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SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2002

OR

For the transition period from  __________ to __________

Commission file number:   000-20985

CALYPTE BIOMEDICAL CORPORATION
(Exact name of registrant as specified in its charter)

1265 Harbor Bay Parkway, Alameda, California   94502
(Address of principal executive offices)     (Zip Code)

(510) 749-5100
(Registrant’s telephone number, including area code)

          Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

          The registrant had 113,825,876 shares of common stock outstanding as of November 8, 2002.

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

FORM 10-Q

INDEX

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PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(1)     The Company and Basis of Presentation

Calypte Biomedical Corporation (the Company) is a health care company dedicated to the development and commercialization of urine-based diagnostic products and services for Human Immunodeficiency Virus Type 1 (HIV-1), sexually transmitted diseases and other chronic illnesses.  The Company’s tests include the screening enzyme immunoassay (EIA) and supplemental Western Blot tests, the only two FDA-licensed HIV-1 antibody tests that can be used on urine samples.  The Company believes that accurate, non-invasive urine-based testing methods for HIV and other chronic diseases make important contributions to public health by helping to foster an environment in which testing may be done safely, economically, and painlessly. 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC), and reflect all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary for a fair presentation of the Company’s financial position as of September 30, 2002 and the results of its operations for the three and nine months ended September 30, 2002 and 2001 and its cash flows for the nine months ended September 30, 2002 and 2001.  Interim results are not necessarily indicative of the results to be expected for the full year.  This information should be read in conjunction with the Company’s audited consolidated financial statements for each of the years in the three year period ended December 31, 2001 included in its Form 10-K/A (No. 1) filed with the SEC on August 5, 2002.

Certain information in footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America has been condensed or omitted pursuant to the rules and regulations of the SEC.  The data disclosed in these condensed consolidated financial statements and in the related notes is unaudited.

During the first three quarters of 2002, Calypte has incurred a net loss of $7.1 million and our accumulated deficit at September 30, 2002 was $95.2 million.  For us to successfully implement our business plan, we must overcome certain impediments.  Specifically, in April of 2002, we announced the winding down of our business operations because we lacked sufficient capital to continue to successfully implement our business model.  Subsequently, in May of 2002, we announced an arrangement for new funding, which allowed for Calypte to resume and recommence regular business operations.  Based upon our tenuous financial condition, our independent auditors have issued an opinion that raises substantial doubt about our ability to continue our business operations as a going concern.  We continue to reassess our business plan and capital requirements as a result of the wind-down and subsequent restart of our operations.  We do not believe that our currently available financing will be adequate to sustain operations at current levels through the remainder of 2002 unless new financing is arranged.  Although, as of September 30, 2002, we have completed new financings in which we have received an aggregate of approximately $6.2 million, exceeding the initial $5 million new funding commitment more fully discussed in Note 6, we do not know if we will succeed in raising additional funds through further offerings of debt or equity.  We must achieve profitability for our business model to succeed. Prior to accomplishing this goal, we believe that we will need to arrange additional financing of at least $5 million in the next twelve months.  There can be no assurance that subsequent additional financings will be made available to the Company on a timely basis or that the additional capital that the Company requires will be available on acceptable terms, if at all.  The terms of a subsequent financing may involve a change of control and/or require stockholder approval, or require the Company to obtain waivers of certain covenants that are contained in existing agreements. 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

We are actively engaged in seeking additional financing in a variety of venues and formats and we continue to impose actions designed to minimize our operating losses. We would consider strategic opportunities, including investment in the Company, a merger or other comparable transaction, to sustain our operations. We do not currently have any agreements in place with respect to any such strategic opportunity, and there can be no assurance that such opportunity will be available to us on acceptable terms, or at all.  If additional financing is not available when required or is not available on acceptable terms, or we are unable to arrange a suitable strategic opportunity, it will place the Company in significant financial jeopardy and we may be unable to continue our operations at current levels, or at all.

(2)     Significant Accounting Policies

Net Loss Per Share Attributable to Common Stockholders

Basic net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period presented.  The computation of diluted loss per common share is similar to the computation of basic loss per share attributable to common stockholders, except that the denominator is increased for the assumed conversion of convertible securities and the exercise of dilutive options using the treasury stock method.  The weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders are equivalent for the periods presented.  Options and warrants for 34,315,395 and 8,798,559 shares at September 30, 2002 and 2001, respectively, were excluded from the computation of loss per share attributable to common stockholders as their effect was antidilutive.

(3)     Use of Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the Company’s financial statements and accompanying notes.  Actual results could differ materially from those estimates.

(4)     Inventories

Inventory is stated at the lower of cost or market and the cost is determined using the first-in, first-out method.  Inventory as of September 30, 2002 and December 31, 2001 consisted of the following (in thousands):

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(5)     Current Notes Payable

At December 31, 2001, the Company had executed a promissory note in the amount of $411,000 to the parent company of its then-largest stockholder.  The note required interest at 8.5% per annum and principal payments were due beginning in February 2002.  In February 2002, the Company renegotiated the payment terms to require monthly principal payments of $17,500 in February and March 2002, increasing to $35,000 thereafter unless and until the Company secured at least $2 million in additional financing, excluding the $850,000 of convertible debentures and warrants discussed in Note 6, at which time a $200,000 principal payment would be required.  The Company made the payment required on February 28, 2002, but has made no payments subsequently.  In March 2002, the Company further renegotiated the repayment terms of this note, suspending any required principal or interest payments until the Company’s registration statement for the 12% convertible debentures described in Note 6 becomes effective, at which time the Company is required to make a $200,000 payment and then to resume making monthly payments of $35,000 until the principal and accrued interest are repaid in full.  The Company renegotiated the terms of the note due to a lack of available funds and to avoid a default.

As a component of the new financing described more fully in Note 6, on May 14, 2002, the Company issued, pursuant to Regulation S, a $150,000 10% convertible promissory note to BNC Bach, International Ltd. (“BNC Bach”), a private investment fund that is a related party to Townsbury Investments Ltd. (“Townsbury”), the investor in a prior investment that provides an existing equity line of credit.  The closing price for Calypte Common Stock on May 14, 2002 was $0.14.  This note is convertible into shares of the Company’s common stock at $0.05 per share and was due on the earlier of July 14, 2002 or the settlement date of Calypte’s next drawdown under the equity line.  In conjunction with the issuance of the note to BNC Bach, Calypte repriced from $0.27 to $0.015 the 4.2 million-share warrant issued to Townsbury pursuant to the equity line, as permitted by the warrant’s originally negotiated terms. Townsbury exercised the warrant for the entire 4.2 million shares and Calypte received $63,000 in proceeds. 

In light of the Company’s precarious financial condition and its being in danger of ceasing operations, the exercise price was modified to serve as an inducement for the investor to exercise the warrant.  The Company viewed the modification of the exercise price as fair and reasonable under the circumstances.  Townsbury was and is viewed as an unaffiliated party of the Company. The fair value of the warrant had originally been treated as a deferred offering cost associated with the equity line.  The fair value of the repriced warrant was less than that of the original warrant and therefore no accounting adjustment attributable to the repricing was required.  Upon the exercise of the warrant, the Company reclassified the $807,000 unamortized balance of the deferred offering cost to additional paid-in capital. 

