UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION




Washington,
D.C. 20549





FORM
10-K





x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
fiscal year ended December 31, 2008





 ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
transition period ————— to ——————-





Commission
File Number: 0-28666





American
Bio Medica Corporation


(Exact
name of registrant as specified in its charter)





New
      York
              (State
      or other jurisdiction of
              incorporation
      or organization)
            14-1702188
              (IRS
      Employer Identification No.)122
      Smith Road
              Kinderhook,
      New York
              (Address
      of principal executive offices)
            12106
              (Zip
      Code)





Registrant’s
telephone number (including area code) (518) 758-8158





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





Securities
registered pursuant to Section 12(g) of the Exchange Act:





Common
Shares, $0.01 Par value


Title of
each class




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.




 ̈
Yes                                x
No




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.




 ̈
Yes                                x
No




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   x
Yes    ̈
No









Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained herein, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form
10-K.            x




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer
                     ̈
                    Accelerated
      filer
                     ̈Non-accelerated
      filer
                     ̈
                    Smaller
      reporting company
                    x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2of the Exchange Act).


 ̈
Yes                                x  No





The
aggregate market value of 18,183,613 voting Common Shares held by non-affiliates
of the registrant was approximately $9,455,479 based on the average bid and
asked prices of the registrant’s Common Shares, $.01 par value, as reported on
the NASDAQ Capital Market on June 30, 2008.





As of
March 27, 2009, the registrant had outstanding 21,744,768 Common Shares, $.01
par value.





Documents
Incorporated by Reference:





(1)
              The
      Proxy Statement for the Annual Meeting of Shareholders for the year ending
      December 31, 2008 in Part III of this Form
10-K


(2)
              Other
      documents incorporated by reference on this report are listed in the
      Exhibit Reference Table









American
Bio Medica Corporation





Index
to Annual Report on Form 10-K


For
the fiscal year ended December 31, 2008





PAGEPART
      IItem
      1.
                                Business
                                1Item
      1A.
                                Risk
      Factors
                                8Item
      1B.
                                Unresolved
      Staff Comments
                                15Item
      2.
                                Properties
                                15Item
      3.
                                Legal
      Proceedings
                                16Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                16PART
      IIItem
      5.
                                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                17Item
      6.
                                Selected
      Financial Data
                                18Item
      7.
                                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                18Item
      7A.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                27Item
      8.
                                Financial
      Statements and Supplementary Data
                                27Item
      9.
                                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                                27Item
      9A(T)
                                Controls
      and Procedures
                                27Item
      9B.
                                Other
      Information
                                28PART
      IIIItem
      10.
                                Directors,
      Executive Officers, and Corporate Governance
                                28Item
      11.
                                Executive
      Compensation
                                28Item
      12.
                                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                28Item
      13.
                                Certain
      Relationships and Related Transactions, and Director
      Independence
                                28Item
      14.
                                Principal
      Accounting Fees and Services
                                28PART
      IVItem
      15.
                                Exhibits
      and Financial Statement Schedules
                                28Signatures
                                
                                S-1







This
Form 10-K may contain certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. For this purpose, any
statements contained in this Form 10-K that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, words such as “may”, “could”, “should”, “will”, “expect”, “believe”
“anticipate”, “estimate” or “continue” or comparable terminology is intended to
identify forward-looking statements. It is important to note that actual results
could differ materially from those anticipated from the forward-looking
statements depending on various important factors. These important factors
include our history of losses, the uncertainty of acceptance of current and new
products in our markets, competition in our markets, and the other factors
discussed in our “Risk Factors” found in Item 1A.
 
