SECURITIES AND EXCHANGE COMMISSION

                             Washington, D. C. 2054
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                                   FORM 10-KSB

     [/]  ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d)  OF THE  SECURITIES
EXCHANGE ACT OF 1934. For the fiscal year ended April 30, 1998

                         Commission File Number: 333-16535

                         AMERICAN BIO MEDICA CORPORATION
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                 (Name of Small Business Issuer in its charter )

          New York                                       22-3378935
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  (State or other Jurisdiction                   (IRS Employer Identification
of Incorporation or Organization)                         Number)

        300 Fairview Avenue, Hudson, New York               12534
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       (Address of principal executive Offices)           (Zip Code)

                   102 Simons Road, Ancramdale, New York 12503
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         (Former name or former address, if changed since last report.)

     Issuer's telephone number: (800) 227-1243

     Securities registered pursuant to Section 12(b) of the Act: None

     Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $.01 par value per share

     Check  whether  the issuer:  (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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.
     [x] Yes [ ] No

     Check  if  disclosure  of  delinquent  filers  in  response  to Item 405 of
Regulation  S-B is not  contained  in  this  form,  and no  disclosure  will  be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [x]

     State issuer's revenues for its most fiscal year       $2,154,000.

     State the aggregate market value of the voting stock held by non-affiliates
computed by reference  to the price at which the stock was sold,  or the average
bid and asked  prices of such stock,  as of a specified  date within the past 60
days.

     As  of  June  14,  1998,   there  were  9,064,418  common  shares  held  by
non-affiliates ("Common Shares") outstanding having an aggregate market value of
$22,661,045.

     Documents incorporated by reference:

     Proxy Statement for the Annual Meeting of Shareholders  for the 1999 Fiscal
Year.

<PAGE>

                                     PART I

     Item 1. Description of Business

     Summary
     -------
     American Bio Medica  Corporation  (the  "Company") is primarily  engaged in
acquiring,  developing and marketing biomedical  technologies and products.  The
Company owns a technology for screening  drugs of abuse,  trademarked the "Rapid
Drug Screen." The Company's common shares ("Common Shares") began trading on the
Nasdaq SmallCap Market on December 24, 1997.

     The Company  produces  several versions of a drugs of abuse screening test,
called the "Rapid Drug Screen  Test" at its  manufacturing  facility in Columbia
County,  New York. The Rapid Drug Screen Test is a one-step test kit that allows
a small urine sample to be tested for the presence or absence of drugs of abuse.
The competitively  priced test is self-contained  thereby preventing exposure of
the test  administrator  to the urine  sample.  In the opinion of the  Company's
management ("Management"),  the Rapid Drug Screen Test, which requires no mixing
of  reagents,  is  easier  to use than any  competitive  product.  In  addition,
hundreds of controlled tests conducted by independent  laboratories compared the
Rapid Drug Screen Test with results  produced by EMIT II, a standard  laboratory
test,  and found a 100%  correlation of both positive and negative test results.
As a result,  Management believes that the Rapid Drug Screen Test is as accurate
as that laboratory test.

     Versions of the Rapid Drug Screen  Tests  include a two panel  (cocaine and
marijuana), five panel (cocaine, marijuana, opiates, amphetamine and PCP) and an
eight  panel  (THC,  cocaine,   opiates,  PCP,  amphetamines,   benzodiazepines,
methamphetamines  and  barbiturates)  test. All have been cleared by the Federal
Drug  Administration  (the  "FDA") and can thus be sold in  clinical  as well as
workplace  markets.  The  Company  has  also  completed  a  test  for  tricyclic
antidepressants  which it has  submitted  to the FDA for  approval  and which it
intends to market in the near future as part of a nine-panel  test.  The Company
has recently developed nine tests trademarked "Rapid One", each of which detects
one drug of abuse.

     The Company has installed and uses equipment at its manufacturing  facility
suitable for the mass  production  of its drug  screening  tests.  The Company's
output was initially  hampered by its inability to secure  reliable  supplies of
reagents.  This problem was rectified in May, 1997 through improved  reliability
of its suppliers and the addition of a third supplier.

     The Company owns a patented low cost method for producing keratin proteins.
It  has  also  developed  a  technology  that  will  detect  alcohol  levels  in
individuals through a quick, one step, on-site,  saliva test. The Company has no
intention of developing or marketing its keratin technology,  or its saliva test
for  alcohol  consumption  at this  time,  but  intends  to  concentrate  on the
production and marketing of its drug screen tests and pursuing  development  and
acquisition strategies related to substance abuse testing.

                                       2
<PAGE>

     The Company may develop or acquire  additional  biomedical  technologies or
products in the future unrelated to substance abuse.

     From its  inception  in 1986  until  1991,  the  Company  was  involved  in
marketing  educational books and software to schools and municipal libraries and
audiovisual educational packages to educational institutions and to corporations
throughout  the United  States.  In 1991,  the  Company,  because of  heightened
competition,  increased  costs  of doing  business  and  slow  collections  from
municipalities,  reduced  its  involvement  in this  market  to that of  selling
audiovisual  packages to libraries and  commenced  seeking new  technologies  in
emerging medical markets. 

     Since its  inception  to April 30,  1998,  the Company  has an  accumulated
deficit of $7,342,000  (see Financial  Statements - Balance  Sheet).  Management
believes that the Company's  accumulated  deficit is the result of  discontinued
operations,  the development of its workplace drug test kits and the development
of other  biomedical  products.  However,  the Company  has not been  profitable
during its history;  and there is no  assurance  that the  Company's  biomedical
operations will become profitable.

     Background
     ----------
     According  to  the  "1996  AMA  (American  Management  Association)  Survey
Workplace  Drug  Testing and Drug Abuse  Policies  Summary of Key  Findings,"  a
report on drug testing in the  workplace,  81% of major United  States firms now
test  employees  and/or job  applicants  for drug use, an increase of 277% since
1987 and an increase of 3% since  1995.  The AMA  attributed  the  increases  to
several  factors.   These  factors  include  Department  of  Transportation  and
Department of Defense  regulations  which,  in conjunction  with local and state
regulations,  mandate testing in certain job categories;  the Federal  Drug-Free
Workplace Act of 1988;  court decisions  recognizing an employer's right to test
both  employees  and job  applicants  in the private  sector for drugs of abuse;
action by insurance  carriers to reduce  accident  liability and control  health
care costs; and corporate requirements that vendors and contractors certify that
their workplaces are drug-free.

     The AMA found that business category was the most important  determinant in
drug testing.  The  percentages  in each category which tests for drugs of abuse
are manufacturers (89%), transportation (100%), wholesalers and retailers (79%),
general service providers (77%),  business service providers (60%) and financial
service providers (56%).

     The  survey  states  that the usual  and  recommended  procedure  for urine
samples  calls for a  retesting  of positive  samples by the  gas-chromatography
method.  It also  states  that 76% of firms  that test its  employees  utilize a
medical review officer  ("MRO") who analyzes test findings,  judges them against
the test subject's  medical  profile and renders a verdict to the employer which
does not see the test  results  but only  the  MRO's  report.  The use of an MRO
offers significant  protection to employees who may test positive due to the use
of prescription drugs or non-controlled  substances which register as controlled
substances.

                                       3
<PAGE>

     The Substance  Abuse and Mental Health Services  Administration,  Office of
Applied  Studies of the United States  Department of Health and Human  Services,
Public Health Service,  in its advance report number 18 released in August, 1996
entitled "Preliminary  Estimates from the 1995 National Household Survey on Drug
Abuse,"  notes that 14.3% of  unemployed  adults,  age 18 years and older,  were
current  illicit drug users in 1995  compared  with 5.5% of full-time  employed
adults and that the rate of drug use  decreased  from  1994's  6.7%.  71% of all
current  illicit  drug users 18 years old and older (7.4  million  adults)  were
employed,  including  5.5 million  full-time  workers and 1.9 million  part-time
workers.  Because of the high  incidence of  workplace  drug use, the testing of
employees for the most  "popular"  drugs has become  widespread.  Positive tests
often result in discharge of, or treatment for, the employee.  In addition,  the
threat of testing,  particularly random testing,  has the prophylactic effect of
reducing workplace drug use.

     The Company  believes that the drugs of abuse  testing  market is large and
growing and that the largest  market  opportunity  for  on-site  drug  screening
products is the private  sector with an additional  large public sector  demand.
Management  believes that drug testing  performed in an on-site  facility  using
technologies  designed  for on-site  use can be just as  accurate  as  screening
performed in a  full-service  lab.  Drug  screening  tests are now  performed in
markets which include:  preemployment testing, random testing of employees, drug
rehabilitation  programs,   hospital  laboratories,   emergency  rooms,  private
security agencies,  public transportation,  law enforcement agencies,  probation
and parole programs and United States Department of Defense contractors.

 Workplace Drug Test
 -------------------
     Design
     ------
     The Company has  developed  and  markets  its  trademarked  "The Rapid Drug
Screen,"  a test for  two,  five or eight  drugs of abuse  which  can be used in
offices,  factories,  "halfway"  houses,  remote locations and in all situations
where an immediate  test result is required.  The product  consists of a "NIDA 5
Card," ("NIDA" stands for the National  Institute on Drug Abuse) a business-card
size card divided into two, five or eight lengthwise  strips,  or sections.  The
person being tested  urinates  into a test cup,  puts on the lid and hands it to
the supervisor or other person  administering  the test. The test  administrator
inserts  the card  into a  pre-punched  slit in the lid  without  the  danger of
spilling,   touching  or  contaminating   the  urine  inside.   Thus,  the  test
administrator  is not exposed to the urine sample nor does he or she have to mix
reagents.

     Within five to eight minutes,  the results can be read on the inserted card
through  the side of the cup.  A single  line in the test area of the Rapid Drug
Screen  indicates the sample is positive for one of the specific  drugs of abuse
designated  by NIDA in the  "Drug-Free  Workplace  Act of  1989"  as those to be
tested for in most federally regulated drug testing programs. If the results are
positive, the cup is sealed with provided materials and sent to a laboratory for
confirmation.  No  adverse  action  is taken by the  test  administrator  unless
confirmation  of a positive test is received from an independent  laboratory.  A
double line in the test area of the Rapid Drug Screen  indicates that the screen
is negative for the presence of tested drugs of abuse.

                                       4
<PAGE>

     The Company has  designed a five panel card,  a two panel card and an eight
panel card and can produce,  on special  order or if the market  demands,  cards
which test for any combination of drugs of abuse. The two panel strip,  designed
for juvenile  corrections centers and educational  institutions,  tests only for
cocaine and marijuana.  The eight panel strip, designed to rival two competitive
products sold primarily to hospital and physician markets includes barbiturates,
benzodiazepines and methamphetamines.  These additional tests can be combined in
single  unit  with the NIDA 5 Card,  which  tests for PCP,  marijuana,  cocaine,
amphetamines and opiates,  so that one sample can test  simultaneously for eight
drugs of abuse. The Company's test for methamphetamine is also incorporated in a
two panel test for  marijuana and  methamphetamine  and in a five panel test for
methamphetamine,  amphetamine,  cocaine,  opiates and marijuana. The Company has
also completed a test for tricyclic  antidepressants  (which it has submitted to
the FDA) and  intends  to market it in the near  future as part of a  nine-panel
test.

     Benzodiazepines,    barbiturates,   and   tricyclic   antidepressants   are
prescription  sedatives  which are often abused and can be deadly.  In fact, the
Florida Alcohol and Drug Abuse Association reports that barbiturates account for
approximately  one-third of all  reported  drug-related  deaths while  tricyclic
antidepressants  have been  identified  as a leading cause of fatality from drug
ingestion in Australia.  Domestic concerns regarding trends of barbiturate abuse
focus on the drug's growing popularity among teenagers, as evidenced by the 1996
Monitoring the Future Study which  documents a 38% rise in barbiturate use among
high school seniors since 1992.

     In July, 1998, the Company began marketing "Rapid One," a line of nine drug
tests, each of which screens for the present or absence of a substance of abuse.
Rapid One utilizes the same  technology as the Rapid Drug Screen.  It includes a
single dip platform,  an  identification  and date area and does not require the
use of pipettes or reagents. Rapid One is designed for correction facilities and
other  markets where the person  subject to substance  abuse testing is known to
abuse a specific  drug.  Market  acceptance of the Rapid One drug test cannot be
assured.

     One of the problems  which can occur in workplace  drug testing is fraud or
evasion  practiced  by the person being  tested.  The most  prevalent  method of
avoiding  adverse test results is the substitution by the person being tested of
a  hidden  "clean"  urine  sample  which  he or she  brings  to the  test.  As a
consequence,  each of the Company's drug screens  contains a temperature  sensor
which helps prevent the  substitution  of another urine sample as the likelihood
is that the  substituted  sample would be of a lower  temperature  than a sample
produced from the body on the spot. In addition,  the Rapid Drug Screen contains
a control line,  designed to assure the  administrator of the test that the test
is working  properly.  Should the control line not appear,  the administrator is
instructed  to void the test and re-test the  individual  by  obtaining  another
specimen sample.

