**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 Washington,
        D. C. 20549
 **FORM
        10-Q**
 
 x Quarterly
        report under Section 13 or 15(d) of the Securities Exchange Act of
        1934
  For the quarterly period ended **September
        30, 2008**
 
  ̈ Transition
        report under Section 13 or 15(d) of the Securities Exchange Act of
        1934
 
 For the transition period from  to
 
 Commission
        File Number: **0-28666**
 
 **AMERICAN
                  BIO MEDICA CORPORATION**(Exact
                  name of registrant as specified in its
                  charter)
 
 **New
                  York**
              **14-1702188**(State
                  or other jurisdiction of
              (I.R.S.
                  Employerincorporation
                  or organization)
              Identification
                  No.)
 
 **122
                  Smith Road, Kinderhook, New York**
              
              **12106**(Address
                  of principal executive offices)
              
              (Zip
                  Code)
 
 **518-758-8158**(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 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  x Yes  ̈ No
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer”, “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act.
 
 Large
        accelerated filer  ̈     Accelerated
        filer  ̈
 
 Non-accelerated
        filer  ̈      Smaller
        reporting company x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act)             ̈ Yes x No
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date:
 
 21,744,768
        Common Shares as of November 12 2008
  
 
 **American
        Bio Medica Corporation**
 
 **Index
        to Quarterly Report on Form 10-Q**
 **For
        the quarter ended September 30, 2008**
 
 **PAGE****PART
                  I – FINANCIAL INFORMATION**Item
                  1.
              Financial
                  StatementsBalance
                  Sheets as of September 30, 2008 and December 31, 2007
              3Statements
                  of Operations for the nine months ended September 30, 2008 and
                  September
                  30, 2007
              4Statements
                  of Operations for the three months ended September 30, 2008 and
                  September
                  30, 2007
              5Statements
                  of Cash Flows for the nine months ended September 30, 2008 and
                  September
                  30, 2007
              6Notes
                  to Financial Statements
              7Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              11Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              16Item
                  4.
              Controls
                  and Procedures
              16**PART
                  II – OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              16Item
                  1A.
              Risk
                  Factors
              16Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              16Item
                  3.
              Defaults
                  Upon Senior Securities
              17Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              17Item
                  5.
              Other
                  Information
              17Item
                  6.
              Exhibits
              17**Signatures**
              
              18
  2
 **PART
          I - FINANCIAL INFORMATION**
 
 **Item
          1. Financial Statements**
 
 **American
                    Bio Medica Corporation****Balance
                    Sheets****September 30,**
                
                **December 31,****2008**
                
                **2007****(Unaudited)****ASSETS**Current
                    assetsCash
                    and cash equivalents
                
                $
                391,000
                
                $
                336,000Accounts
                    receivable - net of allowance for doubtful accounts of $105,000
                    at both
                    September 30, 2008 and December 31, 2007
                
                
                1,765,000
                
                
                1,365,000Inventory
                    – net of reserve for slow moving and obsolete inventory of $250,000
                    at
                    both September 30, 2008 and December 31, 2007
                
                
                5,433,000
                
                
                4,994,000Prepaid
                    and other current assets
                
                
                114,000
                
                
                181,000Total
                    current assets
                
                
                7,703,000
                
                
                6,876,000Property,
                    plant and equipment, net
                
                
                2,043,000
                
                
                2,267,000Debt
                    issuance costs
                
                
                120,000Other
                    assets
                
                
                7,000
                
                
                7,000Total
                    assets
                
                $
                9,873,000
                
                $
                9,150,000**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**Current
                    liabilitiesAccounts
                    payable
                
                $
                1,432,000
                
                $
                1,403,000Accrued
                    expenses
                
                
                657,000
                
                
                220,000Wages
                    payable
                
                
                399,000
                
                
                332,000Patent
                    sublicense current
                
                
                
                
                
                50,000Line
                    of credit
                
                
                419,000
                
                
                723,000Current
                    portion of long term debt
                
                
                128,000
                
                
                121,000Current
                    portion of unearned grant
                
                
                10,000
                
                
                10,000Total
                    current liabilities
                
                
                3,045,000
                
                
                2,859,000Other
                    liabilities
                
                
                102,000
                
                
                48,000Long-term
                    debt
                
                
                1,761,000
                
                
                1,107,000Unearned
                    grant
                
                
                40,000
                
                
                40,000Total
                    liabilities
                
                
                4,948,000
                
                
                4,054,000COMMITMENTS
                    AND CONTINGENCIESStockholders'
                    equity:Preferred
                    stock; par value $.01 per share; 5,000,000 shares authorized,
                    none issued
                    and outstanding at September 30, 2008 and December 31,
                    2007Common
                    stock; par value $.01 per share; 50,000,000 shares authorized;
                    21,744,768
                    issued and outstanding at both September 30, 2008 and December
                    31, 2007
                
                
                217,000
                
                
                217,000Additional
                    paid-in capital
                
                
                19,273,000
                
                
                19,267,000Accumulated
                    deficit
                
                
                (14,565,000
                )
                
                (14,388,000
                )Total
                    stockholders’ equity
                
                
                4,925,000
                
                
                5,096,000Total
                    liabilities and stockholders’ equity
                
                $
                9,873,000
                
                $
                9,150,000
 
 *The
          accompanying notes are an integral part of the financial
          statements*
  3
 
 **American
                    Bio Medica Corporation****Statements
                    of Operations****(Unaudited)****For The Nine Months Ended****September 30****2008**
                
                **2007**Net
                    sales
                
                
                
                
                $
                10,368,000
                
                $
                10,523,000Cost
                    of goods sold
                
                
                
                
                
                5,822,000
                
                
                6,383,000Gross
                    profit
                
                
                
                
                
                4,546,000
                
                
                4,140,000Operating
                    expenses:Research
                    and development
                
                
                
                
                
                445,000
                
                
                520,000Selling
                    and marketing
                
                
                
                
                
                2,197,000
                
                
                2,334,000General
                    and administrative
                
                
                
                
                
                1,973,000
                
                
                2,149,0004,615,000
                
                
                5,003,000Operating
                    loss
                
                
                
                
                
                (69,000
                )
                
                (863,000
                )Other
                    income (expense):Interest
                    income
                
                
                
                
                
                3,000
                
                
                7,000Interest
                    expense
                
                
                
                
                
                (107,000
                )
                
                (106,000
                )Other
                    expense
                
                
                
                
                
                (4,000
                )(108,000
                )
                
                (99,000
                )**Loss
                    before tax**
                
                
                
                
                
                (177,000
                )
                
                (962,000
                )Income
                    tax**Loss
                    after tax**
                
                
                
                
                $
                (177,000
                )
                $
                (962,000
                )**Basic
                    and diluted loss per common share**
                
                
                
                
                $
                (0.01
                )
                $
                (0.04
                )Weighted
                    average number of shares outstanding – basic and diluted
                
                
                
                
                
                21,744,768
                
                
                21,733,779
 
 *The
          accompanying notes are an integral part of the financial
          statements*
  4
 
 **American
                    Bio Medica Corporation****Statements
                    of Operations****(Unaudited)****For The Three Months Ended****September 30****2008**
                
                **2007**Net
                    sales
                
                
                
                
                $
                3,604,000
                
                $
                3,912,000Cost
                    of goods sold
                
                
                