 PART
I
  ITEM
1.  BUSINESS
  Form and Year of
Organization
  American
Bio Medica Corporation was incorporated on April 2, 1986 under the laws of the
State of New York under the name American Micro Media, Inc. On September 9,
1992, we filed an amendment to our Articles of Incorporation to change our name
to American Bio Medica Corporation (“ABMC” or “the Company”).
  Our
Business
  We
develop, manufacture and sell immunoassay diagnostic test kits, primarily for
the immediate, point of collection testing (“POCT”) for drugs of abuse in urine
and oral fluids (saliva). Our drugs of abuse screening products offer employers,
law enforcement, government, health care, laboratory and education
professionals, self-contained, cost effective, user friendly screening devices
capable of accurately identifying illicit drug use within minutes.
  In
addition to the manufacture and sale of drugs of abuse screening products, we
provide contract strip manufacturing services for other POCT diagnostic
companies. While we do not currently derive a significant portion of our
revenues from contract manufacturing, we expect to continue to explore
additional applications for our technology and as a result, contract
manufacturing could become a greater portion of our revenues in the
future.
  According
to a BCC Research and Consulting market research report released in July 2008,
the global drugs of abuse (DOA) testing market generated $1.9 billion in 2007.
This is expected to increase to $2.0 billion in 2008 and $2.6 billion in 2014,
for a compound annual growth rate of 4.6%. In addition, according to an industry
report distributed by Espicom Business Intelligence in December 2007, the global
point of care testing (“POC”) market (which includes the POCT market) was
estimated to be worth $11.3 billion in 2007 and is growing at 11% a year. POC
accounts for approximately 34% of the $33.6 billion global in-vitro diagnostic
(IVD) testing market.
  Our
Products
  POCT
Devices for the Detection of DOA in Urine
  We
manufacture a number of POCT devices that detect the presence or absence of
drugs of abuse in urine. We offer a number of standard configurations and we can
also produce custom configurations on special order if the market demands. Our
urine based POCT devices can test for the following drugs: cocaine (available
with a cutoff level of either 150 ng/ml or 300 ng/ml), THC (marijuana), opiates
(available with a cutoff level of either 300 ng/ml or 2000 ng/ml), amphetamines,
PCP, benzodiazepines, methamphetamines, barbiturates, tricyclic antidepressants,
methadone, MDMA (Ecstasy), oxycodone, propoxyphene and
buprenorphine.
  All of
our urine-based POCT devices are accurate, cost-effective, easy to use, and
provide results within minutes. We currently offer the following POCT devices
for urine based DOA testing:
  Rapid Drug ScreenÒ: The Rapid Drug Screen, or
RDS®, is a patented, rapid, POCT kit that detects the presence or absence of 2
to 10 drugs of abuse simultaneously in a single urine specimen.
  Rapid ONE®: Our patented Rapid
ONE product line consists of single drug tests, each of which screens for the
presence or absence of a single drug of abuse in a urine specimen. The Rapid ONE
is designed for those situations in which the person subject to substance abuse
testing is known to use a specific drug. It can also be used to enhance a RDS by
allowing screening of an additional drug.
  1
  Rapid TEC®: The patented Rapid
TEC contains one or two drug testing strips that can test for 2 to 5 drugs of
abuse simultaneously in a single urine specimen as each strip includes the
chemistry to detect more than one class of drug. The Rapid TEC is designed for
those customers who require a less expensive product but still need to test for
more than one drug of abuse utilizing one urine sample.
  RDS InCup®: The RDS InCup is
an all-inclusive point of collection test for 2 to 12 drugs of abuse that
incorporates collection and testing of the sample in a single one-step device.
Each RDS InCup device contains multiple channels and each channel contains a
single drug testing strip that contains the chemistry to detect a single class
of drugs of abuse. Once the donor provides a sample, the results are available
within a few minutes without any manipulation of the sample or the
device.
  Rapid TOX®:The Rapid TOX is a
cost effective drug screen in a horizontal cassette platform that simultaneously
detects 2 to 10 drugs of abuse in a single urine specimen. Each Rapid TOX device
contains one or two channels and each channel contains a single drug testing
strip that contains the chemistry to detect more than one class of drug of
abuse.
  Rapid TOX Cup®: The Rapid TOX
Cup is an all-inclusive point of collection test for 2 to 14 drugs of abuse that
incorporates collection and testing of the sample in a single device. Each Rapid
TOX Cup device contains multiple channels and each channel contains a single
drug testing strip that contains the chemistry to detect more than one class of
drug of abuse.
  POCT
Devices for the Detection of DOA in Oral Fluids (saliva):
  We
manufacture a number of POCT devices that detect the presence or absence of
drugs of abuse in oral fluids (saliva). These devices are easy to perform and
provide test results within minutes with enhanced sensitivity and detection
comparable to laboratory based oral fluids tests.
  OralStat®: Our OralStat is a
patented and patent-pending, innovative POCT system for the detection of drugs
of abuse in oral fluids. OralStat can simultaneously test for 6 drugs in each
device. Currently, the assays available on the OralStat are amphetamines,
methamphetamines, benzodiazepines, cocaine, methadone, opiates, PCP and
THC.
  OralStat EX:The OralStat EX
is an oral fluid point of collection test that was designed to make both point
of collection testing and confirmation testing simple. The oral fluid sample is
expressed into a separate transportable bottle containing a buffer solution, and
after the initial screen has been performed there is ample solution remaining to
send to a laboratory for confirmation of positive test results.
  Rapid STATTM: The Rapid STAT is
an oral fluid point of collection test that combines the incubation benefits of
the OralStat (see OralStat on this page) with the Rapid TOX (see Rapid TOX on
this page) cassette product platform. The Rapid STAT maximizes drug recovery and
provides a transport container for confirmation of positive results. The Rapid
STAT provides even faster test results, making it ideal for those market
applications, such as roadside testing, in which portability and time is
crucial. In addition to these added benefits, the Rapid STAT provides even lower
THC testing sensitivity, making it unrivaled in the market.
  Other
Products
  Rapid Reader®:The Rapid
Reader is an FDA 510(k) cleared, compact, portable device that captures a
picture of the test results on an ABMC drug screen using a high-resolution
camera. The results are then analyzed, interpreted, and sent to a data
management system, which enables the user to interpret, store, transmit and
print the drug test results. The Rapid Reader system can only be used to
interpret and record the results of ABMC drug screens. Presently, we offer three
different models of the Rapid Reader to our customers, the 210 and 250, which
are connected to a PC via a USB port, and the 710, which is a stand-alone device
that does not require the connection to a PC.
  2
  Adulteration, Alcohol and Nicotine:In addition to the products we manufacture, we also distribute a number
of point of collection tests that detect the presence or absence of adulterants,
alcohol and nicotine. These tests are manufactured by unaffiliated third
parties. Two of these products are sold under ABMC-owned trademarks; the Rapid
AlcoTECTM alcohol test and the Rapid CheckTM test for adulterant. Some of the
adulterant test products we distribute are also incorporated into our urine
based POCT device for drugs of abuse. We do not derive a significant portion of
our revenues from the sale of these products.
  Contract
Manufacturing
  We
provide bulk strip contract manufacturing services to a number of non-affiliated
POCT diagnostic companies. In the fiscal year ended December 31, 2008, we
manufactured test components for the detection of:
  §
              RSV
      (Respiratory Syncytial Virus): the most common cause of lower respiratory
      tract infections in children
worldwide
 §
              Fetal
      amniotic membrane rupture
 §
              Lactoferin:
      a protein with documented anti-viral, anti-microbial, and immune
      modulating/enhancing effects
  We also
performed development work for certain manufacturing customers related to
devices to detect various other infectious diseases.  We do not
currently derive a significant portion of our revenues from contract
manufacturing.
  Our
Markets
  Corporate/Workplace
  Corporate/Workplace
testing consists of pre-employment testing of job applicants, and random, cause
and post accident testing of an employee. Many employers recognize the financial
and safety benefits of implementing Drug Free Workplace Programs, of which drug
testing is an integral part. Government incentives encourage employers to adopt
Drug Free Workplace Programs. In some states, there are workman’s compensation
and unemployment insurance premium reductions, tax deductions and other
incentives for adopting these programs.  The Drug Free Workplace Act
requires employers receiving federal contracts of $100,000 or more to enact a
Drug Free Workplace program (the Federal Acquisition Streamlining Act of 1994
raised the threshold of contracts covered by the Drug Free Workplace Act from
$25,000 to those exceeding $100,000).
  §
              In
      their December 2004 report (the most recent report related to this subject
      matter) titled “The Economic Costs of Drug Abuse in the United States”,
      the Office of National Drug Control Policy reported that the economic cost
      of drug abuse in 2002 was estimated to be $180.9 billion, increasing 5.34%
      annually since 1992. This value represents both the use of resources to
      address health and crime consequences as well as the loss of potential
      productivity from disability, death and withdrawal from the legitimate
      workforce.
 §
              According
      to the 2007 SAMHSA (Substance Abuse Mental Health Services Administration)
      National Survey on Drug Use and Health released in September 2008, most
      drug users are employed. Of the 17.4 million current illicit drug users
      aged 18 or older in 2007, 13.1 million, or 75.3% were employed either full
      or part time.
  Government/Corrections/Law
Enforcement
  This
market includes federal, state and county level agencies, including:
correctional facilities, pretrial agencies, probation, drug courts and parole
departments at the federal and state levels and juvenile correctional
facilities. A significant number of individuals on parole or probation, or
within federal, state and local correctional facilities and jails, have one or
more conditions to their sentence required by the court or probation agency
which includes periodic drug testing and substance abuse treatment.
  3
  According
to the Bureau of Justice Statistics (“BOJ”):
 §
              In
      2007, over 7.3 million people in the United States were on probation, in
      jail or prison, or on parole; and
 §
              In
      2006 (the most recent year for which this data is available), there were
      approximately 1.9 million arrests for drug abuse violations. Drug abuse
      violations are defined as State or local offenses relating to the unlawful
      possession, sale, use, growing, manufacturing, and making of narcotic
      drugs including opium or cocaine and their derivatives, marijuana,
      synthetic narcotics, and dangerous non-narcotic drugs such as
      barbiturates.
  Clinical/Physician/Hospital
  This
market includes emergency rooms, physician offices, hospitals and clinics and
rehabilitation facilities associated with hospitals. In August 2008, the Drug
Abuse Warning Network (a public health surveillance system that monitors
drug-related visits to hospital emergency departments and drug-related deaths
investigated by medical examiners and coroners) estimated that in 2006 over 1.7
million emergency department visits were associated with drug misuse or abuse.
To address this issue, drug testing is performed in this market so healthcare
professionals are able to ascertain the drug status of a patient before they
administer pharmaceuticals or treatment.
  In 2006,
we entered into a Supply Agreement with Nanogen, Inc. (NASDAQ:NGEN) allowing
Nanogen to market our products under their own brand name to customers in this
market. We received notice in the third quarter of 2008 that, as a result of a
merger with another entity, Nanogen was terminating the Supply Agreement
effective December 24, 2008. This termination did not have a material impact on
sales in the fiscal year ended December 31, 2008, nor is it expected to have a
material impact on sales in the future.
  International
Markets
  The
International Market consists of various markets outside of the United States.
Although Corporate/Workplace testing is not as prevalent outside of the United
States as within, the Government/Corrections/Law Enforcement and
Clinical/Physician/Hospital markets are somewhat in concert with their United
States counterparts. One market that is significantly more prevalent outside of
the United States is roadside drug testing. Countries including but not limited
to, France, Australia, Malaysia, New Zealand, Portugal, Finland, Germany,
Norway, Switzerland and Canada, already conduct roadside drug testing, are
currently in a pilot phase of drug testing, or have put laws in place to allow
drug testing.  In the fiscal year ended December 31, 2008, we were
awarded, through our European distributor, a government tender allowing the
police force in France to use our Rapid STAT product (see Rapid STAT on page 2)
to perform drug testing of French motorists.  In addition, in 2008, we
appointed a master distributor to market in the region of Latin America. This
distributor’s sales are primarily in the Government/Corrections/Law Enforcement
and Clinical/Physician/Hospital markets, along with some sales in the
Corporate/Workplace testing market.
  Rehabilitation
Centers
  This
market for our products includes people in treatment for substance
abuse.  There is a high frequency of testing in this market. 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.
  Educational
Market
  According
to the December 2008 University of Michigan Monitoring the Future study, 14.1%
of 8th
graders, 26.9% of 10th graders
and 36.6% of 12th graders
have used an illicit drug within the 12 months prior to the study. Furthermore,
the study reported that a little less than half of young people have tried an
illicit drug by the time they finish high school. In June 2002, the Supreme
Court ruled that students in extracurricular activities including athletics,
band, choir, and other activities could be tested for drugs at the start of the
school year and randomly throughout the year.
  Our Distribution
Methods
  We have a
two-pronged distribution strategy that focuses both on growing our business
through our direct sales team and with valued third party distributors. Our
direct sales team consists of highly experienced and well-trained sales
professionals with drugs of abuse testing experience, and our distributors are
unaffiliated entities that resell our POCT devices either as a stand-alone
product or as part of a service they provide to their customers.
  4
  Our
direct sales force, inside sales representatives and network of distributors
sell our products to the Corporate/Workplace, Government/Corrections/Law
Enforcement, Clinical/Physician/Hospital, Rehabilitation, and Educational
markets, and we sell primarily through a network of distributors in the
International market. Although we currently sell directly into the
Clinical/Physician/Hospital market, going forward our goal is to obtain a
distribution relationship with a multi-national diagnostics company focused on
the Clinical/Physician/Hospital market.
  We
promote our products through direct mail campaigns, selected advertising,
participation at high profile trade shows, use of key point of collection
advocate consultants and other marketing activities. We expect to continue to
recruit and utilize experienced, valued third party distributors, in addition to
selling directly in our markets and to our key customers.
  Competition
  We
compete on the following factors:
  §
              pricing;
 §
              quality
      of product;
 §
              ease
      and user-friendliness of products;
and
 §
              customer
      and technical support
  Pricing: The pricing
structure within the point of collection drug testing market is highly
competitive and currently our products are cost competitive, although pricing
pressures have increased significantly when comparing our product pricing with
the pricing of point of collection drug tests manufactured outside of the United
States. In order to meet the price pressure caused primarily by these foreign
manufacturers, ABMC continues to evaluate all aspects of its manufacturing and
assembly processes to identify areas of cost savings. Cost savings in
manufacturing would allow us to sustain acceptable gross margins while still
providing our customers with cost competitive products. In addition, we continue
to explore new, lower cost product alternatives for our customers.
  Quality: There have been a
number of studies that have reported on the accuracy and reliability of ABMC
products. A study was conducted by the Department of Health and Human Services
in 1999 (as of the date of this report, this is still the most current
government issued study) that ranked RDS as the most accurate multi-drug device
for all drugs when compared to GC/MS (Gas Chromatography/Mass Spectrometry), a
laboratory test consisting of a combination of two microanalytical techniques:
GC, a separation technique, and MS, an identification technique. Another study
conducted in 2003 on the Rapid One test for Oxycodone conducted by the Greater
Los Angeles VA Healthcare System found that “only the.....Rapid One OXY test
demonstrated 100% reliability.”
  Ease and user-friendliness:Some of our competitors’ point of collection drug tests use a collection
or delivery method different than our point of collection drug tests. Our urine
based products do not require pipetting (dropping) of the specimen, adding or
mixing of reagents or other manipulation of the device by the
user.  In fact, our Rapid TOX (see page 2) product offers the option
of dipping the test into the urine specimen rather than pipetting the specimen.
In The Rosita Roadside Study conducted in Europe in 1999, the RDS products were
ranked “Very Good” for user friendliness, the highest rating given to any of the
products in the study.
  Customer and technical support :Customer and technical support  are becoming more important in
the point of collection drug testing market as individuals being tested become
more knowledgeable about how to “beat” a drug test. Questions related to test
administration, drug cross reactivity, drug metabolism, and other such matters
are becoming areas in which clarification is sometimes needed by customers using
these devices. ABMC provides its customers with continuous customer and
technical support on a 24/7/365 basis. Most of our competitors do not offer such
service to their customers.
  5
  Raw Materials and
Suppliers
  The
primary raw materials required for the manufacture of our point of collection
test strips and our point of collection drug test kits consist of antibodies,
antigens and other reagents, plastic molded devices, membranes, and packaging
materials. We maintain an inventory of raw materials which, to date, has been
acquired primarily from third parties. Currently, most raw materials are
available from several sources. We own the molds and tooling for our plastic
components that are custom and proprietary, but we do not own the molds and
tooling for our plastic components that are "stock" items. The ownership of
these molds affords us flexibility and control in managing the supply chain for
these components.
  Major
Customers
  We have a
number of national account customers that in total represent a significant
portion of our sales in fiscal years ended December 31, 2008 and December 31,
2007. One of these national account customers represented 11.2% of net sales in
fiscal year ended December 31, 2008 and 9.3% of net sales in fiscal year ended
December 31, 2007.
  Patents and
Trademarks/Licenses
  To date,
we hold 26 patents related to our point of collection drug testing devices,
including 4 U.S. design patents and 8 utility patents. We currently have 8
United States patent applications pending, and 8 foreign patent applications
pending. The earliest expiration date of any of our issued patents is January
2013.
  To date,
we have registered 20 trademarks in the United States, including but not limited
to Rapid Drug Screen, RDS, Rapid ONE, OralStat, Rapid Reader, Rapid TOX, Rapid
TOX Cup, InCup, our website domain and our corporate logos. We have also
registered 18 trademarks in countries/regions such as Canada, Mexico, Europe,
and the United Kingdom. We currently have 4 additional trademark applications
pending in the United States.
  On
February 28, 2006, we entered into a non-exclusive Sublicense Agreement with an
unaffiliated third party related to certain patents allowing us to expand our
contract manufacturing operations. Under this Sublicense Agreement, we paid a
non-refundable fee of $175,000 over the course of 2 years and we were to pay
royalties on products that fell within the scope of the patents. We did not
manufacture any products that fell within the scope of the patents in 2008. The
last expiration date of the patents covered by the Sublicense Agreement was
December 17, 2008.  Therefore, the Sublicense Agreement expired on
December 17, 2008 and such expiration is not expected to have a material impact
on our sales in the future. Upon the expiration of the patents covered under the
Sublicense Agreement, the subject matter disclosed therein is placed in the
public domain, and anyone can practice under the teachings of those
patents.
  On March
29, 2006, we entered into a royalty agreement with Integrated Biotechnology
Corporation (“IBC”). IBC is the owner of an RSV (Respiratory Syncytial Virus)
test that the Company manufactures for one of IBC’s distributors. The agreement
was entered into to address amounts that IBC owed to ABMC at the end of fiscal
year 2005, and to streamline the order and fulfillment process of IBC’s RSV
product. All outstanding amounts due were satisfied by the end of the third
quarter of 2007. After satisfaction of amounts due, we continued to work
directly with IBC’s distributor under the terms of the Agreement, which stated
that we were to pay IBC a 20% royalty of total sales received from IBC’s
distributor. The agreement expired on November 2, 2008. However, we continue to
work directly with IBC’s distributor and manufacture an RSV product for
them.
  Government
Regulations
  The
development, testing, manufacture and sale of our point of collection drug
tests, and possible additional testing devices for other substances or
conditions, are subject to regulation by the United States and foreign
regulatory agencies. Pursuant to the Federal Food, Drug, and Cosmetic Act, and
associated regulations, FDA regulates the pre-clinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices. If ABMC
fails to comply with applicable requirements, we 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 pre-market
clearance or pre-market approval for devices, withdrawal of marketing clearances
or approvals and criminal prosecution.
  6
  Our
products fall under the category of 510(k) submissions to FDA. A 510(k) is a
premarketing submission made to FDA to demonstrate that the device to be
marketed is as safe and effective, that is, substantially equivalent, to a
legally marketed device that is not subject to premarket approval. Applicants
must compare their 510(k) device to one or more similar devices currently on the
U.S. market and make and support their substantial equivalency claims. A legally
marketed device is a device that was legally marketed prior to May 28, 1976
(preamendments device), or a device that has been reclassified from Class III to
Class II or I, or a device which has been found to be substantially equivalent
to such a device through the 510(k) process, or one established through
Evaluation of Automatic Class III Definition. The legally marketed device(s) to
which equivalence is drawn is known as the "predicate" device(s). Applicants
must submit descriptive data and, when necessary, performance data to establish
that their device is substantially equivalent to a predicate
device.
  Although
FDA clearance is not required for non-clinical markets (such as
Corporate/Workplace and Government/Corrections/Law Enforcement), it is required
for clinical markets (such as hospitals and physicians).
  Currently
we have received 510(k) clearances related to our:
  §
              9
      panel RDS test and our Rapid ONE dipsticks, with some drugs being approved
      for two different cut-off levels, (with these approvals, we can offer a
      variety of combinations to meet customer requirements, both in multiple
      panel tests and individual Rapid One tests.  In addition, the
      testing strips contained in the RDS InCup are the same as those testing
      strips contained within the RDS. Therefore, the RDS InCup can be offered
      in a variety of combinations to meet customer requirements);
      and
 §
              Rapid
      TEC product line; and
 §
              Rapid
      Reader; and
 §
              Rapid
      TOX product line; and
 §
              Rapid
      TOX Cup
  In
October 2007, we filed a 510(k) clearance application for methamphetamines,
amphetamines and MDMA (Ecstasy) at a detection level of 500 ng/ml (these drugs
currently have active 510(k) clearances but at different detection levels). FDA
did not approve this application and we have elected not to re-submit this
application. However, these detection levels of methamphetamines, amphetamines
and MDMA are available in our 510(k) cleared Rapid TOX Cup
  We have
not yet submitted our OralStat or Rapid STAT products to FDA for 510(k)
clearance. Pending submission for FDA 510(k) clearance, the OralStat and Rapid
STAT products are labeled and made available “for forensic use only”, which
means for use in legal determinations only; it is not intended or promoted for a
health or medical use or purpose. As of the date of this report, no point of
collection oral fluid test has received FDA 510(k) marketing
clearance.
  Furthermore,
in order to sell our products in Canada, we must comply with ISO13485, the
International Standards Organization's Directive for Quality Systems for Medical
Devices (MDD or Medical Device Directive), and in order to sell our products in
the European Union, the Company must obtain CE marking for our products (in the
European Union, a "CE" mark is affixed to the product for easy identification of
quality products). Collectively, these standards are similar to the U.S. Federal
Regulations enforced by FDA, and are a reasonable assurance to the customer that
our products are manufactured in a consistent manner to help ensure that
quality, defect-free goods are produced.  As of the date of this
report, we have received approval and the right to bear the CE mark on our Rapid
Drug Screen, Rapid ONE, Rapid TEC, Rapid TOX, RDS InCup, OralStat, Rapid STAT,
and Rapid TOX Cup products. We received our ISO13485, 2003 compliance
certification in August 2006 and in 2007 we received our ISO 9001, 2000
compliance certification. We have also acquired the license to sell our RDS,
Rapid ONE and Rapid TOX products in Canada.
  7
  The
Clinical Laboratory Improvement Amendments (CLIA) of 1988 established quality
standards for laboratory testing to ensure the accuracy, reliability and
timeliness of patient test results regardless of where the test was performed.
As a result, those using CLIA waived tests are not subject to the more stringent
and expensive requirements of moderate or high complexity laboratories. In 2007,
ABMC filed its initial application for a CLIA waiver for our Rapid Drug Screen,
Rapid ONE and Rapid TOX point of collection drug test product lines. The waiver
would apply to all 14 drugs that the Company’s tests currently detect, in
addition to two different cut-off levels for the Company’s opiate and cocaine
tests. CLIA waived tests are recognized by FDA to be so simple to use and so
accurate that there is little risk of error. CLIA waived tests are the most
widely used tests in the clinical market (hospitals and physicians), and are
in-demand for occupational health markets. As of the date of this report, we
have not yet received the CLIA waiver for our Rapid Drug Screen and Rapid ONE
product lines. However, in August 2008, we received our CLIA waiver from FDA
related to our Rapid TOX product line. As of the date of this report, the Rapid
TOX is the only ABMC POCT device that has been granted a CLIA waiver from
FDA.
  Due to
the nature of the manufacturing of our point of collection tests and the raw
material used, ABMC does not incur any material costs associated with compliance
with environmental laws, nor do we experience any material effects of compliance
with environmental laws.
  Research and
Development
  Our
research and development (“R&D”) efforts are continually focused on
enhancing and/or maintaining the performance and reliability of our drug testing
strips. During 2008, our R&D team continued to make enhancements to our
point of collection drug testing lines. The R&D team also continued the
development process on contract manufacturing projects. Our R&D expenditures
were $563,000 for the fiscal year ended December 31, 2008, compared to $669,000
for the fiscal year ended December 31, 2007. None of the costs incurred in
research and development in either fiscal year ended December 31, 2008 or
December 31, 2007 were borne by a customer.
  Manufacturing and
Employees
  Our
facility in Kinderhook, New York houses assembly and packaging of our products
in addition to the Company’s administration. We continue to primarily outsource
the printing of the plastic components used in our products, and we outsource
the manufacture of the plastic components used in our products.  We
manufacture all of our own individual test strips and we manufacture test strips
for unaffiliated third parties at our R&D and bulk manufacturing facility in
Logan Township, New Jersey. We contract with a third party for the manufacture
of the Rapid Reader product.
  As of
December 31, 2008, we had approximately 99 employees, of which 97 were full time
and 2 were part-time. None of our employees are covered by collective bargaining
agreements, and we believe our relations with our employees are
good.
  ITEM
1A.  RISK FACTORS
  We
have a history of incurring net losses.
  Since the
Company’s inception in 1992 through the fiscal transition period ending December
31, 2001, we incurred net losses. We began earning profits in the fiscal year
ending December 31, 2002 and continued to be profitable through December 31,
2004. However, in the fiscal year ending December 31, 2005, we incurred a net
loss. In the fiscal year ending December 31, 2006, we reported net income of
$196,000. We incurred net losses of $990,000 and $850,000 in fiscal years ended
December 31, 2007 and 2008, respectively. As of December 31, 2008, we have an
accumulated deficit of $15,238,000. We expect to continue to make substantial
expenditures for sales and marketing, product development and other business
purposes. Our ability to achieve profitability in the future will primarily
depend on our ability to increase sales of our products, reduce production and
other costs and successfully introduce new products and enhanced versions of our
existing products into the marketplace. There can be no assurance that we will
be able to increase our revenues at a rate that equals or exceeds expenditures.
In the fiscal year ended December 31, 2008, our sales were negatively impacted
by the global economic crisis, which affected our results of operations. Our
failure to increase sales while maintaining or reducing administrative, research
and development and production costs will result in the Company incurring
additional losses.
  8
  Our
products are sold in limited markets and the failure of any one of them to
achieve and continue to achieve widespread market acceptance would significantly
harm our results of operation.
  We offer
a number of point of collection tests for drugs of abuse that are sold in
limited markets, and we currently derive most of our revenues from sales of our
point of collection tests for drugs of abuse. Based upon actual results in 2008
and given current levels of operating expenses, we must achieve approximately
$3.7 million in quarterly net sales to attain break-even results of operations.
In addition, the markets in which we sell our products are cost competitive. If
we are required to lower our prices to our customers, our revenue levels could
be negatively impacted which would adversely affect our gross profit
margins.  If our products do not achieve and maintain this level of
revenue, or maintain certain gross profit margins, our results of operations
would be significantly harmed.
  Achieving
continued market acceptance for our drug tests requires substantial marketing
efforts and the expenditure of significant funds to inform potential customers
and distributors of the distinctive characteristics, benefits and advantages of
our test kits. A number of our products have only recently been introduced in
the marketplace (the Rapid STAT and the Rapid TOX Cup were both introduced in
2007). We have no history upon which to base market or customer acceptance of
these products. Introduction of these new products has required, and may
continue to require, substantial marketing efforts and expenditure of
funds.
  If
we fail to keep up with technological factors or fail to develop our products we
may be at a competitive disadvantage.
  The point
of collection drug testing market is highly competitive. Several companies
produce drug tests that compete directly with our drugs of abuse product line,
including Varian, Inc., Biosite Diagnostics and Medtox Scientific, Inc. in the
urine point of collection testing market and OraSure Technologies, Inc. and
Varian, Inc. in the oral fluid point of collection testing market.As new technologies
become introduced into the point of collection testing market, we may be
required to commit considerable additional effort, time and resources to enhance
our current product portfolio or develop new products. Our success will depend
upon new products meeting targeted product costs and performance, in addition to
timely introduction into the marketplace. We are subject to all of the risks
inherent in product development, which could cause material delays in
manufacturing.
  We
rely on third parties for raw materials used in our drugs of abuse products and
in our contract manufacturing processes.
  We
currently have approximately 67 suppliers who provide us with the raw materials
necessary to manufacture our point of collection drug testing strips and our
point of collection tests for drugs of abuse. For most of our raw materials we
have multiple suppliers, but there are a few chemical raw materials for which we
only have one supplier.  The loss of one or more of these suppliers,
the non-performance of one or more of their materials or the lack of
availability of raw materials could suspend our manufacturing process related to
our drugs of abuse products. This interruption of the manufacturing process
could impair our ability to fill customers’ orders as they are placed, which
would put the Company at a competitive disadvantage.
  Furthermore,
we rely on a number of third parties for supply of the raw materials necessary
to manufacture the test components we supply to other diagnostic companies under
contract manufacturing agreements. For most of these raw materials we have
multiple suppliers, however, there are a few chemical raw materials for which we
only have one supplier. The loss of one or more of these suppliers could suspend
the strip manufacturing process and this interruption could impair our ability
to perform contract manufacturing services.
  We
have a significant amount of raw material and “work in process” inventory on
hand that may not be used in the next twelve months if the expected
configuration of sales orders are not received at our projected
levels.
  We
currently have approximately $3.1 million in raw material components for the
manufacture of our products at December 31, 2008. The non-chemical raw material
components may be retained and used in production indefinitely and the chemical
raw materials components have lives in excess of 20 years. In addition to the
raw material inventory, we have approximately $2.2 million in manufactured
testing strips, or other “work in process” inventory at December 31, 2008. The
components for much of this “work in process” inventory have lives of 12-24
months. If sales orders received are not for devices that would utilize the raw
material components, or if product developments make the raw materials obsolete,
we may be required to dispose of the unused raw materials. In addition, since
the components for much of the “work in process” inventory have lives of 12-24
months, if sales orders within the next 12-24 months are not for devices that
contain the components of the “work in process” inventory, we may need to
discard the unused “work in process” inventory. Beginning in 2004, we
established a reserve for obsolete or slow moving inventory. In 2008, we
increased this reserve to $308,000. There can be no assurance that this reserve
will be adequate for 2009 and/or that it will not have to be
increased.
  9
  We
depend on our R&D team for product development and/or product
enhancement.
  Our
R&D team performs product development and/or enhancement. There can be no
assurance that our R&D team can successfully complete the enhancement of our
current products and/or complete the development of new products. Furthermore,
the loss of one or more members of our R&D team could result in the
interruption or termination of new product development and/or current product
enhancement, affecting our ability to provide new or improved products to the
marketplace, which would put the Company at a competitive
disadvantage.
  Our
products must be cost competitive and perform to the satisfaction of our
customers.
  Cost
competitiveness and satisfactory product performance are essential for success
in the point of collection drug testing market. There can be no assurance that
new products we may develop will meet projected price or performance objectives.
In fact, price competition is increasing in the point of collection testing
markets as additional foreign (i.e. non-U.S. based companies) manufacturers
enter the market. Many foreign manufacturers have lower manufacturing costs and
therefore can offer their products at a lower price than a U.S. manufacturer.
These lower costs include, but are not limited to, costs for labor, materials,
regulatory compliance and insurance.
  Due to
the variety and complexity of the environments in which our customers operate,
our products may not operate as expected, unanticipated problems may arise with
respect to the technologies incorporated into our test kits or product defects
affecting product performance may become apparent after commercial introduction
of new test kits we put on the market. In the event that we are required to
remedy defects in any of our products after commercial introduction, the costs
to the Company could be significant. Any of these issues could result in
cancelled orders, delays and increased expenses. In addition, the success of
competing products and technologies, pricing pressures or manufacturing
difficulties could further reduce our profitability and the price of our
securities.
  One of
our customers accounted for approximately 11.2% of the total net sales of the
Company for the fiscal year ended December 31, 2008. Although we have entered
into a written purchase agreement with this customer, this customer does not
have any minimum purchase obligations and could stop buying our products with 90
days notice. A reduction, delay or cancellation of orders from this customer or
the loss of this customer could reduce the Company’s revenues and profits. The
Company cannot provide assurance that this customer or any of its current
customers will continue to place orders, that orders by existing customers will
continue at current or historical levels or that the Company will be able to
obtain orders from new customers.
  We
face significant competition in the drug testing market and potential
technological obsolescence.
  We face
competition from other manufacturers of point of collection tests for drugs of
abuse. Manufacturers such as Varian, Inc., Medtox Scientific, Inc., Biosite
Diagnostics and OraSure Technologies, Inc. are better known and some have far
greater financial resources than ABMC. In addition to these manufacturers, there
are a number of smaller privately held companies, as well as foreign
manufacturers, that serve as our competitors. The markets for point of
collection tests for drugs of abuse are highly competitive. Currently, the
pricing of our products is cost competitive, but competing on a cost basis
against foreign manufacturers becomes more difficult as costs to produce our
products in the United States continue to increase. Furthermore, some of our
competitors can devote substantially more resources than we can to business
development and they may adopt more aggressive pricing policies. We expect other
companies to develop technologies or products that will compete with our
products.
  10
  Possible
inability to hire and retain qualified personnel.
  We will
need additional skilled sales and marketing, technical and production personnel
to grow the business. If we fail to retain our present staff or hire additional
qualified personnel our business could suffer.
  We
depend on key personnel to manage our business effectively.
  We are
dependent on the expertise and experience of our senior management such as Stan
Cipkowski, Chief Executive Officer, Martin Gould, Chief Scientific Officer and
Todd Bailey, Vice President, Sales & Marketing for our future success. The
loss of Messrs. Cipkowski, Gould and/or Bailey could negatively impact our
business and results of operations. We currently maintain key man insurance for
Messrs. Cipkowski and Gould. Although we have employment agreements in place
with Messrs. Cipkowski and Gould, there can be no assurance that any of our
senior management will continue their employment.
  Failure
to effectively manage growth and expansion could adversely affect our business
and operating results.
  We may
expand our operations in the future. Any failure to manage our growth
effectively will result in less efficient operations, which could adversely
affect our operating and financial results.
  To
effectively manage our growth, we must, among other things:
  §
              accurately
      estimate the number of employees we will require and the areas in which
      they will be required;
 §
              upgrade
      and expand our office infrastructure so that it is appropriate for our
      level of activity;
 §
              manage
      expansion into additional geographic areas;
and
 §
              improve
      and refine our operating and financial
systems
  We expect
to devote considerable resources and management time to improving our operating
and financial systems to manage our growth. Failure to accomplish any of these
objectives would impede our ability to deliver products and services in a timely
fashion, fulfill existing customer orders and attract and retain new
customers.  These impediments would have a material adverse effect on
our financial condition, results of operations and cash flows.
  Any
adverse changes in our regulatory framework could negatively impact our
business.
  Marketing
clearance from FDA is not currently required for the sale of our products in
non-clinical markets, but is required in the clinical and over-the-counter
(“OTC”) markets. Our point of collection drug tests are 510(k) cleared and have
met FDA requirements for professional use (with the exception of the OralStat
and Rapid STAT which are not 510(k) cleared and are therefore for forensic use
only) and we have been granted a CLIA waiver from FDA related to our Rapid TOX
product line. The Workplace and Government/Corrections/Law Enforcement markets
are currently our primary markets and if any additional FDA clearance is
required to sell in these markets, this additional cost may cause us to raise
the price of our products and make it difficult to compete with other point of
collection products or laboratory based testing, thereby negatively impacting
our revenues. Furthermore, there can be no assurance that if we are required to
apply for additional FDA clearances that they will be granted.  If
such clearance(s) is/are not granted, we would be unable to sell our products in
the Workplace and/or Government/Corrections/Law Enforcement markets, and our
revenues would be negatively impacted. Although we are currently unaware of any
changes in regulatory standards related to any of our markets, if regulatory
standards were to change in the future, there can be no assurance that FDA will
grant us the approvals, if and when we apply for them, required to comply with
the changes.
  We
rely on intellectual property rights, and we may not be able to obtain patent or
other protection for our technology, products or services.
  We rely
on a combination of patent, copyright, trademark and trade secret laws,
confidentiality procedures and contractual provisions to protect our proprietary
technology, products and services. We also believe that factors such as the
technological and creative skills of our personnel, new product developments,
product enhancements and name recognition are essential to establishing and
maintaining our technology leadership position. Our personnel are bound by
non-disclosure agreements. However, in some instances, some courts have not
enforced all aspects of such agreements.
  11
  We seek
to protect our proprietary products under trade secret and copyright laws, which
afford only limited protection. We currently have a total of 26 U.S. and foreign
patents related to our POCT products. We have additional patent applications
pending in the United States, and other countries, related to our POCT products.
We have trademark applications pending in the United States. Certain trademarks
have been registered in the United States and in other countries. There can be
no assurance that the additional patents and/or trademarks will be granted or
that, if granted, they will withstand challenge.
  Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain information that we regard as
proprietary. We may be required to incur significant costs to protect our
intellectual property rights in the future. In addition, the laws of some
foreign countries do not ensure that our means of protecting our proprietary
rights in the United States or abroad will be adequate. Policing and enforcement
against the unauthorized use of our intellectual property rights could entail
significant expenses and could prove difficult or impossible.
  Potential
issuance and exercise of new options and warrants and exercise of outstanding
options and warrants, along with the conversion of outstanding Convertible
Debentures could adversely affect the value of our securities.
  The Board
of Directors of the Company has adopted four Non-statutory Stock Option Plans
providing for the granting of options to employees, directors, and consultants,
however, two of those plans, the Fiscal 1997 Plan and the Fiscal 1998 Plan, have
no options available for issuance and there are no options issued and
outstanding under either plan. As of December 31, 2008 there were 990,500
options issued and outstanding under the Fiscal 2000 Plan and 2,771,580 options
issued and outstanding under the Fiscal 2001 Plan, for a total of 3,762,080
options issued and outstanding as of December 31, 2008. All of these options are
fully vested. As of December 31, 2008, there were 9,500 options available for
issuance under the Fiscal 2000 Plan and 945,420 options available for issuance
under the Fiscal 2001 Plan.
  On August
15, 2008, the Company completed an offering of Series A Debentures (the
“Offering”) and received gross proceeds of $750,000 in principal amount of
Series A Debentures (see Current Report on Form 8-K and amendment on Form
8-K/A-1 filed with the Commission on August 8, 2008 and August 18, 2008
respectively). Holders of the Series A Debentures will have a right of
conversion of the principal amount of the Series A Debentures into shares (the
“Debenture Conversion Shares”) of the common stock of the Company (“Common
Stock”), at a conversion rate of 666.67 shares per $500 in principal amount of
the Series A Debentures (representing a conversion price of approximately $0.75
per share). This conversion right can be exercised at any time, commencing the
earlier of (a) 120 days after the date of the Series A Debentures, or (b) the
effective date of a Registration Statement to be filed by the Company with
respect to the Conversion Shares. The Company has the right to redeem any Series
A Debentures that have not been surrendered for conversion at a price equal to
the Series A Debentures’ face value plus $0.05 per underlying common share, or
$525 per $500 in principal amount of the Series A Debentures. The Company can
exercise this redemption right at any time within 90 days after any date when
the closing price of the Common Stock has equaled or exceeded $2.00 per share
for a period of 20 consecutive trading days.
  As
placement agent, Cantone Research, Inc. (“Cantone”) received a placement agent
fee, and was also issued a four year warrant to purchase 30,450 shares of the
Company’s common stock at an exercise price of $0.37 per share (the closing
price of the Company’s common shares on the Closing Date) and a four year
warrant to purchase 44,550 shares of the Company’s common stock at an exercise
price of $0.40 per share (the closing price of the Company’s common stock on the
Series A Completion Date), (together the “Placement Agent Warrants”). All
Warrants issued to Cantone are immediately exercisable upon
issuance.
  12
  If these
Options, Debenture Conversion Shares or Placement Agent Warrants are exercised,
the common shares issued will be freely tradable, increasing the total number of
common shares issued and outstanding.  If these shares are offered for
sale in the public market, the sales could adversely affect the prevailing
market price by lowering the bid price of our securities. The exercise of any of
these Options, Debenture Conversion Shares or Placement Agent Warrants could
also materially impair our ability to raise capital through the future sale of
equity securities because issuance of the common shares underlying the Options,
Debenture Conversion Shares or Placement Agent Warrants would cause further
dilution of our securities. In addition, in the event of any change in the
outstanding shares of our common stock by reason of any recapitalization, stock
split, reverse stock split, stock dividend, reorganization consolidation,
combination or exchange of shares, merger or any other changes in our corporate
or capital structure or our common shares, the number and class of shares
covered by the Options and/or the Exercise Price of the Options may be adjusted
as set forth in their plans.
  Substantial
resale of restricted securities may depress the market price of our
securities.
  There are
3,993,155 common shares presently issued and outstanding as of the date hereof
that 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 that a person
holding restricted securities for a period of one year or more may, in any three
month period, sell those securities in unsolicited brokerage transactions or in
transactions with a market maker, in an amount equal to the greater of one
percent of our outstanding common shares or the average weekly trading volume
for the prior four weeks. 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. Investors should be aware that sales
under Rule 144 or 144(k), or pursuant to a registration statement filed under
the Act, may depress the market price of our securities in any market that may
develop for such shares.
  We
believe we will need additional funding for our existing and future
operations.
  Our
financial statements for the fiscal year ended December 31, 2008 have been
prepared assuming we will continue as a going concern. We do not believe, based
on certain assumptions, including our expectation that the overall global
economic crisis will continue to have a negative impact on our business in 2009,
that our current cash balances, and cash generated from future operations will
be sufficient to fund operations for the next twelve months. Future events,
including the problems, delays, expenses and difficulties which may be
encountered in establishing and maintaining a substantial market for our
products, could make cash on hand insufficient to fund operations. If cash
generated from operations is insufficient to satisfy our working capital and
capital expenditure requirements, we may be required to sell additional equity
or debt securities or obtain additional credit facilities.  There can
be no assurance that such financing will be available or that we will be able to
complete financing on satisfactory terms, if at all. Any such equity financing
may result in further dilution to existing shareholders.
  Our
ability to retain and attract market makers is important to the continued
trading of our securities.
  Our
common shares trade on the NASDAQ Capital Market under the symbol “ABMC”. In the
event that the market makers cease to function as such, public trading of our
securities will be adversely affected or may cease entirely.
  If
we fail to meet the continued listing requirements of the NASDAQ Capital Market,
our securities could be delisted.
  Our
securities are listed on the NASDAQ Capital Market. The NASDAQ Stock Market
(“NASDAQ”) Marketplace Rules impose requirements for companies listed on the
NASDAQ Capital Market to maintain their listing status, including but not
limited to minimum common share bid price of $1.00, and  $2,500,000 in
shareholders' equity or $500,000 in net income in the last fiscal year. As of
the date of this report and for the past twelve months our common shares are
trading and have traded below the minimum bid requirement. In October 2008,
NASDAQ advised us that, because of the extraordinary market conditions, NASDAQ
was suspending enforcement of the bid price and market value requirements
through January 16, 2009. In December 2008, NASDAQ further extended this
suspension until April 20, 2009, and
again on March 24, 2009, NASDAQ notified us that they were further extending
this suspension until July 20, 2009. Although these suspensions have
provided us more time to regain compliance with the minimum bid price
requirement, there can be no assurance that these suspensions will in fact
enable us to regain compliance. Our continued failure to regain compliance with
NASDAQ listing requirements will more than likely result in delisting of our
securities.
  13
  Delisting
could reduce the ability of investors to purchase or sell our securities as
quickly and as inexpensively as they have done historically and could subject
transactions in our securities to the penny stock rules. Furthermore, failure to
obtain listing on another market or exchange may make it more difficult for
traders to sell our securities. Broker-dealers may be less willing or able to
sell or make a market in our securities because of the penny stock disclosure
rules. Not maintaining a listing on a major stock market may result in a
decrease in the trading price of our securities due to a decrease in liquidity
and less interest by institutions and individuals in investing in our
securities. Delisting from NASDAQ could also make it more difficult for us to
raise capital in the future.
  We
may incur additional significant increased costs as a result of operating as a
public company, and our management will be required to devote substantial time
to new compliance initiatives.
  We may
incur significant legal, accounting and other expenses as a result of our
required compliance with certain regulations. More specifically, the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), as well as new rules
subsequently implemented by the SEC, have imposed various new requirements on
public companies. Our management and other personnel will need to devote a
substantial amount of time to these compliance initiatives. Moreover, these
rules and regulations are expected to increase our legal and financial
compliance costs and may make some activities more time-consuming and
costly.
  The
Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure controls and
procedures. In particular, in our fiscal year ended December 31, 2007,
management was required to perform system and process evaluation and testing of
the effectiveness of our internal controls over financial reporting, as required
by Section 404 of the Sarbanes-Oxley Act. Commencing in our fiscal year ended
December 31, 2009, our independent registered public accounting firm will report
on the effectiveness of our internal controls over financial reporting, as
required by Section 404 of the Sarbanes-Oxley Act.
  Our
testing, or the subsequent testing by our independent registered public
accounting firm may reveal deficiencies in our internal controls over financial
reporting that are deemed to be material weaknesses. As a result, our compliance
with Section 404 may require that we incur substantial accounting expense and
expend significant management efforts. We currently do not have an internal
audit group, and we may need to hire additional accounting and financial staff
with appropriate public company experience and technical accounting knowledge to
ensure compliance with these regulations.
  Moreover,
if we are not able to comply with the requirements of Section 404 in a timely
manner, or if we, or our independent registered public accounting firm
identifies deficiencies in our internal controls over financial reporting that
are deemed to be material weaknesses, the market price of our common shares
could decline, and we could be subject to sanctions or investigations by the SEC
or other regulatory authorities, which would require additional financial and
management resources.
  As
of the date of this report, we are not in compliance with certain financial
covenants required by our primary financial institution, First Niagara Financial
Group (“FNFG”), and such non-compliance could cause FNFG to accelerate our
loans.
  We
currently have a line of credit, a real estate mortgage and a term note (“Credit
Facilities”) with FNFG (See Note D and Note E). On February 4, 2009, we received
a letter from FNFG notifying the Company that an event of default had occurred
under our Letter Agreement and other documents (the “Loan Documents”), related
to the Credit Facilities; more specifically, we failed to comply with the
maximum monthly net loss covenant set forth in the Letter
Agreement.  Pursuant to the terms of the Loan Documents, all
obligations of the Company to FNFG under the Loan Documents can be declared by
FNFG to be immediately due and payable. The principal amount totals
$1,636,635.97, plus interest and other charges through February 4, 2009
(collectively, the “Debt”).
  14
  The
February 4, 2009 notice also stated that, as an accommodation to the Company,
FNFG decided not to immediately accelerate the Debt, and that they expected the
Company to enter into a Forbearance Agreement with FNFG memorializing measures
and conditions required by FNFG. FNFG also notified the Company that they were
reducing the commitment on our line of credit to $650,000 (previously the line
of credit commitment was $750,000), and placing a hold on one of our accounts
held at FNFG, which had a balance of $108,000 as of February 4,
2009.
  On March
12, 2009, we entered into a Forbearance Agreement (the “Agreement”) with FNFG.
The Agreement addresses the Company’s non-compliance with the maximum monthly
net loss and the minimum debt service coverage ratio covenants (“Existing
Defaults”) under the Loan Documents related to extensions of credit made by FNFG
to the Company; more specifically the Company’s line of credit, term note and
real estate mortgage (the “Debt”) with FNFG. Under the terms of the Agreement,
FNFG will forbear from exercising its rights and remedies arising under the Loan
Documents from the Existing Defaults. The Agreement is in effect until (i) June
1, 2009; or (ii) the date on which FNFG elects to terminate the Agreement upon
the occurrence of an event of default under the Agreement or under the Loan
Documents (other than an Existing Default); or (iii) the date on which any
subsequent amendment to the Agreement becomes effective (the “Forbearance
Period”).
  Under the
Agreement, during the Forbearance Period: FNFG will waive any further default
relating to the maximum monthly net loss covenant and minimum debt service
coverage ratio provided the Company shows a net loss no greater than $300,000
for the quarter ending March 31, 2009, and on or before May 1, 2009, the Company
must produce to FNFG a legally binding and executed commitment letter from a
bona-fide third party lender setting forth the terms of a full refinancing of
the Debt to close on or before June 1, 2009.
  During
the Forbearance Period, FNFG will continue to place a hold on one of our
accounts, but will release up to $5,000 per month from the account to be used
for the purpose of paying a financial advisory firm engaged by the Company to
find and evaluate alternative funding sources; the financial advisory firm was
referred to the Company by FNFG.
  The
maximum available under the line of credit during the Forbearance Period will be
the lesser of $650,000, or the Net Borrowing Capacity. Net Borrowing Capacity is
defined as Gross Borrowing Capacity less the Inventory Value Cap. Gross
Borrowing Capacity is defined as (i) the sum of 80% of eligible accounts
receivable, (ii) 20% of raw material inventory and (iii) 40% of finished goods
inventory. Inventory Value Cap is defined as the lesser of $400,000, or the
combined value of items (ii) and (iii) of Gross Borrowing Capacity. Since
September 2008, the Company’s Net Borrowing Capacity has declined from
$1,195,000 to $795,000 as of the date of this report.
  During
the Forbearance Period, interest shall accrue on the line of credit at the rate
of prime plus 4%, an increase from prime plus 1%. Interest accruing on the real
estate mortgage during the Forbearance Period shall remain unchanged at the
fixed rate of 7.5% and interest on the term note shall remain unchanged at the
fixed rate of 7.17%. In the event of default under the Agreement, interest under
the line of credit shall increase to the greater of prime plus 6% or 10%. The
line of credit shall terminate on June 1, 2009.
  If we are
unable to maintain compliance with any of the conditions during the Forbearance
Period, or if we are unable to secure a full refinancing of the Debt on or
before June 1, 2009, FNFG will have the right to accelerate the Debt, however,
the Company could request an extension of the Forbearance Period. If FNFG did
not agree to an extension of the Forbearance Period and were to exercise its
right to accelerate the Debt, the Company does not have the funds available to
pay the Debt and FNFG may enforce their rights and remedies available under the
Loan Documents, including but not limited to foreclosure of its liens on the
Company’s assets.
  ITEM
1B. UNRESOLVED STAFF COMMENTS
  None.
  ITEM
2. PROPERTIES
  We
purchased our property in Kinderhook, New York in November 2001. The property
consists of a 30,000 square foot facility with approximately 22 surrounding
acres. Our Kinderhook facility houses administration, customer service, inside
sales, assembly and packaging and shipping. In November 2006, we refinanced
mortgages/loans and obtained a new loan through FNFG in the amount of $750,000.
The balance on this mortgage at fiscal year ended December 31, 2008 was
$739,000.
  15
  We lease
14,400 square feet of space in Logan Township, New Jersey that houses our bulk
strip manufacturing and research and development. The total minimum monthly
lease cost is $7,100.
  ITEM
3. LEGAL PROCEEDINGS
  Our NASDAQ
listing
  On
November 12, 2007, we received a notice from NASDAQ informing us that for the
last 30 consecutive business days, the bid price of our common stock had closed
below the minimum $1.00 per share requirement for continued inclusion under
NASDAQ Marketplace Rule 4310(c)(4). The letter stated that under NASDAQ
Marketplace Rule 4310(c)(8)(D), we would be provided with 180 calendar days, or
until May 12, 2008, to regain compliance with NASDAQ Marketplace Rule
4310(c)(4). To regain compliance, anytime before May 12, 2008, the closing bid
price of our common stock had to be $1.00 per share or more for a minimum of 10
consecutive business days.
  On May
13, 2008, we received a notice from NASDAQ informing us that pursuant to
NASDAQ’s previous communication of November 12, 2007, we had not regained
compliance with NASDAQ Marketplace Rule 4310(c)(4) related to the minimum
closing bid price of our common stock by May 12, 2008. The notice stated that
because we met all initial inclusion criteria for the NASDAQ Capital Market set
forth in NASDAQ Marketplace Rule 4310(c) (except for the bid price) on May 12,
2008, in accordance with NASDAQ Marketplace Rule 4310(c)(8)(D), we would be
provided an additional 180 calendar day compliance period, or until November 10,
2008 to regain compliance. To regain compliance, anytime before November 10,
2008, the bid price of our common stock had to close at $1.00 per share or more
for a minimum of 10 consecutive business days.
  On
October 30, 2008, we received a letter dated October 16, 2008 from NASDAQ
stating that, given the extraordinary market conditions, NASDAQ has decided to
suspend enforcement of the bid price and market value of publicly held shares
requirements through January 16, 2009. On October 16, 2008, NASDAQ filed an
immediately effective rule change with the U.S. Securities and Exchange
Commission (“SEC”) to implement the suspension. On December 22, 2008, we
received notice from NASDAQ stating that, given the continued extraordinary
market conditions, NASDAQ was extending the suspension of the bid price and
market value of publicly held shares requirements through
April 20, 2009. On March 24, 2009, we received a notice from NASDAQ that they
were further extending the suspension of the bid price and market value of
publicly held shares requirements. According to this new notice from
NASADAQ, enforcement of these rules is scheduled to resume onJuly
20, 2009. Any company in the compliance process for a bid price or market
value of publicly held shares concern will continue to be "frozen" at the same
stage of the process until the end of the suspension. During the suspension
period, companies can regain compliance and could still be delisted for other
reasons.  Prior to the resumption of these rules, NASDAQ will contact
us to inform us of the number of calendar days remaining in our compliance
period and the specific date by which we need to regain compliance. The NASDAQ
notices have no effect on the listing of ABMC’s common stock on NASDAQ as of the
date of this report, and our common shares continue to trade at levels below the
compliance threshold as of the date of this report.
  Other
Matters
  We have
been named in legal proceedings in connection with matters that arose during the
normal course of business, and that in our opinion are not
material.  While the ultimate result of any litigation cannot be
predicted, it is management’s opinion based upon consultation with counsel, that
it has adequately provided for losses that may be incurred related to these
claims.  If we are unsuccessful in defending any or all of these
claims, resulting financial losses could occur and such losses could have an
adverse effect on our financial position, results of operations and cash flows.
We are unaware of any proceedings being contemplated by governmental authorities
as of the date of this report.
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  None.
  16
  PART
II
 
 ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Market
Information
  Our
common shares trade on the National Association of Securities Dealers Automated
Quotation System Capital Market (NASDAQ Capital Market) under the symbol
ABMC.
  The
following table sets forth the high and low sale prices of our securities as
reported by the NASDAQ Capital Market for the periods
indicated.
  Common
Shares
  Fiscal year ending December 31,
      2008
                      
                      High
                      
                      
                      LowQuarter
      ending December 31, 2008
                      
                      $
                      0.54
                      
                      
                      $
                      0.08Quarter
      ending September 30, 2008
                      
                      $
                      0.95
                      
                      
                      $
                      0.32Quarter
      ending June 30, 2008
                      
                      $
                      0.98
                      
                      
                      $
                      0.33Quarter
      ending March 31, 2008
                      
                      $
                      0.98
                      
                      
                      $
                      0.46
 
 Fiscal year ending December 31,
      2007
                    
                    High
                    
                    
                    LowQuarter
      ending December 31, 2007
                    
                    $
                    1.00
                    
                    
                    $
                    0.36Quarter
      ending September 30, 2007
                    
                    $
                    1.43
                    
                    
                    $
                    0.94Quarter
      ending June 30, 2007
                    
                    $
                    1.31
                    
                    
                    $
                    0.90Quarter
      ending March 31, 2007
                    
                    $
                    1.33
                    
                    
                    $
                    0.89
 
 Holders
  As of
March 27, 2009, there were approximately 4,000 holders of our securities. As of
March 27, 2009, there were outstanding 21,744,768 common shares.
  Dividends
  We have
not declared any dividends on our common shares and do not expect to do so in
the foreseeable future. Future earnings, if any, will be retained for use in our
business.
  Securities authorized for
issuance under equity compensation plans previously approved by security
holders
  We have
two Non-statutory Stock Option Plans in place (the Fiscal 2000 Plan and the
Fiscal 2001 Plan) that have been adopted by our Board of Directors and
subsequently approved by our shareholders. The Plans provide for the granting of
options to employees, directors, and consultants.
  Securities authorized for
issuance under equity compensation plans not previously approved by security
holders
  As part
of their compensation as the placement agent in our August 2008 Series A
Convertible Debenture Offering, Cantone Research, Inc. (“Cantone”) was issued a
four year warrant to purchase 30,450 shares of the Company’s common stock at an
exercise price of $0.37 per share, and a four year warrant to purchase 44,550
shares of the Company’s common stock at an exercise price of $0.40 per share.
All warrants issued to Cantone were immediately exercisable upon
issuance.
  17


The
following table summarizes this information as of December 31, 2008, with
respect to compensation plans (including individual compensation arrangements)
under which our common stock is authorized for issuance:




Plan Category
                          
                          Number of securities to be
                            issued upon exercise of
                            outstanding options,
                            warrants and rights
                            (a)
                          
                          
                          Weighted-average
                            exercise price of
                            outstanding options,
                            warrants and rights
                            (b)
                          
                          
                          Number of securities remaining
                            available for future issuance under
                            equity compensation plans
                            (excluding securities
                            reflected in column (a))
                            (c)Equity
      Compensation Plans approved by security holders
                          
                          
                          3,762,080
                          
                          
                          $
                          1.34
                          
                          
                          