On July 14, 2002, Calypte and BNC Bach agreed to extend the maturity date of the note from July 14, 2002 to December 31, 2002.  The market price for Calypte common stock was $0.36 on July 14, 2002.  In return for the extension of the maturity date, Calypte agreed to amend the conversion price of the note from $0.05 per share to the lesser of (a) $0.05 per share or (b) 60% of the lowest three closing bid prices of Calypte’s common stock during the 22 business days prior to the date BNC Bach notifies Calypte of its election to convert the note.  No accounting adjustments were required as a result of the extension of the note’s maturity or the amendment of the conversion price.

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(6)     Notes and Debentures Payable

$850,000 12% Convertible Debentures
On February 11, 2002, the Company signed a securities purchase agreement with a private investment fund, Bristol Investment Fund, Ltd. (“Bristol”) pursuant to which Bristol agreed to purchase two 12% secured convertible debentures for an aggregate of $850,000, each of which matures two years after its issuance. The first debenture, in the amount of $425,000, was purchased by Bristol, under an exemption provided by Regulation S, on February 11, 2002 and the Company received net proceeds of $368,000.  The closing price for Calypte stock on February 11, 2002 was $0.25.  On May 10, 2002, Calypte issued a second $100,000 12% convertible debenture to Bristol, also under an exemption provided by Regulation S, and received net proceeds of $90,000. This debenture has the same terms as those of the initial debenture and reduces the remaining commitment under the agreement to $325,000.  The closing price for Calypte stock on May 10, 2002 was $0.03. The outstanding debentures bears interest at the annual rate of 12%, payable quarterly in common stock or cash at Bristol’s option.  Under the terms of the debentures, Bristol can elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Company’s common stock.  The Conversion Price for any debenture issued pursuant to this agreement is equal to the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to the conversion date discounted by 30% and (ii) $0.115.  During May 2002, Bristol converted a principal amount of approximately $60,000 plus accrued interest into 4,462,425 shares of the Company’s common stock at $0.014 per share. 

Under the Security Purchase Agreement, Bristol would be obligated to purchase the remaining debenture no later than ten (10) business days after the effective date of a registration statement for the shares of common stock underlying the debenture, provided that there are no material adverse effects on the business operations, assets, financial conditions or prospects of the Company or its subsidiaries, if any, as of the date of the effectiveness of the registration statement and so long as the shares underlying the debenture (in the amount of $325,000) are included in the registration statement.  However, since the Company is not including the shares underlying the remaining $325,000 of the debenture commitment in its current registration statement, Bristol is not obligated to purchase the $325,000 of the remaining debenture until such time as the underlying shares are registered. Upon the effectiveness of the registration statement, Bristol is required to convert the debentures at a monthly rate equal to 5% of the aggregate trading volume of the Company’s common stock for the 60 trading days immediately preceding such conversions.

In conjunction with this transaction, the Company issued a Class A warrant to purchase up to 1,700,000 shares of its Common Stock.  The Class A warrant is exercisable for a period of seven years after issuance at a price per share equal to the Conversion Price.  Bristol has sole discretion with respect to when and if it chooses to exercise any or all of the Class A warrant prior to its expiration.   The warrant was valued on the date of issue at $0.21 per share using the Black-Scholes option-pricing model with the following assumptions:  expected dividend yield of 0.0%; risk free interest rate of 4.7%, the contractual life of 7 years, and volatility of 80%.  As additional fees for this transaction, the Company also issued a warrant to purchase 85,000 shares of its common stock.  The warrant to purchase the 85,000 shares has the same terms and the same fair market value as the Class A warrant.    

The Company also issued Bristol a Class B warrant to purchase an additional 12,000,000 shares of its Common Stock.  Upon the effectiveness of the related registration statement, Bristol is required to exercise the Class B warrant in conjunction with the mandatory monthly conversion of its debentures so that each month the Company will issue to Bristol, pursuant to the Class B warrant, a number of shares equal to 150% of the shares issued to the fund pursuant to the monthly conversion of the debentures. Because Bristol is required to convert the debentures for a minimum number of shares equal to 5% of the

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

Company’s aggregate trading volume for the preceding 60 trading days, this means that Bristol must exercise the Class B warrant during each monthly conversion period for a number of shares equal to 7.5% of such trading volume, provided that more than 2 million shares will not be issued per month pursuant to such conversion and exercise without the Company’s consent. However, since the Company is not including the shares underlying the 12,000,000 share Class B warrant in its current registration statement, Bristol is not obligated to begin exercising the warrant until such time as the underlying shares are registered. The term of the Class B warrant is 12 months from the effective date of the related registration statement.  The exercise price for the Class B warrant is the lesser of (i) the average of the lowest three trading prices during the 20 trading days immediately prior to exercise discounted by 25%; and (ii) $0.215 per share.  The warrant was valued on the date of issue at $0.14 per share using the Black-Scholes option-pricing model with the following assumptions:  expected dividend yield of 0.0%; risk free interest rate of 2.2%, the contractual life of 1 year, and volatility of 80%. 

The Company did not receive any additional consideration over and above the negotiated price for the debentures in connection with the issuance of the Class A and B warrants.  The Class A and B warrants were contemplated and considered a part of the negotiated transaction for the debentures issued to Bristol.  The Class A and Class B warrants are intended to act as consideration for the investment by Bristol and will also provide the Company with immediate cash upon their exercise.  The Class B warrants are intended to provide the Company with cash over a one year period following the effective date of the registration statement for the shares underlying the debentures and warrants.  Management believes that the terms of the financing were on the best possible terms available as a result of the Company’s tenuous financial condition at the time of the arrangement.

In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In, a Company’s Own Stock,” and the terms of the warrants, the fair value of the warrants was accounted for as a liability, with an offsetting discount to the carrying value of the first $425,000 debenture, which is being amortized as interest expense over the 24 month term of the debenture.  The combined fair values of the Class A and Class B warrants treated as a discount to the debenture exceeded the $425,000 amount of the debenture.  Accordingly, the aggregate amount of the warrant liability and the offsetting debenture discount recorded attributable to the Class A and Class B warrants was limited to $425,000 at the time of issuance.  The warrant liability will be reclassified to equity at the time the Company has registered sufficient shares to allow for the exercise of the warrants.  Until that time, it will be marked to market through earnings.  Accordingly, during the third quarter of 2002, the Company recorded a reduction of previously recognized non-cash interest expense of  $1,982,000 attributable to the re-measurement or “adjustment to market” of the warrant liability.  Year-to-date non-cash interest expense attributable to the re-measurement of the warrant liability is $152,000.  The Company also recognized approximately $123,000 in non-cash interest expense related to the amortization of the debenture discount during the first three quarters of 2002.

The Company determined that both of the debentures were issued with a beneficial conversion feature.  The intrinsic value was calculated at the date of issue as the difference between the conversion price of the debenture and the fair value of the Company’s common stock into which the debenture was convertible, multiplied by the number of common shares into which the debenture was convertible.  Because the Company also issued warrants in conjunction with the first, $425,000, debenture, as described above, the value of the beneficial conversion feature was not accorded treatment as a discount to the debenture, since the valuation of the accompanying warrants had reduced the carrying value of the debenture to zero at the time of issuance.  The beneficial conversion feature attributable to the second $100,000 debenture was limited to $100,000 by the face amount of the debenture and recorded as a

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

discount to the debenture to be amortized to interest expense over the life of the debenture.  The Company has recognized approximately $19,000 in non-cash interest expense attributable to the amortization of this discount through September 30, 2002.