                
                
                2,104,000
                
                
                2,493,000Gross
                    profit
                
                
                
                
                
                1,500,000
                
                
                1,419,000Operating
                    expenses:Research
                    and development
                
                
                
                
                
                128,000
                
                
                173,000Selling
                    and marketing
                
                
                
                
                
                713,000
                
                
                818,000General
                    and administrative
                
                
                
                
                
                532,000
                
                
                641,0001,373,000
                
                
                1,632,000Operating
                    income/(loss)
                
                
                
                
                
                127,000
                
                
                (213,000
                )Other
                    income (expense):Interest
                    income
                
                
                
                
                
                
                
                
                2,000Interest
                    expense
                
                
                
                
                
                (41,000
                )
                
                (41,000
                )(41,000
                )
                
                (39,000
                )**Income/(Loss)
                    before tax**
                
                
                
                
                
                86,000
                
                
                (252,000
                )Income
                    tax**Income/(Loss)
                    after tax**
                
                
                
                
                $
                86,000
                
                $
                (252,000
                )**Basic
                    and diluted income/(loss) per common share**
                
                
                
                
                $
                0.00
                
                
                (0.01
                )Weighted
                    average number of shares outstanding – basic
                
                
                
                
                
                21,744,768
                
                
                21,744,768Dilutive
                    effect of stock options and warrants
                
                
                
                
                
                16,934Weighted
                    average number of shares outstanding – fully diluted
                
                
                
                
                
                21,761,702
                
                
                21,744,768
 
 *The
          accompanying notes are an integral part of the financial
          statements*
  5
 **American
                      Bio Medica Corporation****Statements
                      of Cash Flows****(Unaudited)****For
                      The Nine Months Ended****September****2008**
                  
                  **2007****Cash
                      flows from operating activities:**Net
                      loss
                  
                  $
                  (177,000
                  )
                  $
                  (962,000
                  )Adjustments to reconcile net loss to net cash used in operating
                      activities:Depreciation
                  
                  
                  268,000
                  
                  
                  338,000Loss
                      on disposal of fixed assets
                  
                  
                  4,000Amortization
                      of debt issuance costs
                  
                  
                  5,000Non-cash
                      compensation expense
                  
                  
                  
                  
                  
                  26,000Changes
                      in:Accounts
                      receivable
                  
                  
                  (399,000
                  )
                  
                  (753,000
                  )Inventory
                  
                  
                  (439,000
                  )
                  
                  643,000Prepaid
                      and other current assets
                  
                  
                  67,000
                  
                  
                  (24,000
                  )Accounts
                      payable
                  
                  
                  29,000
                  
                  
                  12,000Accrued
                      expenses
                  
                  
                  437,000
                  
                  
                  (165,000
                  )Other
                      liabilities
                  
                  
                  4,000Wages
                      payable
                  
                  
                  67,000
                  
                  
                  137,000Net
                      cash used in operating activities
                  
                  
                  (134,000
                  )
                  
                  (748,000
                  )**Cash
                      flows from investing activities:**Purchase of property, plant and equipment
                  
                  
                  (48,000
                  )
                  
                  (632,000
                  )Net
                      cash used in investing activities
                  
                  
                  (48,000
                  )
                  
                  (632,000
                  )**Cash
                      flows from financing activities:******Proceeds from exercise of options
                  
                  
                  
                  
                  
                  23,000Long term debt payments
                  
                  
                  (89,000
                  )
                  
                  (74,000
                  )Proceeds from debt financing
                  
                  
                  
                  
                  
                  539,000Proceeds from line of credit
                  
                  
                  2,129,000
                  
                  
                  900,000Proceeds from long-term debt financing
                  
                  
                  750,000Debt issuance costs
                  
                  
                  (120,000
                  )Line of credit payments
                  
                  
                  (2,433,000
                  )
                  
                  (273,000
                  )Net
                      cash provided by financing activities
                  
                  
                  237,000
                  
                  
                  1,115,000**Net
                      increase / (decrease) in cash and cash
                      equivalents**
                  
                  
                  55,000
                  
                  
                  (265,000
                  )Cash
                      and cash equivalents - beginning of period
                  
                  
                  336,000
                  
                  
                  641,000**Cash
                      and cash equivalents - end of period**
                  
                  $
                  391,000
                  
                  $
                  376,000**Supplemental
                      disclosures of cash flow information**Cash
                      paid during period for interest
                  
                  $
                  107,000
                  
                  $
                  106,000Purchase
                      of property, plant and equipment, financing through capital
                      lease
                  
                  $
                  
                  
                  $
                  17,000Warrants
                      issued in connection with long term debt financing
                  
                  $
                  6,000
                  
                  $
 
 *The
          accompanying notes are an integral part of the financial
          statements*
  6
 
 Notes
          to
          financial statements
 
 September
          30, 2008
 
 **Note
          A - Basis of Reporting**
 
 The
          accompanying unaudited financial statements of American Bio Medica Corporation
          (the “Company”) have been prepared in accordance with generally accepted
          accounting principles in the United States of America for interim financial
          information and in accordance with the instructions to Form 10-Q and Regulation
          S-X. Accordingly, they do not include all information and footnotes required
          by
          generally accepted accounting principles for complete financial statement
          presentation. In the opinion of management, the financial statements include
          all
          normal, recurring adjustments, which are considered necessary for a fair
          presentation of the financial position of the Company at September 30,
          2008, and
          the results of its operations for the three and nine month periods ended
          September 30, 2008 and September 30, 2007, and cash flows for the nine
          month
          periods ended September 30, 2008 and 2007.
 
 Operating
          results for the three and nine months ended September 30, 2008 are not
          necessarily indicative of results that may be expected for the year ending
          December 31, 2008. Amounts at December 31, 2007 are derived from the Company’s
          audited financial statements. For further information, refer to the audited
          financial statements and notes thereto included in the Company’s Annual Report
          on Form 10-KSB for the fiscal year ended December 31, 2007.
 
 During
          the nine months ended September 30, 2008, there were no significant changes
          to
          the Company's critical accounting policies, which are included in the Company's
          Annual Report on Form 10-KSB for the year ended December 31, 2007.
  The
          preparation of these financial statements requires the Company 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, the Company evaluates its estimates, including those related
          to
          product returns, bad debts, inventories, income taxes, warranty obligations,
          contingencies and litigation. The Company bases its estimates on historical
          experience and on various other assumptions that are believed to be reasonable
          under the circumstances; the results of which form the basis for making
          judgments about the carrying values of assets and liabilities that are
          not
          readily apparent from other sources. Actual results may differ from these
          estimates under different assumptions or conditions.
 
 These
          unaudited financial statements have been prepared assuming that the Company
          will
          continue as a going concern and, accordingly, do not include any adjustments
          that might result from the outcome of this uncertainty. The Company's
          independent registered public accounting firm's report of the financial
          statements included in the Company's Annual Report on Form 10-KSB for the
          year
          ended December 31, 2007, contained an explanatory paragraph regarding the
          Company's ability to continue as a going concern.
 
