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, 2009





 ̈
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 Act: None





Securities
registered pursuant to Section 12(g) of the 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 whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).




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 Act).


 ̈
Yes          x  No





The
aggregate market value of 18,183,613 voting Common Shares held by non-affiliates
of the registrant was approximately $3,636,723 based on the last sale price of
the registrant’s Common Shares, $.01 par value, as reported on the NASDAQ
Capital Market on June 30, 2009.





As of
March 30, 2010, the registrant had outstanding 21,744,768 Common Shares, $.01
par value.





Documents
Incorporated by Reference:





(1)
              Portions
      of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders
      to be held on June 15, 2010 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, 2009





PAGEPART
      IItem
      1.
                    Business
                    1Item
      1A.
                    Risk
      Factors
                    9Item
      1B.
                    Unresolved
      Staff Comments
                    16Item
      2.
                    Properties
                    16Item
      3.
                    Legal
      Proceedings
                    16Item
      4.
                    Submission
      of Matters to a Vote of Security Holders
                    17PART
      IIItem
      5.
                    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                    17Item
      6.
                    Selected
      Financial Data
                    19Item
      7.
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    19Item
      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
                    28Item
      9A
                    Controls
      and Procedures
                    28Item
      9B.
                    Other
      Information
                    28PART
      IIIItem
      10.
                    Directors,
      Executive Officers, and Corporate Governance
                    29Item
      11.
                    Executive
      Compensation
                    29Item
      12.
                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                    29Item
      13.
                    Certain
      Relationships and Related Transactions, and Director
      Independence
                    29Item
      14.
                    Principal
      Accounting Fees and Services
                    29PART
      IVItem
      15.
                    Exhibits,
      Financial Statement Schedules
                    29Signatures
                    
                    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, our ability to continue as a going concern,
adverse changes in regulatory requirements related to the marketing and use of
our products, the uncertainty of acceptance of current and new products in our
markets, competition in our markets and 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 (the “Company”) 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 and
changed our name to American Bio Medica Corporation.




Our
Business




We
develop, manufacture and sell immunoassay diagnostic tests, primarily for the
immediate, point of collection testing (“POCT”) for drugs of abuse (“DOA”) in
urine and oral fluids. Our DOA testing products offer employers, law
enforcement, government, health care, laboratory and education professionals,
self-contained, cost-effective, user-friendly products capable of accurately
identifying illicit drug use within minutes.




In
addition to the manufacture and sale of DOA testing products, we provide bulk
test strip contract manufacturing services for other POCT diagnostic companies.
While we do not currently derive a significant portion of our revenues from bulk
test strip contract manufacturing, if we continue to explore additional
applications for our technology, bulk test strip 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 December
2009, the global point of care testing market (which includes the POCT market)
was worth nearly $13.4 billion in 2009, and it is estimated to increase to $18.7
billion, at a 5-year compound annual growth rate (CAGR) of 7.0%. In July 2008,
BCC Research and Consulting reported that the DOA testing market increased from
$1.9 billion in 2007 to an estimated $2.0 billion by the end of 2008 and that it
should reach $2.6 billion in 2014, for a CAGR of 4.6%.




Our
Products




POCT
Products for the Detection of DOA in Urine




We
manufacture a number of POCT products that detect the presence or absence of
certain DOA in urine. We offer a number of standard configurations and we can
also produce custom configurations on special order if the market demands. We
also offer different cut-off levels for certain drugs. Cut-off levels are
concentrations of drugs or metabolites that must be present in urine or oral
fluid specimens before a positive result will be obtained. Our urine-based POCT
products test for the following drugs: amphetamines, barbiturates,
benzodiazepines, buprenorphine, cocaine (available with a cut-off level of
either 150 ng/mL or 300 ng/mL), MDMA (Ecstasy), methadone, methamphetamines,
opiates (available with a cut-off level of either 300 ng/mL or 2000 ng/mL),
oxycodone, PCP (phencyclidine), propoxyphene, THC (marijuana) and tricyclic
antidepressants.




All of
our urine-based POCT products are accurate, cost-effective, easy to use and
provide results within minutes. We currently offer the following POCT products
for urine-based DOA testing:




Rapid Drug ScreenÒ: The Rapid Drug Screen, or
RDS®, is a patented and patent pending rapid, POCT kit that detects the presence
or absence of 2 to 10 DOA simultaneously in a single urine
specimen.




1




Rapid ONE®: The patented Rapid
ONE product line consists of single drug tests, each of which tests 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.




Rapid TEC®: The patented Rapid
TEC contains one or two drug-testing strips that can each test for 2 to 5 DOA
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. As of the date of this
report, we only sell the Rapid TEC in limited quantities to specific customers;
as most of our customers prefer to utilize our Rapid TOX® platform (see
description of Rapid TOX below).




RDS InCup®: The patented and
patent pending RDS InCup is an all-inclusive point of collection test for 2 to
12 DOA that incorporates collection and testing of a urine sample in a single
step. Each RDS InCup product contains multiple channels and each channel
contains a single drug-testing strip that contains the chemistry to detect a
single class of DOA. Once the donor provides a sample, the results are available
within a few minutes without any further handling of the urine sample or the
product.




Rapid TOX®:Rapid TOX is a
cost-effective drug test in a horizontal cassette platform that simultaneously
detects 2 to 10 DOA in a single urine specimen. Each Rapid TOX 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. In addition to the
drug-testing panels previously noted as available in our urine POCT products,
Rapid TOX provides our customers with additional cut-off options for
amphetamines, MDMA (Ecstasy) and methamphetamines. The standard cut-off level
for these drugs is 1,000 ng/mL; Rapid TOX can be configured to contain the
standard cut-off levels for these drugs or to contain a cut-off level of 500
ng/mL.




Rapid TOX Cup® II: The
patented and patent pending Rapid TOX Cup II is an all-inclusive point of
collection test for 2 to 14 DOA that incorporates collection and testing of the
sample in a single product. Each Rapid TOX Cup II 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. Like Rapid TOX, the Rapid TOX Cup
II also offers additional cut-off levels (of 500 ng/mL) for amphetamines, MDMA
(Ecstasy) and methamphetamines.




POCT
Products for the Detection of DOA in Oral Fluids:




We
manufacture a number of POCT products that detect the presence or absence of DOA
in oral fluids. These products are easy to use and provide test results within
minutes with enhanced sensitivity and detection comparable to laboratory-based
oral fluids tests. Currently, the assays available on our oral fluid products
are amphetamines, barbiturates, benzodiazepines, cocaine, MDMA (Ecstasy),
methadone, methamphetamines, opiates, PCP, propoxyphene and THC.




OralStat®: OralStat is a
patented and patent pending, innovative POCT system for the detection of DOA in
oral fluids. Each OralStat simultaneously tests for 6 or 10 DOA in a single oral
fluid specimen.




OralStat EX: OralStat EX is an
oral fluid point of collection test that was designed to make both POCT 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. We did not sell any OralStat EX products
in the year ended December 31, 2009, however, this product line can still be
offered to customers if market demand requires.




Rapid STATTM: Rapid STAT is a
patent pending oral fluid point of collection test that combines the
incubation benefits of OralStat (see definition of OralStat above) with the
Rapid TOX cassette product platform (see definition of Rapid TOX above). Rapid
STAT maximizes drug recovery and provides a transport container for confirmation
of positive test results. 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, Rapid STAT
provides even lower THC testing sensitivity, making it unrivaled in the market.
Each Rapid STAT simultaneously tests for six DOA in a single oral fluid
specimen.




2




Other
Products




We
distribute a number of other products related to the detection of drugs or
substances of abuse. We do not manufacture these products. We do not derive a
significant portion of our revenues from the sale of these
products.




Rapid Reader®:The Rapid
Reader is a compact, portable unit that captures a picture of the test results
on an ABMC drug test 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 an ABMC
drug test. Although we only distribute this product, we obtained 510(k)
marketing clearance (see page 7 for a description of 510(k) marketing
clearance) from the U.S. Food and Drug Administration (“FDA”) specific to our
marketing of the Rapid Reader. Presently, we offer two different models of the
Rapid Reader to our customers, the 210 and 250.




Adulteration, Alcohol and Nicotine:We currently offer a number of point of collection tests that detect the
presence or absence of adulterants, alcohol and nicotine. Two of these products
are sold under ABMC-owned trademarks; the Rapid AlcoTECTM alcohol test and the
Rapid Check® test for adulterants. Some of the adulterant test products we
distribute are also incorporated into our urine-based POCT products for DOA. We
do not derive a significant portion of our revenues from the sale of these
products.




3




Contract
Manufacturing




We
provide bulk test strip contract manufacturing services to a number of
non-affiliated POCT diagnostic companies. In the year ended December 31, 2009,
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


We also
performed development work for certain manufacturing customers related to
products to detect various other infectious diseases. None of the costs related
to the performance of this development work were paid for by current or
potential contract manufacturing customers. We do not currently derive a
significant portion of our revenues from contract manufacturing.




Our
Markets




Workplace




The
Workplace market consists of pre-employment testing of job applicants, and
random, cause and post-accident testing of employees. 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
worker’s compensation and unemployment insurance premium reductions, tax
deductions and other incentives for adopting these programs. The Drug-Free
Workplace Act requires some federal contractors and all federal grantees to
agree that they will provide drug-free workplaces as a precondition of receiving
a contract or grant from a federal agency. Typically if a contractor receives a
federal contract of $100,000 or more, they must 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). Any organization or individual that has been granted a
federal contract, regardless of size, must enact a drug-free workplace
program.




§
            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 2008 SAMHSA (Substance Abuse Mental Health Services Administration)
      National Survey on Drug Use and Health released in September 2009, most
      drug users are employed. Of the 17.8 million current illicit drug users
      aged 18 or older in 2008, 12.9 million, or 72.7% were employed either full
      or part time.




Government




The
Government market includes federal, state, county and local 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, county 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.




According
to reports issued by the Bureau of Justice Statistics:




§
            In
      2008, 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.




4




Clinical




The
Clinical market includes emergency rooms, physician offices, hospitals and
clinics and rehabilitation facilities associated with hospitals. In August 2009,
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 2008
almost 2 million emergency department visits were associated with drug misuse or
abuse. To address this issue, drug testing is performed so healthcare
professionals are able to ascertain the drug status of a patient before they
administer pharmaceuticals or other treatment.




We
currently sell in this market through our direct sales force; however, we do not
maintain a large share of this market. We believe the best marketing strategy in
this market would be to obtain an exclusive distribution relationship with a
multi-national diagnostics company focused on the clinical POCT market, and we
continue to make efforts to develop such a relationship.




International




The
International market consists of various markets outside of the United States.
Although workplace testing is not as prevalent outside of the United States as
within, the international Government and Clinical 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 year ended December 31, 2008,
after an extensive study of virtually every oral fluid POCT for DOA on the
market, the French government chose our Rapid STAT (see definition of Rapid STAT
on page 2) to be used by the French police to perform drug testing at the
roadside. We also appointed a master distributor to market in the region of
Latin America in the year ended December 31, 2008. This distributor’s sales are
primarily in the Government and Clinical markets, along with some sales in the
Workplace market.




Rehabilitation




The
Rehabilitation market includes people in treatment for substance abuse. There is
typically 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.




Education




The
Education market consists of student drug-testing. 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. According to the December 2009
University of Michigan Monitoring the Future study, 15% of 8th
graders, 29% of 10th graders
and 37% 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.