                                       5
<PAGE>

     FDA  Approval
     -------------
     FDA "510K"  clearances  have been granted for each of the  Company's  tests
included on its eight-panel Rapid Screen. The Company has applied to the FDA for
its test for tricyclic  antidepressants,  but approval has not yet been granted.
The Company intends to apply to the FDA for its Rapid One tests which,  although
they use the same methodology and chemistries as the Rapid Screen test, employ a
different delivery device.  Although FDA approval is not required for most forms
of workplace drug testing,  including The Rapid Drug Screen,  it is required for
use in a  clinical  setting  which  Management  anticipates  may  become a major
marketplace for the Company's drug testing  products. 

     Marketing  and Sales
     --------------------
     The Company  advertises  through trade journals and direct mail  campaigns;
and its  representatives  attend trade  shows.  The Company  sells  primarily to
distributors  which then  resell in the  various  marketplaces.  The Company has
garnered orders from distributors,  municipal bodies and corporate users as well
as from penal  facilities.  The Company  employs a national  sales  director,  a
director of marketing,  five regional managers, an international sales director,
a government and corrections  sales director and a major account sales director.
The Company has opened a national  sales  office in Boca  Raton,  Florida.

   The Company has divided its marketplace into the following categories.

      Corporate Workplace Drug Testing Programs
      -----------------------------------------
     The  Company  has  developed  a  nationwide  network  of  distributors  and
administrators  of workplace drug testing programs to sell its Rapid Drug Screen
testing kit.

                                       6
<PAGE>

      Government, Corrections and Law Enforcement
      -------------------------------------------
     This market includes  federal,  state and county level agencies,  including
correctional facilities,  pretrial agencies, probation and parole departments at
the federal and state levels and juvenile correction facilities. The Company has
shipped  orders to several  agencies  including  the  Broward  County,  Florida,
Sheriff's  Department,  the United States Probation Department and other similar
facilities  and agencies.  In addition,  the Company  exhibits at the winter and
summer trade shows of American Corrections Association.

      Rehabilitation Centers
      ----------------------
     This market  includes  people in treatment for  substance  abuse in general
hospitals, mental health centers and outpatient programs. The importance of this
market relates to the high frequency of testing.  For example, in many residence
programs,  patients  are tested each time they leave the  facility and each time
they return. In outpatient  programs,  patients are generally tested on a weekly
basis. The Company has received orders from a chain of 60 rehabilitation centers
and is  negotiating  with others.  The Company  exhibited  at the 1997  Employee
Assistance Program convention in Chicago.

      International Markets
      ---------------------
     The Company has entered  into  distribution  agreements  with  companies in
several countries and is pursuing a course of multinational  distribution of its
products through both clinical and non-clinical  distribution  companies.  As of
July, 1998, the Company has granted  distribution  rights for its drug screening
products  in  countries  through  out  the  world,  including  Mexico,  Ireland,
Australia, New Zealand, Hungary, and Sweden.

      Clinical, Physicians and Hospitals
      ----------------------------------
     The Company is actively  pursuing  hospital and  physician  markets for its
entire  product  line.  The Company has entered into an  exclusive  distribution
contract with, and has started shipping to, a subsidiary of Murex  International
Technologies Corp.  (Nasdaq),  (majority owned by Abbott  Laboratories (NYSE) to
market the Rapid Drug  Screen  product  line to  hospitals  and clinics in North
America. The Company hopes to expand this distribution to additional  countries.
In addition, the Company distributes its products to physicians through specific
distribution  companies  that  specifically  deal with that market.  The Company
supports  physicians  offices in their marketing programs through the Physicians
Drug Test  Network,  an  advertising  and support  program that makes  available
materials to  participating  physicians who provide drug screening for families,
individuals, schools and employers.
    
     Consumer and Over-the-Counter
     -----------------------------
     The  Rapid  Drug  Screen  test is  ideal  for  consumer  use as it leads to
immediate  and  accurate  results  at a price  less than half that of  available
consumer kits.  Since receiving its FDA 510(k) approval for clinical sales,  the
Company has been actively investigating the FDA requirements for this market. It
has been approached by several store and pharmacy chains. The Company intends to
market  through  distributors  or to sell  directly to larger retail chains upon
final  FDA   determination  of  on-site  drug  testing  as  an  over-the-counter
alternative.

                                       7
<PAGE>

      Additional Markets
      ------------------
     As reported in the "New York Times" (October 20, 1996),  President  Clinton
has called for drug testing of all teenagers by state motor vehicle  departments
prior to granting  driving  licenses to them.  In addition,  certain  low-income
housing  funded by the  Department  of  Housing  and Urban  Development  require
testing of residents as a condition for continued occupancy.  Finally, many high
school and college  sports  programs are requiring  random  testing for drugs of
abuse as a condition of student participation.

      Samples
      -------
     The  Company  has  found  that one of its  best  marketing  methods  is the
shipping of samples to potential  customers which had expressed interest through
responses to  telemarketing,  trade show  demonstration,  advertising or word of
mouth. Although initially expensive,  the Company has found that the best way to
make sales is through demonstration and testing of its products' features.

     Competition
     -----------
     Competition to the Rapid Drug Screen comes from on-site tests  developed by
companies  including Roche Diagnostic Systems,  Medtox (formerly Editek,  Inc.),
Biosite Diagnostics and Drug Testing Resources International.  In all cases that
the  Company is aware of,  competitive  products  use a  collection  or delivery
method different than the Rapid Drug Screen.  Management believes the Rapid Drug
Screen provides an easier option to the user. There is no pipetting of reagents,
stirring or other manipulation of the device by the user.

     Other  available  drug  testing  options,  aside  from  on-site  tests with
immediate results,  include traditional  laboratory testing where a urine sample
is sent to a laboratory for analysis and hair testing where a har sample is sent
to a laboratory for analysis. These forms of drug testing are more expensive and
take longer than the Rapid Drug Screen.

     Manufacturing
     -------------
     After the  successful  completion  of  clinical  trials in May,  1996,  the
Company  initially  subcontracted  the manufacture of components,  including the
test  strips,  of The Rapid Drug Screen to several  outside  manufacturers.  The
Company  found that the use of  subcontractors  to produce  the test  strips was
unsatisfactory from a pricing, delivery and quality control standpoint and began
a  program  of  in-house  manufacturing  to  supplement  product  subcontracted.
Originally, these components were assembled for the Company by Columbia Advocacy
and  Resource  Center  ("COARC"),   an  FDA-approved  contract  manufacturer  in
Mellenville,  New York. During May, 1998 the Company moved  manufacturing of its
products  from  COARC to its own  facility  in  Hudson,  New York.  The  Company
contracts  out the printing and  manufacture  of specimen  cup  components.  The
Company's equipment,  as installed,  is capable of producing up to 500,000 units
per month utilizing one shift per day, five days per week.

     On December 1, 1997,  the Company  announced  its  intention to construct a
15,000 square foot  manufacturing  facility and headquarters in Columbia County,
New York. The Empire State Development Corporation, an agency of New York State,
has agreed in principle to provide  financial  assistance  in the form of grants
and below market interest rate loans as well as financial assistance in employee
training.  Columbia  County has  announced its intention to transfer 20 acres of
land to the Company. The Company intends to begin construction on this facility,
expanded to 28,000 square feet, in September, 1998. The Company believes that it
is likely that the facility  will be built;  but there is no guarantee  that the
promised financial assistance will be consummated without which the Company will
not build the facility.

                                       8
<PAGE>

     Patents and Trademarks
     ----------------------
     The Company has registered "ABM" and its logo in the United States, Canada,
Chile and Mexico and has registered  "Rapid Drug Screen" in Mexico.  The Company
has additional  trademark  applications  pending in the United  States,  Canada,
Philippines  and in 15 European  countries.  The  Company's  trademark  counsel,
Edmund Jaskiewicz, Esq., Executive Vice-President,  has opined that there are no
similar marks and, as a consequence, the Company feels confident that such marks
will be  registered.  The Company has  applied for various  patents  directly in
numerous countries,  including the United States, Canada, Australia,  Argentina,
Brazil,  China,  Japan,  Germany,  Mexico,  Philippines,  Poland  and the United
Kingdom  and has filed  patent  applications  with three  regional  associations
covering 33 additional member countries. Stan Cipkowski, President, has assigned
to the Company for no  consideration,  his  application for a utility and design
patent in the United States and Canada on the drug screen kit as an entity.  Mr.
Jaskiewicz,  as  patent  counsel,  has  opined  that a search  has  revealed  no
competing patented products.  However, there can no assurance that a patent will
be  granted  or that,  if  granted,  it will  withstand  challenge.  (See  "Risk
Factors--Patents and Trademarks.")

      Drugs of Abuse Preliminary Screen ("ABM Prescreen")
      ---------------------------------------------------
     The second of the Company's  products is a preliminary drug screen which is
an easy to use,  accurate  and cost  effective  test paper for the drug  testing
market.  Negative test results  eliminate the possibility  that the urine sample
contains  any of 20  drugs.  The  laboratory  technician  places a few  drops of
pretreated  urine on a test paper and reads the  results  visually  within a few
minutes.  Over 90% of tests  submitted to laboratories  yield negative  results.
Thus,  the  primary  use for  this  product  in  laboratories  is as a means  of
inexpensively and quickly eliminating, through negative results, over 90% of the
testing required.  A patent application is in process.  Pre-clinical  trials for
the preliminary drug screen have been completed at two independent  laboratories
contracted by the Company.  Pre-clinical tests include laboratory  evaluation of
product chemistry and observation of results of addict urine samples tested with
the  product  over a period  of time.  These  tests  were  conducted  under  the
supervision of John Questal, principal of one of the contract  laboratories, and
were  reviewed  by  Dr.  Henry  Wells,   the  Company's   Vice-President-Product
Development.  Based on the  success  of  pre-clinical  evaluations,  independent
clinical  tests were  conducted  by American  Medical  Laboratories,  Chantilly,
Virginia. The Company expects to introduce its ABM Prescreen to the market as an
inexpensive  alternative  to the products  being  offered by the current  market
leaders,  Roche Diagnostic Systems and Biosite  Diagnostics.  The Company cannot
predict when the ABM Prescreen will be introduced into the market.

     Alcohol/Saliva Test
     -------------------
     The Company has developed a technology  that will detect  alcohol levels in
individuals  through  a  quick,  one  step,  on-site,  saliva  test  that can be
calibrated  to  specific  sensitivity  levels.  Though at an  advanced  stage of
development, additional laboratory work and clinical evaluations will need to be
funded and completed prior to any patent applications or commercialization.  Law
enforcement and workplace  testing would be the initial markets targeted by this
Company.


                                       9
<PAGE>

     KDMP (Keratin Derivative Modified Protein)
     ------------------------------------------
     Keratin  Derived  Modified  Protein  ("KDMP") is a liquid  keratin  protein
complex  containing  water soluble  peptides and is rich in cysteine.  It can be
used as an active  ingredient in varying  concentrations  in the formulations of
quality  skin,  nail,  and hair care  products.  Pre-clinical  trials  have been
completed  and the Company  intends to license or sell the  technology.  Various
patents  relating to this technology have been assigned to the Company by Edmund
Jaskiewicz,  Executive  Vice-President,  as  part of the  consideration  for his
receipt of Common Shares. The Company is currently manufacturing this product in
small  quantities  for  several  companies  which  have  requested  samples  for
evaluation.  The  Company  does not  intend to devote  substantial  economic  or
personnel  resources  to the  development  or  marketing of this product for the
foreseeable  future. As a result, no revenue is expected to be derived from this
product until a license is negotiated, of which there is no assurance.

     The Company's Plan of Operations
     --------------------------------
     The  Company  intends to continue  to  establish a network of  distributors
which service customers in non-clinical workplace,  correctional institution and
drug  rehabilitation  areas,  to  market  and  sell its drug  testing  kits,  to
manufacture  and ship such kits and to continue  research and development on its
additional biomedical products.

     The Company has entered  into  national  and  international  non-exclusive,
non-clinical  market distribution  agreements with a number of companies.  These
agreements   permit  the  distributors  also  to  sell  the  products  of  other
manufacturers and permit the Company to sell its test kits to other distributors
within and  outside  the  territory  of each  distributor.  The  agreements  are
cancelable  by either  the  Company  or the  distributor  upon 30 days'  written
notice. 

     The Company has  retained a national  and five  regional  managers (in Fort
Lauderdale,   Nashville,   Los  Angeles,   Baltimore   and   Milwaukee).   These
representatives  call  on  accounts,   such  as  corporations  and  correctional
institutions, directly and support the Company's worldwide distribution network.
The  Company  intends  to  continue  its  extensive  direct  mail  campaign  and
participation  in trade shows.