 **Recently
          Adopted Accounting Standards**
 
 In
          September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
          No. 157”). SFAS No. 157 established a common definition for fair value to be
          applied to U.S. GAAP guidance requiring use of fair value, established
          a
          framework for measuring fair value, and expanded disclosure about such
          fair
          value measurements. SFAS No. 157 became effective for our financial assets
          and
          liabilities on January 1, 2008.  The FASB has deferred the implementation
          of the provisions of SFAS No. 157 relating to certain nonfinancial assets
          and
          liabilities until January 1, 2009. SFAS No. 157 did not materially affect
          how we
          determine fair value.
 
 In
          February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
          Financial Assets and Financial Liabilities Including an Amendment of SFAS
          No.
          115” (“SFAS No. 159”). This new standard permits entities to choose to measure
          many financial instruments and certain warranty and insurance contracts
          at fair
          value on a contract-by-contract basis. SFAS No. 159 became effective on
          January
          1, 2008. We have not elected the fair value option for any of our existing
          financial instruments on the effective date and have not determined whether
          or
          not we will elect this option for any eligible financial instruments we
          acquire
          in the future.
 
 In
          December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
          No. 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated
          Financial Statements” (“SFAS No. 160”). Effective for the Company as of January
          1, 2009, SFAS No. 141(R) requires the acquiring entity in a business combination
          to recognize all (and only) the assets acquired and liabilities assumed
          in the
          transaction; establishes the acquisition-date fair value as the measurement
          objective for all assets acquired and liabilities assumed; and requires
          the
          acquirer to disclose to investors and other users all of the information
          they
          need to evaluate and understand the nature and financial effect of the
          business
          combination. Effective January 1, 2009, SFAS No. 160 requires all entities
          to
          report noncontrolling (minority) interests in subsidiaries as equity in
          the
          consolidated financial statements. Moreover, SFAS No. 160 eliminates the
          diversity that currently exists in accounting for transactions between
          an entity
          and noncontrolling interests by requiring they be treated as equity
          transactions. Management is evaluating the impact of adopting SFAS No.
          141(R)
          and SFAS No. 160, if any, on the Company’s financial statements.
  7
 
 In
          March
          2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
          and Hedging Activities – an Amendment of FASB Statement No. 133” (“SFAS No.
          161”). SFAS No. 161 expands the disclosure requirements in SFAS No. 133,
          regarding an entity’s derivative instruments and hedging activities. SFAS No.
          161 is effective on January 1, 2009. Management is evaluating the impact
          of
          adopting SFAS No. 161, if any, on the Company’s financial
          statements.
 
 In
          May
          2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
          Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
          accounting principles and the framework for selecting the principles to
          be used
          in the preparation of financial statements of nongovernmental entities
          that are
          presented in conformity with generally accepted accounting principles (GAAP)
          in
          the United States (the GAAP hierarchy). SFAS No. 162 shall be effective
          60 days
          following the SEC’s approval of the Public Company Accounting Oversight Board
          (PCAOB) amendments to AU Section 411, “The Meaning of Present Fairly in
          Conformity With Generally Accepted Accounting Principles”. Management is
          evaluating the impact of adopting SFAS No. 162, if any, on the Company’s
          financial statements.
 
 In
          May
          2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
          Guarantee Insurance Contracts” (“SFAS No. 163”), which clarifies how FASB
          Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies
          to financial guarantee insurance contracts issued by insurance enterprises.
          The
          standard is effective for financial statements issued for fiscal years
          beginning
          after December 15, 2008, including interim periods in that year. Management
          is
          evaluating the impact of adopting SFAS No. 163, if any, on the Company’s
          financial statements.
 
 **Note
          B – Net Income / (Loss) Per Common Share**
 
 Basic
          net
          income or loss per share is calculated by dividing the net income or loss
          by the
          weighted average number of outstanding common shares during the period.
          Diluted
          net income per share includes the weighted average dilutive effect of stock
          options and warrants.
 
 Potential
          common shares outstanding as of September 30, 2008 and 2007:
 
 **September 30,**
                  **2008**
                
                **September 30,**
                  **2007****Warrants**
                
                
                224,900
                
                
                150,000**Options**
                
                
                3,762,080
                
                
                3,968,080
 
 For
          the
          three months ended September 30, 2008, the number of securities included
          in the
          diluted EPS was 3,895,146. For the three months ended September 30, 2007,
          the
          number of securities not included in the diluted EPS because the effect
          would
          have been anti-dilutive was 4,118,080.
 
 For
          the
          nine months ended September 30, 2008 and 2007, the number of securities
          not
          included in the diluted EPS because the effect would have been anti-dilutive
          was
          3,986,080 and 4,118,080 respectively.
 
 **Note
          C – Litigation**
 
 The
          Company has been named in legal proceedings in connection with matters
          that
          arose during the normal course of its business, and that in the Company’s
          opinion are not material. While the ultimate result of any litigation cannot
          be
          determined, it is management’s opinion, based upon consultation with counsel,
          that it has adequately provided for losses that may be incurred related
          to these
          claims. If the Company is unsuccessful in defending any or all of these
          claims,
          resulting financial losses could have an adverse effect on the financial
          position, results of operations and cash flows of the Company. ****
 
 **Note
          D – Lines of Credit and Long Term Debt**
 
 On
          November 6, 2006, the Company obtained a real estate mortgage related to
          its
          facility in Kinderhook, New York. The loan through First Niagara Financial
          Group
          (“FNFG”) is in the amount of $775,000 and has a term of 10 years with a 20 year
          amortization. The interest rate is fixed at 7.50% for the first 5 years.
          Beginning with year 6 and through the end of the loan term, the rate changes
          to
          2% above the Federal Home Loan Bank of New York 5 year term, 15 year
          Amortization Advances Rate. The Company’s monthly payment is $6,293 and payments
          commenced on January 1, 2007, with the final payment being due on December
          1,
          2016. The loan is collateralized by the Company's facility in Kinderhook,
          New
          York and its personal property. The amount outstanding on this mortgage
          was
          $744,000 and $758,000 at September 30, 2008 and December 31, 2007,
          respectively.
  8
  The
          Company has a Line of Credit with FNFG. As disclosed in the Company’s Current
          Report on Form 8-K filed with the Securities and Exchange Commission (the
          “Commission”) on August 8, 2008, effective August 1, 2008, the Company and FNFG
          entered into an amendment to the original Loan Documents (the “Amendment”). The
          Amendment combined two lines of credit already in place with FNFG into
          one line
          of credit (the “Line of Credit”) along with amending certain terms related to
          the combined Line of Credit. Pursuant to the Amendment, the maximum amount
          available under the Line of Credit is $750,000, and the maturity date of
          the
          Line of Credit is April 1, 2009. The interest rate on the Line of Credit
          is
          prime plus 1%. Pursuant to the Amendment, the Company is required to maintain
          certain financial covenants; the Company’s monthly net loss must not exceed
          $75,000 during any month and, while any loans or commitments are outstanding
          and
          due FNFG, the Company must maintain a minimum debt service coverage ratio
          of
          1.10x, to be measured at December 31, 2008. The minimum debt service coverage
          ratio is defined as net income plus interest expense plus depreciation
          plus
          expense related to the amortization of derivative securities divided by
          required
          principal payments over the preceding twelve months plus interest expense.
          There
          is no requirement for annual repayment of all principal on this Line of
          Credit;
          it is payable on demand. The purpose of this Line of Credit is to provide
          working capital. The amount outstanding on the Line of Credit was $419,000
          at
          September 30, 2008. At December 31, 2007, the Line of Credit was two separate
          lines of credit and the amount outstanding was $690,000 under one line
          and
          $33,000 under the other line, totaling $723,000.
 