                          954,920Equity
      Compensation Plans not approved by security holders
                          
                          
                          75,000
                          
                          
                          $
                          0.39
                          
                          
                          NA




ITEM
6.  SELECTED FINANCIAL DATA


Not
applicable.
  ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
  The following discussion and
analysis provides information which we believe is relevant to an assessment and
understanding of our financial condition and results of operations. The
discussion should be read in conjunction with the Financial Statements contained
herein and the notes thereto. Certain statements contained in this Annual Report
on Form 10-K, including, without limitation, statements containing the words“believes”,“anticipates”,“estimates”,“expects”,“intends”,“projects”, and words of similar import, are
forward looking as that term is defined by the Private Securities Litigation
Reform Act of 1995, or 1995 Act, and releases issued by the SEC. These
statements are being made pursuant to the provisions of the 1995 Act and with
the intention of obtaining the benefits of the "Safe Harbor" provisions of the
1995 Act. We caution that any forward looking statements made herein are not
guarantees of future performance and that actual results may differ materially
from those in such forward looking statements as a result of various factors,
including, but not limited to, any risks detailed herein, including the“Risk
Factors”section
contained in Item 1A of this Form 10-K, or detailed in our most recent reports
on Form 10-Q and Form 8-K and from time to time in our other filings with the
SEC and amendments thereto. We are not undertaking any obligation to update
publicly any forward-looking statements. Readers should not place undue reliance
on these forward-looking statements.
  Overview
and Plan of Operations
  During
the year ended December 31, 2008 (“2008”), we sustained a net loss of $850,000
from net sales of $12,657,000, and had net cash used in operating activities of
$303,000. During the year ended December 31, 2007 (“2007”), the Company
sustained a net loss of $990,000 from net sales of $13,872,000, and had net cash
used in operating activities of $605,000.
  During
the twelve months ended December 31, 2008, we continued our program to market
and distribute our urine and oral fluid point of collection drug tests. In 2008,
we also received 510(k) clearance for our Rapid TOX Cup product line, and we
were granted a CLIA waiver related to our Rapid TOX product line. Both of these
products were developed to provide our customers with more cost effective
testing options while maintaining the level of quality to which our customers
have become accustomed. We expect these marketing clearances to open up new
markets for us. In addition, we anticipate that the CLIA waiver will have a
positive impact on sales to our lab partner.
  During
2008, we took steps to improve our financial position. Beginning in April 2008,
we implemented a number of cost cutting initiatives including, but not limited
to, reducing the number of employees in our selling and marketing, research and
development and general and administrative departments. We also continue to take
steps to reduce manufacturing costs related to our products to increase our
gross margin. Unfortunately, in the fourth quarter of 2008, the global economic
crisis began to have a more negative impact on our sales and we began to see a
more substantial decline. Therefore, while results from operations have improved
when comparing 2008 to 2007, the improvement is less than what was
expected.
  18
  ABMC’s
sales strategy continues to be a focus on direct sales, while identifying new
contract manufacturing operations and pursuing new national accounts.
Simultaneously with these efforts, we continue to focus on the development of
new products to address market trends and needs. During 2008, we continued to
market and distribute our urine and oral fluid based point of collection tests
for drugs of abuse, our Rapid Reader® drug screen result and data management
system, and performed contract manufacturing services for unaffiliated third
parties.
  The
Company’s continued existence is dependent upon several factors, including our
ability to raise revenue levels and reduce costs to generate positive cash
flows, and to sell additional shares of our common stock to fund operations
and/or obtain additional credit facilities, if and when necessary.
  Critical
Accounting Policies and Estimates
  ABMC’s
discussion and analysis of its financial condition and results of operations are
based upon ABMC’s financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Note A to our financial statements, describes the significant accounting
policies and methods used in the preparation of our financial
statements.
  Use of Estimates:The
preparation of these financial statements requires ABMC to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, ABMC evaluates its estimates, including those related to product
returns, bad debts, inventories, income taxes, warranty obligations,
contingencies and litigation. Estimates are based on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
  Revenue &
Returns:ABMC records estimated reductions to revenue for
customer returns and allowances based on historical experience. If market
conditions were to decline, actions may be taken to increase customer incentive
offerings possibly resulting in an incremental reduction of gross margins.
Revenue is recognized upon shipment to customers.
  Accounts Receivable & Allowance
for Doubtful Accounts: ABMC maintains allowances for doubtful accounts
for estimated losses resulting from the inability of its customers to make
required payments. If the financial condition of ABMC’s customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
  Inventory:ABMC will write
down inventory for estimated obsolescence or unmarketable inventory equal to the
difference between the cost of inventory and the net realizable value based upon
assumptions about future demand and market conditions. If actual market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
  Valuation Allowance:ABMC
records a valuation allowance to reduce its deferred tax assets to the amount
that is more likely than not to be realized. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of our net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made.
  19
  Results
of operations for the twelve months ended December 31, 2008, compared to the
twelve months ended December 31, 2007
  Net
Sales:Net sales
decreased 8.8% in 2008 compared to net sales in 2007. We experienced declines in
our Government/Corrections/Law Enforcement market throughout 2008 as a result of
general economic conditions and price pressure from foreign competitors. Our
Corporate/Workplace market was also negatively impacted by the global economic
crisis in 2008. Beginning in the third quarter of 2008, sales in our national
account division, which primarily sells in the Corporate/Workplace market,
declined as the downturn of the economy negatively impacted new and existing
employment levels; historically we have seen year over year growth in this
division. These decreases in Corporate/Workplace and Government/Corrections/Law
Enforcement markets were offset by an increase in sales in the International
market, primarily through increased sales in Latin America, and an increase in
contract manufacturing sales. We expect to continue to see declines in
Corporate/Workplace market as a result of declines in the employment levels of
our customers, and increased price pressure in the Government/Corrections/Law
Enforcement market, until such time that the economy begins to recover; we
expect that we will continue to experience declines in net sales. We will
continue to focus our sales efforts on national accounts, direct sales and
contract manufacturing, while striving to reduce manufacturing costs, which
could enable us to be more cost competitive.
  Cost of goods
sold:Cost
of goods sold was relatively unchanged year over year; in 2008, cost of goods
sold was 58.4% of net sales, and in 2007 cost of goods sold was 58.7% of net
sales. When comparing cost of goods sold in 2008 to cost of goods sold in 2007,
until the fourth quarter of 2008 we were able to improve cost of goods sold as a
percentage of sales through manufacturing efficiencies as a result of
automation, even with increased costs in raw materials required to manufacture
our products. In the fourth quarter of 2008, the unanticipated sharp decline in
sales due to the downturn of the economy negatively impacted our cost of goods
sold; more specifically, our labor and overhead costs and raw material
expenditures were not in line with the level of sales achieved in the fourth
quarter. Subsequent to the fourth quarter, we reduced manufacturing labor and
overhead costs and raw material expenditures in efforts to improve cost of goods
sold going forward in 2009, anticipating that sales will continue to decline
until the economy begins to recover.
  Affecting
cost of goods sold in 2007 were disposals of certain inventory components
manufactured during the introduction of the new Rapid TOX product in the fourth
quarter of fiscal year ended December 31, 2005, inventory disposals of expired
products, and disposals of components as a result of product improvements. In
the fourth quarter of 2008, we increased our reserve for slow moving and
obsolete inventory from $250,000 to $308,000 and we believe this increased
reserve is currently adequate.
  Operating
Expenses:Operating expenses for 2008 decreased 10.6% when compared to
operating expenses in 2007. Operating expenses as a percentage of sales also
improved to 46.5% of net sales in 2008, compared to 47.5% of net sales in 2007.
Decreases in cost associated with our CLIA waiver application as well as the
implementation of cost cutting initiatives implemented in research and
development, selling and marketing, and general and administrative resulted in
expense reductions in all three divisions. The reductions were partially offset
by certain increases provided in the following detail:
  Research and development
(“R&D”)
  R&D
expenses for 2008 decreased 15.8% when compared to R&D expenses in 2007.
Savings in salaries and benefits, consulting fees, FDA compliance costs,
supplies, travel, phone, patent/license fees and depreciation were minimally
offset by increases in facilities costs. This reduction in expenses is primarily
a result of personnel reductions made in the first half of 2008 as part of our
cost cutting initiatives. In addition, in June 2008, our Vice President of
Product Development retired. The former vice president received a payment of
$35,000, equal to half his annual salary of $70,000. We paid this in 3 equal
monthly installments of approximately $11,666 each beginning July 31, 2008, with
the last payment being made on September 30, 2008. We do not expect to fill this
position in the future.  Throughout 2008, our R&D department
continued to focus their efforts on the enhancement of our current products and
exploration of contract manufacturing opportunities.
  20
  Selling and
marketing
  Selling
and marketing expenses for 2008 decreased 11.1% when compared to selling and
marketing expenses in 2007. Reductions in sales salaries and commissions, travel
expense, trade show related expenses, consulting fees and depreciation were
partially offset by increases in postage, advertising expense, royalty expense,
marketing salaries and miscellaneous expenses. As with R&D, the expense
reductions in selling and marketing are as a result of our cost cutting
initiatives that began in the first half of 2008. The increase in miscellaneous
expense is attributed to a settlement of a claim related to a product
return.  Throughout 2008, we promoted our products through selected
advertising, participation at high profile trade shows and other marketing
activities. Our direct sales force continued to focus their selling efforts in
our targets markets, which include but are not limited to, Corporate/Workplace,
and Government/Corrections/Law Enforcement. In addition, beginning in the fourth
quarter of 2008, our direct sales force began to focus more efforts on the
Clinical/Physician/Hospital market, as a result of our receipt of a CLIA waiver
related to our Rapid TOX product line.
  General and administrative
(“G&A”)
  G&A expenses for 2008 decreased
8.9% when compared to G&A expenses in 2007. G&A was also positively
impacted by our cost cutting initiatives. Decreases in investor relations
expense, insurance costs, consulting fees, licenses and permits, outside service
fees and repairs and maintenance were partially offset by increases in quality
assurance salaries and supplies, general and administrative salaries and
benefits, legal fees, miscellaneous expense, bad debts and bank service
fees.  The increase in miscellaneous expense stems from establishing a
reserve against a long term receivable. In addition, the costs associated with
our CLIA waiver application for our Rapid TOX product line were only $13,000 in
2008, compared to $236,000 in 2007. 2007 also included non-cash compensation of
$26,000 related to the amortization of expense of options issued to two
employees in 2006, our former Chief Financial Officer and our former Vice
President of Product Development; this expense did not occur in
2008.
  In 2008,
we implemented a number of cost cutting initiatives and we believe that our
current infrastructure is sufficient to support our business. However,
additional investments in research and development, selling and marketing and
general and administrative may be necessary to develop new products in the
future and enhance our current products to meet the changing needs of the point
of collection testing market, to grow our contract manufacturing operations, to
promote our products in our markets and to institute changes that may be
necessary to comply with various new public company reporting requirements
including but not limited to requirements related to internal controls over
financial reporting.
  Other income and
expense:  Other expense incurred during 2008 consisted of
losses on disposals of assets and penalties accrued on a sales tax liability.
This was offset by other income earned attributable to a grant received in 2002,
2003 and 2005. The Company received the original grant from the Columbia
Economic Development Corporation in three parts totaling $100,000. The final
installment of $25,000 was received in the first quarter of 2005. The grant is
convertible to a loan based upon a percentage of the grant declining from 90% of
the grant amount in 2003 to 0% in 2012. The grant is convertible to a loan only
if the employment levels in the Kinderhook facility drop below 45 employees at
any time during the year.  The employment levels in the Kinderhook
facility were 61 and 81 at December 31, 2008 and December 31, 2007,
respectively.The amount of
other income earned on this grant was $10,000 in 2008 and 2007.
  In 2008
and 2007, we incurred interest expense related to our loans and lines of credit
with FNFG.  In 2008 and 2007, we earned interest on our cash
accounts.
  Results
of operations for the twelve months ended December 31, 2007, compared to the
twelve months ended December 31, 2006 (“2006”)
  Net
Sales:  Net sales increased less than 1% in 2007 compared to
net sales in 2006. The slight increase is attributed to increases in our
Corporate/Workplace market (through increases in national account sales) and
International markets, which were offset by decreases in the
Government/Corrections/Law Enforcement market and contract manufacturing. The
decrease in the Government/Corrections/Law Enforcement markets is a result of
price pressures in the market due to competition with foreign manufacturers. The
decrease in contract manufacturing sales is primarily a result of timing of the
receipt of orders from one of our contract manufacturing customers.
  21
  Cost of goods
sold:  The increase in cost of goods sold in 2007 from 2006 was
primarily as a result of increased costs in overhead and labor, stemming from
the greater diversity and complexity of new products as well as increases in
some material costs. Also affecting cost of goods sold in 2007 are disposals of
certain inventory components manufactured during the introduction of our Rapid
TOX product, inventory disposals of expired product and disposals of components
as a result of product enhancements.
  Operating
expenses:  Operating expenses remained relatively unchanged in
2007 when compared to operating expenses in 2006. Increases in research and
development and general and administrative were offset by a decrease in selling
and marketing expenses.
  Research and
Development
  R&D
expenses increased in 2007 when compared to 2006. The increase in R&D
expense was due to increases in salaries and facilities costs, which were
partially offset by savings in consulting fees, and compliance
costs.  In 2006, we received a non-refundable fee of $25,000 from a
customer for a development plan that was included as a reduction in expense in
R&D in 2006; this did not recur in 2007.
  Selling and
marketing
  Selling
and marketing decreased in 2007 when compared to 2006. This reduction is
primarily a result of savings in salary and royalty expense, which was offset by
increases in commission expense, advertising and trade show
expense.
  General and
Administrative
  G&A
expense increased in 2007 when compared to 2006. Increased regulatory costs
associated with our CLIA waiver application, along with increases in investor
relations expense and salaries, were offset by decreases in outside service and
communication costs. Non-cash compensation of $26,000 in 2007 and $37,000 in
2006 stems from the amortization of expense of options issued to two employees
in 2006, our former Chief Financial Officer and our former Vice President of
Product Development.
  Other income and
expense:Other income earned in 2007 and 2006 was attributable
to a grant received in 2002, 2003 and 2005.  The Company received the
original grant from the Columbia Economic Development Corporation in three parts
totaling $100,000.  The final installment of $25,000 was received in
the first quarter of 2005.  The grant is convertible to a loan based
upon a percentage of the grant declining from 90% of the grant amount in 2003 to
0% in 2012.  The grant is convertible to a loan only if the employment
levels in the Kinderhook facility drop below 45 employees at any time during the
year.  The employment levels in the Kinderhook facility were 81 and 87
at December 31, 2007 and December 31, 2006, respectively.Other income
was offset by losses on disposals of assets in 2007.
  In 2007
and 2006, we incurred interest expense related to our loans and lines of credit
with FNFG.  In 2007 and 2006, we earned minimal interest on our cash
accounts.
  LIQUIDITY
AND CAPITAL RESOURCES AS OF DECEMBER 31, 2008
  The
Company’s cash requirements depend on numerous factors, including product
development activities, penetration of the direct sales market, market
acceptance of our new products, and effective management of inventory levels in
response to sales forecasts. We expect to devote capital resources to continue
product development and research and development activities. We will examine
other growth opportunities including strategic alliances and expect such
activities will be funded from existing cash and cash equivalents, issuance of
additional equity or additional borrowings, subject to market and other
conditions. The Company’s financial statements for the fiscal year ended December
31, 2008have been prepared assuming we will continue as a going concern.
As of the date of this report, we do not believe that our current cash balances,
together with cash generated from future operations and amounts available under
our credit facilities will be sufficient to fund operations for the next twelve
months. If cash generated from operations is not sufficient to satisfy our
working capital and capital expenditure requirements, we will be required to
sell additional equity or obtain additional credit facilities. There is no
assurance that such financing will be available or that we will be able to
complete financing on satisfactory terms, if at all.
  22
  The
Company has a line of credit, a real estate mortgage and a term note (“Credit
Facilities”) with FNFG.
  Line of
Credit
  As
disclosed in our Current Report on Form 8-K filed with the Securities and
Exchange Commission (the “Commission”) on August 8, 2008, effective August 1,
2008, we entered into an amendment with FNFG related to the original Loan
Documents (the “Amendment”). The Amendment combined two lines of credit already
in place with FNFG into one line of credit (the “Line of Credit”) along with
amending certain terms related to the combined Line of Credit. Pursuant to the
Amendment, we are required to maintain certain financial covenants; our monthly
net loss must not exceed $75,000 during any month and, while any loans or
commitments are outstanding and due FNFG, we must maintain a minimum debt
service coverage ratio of 1.10x, to be measured at December 31, 2008. The
minimum debt service coverage ratio is defined as net income plus interest
expense plus depreciation plus expense related to the amortization of derivative
securities divided by required principal payments over the preceding twelve
months plus interest expense. There is no requirement for annual repayment of
all principal on this Line of Credit; it is payable on demand. The purpose of
this Line of Credit is to provide working capital. The amount outstanding on the
Line of Credit was $431,000 at December 31, 2008. At December 31, 2007, the Line
of Credit was two separate lines of credit and the amount outstanding was
$690,000 under one line and $33,000 under the other line, totaling
$723,000.
  Real Estate
Mortgage
  We have a
real estate mortgage on our facility in Kinderhook, New York through FNFG. It
has a term of 10 years with a 20 year amortization. The interest rate is fixed
at 7.5% for the first 5 years and beginning with year 6 through the end of the
loan term, the rate changes to 2% above the Federal Home Loan Bank of New York 5
year term, 15 year Amortization Advances Rate. Our monthly payment is $6,293 and
payments commenced on January 1, 2007, with the final payment being due on
December 1, 2016. The loan is collateralized by our facility in Kinderhook, New
York and its personal property.  The amount outstanding on this
mortgage was $739,000 and $758,000 at December 31, 2008 and December 31, 2007,
respectively.
  Term
Note
  We also
have a Term Note with FNFG in the amount of $539,000 (the “Note”). The term of
the Note is 5 years with a fixed interest rate of 7.17%. Our monthly payment is
$10,714 and payments commenced on February 1, 2007, with the final payment being
due on January 23, 2012. We have the option of prepaying the Note in full or in
part at any time during the term without penalty. The loan is secured by certain
assets now owned or hereafter acquired. The proceeds received were used for the
purchase of manufacturing automation equipment. The amount outstanding on this
Note was $356,000 and $455,000 at December 31, 2008 and December 31, 2007,
respectively.
  Forbearance
  On
February 4, 2009, we were notified by FNFG, that we were in default under the
Loan Documents with FNFG related to the Credit Facilities; specifically that we
failed to comply with the maximum monthly net loss covenant. As a result of the
default, FNFG had the right to immediately accelerate the principal amount due
under our Credit Facilities, which was $1,636,635.97 as of the date of the
notice, however, FNFG decided not to immediately accelerate as they expected the
Company to enter into a Forbearance Agreement memorializing certain measures and
conditions.
  On March
12, 2009, we entered into a Forbearance Agreement (the “Agreement”) with FNFG.
The Agreement addresses the Company’s non-compliance with the maximum monthly
net loss and the minimum debt service coverage ratio covenants (“Existing
Defaults”) under the Loan Documents related to extensions of credit made by FNFG
to the Company; more specifically the Company’s line of credit, term note and
real estate mortgage (the “Debt”) with FNFG. Under the terms of the Agreement,
FNFG will forbear from exercising its rights and remedies arising under the Loan
Documents from the Existing Defaults. The Agreement is in effect until (i) June
1, 2009; or (ii) the date on which FNFG elects to terminate the Agreement upon
the occurrence of an event of default under the Agreement or the Loan Documents
(other than an Existing Default); or (iii) the date on which any subsequent
amendment to the Agreement becomes effective (the “Forbearance
Period”).
  23
  Under the
Agreement, during the Forbearance Period: FNFG will waive any further default
relating to the maximum monthly net loss covenant and minimum debt service
coverage ratio provided the Company shows a net loss no greater than $300,000
for the quarter ending March 31, 2009, and on or before May 1, 2009, the Company
must produce to FNFG a legally binding and executed commitment letter from a
bona-fide third party lender setting forth the terms of a full refinancing of
the Debt to close on or before June 1, 2009.
  During
the Forbearance Period, FNFG will continue to place a hold on one of our
accounts (with a balance of $108,000), but will release up to $5,000 per month
from the account to be used for the purpose of paying a financial advisory firm
engaged by the Company to find and evaluate alternative funding sources; the
financial advisory firm was referred to the Company by FNFG.
  The
maximum available under the line of credit during the Forbearance Period will be
the lesser of $650,000, or the Net Borrowing Capacity. Net Borrowing Capacity is
defined as Gross Borrowing Capacity less the Inventory Value Cap. Gross
Borrowing Capacity is defined as the sum of (i) 80% of eligible accounts
receivable, (ii) 20% of raw material inventory and (iii) 40% of finished goods
inventory. Inventory Value Cap is defined as the lesser of $400,000, or the
combined value of items (ii) and (iii) of Gross Borrowing Capacity. Since
September 2008, the Company’s Net Borrowing Capacity has declined from
$1,195,000 to $795,000 as of the date of this report.
  During
the Forbearance Period, interest shall accrue on the line of credit at the rate
of prime plus 4%, an increase from prime plus 1%. Interest accruing on the real
estate mortgage during the Forbearance Period shall remain unchanged at the
fixed rate of 7.5% and interest on the term note shall remain unchanged at the
fixed rate of 7.17%. In the event of default under the Agreement, interest under
the line of credit shall increase to the greater of prime plus 6% or 10%. The
line of credit shall terminate on June 1, 2009.
  Working
Capital
  The
Company’s working capital decreased $887,000 at December 31, 2008, when compared
to working capital at December 31, 2007. This decrease in working capital is
primarily a result of the reclassification of long-term bank debt with FNFG to
short-term, as a result of the Company’s default under the Loan Documents
related to our Credit Facilities and the subsequent Forbearance
Agreement.
  We have
historically satisfied net working capital requirements through cash from
operations, bank debt, occasional proceeds from the exercise of stock options
and warrants (approximately $623,000 since 2002) and through the private
placement of equity securities ($3,299,000 in gross proceeds since August 2001,
with net proceeds of $2,963,000 after placement, legal, transfer agent,
accounting and filing fees).
  Cash
Flows
  The net
loss in 2008, together with increases in inventory and decreases in wages
payable offset by decreases in accounts receivable and prepaid expenses and
increases in other non-current assets, accrued expenses, accounts payable and
other long-term liabilities, resulted in cash used in operations of $303,000 in
2008.  The primary use of cash in 2008 was funding of operations. We
have never paid any dividends on our common shares and we anticipate that all
future earnings, if any, will be retained for use in our business.
  Net cash
used in investing activities in both 2008 and 2007 was for investment in
property, plant and equipment. Included in 2007 was $706,000 representing the
cost of automation equipment.
  Net cash
provided by financing activities in 2008 consisted of proceeds from our Series A
Debenture financing and line of credit, which was offset by line of credit
payments, debt issuance costs and payments on outstanding debt.  Net
cash provided by financing activities in 2007 consisted of proceeds from the
exercise of stock options, proceeds from our line of credit and proceeds from a
5-year term note, which was offset by debt and line of credit
payments.
  24
  At
December 31, 2008 and December 31, 2007, we had cash and cash equivalents of
$201,000 and $336,000 respectively.
  Debenture
Financing
  The
Company completed an offering of Series A Debentures in August 2008 and received
gross proceeds of $750,000 in principal amount of Series A Debentures (see
Current Report on Form 8-K and amendment on Form 8-K/A-1 filed with the
Commission on August 8, 2008 and August 18, 2008 respectively). The net proceeds
of the offering of Series A Debentures were $631,000 after $54,000 of placement
agent fees and expenses, legal and accounting fees of $63,000 and $2,000 of
state filing fees. The securities issued in this transaction were sold pursuant
to the exemption from registration afforded by Rule 506 under Regulation D
("Regulation D") as promulgated by the Commission under the Securities Act of
1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933
Act.
  The
Series A Debentures accrue interest at a rate of 10% per annum (payable by the
Company semi-annually) and mature on August 1, 2012. The payment of principal
and interest on the Series A Debentures is subordinate and junior in right of
payment to all Senior Obligations, as defined under the Series A Debentures.
Holders of the Series A Debentures will have a right of conversion of the
principal amount of the Series A Debentures into shares (the “Conversion
Shares”) of the common stock of the Company (“Common Stock”), at a conversion
rate of 666.67 shares per $500 in principal amount of the Series A Debentures
(representing a conversion price of approximately $0.75 per share). This
conversion right can be exercised at any time, commencing the earlier of (a) 120
days after the date of the Series A Debentures, or (b) the effective date of a
Registration Statement to be filed by the Company with respect to the Conversion
Shares. The Company has the right to redeem any Series A Debentures that have
not been surrendered for conversion at a price equal to the Series A Debentures’
face value plus $0.05 per underlying common share, or $525 per $500 in principal
amount of the Series A Debentures, representing an aggregate conversion price of
$787,500. This redemption right can be exercised by the Company at any time
within 90 days after any date when the closing price of the Common Stock has
equaled or exceeded $2.00 per share for a period of 20 consecutive trading
days.
  As
placement agent Cantone Research, Inc. (“CRI”) received a Placement Agent fee of
$52,500, or 7% of the gross principal amount of Series A Debentures sold. In
addition, the Company issued Cantone a four year warrant to purchase 30,450
shares of the Company’s common stock at an exercise price of $0.37 per share
(the closing price of the Company’s common shares on the Closing Date) and a
four year warrant to purchase 44,550 shares of the Company’s common stock at an
exercise price of $0.40 per share (the closing price of the Company’s common
stock on the Series A Completion Date), (together the “Placement Agent
Warrants”). All warrants issued to CRI are immediately exercisable upon
issuance.
  Pursuant
to a Registration Rights Agreement, the Company will use reasonable efforts to
register the Conversion Shares and the shares of Common Stock issuable upon
exercise of the Placement Agent Warrants.
  We will
need to raise additional capital in fiscal 2009 to be able to continue
operations. If events and circumstances occur such that we do not meet our
current operating plans, we are unable to raise sufficient additional equity or
debt financing, or our credit facilities are insufficient or not available, we
may be required to further reduce expenses or take other steps which could have
a material adverse effect on our future performance.
  RECENT
ACCOUNTING PRONOUNCEMENTS
  In June
2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes—an
Interpretation of FASB Statement No. 109” (“FIN 48”).  This
Interpretation clarified the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes”. We adopted FIN 48 on
January 1, 2007 and it did not have a significant effect on our financial
statements.
  In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 established a common definition for fair value to be
applied to U.S. GAAP guidance requiring use of fair value, established a
framework for measuring fair value, and expanded disclosure about such fair
value measurements. SFAS No. 157 became effective for our financial assets and
liabilities on January 1, 2008.  The FASB has deferred the implementation
of the provisions of SFAS No. 157 relating to certain nonfinancial assets and
liabilities until January 1, 2009. SFAS No. 157 did not materially affect how we
determine fair value.
  25
  In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of SFAS No.
115” (“SFAS No. 159”). This new standard permits entities to choose to measure
many financial instruments and certain warranty and insurance contracts at fair
value on a contract-by-contract basis. SFAS No. 159 became effective on January
1, 2008. We have not elected the fair value option for any of our existing
financial instruments on the effective date and have not determined whether or
not we will elect this option for any eligible financial instruments we acquire
in the future.
  In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements” (“SFAS No. 160”). Effective for the Company as of January
1, 2009, SFAS No. 141(R) requires the acquiring entity in a business combination
to recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. Effective January 1, 2009, SFAS No. 160 requires all entities to
report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. Moreover, SFAS No. 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions. We are evaluating the impact of adopting SFAS No. 141(R) and SFAS
No. 160, if any, on our financial statements.
  In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an Amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 expands the disclosure requirements in SFAS No. 133,
regarding an entity’s derivative instruments and hedging activities. SFAS No.
161 is effective on January 1, 2009. We are evaluating the impact of adopting
SFAS No. 161, if any, on our financial statements.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 shall
be effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles”. We
are evaluating the impact of adopting SFAS No. 162, if any, on our financial
statements.
  In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts” (“SFAS No. 163”), which clarifies how FASB
Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies
to financial guarantee insurance contracts issued by insurance enterprises. The
standard is effective for financial statements issued for fiscal years beginning
after December 15, 2008, including interim periods in that year.  We
are evaluating the impact of adopting SFAS No. 163, if any, on our financial
statements.
  26
  ITEM 7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  Not
applicable.
  ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA
  Our
Financial Statements are set forth beginning on page F-1.
  ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None.
  ITEM
      9A(T).
              CONTROLS
      AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  Management
has reviewed the effectiveness of our "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as
of the end of the period covered by this report and have concluded that the
disclosure controls and procedures are effective to ensure that material
information relating to the Company is recorded, processed, summarized, and
reported in a timely manner.
  Management’s
Report on Internal Control Over Financial Reporting
  Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended.  Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.  Our internal control over financial reporting
includes those policies and procedures that:
  (i)  pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of our assets;
  (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorization of Management; and
  (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
  Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or the degree of compliance may
deteriorate.
  Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008.  In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organization of the Treadway
Commission (COSO) in Internal Control-Integrated Framework.  Based on
that assessment, Management has concluded that our internal control over
financial reporting was effective as of December 31, 2008.
  Changes
in Internal Control Over Financial Reporting
  There
have been no changes in our internal control over financial reporting during the
last quarterly period covered by this report that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
  This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by our independent
registered public accounting firm pursuant to temporary rules of the Securities
and ExchangeCommission that permit
us to provide only Management's report in this annual report.
  27
  ITEM
      9B.
              OTHER
      INFORMATION
  None.
  PART
III
  ITEM
      10.
              DIRECTORS,
      EXECUTIVE OFFICERS, AND CORPORATE
GOVERNANCE
  The
information required by this item is contained in our definitive Proxy Statement
with respect to our Annual Meeting of Shareholders for the fiscal year ending
December 31, 2008, under the captions “Discussion of Proposal Recommended by
Board”, “Directors that are not Nominees”, “Additional Executive Officers and
Senior Management”, “Section 16(a) Beneficial Ownership Reporting Compliance”,
“Code of Ethics”, “Audit Committee” and “Audit Committee Financial Expert” and
is incorporated herein by reference.
  ITEM
      11.
              EXECUTIVE
      COMPENSATION
  The
information required by this item is contained in our definitive Proxy Statement
with respect to our Annual Meeting of Shareholders for the fiscal year ending
December 31, 2008, under the captions “Executive Compensation”, “Compensation
Committee Interlocks and Insider Participation”, and “Compensation Committee
Report”, and is incorporated herein by reference.
  ITEM
      12.
              SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
  The
information required by this item is contained within Item 5.Market for Common Equity
and Related Stockholders Matters earlier in this Annual Report on Form 10-K and
in our definitive Proxy Statement with respect to the Annual Meeting of
Shareholders for the fiscal year ending December 31, 2008, under the caption
“Security Ownership of Management and Certain Beneficial Owners” and is
incorporated herein by reference.
  ITEM 13.
              CERTAIN RELATIONSHIPS AND
      RELATED TRANSACTIONS, AND DIRECTOR
  INDEPENDENCE
  The
information required by this item is contained in our definitive Proxy Statement
with respect to the Annual Meeting of Shareholder for the fiscal year ending
December 31, 2008, under the captions “Certain Relationships and Related
Transactions” and “Independent Directors”, and is incorporated herein by
reference.
  ITEM
      14.
              PRINCIPAL
      ACCOUNTING FEES AND SERVICES
  The
information required by this item is contained in our definitive Proxy Statement
with respect to the Annual Meeting of Shareholder for the fiscal year ending
December 31, 2008, under the caption “Independent Public Accountants”, and is
incorporated herein by reference.
  PART
IV
  ITEM
      15.
              EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES
  (a)
              The
      following documents are filed as part of this Annual Report on Form
      10-K:
  (1)
              Our
      financial statements
  PAGEReport
      of Independent Registered Public Accounting Firm – UHY LLP
                          F-2Balance
      Sheets
                          F-3Statements
      of Operations
                          F-4Statements
      of Changes in Stockholders’ Equity
                          F-5Statements
      of Cash Flows
                          F-6Notes
      to Financial Statements
                          F-7
  28
  (2)
              Financial
      Statement Schedule
  Such
schedules are not provided because they are not applicable or the required
information is provided in our Financial Statements and/or our Notes to the
Financial Statements.
  (3)
              See
      Item 15(b) of this Annual Report on Form
10-K.
  29
 