Our Distribution
Methods




We have a
two-pronged distribution strategy that focuses on growing our business through
direct sales and distributors. Our direct sales team consists of our Vice
President of Sales and Marketing, Director of Government Sales, Director of
Latin America Sales, Director of International Sales, Regional Sales Managers
and Inside Sales Representatives (collectively our “Direct Sales Team”); all of
which are trained professionals and most of which are highly experienced in DOA
testing sales. Our distributors are unaffiliated entities that resell our POCT
products either as stand-alone products or as part of a service they provide to
their customers.




5




Our
Direct Sales Team and network of distributors sell our products to the
Workplace, Government, Clinical, Rehabilitation, and Education markets, and we
sell primarily through a network of distributors in the International market.
Although we currently sell our urine-based point of collection products directly
into the Clinical market, we continue to make efforts to develop a distribution
relationship with a multi-national diagnostics company focused on the Clinical
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 distributors in addition to selling directly in
our markets.




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 POCT market for DOA is highly competitive and currently our
products are cost-competitive in most markets in which we compete, although
price pressures have increased significantly when comparing our product pricing
with the pricing of point of collection 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 achieve and/or sustain acceptable gross margins
while still providing our customers with cost-competitive products. In addition,
we continue to explore new, lower cost product alternatives to offer 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 our RDS the most accurate multi-drug
product for all drugs when compared to GC/MS (Gas Chromatography/Mass
Spectrometry). GC/MS is 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 product 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.




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 testing related
matters are becoming areas in which clarification is needed by customers using
these products. ABMC provides its customers with continuous customer and
technical support on a 24/7/365 basis. We believe that this support provides us
with a competitive advantage since most of our competitors do not offer this
extended service to their customers.




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 tests consist of antibodies,
antigens and other reagents, plastic molded pieces, 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.




6




Major
Customers




We have a
number of national account customers that in total represent a significant
portion of our sales in the years ended December 31, 2009 and December 31, 2008.
One of these national account customers represented 11.1% of net sales in the
year ended December 31, 2009 and 11.2% of net sales in the year ended December
31, 2008.




Patents and
Trademarks/Licenses




To date,
we hold 27 patents related to our point of collection drug-testing products,
including 4 design patents and 8 utility patents issued in the United States. We
currently have 9 United States patent applications pending and 13 foreign patent
applications pending. The earliest expiration date of any of our issued patents
is January 2013.




To date,
we have registered 23 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, Rapid Check, our website domain, our corporate logos and certain
product logos. We have also registered 17 trademarks in countries/regions such
as Canada, Mexico, Europe, and the United Kingdom. We currently have two
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
bulk test strip contract manufacturing operations. Under this Sublicense
Agreement, we paid a non-refundable fee of $175,000 over the course of two 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 during the term of the sublicense. 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 has
not had a material impact on our sales. 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 a RSV test that we manufacture for one
of IBC’s distributors. The agreement was entered into to address amounts that
IBC owed to ABMC at the end of the year ended December 31, 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 the
year ended December 31, 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 a RSV product for
them.




Government
Regulations




In
certain markets, the development, testing, manufacture and sale of our point of
collection drug tests, and possible additional testing products 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, the FDA regulates the pre-clinical and clinical
testing, manufacture, labeling, distribution and promotion of medical devices. A
“medical device” is defined as an “instrument, apparatus, implement, machine,
contrivance, implant, in vitro reagent, or other similar or related article,
including any component, part, or accessory, which is...intended for use in the
diagnosis of disease or other conditions, or in the cure, mitigation, treatment,
or prevention of disease, in man or other animals, or intended to affect the
structure or any function of the body of man or other animal...”




Based
upon legal advice from our FDA counsel, we have taken the position that our
products are not “medical devices” as defined above, except when they are
marketed and sold to the Clinical market (see Item 1A, Risk Factor related to
“Any adverse changes in our regulatory framework...” on page 11). For instance,
most of our urine-based products are marketed and sold in the Clinical market;
therefore, these urine-based products would fall under the category of 510(k)
submissions to the FDA. A 510(k) is a premarketing submission made to the 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 (pre-amendments 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 a device is substantially
equivalent to a predicate device.




7




We do not
currently market our OralStat or Rapid STAT products to the Clinical market, as
we have not yet obtained a 510(k) clearance for any of our oral fluid products.
As of the date of this report, there are no oral fluid POCT’s (in which the
testing result is truly obtained at the time the sample is collected) that have
received 510(k) clearance.




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);


§
            Rapid
      TEC product line;


§
            Rapid
      Reader;


§
            Rapid
      TOX product line; and


§
            Rapid
      TOX Cup (which includes alternative cut-off levels of 500 ng/mL for
      amphetamines, MDMA (Ecstasy) and
  methamphetamines).




Furthermore,
in order to sell our products in Canada, we must comply with ISO 13485, 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, we 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 the 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 TOX, RDS InCup and OralStat and our application for the right
to bear the CE mark on our Rapid TOX Cup II product is in process. We received
our ISO 13485:2003 compliance certification in August 2006 and in 2007 we
received our ISO 9001:2000 compliance certification. We have also obtained the
license to sell our RDS, Rapid ONE and Rapid TOX products in
Canada.




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
August 2008, we received our CLIA waiver from the FDA related to our Rapid TOX
product line. As of the date of this report, the Rapid TOX is the only ABMC POCT
product that has been granted a CLIA waiver from the 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
(“R&D”)




Our
R&D efforts are continually focused on enhancing and/or maintaining the
performance and reliability of our drug-testing products. During the year ended
December 31, 2009, our R&D team continued to make enhancements to our POCT
products. The R&D team also continued the development process on bulk test
strip contract manufacturing projects. Our R&D expenditures were $418,000
for the year ended December 31, 2009, compared to $563,000 for the year ended
December 31, 2008. None of the costs incurred in R&D in either the year
ended December 31, 2009 or the year ended December 31, 2008 were borne by a
customer.




8




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, adulteration, alcohol and nicotine products.




As of
December 31, 2009, we had 96 employees, of which 95 were full-time and 1 was
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 our
inception and throughout most of our history, we have incurred net losses,
including but not limited to, a net loss of $900,000 incurred in the year ended
December 31, 2009. 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 year
ended December 31, 2009, our sales continued to be negatively impacted by the
global economic crisis that began in the latter half of the year ended December
31, 2008, which negatively affected our results of operations. Our failure to
increase sales while maintaining or reducing general and administrative, sales
and marketing, research and development and production costs will result in the
Company incurring additional losses.




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 operations.




We offer
a number of point of collection tests for DOA that are sold in limited markets,
and we currently derive most of our revenues from sales of our point of
collection tests for DOA. Based upon actual results in the year ended December
31, 2009, and given current levels of operating expenses, we must achieve
approximately $3.0 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 drug tests. Two of our products are fairly new to our markets (the Rapid
STAT and the Rapid TOX Cup were both introduced in 2007) and therefore, we have
a limited 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 DOA product line, including
Inverness Medical Innovations, Inc., Varian, Inc., and Biosite Diagnostics in
the urine POCT market and OraSure Technologies, Inc., Varian, Inc., and
Inverness Medical Innovations, Inc. in the oral fluid POCT market.As new technologies are
introduced into the POCT 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.




9




We
rely on third parties for raw materials used in our DOA products and in our bulk
test strip contract manufacturing processes.




We
currently have approximately 61 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 DOA. For most of our raw materials we have
multiple suppliers, but there are a few 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 DOA products. This interruption
of the manufacturing process could impair our ability to fill customers’ orders
as they are placed, putting the Company at a competitive
disadvantage.




Furthermore,
we rely on a number of third parties for the supply of raw materials necessary
to manufacture the test components we supply to other diagnostic companies under
bulk test strip contract manufacturing agreements. For most of these raw
materials we have multiple suppliers, however, there are a few raw materials for
which we only have one supplier. The loss of one or more of these suppliers
could suspend the bulk test strip manufacturing process and this interruption
could impair our ability to perform bulk test strip 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 year ending December 31, 2010 if the expected
configuration of sales orders are not received at projected levels.




We
currently have approximately $2.0 million in raw material components for the
manufacture of our products at December 31, 2009. 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, 2009. The
components for much of this “work in process” inventory have lives of 12-24
months. If sales orders received are not for products that would utilize the raw
material components, or if product developments make the raw materials obsolete,
we may be required to dispose of these 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 products that
contain the components of the “work in process” inventory, we may need to
discard this expired “work in process” inventory. Beginning in the year ended
December 31, 2004, we established an allowance for obsolete or slow moving
inventory. At December 31, 2009, this allowance was set to $271,000. There can
be no assurance that this allowance will continue to be adequate for the year
ending December 31, 2010 and/or that it will not have to be adjusted in the
future.




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 POCT
market. There can be no assurance that new products we may develop will meet
projected price or performance objectives. In fact, price competition continues
to increase in the POCT markets as more companies offer products manufactured
outside of the United States. Many foreign manufacturers have lower
manufacturing costs and therefore can offer their products at a lower price.
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 drug tests or product defects
affecting product performance may become apparent after commercial introduction
of our drug tests to the market. We could incur significant costs if we are
required to remedy defects in any of our products after commercial introduction.
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.




10




One of
our customers accounted for approximately 11.1% of the total net sales of the
Company for the year ended December 31, 2009. 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 our revenues and profits. We cannot provide
assurance that this customer or any of our current customers will continue to
place orders, that orders by existing customers will continue at current or
historical levels or that the we 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 DOA.
Manufacturers such as Inverness Medical Innovations, Inc., Varian, Inc., Biosite
Diagnostics and OraSure Technologies, Inc. may be better known and some have far
greater financial resources. 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 DOA
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.




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 for our
future success. The loss of a member of senior management could negatively
impact our business and results of operations. Although we have employment
agreements in place with the majority of senior management, there can be no
assurance that any of our senior management will continue their employment. We
currently maintain key man insurance for our Chief Executive Officer Stan
Cipkowski and our Chief Science Officer Martin R. Gould.




Any
adverse changes in our regulatory framework could negatively impact our
business.




Our urine
point of collection products have received 510(k) marketing clearance from the
FDA, and have therefore met FDA requirements for professional use. Our oral
fluid point of collection products have not received 510(k) marketing clearance
from the FDA. We have also been granted a CLIA waiver from the FDA related to
Rapid TOX, our urine point of collection product line. Workplace and Government
are our primary markets, and it has been our belief that marketing clearance
from the FDA is not required to sell our products in non-clinical markets (such
as Workplace and Government), but is required to sell our products in the
Clinical and over-the-counter (consumer) markets. However, in July 2009, we
received a warning letter from the FDA, which alleges we are marketing our oral
fluid drug screen, OralStat, in workplace settings without marketing clearance
or approval (see Current Report on Form 8-K filed with the United States
Securities and Exchange Commission (“SEC”) on August 5, 2009).




On August
18, 2009 we responded to the FDA warning letter received in July 2009, setting
forth our belief that FDA clearance was not required in non-clinical markets. On
October 27, 2009, we received another letter from the FDA (“October 2009
Letter”), which stated that they did not agree with our interpretation of
certain FDA regulations. We responded to the October 2009 Letter on December 8,
2009 and as of the date of this report; we continue to be in discussions with
the FDA related to this matter.