 On
          January 22, 2007, the Company entered into a Term Note with FNFG in the
          amount
          of $539,000 (the “Note”). The term of the Note is 5 years with a fixed interest
          rate of 7.17%. The Company’s monthly payment is $10,714 and payments commenced
          on February 1, 2007, with the final payment being due on January 23, 2012.
          The
          Company has the option of prepaying the Note in full or in part at any
          time
          during the term without penalty. The loan is secured by Company assets
          now owned
          or hereafter acquired. The proceeds received were used for the purchase
          of
          automation equipment to enhance the Company's manufacturing process in
          its New
          Jersey facility. The amount outstanding on this Note was $381,000 and $455,000
          at September 30, 2008 and December 31, 2007, respectively.
 
 Any
          default or breach by the Company of any of the terms, covenants and conditions
          set forth in any Loan Document related to the Note, the Line of Credit
          or the
          Mortgage (together the “Credit Facilities”) shall constitute a default and FNFG
          may declare all sums outstanding under the Credit Facilities due and payable
          without notice or demand. In the event of default, the Company will be
          subject
          to an interest rate of prime plus 6% under its Line of Credit.
 
 Under
          the
          Loan Documents, as amended by the Amendment, the Company was required to
          sell at
          least $500,000 in subordinated debentures by September 1, 2008, on terms
          consistent with a term sheet agreed to between the Company and Cantone
          Research,
          Inc. of Tinton Falls, New Jersey (“Cantone”) for the private placement of an
          issue of 10% Subordinated Convertible Debentures, Series A (the “ Series
          A
          Debentures ”).
 
 On
          August
          15, 2008, the Company completed its offering of the Series A Debentures
          and
          received gross proceeds of $750,000 in principal amount of Series A Debentures
          (see Current Report on Form 8-K and amendment on Form 8-K/A-1 filed with
          the
          Commission on August 8, 2008 and August 18, 2008 respectively). The net
          proceeds
          of the offering of Series A Debentures were $630,000. The securities issued
          in
          this transaction were sold pursuant to the exemption from registration
          afforded
          by Rule 506 under Regulation D ("Regulation D") as promulgated by the Commission
          under the Securities Act of 1933, as amended (the "1933 Act"), and/or Section
          4(2) of the 1933 Act.
 
 The
          Series A Debentures accrue interest at a rate of 10% per annum (payable
          by the
          Company semi-annually) and mature on August 1, 2012. The payment of principal
          and interest on the Series A Debentures is subordinate and junior in right
          of
          payment to all Senior Obligations, as defined under the Series A Debentures.
          Holders of the Series A Debentures will have a right of conversion of the
          principal amount of the Series A Debentures into shares (the “Conversion
          Shares”) of the common stock of the Company (“Common Stock”), at a conversion
          rate of 666.67 shares per $500 in principal amount of the Series A Debentures
          (representing a conversion price of approximately $0.75 per share). This
          conversion right can be exercised at any time, commencing the earlier of
          (a) one
          hundred twenty (120) days after the date of the Series A Debentures, or
          (b) the
          effective date of a Registration Statement to be filed by the Company with
          respect to the Conversion Shares. The Company has the right to redeem any
          Series
          A Debentures that have not been surrendered for conversion at a price equal
          to
          the Series A Debentures’ face value plus $0.05 per underlying common share, or
          $525 per $500 in principal amount of the Series A Debentures, representing
          an
          aggregate conversion price of $787,500. This redemption right can be exercised
          by the Company at any time within ninety (90) days after any date when
          the
          closing price of the Common Stock has equaled or exceeded $2.00 per share
          for a
          period of twenty (20) consecutive trading days.
  9
 
 As
          the
          Offering’s placement agent Cantone received a Placement Agent fee of $52,500, or
          7% of the gross principal amount of Series A Debentures sold. In addition,
          the
          Company issued Cantone a four (4) year warrant to purchase 30,450 shares
          of the
          Company’s common stock at an exercise price of $0.37 per share (the closing
          price of the Company’s common shares on the Closing Date) and a four (4) year
          warrant to purchase 44,550 shares of the Company’s common stock at an exercise
          price of $0.40 per share (the closing price of the Company’s common stock on the
          Series A Completion Date), (together the “Placement Agent Warrants”). All
          warrants issued to Cantone are immediately exercisable upon issuance.
 
 The
          Company has incurred $125,000 in costs related to the offering. Included
          in
          these costs was $6,000 of non-cash compensation expense related to the
          issuance
          of the Placement Agent Warrants to Cantone. These costs will be amortized
          over
          the term of the Series A Debentures. For the three months ended September
          30,
          2008, the Company amortized $5,000 of expense related to these debt issuance
          costs. The Company has also accrued $13,000 in interest expense at September
          30,
          2008.
 
 Pursuant
          to a Registration Rights Agreement, the Company will use reasonable efforts
          to
          register the Conversion Shares and the shares of Common Stock issuable
          upon
          exercise of the Placement Agent Warrants.
 
 On
          May 8,
          2007, the Company purchased a copier through an equipment lease with RICOH
          in
          the amount of $17,000. The term of the lease is 5 years with an interest
          rate of
          14.11%. The amount outstanding on this lease was $13,000 and $15,000 at
          September 30, 2008 and December 31, 2007, respectively.
 
 **Note
          E –Sublicense Agreement**
  On
          February 28, 2006, the Company entered into a non-exclusive Sublicense
          Agreement
          (the “Agreement”) with an unaffiliated third party related to certain patents
          allowing us to expand our contract manufacturing operations. Under this
          Sublicense Agreement, the Company must pay a non-refundable fee of $175,000
          over
          the course of 2 years, of which $75,000 was paid in the first quarter of
          2006
          and $50,000 was paid in the first quarter of 2007. The remaining $50,000
          was
          paid in the first quarter of 2008. The Company is also required to pay
          royalties
          for products it manufactures that fall within the scope of these patents.
          The
          Company was not obligated to pay any royalties in 2006 or 2007. Beginning
          with
          the year ended December 31, 2007, the Company is obligated to pay a $20,000
          minimum annual royalty (“MAR”) that can be applied against royalties on sales of
          products that fall within the scope of the sublicensed patents in the fiscal
          year ending December 31, 2008. The first MAR payment was made in January
          2008
          and there were not any sales of products made in the nine months ended
          September
          30, 2008 that would be applied against the MAR.
 
 **Note
          F – Integrated Biotechnology Agreement**
 
 In
          March
          2006, the Company entered into a royalty agreement with Integrated Biotechnology
          Corporation (“IBC”). IBC is the owner of the RSV (Respiratory Syncytial Virus)
          test that the Company manufactures for one of IBC’s distributors. The agreement
          was entered into to address amounts that IBC owed to the Company at the
          end of
          fiscal year 2005, and to streamline the order and fulfillment process of
          IBC’s
          RSV product. All outstanding amounts due to the Company were satisfied
          by the
          end of the third quarter of 2007. The Company continues to work directly
          with
          IBC’s distributor under the terms of the agreement, which states the Company
          is
          to pay a 20% royalty of total sales to IBC. During the nine months ended
          September 30, 2008, IBC earned royalties in the amount of $65,000.
 