New Financing from Cataldo Investment Group (“CIG”)
On April 17, 2002, the Company announced that it would begin winding down its operations as it did not have sufficient working capital or the necessary funds to continue with its business plan or operations.  The Company also announced that it might file for bankruptcy protection.  At that time, the Company furloughed most of its employees and notified its customers of a likely cessation of operations.  On May 9, 2002, the Company entered into a letter agreement with the Cataldo Investment Group (CIG) pursuant to which CIG agreed to provide approximately $1.5 million to the Company within the following 90 days.  It was further agreed that CIG would raise an aggregate of at least $5 million over the next 12 months to fund Calypte’s operations.  As a result of the CIG investment commitment, the Company announced on May 13, 2002 that it would not complete the wind down of its business as previously announced.  Furthermore, the Company discontinued any plans to file for bankruptcy protection at the current time.  The Company recalled many of its furloughed employees and has restarted its business.  The Company can give no assurance that its revenues and customer base will not be negatively impacted over the long term by the announcement and commencement of the wind down of its business. 

CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony Cataldo, the Company’s executive chairman, to facilitate investments in the Company.  Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG.  As a condition precedent to the initial investment, it was requested that Mr. Cataldo be appointed Executive Chairman in connection with the restart of the Company’s operation.  Additionally, Mr. Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of Directors.  During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of the resignation of a director during the limited time period.  The Company initially came into contact with individual investors that comprise CIG via certain existing security holders of the Company who were concerned about the Company winding down its business affairs and their investment (holdings) in the Company.  Thereafter, Mr. Cataldo arranged for new financings, which were categorized under the acronym CIG.  The individual investors that comprise the de facto entity referred as to CIG are not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that comprise CIG.  To the best of the Company’s knowledge, the individual investors of CIG are not affiliated with each other.  Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time of the new financing.  He continues to actively pursue raising the necessary capital to fund the Company’s on-going operations.  There are no defined terms with respect to investments that can be attributed to CIG and as such all financing arrangements must be negotiated on an individual basis.  To date, to the best of the Company’s knowledge, all investors that have been aggregated under the acronym CIG are offshore residents.  Additional new investors not a part of the original CIG investment in the Company may be referred to going forward under the acronym CIG. 

There can be no assurance that the terms of such capital will be made available to the Company on a timely basis and there can be no assurance that the additional capital that the Company requires will be available on acceptable terms, if at all.  Any failure to secure additional financing on a timely basis will place the Company in significant financial jeopardy.

In conjunction with the acceptance of the CIG financing proposal, the Company’s Board of Directors appointed Anthony J. Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

aggregate of 7,966,666 stock options pursuant to an employment agreement negotiated between Mr. Cataldo and the independent members of the Board of Directors.  Mr. Cataldo was appointed to the Board replacing David E. Collins, who resigned as Chairman of the Board and from the Board of Directors.  On May 10, 2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo was granted fully-vested options to purchase 1,966,666 shares of the Company’s common stock at $0.015 per share and options to purchase 6,000,000 shares of the Company’s common stock at $0.03 per share, with the option to purchase 3,000,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant.  The options have a five-year term.  As options granted to an employee, Mr. Cataldo’s options were accounted for under the provisions of APB 25 and FIN 44.  The Company recognized compensation expense of $29,500 based on the intrinsic value of the below-market grant of 1,966,666 shares and no expense based on the at-market grant of 6,000,000 shares.  See Note 9 for information regarding a subsequent modification of Mr. Cataldo’s option grant.

As of September 30, 2002, in addition to approximately $1.4 million received under our equity line with Townsbury, (see Note 7), Calypte has received approximately $4.9 million in financing, primarily pursuant to the CIG commitments.  The components of the financing include the following:

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

   (1) Includes fee shares 

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

(7)     Equity Line Financing

In August 2001, the Company and Townsbury, a private investment fund, signed a Common Stock Purchase Agreement for the future issuance and purchase of the Company’s common stock.  The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility.  During the first nine months of 2002, the Company completed eleven draw downs under the facility, issuing 16.1 million shares of its Common Stock at an average price of $0.146 per share and receiving cash proceeds totaling $2.2 million after deducting fees and expenses in settling these draw downs.  Since the effectiveness of the related registration statement through September 30, 2002, the Company has completed thirteen draw downs under the facility, issuing 18.3 million shares of its common stock and receiving $2.6 million in net proceeds after deducting fees and expenses.  Additionally, during the first nine months of 2002, the Company recognized as a cost of the financing $0.1 million of the deferred offering cost attributable to a warrant to purchase 4.2 million shares of its Common Stock issued to Townsbury in conjunction with the draw down facility.  As described in Note (6) above, the deferred offering cost associated with this financing facility was reclassified to equity upon the repricing and exercise of the warrants.  The Company continues to draw on the equity line facility as indicated in Note 9.

(8)     Gain on Extinguishment of Debt

On February 12, 2002, the Company completed a restructure of approximately $1.7 million of its past

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CALYPTE BIOMEDICAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and 2001
(unaudited)

due accounts payable and certain obligations with 27 of its trade creditors.  Under the restructuring, the Company issued approximately 1.4 million restricted shares of its common stock at various negotiated prices per share to trade creditors in satisfaction of specified debt.  The issuance of the shares was pursuant to Regulation D of the Securities Act.  The Company agreed to use its best efforts to register the shares within 45 business days of the closing date.  As of the current date, the Company has not filed the registration statement, however, the agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period.  The creditors accepted the shares plus deferred cash payments of from 0% to 25% of the outstanding balance in satisfaction of $1,699,000 of indebtedness plus certain patent rights for 2002.  On the date the shares were issued, the value of the Company’s Common Stock was $248,000 and the aggregate deferred cash payment yet to be made to the trade creditors totaled $132,000.  The Company recognized an extraordinary gain of $1,319,000 during the first quarter of 2002 as a result of restructuring this indebtedness.  During the third quarter of 2002, the Company made cash payments to the various creditors totaling 10% of the deferred cash balance or approximately $13,000.

(9)     Subsequent Events

During October 2002, the Company completed two additional draw downs under its equity line facility with Townsbury, issuing 6.4 million shares at an average price of $0.078 per share and receiving net proceeds of $448,000 after deducting fees and expenses.  The Company has sold substantially all of the currently registered shares under its equity line with Townsbury pursuant to draw downs under the equity line and Townsbury’s exercise of its 4.2 million share warrant and has received an aggregate of $3.3 million of the $10 million commitment pursuant to draw downs. 

In the fourth quarter of 2002, the Company renegotiated the terms of the option grant contained in Mr. Cataldo’s Employment Agreement, canceling the option grants in excess of the 900,000 shares permitted by the Company’s 2000 Equity Incentive Plan to be issued annually to one plan participant and deferring a portion of his salary.  An additional 7,066,666 of the previously granted options will be reissued out of the Company’s 2000 Equity Inventive Plan, subject to stockholders approval of the proposal to increase the share authorization by 83 million and permit annual grants of up to 10 million shares to an individual plan participant. The Company has also deferred approximately 30% of Mr. Cataldo’s cash compensation, which the Company is accruing, until such time as we mutually agree the Company is in a financial position to compensate him in accordance with the terms of his agreement.  In return for these concessions, the 7,066,666 options will be fully vested upon stockholder approval on the day of the annual meeting. All other terms and conditions of the original grant remain unchanged. This modification in terms will trigger a new measurement date upon stockholder approval and may result in compensation expense for any intrinsic value on that date.