     The Company's present  manufacturing  equipment and personnel designated by
COARC is  sufficient  to produce  50,000 drug test kits each week,  assuming one
shift per day,  five days a week.  In the event the Company  desires to increase
production, its estimated costs for additional equipment are $40,000.

     The Rapid Drug Screen Test was featured on "Today's  Health," aired on CNBC
in July, 1997.

                                       10
<PAGE>

     Government Regulation
     ---------------------
     The development,  testing, manufacture and sale of the Company's laboratory
test kits and certain additional  proposed products are subject to regulation by
United  States and foreign  regulatory  agencies.  Pursuant to the Federal Food,
Drug,  and Cosmetic Act, and the  regulations  promulgated  thereunder,  the FDA
regulates  the  preclinical  and  clinical   testing,   manufacture,   labeling,
distribution  and promotion of medical  devices.  If the Company fails to comply
with  applicable  requirements  it may be subject to fines,  injunctions,  civil
penalties,  recall or  seizure  of  products,  total or  partial  suspension  of
production,  failure of the government to grant premarket clearance or premarket
approval  for  devices,  withdrawal  of marketing  clearances  or approvals  and
criminal prosecution.

     Year 2000
     ---------
     The Company has completed a review of its operational and financial systems
and believes all areas to be Year 2000 compliant. New software has been acquired
for the accounting  systems and will be fully  implemented prior to December 31,
1999.

     Risk Factors
     ------------

     Limited Operating History.
     --------------------------
     Although  the  Company  was  formed  in  1986,  as far as the  development,
manufacture  and sale of drug  testing  kits  are  concerned,  it has  extremely
limited  operational  history upon which investors may base an evaluation of its
performance  or any  assumption  as to the  likelihood  that the Company will be
profitable.  (See  "Business.")  The Company's  prospects  must be considered in
light of the risks,  expenses,  delays,  problems  and  difficulties  frequently
encountered  in  the  establishment  of a  new  business,  the  development  and
commercialization  of new  products  based  on  innovative  technology  and  the
competitive environment in which the Company operates. Since the Company's entry
into the biomedical business, the Company has generated limited revenues.  There
can be no  assurance  that  the  Company  will be able to  generate  significant
revenues or achieve profitable  operations.  (See  "Management's  Discussion and
Analysis  of  Financial  Condition  and  Results of  Operations"  and  Financial
Statements.)

     Technological  Factors;   Uncertainty  of  Product  Development;   Unproven
Technology.
--------------------------------------------------------------------------------
     Although the Company's  development  efforts relating to the  technological
aspects  of the  workplace  drug  testing  kit are  completed,  the  Company  is
continually  seeking to refine and  improve  its design and  performance  and to
develop  additional  versions.  In  addition,  the Company  plans to perfect its
laboratory  drug test kit,  its saliva  alcohol  level test kit and its  Keratin
production technology.  The Company's efforts remain subject to all of the risks
inherent  in  new  product  development,   including  unanticipated   technical,
regulatory or other  problems  which could result in material  delays in product
development or commercialization  or significantly  increased costs. The Company
may be required to commit considerable additional efforts, time and resources to
develop production  versions of its additional  products.  The Company's success
will depend upon such products  meeting  targeted product costs and performance,
and may also depend upon their timely  introduction into the marketplace.  There
can be no assurance that development of the Company's  proposed products will be
successfully  completed  on a timely  basis,  if at all,  that  they  will  meet
projected  price or performance  objectives,  satisfactorily  perform all of the
functions  for  which  they are  being  designed,  or  prove to be  sufficiently
reliable  in  widespread  commercial  application.  Moreover,  there  can  be no
assurance   that   unanticipated   problems  will  not  arise  with  respect  to
technologies  incorporated  into its test kits or that product  defects will not
become  apparent after  commercial  introduction of its additional test kits. In
the event that the Company is required to remedy  defects in any of its products
after  commercial  introduction,  the costs to the Company could be significant,
which could have a material  adverse effect on the Company revenues or earnings.
(See "Business.")

                                       11
<PAGE>

     Uncertainty of Continued Market Acceptance.
     -------------------------------------------
     The  Company's  drug  test  kits have  been  well  received  by  customers,
including  corporations,  distributors  and  correctional  institutions.  As  is
typically the case with an emerging  company,  demand and market  acceptance for
newly introduced  products is subject to a high level of uncertainty.  Achieving
continued  market  acceptance  for  its  drug  tests  will  require  substantial
marketing  efforts and  expenditure  of  significant  funds to inform  potential
distributors  and  customers of the  distinctive  characteristics,  benefits and
advantages of its kits.  There can be no assurance  that its drug test kits will
become  generally  accepted  or  that  the  Company's  efforts  will  result  in
successful product  commercialization  or initial or continued market acceptance
for its other drug testing products. (See "Business--Marketing and Sales.")

     Competition in the Drug Testing Market; Technological Obsolescence.
     -------------------------------------------------------------------
     The Company faces  competition for every existing and proposed product from
drug  manufacturers  and  other  manufacturers  of drug test  kits.  Some of its
competitors  are well known and have far greater  financial  resources  than the
Company.  To  the  best  of  Management's  knowledge,  and in  its  opinion,  no
competitors  have introduced  products which equal the ease of use combined with
the accuracy of the Company's drug test kits. (See "Business--Competition.") The
markets for drug test kits and related  products are highly  competitive.  There
can be no assurance that other  technologies or products which are  functionally
similar  to  those  of the  Company  are not  currently  under  development.  In
addition,  there can be no assurance that other  companies with the expertise or
resources that would  encourage  them to attempt to develop or market  competing
products will not develop new products  directly  competitive with the Company's
drug test kits.  Despite the protections which would be available to the Company
in the event its pending application for a design patent is granted, the Company
expects other  companies to attempt to develop  technologies  or products  which
will compete with the Company's products. (See "Business--Competition.")

     Possible Inability to Find and Attract Qualified Personnel.
     -----------------------------------------------------------
     The Company  currently  has  sufficient  management  expertise and depth to
develop  its  business.  It  has  recently  added  marketing  and  manufacturing
management and has added to its scientific advisory board. However, it will need
additional  skilled and dedicated  marketing  personnel as well as technical and
production  personnel in the future.  There is no guarantee that the Company can
retain its present staff or that capable  personnel with relevant skills will be
available. (See "Management.")

     Dependence on Management.
     -------------------------
     The Company is dependent on the expertise and experience of Stan Cipkowski,
President,   Jay  Bendis,   Vice-President-Marketing,   and  Douglas  Casterlin,
Vice-President  and General  Manager,  for its  operations.  The loss of Messrs.
Cipkowski,  Bendis and Casterlin,  or any of them,  will  seriously  inhibit the
Company's operations. The Company does not maintain key man insurance for any of
its management employees. (See "Management.")

                                       12
<PAGE>

     Possible Adverse Changes in Regulatory Framework.
     -------------------------------------------------
     Approval  from the FDA is not required for the sale of workplace  drug test
kits,  but is required  for  clinical  drug test kits.  The Company has received
"510(k)" approval from the FDA for its two, five and eight panel drug test kits.
It is awaiting  FDA  approval of one test of its nine panel drug test kit and is
preparing the application for its Rapid One drug test kit.  However,  regulatory
standards  may change in the future and there is no  assurance  that if and when
the Company applies for additional  approvals from the FDA they will be granted.
(See   "Business--FDA   Approval,"    "Business--Government    Regulation"   and
"Business--Patents and Trademarks.")

     Patents and Trademarks
     ----------------------
     The Company  has  applied for design  patents on its drug test kits and for
certain  trademarks in the United States,  South and Central  America,  European
Common  Market and Japan.  Certain  trademarks  have been granted and others are
pending (see "Business--Patents and Trademarks").  Although its patent/trademark
counsel  who is also  Executive  Vice  President,  has opined  that there are no
competing  designs or marks,  there is no  assurance  that the  patents  will be
granted or that  additional trademarks will be  registered. (See "Business--"FDA
Approval" and "Business--Patent and Trademarks.")

     Dilution  as a Result of  Conversion  of Series  "D"  Preferred  Shares and
     Exercise of Warrants.
     ---------------------------------------------------------------------------
     Investors hold 2,500 Series "D" Preferred Shares of the Company,  which are
convertible  into Common Shares.  Only 250 Series "D" Preferred Shares have been
converted in Common Shares.  Each Series "D" Preferred Share is convertible into
a number of Common Shares equal to (i) $1,000 (ii) divided by a conversion price
which is the lesser of (a) 95% of the "Market Price" (the average of the closing
bid prices of the Common  Shares over any three  trading  days,  selected by the
holder of the Series "D"  Preferred  Shares in the 20 trading  days  immediately
preceding  the date of  conversion)  and (b)  $4.625,  except that if the 10 day
average  closing  bid  price  ending  on the  effective  date of a  registration
statement (the "Effective Price") is greater than $4.625, the maximum conversion
price will be such Effective Price, not to exceed in any case, $4.995. Under the
applicable conversion formulas of the Series "D" Preferred Shares, the number of
Common Shares issuable upon  conversion is inversely  proportional to the market
price of the Common Shares at the time of conversion (i.e., the number of shares
increases as the market price of the Common Shares  decreases);  and except with
respect to certain redemption rights of the Company for the Series "D" Preferred
Shares and the  limitation  under Nasdaq Small Cap  regulations  which limit the
aggregate amount of Common Shares which the Company may issue at a discount from
market price upon  conversion  of the Series "D"  Preferred  Shares and Warrants
without shareholder  approval,  (such shareholder approval is being requested by
the Company), there is no cap on the number of shares of Common Shares which may
be issued. In addition, the number of Common Shares issuable upon the conversion
of the Series "D"  Preferred  Shares and the  exercise of Warrants is subject to
adjustment  upon the occurrence of certain  dilutive  events.  Holders also hold
outstanding  Warrants to acquire a total of 107,355  Common Shares at a price of
$4.81 share.  The exercise of such  Warrants and  conversion  of such Series "D"
Preferred  Shares and the sale of such Common  Shares  could have a  significant
negative  effect on the market price of the Common  Shares and could  materially
impair the Company's  ability to raise capital through the future sale of equity
securities.

                                       13
<PAGE>

      Resale of Restricted Securities.
     ---------------------------------
     5,220,571  Common Shares  presently  issued and outstanding as of the date
hereof are "restricted  securities" as that term is defined under the Securities
Act of 1933, as amended, (the "Securities Act") and in the future may be sold in
compliance  with Rule 144 of the  Securities  Act, or pursuant to a Registration
Statement filed under the Securities Act. Rule 144 provides,  in essence, that a
person  holding  restricted  securities  for a period of one year may sell those
securities in  unsolicited  brokerage  transactions  or in  transactions  with a
market  maker,  in an amount equal to one percent of the  Company's  outstanding
Common Shares every three months.  Sales of unrestricted shares by affiliates of
the Company are also  subject to the same  limitation  upon the number of shares
that may be sold in any three month period. Such information is deemed available
if the issuer  satisfies the reporting  requirements  of sections 13 or 15(d) of
the  Securities and Exchange Act of 1934 (the  "Securities  Exchange Act") or of
Rule 15c2-11  thereunder.  Rule 144(k) also permits the  termination  of certain
restrictions  on  sales  of  restricted  securities  by  persons  who  were  not
affiliates  of the Company at the time of the sale and have not been  affiliates
in the  preceding  three  months.  Such  persons must satisfy a two year holding
period.  There is no  limitation  on such  sales  and  there  is no  requirement
regarding  adequate current public  information.  Investors should be aware that
sales under Rule 144 or 144(k),  or pursuant to a registration  statement  filed
under the Act, may have a depressive effect on the market price of the Company's
securities in any market which may develop for such shares.

     Preferred Shares.
     -----------------
     The Company has the  authority  to issue up to 5,000,000  Preferred  Shares
with such designations, rights and preferences as may be determined by the Board
of Directors. The Company is empowered, without further shareholder approval, to
issue Preferred Shares with dividend,  liquidation,  conversion, voting or other
rights  which could  adversely  affect the voting  power or other  rights of the
holders  of  Common  Shares.   2,500  Series  "D"  Preferred  Shares  which  are
convertible to Common Shareswere issued and 2,250 are presently outstanding.

     Need for Additional Financing.
     ------------------------------
     The Company  expects that its cash on hand will be  sufficient  to fund the
Company's proposed  operations for at least 12 months. This estimate is based on
certain assumptions and there can be no assurance that unanticipated  unbudgeted
costs will not be incurred.  Future  events,  including  the  problems,  delays,
expenses  and  difficulties   which  may  be  encountered  in  establishing  and
maintaining  a  substantial  market for the  Company's  drug test kits and other
technologies could make cash on hand insufficient to fund the Company's proposed
operations.  There can be no  assurance  that the Company will be able to obtain
any  necessary  additional  financing on terms  acceptable  to it, if at all. In
addition,  financing  may  result in  further  dilution  to the  Company's  then
existing stockholders.  The Company has no established borrowing arrangements or
available  lines of  credit.  (See  "Management's  Discussion  and  Analysis  of
Financial condition and Results of Operations.")