11




Currently
there are many other oral fluid point of collection products being sold in the
Workplace market by our competitors, none of which have received FDA marketing
clearance. Therefore, if we are required to be one of the first companies to
obtain FDA marketing clearance to sell our oral fluid products in the Workplace
market, it is entirely possible that the cost of such clearance would be
material and that incurring such cost could have a negative impact on our
efforts to improve our performance and to achieve profitability. Furthermore,
there can be no assurance that we would obtain such marketing clearance from the
FDA. Our oral fluid products currently account for approximately 20% of our
sales; if we were unable to market and sell our oral fluid products in the
Workplace market, this could negatively impact our revenues.




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 the FDA
will grant us the appropriate marketing clearances required to comply with the
changes, if and when we apply for them.




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.




We seek
to protect our proprietary products under trade secret and copyright laws, which
afford only limited protection. We currently have a total of 27 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.




We
currently have two option plans, the Fiscal 2000 Non-statutory Stock Option Plan
(the “2000 Plan”) and the Fiscal 2001 Non-statutory Stock Option Plan (the “2001
Plan”). Both the 2000 Plan and the 2001 Plan have been adopted by our Board of
Directors and approved by our shareholders, and both have options issued and
options available for issuance. As of December 31, 2009 there were 263,500
options issued and outstanding under the 2000 Plan and 3,308,080 options issued
and outstanding under the 2001 Plan, for a total of 3,571,580 options issued and
outstanding as of December 31, 2009. Of the total options issued and
outstanding, 3,071,580 are fully vested as of December 31, 2009. As of December
31, 2009, there were 736,500 options available for issuance under the 2000 Plan
and 408,920 options available for issuance under the 2001 Plan.




On August
15, 2008, we 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 SEC
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.




12




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 were immediately exercisable upon
issuance.




We
registered the Debenture Conversion Shares and the Common Stock underlying the
Placement Agent Warrants in a Registration Statement on Form S-3 (the
“Registration Statement”) filed with the SEC on April 15, 2009 and further
amended on May 5, 2009. The Registration Statement was declared effective on
June 10, 2009.




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.




13




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 (“Rule 144”), or pursuant to a
registration statement filed under the Securities Act. Rule 144 addresses sales
of restricted securities by affiliates and non-affiliates of an issuer. An
“affiliate” is a person, such as an officer, director or large shareholder, in a
relationship of control with the issuer. “Control” means the power to direct the
management and policies of the company in question, whether through the
ownership of voting securities, by contract, or otherwise. If someone buys
securities from a controlling person or an affiliate, they take restricted
securities, even if they were not restricted in the affiliate's
hands.




A person
who is not an affiliate of the issuer (and who has not been for at least three
months) and has held the restricted securities for at least one year can sell
the securities without regard to restrictions. If the non-affiliate had held the
securities for at least six months but less than one year, the securities may be
sold by the non-affiliate as long as the current public information condition
has been met (i.e. that the issuer has complied with the reporting requirements
of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)).




We are
subject to reporting requirements of the Exchange Act. Under Rule 144, if a
holder of securities is an affiliate of an issuer subject to Exchange Act
reporting requirements, the securities must be held for at least six months. In
addition, the number of equity securities sold during any three-month period
cannot exceed 1% of the outstanding shares of the same class being sold. The
securities must be sold in unsolicited, routine trading transactions and brokers
may not receive more than normal commission. Affiliates must also file a notice
with the SEC on Form 144 if a sale involves more than 5,000 shares or the
aggregate dollar amount is greater than $50,000 in any three-month period. The
sale must take place within three months of filing the Form 144 and, if the
securities have not been sold, an amended notice must be filed. Investors should
be aware that sales under Rule 144 or pursuant to a registration statement filed
under the Securities Act may depress the market price of our securities in any
market for such shares.




We
believe we will need additional funding for our existing and future
operations.




Our
financial statements for the year ended December 31, 2009 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 either all or
at least part of the year ending December 31, 2010, 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
securities are currently trading on the Pink OTC Markets, Inc., commonly
referred to as the “Pink Sheets”, and may be subject to SEC “penny stock,”
rules, which could make it more difficult for a broker-dealer to trade our
common shares, for an investor to acquire or dispose of our common shares in the
secondary market and to retain or attract market makers.




The SEC
has adopted regulations that define a “penny stock” to be any equity security
that has a market price per share of less than $5.00, subject to certain
exceptions, such as any securities listed on a national securities exchange or
securities of an issuer in continuous operation for more than three years whose
net tangible assets are in excess of $2 million, or an issuer that has average
revenue of at least $6 million for the last three years. Our common shares were
delisted from the NASDAQ Capital Market in September 2009 and are currently
trading on the Pink Sheets. As of the year ended December 31, 2009, our net
tangible assets did exceed $2 million, and our average revenue for the last
three years exceeded $6 million, so our securities currently qualify for
exclusion from the “penny stock” definitions. However, if our net tangible
assets cease to exceed $2 million and our three-year average revenue falls below
$6 million, we would fail to qualify for either of these exclusions, and our
common shares would be subject to “penny stock” rules. For any transaction
involving a “penny stock,” unless exempt, the rules impose additional sales
practice requirements on broker-dealers, subject to certain exceptions. For
these reasons, a broker-dealer may find it more difficult to trade our common
stock and an investor may find it more difficult to acquire or dispose of our
common stock on the secondary market. Therefore, 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, and could also make it more difficult for us to raise capital in the
future. Furthermore, listing on the Pink Sheets may make it more difficult to
retain and attract market makers. In the event that market makers cease to
function as such, public trading of our securities will be adversely affected or
may cease entirely.




14




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 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, beginning with our 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. On October 2, 2009, the SEC extended
the deadline requiring smaller reporting companies to obtain auditor's
attestation related to their assessments of the effectiveness of our internal
controls over financial reporting. Smaller reporting companies are now required
to obtain auditor's attestation of their assessments beginning with annual
reports covering fiscal years ended on or after June 15, 2010, instead of the
prior deadline of fiscal years ended on or after December 15, 2009. Therefore,
commencing in our year ending December 31, 2010, 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 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, identify
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.
  Difficult
conditions in the global economy have adversely affected our business and
results of operations and it is uncertain if these conditions will improve in
the near future.
  The
economic downturn has substantially reduced our sales and negatively impacted
our results of operations.  If the current economic downturn continues
or intensifies, our results could be more adversely affected in the future. A
prolonged economic downturn, both in the United States and worldwide, may
continue to lead to lower sales, lower gross margins and increased bad debt
risks, all of which could adversely affect our results of operations, financial
condition and cash flows. There could be a number of other adverse effects on
the Company’s business, including insolvency of customers and
suppliers.
  15
  ITEM
1B. UNRESOLVED STAFF COMMENTS
  None.
  ITEM
2. PROPERTIES
  We
purchased our property in Kinderhook, New York in November 2001. The property
currently 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. We lease (under a
long-term, non-cancellable lease) 14,400 square feet of space in Logan Township,
New Jersey that houses our bulk test strip manufacturing and research and
development. Both facilities are currently adequate and meet the needs of all
areas of the Company.
  ITEM
3. LEGAL PROCEEDINGS
  From time
to time, we are named in legal proceedings in connection with matters that arose
during the normal course of business. While the ultimate result of any such
litigation cannot be predicted, if we are unsuccessful in defending any such
litigation, the resulting financial losses could have an adverse effect on the
financial position, results or operations and cash flows of the Company. We are
aware of no significant litigation loss contingencies for which management
believes it is both probable that a liability has incurred and that the amount
of the loss can be reasonably estimated. We are unaware of any proceedings being
contemplated by governmental authorities as of the date of this
report.
  16
  ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  None.
  PART II
  ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Market
Information
  Our
common shares traded on the NASDAQ Capital Market (“NASDAQ”) under the symbol
“ABMC” from December 24, 1997 until September 3, 2009, when trading in our
common shares was suspended for failure to comply with NASDAQ’s minimum bid
price listing requirement. NASDAQ subsequently delisted our common shares
effective October 16, 2009. Our common shares are currently trading on the Pink
OTC Markets, Inc. (the “Pink Sheets”) under the symbol “ABMC”.
  The
following table sets forth the high and low closing bid prices of our
securities as reported by the Pink Sheets beginning September 3, 2009 and
through the period noted below. The prices quoted reflect inter-dealer prices,
without retail mark-up, mark-down, or commission and may not necessarily
represent actual transactions.
  Fiscal year ending December 31,
      2009
                      
                      High
                      
                      
                      LowQuarter
      ending December 31, 2009
                      
                      $
                      0.15
                      
                      
                      $
                      0.09Period
      from September 3, 2009 through September 30, 2009
                      
                      $
                      0.18
                      
                      
                      $
                      0.15
  The
following table sets forth the high and low sale prices of our securities as
reported by NASDAQ for the periods noted until September 3, 2009 (the date on
which trading in the Company’s common shares was suspended on
NASDAQ).
  Common
Shares
  Fiscal year ending December 31,
      2009
                      
                      High
                      
                      
                      LowPeriod
      from July 1, 2009 through September 2, 2009
                      
                      $
                      0.30
                      
                      
                      $
                      0.16Quarter
      ending June 30, 2009
                      
                      $
                      0.42
                      
                      
                      $
                      0.11Quarter
      ending March 31, 2009
                      
                      $
                      0.30
                      
                      
                      $
                      0.10
  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
  Holders
  Based
upon the number of record holders and individual participants in security
position listings, as of March 30, 2010, there were approximately 3,000 holders
of our securities. As of March 30, 2010, there were 21,744,768 common shares
outstanding.
  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.
  17
  Securities authorized for
issuance under equity compensation plans previously approved by security
holders
  We have
two Non-statutory Stock Option Plans in place (the 2000 Plan and the 2001 Plan,
collectively the “Plans”) 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 (see Part I, Item 1A, Risk
Factor titled, “Potential issuance and exercise...” on page 12).
  18
  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 (see
Part I, Item 1A, Risk Factor titled, “Potential issuance and exercise...” on page
12).
  The
following table summarizes information as of December 31, 2009, 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
                        issuedupon exercise of
                        outstandingoptions,
                        warrants and rights
                        (a)
                      
                      
                      Weighted-average
                        exerciseprice of
                        outstanding options,
                        warrants and rights
                        (b)
                      
                      
                      Number of securities remaining
                        availablefor future issuance under
                        equitycompensation plans
                        (excluding securities
                        reflected in column (a))
                        (c)Equity
      Compensation Plans approved by security holders
                      
                      
                      3,571,580
                      
                      
                      $
                      0.96
                      
                      
                      