 **Note
          G – Stock Option Grants**
 
 In
          June
          2006, the Company’s Board of Directors granted a stock option to purchase 72,000
          shares of the Company’s common stock to the Company’s then Chief Financial
          Officer, and an option to purchase 3,000 shares of the Company’s common stock to
          an employee in the Company’s R&D division. Both option grants have exercise
          prices of $1.05 (the closing price of the Company’s common shares on the date of
          grant) and vested 100% on the one-year anniversary of the date of the grant
          (although the options granted to the former Chief Financial Officer expired
          in
          January 2008). In accordance with FAS 123(R), the Company recognized $63,347
          in
          non-cash compensation expense related to these grants from June 2006 through
          May
          2007. Included in general and administrative expense for the nine months
          ended
          September 30, 2007 is $26,000 of this non-cash compensation
          expense.
  10
  **Note
          H – Employment Agreements**
  The
          Company has entered into employment agreements with its Chief Executive
          Officer
          Stan Cipkowski, Chief Science Officer Martin R. Gould, Chief Financial
          Officer
          Stefan Parker and Executive Vice President of Operations Douglas Casterlin,
          providing for aggregate annual salaries of $624,000. The
          agreement with Chief Executive Officer Cipkowski provides for a $206,000
          annual
          salary, is for a term of one year and automatically renews unless either
          party
          gives advance notice of 60 days. The
          agreement with the Chief Science Officer Gould provides for a $149,000
          annual
          salary, is for a term of one year and automatically renews unless either
          party
          gives advance notice of 60 days. The agreement with Chief Financial Officer
          Parker provides for a $120,000 annual salary, is for a term of one year
          and
          automatically renews unless either party gave advance notice of 60 days.
          The
          agreement with the Executive Vice President of Operations Casterlin provides
          for
          a $149,000 annual salary, is for a term of one year and automatically renews
          unless either party gives advance notice of 60 days. Copies of Cipkowski
          and
          Gould’s employment agreements were filed as exhibits to its Quarterly Report
          on
          Form 10-QSB filed with the Commission on August 13, 2007. A copy of Parker’s
          employment agreement was filed as an exhibit to the Company’s Current Report on
          Form 8K filed with the Commission on August 24, 2007. A copy of Casterlin’s
          employment agreement was filed as an exhibit to the Company’s Current Report on
          Form 8-K filed with the Commission on May 1, 2008.
  **Item
          2. Management's Discussion and Analysis of Financial Condition and Results
          of
          Operations**
  **General**
  The
          following discussion of the Company's financial condition and the results
          of
          operations should be read in conjunction with the Financial Statements
          and Notes
          thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This
          discussion contains, in addition to historical statements, forward-looking
          statements that involve risks and uncertainties. Our actual future results
          could
          differ significantly from the results discussed in the forward-looking
          statements. Factors that could cause or contribute to such differences
          include,
          but are not limited to, the factors discussed in the section titled "Risk
          Factors" in our Annual Report on Form 10-KSB for the year ended December
          31,
          2007. Any forward-looking statement speaks only as of the date on which
          such
          statement is made and we do not assume any responsibility to update any
          such
          forward-looking statement, nor we do intend to update any such forward-looking
          statements.
 
 **Overview**
 
 During
          the year ended December 31, 2007, the Company sustained a net loss of $990,000
          from net sales of $13,872,000, and had net cash used in operating activities
          of
          $605,000. During the nine months ended September 30, 2008, the Company
          sustained
          a net loss of $177,000 from net sales of $10,368,000. The Company had net
          cash
          used in operating activities of $134,000 for the nine months ended September
          30,
          2008.
 
 During
          the nine months ended September 30, 2008, the Company continued to take
          steps to
          improve its financial position. Beginning in April 2008, the Company implemented
          a number of cost cutting initiatives including, but not limited to, reducing
          the
          number of employees in its selling and marketing, research and development
          and
          general and administrative departments. The Company also continues to take
          steps
          to reduce manufacturing costs related to its products to increase the Company’s
          gross margin. Simultaneously with these efforts, the Company continues
          to focus
          on the development of new products to address market trends and needs.
 
 The
          Company's continued existence is dependent upon several factors, including
          its
          ability to raise revenue levels and reduce costs to generate positive cash
          flows, and to sell additional shares of the Company's common stock to fund
          operations and/or obtain additional credit facilities, if and when
          necessary.
 
 In
          July
          2008, the Company shipped their first order of its OralStat® oral fluid drug
          tests to Save Mart Supermarkets of Modesto, California, a privately held
          food
          store chain.
 
 In
          August
          2008, the Company completed its private placement of Series A Debentures.
 
 In
          August
          2008, the Company was granted CLIA waived status from the US Food and Drug
          Administration (“FDA”) of its Rapid TOX® point of collection drug test product
          line. The waiver applies to all 14 drugs that the Company’s products currently
          test, and to two different cut-off levels for its opiate and cocaine tests.
          CLIA
          waived tests are recognized by FDA to be so simple to use and so accurate
          that
          there is little risk of error. CLIA waived tests are the most widely used
          tests
          in the clinical market (hospitals and physicians), and are in-demand for
          occupational health and criminal justice applications.
  11
 
 **Plan
          of Operations**
 
 The
          Company’s sales strategy continues to be a focus on direct sales, while
          identifying new contract manufacturing operations and pursuing new national
          accounts. During the nine months ended September 30, 2008, the Company
          continued
          its program to market and distribute its urine and oral fluid based point
          of
          collection tests for drugs of abuse and its Rapid Reader® drug screen results
          and data management system. Contract manufacturing operations also continued
          in
          the nine months ended September 30, 2008.
 
 **Results
          of operations for the nine months ended September 30, 2008 compared to
          the nine
          months ended September 30, 2007**
 
 **NET
          SALES:** Net
          sales
          for the nine months ended September 30, 2008 were $10,368,000, compared
          to
          $10,523,000 for the nine months ended September 30, 2007. This represents
          a
          decrease of 155,000, or 1.5%. When comparing the nine months ended September
          30,
          2008 with the nine months ended September 30, 2007, international and contract
          manufacturing sales increased. These increases were offset by decreases
          in
          national accounts, outside sales, and in-house sales. Our outside and in-house
          sales divisions continue to be affected by price pressures in the criminal
          justice market caused by general economic conditions and foreign competition.
          Historically, sales in our national account division have increased, but
          general
          economic conditions have depressed the employment levels of these customers.
          Decreases in national account sales in the third quarter of 2008 have thus
          negatively impacted the sales results for the nine months ended September
          30,
          2008. International sales were positively impacted by increased sales to
          Latin
          America, which were offset by the loss of one of our international distributors
          as well as decreased sales to other areas of the world as a result of the
          slowing economy.
 
 Our
          Rapid
          Reader® (drug screen interpretation and data management system), Rapid TOX
          (urine based testing cassette), and Rapid TOX Cup® (urine based all inclusive
          testing cup) product line sales increased along with an increase in our
          Rapid
          STATTM (oral fluid based test device) product line sales. The Rapid TOX Cup and
          Rapid STAT product lines were launched late in the third quarter of 2007,
          so
          there were no sales of these product lines included in the nine months
          ended
          September 30, 2007. Increases in these product lines were offset by decreases
          in
          our OralStat® (oral fluid based test device), Rapid TEC® (urine based multi-line
          dipstick), RDS InCup® (urine based all inclusive testing cup), and Rapid Drug
          Screen product lines. The Company believes that the attrition in these
          product
          lines is a result of customers switching from one product line to another
          due to
          either increased ease of use (in the case of the OralStat and Rapid STAT)
          or
          lower cost (in the case of RDS InCup and Rapid TOX Cup and Rapid TEC and
          Rapid
          TOX).
 