                                       14
<PAGE>

     No Dividends.
     -------------
     The payment of dividends rests within the discretion of the Company's Board
of Directors.  No dividends  have been paid on the Common Shares and the Company
does not anticipate the payment of cash dividends in the foreseeable  future. If
the operations of the Company become profitable, it is anticipated that, for the
foreseeable  future,  any  income  received  therefrom  would be  devoted to the
Company's  future  operations and that cash  dividends  would not be paid to the
Company's shareholders.

     Ability to Retain and Attract Market Makers.
     --------------------------------------------
     The Common Shares trade on the Nasdaq  SmallCap  Market.  In the event that
the market makers cease to function as such, public trading in the Common Shares
will be adversely affected or may cease entirely.  Presently,  market makers for
the  Company's  Common  Shares  include GVR Co.,  Fahnestock & Co.,  Inc.,  Hill
Thompson  Magid & Co.,  J.B.  Oxford & Co. Kalb Voorhis & Co., Nash Weiss & Co.,
Inc., Paragon Capital Corp., Troster Singer Corp.,  Comprehensive Capital Corp.,
Herzog, Heine, Geduld, Inc., Mayer & Schweitzer,  Inc., Knight Securities, Ltd.,
Naib Trading Corp.,  National Financial  Securities Corp., Sharpe Capital,  Inc.
and Wien Securities Corp.,  Sherwood Securities Corp., H. J. Meyers & Co., Inc.,
M. H. Meyerson & Co., Inc., National Financial Service Corp.

     Anti-Takeover Provisions in Certificate of Incorporation.
     ---------------------------------------------------------
     The  Company's  certificate  of  incorporation  authorizes  the issuance of
5,000,000  Preferred Shares.  The Board of Directors has the authority,  without
further action by the Common  Shareholders,  to issue Preferred Shares from time
to  time  in one or  more  classes  or  series,  to fix  the  number  of  shares
constituting any class or series and the stated value thereof, if different from
the par  value,  and to fix the terms of any such  series  or  class,  including
dividend rights,  dividend rates,  conversion or exchange rights, voting rights,
rights  and  terms  of  redemption  (including  sinking  fund  provisions),  the
redemption price and the liquidation  preference of such class or series.  Thus,
the  Board of  Directors,  in order to avoid a  hostile  takeover,  could  issue
Preferred Shares with supervoting rights,  conversion rights into Common Shares,
liquidation  preference or a combination of rights and  preferences  which could
inhibit  success of such attempt.

     No Assurance of Continued Public Market for Common Shares.
     ----------------------------------------------------------
     Although the Common Shares trade on the Nasdaq SmallCap market, there is no
assurance  that an active  trading  market will be sustained.

                                       15
<PAGE>

     Item 2. Description of Property

     On April 1, 1998, the Company leased 15,000 square feet office,  warehouse,
manufacturing   and   administrative   offices  in  Hudson,   New  York  from  a
non-affiliated  party for a period of one year at a monthly rent of $3,750.  The
Company has the option to extend the lease for an additional year.

     Item 3. Legal Proceedings

     In  February  1994,  Robert  Freidenberg,  as  owner  of  the  two  medical
technology  companies,  MDI and Gendex,  acquired by the Company, in the name of
these  corporations,  filed suit to have a Share Exchange Agreement rescinded on
the grounds of breach of contract. In order to preserve a claim for damages, the
Company filed a third-party  claim  against Dr.  Freidenberg,  for breach of the
Share Exchange  Agreement.  In November 1995, after a trial, the court dismissed
Dr. Friedenberg's lawsuit and allowed the Company's third-party claim to proceed
to trial.In  September,  1996, Dr. Friedenberg died. A pretrail hearing was held
in December 1996 which set a trial date of April 28, 1997.

     That trial was  decided by a jury on May 5, 1997.  The  verdict  determined
that Dr. Friedenberg  breached various  contracts,  including the Share Exchange
Agreement,  when he failed to deliver  technology to the Company.  The jury also
found in favor of the  Company  on two of the three  fraud  claims  against  Dr.
Friedenberg  and  awarded  the Company  approximately  $321,000 in damages.  Dr.
Friedenberg's  estate,  just prior to the jury trial, filed a supplemental claim
for the shares of the  Company's  stock which he would have  received  under the
Share Exchange Agreement which the trial judge took under advisement.  The trial
judge, on July 17, 1998 ruled that the estate of Dr.  Friedenberg is entitled to
5,907,154  common  shares of the  Company.  The  Company  has  taken an  appeal.
Management,  in  consultation  with  counsel,  is of the opinion  that the trial
judge's  award of the shares to Dr.  Friedenberg's  estate  will be  reversed on
appeal.

     In June  1995,  the  Company  filed  a  lawsuit  against  Mr.  Morris,  Dr.
Friedenberg's  counsel,  for the breach of attorney-client  relationship and his
fiduciary duty and negligence in representing the Company in matters relating to
Dr.  Friedenberg  and in the  preparation of the Share Exchange  Agreement.  The
Company's  lawsuit demands  damages in the amount of $1,000,000.  Mr. Morris has
counterclaimed  for common  shares.  No trial date has been set.  The Company is
vigorously contesting the Morris claim.
     
     Item 4. Submission of Matters to a Vote of Security Holders

     None.
                                       16
<PAGE>

                                     PART II

     Item 5. Market For Common Equity and Related Stockholder Matters

     The table on the following  page sets forth the range of high and low sales
prices for the Common Shares on the NASD Bulletin Board for each quarter for the
fiscal years 1997 and 1998. As of July 31, 1998, there were approximately 3,822.
holders of Common Shares.

                                                   High                 Low
                                                   ----                 ---
     Fiscal Year Ending April 30, 1998
     ---------------------------------
                 Fourth Quarter                   $4.43                $3.40
                 Third Quarter                     6.50                 3.25
                 Second Quarter                    3.97                 2.69
                 First Quarter                     4.13                 3.00

     Fiscal Year Ending April 30, 1997
     ---------------------------------
                Fourth Quarter                     4.25                 3.50
                Third Quarter                      4.75                 2.75
                Second Quarter                     7.38                 4.31
                First Quarter                      6.00                 2.00

     As of July 31, 1998, there were outstanding approximately 14,282,989 Common
Shares and 2,250 convertible Series "D" Preferred Shares. There is one holder of
the Preferred Shares which do not trade.

     The Company has not  declared any  dividends on the Common  Shares and does
not expect to do so in the foreseeable future.

     Item 6. Management's Discussion and Analysis or Plan of Operation

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                   for the years ended April 30, 1997 and 1998

     The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for  forward-looking  statements.  In order to comply with the terms of the safe
harbor,  the Company notes that except for the  description of historical  facts
contained herein,  the Registration  Statement  contains certain forward looking
statements that involve risks and uncertainties as detailed herein and from time
to time in the Company's filings with the Securities and Exchange Commission and
elsewhere.  Such statements are based on Management's  current  expectations and
are subject to a number of factors and  uncertainties  which could cause  actual
results  to  differ  materially  from  those  described  in the  forward-looking
statements.  These factors include, among others: (a) the Company's fluctuations
in sales and operating results,  risks associated with international  operations
and regulatory,  competitive and contractual risks and product development;  (b)
the ability to achieve strategic  initiatives,  including but not limited to the
ability  to  achieve  sales  growth  across  the  business  segments  through  a
combination of enhanced sales force,  new products,  and customer  service;  and
acquisitions.

                                       17
<PAGE>

     Results of Operations  for the Year Ended April 30, 1998 as Compared to the
Year Ended April 30, 1997
--------------------------------------------------------------------------------
     During the current  year,  the Company  undertook an  extensive  program to
market and distribute its primary product, the Rapid Drug Test kit. As a result,
revenues from the sale of the test kits were $1,991,000 for the year ended April
30, 1998 as compared to $318,000 for the year ended April 30, 1997, representing
an increase of $1,673,000 or 526.2%. Cost of goods sold for the year ended April
30, 1998 was $971,000 or 48.8% of drug test  revenues as compared to $183,000 or
57.6% of drug test  revenues for the year ended April 30, 1997.  In an effort to
lower this cost, the Company has undertaken to develop a cost reduction  program
aimed  specifically  at its  in-place  production  process and  expects  further
savings in the coming year.

     Revenues from book sales were $164,000 for the year ended April 30, 1998 as
compared to $275,000 for the year ended April 30, 1997  representing  a decrease
of $111,000 or 40.4%.  It is expected  that with  continued  strong sales in the
drug test market,  book sales as a percent of overall  revenue will  continue to
decline. Cost of goods sold for the year ended April 30, 1998 was $79,000 (48.2.
% of book sales) as compared to $77,000 (28.1% of book sales) for the year ended
April 30, 1997.

     General  and  administrative  costs for the year ended  April 30, 1998 were
$2,739,000,  an increase of 215.6% over  expenses of $868,000 for the year ended
April 30,1997.  The following  table sets forth the percentage  relationship  of
general and administrative costs to sales for both years:

                                         April 30,     %     April 30,     %
                                           1998      Sales     1997      Sales
                                         ---------   -----   --------    -----
Sales salaries & commissions             $ 572,000    26.5   $ 41,000      6.7
Marketing & promotion                      869,000    40.3    112,000     18.3
Legal & professional                       112,000     5.2    117,000     19.2
Investor relations costs                   241,000    11.2    105,000     17.2
Office salaries                            340,000    15.8    275,000     45.0
Telephone                                   51,000     2.4     19,000      3.1
Insurance                                   35,000     1.6     28,000      4.6
Other administrative costs                 519,000    24.1    171,000     28.0
                                         ---------    ----  ---------    -----
 Total general & administrative costs  $ 2,739,000   127.1  $ 868,000    142.1
                                       -----------   -----  ---------    -----

     These increased general and administrative  costs were undertaken to create
the necessary infrastructure to meet the Company's worldwide drug test marketing
and production  goals.  As an outgrowth of increasing  sales the Company expects
general and  administrative  costs to continue to increase but at a slower rate.
As a percent of sales,  this cost  declined  15.0%  during the current  year and
Management expects this trend to continue in future.

     Bad debt  expense  representing  the  write-off  of amounts  owing from two
companies  amounted  to  $380,000  or 17.6% of sales  for the year  ended  April
30,1998.  The company has implemented a stronger credit review process to reduce
this cost in future.

     Depreciation  and amortization was $101,000 and $96,000 for the years ended
April 30,1998 and 1997 respectively.

                                       18
<PAGE>

     Research and  development  expense of $150,000 for the year ended April 30,
1998 was $75,000 more than the $75,000  expended during the year ended April 30,
1997.  This  increase  in  research  and  development  is the  result of ongoing
development of both new products and improved methods to reduce the costs of the
drug testing delivery system.

     Non-cash compensation charges
     -----------------------------
     As an inducement and in lieu of cash outlays,  the Company  granted 260,000
options to employees at exercise prices below market price on date of grant. The
Company  also  granted  89,000  options  as  compensation   for  consulting  and
professional  fees in lieu of cash.  The Company  decided to  eliminate  certain
vesting requirements contained in its employment contracts of the Vice President
of Marketing  and the Vice  President  and General  Manager.  As a result and in
addition to certain  milestones  having  been  reached  under  these  employment
contracts,  the Company  recorded an aggregate  non-cash charge for both options
and stock of $2,214,000.

     Liquidity  and Capital  Resources  As of the End of Fiscal Year Ended April
30, 1998
--------------------------------------------------------------------------------
     The Company's cash and cash equivalents amounted to $3,239,000 for the year
ended  April 30, 1998  representing  an  increase  of  $1,476,000  or 84.0% over
$1,763,000 as of the year ended April 30, 1997. Of this amount,  $3,135,000  was
invested in interest bearing certificates of deposit.  Working capital increased
$931,000 or 26.2% over $3,549,000  recorded as of the year ended April 30, 1997.
The increase in working capital resulted from the sale of convertible  preferred
shares  (Series B, C, & D) in the  principal  amounts of $600,000,  $455,000 and
$2,500,000 respectively, plus proceeds from the exercise of 106,305 warrants and
options for $309,000 during the year.  Cash generated from financing  activities
was  utilized  to finance  operations  and for the  purchase  of  machinery  and
equipment for $71,000.

     As a result of strong  fourth  quarter  sales of drug test  kits,  accounts
receivable increased $374,000 or 110.7% to $712,000 for the year ended April 30,
1998 compared to $338,000 for the year ended April 30, 1997.

     Inventories  rose 48.1% to  $991,000  for the year ended  April 30, 1998 or
$322,000 above $669,000 reported for the year ended April 30, 1997.

     The Company's  primary  short-term needs are to increase its  manufacturing
capabilities, increase inventory levels and continue to support its research and
development  programs.  The Company currently plans to expend approximately $2.0
million for the expansion and  development  of its  manufacturing  facilities in
addition to its marketing and general administrative programs.

