           $     1,068    $     1,193         (10 )%
         Criminal justice                    736            637          16
         International                       479            481           0
         Direct                              282            303          (7 )


         Total Intercept® revenues   $     2,565    $     2,614          (2 )%

Our workplace testing business decreased 10% from $1.2 million in the third quarter of 2008 to $1.1 million in the third quarter of 2009. Pre-employment drug screening represents over 50% of our workplace testing business and the recession experienced in the domestic economy and high unemployment levels have had a significant negative impact on this part of our business, as well as on our direct sales. During the third quarter of 2009, our primary drug testing lab customer reported a decrease in the number of oral fluid drug tests processed compared to the same period in 2008. Our direct sales of Intercept® products were also negatively impacted during the third quarter as a result of a reduction in drug testing by our small business customers. Criminal justice sales increased 16% primarily due to the variable ordering patterns of our criminal justice customers.

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.

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