Additionally, subject to stockholder approval as described above, the Company plans to reserve 4,400,000 shares for issuance to Nancy Katz the Company’s President and Chief Executive Officer under the 2000 Equity Incentive Plan pursuant to her employment agreement. The options granted to Ms. Katz are exercisable at $0.08 per share and are fully exercisable. The measurement date for this grant will be upon stockholder approval and may result in compensation expense for any intrinsic value on that date. 

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that relate to future plans, events or performance are forward-looking statements which involve risks and uncertainties.  The forward-looking information set forth in this Quarterly Report on Form 10-Q is as of November 8, 2002, and Calypte undertakes no duty to update this information.  Should events occur subsequent to November 8, 2002 that make it necessary to update forward-looking information contained in this Form 10-Q, the update forward-looking information will be filed with the SEC in a subsequent Quarterly Report on Form 10-Q or as an earnings release included as an exhibit to a Form 8-K, each of which will be available at the SEC’s website at www.sec.gov.  More information about potential factors that could affect Calypte’s business and financial results is included in the section entitled  “Risk Factors” beginning on page 24 of this Form 10-Q.

Overview

During the first quarter of 2002, Calypte’s financial condition and cash availability deteriorated significantly, to the point that by early April 2002 the Company determined that it would need to curtail its operations and possibly consider filing for bankruptcy protection.  The Company announced that the situation had reached a critical point in mid-April 2002, at which time management began the process of furloughing employees and winding down Calypte’s operations, with complete cessation of operations a likely possibility.  In early May 2002, however, before the wind-down process was completed, Calypte received commitments for what it deemed to be sufficient additional financing to resume its operations and its Board of Directors appointed a new chairman.  Presently, Calypte has recalled a large number of its employees and resumed operations at both of its manufacturing facilities and continues to reassess its current and longer-term business plans and objectives.  During the second and third quarters of 2002, Calypte incurred non-recurring costs associated with the re-start of operations and expects that similar costs may continue into the final quarter of 2002.  Calypte continues to evaluate the impact of the announcement and commencement of the wind down of its business on its revenues and customer base and currently can give no assurance that either its revenues or customer base has not been negatively impacted in the long term.  Although Calypte continues to reassess its business plan and capital requirements as a result of the wind down and subsequent re-start of its operations, it does not believe that its currently available financing will be able to sustain operations at current levels through the remainder of 2002 unless new financing is arranged.  There can be no assurance that the additional capital that Calypte requires will be available on acceptable terms, if at all.  In the absence of such additional capital, Calypte does not have sufficient capital to sustain itself through the fourth quarter of 2002 and our business will be placed in significant financial jeopardy.  Additionally, there can be no assurance that Calypte’s products will be successfully commercialized or that Calypte will achieve significant product revenues.  In addition, there can be no assurance that Calypte will achieve or sustain profitability in the future.

Critical Accounting Policies and Estimates

Calypte’s discussion and analysis of its financial condition and results of operations are based upon Calypte’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires Calypte 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, Calypte evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, restructuring costs, and contingencies and litigation. Calypte bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances,

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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.

Calypte believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Calypte recognizes revenue from product sales upon shipment to customers and when all requirements related to the shipments have occurred. Should changes in terms cause Calypte to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. Calypte maintains an allowance for doubtful accounts on a specific account identification basis for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of Calypte’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Calypte adjusts the value of its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. Further, as the company has continued to incur negative gross profits, with high fixed manufacturing costs, Calypte also reviews its inventories for lower of cost or market valuation. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Calypte records a full valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While Calypte has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event Calypte were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

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Results of Operations

The following represents selected financial data:

Wind Down and Restart

In mid-April 2002, as a result of insufficient cash to continue its operations, the Company announced that it was winding down its operations and might have to cease its operations entirely and file for bankruptcy.  The Company immediately furloughed all but a few manufacturing and administrative employees, making no separation payments or payments of accrued vacation to any employees.  The manufacturing employees who were retained completed certain lots of in-process inventory and readied them for sale and were then also furloughed.  Immediately prior to the re-start, the Company had terminated all but 5 employees, retaining only the minimum necessary to ensure regulatory compliance for the Company’s facilities should additional financing enabling a restart become available.  Upon receipt of the initial Cataldo Investment Group (“CIG”) financing, the Company recalled key management and manufacturing employees and began the process of resuming its manufacturing operations.  Other employees, such as administrative and sales personnel, were recalled in stages as required and as funding permitted.  The Company had 73 employees prior to its wind-down and, as of September 30, 2002, has approximately 60 employees, including temporary employees.  This represents a reduction in annual cash salary and benefits of approximately $1 million.  Not all of the pre-wind-down employees were rehired, but the Company believes its current complement is sufficient to meet its operational needs. 

The costs of the wind-down and re-start are difficult to quantify precisely, but the Company believes that the lower margins experienced since those of the fourth quarter of 2001, when gross margin reached 25%, are primarily the result of the wind-down and restart.  The margin reduction reflects both the inherent inefficiencies in the restart of the Company’s manufacturing processes, including the excess overhead and capacity costs incurred, as well as the lower sales demand resulting from abnormally-large purchases prior to the wind-down and the time required to rebuild demand among customers concerned with our longer-term stability.  Additionally, the Company has incurred incremental general and administrative costs

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attributable to consultants employed in the restart process and in investor relations initiatives within the financial community.

Customer Trends

HIV-1 Urine Test Sales            Sales of our urine HIV-1 screening test accounted for 29% and 43% of our total sales for the year ended December 31, 2001 and the nine months ended September 30, 2002, respectively.  Sales of our urine Western Blot supplemental test accounted for approximately 2% of calendar year 2001 revenue and approximately 5% of revenue for the first three quarters of 2002. 

Serum Western Blot Sales           Sales of our serum based Cambridge Biotech HIV-1 Western Blot supplemental test kit accounted for 42% of our revenues for the year ended December 31, 2001 and 43% of our revenues for the first nine months of 2002.  Sales of this product to bioMerieux Inc. accounted for approximately 25% of our total revenues for the year ended December 31, 2001 and approximately 22% of our revenues for the first nine months of 2002.  Subsequent to the restart of our operations in May 2002, we have not sold to bioMerieux.  We have, however, signed a new distributor for this product, Adaltis, U.S., Inc., who is already included among our ten largest customers for the first nine months of 2002.  We believe that the loss of serum Western Blot sales to bioMerieux will only impact revenues on a short-term basis.

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Since there is limited competition in the supplemental testing market, we anticipate that we will be able to rebuild market share and revenues to previous levels. 

Viral Lysate Sales          Sales of viral lysate accounted for approximately 20% of our revenue for the year ended December 31, 2001 and approximately 8% of total revenue for the first nine months of 2002.  The HIV viral lysate that we sell is a component of the production of our urine based screening tests.  There is a limited and sporadic demand for our HIV viral lysate.  The largest customer for our viral lysate in 2001 and its only significant customer in the first nine months of 2002 was the Murex division of Abbott Laboratories, Inc.  We believe that the large percentage of 2001 revenue attributed to the sale of our HIV viral lysate may have resulted from Murex’s decision to stockpile larger than normal quantities of viral lysate in light of our tenuous financial condition in an effort to avoid a potential interruption of supply.  Their second quarter 2002 purchase may have been motivated by the same considerations.  Subsequent to the restart of our operations in May 2002, we have not sold a significant amount of viral lysate.  We expect HIV viral lysate sales to remain low for the balance of 2002.  We are seeking new customers for this product but have no expectation of near-term demand for this product.  However, as we view our HIV viral lysate as a component material, its sale is not considered to be a major component of our anticipated future revenue but rather a supplemental revenue source.