     The  Company  expects its capital  requirements  to increase  over the next
several years as it expands its research and  development  efforts,  new product
development, sales and administration infrastructure, manufacturing capabilities
and facilities.  The Company's future liquidity and capital funding requirements
will depend on numerous  factors,  including  the extent to which the  Company's
products  under   development  are   successfully   developed  and  gain  market
acceptance,  the timing of regulatory actions regarding the Company's  potential
products,   the  costs  and  timing  of  expansion  of  sales,   marketing   and
manufacturing   activities,   facilities   expansion   needs,   procurement  and
enforcement of patents important to the Company's business,  results of clinical
investigations and competition.

                                       19
<PAGE>

     The Company  believes that its available cash and cash from operations will
be  sufficient  to satisfy  its  funding  needs for at least the next 12 months.
Thereafter,  if cash generated from  operations is  insufficient  to satisfy the
Company's working capital and capital expenditure requirements,  the Company may
be required to sell additional  equity or debt  securities or obtain  additional
credit facilities.  There can be no assurance that such financing,  if required,
will be available on satisfactory terms, if at all.

     Item 7. Financial Statements

     a. Balance Sheet as of April 30, 1998

     b. Statement of Operations for the two years ended April 30, 1997 and 1998

     c. Statement of Cash Flows for the two years ended April 30, 1997 and 1998

     d. Statement of Stockholders' Equity for the two years ended April 30, 1997
        and 1998

     e. Notes to Financial Statements

     Item 8. Changes in and Disagreement With Accountants

     Not applicable.

                                     PART III

     Item 9.  Directors,  Executive  Officers,  Promoters  and Control  Persons:
Compliance with Section 16(a) of the Exchange Act

Directors and Officers
----------------------
     The following sets forth the names of the Company's directors and officers.
Directors  of the  Company  are elected  annually  by the  shareholders  and the
officers are appointed  annually by the Board of Directors.  Jasper R. Clay, Jr.
and John F. Murray were appointed by the Board of Directors to fill vacancies.

Name                 Age            Position                            Since
----                 ---            --------                            -----
Stan Cipkowski       50     President and a Director                     1986
Edmund Jaskiewicz    75     Chairman of the Board of Directors,
                             Executive Vice-President and Secretary      1992
Jay Bendis           51     Vice-President-Marketing and a Director      1995
Henry J. Wells       66     Vice-President-Product Development           1995
Jasper R. Clay, Jr.  65     A Director                                   1997
John F.  Murray      53     Chief Financial Officer and a Director       1997
Karen Russo          37     A Director                                   1997
Douglas Casterlin    51     Vice-President and General Manager           1997

                                       20
<PAGE>

     Stan Cipkowski  founded the predecessor of the Company in 1982 and has been
an officer and director of the Company  since its  incorporation  in April 1986.
>From  1982 to  1986,  he was sole  proprietor  of  American  Micro  Media,  the
predecessor,  which was acquired by the Company. In addition, from 1983 to 1987,
Mr.   Cipkowski  was  a  general   partner  of  Florida  Micro  Media,   a  Fort
Lauderdale-based   marketer  of   educational   software  and  was  a  principal
shareholder and Chief Financial Officer of Southeast Communications Group, Inc.,
a  publisher  of direct  response  media.  In 1982,  he became a  consultant  to
Dialogue   Systems,   Inc.,   a  New   York-based   developer  of  training  and
communications  materials,  where he  served  as  Vice-President  of  Sales  and
Marketing.  From  1977 to 1982,  he was  employed  by  Prentice-Hall  Publishing
Company,  reaching the position of National Sales Manager.  Prior to 1977 he was
employed as an accountant for the New Seabury  Corporation  and as Mid-West Area
Manager for the Howard Johnson Company.

     Edmund  Jaskiewicz is a  lawyer-engineer.  He has  practiced  international
patent and  corporate  law as a sole  practitioner  since 1963 and has served as
Chairman of the Board of Directors since 1992. From 1953 to 1963 Mr.  Jaskiewicz
was associated with Toulmin and Toulmin,  Esqs.,  Washington,  D.C. From 1960 to
1962, he resided in Frankfurt,  Germany managing that firm's local office.  From
1952 to 1953 he was with the Patent  Section of the Bureau of  Ordinance  of the
Department of the Navy working on patent  infringement and licensing matters. He
received his J. D. in 1952 from George Washington  University Law School and his
B. S. in Engineering from the University of Connecticut in 1947.

     Jay Bendis has been an independent consultant to biomedical companies since
1990,  specializing in commercializing new concept products in both domestic and
international  markets.  From 1990 to 1992, he served as Vice-President of Sales
and Marketing for Scientific  Imaging  Instruments  where he was a principal and
Vice-President  of Sales and Marketing.  From 1985 to 1990, Mr. Bendis served as
National  Sales  Manager  of the XANAR  Laser  Corp.,  a  division  of Johnson &
Johnson,  where he directed its national sales force and developed its marketing
strategy for integrating high power lasers into the hospital  market.  From 1979
to 1984, he was the Eastern Area Sales and Marketing Manager for the IVAC Corp.,
a division  of Eli  Lilly.  Prior to 1979,  Mr.  Bendis  held  sales  management
positions with Xerox Corporation and A.M.  International.  Mr. Bendis earned his
B.A. in  Marketing/Management  from Kent State  University  and is  currently a
member of the Edison  BioTechnology  Center  Advisory  Council  for the State of
Ohio.

     Henry Wells,  Ph.D.  has served  since 1990 as a contract  chemist with the
title of  Vice-President-Science  and Technology  for New Horizons  Diagnostics,
Inc. where he adapts  immuno-chemical  technologies  for detection of infectious
diseases.  From 1989 to 1990, he was director of production  for Espro,  Inc., a
producer   of   in-vivo   pesticides.   From  1985  to  1989,   Dr.   Wells  was
Vice-President-Science  and Technology for Keystone Diagnostics,  Inc. From 1984
to 1985, he was Director of Research and  Development  for  Hill-Wells  Research
Corporation,  a developer of  diagnostics  products.  From 1981 to 1984,  he was
Vice-President-Research  and  Development of Hematec  Corporation.  From 1979 to
1981, Dr. Wells was Director of Biochemistry for Helena Laboratories.  From 1973
to 1979, he was Manager of Chemical  Chemistry at Smith Kline  Diagnostics.  Dr.
Wells earned his Ph.D. in Biochemistry from the University of Pittsburgh, his M.
A.  from  University  of  Pennsylvania  and  his B.S. in  Chemistry  from  the
University of Pittsburgh.

                                       21
<PAGE>

     John F.  Murray has served as Chief  Financial  Officer of Federal  Supply,
Inc.,  Pompano Beach,  Florida since April,  1994. From 1988 to 1994, Mr. Murray
served as Controller for Bio Therapeutics, Inc., Woodbridge, New Jersey. He also
was Controller of Shortline, a group of transportation  companies,  from 1982 to
1988 and,  from 1974 to 1982,  of Kleber  Tire & Rubber  Corp.  Mr.  Murray  was
Director of Accounting for Western Union Telegraph Company from 1972 to 1974 and
Senior  Accountant  for S.D.  Leidesdorf  & Co (now Ernst & Young)  from 1969 to
1972. Mr. Murray received his B.B.A. in Accounting from the Baruch School of the
City University of New York in 1968 and became a Certified Public  Accountant in
the State of New York in 1974.

     Jasper R. Clay, Jr. served as a United States Parole Commissioner from 1984
to 1996 and from 1991 to 1996,  as  Vice-Chairman  of the United  States  Parole
Commission  and  Chairman  of the  National  Appeals  Board.  He served as final
authority  for all  decisions  relating  to parole,  revocation,  imposition  or
modification of parole conditions, or denial of discharge from supervision. From
1976 to 1984, Mr. Clay was State of Maryland Parole  Commissioner  and from 1969
to 1976,  he was an Associate  Member of the State of Maryland  Board of Parole.
Mr. Clay served as an Associate  Member of the State of Maryland Board of Parole
from 1969 to 1976,  District Supervisor of the Baltimore City District Office in
1968,  Staff  Specialist-Training  and Development for the Maryland  Division of
Parole and Probation  from 1966 to 1968,  Parole and  Probation  Agent I and II,
Baltimore District, Office of the Maryland Division of Parole and Probation from
1958 to 1966 and as a Psychiatric  Aide at the Spring Grove State  Hospital from
1957 to 1958.

     Mr.  Clay  received  an  Honorable  Discharge  from the United  States Army
Infantry  as  a  First  Lieutenant  in  1956.  He  is  active  in a  number  of
professional  organizations  including  the  American  Correctional  Association
(where he is presently a member of the Awards  Committee),  the  Association  of
Paroling  Authorities  International  (where he serves  as an  officer)  and the
National  Council  of Crime  and  Delinquency.  He is a member  of the  American
Correctional Association,  the National Council of Crime and Delinquency and the
Association of Paroling Authorities International.  Mr. Clay earned his B. A. in
Psychology from Morgan State University in 1954 and attended the graduate school
at Loyola College in areas such as Guidance, Counseling and Psychology.

     Douglas Casterlin was General Manager of Coarc, Inc., the Company's product
assembling,  packaging  and  shipping  contractor,  from  1979 to 1997.  In that
capacity,  he  developed a contract  manufacturing  business  involving  plastic
injection  molding  and clean room  assembly  and  packaging  of FDA - regulated
medical  products.  He also  negotiated  a  joint  venture  with a major  German
health care  product  manufacture  to establish its United States operations and
established a professional-format videocassette remanufacturing business serving
the television broadcast industry.  Mr. Casterlin was Workshop Director,  Putnam
Industries,  Inc., from 1976 to 1979 and Production Manager,  from 1973 to 1976,
of  Occupatics,  Inc. From 1966 to 1970,  Mr.  Casterlin  served as an Air Force
Intelligence  Officer  and was  honorably  discharged  as  Sergeant.  He studied
Engineering at Lehigh  University from 1965 to 1966 and received his B.A. degree
in Psychology in 1973 from the State University of New York at New Paltz.

                                     22
<PAGE>

     Scientific Advisory Board
     -------------------------
     The Company has  established a scientific  advisory board of which Henry J.
Wells, Ph.D.,  Vice-President,  is chairperson.  The members of the board are as
follows:

     Anthony G.  Costantino,  Ph.D.,  received a degree in Pharmacy  from Dukane
University and a Ph.D. in Toxicology  from the  University of Maryland.  He is a
Board  Certified  Forensic  Toxicologist  and  currently  serves as  Director of
Clinical Toxicology at American Medical Laboratories in Chantilly, Virginia.

     Delmiro A. Vazquez, B.S., M.T.,(ASCP), earned his B. S. from the University
of Miami and a completed his Medical Technology Rotation in the American Society
of Pathologists  Approved  Program at the University of  Miami/Jackson  Memorial
Hospital.  Mr.  Vazquez  holds  postgraduate  certificates  in Nuclear  Medicine
(Broward General Hospital) and Biomedical Engineering  (University of Miami). He
is currently  Co-RP of the Forensic  Toxicology  Department  at Columbia  Cedars
Medical Center.

     Kenneth  Steiner,  M.D.  received his M.D. from the University of Tennessee
and is Board Certified by the National Board of Medical  Examiners.  He is Board
Certified  by the  American  Board of  Emergency  Medicine  and by the  American
Association  of Medical  Review  Officers.  Additionally,  Dr.  Steiner has been
designated as an FAA Medical Examiner.

     The  board  meets  from  time to time to  consider  the  Company's  present
technology and proposed technology development.

     Item 10. Executive Compensation

     See Proxy  Statement for the Annual  Meeting of  Shareholders  for the 1999
Fiscal Year.

                                       23
<PAGE>

     Item 11. Security Ownership of Certain Beneficial Owners and Management

     The  following  table  sets  forth  as of July 31,  1998,  the  number  and
percentage  of shares of the common  stock of the  Company,  owned of record and
beneficially,  by each  officer  and  directors  of the Company and by any other
person owning more than 5% of the outstanding  Common Shares and by all officers
and directors as a group.