  (b)
              Exhibits
  Number
                                                      
                                                      Description of Exhibits3.5
                                                      
                                                      Bylaws(1)3.50
                                                      
                                                      Amended
      and Restated Bylaws(5)3.6
                                                      
                                                      Fifth
      amendment to the Certificate of Incorporation (filed as Exhibit 3.6 to the
      Company’s Form SB-2 filed on November 21, 1996 and incorporated herein by
      reference)3.7
                                                      
                                                      Sixth
      amendment to the Certificate of Incorporation(5)4.2
                                                      
                                                      Investor
      Registration Rights Agreement, dated August 22, 2001, among American Bio
      Medica Corporation and the investors(4)4.3
                                                      
                                                      Placement
      Agent Registration Rights Agreement, dated August 22, 2001, among American
      Bio Medica Corporation and the placement agent and its sub-agents(4)4.4
                                                      
                                                      Form
      of Warrant Agreement and Warrant among American Bio Medica Corporation and
      the investors(4)4.5
                                                      
                                                      Form
      of Warrant Agreement and Warrant among American Bio Medica Corporation and
      the placement agent and its sub-agents(4)4.6
                                                      
                                                      Fiscal
      1997 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
      Statement for its Fiscal 1997 Annual Meeting and incorporated herein by
      reference) (a)4.7
                                                      
                                                      Services
      Agreement dated September 7, 2005 by and between the Company and Barretto
      Pacific Corporation(10)4.8
                                                      
                                                      Stock
      Grant Agreement dated September 7, 2005 by and between the Company and
      Barretto Pacific Corporation(10)4.14
                                                      
                                                      Fiscal
      1998 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
      Statement for its Fiscal 1998 Annual Meeting and incorporated herein by
      reference) (a)4.15
                                                      
                                                      Fiscal
      2000 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
      Statement for its Fiscal 2000 Annual Meeting and incorporated herein by
      reference) (a)4.16
                                                      
                                                      Common
      Stock Purchase Agreement dated April 28, 2000 by and between the Company
      and Seaside Partners, L.P.(2)4.17
                                                      
                                                      Fiscal
      2001 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
      Statement for its Fiscal 2002 Annual Meeting and incorporated herein by
      reference) (a)4.18
                                                      
                                                      Extension
      Agreement by and between the Company and Steven Grodko4.19
                                                      
                                                      Registration
      Letter Agreement by and between the Company and Steven
    Grodko10.3
                                                      
                                                      Term
      Note with First Niagara Bank(11)10.6
                                                      
                                                      Contract
      of Sale dated May 19, 1999/Kinderhook, New York facility(2)10.7
                                                      
                                                      Agreement
      of Lease dated May 13, 1999/Kinderhook, New York facility(2)10.8
                                                      
                                                      Lease
      dated August 1, 1999/New Jersey facility(2)10.9
                                                      
                                                      Amendment
      dated March 23, 2001 to Lease dated August 1, 1999/New Jersey
      facility(3)10.10
                                                      
                                                      Amended
      Contract of Sale dated May, 2001/Kinderhook, New York facility(3)10.11
                                                      
                                                      Financial
      Advisory Agreement dated May 2, 2001 by and between Brean Murray &
      Co., Inc. and the Company(3)10.12
                                                      
                                                      Employment
      contract between the Company and Robert L. Aromando, Jr. (a)(3)10.13
                                                      
                                                      Employment
      contract between the Company and Stan Cipkowski (a)(3)10.14
                                                      
                                                      Employment
      contract between the Company and Douglas Casterlin (a)(3)10.15
                                                      
                                                      Employment
      contract between the Company and Keith E. Palmer (a)(3)10.16
                                                      
                                                      Warrant
      Agreement dated November 15, 2001 by and between the Company and Hudson
      River Bank & Trust Company(5)10.17
                                                      
                                                      Amendment
      No.3 dated August 20, 2002/New Jersey facility(6)10.18
                                                      
                                                      Employment
      contract between the Company and Gerald A. Moore (a)(6)
  30
  10.19
                                                                                
                                                                                Financial
      Advisory Agreement dated December 2, 2003 by and between Brean Murray
      & Co., Inc and the Company(7)10.19.1
                                                                                
                                                                                Settlement
      letter dated June 21, 2004 by and between Bran Murray & Co., Inc and
      the Company(8)10.20
                                                                                
                                                                                Contract
      of Sale/land-Kinderhook, NY facility(7)10.21
                                                                                
                                                                                Employment
      contract between the Company and Stan Cipkowski(a),(7)10.22
                                                                                
                                                                                Employment
      contract between the Company and Stan Cipkowski(a),(9)10.23
                                                                                
                                                                                Employment
      contract between the Company and Stan Cipkowski(12)10.24
                                                                                
                                                                                Employment
      contract between the Company and Keith E. Palmer(12)10.25
                                                                                
                                                                                Amendment
      No 4 dated October 9, 2006/Lease of New Jersey facility(13)10.26
                                                                                
                                                                                Amendment
      No. 5 dated January 19, 2007/Lease of New Jersey facility(13)10.27
                                                                                
                                                                                Employment
      contract between the Company and Stan Cipkowski(a)(14)10.28
                                                                                
                                                                                Employment
      contract between the Company and Martin Gould(a)(14)10.29
                                                                                
                                                                                Employment
      contract between the Company and Keith E. Palmer(a)(14)10.30
                                                                                
                                                                                Employment
      contract between the Company and Stefan Parker(a)(15)10.31
                                                                                
                                                                                Employment contract between the
      Company and Douglas Casterlin(a)(16)31.1
                                                                                
                                                                                Rule
      13a-14(a)/15d-14(a) Certification of the Chief Executive
      Officer31.2
                                                                                
                                                                                Rule
      13a-14(a)/15d-14(a) Certification of the Chief Financial
      Officer32.1
                                                                                
                                                                                Section
      1350 Certification of the Chief Executive Officer32.2
                                                                                
                                                                                Section
      1350 Certification of the Chief Financial
  Officer
  (a)
                Indicates
      an employee benefits plan, management contract or compensatory plan or
      arrangement in which a named executive officer
    participates.
 (1)
              Filed
      as the exhibit number listed to the Company’s Form 10-SB filed on November
      21, 1996 and incorporated herein by
reference.
 (2)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on August
      11, 2000 and incorporated herein by
reference.
 (3)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on August
      13, 2001 and incorporated herein by
reference.
 (4)
              Filed
      as the exhibit number listed to the Company’s Form S-3 filed on September
      26, 2001 and incorporated herein by
reference.
 (5)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on April
      15, 2002 and incorporated herein by
reference.
 (6)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on March
      31, 2003 and incorporated herein by
reference.
 (7)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on May 10,
      2004 and incorporated herein by
reference.
 (8)
              Filed
      as the exhibit number listed to the Company’s Form 10-QSB filed August 10,
      2004 and incorporated herein by
reference.
 (9)
              Filed
      as the exhibit number listed to the Company’s Form 10-QSB filed on
      November 12, 2004 and incorporated herein by
  reference.
 (10)
              Filed
      as the exhibit number listed to the Company’s Form 10-QSB filed on
      November 8, 2005 and subsequently amended on Form 10-QSB/A filed on
      February 24, 2006 and incorporated herein by
  reference.
 (11)
              Filed
      as the exhibit number listed to the Company’s Form 8-K filed on January
      24, 2007 and incorporated herein by
reference.
 (12)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on March
      31, 2006 and incorporated herein by
reference.
 (13)
              Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on March
      29, 2007 and incorporated herein by
reference.
 (14)
              Filed
      as the exhibit number listed to the Company’s Form 10-QSB filed on August
      13, 2007 and incorporated herein by
reference.
 (15)
              Filed
      as the exhibit number listed to the Company’s Form 8-K filed on August 24,
      2007 and incorporated herein by
reference.
 (16)
              Filed
      as the exhibit number listed to the Company’s Form 8-K filed on May 1,
      2008 and incorporated herein by
reference.
 
 (c)        Not
applicable.
  31





SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.





AMERICAN
      BIO MEDICA CORPORATIONBy /s/ Stefan ParkerStefan
      ParkerChief
      Financial Officer(Principal
      Accounting Officer)Executive
      Vice President, Finance





Date:March 30, 2009





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 30, 2009:





/s/ Stan Cipkowski
              
              Chief
      Executive Officer & DirectorStan
      Cipkowski
              
              (Principal
      Executive Officer)/s/ Edmund Jaskiewicz
              
              Chairman
      and PresidentEdmund
      Jaskiewicz/s/Richard P. Koskey
              
              DirectorRichard
      P. Koskey/s/ Daniel W. Kollin
              
              DirectorDaniel
      W. Kollin/s/ Anthony G. Costantino
              
              DirectorAnthony
      G. Costantino/s/ Carl A. Florio
              
              DirectorCarl
      A. Florio/s/ Jean Neff
              
              DirectorJean
      Neff/s/ Stefan Parker
              
              Chief
      Financial OfficerStefan
      Parker
              
              (Principal
      Financial Officer)Executive
      Vice President, Finance


S-1


AMERICAN
BIO MEDICA CORPORATION





INDEX
TO FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS





PAGEReport
      of Independent Registered Public Accounting Firm
                  F-2Balance
      Sheets
                  F-3Statements
      of Operations
                  F-4Statements
      of Changes in Stockholders’ Equity
                  F-5Statements
      of Cash Flows
                  F-6Notes
      to Financial Statements
                  F-7


F-1




Report
of Independent Registered Public Accounting Firm





To the
Stockholders and Board of Directors of


American
Bio Medica Corporation





We have
audited the accompanying balance sheets of American Bio Medica Corporation as of
December 31, 2008 and 2007, and the related statements of operations, changes in
stockholders’ equity and cash flows for the years 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 audits.