Results of Operations

Calypte’s third quarter 2002 operations were significantly impacted by the after-effects of the second quarter decision that resulted in an almost-complete wind down of its operations due to insufficient cash to fund continuing operations.  Early in the second quarter of 2002, Calypte announced that it was contemplating the possibility of filing for bankruptcy protection and, correspondingly, management took steps to maximize the value of any potential bankruptcy estate, including conversion of as much raw material and in-process inventory as possible to finished product available for shipment, while simultaneously preparing both the Alameda, California and Rockville, Maryland manufacturing facilities and its R&D, sales and administrative operations for what might have been a complete cessation of the Company’s operations.  By the middle of the second quarter of 2002, new financing commitments made it possible to resume operations, including manufacturing operations at both plants.  In response to our early second quarter announcement regarding the potential cessation of operations, some of Calypte’s urine screening test reference laboratory customers made significant purchases of product prior to the wind down and are only now needing to re-order product to refill their inventory and distribution networks.  We have carried only minimal inventories of our supplemental test products throughout 2002 and sold all that were available prior to the wind-down.  Virtually all of our second quarter post-restart sales were made using materials that were already in some stage of manufacture at the time of the wind-down and subsequent restart.  Consequently, the complete resumption of manufacturing operations from the beginning of the process has only been accomplished during the third quarter of 2002.  Although our manufacturing workforce has been in place since late in the second quarter, the restart of our manufacturing processes is more complex and time-consuming than just recalling furloughed employees, requiring, among other things, the acquisition of new raw materials, the testing and recalibration of certain equipment and the initiation of new cycles of time-determined biologic processes.  By the end of the third quarter, both of our manufacturing facilities had completed at least one production cycle from beginning to end, including product submission to and lot release by the FDA.  Nevertheless, the larger-than-normal second quarter purchases of screening tests prior to our wind-down and the time required to fully resume our manufacturing processes and have product available for sale significantly impacted third quarter 2002 operations.  Variations in the results of operations between the reported quarters and on a year-to-date basis must, consequently, be viewed in the context just described and are primarily attributable to the wind-down and restart activity which spanned both the second and third quarters of 2002.

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Three Months Ended September 30, 2002 and 2001

Revenue for the third quarter of 2002 was $493,000, a decrease of $972,000 or 66%, compared to the $1,465,000 in revenues for the third quarter of 2001.  As described earlier, primarily as a result of large orders placed by domestic life insurance reference labs in the second quarter of 2002 eliminating the need for inventory replenishment during the third quarter, HIV-1 screening test revenue and volume decreased by 50% compared to third quarter 2001 revenue and volume.  International sales of Calypte’s screening test were not significant in either period.  Sales of Calypte’s urine Western Blot supplemental test increased marginally compared to third quarter 2001 levels.  This product was not available during the second quarter of 2002 at the time the reference labs made their large screening test purchases, but it became available in the third quarter as production resumed.  Third quarter 2002 revenue from the sale of Calypte’s serum Western Blot supplemental tests decreased 60%, with a comparable volume reduction, compared with third quarter 2001 revenues, primarily as a result of product unavailability caused by the wind down and restart.  Calypte discontinued the sale of its research-use-only HTLV Western Blot test in late 2001.  Sales of that product accounted for $164,000, or 11%, of third quarter 2001 revenue.  During the third quarter of 2001, Calypte also sold $278,000 of viral lysate (19% of third quarter 2001 revenue), a component used in manufacturing our HIV supplemental tests, and for which there is a sporadic market to a customer that has also used it as a component in its test.  Calypte made no such sales in the third quarter of 2002, does not expect to make additional sales to this customer in the near future, and does not consider sales of this product to be a core component of its on-going business.

Gross margin was -213% for the third quarter of 2002, compared with -1.5% for the third quarter of 2001.  As described earlier, at both of its manufacturing facilities, Calypte incurred and expensed personnel and operating costs associated with its manufacturing processes throughout the third quarter of 2002 although it was not until late in the quarter that those processes resulted in saleable product.  This is a significantly different scenario than that of the third quarter of 2001, when both facilities were fully operational at levels sufficient to reach a near-record sales quarter and generate a breakeven margin.  Until completing the Rockville facility’s space consolidation project at the end of the first quarter of 2002, Calypte recorded the costs attributable to its excess capacity as a component of general and administrative expense.  Following completion of the project and the restart of operations, beginning in the third quarter of 2002, Calypte now recognizes all costs associated with the operation of the Rockville facility as components of product cost.  The rent and other facility operating cost savings resulting from the space consolidation at Rockville accounted for approximately $50,000 in savings for the third quarter of 2002.

Research and development expense decreased by $132,000, or 38%, from $351,000 in the third quarter of 2001 to $219,000 in the third quarter of 2002.  Approximately 80% of the decrease is attributable to the restructuring of the license agreement between Calypte and one of its patent licensors in which the licensor agreed to accept Calypte common stock in partial satisfaction of 2002 royalties.  The Company continued to pursue its HIV rapid test initiative throughout the third quarter of 2002.  Other components of research and development expenses decreased modestly compared to the third quarter of 2001.

Selling, general and administrative expense increased by $316,000, or 25%, from $1,249,000 in the second quarter of 2001 to $1,565,000 in the second quarter of 2002.  Sales and marketing expense decreased by $50,000, primarily due to reductions in salary and travel expenses attributable to vacancies within the sales organization that remained unfilled during the third quarter of 2002.  General and administrative expenses increased by $366,000 compared to the third quarter of 2001.  The significant components of the change include: (i) a $181,000 increase in salary and benefits expense resulting from the restoration of salary reductions imposed during most of 2001 and the salary and benefits for additional executive positions compared to the third quarter of 2001; (ii) a $429,000 increase in professional services expenses, primarily

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attributable to investor relations and awareness initiatives and to consultants assisting with the restart of operations; (iii) an $82,000 increase in travel expense attributable to both the restart and refinancing of the company as well as travel to attend the World AIDS Conference in Barcelona, Spain; and (iv) a decrease in excess capacity costs attributable to consolidating the Rockville operation. 

As a small public company (OTCBB: CALY) with little institutional investor following, we struggle to achieve corporate awareness, which has a direct impact on our business. Adding visibility in the financial community builds both our corporate identity and is an important indicator to our current and potential customers. In our opinion, customers select our urine-based HIV-testing platform not only for the safety and efficacy of our FDA-approved products, but because of our financial status and stature.  This is a key factor in choosing Calypte and spending the time and money to qualify a new testing source in an FDA-regulated industry.  To that end, and in conjunction with our restart of operations, we have elected to increase discretionary funding to create awareness of us within the public investment community - using a variety of means.  These initiatives have included the engagement of a new investor relations firm, the funding of a paid investment research report, participation in various types of internet-based investor communications, and other activities designed to introduce the company to potential new investment sources.  In aggregate, costs attributable to these efforts amounted to approximately $200,000 during the third quarter of 2002 and approximately $700,000 since the restart of operations.

Calypte’s loss from operations increased 75% from a loss of $1.6 million for the third quarter of 2001 to a loss of $2.8 million for the third quarter of 2002.