Name and Address                  Common Shares               Percentage(1)
----------------                  -------------               ------------
Edmund Jaskiewicz                  2,005,572                     13.9%
1730 M Street, NW
Washington, DC 20036

Stan Cipkowski                     2,599,250                     18.0%
300 Fairview Avenue
Hudson, New York 12534

Jay Bendis                           545,999                      3.8%
71 Springcrest Drive
Akron, Ohio 44333

Henry J. Wells, Ph.D.                  -0-                        -0-%
9421 Book Row
Columbia, Maryland 21046

Jasper R. Clay, Jr.                    -0-                        -0-%
4964 Moonfall Way
Columbia, Maryland 21044

John F. Murray                         6,000                      -0-%
300 Fairview Avenue
Hudson, New York 12534

Karen Russo                            1,250                      -0-%
8675 Falmouth Avenue
Playa del Rey, CA 90293

Douglas Casterlin
300 Fairview Avenue
Hudson, New York 12534               112,500                      0.8%
                                     -------                     -----
All Officers and
Officers and Directors
as a Group (8 persons)             5,220,571                     36.5%
---------------------

                                       24
<PAGE>

Item. 12 Certain Relationships and Related Transactions
         ----------------------------------------------
     In August,  1997, the Company issued 150,000 options pursuant to its Fiscal
1997  Nonstatutory  Option  Plan as  follows:  10,000 to  Jasper  Clay,  Jr.,  a
Director,  10,000 to John F.  Murray,  a Director,  and 130,000  options to four
non-management employees. As of December 31, 1997, Edward Jaskiewicz,  Executive
Vice-President,  gifted a total of  964,300  Common  Shares  to  members  of his
family.  Stan  Cipkowski  gifted an aggregate of 40,000  Common  Shares to three
trusts/foundations.  During fiscal 1998, Karen Russo and John Murray, Directors,
purchased  1,250  and  3,620  Common  Shares in  brokerage  transactions.  As of
December 31, 1997, Stan Cipkowski gifted to Douglas  Casterlin,  Vice-President,
150,000 Common Shares. Between September 1, 1997 and April 30, 1998, the Company
issued  417,000  options,   pursuant  to  its  Fiscal  Nonstatutory  1998  Plan,
exercisable  for a period of three years to 18 persons of which 162,000  options
were exercisable at $3.00; 245,000 options at $3.50 and 10,000 options at $4.00.








                                       25
<PAGE>



                        AMERICAN BIO MEDICA CORPORATION

Contents

                                                                          Page
                                                                          ----
Financial Statements

 Independent auditors' report                                             F-2

 Independent auditors' report                                             F-3

 Balance sheet as of April 30, 1998                                       F-4

 Statements of operations for the years ended April 30, 1998 and 1997     F-5

 Statements of changes in stockholders' equity
   for the years ended April 30, 1998 and 1997                            F-6

 Statements of cash flows for the years ended April 30, 1998 and 1997     F-7

 Notes to financial statements                                            F-8









                                       F-1
<PAGE>





INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
   of American Bio Medica Corporation
Hudson, New York


     We have  audited the  accompanying  balance  sheet of  American  Bio Medica
Corporation as of April 30, 1998 and the related statements of operations,  cash
flows  and  changes  in  stockholders'  equity  for the year then  ended.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

     We conducted  our audit in  accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes  examining on a test basis evidence  supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all  material  respects,  the  financial  position  of  American  Bio  Medica
Corporation  as of  April 30,  1998 and the results of its  operations  and cash
flows for the year then ended, in conformity with generally accepted  accounting
principles.



                                    /s/Richard A. Eisner & Company, LLP
                                    Richard A. Eisner & Company, LLP


New York, New York
June 14, 1998

With respect to the second paragraph of Note K[3]
July 23, 1998




                                       F-2

<PAGE>
Independent Auditor's Report

                                THOMAS P. MONAHAN
                           CERTIFIED PUBLIC ACCOUNTANT
                              208 LEXINGTON AVENUE
                           PATERSON, NEW JERSEY 07502


To The Board of Directors and Shareholders
of American Bio Medica Corporation

     I have  audited  the  accompanying  balance  sheet of  American  Bio Medica
Corporation as of April 30, 1997 and the related statements of operations,  cash
flows  and  shareholders'  equity  for the year  ended  April  30,  1997.  These
financial  statements are the  responsibility  of the Company's  Management.  My
responsibility  is to express an opinion on these financial  statements based on
my audit.

       I conducted  my audit in  accordance  with  generally  accepted  auditing
standards.  Those standards  require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining on a test basis,  evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing  the  accounting   principles  and   significant   estimates  made  by
Management,  as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.

     In my opinion,  the financial  statements referred to above present fairly,
in all  material  respects,  the  financial  position  of  American  Bio  Medica
Corporation as of April 30, 1997 and the results of its operations, shareholders
equity  and cash flows for the year  ended  April 30,  1997 in  conformity  with
generally accepted accounting principles.




                                        /s/Thomas P. Monahan
                                        Thomas P. Monahan, CPA


       May 28, 1997
       Paterson, New Jersey




                                      F-3
<PAGE>

                        AMERICAN BIO MEDICA CORPORATION

                                 Balance Sheet
                                 April 30, 1998

ASSETS
Current assets:
   Cash and cash equivalents                                      $  3,239,000
   Accounts receivable -
     net of allowance for doubtful accounts of $40,000                 712,000
   Inventory                                                           991,000
   Prepaid expenses and other current assets                            24,000
                                                                  ------------
      Total current assets                                           4,966,000

Property, plant and equipment, net                                     147,000
Due from officer                                                       235,000
Other assets                                                             8,000
                                                                  ------------
                                                                  $  5,356,000
                                                                  ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable and accrued expenses                          $    486,000
                                                                  ------------
Stockholders' equity:
Preferred stock; par value $.01 per share;
  5,000,000 shares authorized; 2,500 shares
   Series D, 8% cumulative, convertible
   issued and outstanding (face value $2,500,000)
Common stock; par value $.01 per share
  30,000,000 shares authorized; 14,282,989 shares
   issued and outstanding                                              143,000
Additional paid-in capital                                          12,102,000
Subscription receivable                                                 (9,000)
Unearned portion of compensatory options                               (24,000)
Accumulated deficit                                                 (7,342,000)
                                                                  ------------
                                                                     4,870,000
                                                                  ------------

                                                                  $  5,356,000
                                                                  ============








                       See notes to financial statements.

                                      F-4

<PAGE>

                         AMERICAN BIO MEDICA CORPORATION
                            Statements of Operations


                                                       Year Ended April 30,
                                                      ----------------------
                                                        1998         1997
                                                      ---------    ---------

Net sales                                          $  2,154,000  $   611,000
Cost of goods sold                                    1,051,000      260,000
                                                   ------------  -----------
Gross profit                                          1,103,000       351,00
                                                   ------------  -----------
Operating expenses:
   Selling, general and administrative                2,739,000      868,000
   Noncash compensation charges                       2,214,000
   Depreciation and amortization                        101,000       96,000
   Research and development                             150,000       75,000
   Write-off of bad debts                               380,000
                                                   ------------  -----------
                                                      5,584,000    1,039,000
                                                    ------------  -----------
Operating loss                                       (4,481,000)    (688,000)
                                                   ------------  -----------
Other income:
   Retirement of debt                                                127,000
   Interest income                                       91,000        56,00
                                                   ------------  -----------
                                                         91,000      183,000
                                                   ------------  -----------
Net loss                                           $ (4,390,000) $  (505,000)

Adjustments:
   Preferred stock beneficial conversion feature       (359,000)
   Preferred stock dividends                            (45,000)
                                                   ------------
Net loss attributable to common stockholders       $ (4,794,000)
                                                   ============

Basic and diluted loss per common share                   $(.35)       $(.04)
                                                          =====        =====
Weighted average number of shares outstanding
  - basic and diluted                                13,768,000   12,728,000
                                                     ==========   ==========








                       See notes to financial statements.

                                      F-5

<PAGE>

                         AMERICAN BIO MEDICA CORPORATION
                 Statements of Changes in Stockholders' Equity

<TABLE>
<CAPTION>

                                                                               
                  Unearned
                                         Preferred                     
Additional               Compen-
                                           Stock     Common Stock       
Paid-in    Subscription  satory  Accumulated
                                          Shares   Shares     Amount    
Capital     Receivable   Options   Deficit       Total
                                          ------    ------     ------    
-------    ----------   -------   -------       -----
<S>                                      <C>       <C>        <C>        <C>   
       <C>      <C>        <C>           <C>
Balance - April 30, 1996                           11,977,357 $ 120,000  $
2,636,000                       $(2,402,000)  $  354,000

Proceeds from exercise of warrants and
 options                                              872,445     9,000   
2,258,000                                      2,267,000
Shares issued for conversion of debt                  200,666     2,000     
148,000                                        150,000
Shares issued in private placement                    100,000     1,000      
49,000                                         50,000
Proceeds from private placement of
 Preferred "A" shares
 (net of costs of $90,000)                 150                            
1,410,000                                      1,410,000
Preferred "A" shares converted to
 common shares                             (60)       229,039     2,000      
(2,000)                       
Net loss                                                                       
                              (505,000)    (505,000)
                                          -----    ---------- ---------   
---------                        ----------    ---------
Balance - April 30, 1997                    90     13,379,507   134,000   
6,499,000                        (2,907,000)   3,726,000
Proceeds from exercise of warrants
 and options                                          106,305     1,000     
317,000   $(9,000)                             309,000
Preferred "A" shares converted to
 common shares                             (90)       404,034     4,000      
(4,000)
Proceeds from private placement of
 Preferred "B" shares
 (net of costs of $48,000)                  60                              
552,000                                        552,000
Preferred "B" shares converted to
 common shares                             (60)       226,037     2,000      
(2,000)
Cash dividend paid to holders of
 Preferred "B" shares                                                          
                               (26,000)     (26,000)
Proceeds from private placement
 of Preferred "C" shares
 (net of costs of $57,000)                  45.5                            
398,000                                        398,000
Preferred "C" shares converted to
 common shares                             (45.5)     160,359     2,000      
(2,000)
Stock dividend paid to holders of
 Preferred "C" shares                                   6,747                
19,000                           (19,000)
Proceeds from private placement of
 Preferred "D" shares and warrants
 (net of costs of $188,000)              2,500                            
2,312,000                                      2,312,000
Purchase of options previously granted                                     
(225,000)                                      (225,000)
Issuance of compensatory stock                                            
1,896,000                                      1,896,000
Value assigned to compensatory
 stock options                                                              
342,000            $(24,000)                   318,000
Net loss                                                                       
                             (4,390,000) (4,390,000)
                                         ------    ---------- --------- 
-----------   -------   --------    ----------  ----------
Balance - April 30, 1998                 2,500     14,282,989 $ 143,000 
$12,102,000   $(9,000) $(24,000)   $(7,342,000) $4,870,000
                                         ======    ========== ========= 
===========   =======   ========   ===========  ==========

</TABLE>



                       See notes to financial statements.


                                      F-6

<PAGE>

                        AMERICAN BIO MEDICA CORPORATION
                            Statements of Cash Flows

                                                        Year Ended April 30,
                                                        --------------------
                                                        1998           1997
                                                    ------------  ------------
Cash flows from operating activities:
 Net loss                                         $ (4,390,000) $   (505,000)
  Adjustments to reconcile net loss
   to net cash used in operating activities:
    Amortization and depreciation                      101,000        96,000
    Retirement of debt                                              (127,000)
    Provision for bad debts                             40,000
    Issuance of compensatory stock options             318,000
    Issuance of compensatory stock                   1,896,000
    Changes in:
     Loan receivable                                   102,000      (102,000)
     Accounts receivable                              (414,000)     (303,000)
     Inventory                                        (322,000)     (646,000)
     Prepaid expenses and other current assets         (20,000)       (4,000)
     Other assets                                       (8,000)
     Accounts payable and accrued expenses             106,000       347,000
                                                  ------------  ------------
      Net cash used in operating activities         (2,591,000)   (1,244,000
                                                  ------------  ------------
Cash flows from investing activities
  Purchase of property, plant and equipment            (71,000)     (115,000)
  Purchase of investments                                         (1,053,000)
  Maturity of investments                            1,053,000
  Patent costs                                                        (8,000)
  Loans to officer                                    (235,000)
                                                  ------------  ------------
    Net cash provided by
      (used in) investing activities                   747,000    (1,176,000)
                                                  ------------  ------------
Cash flows from financing activities:
  Convertible debenture                                             (132,000)
  Proceeds from private placements                   3,262,000
  Proceeds from exercise of warrants and options       309,000     3,878,000
  Cash dividends paid                                  (26,000)
  Purchase of Company's options                       (225,000)
                                                  ------------  ------------
    Net cash provided by financing activities        3,320,000     3,746,000
                                                  ------------  ------------

Net increase in cash and cash equivalents            1,476,000     1,326,000
Cash and cash equivalents - beginning of period      1,763,000       437,000
                                                  ------------  ------------
Cash and cash equivalents - end of period         $  3,239,000  $  1,763,000
                                                  ============  ============
Noncash activities:
  Stock dividends paid to
    holders of preferred stock                    $     19,000
  Conversion of convertible debt
    into common stock                                           $    150,000







                       See notes to financial statements.

                                      F-7

<PAGE>

                        AMERICAN BIO MEDICA CORPORATION

                         Notes to Financial Statements
                                 April 30, 1998

  Note A - The Company and its Significant Accounting Policies

     American Bio Medica  Corporation  (the "Company") was formed under the laws
of the State of New York on April 10,  1986 and is in the business of acquiring,
developing  and marketing  biomedical  technologies  and  products.  The Company
currently  owns two  technologies  for  screening  drugs of abuse,  a  workplace
screening  test and a preliminary  test for use by  laboratories.  The Company's
products are manufactured and assembled by outside contract  manufacturers.  The
Company is also involved in marketing  educational books and software to schools
and municipal  libraries and audio-visual  educational  packages to corporations
throughout the United States.