                      1,145,420Equity
      Compensation Plans not approved by security holders
                      
                      
                      75,000
                      
                      
                      $
                      0.39
                      
                      
                      NA
 
 Performance
Graph
  As a
smaller reporting company, we are not required to provide the information
required under this item.
  ITEM
6.  SELECTED FINANCIAL DATA
  As a
smaller reporting company, we are not required to provide the information
required under this item.
  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 (“1995 Act”), and in 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 publicly update 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,
2009, we sustained a net loss of $900,000 from net sales of $9,726,000, and had
net cash provided by operating activities of $254,000. During the year ended
December 31, 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.
  19
  During
the year ended December 31, 2009, we continued to market and distribute our
urine and oral fluid-based point of collection tests for DOA and our Rapid
Reader drug screen result and data management system, and we also performed bulk
test strip contract manufacturing services for unaffiliated third parties.
Throughout the year ended December 31, 2009, we continued to take steps to
reduce manufacturing costs to increase our gross margin. Unfortunately, the
global economic crisis continued to have a negative impact on our sales
throughout the year ended December 31, 2009. In response to the uncertainties
associated with the state of the global economy, we initiated cost-cutting
measures to reduce our operating expenses. Although these measures did not
prevent us from sustaining a net loss in the year ended December 31, 2009, these
measures did enable the Company to minimize our net loss.
  Our sales
strategy continues to be a focus on direct sales, while identifying new contract
manufacturing opportunities and pursuing new national accounts. Simultaneously
with these efforts, we continue to focus on the development of new product
platforms and configurations to address market trends and needs.
  Our
continued existence is dependent upon several factors including, but not limited
to, our ability to raise revenue levels, to continue to 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
  Our
discussion and analysis of our financial condition and results of operations are
based upon our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America, or
“U.S. GAAP”. Part IV, Item 15, Note A to our financial statements, describes the
significant accounting policies and methods used in the preparation of our
financial statements. The accounting policies that we believe are most critical
to aid in fully understanding and evaluating the financial statements include
the following:
  Use of Estimates:The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our 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:Revenue
is recognized upon shipment to customers.
  Accounts Receivable and Allowance
for Doubtful Accounts: We maintain an allowance for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, an additional
allowance may be required.
  Inventory and Allowance for Slow
Moving and Obsolete Inventory:We maintain an allowance for slow moving
and obsolete inventory. If necessary, actual write-downs to inventory are made
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 allowances or write-downs may be required.
  Deferred Income Tax Asset Valuation
Allowance:We record a valuation allowance to reduce our deferred income
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 deferred income tax valuation
allowance, in the event we were to determine that we would be able to realize
our deferred income tax assets in the future in excess of our net recorded
amount, an adjustment to the deferred income tax asset would increase income in
the period such determination was made.
  20
  Results
of operations for the year ended December 31, 2009, compared to the year ended
December 31, 2008
  Net
Sales:Net sales
decreased 23.2% in the year ended December 31, 2009, compared to net sales in
the year ended December 31, 2008. The economic downturn continued to affect
sales across all market segments, however our core markets, Workplace and
Government, were particularly affected. Increasingly high unemployment levels
have resulted in decreases in the Workplace market, as employers perform less
pre-employment and random drug testing either due to lower employment levels or
in some cases, as part of cost-cutting measures. Also, a number of our national
accounts customers are staffing agencies that perform pre-employment drug
testing and with fewer employers hiring, these customers are performing fewer
drug tests. Our Government market continues to be impacted by price pressures
caused by competitors selling products manufactured outside of the United
States. Most government contracts are awarded via an open solicitation process
and in most cases, the company with the lowest priced product is awarded the
contract. Since foreign manufacturers can offer their products at a lower price
due to lower costs, including but not limited to, lower labor, material,
regulatory and insurance costs, it has become increasingly difficult to compete
from a cost standpoint. However, we have been successful in garnering government
contracts, especially in those cases when an emphasis is placed on quality,
customer service, technical support and “Made in America” requirements. For some
of the contracts we currently hold, decreased purchasing levels (in attempts to
close budget deficits), have resulted in decreased buying by our customers. In
addition to our core markets, we also experienced sales declines in our
International market for the same reasons previously discussed, as poor economic
conditions continue to be of a global nature. Our contract manufacturing sales
also declined in the year ended December 31, 2009 when compared to the year
ended December 31, 2008; increased sales of the fetal amniotic rupture test were
offset by a decline in sales of the RSV test.
  While we
remain encouraged by reports of improvement in certain aspects of global
economic conditions, until the economy fully recovers and companies begin to
rehire employees, we expect to continue to see declines in our core markets. We
are hopeful that these decline rates will stabilize and eventually improve. We
are optimistic that sales in our International market and Contract Manufacturing
will either recover or decline at a lower rate.
  Cost of goods
sold/gross profit:Cost of goods sold
declined slightly year over year; in the year ended December 31, 2009, cost of
goods sold was 57.7% of net sales, while in the year ended December 31, 2008
cost of goods sold was 58.4% of net sales. In the fourth quarter of the year
ended December 31, 2008, the unanticipated sharp decline in sales due to the
downturn of the economy negatively impacted our cost of goods sold; more
specifically, our rolling weighted average labor and overhead costs and raw
material expenditures were not in line with the level of sales achieved in the
fourth quarter of the year ended December 31, 2008. To address sales declines,
starting in the year ended December 31, 2009, we decreased product manufacturing
and reduced labor and overhead costs in an effort to bring production output in
line with anticipated demand. In the latter part of the year ended December 31,
2009, we did experience sporadic periods of sales improvement, leading us to
increase production personnel levels (from lower levels maintained earlier in
the year ended December 31, 2009). At December 31, 2009, we had not reverted to
those lower production levels due to the uncertainty of our markets and as to
when a full economic recovery will occur. In addition, although we have cut back
on the amount of product being manufactured, certain direct labor and overhead
costs are fixed and such fixed costs are now being allocated to a reduced number
of manufactured strips, thus increasing our manufacturing cost per unit. We
continue to evaluate our production personnel levels as well as our product
manufacturing levels to ensure they are adequate to meet current and anticipated
sales demands.
  In
addition, gross profit in the year ended December 31, 2009 was affected by sales
declines in the Workplace market (typically higher margin sales), and typically
lower margin rates for new contracts in the Government market due to price
pressures from foreign manufacturers, as well as continued price pressures in
all markets.
  Operating
Expenses:As a result of cost-cutting measures implemented in the
beginning of the year, operating expenses for the year ended December 31, 2009
decreased 18.7% when compared to operating expenses in the year ended December
31, 2008. These cost-cutting measures resulted in expense reductions some of
which were offset by certain increases as described in the following
detail:
  21
  Research and development
(“R&D”)
  R&D
expenses for the year ended December 31, 2009 decreased 25.8% when compared to
R&D expenses incurred in the year ended December 31, 2008. Savings in
salaries, consulting fees, FDA compliance costs, utility costs, supplies,
travel, phone and depreciation were minimally offset by increases in employee
related benefits and repairs and maintenance. The greatest savings were in
salary expense and FDA compliance costs. In June 2008, our Vice President of
Product Development retired and we have not filled this position, nor do we
expect to fill this position in the future. Also, the year ended December 31,
2008 included costs related to our application for a CLIA waiver (see Part I,
Item 1, “Government Regulations” on page 7) and these costs did not recur in the
year ended December 31, 2009. Throughout the year ended December 31, 2009, our
R&D department continued to focus their efforts on the enhancement of our
current products and exploration of contract manufacturing
opportunities.
  Selling and
marketing
  Selling
and marketing expenses for the year ended December 31, 2009 decreased 25.4% when
compared to selling and marketing expenses incurred in the year ended December
31, 2008. Reductions were seen in all expense categories except for increases
noted in advertising expense, marketing salaries, marketing employee-related
benefits and dues and subscriptions. The increase in marketing salaries is due
to the addition of a position for information technology services, website
development and Rapid Reader support; previously, these services were provided
by an independent contractor (see Part IV, Item 15, Note K to the Financial
Statements). The expense reductions in selling and marketing are attributed to
the implementation of cost-cutting measures as well as decreased sales resulting
in a decrease in sales commissions. Also, the year ended December 31, 2008
included two non-recurring charges; included in miscellaneous expense were costs
related to a settlement of a claim regarding a product return and included in
royalty expense were costs related to an agreement regarding the RSV product we
manufacture for an unaffiliated third party, and neither of these expenses
recurred in the year ended December 31, 2009. Throughout the year ended December
31, 2009, 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 target markets, which
include, but are not limited to, our core markets of Workplace and Government.
In addition, beginning in the fourth quarter of the year ended December 31,
2008, our direct sales force began to focus more efforts on the Clinical market,
as a result of our receipt of a CLIA waiver related to our Rapid TOX product
line. While we have seen some positive impact on sales as a result of these
efforts to sell into CLIA waived markets, to date the impact has not been
significant.
  22
  General and administrative
(“G&A”)
  G&A
expenses for the year ended December 31, 2009 decreased 10.0% when compared to
G&A expenses incurred in the year ended December 31, 2008. G&A was also
positively impacted by our cost-cutting measures, although certain G&A costs
are less sensitive to sales levels so the impact was not as great as noted in
R&D and selling and marketing. Decreases in investor relations expense,
directors’ fees and expense, CLIA waiver expense, insurance, patents and
licenses, licenses and permits, office and computer supplies and miscellaneous
expense were offset by increases in accounting fees, quality assurance,
purchasing and administrative salaries and benefits, consulting fees, broker
fees, legal fees, auto expense, telephone, dues and subscriptions, repairs and
maintenance, bank service fees and share-based payment expense. In the year
ended December 31, 2008, miscellaneous expense stemmed from establishing a
reserve against a long-term receivable and this expense did not recur in the
year ended December 31, 2009. In addition, charges related to our application
for a CLIA waiver and a patent sublicense incurred in the year ended December
31, 2008, and they did not recur in the year ended December 31,
2009.
  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 POCT 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 regulatory and public company reporting
requirements, including but not limited to, requirements related to internal
controls over financial reporting and FDA compliance costs.
  Other income and
expense:  Other expense incurred during the year ended December
31, 2009 consisted of losses on disposals of property, plant and equipment
offset by a gain realized on a grant. The grant was originally received from the
Columbia Economic Development Corporation totaling $100,000. 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
57 and 61 at the years ended December 31, 2009 and December 31, 2008,
respectively.The amount of
gain realized on this grant was $10,000 in the years ended December 31, 2009 and
December 31, 2008. During the years ended December 31, 2009 and December 31,
2008, we incurred interest expense related to our loans and lines of credit with
First Niagara Bank and Rosenthal & Rosenthal, Inc. and we earned interest on
our cash accounts.
  LIQUIDITY
AND CAPITAL RESOURCES AS OF DECEMBER 31, 2009
  Our 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 and production 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. Our financial statements for the year ended December 31, 2009 have
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.
  The
Company has a real estate mortgage with First Niagara Bank (“First Niagara”) and
a line of credit with Rosenthal & Rosenthal, Inc.
(“Rosenthal”).
  23
  Real Estate
Mortgage
  On
December 17, 2009, we closed on a refinancing and consolidation of our existing
real estate mortgage and term note with First Niagara (see Item 1, Note E in our
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2009
filed with the SEC on November 13, 2009 for information on the prior real estate
mortgage and term note). The new credit facility through First Niagara is a
fully secured term loan that matures on January 1, 2011, with a 6.5-year (78
month) amortization (the “Mortgage Consolidation Loan”). The Mortgage
Consolidation Loan continues to be secured by our facility in Kinderhook, New
York as well as various pieces of machinery and equipment.
  The
principal amount of the Mortgage Consolidation Loan is $953,000. The annual
interest rate of the Mortgage Consolidation Loan is fixed at 8.75%, which is an
increase from interest rates of 7.5% and 7.17%, respectively, on the prior
existing real estate mortgage and term note. The monthly payment of principal
and interest is $16,125, which is a decrease from the combined monthly payments
of principal and interest of $17,007 previously being made on the real estate
mortgage and term note as separate credit facilities. We have incurred
approximately $28,000 in costs associated with this refinancing; including
approximately $22,000 in legal fees incurred and passed on from First Niagara.
These costs will be amortized over the term of the Mortgage Consolidation
Loan.  Accrued interest was paid at closing totaling $7,000. In
addition, we were required to make a $25,000 principal payment at the time of