We
conducted our audits in accordance with the auditing standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting.  Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal controls
over financial reporting.  Accordingly, we express no such
opinion.  An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide 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 December 31, 2008 and 2007, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note A to the financial
statements, the Company has recurring losses from operations and liquidity
constraints that raise substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





/s/ UHY LLPAlbany,
      New YorkMarch
      30, 2009


F-2


AMERICAN
BIO MEDICA CORPORATION


Balance
Sheets




December 31,
                    
                    
                    December 31,2008
                    
                    
                    2007ASSETSCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    201,000
                    
                    
                    $
                    336,000Accounts
      receivable - net of allowance for doubtful accounts of $105,000 at
      December 31, 2008 and 2007
                    
                    
                    1,161,000
                    
                    
                    
                    1,365,000Inventory
      – net of reserve for slow moving and obsolete inventory of $308,000 at
      December 31, 2008 and $250,000 at December 31, 2007
                    
                    
                    5,552,000
                    
                    
                    
                    4,994,000Prepaid
      and other current assets
                    
                    
                    97,000
                    
                    
                    
                    181,000Total
      current assets
                    
                    
                    7,011,000
                    
                    
                    
                    6,876,000Property,
      plant and equipment, net
                    
                    
                    1,961,000
                    
                    
                    
                    2,267,000Debt
      issuance costs
                    
                    
                    117,000Other
      non-current assets
                    
                    
                    47,000
                    
                    
                    
                    7,000Total
      assets
                    
                    $
                    9,136,000
                    
                    
                    $
                    9,150,000LIABILITIES AND STOCKHOLDERS'
      EQUITYCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    1,568,000
                    
                    
                    $
                    1,403,000Accrued
      expenses and other current liabilities
                    
                    
                    544,000
                    
                    
                    
                    220,000Wages
      payable
                    
                    
                    230,000
                    
                    
                    
                    332,000Patent
      sublicense current
                    
                    
                    
                    
                    
                    
                    50,000Line
      of credit
                    
                    
                    431,000
                    
                    
                    
                    723,000Current
      portion of long term debt
                    
                    
                    1,098,000
                    
                    
                    
                    121,000Current
      portion of unearned grant
                    
                    
                    10,000
                    
                    
                    
                    10,000Total
      current liabilities
                    
                    
                    3,881,000
                    
                    
                    
                    2,859,000Other
      long-term liabilities
                    
                    
                    207,000
                    
                    
                    
                    48,000Long-term
      debt
                    
                    
                    760,000
                    
                    
                    
                    1,107,000Unearned
      grant
                    
                    
                    30,000
                    
                    
                    
                    40,000Total
      liabilities
                    
                    
                    4,878,000
                    
                    
                    
                    4,054,000COMMITMENTS
      AND CONTINGENCIESStockholders'
      equity:Preferred
      stock; par value $.01 per share; 5,000,000 shares authorized, none issued
      and outstanding at December 31, 2008 and 2007Common
      stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768
      issued and outstanding at December 31, 2008 and 2007
                    
                    
                    217,000
                    
                    
                    
                    217,000Additional
      paid-in capital
                    
                    
                    19,279,000
                    
                    
                    
                    19,267,000Accumulated
      deficit
                    
                    
                    (15,238,000
                    )
                    
                    
                    (14,388,000
                    )Total
      stockholders’ equity
                    
                    
                    4,258,000
                    
                    
                    
                    5,096,000Total
      liabilities and stockholders’ equity
                    
                    $
                    9,136,000
                    
                    
                    $
                    9,150,000


The
accompanying notes are an integral part of the financial
statements


F-3


AMERICAN
BIO MEDICA CORPORATION





Statements
of Operations




For the Year
                  Ended December
                  31,
                  2008
                
                
                For the Year
                  Ended December
                  31,
                  2007
                
                
                For the Year
                  Ended December
                  31,
                  2006Net
      sales
                
                $
                12,657,000
                
                
                $
                13,872,000
                
                
                $
                13,838,000Cost
      of goods sold
                
                
                7,396,000
                
                
                
                8,141,000
                
                
                
                7,035,000Gross
      profit
                
                
                5,261,000
                
                
                
                5,731,000
                
                
                
                6,803,000Operating
      expenses:Research
      and development
                
                
                563,000
                
                
                
                669,000
                
                
                
                606,000Selling
      and marketing
                
                
                2,749,000
                
                
                
                3,091,000
                
                
                
                3,325,000General
      and administrative
                
                
                2,575,000
                
                
                
                2,827,000
                
                
                
                2,621,000Operating
      income/ (loss)
                
                
                (626,000
                )
                
                
                (856,000
                )
                
                
                251,000Other
      income/(expense):Other
      income/(expense)
                
                
                (13,000
                )
                
                
                9,000
                
                
                
                10,000Interest
      income
                
                
                3,000
                
                
                
                9,000
                
                
                
                7,000Interest
      expense
                
                
                (213,000
                )
                
                
                (149,000
                )
                
                
                (67,000
                )Income/(loss)
      before tax
                
                
                (849,000
                )
                
                
                (987,000
                )
                
                
                201,000Income
      tax
                
                
                (1,000
                )
                
                
                (3,000
                )
                
                
                (5,000
                )Net
      income/(loss) after tax
                
                $
                (850,000
                )
                
                $
                (990,000
                )
                
                $
                196,000Basic
      and diluted income/(loss) per common share
                
                $
                (0.04
                )
                
                $
                ( 0.05
                )
                
                $
                0.01Weighted
      average number of shares outstanding - basic
                
                
                21,745,000
                
                
                
                21,737,000
                
                
                
                21,484,000Dilutive
      effect of stock options and warrants
                
                
                
                
                
                
                
                
                
                
                89,000Weighted
      average number of shares outstanding –diluted
                
                
                21,745,000
                
                
                
                21,737,000
                
                
                
                21,573,000





The
accompanying notes are an integral part of the financial
statements


F-4


AMERICAN
BIO MEDICA CORPORATION





Statements
of Changes in Stockholders’ Equity





Common Stock
              
              
              Additional
                Paid-in
              
              
              AccumulatedShares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              TotalBalance-December
      31, 2005
              
              
              21,359,768
              
              
              $
              214,000
              
              
              $
              18,853,000
              
              
              $
              (13,594,000
              )
              
              $
              5,473,000Stock
      option/Warrant exercise
              
              
              360,000
              
              
              
              3,000
              
              
              
              328,000
              
              
              
              
              
              
              
              331,000Non-cash
      compensation
              
              
              
              
              
              
              
              
              
              
              37,000
              
              
              
              
              
              
              
              37,000Net
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              196,000
              
              
              
              196,000Balance-December
      31, 2006
              
              
              21,719,768
              
              
              $
              217,000
              
              
              $
              19,218,000
              
              
              $
              (13,398,000
              )
              
              $
              6,037,000Stock
      option exercise
              
              
              25,000
              
              
              
              
              
              
              
              23,000
              
              
              
              
              
              
              
              23,000Non-cash
      compensation
              
              
              
              
              
              
              
              
              
              
              26,000
              
              
              
              
              
              
              
              26,000Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (990,000
              )
              
              
              (990,000
              )Balance-December
      31, 2007
              
              
              21,744,768
              
              
              $
              217,000
              
              
              $
              19,267,000
              
              
              $
              (14,388,000
              )
              
              $
              5,096,000Non-cash
      compensation
              
              
              
              
              
              
              
              
              
              
              12,000
              
              
              
              
              
              
              
              12,000Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (850,000
              )
              
              
              (850,000
              )Balance-December
      31, 2008
              
              
              21,744,768
              
              
              $
              217,000
              
              
              $
              19,279,000
              
              
              $
              (15,238,000
              )
              
              $
              4,258,000




The accompanying notes are an integral part of the financial
statements


F-5


AMERICAN
BIO MEDICA CORPORATION




Statements
of Cash Flows


Year
      Ended
                        
                        
                        Year
      Ended
                        
                        
                        Year
      EndedDecember
      31,
                        
                        
                        December31,
                        
                        
                        December
      31,2008
                        
                        
                        2007
                        
                        
                        2006Cash
      flows from operating activities:Net
      income/(loss)
                        
                        $
                        (850,000
                        )
                        
                        $
                        (990,000
                        )
                        
                        $
                        196,000Adjustments
      to reconcile net income/(net loss) to net cash provided by / (used in)
      operating activities:Depreciation
                        
                        
                        353,000
                        
                        
                        
                        437,000
                        
                        
                        
                        376,000Loss
      on disposal of fixed assets
                        
                        
                        4,000
                        
                        
                        
                        1,000Amortization
      of debt issuance costs
                        
                        
                        14,000Provision
      for slow moving and obsolete inventory
                        
                        
                        58,000Compensatory
      stock options
                        
                        
                        
                        
                        
                        
                        26,000
                        
                        
                        
                        37,000Unearned
      grant
                        
                        
                        (10,000
                        )
                        
                        
                        (10,000
                        )
                        
                        
                        (10,000
                        )Changes
      in:Accounts
      receivable
                        
                        
                        204,000
                        
                        
                        
                        (53,000
                        )
                        
                        
                        58,000Inventory
                        
                        
                        (616,000
                        )
                        
                        
                        (135,000
                        )
                        
                        
                        (408,000
                        )Prepaid
      expenses and other current assets
                        
                        
                        84,000
                        
                        
                        
                        (15,000
                        )
                        
                        
                        (58,000
                        )Other
      non-current assets
                        
                        
                        (40,000
                        )
                        
                        
                        50,000
                        
                        
                        
                        (50,000
                        )Accounts
      payable
                        
                        
                        165,000
                        
                        
                        
                        312,000
                        
                        
                        
                        (288,000
                        )Accrued
      expenses and other current liabilities
                        
                        
                        324,000
                        
                        
                        
                        (241,000
                        )
                        
                        
                        378,000Patent
      sublicense
                        
                        
                        (50,000
                        )
                        
                        
                        (50,000
                        )
                        
                        
                        100,000Wages
      payable
                        
                        
                        (102,000
                        )
                        
                        
                        63,000
                        
                        
                        
                        11,000Other
      long-term liabilities
                        
                        
                        159,000Net
      cash provided by (used in) operating activities
                        
                        
                        (303,000
                        )
                        
                        
                        (605,000
                        )
                        
                        
                        342,000Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                        
                        
                        (51,000
                        )
                        
                        
                        (706,000
                        )
                        
                        
                        (803,000
                        )Net
      cash used in investing activities
                        
                        
                        (51,000
                        )
                        
                        
                        (706,000
                        )
                        
                        
                        (803,000
                        )Cash
      flows from financing activities:Proceeds
      from stock option exercise
                        
                        
                        
                        
                        
                        
                        23,000
                        
                        
                        
                        85,000Proceeds
      from warrant exercise
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        247,000Net
      proceeds (payments) from line of credit
                        
                        
                        (292,000
                        )
                        
                        
                        547,000
                        
                        
                        
                        176,000Proceeds
      from debt financing
                        
                        
                        750,000
                        
                        
                        
                        539,000
                        
                        
                        
                        775,000Debt
      issuance costs
                        
                        
                        (119,000
                        )Payments
      on debt financing
                        
                        
                        (120,000
                        )
                        
                        
                        (103,000
                        )
                        
                        
                        (627,000
                        )Net
      cash provided by financing activities
                        
                        
                        219,000
                        
                        
                        
                        1,006,000
                        
                        
                        
                        656,000Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        (135,000
                        )
                        
                        
                        (305,000
                        )
                        
                        
                        195,000Cash
      and cash equivalents – beginning of period
                        
                        
                        336,000
                        
                        
                        
                        641,000
                        
                        
                        
                        446,000Cash
      and cash equivalents – end of period
                        
                        $
                        201,000
                        
                        
                        $
                        336,000
                        
                        
                        $
                        641,000Supplemental
      disclosures of cash flow information:Cash
      paid during the year for interest
                        
                        $
                        122,000
                        
                        
                        $
                        149,000
                        
                        
                        $
                        67,000Purchase
      of property, plant and equipment, financing through capital
      lease
                        
                        
                        
                        
                        
                        $
                        17,000Warrants
      issued in connection with long-term debt financing
                        
                        $
                        12,000


The
accompanying notes are an integral part of the financial
statements


F-6


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2008


NOTE
A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES




The
Company:




American
Bio Medica Corporation (“ABMC” or the “Company”) is in the business of
developing, manufacturing, and marketing point of collection diagnostics test
kits, as well as performing contract manufacturing services for third
parties.




The
Company’s financial statements have been prepared assuming the Company will
continue as a going concern, which assumes the realization of assets and the
satisfaction of liabilities in the normal course of business.  For the
year ended December 31, 2008, the Company had a net loss of $850,000 and net
cash used in operating activities of $303,000 as compared to a net loss of
$990,000 and net cash used in operating activities of $605,000 in
2007.  The Company’s cash balances decreased by $135,000 during the
twelve months ended December 31, 2008 and decreased by $305,000 during the
twelve months ended December 31, 2007. As of December 31, 2008, the Company had
an accumulated deficit of $15,238,000.  During 2007 and continuing
throughout the fiscal year ended December 31, 2008, the Company implemented
programs to improve its financial prospects including entering into national and
international distribution agreements, investing in automation equipment to
improve process efficiencies and reduce costs, implementing a number of cost
cutting initiatives, including strategic reductions in personnel, and other
measures to enhance profit margins. The Company continues to explore other
measures, which would allow the Company to make further improvements in
efficiency to lower the costs to manufacture its products.




If cash
generated from operations is insufficient to satisfy the Company’s working
capital and capital expenditure requirements, the Company will be required to
sell additional equity or obtain additional credit facilities.  There
can be no assurance that such financing will be available or that the Company
will be able to complete financing on satisfactory terms, if at
all.




Additionally,
in February 2009, the Company was notified by its bank that it had defaulted
under its primary credit facilities.  As a result, all of the
Company’s obligations to the bank (i.e. line of credit, real estate loan and
term note) can be declared immediately due and payable by the bank. In March
2009, the Company executed an agreement with the bank under which the bank has
agreed to forbear its rights and remedies until June 1, 2009, provided the
Company comply with certain terms and conditions under the agreement (See Note
K).




The Company’s history of operating cash
flow deficits and its current cash position raise substantial doubt about its
ability to continue as a going concern and its continued existence is dependent
upon several factors, including its ability to raise revenue levels and reduce
costs to generate positive cash flows, to sell additional shares of the
Company’s common stock to fund operations and obtain additional credit
facilities, or refinance its current credit facilities. The financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amount of or classification of liabilities that
might be necessary as a result of this uncertainty.




Significant Accounting
Policies:




[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]           Accounts Receivable: Accounts
receivable consists of mainlytrade receivables due from customers for the sale of our products. 
Payment terms vary on a customer-by-customer basis, and generally range from
cash on delivery to net 90 days.  Receivables are considered past due when
they have exceeded their payment terms.  Accounts receivable have been
reduced by an estimated allowance for doubtful accounts. The Company estimates
its allowance for doubtful accounts based on facts, circumstances and judgments
regarding each receivable.  Customer payment history and patterns,
historical losses, economic and political conditions, trends and individual
circumstances are among the items considered when evaluating the collectability
of the receivables. Accounts are reviewed regularly for collectability and those
deemed uncollectible are written off.


F-7




AMERICAN BIO MEDICA
CORPORATION


Notes to
Financial Statements
 December
31, 2008


[3]           Inventory:Inventory is stated
at the lower of cost or market.  Labor and overhead are determined on
an average cost basis and raw materials are determined on a first-in-first-out
method.  At December 31, 2008, the Company established an allowance of
$308,000 for slow moving and obsolete inventory.




[4]           Income taxes:The
Company accounts for income taxes in accordance with Statements of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities, and are measured using the
enacted laws and tax rates that will be in effect when the differences are
expected to reverse. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits that are not expected
to be realized. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in the period that such tax rate changes are
enacted.




[5]           Depreciation: Property, plant
and equipment are depreciated on the straight-line method over their estimated
useful lives; 3-5 years for equipment and 30 years for buildings. Leasehold
improvements and capitalized lease assets are amortized by the straight-line
method over the shorter of their estimated useful lives or the term of the
lease.




[6]           Revenue
recognition:  The Company recognizes revenue when title
transfers upon shipment. Sales are recorded net of discounts and returns. All
buyers have economic substance apart from the Company and the Company does not
have any obligation for customer acceptance. The Company's price is fixed and
determinable at the date of sale. The buyer has paid the Company or is obligated
to pay the Company and, in the case of a distributor, the obligation is not
contingent on the resale of the product, nor does the Company have any
obligation to bring about the resale of the products. The buyer's obligation
would not be changed in the event of theft or physical destruction or damage to
the product. All distributors have economic substance apart from customers and
the payment terms are not conditional. The transactions with distributors are on
terms similar to those given to the Company's other customers. No agreements
exist with the distributors that offer a right of return.




[7]           Shipping and handling:
Shipping and handling fees charged to customers are included in net sales, and
shipping and handling costs incurred by the Company, to the extent of those
costs charged to customers, are included in cost of sales.




[8]           Research and
development:  Research and development (“R&D”) costs are
charged to operations when incurred. These costs include salaries, benefits,
travel, supplies, depreciation of R&D equipment and other miscellaneous
expenses.  Amounts received from third parties to perform R&D
projects are recorded as a reduction to R&D expense.




[9]           Income (loss) per common share:Basic income or loss per common share is calculated by dividing net
income or net loss by the weighted average number of outstanding common shares
during the period. For the year ended December 31, 2006, diluted net income per
share includes the dilutive effect of 1,142,000 stock options and 0
warrants.




Potential
common shares outstanding as of December 31, 2008, 2007 and 2006:




December 31, 2008
                  
                  
                  December 31, 2007
                  
                  
                  December 31, 2006Warrants
                  
                  
                  75,000
                  
                  
                  
                  150,000
                  
                  
                  
                  150,000Options
                  
                  
                  3,762,080
                  
                  
                  
                  3,968,080
                  
                  
                  
                  3,993,080


F-8




AMERICAN BIO MEDICA
CORPORATION
 Notes to
Financial Statements
 December
31, 2008


For the
twelve months ended December 31, 2008 and December 31, 2007, the number of
securities not included in the diluted loss per share was 3,837,080 and
4,118,080, respectively, as their effect was anti-dilutive. For the twelve
months ended December 31, 2006, the number of securities not included in the
diluted income per share was 3,001,080. The securities would have been
anti-dilutive because the exercise price of the securities was greater than the
average market price of the Company’s common shares for the fiscal year ending
December 31, 2006.




[10]     
  Use of estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect 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.




[11]      
 Impairment of long-lived
assets: The Company records impairment losses on long-lived assets used
in operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.




[12]        Financial Instruments: The
carrying amounts of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses, and other liabilities approximate their fair value
based on the short term nature of those items.




Estimated
fair value of financial instruments is 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.




SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”), establishes a
common definition for fair value to be applied to U.S. generally accepted
accounting principles requiring use of fair value, establishes a framework for
measuring fair value and expands disclosures about such fair value measurements.
Issued in February 2008, FASB Staff Position (“FSP”) No. 157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and
Other Accounting Pronouncements that Address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13”, removed
leasing transactions accounted for under SFAS No. 13 and related guidance
from the scope of SFAS No. 157. FSP No. 157-2, “Partial Deferral of
the Effective Date of SFAS No. 157”, deferred the effective date of SFAS
No. 157 for all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the Company’s Financial
Statements on a recurring basis, to fiscal years beginning after
November 15, 2008.




The
Company adopted SFAS No. 157 as of January 1, 2008 for financial
assets and financial liabilities, and there was no impact on the Company’s
financial position and results of operations for the year ended
December 31, 2008. The Company is currently assessing the impact of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities on the
Company’s financial position and results of operations.


F-9




AMERICAN BIO MEDICA
CORPORATION


Notes to
Financial Statements
 December
31, 2008


SFAS
No. 157 establishes a hierarchy for ranking the quality and reliability of
the information used to determine fair values. SFAS No. 157 requires that
assets and liabilities carried at fair value be classified and disclosed in one
of the following three categories:




Level 1:
Unadjusted quoted market prices in active markets for identical assets or
liabilities.


Level 2:
Unadjusted quoted prices in active markets for similar assets or liabilities,
unadjusted quoted prices for identical or similar assets or liabilities in
markets that are not active, or inputs other than quoted prices are observable
for the asset or liability.


Level 3:
Unobservable inputs for the asset or liability.




The
Company endeavors to utilize the best available information in measuring fair
value. Financial assets and liabilities are classified based on the lowest level
of input that is significant to the fair value measurement. The following
methods and assumptions were used by the Company in estimating its fair value
disclosures for financial instruments:




Cash
Equivalents—The carrying amount reported in the balance sheet for cash
equivalents approximates its fair value due to the short-term maturity of these
instruments.




Long-Term
Debt—The carrying amounts of the Company’s borrowings under its line of credit
agreements and other long-term debt approximates fair value, based upon current
interest rates.