Third quarter interest expense decreased by $1,331,000 from $6,000 in 2001 to a negative expense of $1,325,000 in 2002.  The negative expense in the third quarter of 2002 is primarily attributable to the $1,982,000 non-cash mark to market reduction in the value of the of the warrant liability as of September 30, 2002 associated with warrants for 13,700,000 shares of the Company’s common stock issued pursuant to a financing transaction during the first quarter of 2002, offset by $505,000 of non-cash interest expense attributable to the amortization of note and debenture discounts on debt instruments issued in the first three quarters of 2002. The balance of the difference relates to interest expense accrued on notes and debentures issued during 2002.

Nine Months Ended September 30, 2002 and 2001

The second quarter 2002 wind down and restart of Calypte’s operations has had an impact on year-to-date 2002 results similar to that described for the third quarter of 2002.  Variations in the results of operations between the first three quarters of 2001 and 2002 must be viewed in that context.  Additionally, prior to the wind down of operations in the second quarter of 2002, the Company had operated with very limited cash resources and had curtailed expenses compared to 2001 levels to the greatest extent possible consistent with maintaining operational viability.

Revenue for the first nine months of 2002 was $2,861,000, a decrease of $1,617,000, or 36% compared to the $4,478,000 reported for the comparable period of 2001.  2002 revenue from the sale of Calypte’s urine HIV-1 screening test decreased by 19%, with a generally comparable volume decrease.  International sales of Calypte’s urine-based HIV-1 screening test accounted for approximately 4% of revenues during the first nine months of 2001, and less than 1% during 2002.  Sales of supplemental tests and viral lysate decreased 45% in the first three quarters of 2002, compared to 2001 levels.  Revenues from the sale of the serum-based HIV-1 supplemental test decreased 29%, primarily due to wind down and restart product availability issues.  As noted previously, Calypte discontinued the sale of its research-use-only HTLV supplemental test in late 2001; that product had accounted for $434,000, or approximately 10%, of revenue in 2001.  Sales of Calypte’s viral lysate decreased $448,000 in 2002 compared to 2001 levels.  That product accounted for

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15% of revenue in 2001 compared with 8% in 2002.  As noted previously, Calypte uses viral lysate as a component in its HIV-1 supplemental tests and sporadically sells it to another manufacturer who uses it for the same purpose. Calypte does not expect to make additional sales of viral lysate to this customer in the near future, nor does it consider sales of viral lysate to be a core component of its on-going business..

Gross margin decreased from -17% for the first nine months of 2001 to -60% for the first nine months of 2002.  As described previously with respect to the third quarter of 2002, Calypte had a manufacturing work force in place and incurred personnel and manufacturing process expenses throughout the third quarter of 2002, however only late in the third quarter was a complete cycle of post-restart production achieved at both manufacturing facilities.  The incurring of these costs during the restart process over the time required to manufacture saleable product had a detrimental impact on gross margin during the first three quarters of 2002.  Additionally, until completing the Rockville facility’s space consolidation project at the end of the first quarter of 2002, Calypte recorded the costs attributable to its excess capacity as a component of general and administrative expense.  Following the completion of the space consolidation project and the restart of operations, beginning in the third quarter of 2002, Calypte recognized all expenses associated with the operation of the Rockville facility as components of product cost.  The Rockville consolidation project has resulted in cost savings approximating $200,000 on an annualized basis, the proportionate share of which has been recognized as a reduction in product cost during the second and third quarters. 

Research and development expense decreased $561,000, or 47%, from $1,201,000 for the first nine months of 2001 to $640,000 for the first nine months of 2002.  Approximately one half of the decrease is attributable to the restructuring of the license agreement between Calypte and one of its patent licensors in which the licensor agreed to accept Calypte common stock in partial satisfaction of 2002 royalties.  The remainder of the reduction is primarily attributable to reductions of discretionary costs associated with consultants, clinical trials, and specimen acquisition.  Although research and development expense decreased between 2001 and 2002, and in spite of its cash constraints, Calypte has continued to fund its HIV rapid test initiative as its primary new product effort throughout 2002, and recently met with FDA officials to establish the testing and validation protocol that will be used for US regulatory approval. The Company plans to file this protocol by year end.

Selling, general and administrative expenses decreased $476,000 or 9%, from $5,343,000 for the first three quarters of 2001 to $4,867,000 for the first three quarters of 2002.  Sales and marketing expenses decreased by approximately $1.0 million or 49%, composed primarily of (i) the impact of 2002 sales position vacancies on salaries and benefits and corresponding decreases in sales-related travel expenses, as well as (ii) significant reductions in the costs of outside consultants, primarily those who supported general corporate awareness and community based organization marketing initiatives in 2001.  General and administrative expenses increased by approximately $0.5 million, or 15%, in the first three quarters of 2002.  The primary components of the increase include the following items.  (i) Expenses associated with the restart of operations and efforts to increase the visibility of the company within the investment community total $1.2 million, which exceeds by $1.0 million comparable expenditures during 2001.  Most of this expense was recorded during the second quarter and is not expected to continue at that level.  Calypte has recorded approximately $498,000 of this expense as non-cash general and administrative expense associated with fully vested options and warrants granted to consultants involved in the restart of the Company’s operations.  (ii) Salary and benefits expense has increased by $198,000, primarily as a result of the restoration of salary reductions imposed during most of 2001 and additional salary and benefits attributable to executive positions.  (iii) Partially offsetting these 2002 increases is a reduction in bad debt expense of $156,000.  (iv) Additionally, 2002 general and administrative expense reflects a decrease in excess capacity costs attributable to the Rockville operation. 

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The Company’s loss from operations is essentially unchanged from a loss of $7.3 million for the first nine months of 2001 to a loss of $7.2 million for the first nine months of 2002.

Interest expense decreased by $144,000 from $1,357,000 for the first nine months 2001 to $1,213,000 for the first nine months of 2002.  $1.0 million of the 2002 expense and $1.3 million of the 2001 expense represents non-cash charges relating to the accounting for various components of the convertible debt and related warrants and the equity line financing vehicles that Calypte has used to fund its operations during 2001 and 2002.  In 2001, the Company sold its 29% minority interest in the stock of Pepgen Corporation, a privately held therapeutic company, for $500,000 and recognized a gain in that amount.

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Liquidity and Capital Resources

Financing Activities

Prior to the second quarter 2002 wind down and restart of its operations, Calypte had generally financed its operations from its inception through private placements of preferred and common stock, its Initial Public Offering (IPO) of common stock and, to a much lesser extent, from payments related to research and development agreements, a bank loan facility, equipment lease financings and borrowings from short-term notes payable.  During the first half of 2001, Calypte began drawing funds under an equity line of credit or equity draw down facility that was completed at the end of the second quarter.  Calypte also issued short-term convertible debentures in the first quarter of 2001 that were repaid or converted during the second quarter of 2001.  In the third quarter of 2001, Calypte received proceeds from the exercise of warrants that it had issued in conjunction with the equity line and debentures.  In the fourth quarter of 2001 and during the first ten months of 2002, Calypte drew funds under a second equity line facility and in the fourth quarter of 2001 completed a small private placement.  In the first quarter of 2002, Calypte issued a two-year debenture that remains outstanding.  In conjunction with the restart of its operations based on a financing commitment by the CIG in May 2002, Calypte has issued a series of one- and two-year convertible notes and restricted shares of its common stock in a PIPE transaction during the second and third quarters of 2002, as described more completely below under the subheading, New Financing from Cataldo Investment Group (“CIG”).

In January 1999, the Company completed a private placement of 3,102,500 shares of common stock under Regulation D to institutional investors at $1.00 per share.  Calypte received net proceeds of approximately $3.1 million after deducting placement agent commissions and additional expenses associated with the private placement.