closing on the prior existing term note.
  Payments
commenced on the Mortgage Consolidation Loan on February 1, 2010. If the entire
amount of any required principal and/or interest payment is not paid in full
within 10 days of being due, we would be required to pay a late fee equal to 5%
of the required payment. If an event of default occurs, the annual interest rate
would increase to 6% above the interest rate which is payable as of the due date
or on the date of default.
  We must
maintain Liquidity of at least $50,000 and this Liquidity requirement will be
tested at the end of each month. For the purposes of this requirement, Liquidity
is defined as any combination of cash, marketable securities or borrowing
availability under one of more credit facilities other than the Mortgage
Consolidation Loan. As of the date of this report, we are in compliance with
this requirement.
  Rosenthal Line of
Credit
  On July
1, 2009 (the “Closing Date”), we entered into a Financing Agreement (the
“Refinancing Agreement”) with Rosenthal to refinance a line of credit held by
First Niagara. Under the Refinancing Agreement, Rosenthal agreed to provide the
Company with up to $1,500,000 under a revolving secured line of credit
(“Rosenthal Line of Credit”) that is collateralized by a first security interest
in all of the Company’s receivables, inventory, and intellectual property, and a
second security interest in our machinery and equipment, leases, leasehold
improvements, furniture and fixtures. The maximum availability of $1,500,000
(“Maximum Availability”) is subject to an availability formula (the
“Availability Formula”) based on certain percentages of accounts receivable and
inventory, and elements of the Availability Formula are subject to periodic
review and revision by Rosenthal. Upon entering into the Refinancing Agreement,
our availability under the Rosenthal Line of Credit (“Loan Availability”) was
$1,170,000. From the Loan Availability, we obtained approximately $646,000 to
pay off funds drawn against the line of credit with First Niagara. The Company
has used and will continue to use the remaining Loan Availability for working
capital.
  We were
charged a facility fee of 1% of the amount of the Maximum Facility, which was
payable on the Closing Date and is payable on each anniversary of the Closing
Date thereafter. Under the Refinancing Agreement, we will also pay an
administrative fee of $1,500 per month for as long as the Rosenthal Line of
Credit is in place.
  Interest
on outstanding borrowings (which do not exceed the Availability Formula) is
payable monthly and is charged at variable annual rates equal to (a) 4% above
the JPMorgan Chase Bank prime rate (“Prime Rate”) (never to be deemed to be
below 4%) for amounts borrowed with respect to eligible accounts receivable (the
“Effective Rate”), and (b) 5% above the Prime Rate for amounts borrowed with
respect to eligible inventory (the “Inventory Rate”). Any loans or advances that
exceed the Availability Formula will be charged at the rate of 3% per annum in
excess of the Inventory Rate (the “Over-Advance Rate”). If we were to default
under the Refinancing Agreement, interest on outstanding borrowings would be
charged at the rate of 3% per annum above the Over-Advance Rate. The minimum
interest charges payable to Rosenthal each month are $4,000.
  24
  So long
as any obligations are due under the Rosenthal Line of Credit, we must maintain
working capital of not less than $2,000,000 and tangible net worth, as defined
by the Refinancing Agreement, of not less than $4,000,000 at the end of each
fiscal quarter. Under the Refinancing Agreement, tangible net worth is defined
as (a) the aggregate amount of all Company assets (in accordance with U.S.
GAAP), excluding such other assets as are properly classified as intangible
assets under U.S. GAAP, less (b) the aggregate amount of liabilities (excluding
liabilities that are subordinate to Rosenthal). Failure to comply with the
working capital and tangible net worth requirements defined under the
Refinancing Agreement would constitute an event of default and all amounts
outstanding would, at Rosenthal’s option, be immediately due and payable without
notice or demand. Upon the occurrence of any such default, in addition to other
remedies provided under the Agreement, we would be required to pay to Rosenthal
a charge at the rate of the Over-Advance Rate plus 3% per annum on the
outstanding balance from the date of default until the date of full payment of
all amounts to Rosenthal. However, in no event would the default rate exceed the
maximum rate permitted by law.
  The
Refinancing Agreement terminates on May 31, 2012; however, we may terminate the
Agreement on any anniversary of the Closing Date with at least 90 days and not
more than 120 days advance written notice to Rosenthal. If we elect to terminate
the Refinancing Agreement prior to the expiration date, we will pay to Rosenthal
a fee of (a) 3% of the Maximum Availability if such termination occurs prior to
the first anniversary of the Closing Date, (b) 2% of the Maximum Availability if
such termination occurs on or after the first anniversary of the Closing Date
but prior to the second anniversary of the Closing Date, and (c) 1% of the
Maximum Availability if such termination occurs on or after the second
anniversary of the Closing Date. The Line of Credit is payable on demand and
Rosenthal may terminate the Refinancing Agreement at any time by giving the
Company 45 days advance written notice.
  The
amount outstanding on this Line of Credit was $260,000 at December 31, 2009,
with additional Loan Availability of $391,000, for a total Loan Availability of
$651,000 as of December 31, 2009. We incurred $41,000 in costs related to this
refinancing in the year ended December 31, 2009. These costs are being amortized
over the term of the Rosenthal Line of Credit.
  Working
Capital
  The
Company’s working capital increased $361,000 at December 31, 2009, when compared
to working capital at December 31, 2008. This increase in working capital is
primarily a result of a reclassification of debt with First Niagara from
short-term to long-term as a result of our refinance and consolidation of our
real estate mortgage and term note in December 2009. The new Mortgage
Consolidation Loan matures on January 1, 2011.
  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).
  Dividends
  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.
  Cash
Flows
  Decreases
in inventory, accounts receivable and other non-current assets, were partially
offset by decreases in accounts payable, accrued expenses and other current
liabilities, wages payable and other long-term liabilities, resulting in cash
provided by operations of $254,000 in the year ended December 31,
2009.
  Net cash
used in investing activities in the years ended December 31, 2009 and December
31, 2008 was for investment in property, plant and equipment. Net cash used in
the year ended December 31, 2009 was $35,000 compared to $51,000 in the year
ended December 31, 2008.
  Net cash
used in financing activities in the year ended December 31, 2009 consisted of
proceeds from our line of credit, which was offset by payments made on the line
of credit, debt issuance costs and payments made on outstanding debt. Net cash
provided by financing activities in the year ended December 31, 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 used in financing activities was $385,000 in the year
ended December 31, 2009 compared to net cash provided by financing activities of
$219,000 in the year ended December 31, 2008.
  25
  At
December 31, 2009 and December 31, 2008, we had cash and cash equivalents of
$35,000 and $201,000, respectively.
  Debenture
Financing
  We
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 SEC 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 SEC 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. We have 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. (“Cantone”) received a Placement Agent
fee of $52,500, or 7% of the gross principal amount of Series A Debentures sold.
In addition, we 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 date of closing) 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). All warrants issued to Cantone were immediately
exercisable upon issuance. We registered the common shares underlying the Series
A Debentures in a Registration Statement on Form S-3 filed with the SEC on April
15, 2009 and amended on May 5, 2009. On June 10, 2009, the SEC issued a notice
of effectiveness related to this Form S-3, as amended.
  Given our
current sales levels and results of operations, we will need to raise additional
capital in the year ending December 31, 2010 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.
  26
  RECENT
ACCOUNTING PRONOUNCEMENTS
  Codification
  Effective
with the quarter ended September 30, 2009, we adopted the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification Topic 105, “Generally
Accepted Accounting Principles” (“ASC 105”). ASC 105 establishes the FASB
Accounting Standards Codification (“FASB Codification”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
non-governmental entities in the preparation of financial statements in
conformity with U.S. GAAP. The FASB will make all future changes to guidance in
the FASB Codification by issuing Accounting Standards Updates. The FASB
Codification also provides that rules and interpretive releases of the SEC
issued under the authority of federal securities laws will continue to be
sources of authoritative U.S. GAAP for SEC registrants. The FASB Codification
does not create any new U.S. GAAP standards but incorporates existing accounting
and reporting standards into a new topical structure so that users can more
easily access authoritative accounting guidance. We have updated all references
to authoritative standards to be consistent with those set forth in the FASB
Codification. The adoption of ASC 105 had no impact on our financial
statements.
  In May
2009, the FASB issued guidance that establishes general standards for the
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued and
requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date, that is, whether that date
represents the date the financial statements were issued or were available to be
issued. This guidance is contained within ASC Topic 855, “Subsequent Events”
(“ASC Topic 855”), previously referred to as SFAS No. 165 - “Subsequent Events”.
ASC Topic 855 was effective for our interim and annual periods ending after June
15, 2009. In February 2010, the FASB issued Update No. 2010-09, “Subsequent
Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements”, (“ASU 2010-09”). ASU No. 2010-09 amended ASC Topic 855 and
clarified that subsequent events should be evaluated through the date the
financial statements are issued. In addition, this update no longer requires an
SEC filer to disclose the date through which subsequent events have been
evaluated. This guidance is effective for financial statements issued subsequent
to February 24, 2010. We adopted this guidance on this date and the adoption of
this guidance had no impact on our financial statements.
  In September 2009,
the FASB issued an update that provides amendments to ASC Subtopic 820-10, “Fair
Value Measurements and Disclosures - Overall”, for the fair value measurement of
investments in certain entities that calculates net asset value per share (or
its equivalent). The amendments permit, as a practical expedient, a reporting
entity to measure the fair value of an investment that is within the scope of
the amendments on the basis of the net asset value per share of the investment
(or its equivalent) if the net asset value of the investment (or its equivalent)
is calculated in a manner consistent with the measurement principles of ASC
Topic 946 as of the reporting entity’s measurement date, including measurement
of all or substantially all of the underlying investments of the investee in
accordance with ASC Topic 820. The amendments also require disclosures by major
category of investment about the attributes of investments within the scope of
the amendments, such as the nature of any restrictions on the investor’s ability
to redeem its investments at the measurement date, any unfunded commitment by
the investor, and the investment strategies of the investees. The major category
of investment is required to be determined on the basis of the nature and risks
of the investment in a manner consistent with the guidance for major security
types in U.S. GAAP on investments in debt and equity securities in paragraph
320-10-50-lB. The disclosures are required for all investments within the scope
of the amendments regardless of whether the fair value of the investment is
measured using the practical expedient. The amendments apply to all reporting
entities that hold an investment that is required or permitted to be measured or
disclosed at fair value on a recurring or non-recurring basis and, as of the
reporting entity’s measurement date, if the investment meets certain criteria.
The amendments are effective for the interim and annual periods ending after
December 15, 2009. Early application is permitted in financial statements for
earlier interim and annual periods that have not been issued. The adoption of
these amendments did not have a material impact on our financial
statements.
  In September 2009,
the FASB issued ASC Topic 740, “Income Taxes” (“ASC Topic 740”), an update to
address the need for additional implementation guidance on accounting for
uncertainty in income taxes. For entities that are currently applying the
standards for accounting for uncertainty in income taxes, the guidance and
disclosure amendments are effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We apply the standards for
accounting for uncertainty in income taxes and the adoption of ASC Topic 740 did
not have a material impact on our financial statements.
  ITEM
      7A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  None.
  ITEM
      8.
              FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA
  Our
Financial Statements are set forth beginning on page F-1.
  27
  ITEM
      9.
              CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
  None.
  ITEM 9A.
              CONTROLS
      AND PROCEDURES
  Evaluation
of Disclosure Controls and Procedures
  Management
has reviewed the effectiveness of our “disclosure controls and procedures” (as
defined in the Exchange Act 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
Exchange Act. 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, 2009. 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, 2009.
  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.
  Attestation
Report of Independent Registered Public Accounting Firm
  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 SEC that
permit us to provide only Management's report in this annual
report.
  ITEM
9B. OTHER INFORMATION
  None.
  28
  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 year ended December
31, 2009, 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 year ended December
31, 2009, 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 Part II, Item 5.Market for Registrant’s
Common Equity, Related Stockholders Matters and Issuer Purchases of Equity
Securities 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 year
ended December 31, 2009, 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 Shareholders for the year ended December
31, 2009, 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 Shareholders for the year ended December
31, 2009, under the caption “Independent Public Accountants”, and is
incorporated herein by reference.
  PART
IV
  ITEM 15.
                EXHIBITS,
      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
  (2)
              Financial
      Statement Schedule
  As
      a smaller reporting company, we are only required to provide financial
      statements required by Article 8 of Regulation S-X in lieu of financial
      statements that may be required under Part II, Item 8 of this Annual
      Report on Form 10-K, and these financial statements are noted under Item
      15(a)(1).
  (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 (2)3.51
                        