 In
          the
          second quarter of 2008, the Company began marketing and selling a new version
          of
          its Rapid ONE® dipstick product, the Rapid ONE cassette. The Rapid ONE cassette
          utilizes the same drug-testing strip as the Rapid ONE, which is inserted
          into
          the cassette platform used for the Company’s Rapid TOX product line. It is the
          Company’s intention to transition the Rapid ONE dipstick product to the Rapid
          ONE cassette platform. This product transition will enable the Company
          to
          assemble and package the device on the Company’s automated production equipment
          in its New Jersey facility, thereby making the manufacturing process more
          efficient in time and cost, while still providing its customers with the
          same
          single testing options.
 
 The
          Company’s contract manufacturing operations currently include the manufacture of
          a HIV test, a test for fetal amniotic membrane rupture, a test for RSV
          and other
          infectious diseases, and agricultural testing products. The Company was
          notified
          during the third quarter of 2008 that its agreement with an unaffiliated
          third
          party to provide drug testing strips for incorporation into the party’s tests
          used in hospitals, emergency rooms and clinics will terminate, effective
          December 24, 2008. This termination is a result of the party’s merger with
          another entity, but the Company is currently negotiating to continue this
          contract relationship with the merger successor. The outcome of these
          negotiations will not have a material impact on the Company’s current contract
          manufacturing operations. Contract manufacturing sales for the nine months
          ended
          September 30, 2008 totaled $414,000, up from $218,000 for the nine months
          ended
          September 30, 2007.
 
 **COST
          OF GOODS:** Cost
          of
          goods sold for the nine months ended September 30, 2008 was $5,822,000,
          or 56.2%
          of net sales, compared to $6,383,000, or 60.7% of net sales, for the nine
          months
          ended September 30, 2007. While
          the
          Company has seen increased costs in raw materials related to the manufacture
          of
          its products, the Company has been able to improve its cost of goods sold
          because of increased manufacturing efficiencies resulting from automation
          of its
          Rapid TOX product line and a shift in product sales to non-government markets
          at
          higher gross profit margins. This improvement in cost of goods sold is
          also a
          result of inventory disposals that occurred during the nine months ended
          September 30, 2007 that did not occur during the nine months ended September
          30,
          2008. The inventory disposals in 2007 consisted of expired products and
          components enhanced as a result of product development.
  12
 
 **OPERATING
          EXPENSES:** Operating
          expenses were $4,615,000, or 44.5% of net sales in the nine months ended
          September 30, 2008, compared to $5,003,000, or 47.5% of net sales in the
          nine
          months ended September 30, 2007. Decreases in costs associated with our
          CLIA
          waiver application as well as the implementation of cost cutting initiatives
          in
          research and development, selling and marketing and general and administrative
          resulted in expense reductions in all three divisions.
 
 Research
          and development (R&D) expense
 
 R&D
          expenses for the nine months ended September 30, 2008 were $445,000, or
          4.3% of
          net sales compared to $520,000, or 4.9% of net sales for the nine months
          ended
          September 30, 2007. Savings
          in consulting fees, supplies and materials, travel, depreciation and telephone
          costs were offset by increases in salaries and employee related benefits,
          FDA
          compliance costs, facility utility costs, and repairs and maintenance. Effective
          June 30, 2008, the Company’s Vice President of Product Development retired. The
          former vice president received a payment of $35,000, equal to half his
          annual
          salary of $70,000, paid in 3 equal monthly installments of approximately
          $11,666
          each beginning July 31, 2008, with the last payment being made on September
          30,
          2008. The Company does not expect to fill this position in the future.
          Although
          there were increases in salaries and employee related benefits in the nine
          months ended September 30, 2008 when compared to the nine months ended
          September
          30, 2007, the Company expects to see the full savings from this personnel
          reduction beginning in the fourth quarter of 2008. In the nine months ended
          September 30, 2008, the Company’s R&D department continued to focus its
          efforts on development of new products, exploration of contract manufacturing
          opportunities and enhancement of its current products.
 
 Selling
          and marketing expense
 
 Selling
          and marketing expenses in the nine months ended September 30, 2008 were
          $2,197,000, or 21.2% of net sales, compared to $2,334,000, or 22.2% of
          net
          sales, in the nine months ended September 30, 2007. This decrease in expense
          results from reductions in sales salaries and commissions, sales employee
          related benefits, travel and customer relations, trade show related expenses,
          advertising and marketing consulting fees. These decreases were partially
          offset
          by increases in postage, marketing salaries, and royalty expense as a result
          of
          increased sales of RSV. The reduction in sales salaries, commissions and
          other
          employee related benefits resulted from a reduction in sales personnel
          as part
          of the Company’s implementation of cost cutting initiatives.
 
 General
          and administrative (G&A) expense
 
 G&A
          expenses were $1,973,000, or 19.0% of net sales in the nine months ended
          September 30, 2008 compared to $2,149,000, or 20.4% of net sales in the
          nine
          months ended September 30, 2007. Expenses in the nine months ended September
          30,
          2007 included $204,000 of costs associated with the Company’s CLIA waiver
          application and $26,000 in non-cash compensation expense. Costs associated
          with
          the CLIA waiver application significantly decreased to $13,000, and there
          was no
          non-cash compensation expense in the nine months ended September 30, 2008.
          Also
          contributing to the decrease in G&A expense were decreases in investor
          relations, consulting fees, insurance, travel related expenses, outside
          service
          fees, and repairs and maintenance. These decreases were partially offset
          by
          increases in quality assurance related expenses, accounting and legal fees,
          patents and licenses, bad debts and bank service fees.
 
 **Results
          of operations for the three months ended September 30, 2008 compared to
          the
          three months ended September 30, 2007**
 
 **NET
          SALES** :
          Net
          sales for the quarter ended September 30, 2008 were $3,604,000, compared
          to
          $3,912,000 for the quarter ended September 30 2007. This represents a decrease
          of $308,000, or 7.9%. Decreases in national accounts and outside sales
          were
          offset by increases in contract manufacturing and international sales.
          The
          Company’s outside and in-house sales divisions continue to be affected by price
          pressures in the criminal justice market caused by general economic conditions
          and foreign competition. Historically, sales in our national account division
          have increased, but general economic conditions have depressed the employment
          levels of these customers, causing the decrease in sales in the third quarter
          of
          2008. International sales were positively impacted by increased sales to
          our
          master distributors and customers in Latin America, as well as by increases
          in
          sales to our European master distributor.
 