[13]        Accounting for share-based payments:In accordance with SFAS No. 123 (revised 2004), Share Based Payment, the
Company began to recognize compensation expense for stock options on January 1,
2006. The weighted average fair value of options granted during the twelve
months ended December 31, 2006 was $0.85.  There were no options
granted during the twelve months ended December 31, 2007 or during the twelve
months ended December 31, 2008.




Two
employees were granted stock options on June 13, 2006, the Company’s former
Chief Financial Officer and the Company’s former Vice President of Product
Development.  The exercise price of the options was the same as the
closing price of the Company’s common shares on the date of the
grant.  The calculated fair value of the options was $.85 per option.
The fair value of these stock option grants was estimated utilizing the
Black-Scholes option-pricing model. The following weighted average assumptions
were used: dividend yield of zero percent; risk-free interest rates, which vary
for each grant, ranging from 4.26% to 5.15%; expected life of ten years for all
grants; and stock price volatility ranging from 72% to 75%. The value of these
grants totaled $63,000, which was amortized over the vesting period of one year
from the date of grant.  Total expense included in 2007 was $26,000
and $37,000 of expense was reported in 2006.




[14]        Concentration of credit risk:The Company sells its drug testing products primarily to United States
customers and distributors. Credit is extended based on an evaluation of the
customer’s financial condition.




At
December 31, 2008, three customers accounted for 24.2%, 14.5%, and 11.6% of our
accounts receivable-net.  Substantial portions of these balances were
collected from these customers in the first quarter of 2009.




At
December 31, 2007, two customers accounted for 15% and 10.4% of our accounts
receivable-net.




At
December 31, 2006, one customer accounted for 16% of accounts receivable-net.
Their outstanding balance was current at December 31, 2006 and resulted from
several large shipments in December 2006. This customer did not represent more
than 10% of accounts receivable-net as of December 31, 2007.




Due to
the longstanding nature of our relationships with these customers and
contractual obligations, the Company is confident that it will recover these
amounts.


F-10




AMERICAN BIO MEDICA
CORPORATION


Notes to
Financial Statements
 December
31, 2008


The
Company has established an allowance for doubtful accounts based on factors
surrounding the credit risk of specific customers and other
information.




One of
our customers accounted for approximately 11.2% of total net sales of the
Company for the fiscal year ended December 31, 2008 and 9.3% of the total net
sales of the Company for the fiscal year ended December 31, 2007.




The
Company maintains certain cash balances at financial institutions that are
federally insured and at times the balances have exceeded federally insured
limits.




[15] Reporting
comprehensive income:




The
Company reports comprehensive income in accordance with the provisions of SFAS
No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”). The provisions of
SFAS No. 130 require the Company to report the change in the Company's equity
during the period from transactions and events other than those resulting from
investments by, and distributions to, the shareholders. For the years ended
December, 31, 2008, 2007 and 2006, comprehensive income was the same as net
income.




[16]        Reclassifications: Certain
items have been reclassified from the prior years to conform to the current year
presentation.




[17]        New accounting pronouncements:In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in
Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN
48”).  This Interpretation clarified the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes”. We adopted FIN 48 on
January 1, 2007 and it did not have a significant effect on our financial
statements.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
No. 157”). SFAS No. 157 established a common definition for fair value to be
applied to U.S. GAAP guidance requiring use of fair value, established a
framework for measuring fair value, and expanded disclosure about such fair
value measurements. SFAS No. 157 became effective for our financial assets and
liabilities on January 1, 2008.  The FASB has deferred the implementation
of the provisions of SFAS No. 157 relating to certain nonfinancial assets and
liabilities until January 1, 2009. SFAS No. 157 did not materially affect how we
determine fair value.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of SFAS No.
115” (“SFAS No. 159”). This new standard permits entities to choose to measure
many financial instruments and certain warranty and insurance contracts at fair
value on a contract-by-contract basis. SFAS No. 159 became effective on January
1, 2008. We have not elected the fair value option for any of our existing
financial instruments on the effective date and have not determined whether or
not we will elect this option for any eligible financial instruments we acquire
in the future.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
No. 141(R)”) and SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements” (“SFAS No. 160”). Effective for the Company as of January
1, 2009, SFAS No. 141(R) requires the acquiring entity in a business combination
to recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. Effective January 1, 2009, SFAS No. 160 requires all entities to
report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. Moreover, SFAS No. 160 eliminates the
diversity that currently exists in accounting for transactions between an entity
and noncontrolling interests by requiring they be treated as equity
transactions. We are evaluating the impact of adopting SFAS No. 141(R) and SFAS
No. 160, if any, on our financial statements.


F-11




AMERICAN BIO MEDICA
CORPORATION


Notes to
Financial Statements
 December
31, 2008


In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an Amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 expands the disclosure requirements in SFAS No. 133,
regarding an entity’s derivative instruments and hedging activities. SFAS No.
161 is effective on January 1, 2009. We are evaluating the impact of adopting
SFAS No. 161, if any, on our financial statements.




In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”).  SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 shall
be effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board (PCAOB) amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity With Generally Accepted Accounting Principles”. We
are evaluating the impact of adopting SFAS No. 162, if any, on our financial
statements.




In May
2008, the FASB issued FASB Statement No. 163, “Accounting for Financial
Guarantee Insurance Contracts” (“SFAS No. 163”), which clarifies how FASB
Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies
to financial guarantee insurance contracts issued by insurance enterprises. The
standard is effective for financial statements issued for fiscal years beginning
after December 15, 2008, including interim periods in that year.  We
are evaluating the impact of adopting SFAS No. 163, if any, on our financial
statements.




NOTE
B - INVENTORY




Inventory
is comprised of the following:




December 31, 2008
                    
                    
                    December 31,
                      2007
                    
                    
                    December 31,
                      2006Raw
      Materials
                    
                    $
                    3,134,000
                    
                    
                    $
                    2,264,000
                    
                    
                    $
                    1,841,000Work
      In Process
                    
                    
                    2,210,000
                    
                    
                    
                    2,547,000
                    
                    
                    
                    2,485,000Finished
      Goods
                    
                    
                    516,000
                    
                    
                    
                    433,000
                    
                    
                    
                    783,000Reserve
      for slow moving and obsolete inventory
                    
                    
                    (308,000
                    )
                    
                    
                    (250,000
                    )
                    
                    
                    (250,000
                    )$
                    5,552,000
                    
                    
                    $
                    4,994,000
                    
                    
                    $
                    4,859,000





NOTE
C – PROPERTY, PLANT AND EQUIPMENT




Property,
plant and equipment, at cost, are as follows:




December 31, 2008
                    
                    
                    December 31,
                      2007
                    
                    
                    December 31,
                      2006Land
                    
                    $
                    102,000
                    
                    
                    $
                    102,000
                    
                    
                    $
                    102,000Buildings
      and improvements
                    
                    
                    1,399,000
                    
                    
                    
                    1,396,000
                    
                    
                    
                    1,288,000Manufacturing
      and warehouse equipment
                    
                    
                    2,358,000
                    
                    
                    
                    2,364,000
                    
                    
                    
                    1,815,000Office
      equipment (incl. furniture and fixtures)
                    
                    
                    400,000
                    
                    
                    
                    376,000
                    
                    
                    
                    378,0004,259,000
                    
                    
                    
                    4,238,000
                    
                    
                    
                    3,583,000Less
      accumulated depreciation
                    
                    
                    2,298,000
                    
                    
                    
                    1,971,000
                    
                    
                    
                    1,601,000$
                    1,961,000
                    
                    
                    $
                    2,267,000
                    
                    
                    $
                    1,982,000





Depreciation
expense was $353,000, $437,000 and $376,000 for the years ended December 31,
2008, 2007 and 2006, respectively.


F-12


AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008




NOTE
D – LONG TERM DEBT




Long-term
debt consisted of the following:





December 31,
                                2008
                              
                              
                              December 31,
                                2007
                              
                              
                              December 31,
                                2006First
      Niagara Bank:Mortgage
      payable in equal monthly installments of$6,293
      including interest at 7.5% through December 1,2016
      with a final lump sum payment of $534,000 atmaturity,
      collateralized by the building, land and personalproperty.
                              
                              $
                              739,000
                              
                              
                              $
                              758,000
                              
                              
                              $
                              775,000Term
      note payable in equal monthly installments of $10,714 including interest
      at 7.17% through January 1, 2012 with a final lump sum payment of $11,440
      at maturity, collateralized by the Company’s existing and future
      assets.
                              
                              
                              356,000
                              
                              
                              
                              455,000RICOH:Capital
      lease payable in equal monthly installment of $390 including interest at
      14.11% through May 1, 2012
                              
                              
                              13,000
                              
                              
                              
                              15,000Debenture
      financing:$750,000
      in principal amount of Series A Debentures; interest at 10% per annum,
      payable semi-annually in August and February of each year with first
      payment due February 1, 2009; maturity date of August 1,
    2012
                              
                              
                              750,0001,858,000
                              
                              
                              
                              1,228,000
                              
                              
                              
                              775,000Less current portion(1)
                              
                              
                              (1,098,000
                              )
                              
                              
                              (121,000
                              )
                              
                              
                              (17,000
                              )Non-current
      portion
                              
                              $
                              760,000
                              
                              
                              $
                              1,107,000
                              
                              
                              $
                              758,000





(1)
            The
      term loan and real estate loan were reclassified from long-term to
      short-term as a result of the execution of a Forbearance Agreement with
      First Niagara Bank on March 12, 2009 (See Note K).





At
December 31, 2008, the following are the maturities of long-term debt for each
of the next five years:




2009
                  
                  $
                  1,098,0002010
                  
                  
                  4,0002011
                  
                  
                  4,0002012
                  
                  
                  752,000$
                  1,858,000




In
November 2006, the Company closed on a $750,000 real estate refinancing with
FNFG related to its facility in Kinderhook, New York. The mortgage has a term of
10 years with a 20 year amortization. The interest rate is fixed at 7.5% for the
first 5 years and beginning with year 6 through the end of the loan term, the
rate changes to 2% above the Federal Home Loan Bank of New York 5 year term, 15
year Amortization Advances Rate. The loan is collateralized by the facility in
Kinderhook, New York and its personal property.  The Company received
proceeds of $154,000 after closing costs and accrued interest. The cash received
was for improvements to the Kinderhook, New York property, including paving of
the driveway and parking lot and replacing the roof.


F-13




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


In
January 2007, the Company entered into a Term Note (the “Note”) with FNFG in the
amount of $539,000. The term of the note is 5 years with a fixed interest rate
of 7.17%. The Company has the option of prepaying the Note in full or in part at
any time during the term without penalty. There were no closing costs associated
with this Note.  The loan is secured by Company assets now owned or to
be acquired. The proceeds received were used for the purchase of manufacturing
automation equipment.




In May
2007, the Company purchased a copier through an equipment lease with RICOH in
the amount of $17,000.  The term of the lease is five (5) years with
an interest rate of 14.11%.




In August
2008, the Company completed an offering of Series A Debentures and received
gross proceeds of $750,000 in principal amount of Series A Debentures (see
Current Report on Form 8-K and amendment on Form 8-K/A-1 filed with the
Commission on August 8, 2008 and August 18, 2008 respectively). The net proceeds
of the offering of Series A Debentures were $631,000 after $54,000 of placement
agent fees and expenses, legal and accounting fees of $63,000 and $2,000 of
state filing fees. The securities issued in this transaction were sold pursuant
to the exemption from registration afforded by Rule 506 under Regulation D
("Regulation D") as promulgated by the Commission under the Securities Act of
1933, as amended (the "1933 Act"), and/or Section 4(2) of the 1933
Act.




The
Series A Debentures accrue interest at a rate of 10% per annum (payable by the
Company semi-annually) and mature on August 1, 2012. The payment of principal
and interest on the Series A Debentures is subordinate and junior in right of
payment to all Senior Obligations, as defined under the Series A Debentures.
Holders of the Series A Debentures will have a right of conversion of the
principal amount of the Series A Debentures into shares (the “Conversion
Shares”) of the common stock of the Company (“Common Stock”), at a conversion
rate of 666.67 shares per $500 in principal amount of the Series A Debentures
(representing a conversion price of approximately $0.75 per share). This
conversion right can be exercised at any time, commencing the earlier of (a) 120
days after the date of the Series A Debentures, or (b) the effective date of a
Registration Statement to be filed by the Company with respect to the Conversion
Shares. The Company has the right to redeem any Series A Debentures that have
not been surrendered for conversion at a price equal to the Series A Debentures’
face value plus $0.05 per underlying common share, or $525 per $500 in principal
amount of the Series A Debentures, representing an aggregate conversion price of
$787,500. This redemption right can be exercised by the Company at any time
within 90 days after any date when the closing price of the Common Stock has
equaled or exceeded $2.00 per share for a period of 20 consecutive trading
days.




As
placement agent, Cantone Research, Inc. (“CRI”) received a Placement Agent fee
of $52,500, or 7% of the gross principal amount of Series A Debentures sold. In
addition, the Company issued CRI a 4 year warrant to purchase 30,450 shares of
the Company’s common stock at an exercise price of $0.37 per share (the closing
price of the Company’s common shares on the Closing Date) and a 4 year warrant
to purchase 44,550 shares of the Company’s common stock at an exercise price of
$0.40 per share (the closing price of the Company’s common stock on the Series A
Completion Date), (together the “Placement Agent Warrants”). All warrants issued
to CRI are immediately exercisable upon issuance. Pursuant to a Registration
Rights Agreement, the Company will use reasonable efforts to register the
Conversion Shares and the shares of Common Stock issuable upon exercise of the
Placement Agent Warrants.




The
Company has incurred $131,000 in costs related to the
offering.  Included in these costs was $12,000 of non-cash
compensation expense related to the issuance of the Placement Agent Warrants to
CRI. These costs will be amortized over the term of the Series A
Debentures.  For the fiscal year ended December 31, 2008, the Company
amortized $14,000 of expense related to these debt issuance costs. The Company
has also accrued $31,000 in interest expense at December 31,
2008.


F-14




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008




NOTE
E – LINE OF CREDIT




The
Company has a Line of Credit with FNFG. As disclosed in the Company’s Current
Report on Form 8-K filed with the Commission on August 8, 2008, effective August
1, 2008, we entered into an amendment with FNFG related to the original Loan
Documents (the “Amendment”). The Amendment combined two lines of credit already
in place with FNFG into one line of credit (the “Line of Credit”) along with
amending certain terms related to the combined Line of Credit. Pursuant to the
Amendment, the maximum amount available under the Line of Credit was $750,000,
and the maturity date of the Line of Credit was April 1, 2009. The interest rate
on the Line of Credit was prime plus 1%. Pursuant to the Amendment, we are
required to maintain certain financial covenants; our monthly net loss must not
exceed $75,000 during any month and, while any loans or commitments are
outstanding and due FNFG, we must maintain a minimum debt service coverage ratio
of 1.10x, to be measured at December 31, 2008. The minimum debt service coverage
ratio is defined as net income plus interest expense plus depreciation plus
expense related to the amortization of derivative securities divided by required
principal payments over the preceding twelve months plus interest expense. There
is no requirement for annual repayment of all principal on this Line of Credit;
it is payable on demand. The purpose of this Line of Credit is to provide
working capital. The amount outstanding on the Line of Credit was $431,000 at
December 31, 2008. At December 31, 2007, the Line of Credit was two separate
lines of credit and the amount outstanding was $690,000 under one line and
$33,000 under the other line, totaling $723,000.




NOTE
F - INCOME TAXES




A
reconciliation of the U.S. Federal statutory income tax rate to the effective
income tax rate is as follows:





Year Ended
                      December 31, 2008
                    
                    
                    Year Ended
                      December 31, 2007
                    
                    
                    Year Ended
                      December 31, 2006Tax
      (benefit)/expense at federal statutory rate
                    
                    
                    34
                    %
                    
                    
                    34
                    %
                    
                    
                    34
                    %State
      tax (benefit)/expense, net of federal tax effect
                    
                    
                    5
                    
                    
                    
                    5
                    
                    
                    
                    5Valuation
      allowance
                    
                    
                    (39
                    )
                    
                    
                    (39
                    )
                    
                    
                    (39
                    )Effective
      income tax rate
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %





Significant
components of the Company’s deferred tax assets are as follows:





Year Ended
                                December 31, 2008
                              
                              
                              Year Ended
                                December 31, 2007
                              
                              
                              Year Ended
                                December 31,
                                2006Inventory
                              
                              $
                              35,000
                              
                              
                              $
                              31,000
                              
                              
                              $
                              30,000Inventory
      reserve
                              
                              
                              120,000
                              
                              
                              
                              98,000
                              
                              
                              
                              98,000Stock
      based compensation
                              
                              
                              1,350,000
                              
                              
                              
                              1,384,000
                              
                              
                              
                              1,382,000Allowance
      for doubtful accounts
                              
                              
                              41,000
                              
                              
                              
                              41,000
                              
                              
                              
                              41,000Property,
      plant, and equipment
                              
                              
                              (108,000
                              )
                              
                              
                              (87,000
                              )
                              
                              
                              (95,000
                              )Accrued
      compensation
                              
                              
                              31,000
                              
                              
                              
                              33,000
                              
                              
                              
                              (9,000
                              )Sales
      tax reserve
                              
                              
                              16,000
                              
                              
                              
                              0
                              
                              
                              
                              0Deferred
      Revenue
                              
                              
                              2,000
                              
                              
                              
                              0
                              
                              
                              
                              0Net
      operating loss carry-forward
                              
                              
                              3,998,000
                              
                              
                              
                              3,602,000
                              
                              
                              
                              3,308,000Total
      gross deferred tax assets
                              
                              
                              5,485,000
                              
                              
                              
                              5,102,000
                              
                              
                              
                              4,755,000Less
      valuation allowance
                              
                              
                              (5,485,000
                              )
                              
                              
                              (5,102,000
                              )
                              
                              
                              (4,755,000
                              )Net
      deferred tax assets
                              
                              $
                              0
                              
                              
                              $
                              0
                              
                              
                              $
                              0


F-15




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


Certain
2006 gross deferred tax assets and related valuation allowances previously
reported have been restated in 2007.  This restatement had no net
effect on the Company's 2006 financial position, results of operations or
cash flows.




The
valuation allowance for deferred tax assets as of December 31, 2008 and December
31, 2007 and December 31, 2006 was $5,485,000; $5,102,000 and $4,755,000,
respectively.  The net change in the valuation allowance was an
increase of $383,000 for the year ended December 31, 2008.  The net
change in the valuation allowance was an increase of $347,000 for the year ended
December 31, 2007.




At
December 31, 2008 the Company has Federal and New York state net operating loss
carry forwards for income tax purposes of approximately $10,250,000, which will
begin to expire in 2009.  In assessing the realizability of deferred
tax assets, management considers whether or not it is more likely than not that
some portion or all deferred tax assets will be realized.  The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.  Management considers the projected future taxable
income and tax planning strategies in making this assessment.




The
Company’s ability to utilize the operating loss carry forwards may be subject to
an annual limitation in future periods pursuant to Section 382 of the Internal
Revenue Code of 1986, as amended, if future changes in ownership
occur.




NOTE
G – OTHER INCOME/(EXPENSE)




Other
income for the years ended 2008, 2007 and 2006 is mainly comprised of amounts
earned from a grant of $100,000 received from the Columbia Economic Development
Corporation during 2002, 2003, and 2005. The grant is convertible to a loan
based upon a percentage of the grant declining from 90% of the grant amount in
2003 to 0% in 2012.  The unearned portion of the grant at December 31,
2008 is $40,000.  The grant is convertible to a loan only if the
employment levels in the Kinderhook facility drop below 45 employees at any time
during the year. The employment levels in the Kinderhook facility were 61, 81,
and 87 at December 31, 2008, December 31, 2007 and December 31, 2006,
respectively.  The amount of the unearned grant recognized in each of
the fiscal years ending December 31, 2008, 2007 and 2006 was
$10,000.  Other income for the fiscal years ended December 31, 2008
and 2007 are offset by losses on disposals of fixed assets of $4,000 and $1,000;
respectively.  In addition, $19,000 of accrued penalties related to a
sales tax liability was incurred during the fiscal year ending December 31,
2008.




NOTE
H – STOCKHOLDERS’ EQUITY




[1]           Stock option plans:The
Company adopted the Fiscal 1997 Non-statutory Stock Option Plan (the “1997
Plan”), the Fiscal 1998 Non-statutory Plan (the “1998 Plan”), the Fiscal 2000
Non-statutory Stock Option Plan (the “2000 Plan”), and the 2001 Non-statutory
Stock Option Plan (the “2001 Plan”). The 1997 Plan provides for the granting of
options to purchase up to 2,000,000 shares of common stock, the 1998 Plan and
the 2000 Plan provide for the granting of options to purchase up to 1,000,000
common shares each and the 2001 Plan provides for granting of options to
purchase up to 4,000,000 common shares. These Plans are administered by the
Compensation/Option Committee of the Board of Directors, which determines the
terms of options granted, including the exercise price, the number of shares
subject to the option and the terms and conditions of exercise. Options granted
under the 1997 and 1998 Plans have lives of 5 years and vest over periods from 0
to 4 years. Options granted under the 2000 and 2001 Plans have lives of 10 years
and vest over periods from 0 to 4 years.