                        Amended and Restated Bylaws(3)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 (2)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)4.9
                        
                        2009 Series A Debenture Offering
      - Form of Debenture Placement Agreement(4)4.10
                        
                        2009 Series A Debenture Offering
      - Form of Private Placement Memorandum(4)4.11
                        
                        2009
      Series A Debenture Offering - Form of Security Purchase Agreement (4)4.12
                        
                        2009 Series A Debenture Offering
      - Form of Series A Debenture(4)4.13
                        
                        2009 Series A Debenture Offering
      - Form of Registration Rights Agreement(4)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)4.17
                        
                        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
                        
                        2009 Series A Debenture Offering
      - Form of Placement Agent Warrant Agreement(5)10.3
                        
                        Term
      Note with First Niagara Bank (6)10.6
                        
                        Contract
      of Sale dated May 19, 1999/Kinderhook, New York facility (7)10.7
                        
                        Agreement
      of Lease dated May 13, 1999/Kinderhook, New York facility (7)10.8
                        
                        Lease
      dated August 1, 1999/New Jersey facility (7)10.9
                        
                        Amendment
      dated March 23, 2001 to Lease dated August 1, 1999/New Jersey facility
      (8)10.10
                        
                        Amended
      Contract of Sale dated May, 2001/Kinderhook, New York facility (8)10.17
                        
                        Amendment
      No.3 dated August 20, 2002/New Jersey facility (9)10.19
                        
                        Financial
      Advisory Agreement dated December 2, 2003 by and between Brean Murray
      & Co., Inc and the Company (10)10.19.1
                        
                        Settlement
      letter dated June 21, 2004 by and between Brean Murray & Co., Inc and
      the Company (11)10.20
                        
                        Contract
      of Sale/land-Kinderhook, NY facility (10)10.25
                        
                        Amendment
      No 4 dated October 9, 2006/Lease of New Jersey facility (12)10.26
                        
                        Amendment
      No. 5 dated January 19, 2007/Lease of New Jersey facility (12)10.28
                        
                        Employment
      contract between the Company and Martin Gould (a)(13)10.30
                        
                        Employment
      contract between the Company and Stefan Parker (a)(14)10.31
                        
                        Employment contract between the
      Company and Douglas Casterlin(a)(15)10.32
                        
                        Employment contract between the
      Company and Stan Cipkowski(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
 
 30





(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 April
      15, 2002 and incorporated herein by reference.(3)
              Filed
      as the exhibit number listed to the Company’s Current Report on Form 8-K
      filed on October 18, 2007 and incorporated herein by
      reference.(4)
              Filed
      as the exhibit number listed to the Company’s Registration Statement on
      Form S-3 filed on April 15, 2009 and amended on May 5, 2009 and
      incorporated herein by
reference.


(5)
            Filed
      as exhibit number 4.13 to the Company’s Registration Statement on Form S-3
      filed on April 15, 2009 and amended on May 5, 2009 and incorporated herein
      by reference.


(6)
            Filed
      as the exhibit number listed to the Company’s Form 8-K filed on January
      24, 2007 and incorporated herein by
reference.


(7)
            Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on August
      11, 2000 and incorporated herein by
reference.


(8)
            Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on August
      13, 2001 and incorporated herein by
reference.


(9)
            Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on March
      31, 2003 and incorporated herein by
reference.


(10)
            Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on May 10,
      2004 and incorporated herein by
reference.


(11)
            Filed
      as the exhibit number listed to the Company’s Form 10-QSB filed August 10,
      2004 and incorporated herein by
reference.


(12)
            Filed
      as the exhibit number listed to the Company’s Form 10-KSB filed on March
      29, 2007 and incorporated herein by
reference.


(13)
            Filed
      as the exhibit number listed to the Company’s Form 10-QSB filed on August
      13, 2007 and incorporated herein by
reference.


(14)
            Filed
      as the exhibit number listed to the Company’s Form 8-K filed on August 24,
      2007 and incorporated herein by
reference.


(15)
            Filed
      as the exhibit number listed to the Company’s Form 8-K filed on May 1,
      2008 and incorporated herein by
reference.


(16)
            Filed
      as the exhibit number listed to the Company’s Form 10-Q filed on November
      13, 2009 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/Executive Vice President, Finance
                Principal
      Financial Officer
                Principal
      Accounting Officer





Date:March 30, 2010





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, 2010:





/s/ Stan Cipkowski
              
              Chief
      Executive Officer & DirectorStan
      Cipkowski
              
              Principal
      Executive Officer/s/ Edmund Jaskiewicz
              
              Chairman
      of the Board and PresidentEdmund
      Jaskiewicz/s/Richard P. Koskey
              
              DirectorRichard
      P. Koskey/s/ Carl A. Florio
              
              DirectorCarl
      A. Florio/s/ Jean Neff
              
              DirectorJean
      Neff/s/ Stefan Parker
              
              Chief
      Financial Officer/Executive Vice President, FinanceStefan
      Parker
              
              Principal
      Financial Officer
                  Principal
      Accounting Officer


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, 2009 and 2008, 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, 2009 and 2008, 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, 2010


F-2





AMERICAN
BIO MEDICA CORPORATION


Balance
Sheets




December 31,
                          
                          
                          December 31,2009
                          
                          
                          2008ASSETSCurrent
      assetsCash
      and cash equivalents
                          
                          $
                          35,000
                          
                          
                          $
                          201,000Accounts
      receivable net of allowance for doubtful accounts of $67,000 at December
      31, 2009 and $105,000 at December 31, 2008
                          
                          
                          816,000
                          
                          
                          
                          1,161,000Inventory
      net of allowance for slow moving and obsolete inventory of $271,000 at
      December 31, 2009 and $308,000 at December 31, 2008
                          
                          
                          4,315,000
                          
                          
                          
                          5,552,000Prepaid
      expenses and other current assets
                          
                          
                          101,000
                          
                          
                          
                          97,000Total
      current assets
                          
                          
                          5,267,000
                          
                          
                          
                          7,011,000Property,
      plant and equipment, net
                          
                          
                          1,624,000
                          
                          
                          
                          1,961,000Debt
      issuance costs
                          
                          
                          118,000
                          
                          
                          
                          117,000Other
      assets
                          
                          
                          31,000
                          
                          
                          
                          47,000Total
      assets
                          
                          $
                          7,040,000
                          
                          
                          $
                          9,136,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                          
                          $
                          678,000
                          
                          
                          $
                          1,568,000Accrued
      expenses and other current liabilities
                          
                          
                          506,000
                          
                          
                          
                          544,000Wages
      payable
                          
                          
                          215,000
                          
                          
                          
                          230,000Line
      of credit
                          
                          
                          260,000
                          
                          
                          
                          431,000Current
      portion of long-term debt
                          
                          
                          107,000
                          
                          
                          
                          1,098,000Current
      portion of unearned grant
                          
                          
                          10,000
                          
                          
                          
                          10,000Total
      current liabilities
                          
                          
                          1,776,000
                          
                          
                          
                          3,881,000Other
      liabilities
                          
                          
                          136,000
                          
                          
                          
                          207,000Long-term
      debt
                          
                          
                          1,606,000
                          
                          
                          
                          760,000Related
      party note
                          
                          
                          124,000Unearned
      grant
                          
                          
                          20,000
                          
                          
                          
                          30,000Total
      liabilities
                          
                          
                          3,662,000
                          
                          
                          
                          4,878,000COMMITMENTS
      AND CONTINGENCIESStockholders’
      equity:Preferred
      stock; par value $.01 per share; 5,000,000 shares authorized, none issued
      and outstanding at December 31, 2009 and 2008Common
      stock; par value $.01 per share; 50,000,000 shares authorized; 21,744,768
      issued and outstanding at December 31, 2009 and 2008
                          
                          
                          217,000
                          
                          
                          
                          217,000Additional
      paid-in capital
                          
                          
                          19,299,000
                          
                          
                          
                          19,279,000Accumulated
      deficit
                          
                          
                          (16,138,000
                          )
                          
                          
                          (15,238,000
                          )Total
      stockholders’ equity
                          
                          
                          3,378,000
                          
                          
                          
                          4,258,000Total
      liabilities and stockholders’ equity
                          
                          $
                          7,040,000
                          
                          
                          $
                          9,136,000


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,
                      2009
                    
                    
                    For the Year Ended
                      December 31,
                      2008Net
      sales
                    
                    $
                    9,726,000
                    
                    
                    $
                    12,657,000Cost
      of goods sold
                    
                    
                    5,611,000
                    
                    
                    
                    7,396,000Gross
      profit
                    
                    
                    4,115,000
                    
                    
                    
                    5,261,000Operating
      expenses:Research
      and development
                    
                    
                    418,000
                    
                    
                    
                    563,000Selling
      and marketing
                    
                    
                    2,052,000
                    
                    
                    
                    2,749,000General
      and administrative
                    
                    
                    2,317,000
                    
                    
                    
                    2,575,000Operating
      loss
                    
                    
                    (672,000
                    )
                    
                    
                    (626,000
                    )Other
      income/(expense):Interest
      income
                    
                    
                    1,000
                    
                    
                    
                    3,000Interest
      expense
                    
                    
                    (203,000
                    )
                    
                    
                    (213,000
                    )Other
      expense
                    
                    
                    (25,000
                    )
                    
                    
                    (13,000
                    )Net
      loss before tax
                    
                    
                    (899,000
                    )
                    
                    
                    (849,000
                    )Income
      tax expense
                    
                    
                    (1,000
                    )
                    
                    
                    (1,000
                    )Net
      loss
                    
                    $
                    (900,000
                    )
                    
                    $
                    (850,000
                    )Basic
      and diluted loss per common share
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.04
                    )Weighted
      average number of shares outstanding – basic and diluted
                    
                    
                    21,744,768
                    
                    
                    
                    21,744,768





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, 2007
              
              
              21,744,768
              
              
              $
              217,000
              
              
              $
              19,267,000
              
              
              $
              (14,388,000
              )
              
              $
              5,096,000Warrants
      issued in connection with long-term debt financing
              
              
              
              
              
              
              
              
              
              
              12,000
              
              
              
              
              
              
              
              12,000Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (850,000
              )
              
              
              (850,000
              )Balance-December
      31, 2008
              
              
              21,744,768
              
              
              $
              217,000
              
              
              $
              19,279,000
              
              
              $
              (15,238,000
              )
              
              $
              4,258,000Share-based
      payment expense
              
              
              
              
              
              
              
              
              
              
              20,000
              
              
              
              
              
              
              
              20,000Net
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (900,000
              )
              
              
              (900,000
              )Balance-December
      31, 2009
              
              
              21,744,768
              
              
              $
              217,000
              
              
              $
              19,299,000
              
              
              $
              (16,138,000
              )
              
              $
              3,378,000





The
accompanying notes are an integral part of the financial
statements.