 In
          the
          third quarter of 2008, sales of the Rapid Reader, Rapid TOX, Rapid TOX
          Cup and
          Rapid STAT product lines increased while sales of the RDS InCup, Rapid
          Drug
          Screen, OralStat and Rapid TEC product lines decreased. The Rapid TOX Cup
          and
          Rapid STAT product lines were launched late in the third quarter of 2007,
          so
          there were no sales of these product lines included in the third quarter
          of
          2007. Increases in these product lines were offset by decreases in the
          OralStat
          and RDS InCup product lines. The Company believes that the attrition in
          these
          product lines is a result of customers switching from one product line
          to
          another due to either increased ease of use (in the case of the OralStat
          and
          Rapid STAT) or lower cost (in the case of RDS InCup and Rapid TOX Cup and
          Rapid
          TEC and Rapid TOX).
  13
 
 In
          the
          second quarter of 2008, the Company began marketing and selling a new version
          of
          its Rapid ONE® dipstick product, the Rapid ONE cassette. The Rapid ONE cassette
          utilizes the same drug-testing strip as the Rapid ONE, which is inserted
          into
          the cassette platform used for the Company’s Rapid TOX product line. It is the
          Company’s intention to transition the Rapid ONE dipstick product to the Rapid
          ONE cassette platform. This product transition will enable the Company
          to
          assemble and package the device on the Company’s automated production equipment
          in its New Jersey facility, thereby making the manufacturing process more
          efficient in time and cost, while still providing its customer with the
          same
          single testing options.
 
 The
          Company’s contract manufacturing operations currently include the manufacture of
          a HIV test, a test for fetal amniotic membrane rupture, a test for RSV
          and other
          infectious diseases, and agricultural testing products. The Company was
          notified
          during the third quarter of 2008 that its agreement with an unaffiliated
          third
          party to provide drug testing strips for incorporation into the party’s tests
          used in hospitals, emergency rooms and clinics will terminate, effective
          December 24, 2008. This termination is a result of the party’s merger with
          another entity, and the Company is currently negotiating to continue this
          contract relationship with the merger successor. The outcome of these
          negotiations will not have a material impact on the Company’s current contract
          manufacturing operations. Contract manufacturing sales for the third quarter
          of
          2008 totaled $181,000, up from $136,000 for the third quarter of
          2008.
 
 **COST
          OF GOODS** :
          Cost of
          goods sold for the three months ended September 30, 2008 was $2,104,000,
          or
          58.4% of net sales, compared to $2,493,000, or 63.7% of net sales for the
          three
          months ended September 30, 2007. While the Company has seen increased costs
          in
          raw materials related to the manufacture of its products, the Company has
          been
          able to improve its cost of goods because of increased manufacturing
          efficiencies resulting from automation of its Rapid TOX product line and
          a shift
          in product sales to non-government markets at higher gross profit margins.
  **OPERATING
          EXPENSES:** Operating expenses were $1,373,000, or 38.1% of net sales, in the third
          quarter
          of 2008, compared to $1,632,000, or 41.7% of net sales, in the third quarter
          of
          2007. Decreases in costs associated with our CLIA waiver application as
          well as
          the implementation of cost cutting initiatives in research and development,
          selling and marketing and general and administrative resulted in expense
          reductions in all three divisions.
 
 Research
          and development (R&D) expense
 
 R&D
          expenses for the three months ended September 30, 2008 and 2007 were $128,000,
          or 3.6% of net sales and $173,000, or 4.4% of net sales, respectively.
          Savings
          in salaries and employee related benefits, consulting fees, supplies and
          materials, telephone and depreciation were partially offset by increases
          in
          utility costs, FDA compliance costs, and repairs and maintenance. Effective
          June
          30, 2008, the Company’s Vice President of Product Development, retired. The
          former vice president received a payment of $35,000, equal to half his
          annual
          salary of $70,000, paid in 3 equal monthly installments of approximately
          $11,666
          each beginning July 31, 2008, with the last payment being made on September
          30,
          2008. The Company does not expect to fill this position in the future;
          therefore, the Company expects to see the full savings from this personnel
          reduction beginning in the fourth quarter of 2008. In the third quarter
          of 2008,
          the Company’s R&D department continued to focus its efforts on development
          of new products, exploration of contract manufacturing opportunities and
          enhancement of its current products.
 
 Selling
          and marketing expense
 
 Selling
          and marketing expenses were $713,000, or 19.8% of net sales, in the third
          quarter of 2008, compared to $818,000, or 20.9% of net sales, in the same
          period
          a year ago. This decrease in selling and marketing expense is a result
          of
          savings in sales salaries and employer related payroll taxes, travel costs,
          trade-show related expenses, depreciation, marketing salaries (as a result
          in
          the reduction in marketing personnel in the third quarter of 2008), and
          marketing consulting fees. These savings were partially offset by increases
          in
          postage, sales employee related benefits and insurance, dues and subscriptions
          and royalty expense as a result of increased sales of RSV.
 
 General
          and administrative (G&A) expense
 
 G&A
          expense were $532,000 or 14.8% of net sales in the three months ended September
          30, 2008 compared to $641,000, or 16.4% of net sales in the three months
          ended
          September 30, 2007. The third quarter of 2007 included $15,000 of costs
          associated with our CLIA waiver application; there were no CLIA related
          costs in
          the third quarter of 2008. Decreases in investor relations, salaries, legal
          fees, travel costs, insurances, bank service fees and bad debts, due to
          a
          recovery of previously written off account, were partially offset by increases
          in patents and licenses, auto expense, ISO related expenses, outside service
          fees, utilities and contributions.
  14
  **Liquidity
          and Capital Resources as of September 30, 2008**
 
 The
          Company has working capital of $4,658,000 at September 30, 2008 compared
          to
          working capital of $4,017,000 at December 31, 2007. The Company has historically
          satisfied its net working capital requirements through operations, cash
          generated by proceeds from private placements of equity securities and
          debt
          financing. The Company has never paid any dividends on its common shares
          and
          anticipates that all future earnings, if any, will be retained for use
          in the
          Company's business and it does not anticipate paying any cash
          dividends.
 
 The
          Company's cash requirements depend on numerous factors, including product
          development activities, sales and marketing efforts, market acceptance
          of its
          new products, and effective management of inventory levels in response
          to sales
          forecasts. The Company expects to devote substantial capital resources
          to
          continue its product development, refine manufacturing efficiencies, and
          support
          its direct sales efforts. The Company will examine other growth opportunities,
          including strategic alliances, and expects such activities will be funded
          from
          existing cash and cash equivalents, issuance of additional equity or debt
          securities or additional borrowings, subject to market conditions. The
          Company
          believes that its current cash balances, together with cash generated from
          future operations, maybe sufficient to fund operations for the next twelve
          months, but there can be no assurance of the Company’s continued liquidity. The
          Company is required to comply with certain financial covenants under its
          Credit
          Facilities with FNFG (see Note D), and while the Company is in compliance
          with
          these financial covenants at September 30, 2008, there can be no assurance
          that
          such compliance will continue in the future. Non-compliance would constitute
          a
          default and FNFG may declare all sums outstanding under the Credit Facilities
          due and payable without notice or demand. The Company may be required to
          sell
          additional equity or obtain additional credit facilities. There is no assurance
          that such financing will be available or that the Company will be able
          to
          complete financing on satisfactory terms, if at all.
 
 Despite
          implementation of cost cutting initiatives beginning in the second quarter
          of
          2008, management believes that increases in research and development, selling
          and marketing and general and administrative expense may be required in
          the
          future as the Company continues its investment in long-term growth and
          creates
          the necessary infrastructure to: achieve its worldwide drug test marketing
          and
          sales goals, continue its penetration of the direct sales market, support
          research and development projects and leverage new product initiatives.
          However,
          management has taken measures to control the rate of increase of these
          costs to
          be consistent with the expected sales growth rate of the Company.
 