Also in January 1999, the Company entered into a loan agreement with a bank to borrow up to $2.0 million at an interest rate of prime plus 1 1/4%. The agreement required the Company to maintain certain financial covenants and comply with certain reporting and other requirements.  In addition, the Company’s assets secured its borrowings under the agreement.  In January 2000, the loan was modified to extend the repayment term through August 2000.  In May 2000, the loan was again modified to increase the then outstanding principal balance by $250,000.  The $471,000 outstanding balance on this loan as of December 31, 2000 plus accrued interest was repaid in full in January 2001.

In April 1999, the Company completed a private placement of 3,398,000 shares of its Common Stock at $2.25 per share under Regulation D to institutional investors.  The Company received net proceeds of approximately $7.0 million after deducting placement agent commissions and additional expenses associated with the private placement.

In April 2000, the Company completed a private placement of 4,096,000 shares of its Common Stock at $2.05 per share under Regulation D.  The Company received proceeds of approximately $8.3 million, after deducting expenses associated with the transaction. In connection with a bridge loan of $1 million from one of the investors, Calypte also issued warrants for 100,000 shares of Common Stock with an exercise price of $3.62 per share. The bridge loan was converted to equity upon closing of the private placement.

In January 2001, the Company signed an agreement to place up to $1.1 million in convertible short-term debentures.  Under this arrangement, the Company issued two convertible debentures in the principal amount of $550,000 each to the institutional investor pursuant to Regulation S.  Each debenture had an

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interest rate of 6% and was issued at an original issue discount of 9.1%.  The Company issued the first debenture on January 26, 2001 and the second on March 13, 2001.  Each debenture matured 90 days from the date of issue, or on April 26, 2001 and June 11, 2001, respectively.  Under the terms of the debentures, the debenture holder could elect at any time prior to maturity to convert the balance outstanding on the debentures into shares of the Company’s common stock at a fixed price that represented a 5% discount to the average trading price of the shares for the 10 trading days preceding the issuance of each debenture.  If the Company chose not to redeem the debentures upon maturity, as in the case of the second debenture, the conversion discount to the debenture holder increased to 15% of the average low bid price for the Company’s common stock for any three of the 22 trading days prior to the date of conversion.  Concurrent with the issuance of the first debenture, the Company also issued a warrant to the debenture holder for 200,000 shares of common stock at an exercise price of $1.50.  The Company received aggregate net proceeds from the issuance of the two debentures of $925,000 during the first quarter of 2001.  The Company redeemed the first debenture, plus accrued interest, prior to its contractual maturity using the proceeds from the sales of its common stock.  The Company also redeemed a portion of the second debenture prior to its contractual maturity.  On June 12, 2001, the debenture holder converted the remaining $168,000 balance on the second debenture plus accrued interest into 1,008,525 shares of the Company’s Common Stock, in accordance with the conversion provisions of the debenture.  In August 2001, the Company modified the warrant that it had issued to the debenture holder pursuant to the terms of the warrant, reducing its exercise price to $0.15 per share, and the debenture holder exercised it for the entire 200,000 shares.  The Company received $28,500 in net proceeds from the exercise of the warrants.

Also in January 2001, Calypte amended a common stock purchase agreement for the issuance and purchase of its common stock. The initial closing of the transaction took place on November 2, 2000. The stock purchase agreement established what is sometimes termed an equity line of credit or an equity draw down facility. The facility generally operated as follows.  The investor committed up to $25 million or up to 20% of Calypte’s outstanding shares to purchase Calypte’s common stock over a twelve-month period. Once during each draw down pricing period, Calypte could request a draw, subject to a formula based on its average stock price and average trading volume setting the maximum amount of the request for any given draw.  The amount of money that the investor provided to Calypte and the number of shares Calypte issued to the investor in return for that money was settled during a 22 day trading period following the draw down request based on the formula in the stock purchase agreement. The investor received a 5% discount to the market price for the 22 day period and Calypte received the settled amount of the draw down. By June 30, 2001, Calypte had issued 5,085,018 shares of its common stock, the total number registered for the equity line with the Securities and Exchange Commission, at an average price of $0.42 per share and had received net proceeds of approximately $2,014,000 after deducting expenses of the transactions.  This equity line transaction has been terminated.   The terms of the convertible debentures discussed earlier required that 50% of the net proceeds of any equity sales, including sales under the equity draw down facility, be used to repay the debentures and related accrued interest.  Accordingly, approximately $938,000 of the net proceeds from sales under the equity draw down facility was used to pay down the debentures. In conjunction with the agreement, Calypte issued a 3-year warrant to the investor to purchase up to 1,000,000 shares of its stock at an exercise price of $1.55 per share.  During August 2001, Calypte modified the exercise price for 600,000 shares of the warrant to $0.20 per share, when the market price of Calypte’s common stock was $0.30 per share and the investor exercised it for the entire 600,000 shares.  Calypte received $114,000 in net proceeds from the exercise of these warrants.  Later in August 2001, Calypte modified the exercise price for the remaining 400,000 shares of the warrant to $0.15 per share, when the market price of Calypte’s common stock was $0.24 per share.  The investor exercised the remaining balance of the warrant and Calypte received net proceeds of $57,000 after deducting expenses of the transaction.  Calypte could not execute a draw down under the equity line prior to the effectiveness of the registration statement for the resale of the

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shares and it registered the shares underlying the warrant concurrently with registration for the equity line draw down shares.

In April 2001, the Company announced that it had concluded negotiations to sell its 29% minority interest in the stock of Pepgen Corporation, a privately held therapeutic company, for $500,000.  The Company received the proceeds from the sale in two installments in April and May 2001.

In August 2001, Calypte executed a promissory note in the amount of $400,000 to the parent company of its then-largest stockholder.  The Note required interest at 8.5% per annum and principal plus accrued interest was due no later than September 14, 2001.  The Note was renegotiated in December 2001 to include accrued interest through that date and now bears a face amount of $411,000.  In February 2002, the Company renegotiated the payment terms to require monthly principal payments of $17,500 in February and March 2002, increasing to $35,000 thereafter unless and until the Company secured at least $2 million in additional financing, excluding the $850,000 12% convertible debentures and warrants transaction it entered into in February 2002, at which time a $200,000 principal payment would be required.  The Company made the payment required on February 28, 2002, but has made no payments subsequently.  Due to a lack of available funds and to avoid a default, in March 2002, the Company further renegotiated the repayment terms of this note, suspending any required principal or interest payments until the Company’s registration statement for the 12% convertible debentures becomes effective, at which time the Company is required to make a $200,000 payment and resume making monthly payments of $35,000 until the remaining principal and accrued interest is repaid in full. The Company renegotiated the terms of the note due to a lack of available funds and to avoid a default.

In August 2001, Calypte and a private investment fund signed a common stock purchase agreement for the future issuance and purchase of up to $10 million of Calypte’s common stock over a twenty-four month period.  The initial closing of the transaction occurred in October 2001.  Under this arrangement, Calypte, at its sole discretion, may draw down on this facility, sometimes termed an equity line, from time to time, and the investment fund is obligated to purchase shares of Calypte’s common stock.  This facility operates similarly to the previous equity line facility employed earlier in 2001.  The purchase price of the common stock purchased pursuant to any draw down under this facility is equal to 88% of the daily volume weighted average price of Calypte’s common stock on the applicable date.  Through November 8, 2002, Calypte has issued an aggregate of 24,721,718 shares of its common stock at an average price of $0.133 per share under this facility and has received net proceeds of $3,040,000 after payment of fees and expenses attributable to the draw-downs.  In conjunction with the signing of the stock purchase agreement, on October 19, 2001, the Company issued a 7-year warrant to the investment fund to purchase up to 4,192,872 shares of common stock at an exercise price of $0.2743 per share.  This warrant has since been exercised as part of the restart as described more fully below under the subheading, New Financing from Cataldo Investment Group (“CIG”), in May 2002.  Calypte has sold all but 970,000 of the currently registered shares attributable to this facility.