F-5





AMERICAN
BIO MEDICA CORPORATION


Statements
of Cash Flows




Year Ended
                    
                    
                    Year EndedDecember 31,
                    
                    
                    December 31,2009
                    
                    
                    2008Cash
      flows from operating activities:Net
      loss
                    
                    $
                    (900,000
                    )
                    
                    $
                    (850,000
                    )Adjustments
      to reconcile net loss to net cash provided by / (used in) operating
      activities:Depreciation
                    
                    
                    336,000
                    
                    
                    
                    353,000Loss
      on disposal of property, plant and equipment
                    
                    
                    36,000
                    
                    
                    
                    4,000Amortization
      of debt issuance costs
                    
                    
                    42,000
                    
                    
                    
                    14,000Provision
      for bad debts
                    
                    
                    40,000
                    
                    
                    
                    41,000Provision
      for slow moving and obsolete inventory
                    
                    
                    (37,000
                    )
                    
                    
                    58,000Share-based
      payment expense
                    
                    
                    20,000Changes
      in:Accounts
      receivable
                    
                    
                    305,000
                    
                    
                    
                    163,000Inventory
                    
                    
                    1,274,000
                    
                    
                    
                    (616,000
                    )Prepaid
      expenses and other current assets
                    
                    
                    22,000
                    
                    
                    
                    84,000Other
      assets
                    
                    
                    16,000
                    
                    
                    
                    (40,000
                    )Accounts
      payable
                    
                    
                    (766,000
                    )
                    
                    
                    165,000Accrued
      expenses and other current liabilities
                    
                    
                    (38,000
                    )
                    
                    
                    324,000Unearned
      grant
                    
                    
                    (10,000
                    )
                    
                    
                    (10,000
                    )Patent
      sublicense
                    
                    
                    
                    
                    
                    
                    (50,000
                    )Wages
      payable
                    
                    
                    (15,000
                    )
                    
                    
                    (102,000
                    )Other
      liabilities
                    
                    
                    (71,000
                    )
                    
                    
                    159,000Net
      cash provided by / (used in) operating activities
                    
                    
                    254,000
                    
                    
                    
                    (303,000
                    )Cash
      flows from investing activities:Purchase
      of property, plant and equipment
                    
                    
                    (35,000
                    )
                    
                    
                    (51,000
                    )Net
      cash used in investing activities
                    
                    
                    (35,000
                    )
                    
                    
                    (51,000
                    )Cash
      flows from financing activities:Net
      payments on line of credit
                    
                    
                    (171,000
                    )
                    
                    
                    (292,000
                    )Proceeds
      from debt financing
                    
                    
                    
                    
                    
                    
                    750,000Debt
      issuance costs
                    
                    
                    (69,000
                    )
                    
                    
                    (119,000
                    )Payments
      on debt financing
                    
                    
                    (145,000
                    )
                    
                    
                    (120,000
                    )Net
      cash provided by / (used in) financing activities
                    
                    
                    (385,000
                    )
                    
                    
                    219,000Net
      decrease in cash and cash equivalents
                    
                    
                    (166,000
                    )
                    
                    
                    (135,000
                    )Cash
      and cash equivalents – beginning of period
                    
                    
                    201,000
                    
                    
                    
                    336,000Cash
      and cash equivalents – end of period
                    
                    $
                    35,000
                    
                    
                    $
                    201,000Supplemental
      disclosures of cash flow information:Cash
      paid during the year for interest
                    
                    $
                    203,000
                    
                    
                    $
                    122,000Warrants
      issued in connection with long-term debt financing
                    
                    
                    
                    
                    
                    $
                    12,000Related
      party note issued in lieu of accounts payable
                    
                    $
                    124,000





The
accompanying notes are an integral part of the financial
statements.


F-6


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


NOTE
A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES




The
Company:




American
Bio Medica Corporation (the “Company”) is in the business of developing,
manufacturing, and marketing point of collection diagnostics tests, 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, 2009, the Company had a net loss of $900,000 and net
cash provided by operating activities of $254,000, compared to a net loss of
$850,000 and net cash used in operating activities of $303,000 for the year
ended December 31, 2008. The Company’s cash balances decreased by $166,000
during the year ended December 31, 2009 and decreased by $135,000 during the
year ended December 31, 2008. As of December 31, 2009, the Company had an
accumulated deficit of $16,138,000. During the year ended December 31, 2008 and
continuing throughout the year ended December 31, 2009, the Company implemented
programs to improve its financial prospects including entering into national and
international distribution agreements, implementing a number of cost-cutting
initiatives, including strategic reductions in personnel, analyzing and
controlling inventory levels 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. The Company’s current
Mortgage Consolidation Loan facility with First Niagara has a maturity date of
January 1, 2011 and on that date, the Company may be required to make a
significant payment on this facility, or refinance the facility. There can be no
assurance that the Company can make such a payment or complete a refinancing of
the facility.




The Company’s previous history of
operating cash flow deficits, its current cash position and lack of access to
capital 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 mainly trade receivables due from customers for the sale
of our products. Payment terms vary on a customer-by-customer basis, and
currently range from cash on delivery to net 61 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. At
December 31, 2009 and December 31, 2008, the Company had an allowance for
doubtful accounts of $67,000 and $105,000, respectively.


F-7


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


[3]           Inventory:Inventory is stated
at the lower of cost or market. Work in process and finished goods are comprised
of labor, overhead and raw material costs. Labor and overhead costs are
determined on a rolling average cost basis and raw materials are determined on a
first-in-first-out method. At December 31, 2009 and December 31, 2008, the
Company established an allowance for slow moving and obsolete inventory of
$271,000 and $308,000, respectively.




[4]           Income taxes:The Company
accounts for income taxes in accordance with ASC Subtopic 740-10 (SFAS 109,
“Accounting for Income Taxes”, and ASC Section 740-10-25 (Financial Accounting
Standards Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” –
an interpretation of SFAS 109).  ASC Subtopic 740-10 prescribes the
use of the asset and liability method whereby deferredtax 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; generally 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.




[9]           Net 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.




Potential
common shares outstanding as of December 31, 2009 and 2008:




December 31, 2009
                    
                    
                    December 31, 2008Warrants
                    
                    
                    75,000
                    
                    
                    
                    75,000Options
                    
                    
                    3,571,580
                    
                    
                    
                    3,762,080




F-8


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


For the
years ended December 31, 2009 and December 31, 2008, the number of securities
not included in the diluted loss per share was 3,646,580, and 3,837,080,
respectively, as their effect was anti-dilutive.




[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.




ASC Topic
820, “Fair Value Measurements and Disclosures” (“ASC Topic 820”), previously
referred to as FASB Statement No. 157, “Fair Value Measurements”, establishes a
hierarchy for ranking the quality and reliability of the information used to
determine fair values. ASC Topic 820 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 and
Cash Equivalents—The carrying amount reported in the balance sheet for cash and
cash equivalents approximates its fair value due to the short-term maturity of
these instruments.




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




F-9


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


[13]      
 Accounting for
share-based payments and stock warrants:In accordance with the
provisions of ASC Topic 718, “Accounting for Stock Options and Other Stock Based
Compensation”, previously referred to as SFAS 123(R),the Company recognizes
share-based payment expense for stock options and warrants. The weighted average
fair value of options granted during the year ended December 31, 2009 was
$0.156. The Company did not grant any options during the year ended December 31,
2008.  (See Note I [2] – Stockholders’ Equity; Stock
options).




The
Company accounts for derivative instruments in accordance with the FASB guidance
on Derivatives and Hedging. The guidance requires the Company to recognize all
derivatives as either assets or liabilities on the statement of financial
position unless the contract, including common stock warrants, settles in the
Company’s own stock and qualifies as an equity instrument. A contract designated
as an equity instrument is included in equity at its fair value, with no further
fair value adjustments required; and if designated as an asset or liability is
carried at fair value with any changes in fair value recorded in the results of
operations. The Company did not issue any warrants in the year ended December
31, 2009. The weighted average fair value of warrants issued in the year ended
December 31, 2008 was $0.153. (See Note I [3] – Stockholders’ Equity;
Warrants)




[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, 2009, three customers accounted for 16.2%, 12.2% and 11.3% of the
Company’s net accounts receivable. A substantial portion of these balances was
collected in the first quarter of the year ending December 31, 2010. At December
31, 2008, three customers accounted for 24.2%, 14.5% and 11.6% of the Company’s
net accounts receivable. Substantial portions of these balances were collected
from these customers in the first quarter of the year ended December 31, 2009.
Due to the longstanding nature of our relationships with these customers and
contractual obligations, the Company is confident that it will recover these
amounts.




The
Company has established an allowance for doubtful accounts of $67,000 and
$105,000 at December 31, 2009 and December 31, 2008, respectively, based on
factors surrounding the credit risk of our customers and other
information.




One of
our customers accounted for approximately 11.1% of net sales of the Company for
year ended December 31, 2009 and 11.2% of total net sales of the Company for the
year ended December 31, 2008.




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 ASC Topic 220, “Reporting Comprehensive Income” (“ASC Topic 220”),
previously referred to as SFAS No. 130, “Reporting Comprehensive Income”. The
provisions of ASC Topic 220 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, 2009 and December 31, 2008, 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:We have adopted the Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification Topic 105, “Generally Accepted Accounting
Principles” (“ASC 105”). ASC 105 establishes the FASB Accounting Standards
Codification (“FASB Codification”) as the source of authoritative accounting
principles recognized by the FASB to be applied by non-governmental entities in
the preparation of financial statements in conformity with U.S. GAAP. The FASB
will make all future changes to guidance in the FASB Codification by issuing
Accounting Standards Updates. The FASB Codification also provides that rules and
interpretive releases of the SEC issued under the authority of federal
securities laws will continue to be sources of authoritative U.S. GAAP for SEC
registrants. The FASB Codification does not create any new U.S. GAAP standards
but incorporates existing accounting and reporting standards into a new topical
structure so that users can more easily access authoritative accounting
guidance. We have updated all references to authoritative standards to be
consistent with those set forth in the FASB Codification. The adoption of ASC
105 had no impact on our financial statements.