F-16




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


[2]           Stock options:During the
years ended December 31, 2008 and December 31, 2007, the Company did not issue
any options to purchase shares of common stock.




Stock
option activity for the years ended December 31, 2008, December 31, 2007 and
December 31, 2006 is summarized as follows:




Year Ended
                  December 31,
                  2008
                
                
                Year Ended
                  December 31,
                  2007
                
                
                Year Ended
                  December 31,
                  2006Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
                  Price
                
                
                Shares
                
                
                Weighted
                  Average
                  Exercise
                  PriceOptions
      outstanding at beginning of year
                
                
                3,968,000
                
                
                $
                1.32
                
                
                
                3,993,000
                
                
                $
                1.32
                
                
                
                4,268,000
                
                
                $
                1.31Granted
                
                
                0
                
                
                NA
                
                
                
                0
                
                
                NA
                
                
                
                75,000
                
                
                $
                1.05Exercised
                
                
                0
                
                
                NA
                
                
                
                (25,000
                )
                
                $
                0.94
                
                
                
                (100,000
                )
                
                $
                0.85Cancelled/expired
                
                
                (206,000
                )
                
                $
                1.01
                
                
                
                0
                
                
                NA
                
                
                
                (250,000
                )
                
                $
                1.31Options
      outstanding at end of year
                
                
                3,762,000
                
                
                $
                1.34
                
                
                
                3,968,000
                
                
                $
                1.32
                
                
                
                3,993,000
                
                
                $
                1.32Options
      exercisable at end of year
                
                
                3,762,000
                
                
                $
                1.34
                
                
                
                3,968,000
                
                
                $
                1.32
                
                
                
                3,918,000
                
                
                $
                1.32







The
following table presents information relating to stock options outstanding as of
December 31, 2008:




Options Outstanding
              
              
              Options ExercisableWeighted
              
              
              Weighted
              
              
              
              
              
              WeightedAverage
              
              
              Average
              
              
              
              
              
              AverageRange of Exercise
              
              
              
              
              Exercise
              
              
              Remaining
              
              
              
              
              
              ExercisePrice
              
              Shares
              
              
              Price
              
              
              Life in Years
              
              
              Shares
              
              
              Price$0.85
      - $0.99
              
              
              1,039,000
              
              
              $
              0.88
              
              
              
              3.28
              
              
              
              1,039,000
              
              
              $
              0.88$1.00
      - $1.49
              
              
              1,645,000
              
              
              $
              1.08
              
              
              
              4.70
              
              
              
              1,645,000
              
              
              $
              1.08$1.50
      - $1.99
              
              
              188,000
              
              
              $
              1.57
              
              
              
              3.46
              
              
              
              188,000
              
              
              $
              1.57$2.00
      - $3.38
              
              
              890,000
              
              
              $
              2.31
              
              
              
              1.00
              
              
              
              890,000
              
              
              $
              2.31TOTAL
              
              
              3,762,000
              
              
              $
              1.34
              
              
              
              3.37
              
              
              
              3,762,000
              
              
              $
              1.34


F-17




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


As of
December 31, 2008, there are no stock options available for issuance under the
1997 or the 1998 Plan. Pursuant to the plans, as of April 30, 2000, no further
options could be issued under the 1997 Plan and as of April 30, 2001, no further
options could be issued under the 1998 Plan. Therefore under the 1997 and 1998
plans, as options expire or are cancelled, they are returned to the plans
without the possibility of being issued again. As of December 31, 2008, under
the 1997 Plan, 1,230,625 options have been returned to the plan as a result of
expirations or cancellations and will not be re-issued, and under the 1998 Plan,
922,000 options have been returned to the plan as a result of expirations or
cancellations and will not be re-issued. Neither the 1997 nor the 1998 plan have
any options issued and outstanding and therefore there is no potential for
additional dilution under either the 1997 or the 1998 plans. As of December 31,
2008, there were 9,500 options available for issuance under the Fiscal 2000 Plan
and 945,420 options available for issuance under the Fiscal 2001 Plan. The
options outstanding noted in the table above are issued under either the 2000
Plan or the 2001 Plan.




[3] Warrants:As of December 31,
2008, there were 75,000 warrants outstanding.




In
connection with our sale of 1,408,450 common shares for $2,000,000 ($1.42 per
share) in a private placement to Seaside Partners, L.P. (“Seaside”) on April 28,
2000, the Company issued a 5-year warrant to Seaside to purchase 953,283 common
shares of our stock at an exercise price of $1.17 per share. To settle a penalty
owed to Seaside because of a late effective registration statement, the Company
adjusted the exercise price of the 953,283 warrant shares from $1.17 to $0.95 in
February 2001. In November 2003, the Seaside warrant was transferred and the
common shares underlying the exercise of the warrants and respective rights and
obligations under the Common Stock Purchase Agreement were assigned to Steven
Grodko (“Grodko”). Throughout the fiscal year ending December 31, 2004, Grodko
exercised a total of 553,283 warrant shares, leaving a balance of 400,000
warrants. In October 2005 the Company entered into an Extension Agreement and
registration letter agreement with Grodko in which the Company extended the term
of the warrant thereby changing the expiration date of the warrant to October
28, 2006. Grodko did not exercise any additional warrant shares in 2005. On
October 27, 2006, Grodko exercised 260,000 warrant shares, leaving a balance of
140,000 warrant shares. On October 28, 2006, the remaining balance of 140,000
warrant shares expired naturally. As of December 31, 2006, there were no longer
any warrant shares outstanding under this issuance.




On May 2,
2001, the Company issued a 5 year warrant immediately exercisable and
non-forfeitable, to purchase 200,000 common shares of American Bio Medica
Corporation stock at an exercise price of $1.50 per share to Brean Murray &
Co., Inc. as compensation for its future services as a financial advisor to the
Company. The warrant shares were valued at $134,000 using the Black Scholes
pricing model and the following assumptions, dividend yield of 0%, volatility of
95%, risk free interest rate 4.8% and expected life of 5 years and were recorded
as a charge to operations in the transition period ending December 31, 2001. The
closing price of American Bio Medica Corporation’s common shares on May 2, 2001,
as listed on The National Association of Securities Dealers Automated Quotations
(“NASDAQ”) Capital Market, was $0.95 per share. This warrant was never exercised
either in whole or in part and expired naturally on May 2, 2006.




On August
22, 2001, the Company issued warrants (“Private Placement Warrants”),
exercisable during a 54 month period beginning February 22, 2002, to purchase
1,274,500 common shares of our stock at an exercise price of $1.05 per share in
connection with the private placement of 2,549,000 shares of common stock (the
1,274,500 warrants issued in connection with the August 2001 private placement
traded on the NASDAQ Capital Market and may be hereafter referred to as the
“trading warrants”). The Company also issued, on August 22, 2001, warrants,
exercisable during a 54 month period beginning February 22, 2002, to purchase a
total of 203,920 common shares of our stock at an exercise price of $1.20 per
share, of which warrants to purchase 152,940 common shares were issued to Brean
Murray & Co., Inc. (“Brean Murray”) as compensation for their services as
placement agent and warrants to purchase 12,745 common shares were issued to
Axiom Capital Management, Inc., warrants to purchase 5,735 common shares were
issued to Jeffrey Goldberg, warrants to purchase 16,250 common shares were
issued to Barry Zelin, and warrants to purchase 16,250 common shares were issued
to David L. Jordon, each for their services as sub-agents of Brean Murray. In
the fiscal year end December 31, 2004, 2,500 trading warrants were exercised and
in fiscal year end December 31, 2005 2,500 trading warrants were exercised,
leaving a balance of 1,269,500 trading warrants. As of December 31, 2006, there
were no longer any warrant shares outstanding under these issuance as both the
trading warrants and the warrants issued to the placement agents naturally
expired on August 22, 2006.


F-18




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008




On
December 2, 2003, the Company issued a 5 year warrant immediately exercisable
and non-forfeitable, to purchase 300,000 common shares at an exercise price of
$1.15 to Brean Murray as compensation for its future services as a financial
advisor to the Company. In June 2004, the Company amended the December 2, 2003
Financial Advisory Agreement with Brean Murray and Brean Murray surrendered
150,000 of the 300,000 warrants to purchase common stock. The warrants were
valued at $281,000 using the Black Scholes pricing model and the following
assumptions, dividend yield of 0.0%, volatility of 80.6%, risk free interest
rate 5.2% and expected life of 5 years and $23,000 was recognized as a charge to
operations in the year ended December 31, 2003. The total value of these
warrants was initially to be charged ratably over twelve months from December
2003 through November 2004, the term of the contract.  An additional
$70,000 was expensed in the first quarter of 2004.  However, in
conjunction with the surrender of 150,000 warrants in June 2004, ABMC and Brean
Murray agreed that no further services would be provided and all remaining
expense associated with the valuation of the warrants, $129,000, was recognized
during the quarter ended June 30, 2004.  The closing price of the
Company’s common shares on December 2, 2003, as listed on The NASDAQ Capital
Market, was $1.33 per share. As of December 31, 2008, there were no longer any
warrant shares outstanding under this issuance as the warrants expired naturally
on December 2, 2008.




In
connection with their services as placement agent in the Company’s Series A
Debenture offering, on July 17, 2008, the Company issued Cantone Research, Inc.
(“CRI”) a 4 year warrant to purchase 30,450 shares of the Company’s common stock
at an exercise price of $0.37 per share, and on August 4, 2008 issued CRI a 4
year warrant to purchase 44,550 shares of the Company’s common stock at an
exercise price of $0.40 per share. All warrants issued to CRI are immediately
exercisable upon issuance. The closing price of the Company’s common shares was
$0.37 and $0.40 on July 17, 2008 and August 4, 2008, respectively. The July 17,
2008 warrants were valued using the Black Scholes pricing model and the
following assumptions, dividend yield of zero, volatility of 46.0%, risk free
interest rate of 4.7%, and expected life of 4 years.  The August 4,
2008 warrants were valued using the Black Scholes pricing model and the
following assumptions, dividend yield of zero, volatility of 46.1%, risk free
interest rate of 4.6% and expected life of 4 years.  The total value
of the CRI warrants will be amortized over the term of the Series A Debentures,
with $1,000 in expense being recognized in the fiscal year ended December 31,
2008.




NOTE
I – COMMITMENTS, CONTINGENCIES AND OTHER MATTERS




[1]           Operating leases:The Company
leases office and R&D/production facilities in New Jersey under operating
leases through December 2011.  In addition, the Company leases office
support equipment under leases through February 2009.  At December 31,
2008, the future minimum rental payments under these operating leases are as
follows:




2009
                  
                  $
                  86,0002010
                  
                  
                  86,0002011
                  
                  
                  86,000$
                  258,000




Rent
expense for facilities in New Jersey was $113,000 in 2008, $98,000 in 2007 and
$52,000 in 2006.


F-19




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


[2]           Employment agreements:In the
second quarter of 2007, the Company entered into employment agreements with the
Chief Executive Officer Stan Cipkowski, Chief Science Officer Martin R. Gould
and then Chief Financial Officer Keith E. Palmer providing for aggregate annual
salaries of $504,000.  The agreement with the Chief Executive Officer
Cipkowski provides for a $206,000 annual salary, is for a term of one year and
automatically renews unless either party gives advance notice of 60 days. The
agreement with the Chief Science Officer Gould provides for a $149,000 annual
salary, is for a term of one year and automatically renews unless either party
gives advance notice of 60 days. The agreement with former Chief Financial
Officer Palmer provided for a $149,000 annual salary, was for a term of one year
and automatically renewed unless either party gave advance notice of 60 days.
The employment agreement with former Chief Financial Officer Palmer was
terminated effective July 6, 2007 as a result of Palmer’s
resignation.




In the
third quarter of 2007, the Company entered into an employment agreement with its
current Chief Financial Officer Stefan Parker. The agreement provides for a
$120,000 annual salary, is for a term of one year, and automatically renews
unless either party gives advance notice of 60 days.




In the
second quarter of 2008, the Company entered into an employment agreement with
its Executive Vice President of Operations Douglas Casterlin. The agreement
provides for a $149,000 annual salary, is for a term of one year, expires April
28, 2009, and automatically renews unless either party gives advance notice of
60 days.




[3]           Legal:The Company has been
named in legal proceedings in connection with matters that arose during the
normal course of its business, and that in the Company’s opinion are not
material.  While the ultimate result of any litigation cannot be
determined, it is management’s opinion based upon consultation with counsel,
that it has adequately provided for losses that may be incurred related to these
claims.  If the Company is unsuccessful in defending any or all of
these claims, resulting financial losses could have an adverse effect on the
financial position, results of operations and cash flows of the Company.




[4]           Patent Sublicense: In February
2006, the Company entered into a non-exclusive Sublicense Agreement (the
“Agreement”) with an unaffiliated third party related to certain patents
allowing us to expand our contract manufacturing operations. Under this
Sublicense Agreement, the Company must pay a non-refundable fee of $175,000 over
the course of 2 years, of which $75,000 was paid in the first quarter of 2006,
$50,000 was paid in the first quarter of 2007, and $50,000 was paid in the first
quarter of 2008. The Company was required to pay royalties for products it
manufactures that fall within the scope of these patents. The Company was not
obligated to pay any royalties in 2008, 2007 or 2006. Beginning with the year
ended December 31, 2007, the Company was obligated to pay a $20,000 annual
minimum royalty (“MAR”) that can be applied against royalties on sales of
products that fall within the scope of the sublicensed patents. The first MAR
payment was made in January 2008, and there were not any sales of products made
in the year ended December 31, 2008 that would be applied against the MAR. The
Agreement expired on December 17, 2008 and no further amounts are due by ABMC
under the Agreement.




[5]           Royalty Agreement:In March
2006, the Company entered into a royalty agreement with Integrated Biotechnology
Corporation (“IBC”). IBC is the owner of the RSV (Respiratory Syncytial Virus)
test that the Company manufactures for one of IBC’s distributors. The agreement
was entered into to address amounts that IBC owed to the Company at the end of
fiscal year 2005, and to streamline the order and fulfillment process of IBC’s
RSV product. All outstanding amounts due to the Company were satisfied by the
end of the third quarter of 2007. After satisfaction of amounts due, the Company
continued to work directly with IBC’s distributor under the terms of the
Agreement, which stated that we were to pay IBC a 20% royalty of total sales
received from IBC’s distributor. The agreement expired on November 2,
2008.  However, we continue to work directly with IBC’s distributor
and manufacture an RSV product for them.


F-20




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


NOTE
J – RELATED PARTY DISCLOSURES




During
the fiscal years ended December 31, 2008, December 31, 2007 and December 31,
2006, the Company paid an aggregate of $58,000, $97,000 and $128,000
respectively, to Edmund Jaskiewicz, the Company’s President and Chairman of the
Board of Directors, in consideration of his services as patent and trademark
counsel to the Company, services as a member of its Board of Directors, and for
reimbursement of expenses related to same. At December 31, 2008 there were
invoices totaling $105,000 payable to Mr. Jaskiewicz.




During
the fiscal years ended December 31, 2008, December 31, 2007 and December 31,
2006, the Company paid an aggregate of $85,000, $70,000 and $59,000
respectively, to Alec Cipkowski.  Alec Cipkowski is the son of the
Company’s Chief Executive Officer, Stan Cipkowski.  Alec Cipkowski
performs information technology services for the Company updating and
maintaining the Company website as well as supporting the Rapid Reader devices
that are currently being used by customers.  At December 31, 2008,
there were no amounts due and payable to Alec Cipkowski.  Alec
Cipkowski was an independent contractor and not an employee of the Company until
January 2009 when he was hired at an annual salary of $60,000.  He
will be eligible to receive normal employee benefits on May 1, 2009 in
accordance with the Company’s standard policies.




NOTE
K – SUBSEQUENT EVENT




On
February 4, 2009, we received a letter from FNFG notifying the Company that an
event of default had occurred under the our Letter Agreement and other documents
(the “Loan Documents”), related to our line of credit, real estate mortgage and
term note (the “Credit Facilities”); more specifically, we failed to comply with
the maximum monthly net loss covenant set forth in the Letter
Agreement.  Pursuant to the terms of the Loan Documents, all
obligations of the Company to FNFG under the Loan Documents can be declared by
FNFG to be immediately due and payable. The principal amount totals
$1,636,635.97, plus interest and other charges through February 4, 2009
(collectively, the “Debt”).




The
February 4, 2009 notice also stated that, as an accommodation to the Company,
FNFG decided not to immediately accelerate the Debt, and that they expected the
Company to enter into a Forbearance Agreement with FNFG memorializing measures
and conditions required by FNFG. FNFG also notified the Company that they were
reducing the commitment on our line of credit to $650,000 (previously the line
of credit commitment was $750,000), and placing a hold on one of our accounts
held at FNFG.




On March
12, 2009, we entered into a Forbearance Agreement (the “Agreement”) with FNFG.
The Agreement addresses the Company’s non-compliance with the maximum monthly
net loss and the minimum debt service coverage ratio covenants (“Existing
Defaults”) under the Loan Documents related to extensions of credit made by FNFG
to the Company; more specifically the Company’s line of credit, term note and
real estate mortgage (the “Debt”) with FNFG. Under the terms of the Agreement,
FNFG will forbear from exercising its rights and remedies arising under the Loan
Documents from the Existing Defaults. The Agreement is in effect until (i) June
1, 2009; or (ii) the date on which FNFG elects to terminate the Agreement upon
the occurrence of an event of default under the Agreement or under the Loan
Documents (other than an Existing Default); or (iii) the date on which any
subsequent amendment to the Agreement becomes effective (the “Forbearance
Period”).




Under the
Agreement, during the Forbearance Period: FNFG will waive any further default
relating to the maximum monthly net loss covenant and minimum debt service
coverage ratio provided the Company shows a net loss no greater than $300,000
for the quarter ending March 31, 2009, and on or before May 1, 2009, the Company
must produce to FNFG a legally binding and executed commitment letter from a
bona-fide third party lender setting forth the terms of a full refinancing of
the Debt to close on or before June 1, 2009.




During
the Forbearance Period, FNFG will continue to place a hold on one of our
accounts (with a balance of $108,000), but will release up to $5,000 per month
from the account to be used for the purpose of paying a financial advisory firm
engaged by the Company to find and evaluate alternative funding sources; the
financial advisory firm was referred to the Company by FNFG.


F-21




AMERICAN
BIO MEDICA CORPORATION


Notes
to Financial Statements


December
31, 2008


The
maximum available under the line of credit during the Forbearance Period will be
the lesser of $650,000, or the Net Borrowing Capacity. Net Borrowing Capacity is
defined as Gross Borrowing Capacity less the Inventory Value Cap. Gross
Borrowing Capacity is defined as the sum of (i) 80% of eligible accounts
receivable, (ii) 20% of raw material inventory and (iii) 40% of finished goods
inventory. Inventory Value Cap is defined as the lesser of $400,000, or the
combined value of items (ii) and (iii) of Gross Borrowing Capacity. Since
September 2008, the Company’s Net Borrowing Capacity has declined from
$1,195,000 to $795,000 as of the date of this report.




During
the Forbearance Period, interest shall accrue on the line of credit at the rate
of prime plus 4%, an increase from prime plus 1%. Interest accruing on the real
estate mortgage during the Forbearance Period shall remain unchanged at the
fixed rate of 7.5% and interest on the term note shall remain unchanged at the
fixed rate of 7.17%. In the event of default under the Agreement, interest under
the line of credit shall increase to the greater of prime plus 6% or 10%. The
line of credit shall terminate on June 1, 2009.





NOTE
L- GEOGRAPHIC INFORMATION





Information
concerning net sales by principal geographic location is as
follows:





Year Ended
                        December 31,
                        2008
                      
                      
                      Year ended
                        December 31,
                        2007
                      
                      
                      Year ended
                        December 31,
                        2006United
      States
                      
                      $
                      11,134,000
                      
                      
                      $
                      12,337,000
                      
                      
                      $
                      12,452,000North
      America (not domestic)
                      
                      
                      1,136,000
                      
                      
                      
                      757,000
                      
                      
                      
                      727,000Europe
                      
                      
                      187,000
                      
                      
                      
                      543,000
                      
                      
                      
                      552,000Asia/Pacific
      Rim
                      
                      
                      66,000
                      
                      
                      
                      101,000
                      
                      
                      
                      48,000South
      America
                      
                      
                      125,000
                      
                      
                      
                      122,000
                      
                      
                      
                      59,000Africa
                      
                      
                      9,000
                      
                      
                      
                      12,000
                      
                      
                      
                      0$
                      12,657,000
                      
                      
                      $
                      13,872,000
                      
                      
                      $
                      13,838,000


F-22