On February 11, 2002, Calypte signed a securities purchase agreement with a private investment fund, Bristol Investment Fund Ltd (“Bristol”), pursuant to which the fund agreed to purchase two 12% secured convertible debentures for an aggregate of $850,000, each of which matures two years after its issuance. The first debenture, in the amount of $425,000, was purchased by the investment fund on February 11, 2002 and the Company received net proceeds of $368,000.  The Company originally expected to issue the second debenture, also in the amount of $425,000, upon the effectiveness of a registration statement filed by the Company in March 2002.  As described more fully below under the subheading, New Financing from Cataldo Investment Group (“CIG”), in May 2002, the Company issued a second debenture in the amount of $100,000 pursuant to this agreement and still expects to issue another debenture in the amount of $325,000 upon effectiveness of the registration statement.  In conjunction with the initial debenture issuance, Calypte issued mandatorily exercisable warrants to purchase shares of its common stock.  The mandatory exercise

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feature will commence upon effectiveness of the registration statement for the shares underlying the warrants.

On February 12, 2002, the Company completed a restructure of approximately $1.7 million of its past due accounts payable and certain obligations with 27 of its trade creditors.  Under the restructuring, the Company issued approximately 1.4 million restricted shares of common stock at various negotiated prices per share to trade creditors in satisfaction of specified debt.  The issuance of the shares was pursuant to Regulation D of the Securities Act.  The Company agreed to use its best efforts to register the shares within 45 business days of the closing date.  As of the current date, the Company has not filed the registration statement, however, the agreement does not provide for any specific penalties on the Company for its failure to file a registration statement within the prescribed period.

New Financing from Cataldo Investment Group (“CIG”)

On April 17, 2002, the Company announced that it would begin winding down its operations as it did not have sufficient working capital or the necessary funds to continue with its business plan or operations.  The Company also announced that it might file for bankruptcy protection.  At that time, the Company furloughed most of its employees and notified its customers of a likely cessation of operations.  On May 9, 2002, the Company entered into a letter agreement with the Cataldo Investment Group (CIG) pursuant to which CIG agreed to provide approximately $1.5 million to the Company within the following 90 days.  It was further agreed that CIG would raise an aggregate of at least $5 million over the next 12 months to fund Calypte’s operations.  As a result of the CIG investment commitment, the Company announced on May 13, 2002 that it would not complete the wind down of its business as previously announced.  Furthermore, the Company discontinued any plans to file for bankruptcy protection at the current time.  The Company recalled many of its furloughed employees and has restarted its business.  The Company can give no assurance that its revenues and customer base will not be negatively impacted in the long term by the announcement and commencement of the wind down of its business. 

CIG is essentially a de facto entity comprised of a number of unaffiliated investors assembled by Mr. Anthony Cataldo, the Company’s executive chairman, to facilitate investments in the Company.  Mr. Cataldo does not have an affiliation or any agreements with any of the individual investors that are categorized as CIG.  As a condition precedent to the initial investment, it was requested that Mr. Cataldo be appointed Executive Chairman in connection with the restart of the Company’s operation.  Additionally, Mr. Cataldo was granted a temporary limited right on behalf of CIG to appoint new directors constituting a majority of the Board of Directors.  During the time period of the right, Mr. Cataldo recommended the appointment of one director, as a result of the resignation of a director during the limited time period.  The Company initially came into contact with individual investors that comprise CIG via certain existing security holders of the Company who were concerned about the Company winding down its business affairs and their investment (holdings) in the Company.  Thereafter, Mr. Cataldo arranged for new financings, which were categorized under the acronym CIG.  The individual investors that comprise the de facto entity referred to as CIG are not affiliated and Mr. Cataldo has disclaimed any affiliation or beneficial ownership with the individual investors that comprise CIG.  To the best of the Company’s knowledge, the individual investors of CIG are not affiliated with each other.  Mr. Cataldo was a designee of the investors chosen in light of the tenuous financial condition of the Company at the time of the new financing.  He continues to actively pursue raising the necessary capital to fund the Company’s on-going operations.  There are no defined terms with respect to investments that can be attributed to CIG and as such all financing arrangements must be negotiated on an individual basis.  To date, to the best of the Company’s knowledge, all investors that have been aggregated under the acronym CIG are offshore residents.  Additional new investors not a part of the original CIG investment in the Company may be referred to going forward under

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the acronym CIG. 

There can be no assurance that the terms of such capital will be made available to the Company on a timely basis and there can be no assurance that the additional capital that the Company requires will be available on acceptable terms, if at all.  Any failure to secure additional financing on a timely basis will place the Company in significant financial jeopardy.

In conjunction with the acceptance of the CIG financing proposal, the Company’s Board of Directors appointed Anthony J. Cataldo as Executive Chairman and further agreed to issue to Mr. Cataldo an aggregate of 7,966,666 stock options pursuant to an employment agreement negotiated between Mr. Cataldo and the independent members of the Board of Directors.  Mr. Cataldo was appointed to the Board replacing David E. Collins, who resigned as Chairman of the Board and from the Board of Directors.  On May 10, 2002, when the market price of our common stock was $0.03 per share, Mr. Cataldo was granted fully-vested options to purchase 1,966,666 shares of the Company’s common stock at $0.015 per share and options to purchase 6,000,000 shares of the Company’s common stock at $0.03 per share, with the option to purchase 3,000,000 shares vested immediately and the option to purchase the remainder vested on the one-year anniversary of the option grant.  The options have a five-year term.  As options granted to an employee, Mr. Cataldo’s options were accounted for under the provisions of APB 25 and FIN 44.  The Company recognized compensation expense of $29,500 based on the intrinsic value of the below-market grant of 1,966,666 shares and no expense based on the at-market grant of 6,000,000 shares.  See Note 9 for information regarding a subsequent modification of Mr. Cataldo’s option grant.

Subsequently, in the fourth quarter of 2002, the Company renegotiated the terms of the agreement, canceling the option grants in excess of the 900,000 shares permitted by the Company's 2000 Equity Incentive Plan to be issued annually to one plan participant and deferring a portion of his salary.  The additional 7,066,666 previously granted options will be reissued out of the employee option plan, subject to stockholders approval of the proposal to increase the share authorization by 83 million and permit annual grants of up to 10 million shares to an individual plan participant. The Company has also deferred approximately 30% of Mr. Cataldo’s cash compensation, which the Company is accruing, until such time as we mutually agree the Company is in a financial position to compensate him in accordance with the terms of his agreement.  In return for these concessions, the 7,066,666 options will be fully vested upon stockholder approval on the day of the annual meeting. All other terms and conditions of the original grant remain unchanged. This modification in terms will trigger a new measurement date upon stockholder approval and may result in compensation expense for any intrinsic value on that date.

As of November 8, 2002, in addition to approximately $1.7 million received under our equity line with Townsbury since the May 2002 restart of operations, Calypte has received approximately $4.9 million in financing, primarily pursuant to the CIG commitments.  The components of the financing include the following:

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