     [1] Cash equivalents:

     The Company  considers all highly liquid debt instruments  purchased with a
maturity of three months or less to be cash equivalents.

     [2] Inventory:

     Inventory is stated at the lower of cost or market;  cost is  determined by
the first-in-first-out method.

     [3] Income taxes:

     The Company uses the liability  method of accounting for income taxes.  The
liability method measures  deferred income taxes by applying  enacted  statutory
rates in effect at the  balance  sheet date to the  differences  between the tax
bases of assets and  liabilities  and their  reported  amounts in the  financial
statements.  The resulting  asset or liability is adjusted to reflect changes in
the tax law as they occur.

     [4] Depreciation and amortization:

     Property and equipment are  depreciated  on the  straight-line  method over
their  estimated  useful  lives.  Leasehold  improvements  are  amortized by the
straight-line  method over the shorter of their  estimated  useful  lives or the
term of the lease.

     [5] Patents and license agreements:

     Costs incurred to acquire exclusive  licenses of patentable  technology are
capitalized  and amortized over the shorter of a five year period or the term of
the license.  The portion of these  amounts  determined  to be  attributable  to
patents is amortized over their  remaining  lives and the remainder is amortized
over the estimated period of benefit but not more than 40 years.

     [6] Revenue recognition:

     The Company  recognizes  revenue when  products are shipped or services are
rendered.  Revenues from book sales with the right of return, are recognized net
of a provision for estimated returns.

     [7] Research an development:

     Research and development costs are charged to operations when incurred.


                                      F-8

<PAGE>

Note A - The Company and its Significant Accounting Policies (continued)

     [8] Loss per common share:

     The Company adopted Statement of Financial  Accounting  Standards  ("SFAS")
No.128,  Earnings  Per  Share,"  in the  year  ended  April 30,  1998  and  has
retroactively   applied   the  effects   thereof  for  all  periods   presented.
Accordingly,  the presentation of per share information includes calculations of
basic  and  dilutive  loss  per  share.  The  impact  on the per  share  amounts
previously reported (primary and fully diluted) was not significant. The effects
of potential common shares such as warrants,  options, and convertible preferred
stock has not been included, as the effect would be antidilutive.

     When preferred  stock is  convertible to common stock at a conversion  rate
that is the  lower of a rate  fixed at  issuance  or a fixed  discount  from the
common stock market price at the time of conversion, the discounted amount is an
assured incremental yield, the "beneficial conversion feature", to the preferred
shareholders  and should be accounted  for as an embedded  dividend to preferred
shareholders. As such, the loss per common share was adjusted for this feature.

     [9] Use of estimates:

     The  preparation  of financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  effect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements  and the  reported  amounts  of  revenues  and  expenses  during  the
reporting period. Actual results could differ from those estimates.

     [10] Impairment of long-lived assets:

     The  Company  adopted  SFAS  No.121,  "Accounting  for  the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to be Disposed Of" during the year
ended  April  30,  1998.  SFAS  121  establishes  accounting  standards  for the
impairment of  long-lived  assets,  certain  identifiable  assets,  and goodwill
related to those assets.  There was no effect of the adoption of SFAS 121 on the
financial statements.

     [11] Financial instruments:

     The carrying amounts of cash and cash  equivalents,  accounts  receivable -
net, accounts payable and accrued expenses approximate their fair value based on
the nature of those items.

     Estimated  fair  value  of  financial   instruments  are  determined  using
available  market  information.   In  evaluating  the  fair  value  information,
considerable  judgment is required to interpret the market data used to develop
the  estimates.  The  use  of  different  market  assumptions  and/or  different
valuation  techniques  may have a material  effect on the  estimated  fair value
amounts.  Accordingly,  the estimates of fair value presented  herein may not be
indicative of the amounts that could be realized in a current  market  exchange.
Due to the  related  party  nature of due from  officer the Company is unable to
determine its fair value.

     [12] Stock-based compensation:

     The  Financial   Accounting   Standards   Board  has  issued  SFAS  No.123,
"Accounting  for  Stock-Based  Compensation",  which  encourages,  but  does not
require,   companies  to  record  compensation  cost  for  stock-based  employee
compensation  under a fair  value  based  method.  The  Company  has  elected to
continue  to  account  for  its  stock-based  employee  compensation  using  the
intrinsic value method  prescribed by Accounting  Principles Board Opinion No.25
("APB No.25"),  "Accounting  for Stock Issued to Employees" and disclose the pro
forma  effects  on net loss and loss per share  basic and  diluted  had the fair
value of such  compensation  been  expensed.  Under the provisions of APB No.25,
compensation  cost for stock  options is measured as the excess,  if any, of the
quoted market price of the Company's  common stock at the date of the grant over
the amount an employee must pay to acquire the stock.

                                      F-9


<PAGE>

Note A - The Company and its Significant Accounting Policies (continued)

     [13] Concentration of credit risk:

     The Company  sells its products  primarily to United  States  distributors.
Credit is extended based on an evaluation of the customer's financial condition,
and generally  collateral is not required.  The Company establishes an allowance
for doubtful  accounts based on factors  surrounding the credit risk of specific
customers and other information.

     [14] Recent accounting pronouncements:

     The Financial  Accounting Standards Board has recently issued statements of
Financial Accounting  Standards No.130,  "Reporting  Comprehensive  Income," and
No.131,  "Disclosures about Segments of an Enterprise and Related  Information,"
and No.132,  "Employers'  Disclosures  about  Pensions and Other  Postretirement
Benefits." The above  pronouncements  will not have a significant  effect on the
information presented in the financial statements.

Note B - Investments

     The estimated  fair value of  available-for-sale  investments  at April 30,
1997 was $1,053,000  and consisted of  certificate  of deposits with  maturities
greater than three  months.  The  estimated  fair value of each  investment  was
approximately  equal to the  amortized  cost at April 30,  1997 and,  therefore,
there were no unrealized gains or losses, at that date. The Company did not hold
any investments at April 30, 1998.

Note C - Inventory

     Inventory is comprised of the following:

             Books held for resale                                $    118,000
                                                                  ------------
             Workplace drug screening tests:
                Raw materials                                          447,000
                Work in process                                        148,000
                Finished goods                                         278,000
                                                                  ------------
             Total workplace drug screening tests                      873,000
                                                                  ------------
                                                                  $    991,000
                                                                  ============
Note D - Plant and Equipment

Plant and equipment, at cost, are summarized as follows:

             Office equipment                                     $     60,000
             Manufacturing and warehouse equipment                     144,000
                                                                  ------------
                                                                       204,000
             Less accumulated depreciation                              57,000
                                                                  ------------
                                                                  $    147,000
                                                                  ============

                                      F-10
<PAGE>

Note E - Due From Officer

     At April 30,  1998 the Company  has a note  receivable  from an officer for
$235,000. The note bears interest at 6% per annum and is payable on demand.

Note F - Income Taxes

     At April 30, 1998 the Company has approximately $4,894,000 of net operating
loss carryforwards expiring through 2013.

     At April 30,  1998 the Company  has a deferred  tax asset of  approximately
$1,883,000  representing the benefits of its net operating loss carryforward and
certain expenses not currently deductible.  The Company's deferred tax asset has
been fully reserved by a valuation allowance since realization of its benefit is
uncertain.  The  difference  between  the  statutory  tax  rate  of 34%  and the
Company's  effective tax rate of 0% is substantially  due to the increase in the
valuation allowance of $986,000 and $172,000 for the years ended April 30,  1998
and 1997, respectively.  The Company's ability to utilize its net operating loss
carryforwards  may be subject to an annual limitation in future periods pursuant
to Section 382 of the Internal Revenue Code of 1986, as amended.

Note G - Stockholders' Equity

     [1] Preferred stock:

     In October  1996 the  Company  amended  its  certificate  of  incorporation
authorizing the issuance of 5,000,000  Preferred Shares.  The board of directors
of the Company has the authority,  without  further action by the holders of the
outstanding common shares, to issue preferred shares from time to time in one or
more classes or series,  to fix the number of shares  constituting  any class or
series and the stated value thereof, if different from the par value, and to fix
the terms of any such  series  or class,  including  dividend  rights,  dividend
rates,  conversion  or  exchange  rights,  voting  rights,  rights  and terms of
redemption  (including  sinking fund  provisions,)  the redemption price and the
liquidation preference of such class or series.

     During 1996 the Company  completed a private  placement  in which it netted
proceeds of  approximately  $1,410,000  through  the sale of 150 8%  Convertible
Series A  Preferred  Shares for  $10,000  per  share.  Each  Preferred  Share is
convertible  into Common  Shares  pursuant  to the  following  formula:  $10,000
divided by the lesser of $6.07 or 75% of the  average of the daily  closing  bid
prices for the five consecutive  trading days ending on the trading day prior to
the day on which the  Preferred  Shares  are  converted  to Common  Shares.  All
accrued but unpaid  dividends are payable in cash. The Series A Preferred Shares
were converted into an aggregate of 633,073 Common Shares.

     During September 1997 the Company completed a private placement in which it
netted  proceeds of  approximately  $950,000  through the sale of 60 8% Series B
Convertible  Preferred Shares and 45.5 Shares of Series C Convertible  Preferred
Shares for $10,000 per share.  Each Preferred Share was convertible  into Common
Shares pursuant to the following formula:  $10,000 divided by lesser of $3.50 or
75% of the average of the daily  closing  bid prices for the twenty  consecutive
trading  days ending on the trading day prior to the day on which the  Preferred
Shares are converted to Common Shares.  Dividends were payable in cash or shares
of common stock at the election of the Company on the date the Preferred  Shares
are converted to common shares.  The Series B Preferred  Shares and the Series C
Preferred  Shares were converted into an aggregate of 226,037 and 160,359 Common
Shares respectively.



                                      F-11

<PAGE>

Note G - Stockholders' Equity (continued)

     [1] Preferred stock: (continued)

     During  April 1998  the Company  completed a private  placement in which it
netted proceed of approximately $2,312,000 through the sale of 2,500 8% Series D
Convertible  Preferred  Shares for $1,000 per  share.  Each  Preferred  Share is
convertible at the lesser of (i) 95% of the average of the closing bid prices of
the common  shares  over any three  trading  days  selected by the holder of the
Preferred  Shares  in the 20  trading  days  immediately  preceding  the date of
conversion or (ii) $4.625 based on a formula as provided.  Dividends are payable
in cash or additional Preferred Shares at the Company's option.

     [2] Stock option plans:

     The Company  adopted the Fiscal 1997  Nonstatutory  Stock  Option Plan (the
"1997 Plan") and the Fiscal 1998 Nonstatutory  Plan (the "1998 Plan").  The 1997
Plan provides for the granting of options to purchase up to 2,000,000  shares of
common stock and the 1998 Plan  provides for the granting of options to purchase
1,000,000  shares of common  stock.  Both Plans are  administered  by the Option
Committee  of the Board of  Directors,  which  determine  the  terms of  options
exercised,  including the exercise  price,  the number of shares  subject to the
option and the terms and conditions of exercise.

     [3] Other stock options:

     During  March 1996  the Company  entered  into an  agreement  with a public
relations  and  communications  firm  to  serve  as the  Company's  liaison  and
spokesman to the financial  and  investment  community.  Under the agreement the
Company granted under  Regulation D of the Securities Act of 1933, to the public
relations  firm the right to receive  100,000  common shares at a value of $0.65
per share for a total  consideration  of $65,000 in lieu of an initial  payment,
monthly retainers or expense reimbursement, including communications and mailing
for a period of one year. In addition, the Company granted 550,000 common shares
valued at $0.325 per share representing  one-half the market price of the common
shares at March 14,  1996, the date of the contract. The valuation reflected the
receipt of unregistered  common shares and the market risk of the holding period
until they may be sold  publicly.  Of the  550,000  shares,  50,000  shares were
allocated  to expense  reimbursement  and  500,000  shares  allocated  to public
relations  consulting.  The Company also granted 500,000 options  exercisable at
$1.00 through  March 15,  1999 and 500,000 options  exercisable at $2.00 through
March 15,  1999.  During  March 1998  the  Company  purchased  from  the  public
relations firm 75,000  options  exercisable at $1.00 per common share and 75,000
options  exercisable  at $2.00 per  common  share for  $225,000.  The  remaining
850,000 options cannot be exercised until a registration  statement  relating to
the common shares underlying the options is effective.