 Net
          cash
          used in operating activities was $134,000 for the nine months ended September
          30, 2008, compared to $748,000 for the nine months ended September 30,
          2007. The
          net cash used in operating activities for the nine months ended September
          30,
          2008 resulted primarily from increases in accounts receivable, inventory
          balances and liabilities, including accounts payable, accrued expenses
          and wages
          payable.
 
 Net
          cash
          used in investing activities was $48,000 for the nine months ended September
          30,
          2008, compared to $632,000 for the nine months ended September 30, 2007.
          Net
          cash used in both years was for investment in property, plant and equipment.
          Included in the nine months ended September 30, 2007 was $270,000 representing
          the cost of equipment for use in the Company’s New Jersey facility for the
          automation of the Company’s Rapid TOX product line.
  Net
          cash
          provided by financing activities was $237,000 for the nine months ended
          September 30, 2008, which consisted of proceeds from debenture financing
          and the
          Company’s line of credit offset by debt issuance costs and payments on the
          Company’s outstanding debt and line of credit facilities. Net cash provided by
          financing activities for the nine months ended September 30, 2007 was $1,115,000
          and consisted of proceeds from a 5-year term note, the Company’s lines of credit
          and exercise of stock options offset by debt and line of credit payments.
 
 At
          September 30, 2008, the Company had cash and cash equivalents of
          $391,000.
 
 The
          Company's primary short-term capital and working capital needs relate to
          continued support of its research and development programs, focusing sales
          efforts on segments of the drugs of abuse testing market that will yield
          high
          volume sales, refining its manufacturing and production capabilities, and
          establishing adequate inventory levels to support expected
          sales.
  15
 
 **Item
          3. Quantitative and Qualitative Disclosures About Market
          Risk**
 
 Not
          applicable.
 
 **Item
          4. Controls and Procedures**
 
 *(a)*
                *Evaluation
                    of Disclosure Controls and
                    Procedures*
 
 Our
          Chief
          Executive Officer (Principal Executive Officer) and Chief Financial Officer
          (Principal Financial Officer), together with other members of management,
          have
          reviewed and evaluated the effectiveness of our “disclosure controls and
          procedures” (as defined in the Securities Exchange Act of 1934 Rule 13a-15(e)
          and 15d-15(e)) as of the end of the period covered by this report. Based
          on this
          review and evaluation, our Principal Executive Officer and Principal Financial
          Officer have concluded that our disclosure controls and procedures are
          effective
          to ensure that material information relating to the Company is recorded,
          processed, summarized, and reported in a timely manner.
 
 *(b)
          Changes in Internal Control Over Financial Reporting*
 
 There
          have been no changes in the Company's internal control over financial reporting
          during the last quarterly period covered by this report that have materially
          affected, or are reasonably likely to materially affect, the Company's
          internal
          control over financial reporting.
 
 **PART
          II – OTHER INFORMATION**
  **Item
          1. Legal Proceedings**
 
 See
“Note
          C – Litigation” in the Notes to Financial Statements included in this report for
          a description of pending legal proceedings in which the Company is a
          party.
 
 **Item
          1A. Risk Factors**
 
 Not
          applicable.
 
 **Item
          2. Unregistered Sales of Equity Securities and Use of
          Proceeds**
 
 On
          August
          15, 2008, the Company completed its offering of Series A Debentures and
          received
          gross proceeds of $750,000. The Series A Debentures accrue interest at
          a rate of
          10% per annum (payable by the Company semi-annually) and mature on August
          1,
          2012. The payment of principal and interest on the Series A Debentures
          is
          subordinate and junior in right of payment to all Senior Obligations, as
          defined
          under the Series A Debentures. Holders of the Series A Debentures will
          have a
          right to receive Conversion Shares of Common Stock at a conversion rate
          of
          666.67 shares per $500 in principal amount of the Series A Debentures
          (representing a conversion price of approximately $0.75 per share). This
          conversion right can be exercised at any time, commencing the earlier of
          (a) one
          hundred twenty (120) days after the date of the Series A Debentures, or
          (b) the
          effective date of a Registration Statement to be filed by the Company with
          respect to the Conversion Shares. The Company has the right to redeem any
          Series
          A Debentures, which have not been surrendered for conversion at a price
          equal to
          the Series A Debentures’ face value plus $0.05 per underlying common share, or
          $525 per $500 in principal amount of the Series A Debentures. This redemption
          right can be exercised by the Company at any time within ninety (90) days
          after
          any date when the closing price of the Common Stock has equaled or exceeded
          $2.00 per share for a period of twenty (20) consecutive trading
          days.
 
 On
          August
          15, 2008, the Company completed the Offering and received gross proceeds
          of
          $750,000 in principal amount of Series A Debentures. The securities issued
          in
          this transaction were sold pursuant to the exemption from registration
          afforded
          by Rule 506 under Regulation D as promulgated by the Commission under the
          1933
          Act, and/or Section 4(2) of the 1933 Act. The Series A Debentures were
          placed
          with accredited investors, as that term is defined in Rule 501(a) of Regulation
          D promulgated by the Commission under the Securities Act of 1933, as amended
          (the “ 1933 Act”).
 
 As
          the
          Offering’s placement agent Cantone received a Placement Agent fee of $52,500, or
          7% of the gross principal amount of Series A Debentures sold. In addition,
          the
          Company issued Cantone a four (4) year warrant to purchase 30,450 shares
          of the
          Company’s common stock at an exercise price of $0.37 per share (the closing
          price of the Company’s common shares on the Closing Date) and a four (4) year
          warrant to purchase 44,550 shares of the Company’s common stock at an exercise
          price of $0.40 per share (the closing price of the Company’s common stock on the
          Series A Completion Date), (together the “Placement Agent
          Warrants”).
  16
 
 Pursuant
          to a Registration Rights Agreement, the Company will use reasonable efforts
          to
          register the Conversion Shares and the shares of Common Stock issuable
          upon
          exercise of the Placement Agent Warrants.
 
 **Item
          3. Defaults upon Senior Securities**
 
 None.
 
 **Item
          4. Submission of Matters to a Vote of Security Holders**
  None.
 
 **Item
          5. Other Information**
 
 None.
 
 **Item
          6. Exhibits**
 
 31.1
                
                Rule
                    13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2
                
                Rule
                    13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1
                
                Certification
                    of the Chief Executive Officer pursuant to 18 U.S.C. Section
                    1350, as
                    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                    200232.2
                
                Certification
                    of the Chief Financial Officer pursuant to 18 U.S.C. Section
                    1350, as
                    adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                    2002
  17
  SIGNATURES
 
 In
          accordance with the requirements of the Exchange Act, the registrant has
          caused
          this report to be signed on its behalf by the undersigned thereunto duly
          authorized.
 
 AMERICAN
                    BIO MEDICA CORPORATION(Registrant)By:
                    /s/ Stefan ParkerStefan
                    ParkerChief
                    Financial OfficerExecutive
                    Vice President, FinancePrincipal
                    Accounting Officer and duly authorized
                    Officer
 
 Dated:
          November 14, 2008
  18