                                      F-12
<PAGE>

Note G - Stockholders' Equity (continued)

     [4] Stock options:

     Stock option activity is summarized as follows:

                                             Year Ended April 30,
                             ---------------------------------------------------
                                            1998                          1997
                                          Weighted                      Weighted
                                           Average                       Average
                                          Exercise                      Exercise
                             Shares         Price           Shares        Price
                             ------      ---------        --------        -----
   Options outstanding
     at beginning of year   2,174,000    $    2.31        1,000,000   $    1.50
   Granted                    567,000    $    3.25        1,802,000   $    3.00
   Exercised                  (81,000)   $    3.00         (628,000)  $    3.00
   Canceled                  (150,000)   $    1.50
                           ----------                     ---------
   Options outstanding
     at end of year         2,510,000    $    2.55        2,174,000   $    2.31
                           ==========                     =========
   Options exercisable
     at end of year         1,439,000    $    3.05        1,123,000   $    3.00
                           ==========                     =========

     The  following  table  presents   information  relating  to  stock  options
outstanding at April 30, 1998.

                          Options outstanding             Options Exercisable
                    ------------------------------------  -------------------
                               Weighted       Weighted               Weighted
                               Average        Average                 Average
     Range of                  Exercise      Remaining               Exercise
 Exercise Price     Shares      Price       Life in Year    Shares     Price
 --------------     ------     --------     ------------    -------    -----

 $1.00 - $2.00       850,000    $1.50           .87              .0     $   0
 $3.00 - $4.00     1,660,000    $3.09          1.76       1,439,000     $3.05
                   ---------                              ---------
                   2,510,000    $2.55          1.46       1,439,000     $3.05
                   =========                              =========

     As of April 30, 1998 48,000  options are  available  for future grant under
the 1997 Plan,  583,000  options are  available  for future grant under the 1998
Plan.

     [5] Warrants:

     In  connection  with the  Private  Placement  of the  Series A  Convertible
Preferred Shares the Company granted 24,712 common share warrants  entitling the
holder to purchase one share of common stock at a price of $3.00 per share.  The
warrants were exercised during the fiscal year ended April 30, 1998.

     In  connection  with the Private  Placement of the 8% Series D  Convertible
Preferred  Shares the Company  granted  107,355 common share  purchase  warrants
entitling  the holder to purchase  one share of common stock at a price of $4.81
per share until April 24,  2001. 100,000 of the purchase warrants were issued to
preferred  stockholders  and 7,355 of the purchase  warrants  were issued to the
selling  agent as  additional  commission.  The  weighted  average fair value of
warrants  granted during the year ended April 30,  1998 was $1.67 on the date of
grant  using  the  Black-Scholes   option-pricing   model  using  the  following
assumptions:  dividend yield 0%;  volatility of 59%, risk free rate of 5.61% and
expected life of three years.



                                      F-13
<PAGE>


Note G - Stockholders' Equity  (continued)

     [6] Stock-based compensation:

     The Company  applies APB No. 25 in  accounting  for its stock  option plans
and, accordingly, recognizes compensation expense for the difference between the
fair value of the  underlying  common stock and the exercise price of the option
at the date of grant.  The effect of applying SFAS No. 123 on pro forma net loss
as stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things  (1) the  vesting period of the
stock  options  and (2) the  fair value of  additional  stock  options in future
years.   The  average  fair  value  of  options  granted  during  the  year  was
approximately  $1.78. The following pro forma  information  gives effect to fair
value of the options on the date of grant using the Black-Scholes option-pricing
model with the following  assumptions:  dividend yield of 0%, volatility of 59%,
risk free  interest  rates of ranging from 5.38% - 6.40% and expected  life of 3
years.

                Net loss:
                   As reported                              $   (4,390,000)
                   Pro forma                                    (4,755,000)

                Basic and diluted loss per share:
                   As reported                                      ($0.35)
                   Pro forma                                        ($0.37)

     During the year ended April 30, 1998 the Company granted 260,000 options to
employees  at  exercise  prices  less  than the  fair  value  ($342,000)  of the
underlying  common stock at the dates of grant.  The Company recorded a one-time
noncash   charge  of  $318,000  and  the   difference  of  $24,000  as  unearned
compensation  which is being amortized over the shorter of the vesting period or
period of employment.

     During the year ended April 30,  1998 the Company granted 89,000 options as
compensation for consulting and professional  services.  The Company  determined
the fair value of these  options  to be  approximately  $139,000  and a one-time
noncash charge was recorded.


Note H - 12% Convertible Subordinated Debentures

     During the year ended  April 30,  1997 the  Company  converted  $150,000 of
convertible debentures into 200,666 shares of common stock.


Note I - Loan Receivable

     During  December 1996 the Company entered into a promissory note receivable
with a public  relations  and  communications  firm.  The  principal  amount  of
$100,000 and accrued  interest at 6% were satisfied  through the  performance of
services.  The amount of $102,000  (including  interest)  was charged to expense
during the year ended April 30, 1998.

                                      F-14

<PAGE>

Note J - Secured Loan

     On March 9, 1990,  the Company  entered  into a security  agreement  with a
finance company to borrow money secured by the Company's  receivables  evidenced
by invoices.  At the time, the Company was engaged in selling  educational books
to municipal school districts and public libraries throughout the United States.
The finance  company  agreed to lend an amount  equal to 60% of the net value of
all the Company's accounts receivable.  Accounts receivable funding ceased as of
July 31, 1990.

     The  Company   instituted  a  lawsuit   against  the  finance   company  on
November 26, 1990 for damages due to its failure to lend to the 60% credit limit
based on its  calculations  and for forgiveness of the loan based on the finance
company's charging,  based on its own billings, at an interest rate in excess of
the rate of 25% per annum as  prescribed  in the sections  dealing with usury in
New York Penal State Law.  Although  company counsel had opined that the Company
would prevail in the action and that all indebtedness  incurred in the principal
amount  $126,500 plus interest and fees would be voided by reason of the finance
company's  violation  of the usury  provisions  of the Penal Law,  by  agreement
between the Company and the finance company,  the lawsuit was withdrawn  without
prejudice as the Company,  at that time,  lacked the  resources  for  protracted
litigation. In April 1996, the obligation, if any, to the finance company became
barred by New York State's  six-year  statute of limitations.  The Company wrote
off the obligation during the second quarter of fiscal 1997.


Note K - Commitments and Contingencies

     [1] Operating leases:

     The Company leases office and warehouse facilities under an operating lease
expiring in March 2000. At April 30,  1998, the future  minimum rental  payments
under the operating lease are as follows:

                 1999                            $     46,000
                 2000                                  55,000
                                                 ------------
                                                 $    101,000
                                                 ============
     Rent expense was $37,000 and $13,000 for the years ended April 30, 1998 and
1997, respectively.

     [2] Employment agreements:

     On  November  3, 1995,  the Company  entered  into a three year  employment
agreement with its President.  Under the  agreement,  the President  received an
annual salary of $36,000 per year until April 30,  1996 and $60,000  thereafter.
The base annual  salary was  increased  to $72,000  when the  Company  generated
aggregate gross revenues from the sale of biomedical products of $500,000.

     On  November  3, 1995,  the Company  entered  into a three year  employment
agreement  with its  Executive  Vice-President.  The  agreement  provided for an
annual salary of $24,000 until April 30,  1996 and $48,000 thereafter.  The base
annual  salary was  increased  to $60,000 when the Company  generated  aggregate
gross revenues from the sale of biomedical products of $500,000.

                                      F-15

<PAGE>

Note K - Commitments and Contingencies (continued)

     [2] Employment agreements: (continued)

     On  November  3, 1995 the  Company  entered  into a three  year  employment
agreement  with  its  Vice-President  of  Marketing.  Under  the  agreement  the
Vice-President  received  an annual  salary of $24,000  until April 30, 1996 and
$48,000  thereafter.  The base annual  salary was  increased to $60,000 when the
Company generated  aggregate gross revenues from the sale of biomedical products
of $500,000.  In  consideration of past services valued at $125,000 or $0.25 per
share the  Vice-President  received the right to receive  500,000 common shares.
Upon execution of the agreement the Vice President of Marketing received 100,000
shares.  Certificates  representing 400,000 common shares were being held by the
Company subject to the following vesting:

     100,000  shares upon the Company's  achieving  $1,000,000 in gross revenues
from sales of biomedical  products;  100,000 shares upon the Company's achieving
$2,000,000 in gross  revenues from sales of biomedical  products  100,000 shares
upon  the  Company's  achieving  $3,000,000  in  gross  revenues  from  sales of
biomedical  products;  100,000 shares upon the Company's achieving $4,000,000 in
gross revenues from sales of biomedical products.

     During  the year  ended  April 30,  1998 the Vice  President  of  Marketing
received 200,000 shares upon the Company achieving  $2,000,000 in gross revenues
of biomedical products. Additionally in April 1998, the Board of Directors voted
to  remove  the  vesting  restrictions  on  the  remaining  200,000  shares.  In
connection therewith,  the Company recorded a noncash charge of $1,356,000.  The
amount of the charge was based on the closing  price of the common  stock on the
date the milestones  were achieved and the date the Board of Directors  voted to
remove the vesting restrictions.

     In addition,  the above  agreements  provide for bonuses based on graduated
rates at specified  levels of gross revenues in the aggregate as follows:  6% of
gross  revenues of the Company of $1,000,000 per fiscal year until such revenues
reach $3,000,000,  4.5% of gross revenues between  $3,000,000 and $5,000,000 per
year and 3% thereafter.

     On May 26, 1997 the Company entered into a three year employment  agreement
with its Vice-President/General Manager. The employment agreement provides for a
base  annual  salary of $84,000  per annum and a bonus of 1% of net sales  after
gross revenue of $1,000,000  per fiscal year.  Additionally  the employee  shall
receive 150,000 options at $3.00 per share vesting immediately. The President of
the  Company  gave the  Vice-President/General  Manager  150,000  shares  of the
Company's common stock vesting as follows: 25% upon effective date of employment
and  25%  additional  upon  each  of  the  three  subsequent   anniversaries  of
employment. During the year ended April 30, 1998 the Board of Directors voted to
remove the vesting restrictions. In connection therewith, the Company recorded a
noncash  charge of $540,000  during the year ended April 30, 1998. The amount of
the charge was based on the  closing  price for the common  stock for the shares
received  on the  effective  date  and the  shares  received  when  the  vesting
restrictions were removed.

     During the year ended  April 30, 1998 the  Company  recorded  approximately
$80,000 in bonuses based on revenue in accordance with employment agreements.

                                      F-16


<PAGE>

Note K - Commitments and Contingencies (continued)

[3]     Litigation

     In  February  1994,  Robert  Freidenberg,  as  owner  of  the  two  medical
technology  companies,  MDI and Gendex,  acquired by the Company, in the name of
these  corporations,  filed suit to have a Share Exchange Agreement rescinded on
the grounds of breach of contract. In order to preserve a claim for damages, the
Company filed a third-party  claim  against Dr.  Freidenberg,  for breach of the
Share Exchange  Agreement.  In November 1995, after a trial, the court dismissed
Dr. Friedenberg's lawsuit and allowed the Company's third-party claim to proceed
to trial.In  September,  1996, Dr. Friedenberg died. A pretrail hearing was held
in December 1996 which set a trial date of April 28, 1997.

     That trial was  decided by a jury on May 5, 1997.  The  verdict  determined
that Dr. Friedenberg  breached various  contracts,  including the Share Exchange
Agreement,  when he failed to deliver  technology to the Company.  The jury also
found in favor of the  Company  on two of the three  fraud  claims  against  Dr.
Friedenberg  and  awarded  the Company  approximately  $321,000 in damages.  Dr.
Friedenberg's  estate,  just prior to the jury trial, filed a supplemental claim
for the shares of the  Company's  stock which he would have  received  under the
Share Exchange Agreement which the trial judge took under advisement.  The trial
judge, on July 17, 1998 ruled that the estate of Dr.  Friedenberg is entitled to
5,907,154   common  shares  of  the  Company.   Management  of  the  Company  in
consultation  with counsel is of the opinion that the trial judge's award of the
shares to Dr. Friedenberg's estate will be reversed on appeal.

     In June  1995,  the  Company  filed  a  lawsuit  against  Mr.  Morris,  Dr.
Friedenberg's  counsel,  for the breach of attorney-client  relationship and his
fiduciary duty and negligence in representing the Company in matters relating to
Dr.  Friedenberg  and in the  preparation of the Share Exchange  Agreement.  The
Company's  lawsuit demands  damages in the amount of $1,000,000.  Mr. Morris has
counterclaimed  for common  shares.  No trial date has been set.  The Company is
vigorously contesting the Morris claim.

Note L - Reclassification

     Certain amounts at April 30,  1997 have been reclassified to conform to the
current year presentation.

Note M - Fourth Quarter Transactions and Adjustments (Unaudited):

     During  the  fourth  quarter  of fiscal  1998,  the  Company  made  various
adjustments  aggregating  approximately  $1,883,000  representing charges to the
results of operations  previously  reported.  The effects of such adjustments on
each of the first three quarters of the year have not been determined.


                                      F-17
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