F-10


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


In May 2009, the FASB
issued guidance that establishes generals standards for the accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued and requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date, that is, whether that date represents the date the
financial statements were issued or were available to be issued. This guidance
is contained within ASC Topic 855, “Subsequent Events” (“ASC Topic 855”),
previously referred to as SFAS No. 165 - “Subsequent Events”. ASC Topic 855 was
effective for our interim and annual periods ending after June 15, 2009. In
February 2010, the FASB issued Update No. 2010-09, “Subsequent Events (Topic
855): Amendments to Certain Recognition and Disclosure Requirements”, ("ASU
2010-09"). ASU No. 2010-09 amended ASC Topic 855 and clarified that subsequent
events should be evaluated through the date the financial statements are issued.
In addition, this update no longer requires an SEC filer to disclose the date
through which subsequent events have been evaluated. This guidance is effective
for financial statements issued subsequent to February 24, 2010. We adopted this
guidance on this date and the adoption of this guidance had no impact on our
financial statements.




In September 2009,
the FASB issued an update that provides amendments to ASC Subtopic 820-10, “Fair
Value Measurements and Disclosures - Overall”, for the fair value measurement of
investments in certain entities that calculates net asset value per share (or
its equivalent). The amendments permit, as a practical expedient, a reporting
entity to measure the fair value of an investment that is within the scope of
the amendments on the basis of the net asset value per share of the investment
(or its equivalent) if the net asset value of the investment (or its equivalent)
is calculated in a manner consistent with the measurement principles of ASC
Topic 946 as of the reporting entity’s measurement date, including measurement
of all or substantially all of the underlying investments of the investee in
accordance with ASC Topic 820. The amendments also require disclosures by major
category of investment about the attributes of investments within the scope of
the amendments, such as the nature of any restrictions on the investor’s ability
to redeem its investments at the measurement date, any unfunded commitment by
the investor, and the investment strategies of the investees. The major category
of investment is required to be determined on the basis of the nature and risks
of the investment in a manner consistent with the guidance for major security
types in U.S. GAAP on investments in debt and equity securities in paragraph
320-10-50-lB. The disclosures are required for all investments within the scope
of the amendments regardless of whether the fair value of the investment is
measured using the practical expedient. The amendments apply to all reporting
entities that hold an investment that is required or permitted to be measured or
disclosed at fair value on a recurring or non-recurring basis and, as of the
reporting entity’s measurement date, if the investment meets certain criteria.
The amendments are effective for the interim and annual periods ending after
December 15, 2009. Early application is permitted in financial statements for
earlier interim and annual periods that have not been issued. The adoption of
these amendments did not have a material impact on our financial
statements.


In September 2009,
the FASB issued ASC Topic 740, “Income Taxes” (“ASC Topic 740”), an update to
address the need for additional implementation guidance on accounting for
uncertainty in income taxes. For entities that are currently applying the
standards for accounting for uncertainty in income taxes, the guidance and
disclosure amendments are effective for financial statements issued for interim
and annual periods ending after September 15, 2009. We apply the standards for
accounting for uncertainty in income taxes and the adoption of ASC Topic 740 did
not have a material impact on our financial statements.


F-11


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


NOTE
B - INVENTORY




Inventory
is comprised of the following:




December 31,
                          2009
                        
                        
                        December 31,
                          2008Raw
      Materials
                        
                        $
                        2,013,000
                        
                        
                        $
                        3,134,000Work
      In Process
                        
                        
                        2,154,000
                        
                        
                        
                        2,210,000Finished
      Goods
                        
                        
                        419,000
                        
                        
                        
                        516,000Allowance
      for slow moving and obsolete inventory
                        
                        
                        (271,000
                        )
                        
                        
                        (308,000
                        )$
                        4,315,000
                        
                        
                        $
                        5,552,000





NOTE
C – PROPERTY, PLANT AND EQUIPMENT




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




December 31,
                            2009
                          
                          
                          December 31,
                            2008Land
                          
                          $
                          102,000
                          
                          
                          $
                          102,000Buildings
      and improvements
                          
                          
                          1,355,000
                          
                          
                          
                          1,399,000Manufacturing
      and warehouse equipment
                          
                          
                          2,363,000
                          
                          
                          
                          2,358,000Office
      equipment (incl. furniture and fixtures)
                          
                          
                          393,000
                          
                          
                          
                          400,0004,213,000
                          
                          
                          
                          4,259,000Less
      accumulated depreciation
                          
                          
                          2,589,000
                          
                          
                          
                          2,298,000$
                          1,624,000
                          
                          
                          $
                          1,961,000





Depreciation
expense was $336,000 and $353,000, for the years ended December 31, 2009 and
December 31, 2008, respectively.




NOTE
D – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES




Accrued expenses and other current
liabilities consisted of the following:




December 31, 2009
                        
                        
                        December 31,
                          2008Accrued
      accounting fees
                        
                        $
                        101,000
                        
                        
                        $
                        85,000Accrued
      interest payable
                        
                        
                        35,000
                        
                        
                        
                        40,000Accounts
      receivable credit balances
                        
                        
                        246,000
                        
                        
                        
                        183,000Accrued
      sales tax payable
                        
                        
                        6,000
                        
                        
                        
                        23,000Accrued
      expenses
                        
                        
                        44,000
                        
                        
                        
                        109,000Deferred
      revenue
                        
                        
                        
                        
                        
                        
                        5,000Other
      current liabilities
                        
                        
                        74,000
                        
                        
                        
                        99,000$
                        506,000
                        
                        
                        $
                        544,000


F-12


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


NOTE
E – LONG-TERM DEBT




Long-term
debt consisted of the following:




December 31,
                                            2009
                                          
                                          
                                          December 31,
                                            2008First
      Niagara:Mortgage payable in equal monthly
      installments of $16,125 including interest at 8.75% through January 1,
      2011 (“Maturity) with a final lump sum payment representing the entire
      unpaid balance of principal, plus accrued interest at Maturity,
      collateralized by the building, land and personal property (1)
                                          
                                          $
                                          953,000
                                          
                                          
                                          $
                                          739,000Term 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 (2)
                                          
                                          
                                          
                                          
                                          
                                          
                                          356,000RICOH:Capital
      lease payable in equal monthly installment of $390 including interest at
      14.11% through May 1, 2012
                                          
                                          $
                                          10,000
                                          
                                          
                                          
                                          13,000Debenture
      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
                                          
                                          $
                                          750,000
                                          
                                          
                                          
                                          750,0001,713,000
                                          
                                          
                                          
                                          1,858,000Less
      current portion
                                          
                                          
                                          (107,000
                                          )
                                          
                                          
                                          (1,098,000
                                          )Non-current
      portion
                                          
                                          $
                                          1,606,000
                                          
                                          
                                          $
                                          760,000





(1)
            On
      December 17, 2009, the Company closed on a refinancing and consolidation
      of its existing real estate mortgage and term note with First Niagara.
      Prior to this refinancing, the original mortgage loan was payable in
      monthly installments of $6,293 including interest at 7.5% and the maturity
      date was December 16, 2016.


(2)
            This Term Note was refinanced on
      December 17, 2009 and consolidated into our existing mortgage loan with
      First Niagara.





At
December 31, 2009, the following are the maturities of long-term debt for each
of the next five years:




2010
                      
                      
                      107,0002011
                      
                      
                      854,0002012
                      
                      
                      752,00020132014$
                      1,713,000


F-13


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


FIRST NIAGARA: REAL ESTATE
MORTGAGE AND TERM NOTE




On
November 6, 2006, the Company obtained a real estate mortgage (“Real Estate
Mortgage”) related to its facility in Kinderhook, New York. The Real Estate
Mortgage was through First Niagara in the amount of $775,000 and had a term of
10 years with a 20-year amortization. The interest rate was fixed at 7.5% for
the first 5 years. Beginning with year 6 and through the end of the loan term,
the rate was to change to 2% above the Federal Home Loan Bank of New York 5-year
term, 15-year Amortization Advances Rate. The Company’s monthly payment was
$6,293 with the final payment being due on December 1, 2016. The loan is
collateralized by the Company's facility in Kinderhook, New York and its
personal property.




On
January 22, 2007, the Company entered into a note with First Niagara in the
amount of $539,000 (the “Term Note”). The Term Note had a fixed interest rate of
7.17% and had a term of 5 years. The Company’s monthly payment was $10,714 with
the final payment being due on January 23, 2012. The Company had the option of
prepaying the Term Note in full or in part at any time during the term without
penalty. The Term Note was secured by Company machinery and equipment now owned
or hereafter acquired. The proceeds received from the Term Note were used for
the purchase of automation equipment to enhance the Company's manufacturing
process in its New Jersey facility.




On
December 17, 2009, the Company closed on a refinancing and consolidation of its
existing Real Estate Mortgage and Term Note with First Niagara. The new credit
facility through First Niagara is a fully secured term loan that matures on
January 1, 2011, with a 6.5-year (78 month) amortization (the “Mortgage
Consolidation Loan”). The Mortgage Consolidation Loan continues to be secured by
our facility in Kinderhook, New York as well as various pieces of machinery and
equipment.




The
principal amount of the Mortgage Consolidation Loan is $953,000. The annual
interest rate of the Mortgage Consolidation Loan is fixed at 8.75%. The monthly
payment of principal and interest is $16,125. We have incurred approximately
$28,000 in costs associated with this refinancing; including approximately
$22,000 in legal fees incurred and passed on from First Niagara. These costs,
which are included in prepaid expenses and other current assets, will be
amortized over the term of the Mortgage Consolidation Loan. For the year ended
December 31, 2009, we amortized $2,000 of these costs. Accrued interest was paid
at closing totaling $7,000. In addition, we were required to make a $25,000
principal payment at the time of closing on the prior existing Term
Note




Payments
commenced on the Mortgage Consolidation Loan on February 1, 2010. If the entire
amount of any required principal and/or interest payment is not paid in full
within 10 days of being due, we would be required to pay a late fee equal to 5%
of the required payment. If an event of default occurs, the annual interest rate
would increase to 6% above the interest rate which is payable as of the due date
or on the date of default.




We must
maintain Liquidity of at least $50,000 and this Liquidity requirement will be
tested at the end of each month. For the purposes of this requirement, Liquidity
is defined as any combination of cash, marketable securities or borrowing
availability under one of more credit facilities other than the Mortgage
Consolidation Loan. As of the date of this report, we are in compliance with
this requirement.




RICOH




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 years with an interest rate
of 14.11%.




DEBENTURE
FINANCING




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 SEC 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 SEC under the Securities Act of 1933, as amended (the
“1933 Act”), and/or Section 4(2) of the 1933 Act.


F-14


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


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. 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.




The
Company incurred $131,000 in expenses related to the offering, including $12,000
in expense related to warrants issued to the placement agent. For the years
ended December 31, 2009, and December 31, 2008, the Company amortized $32,000
and $14,000, respectively, of expense related to these debt issuance costs. The
Company has also accrued interest expense related to the Series A Debentures of
$31,000 at both December 31, 2009 and December 31, 2008.




NOTE
F – LINES OF CREDIT




FIRST NIAGARA LINE OF
CREDIT




Effective
August 1, 2008, we entered into an amendment with First Niagara related to the
original Loan Documents (the “Amendment”). The Amendment combined two lines of
credit already in place with First Niagara into one line of credit (the “First
Niagara Line of Credit”) along with amending certain terms related to the First
Niagara Line of Credit. Pursuant to the Amendment, the maximum amount available
under the First Niagara Line of Credit was $750,000, and the maturity date of
the First Niagara Line of Credit was April 1, 2009. The interest rate on the
First Niagara Line of Credit was prime plus 1%. Pursuant to the Amendment, we
were required to maintain certain financial covenants; our monthly net loss must
not exceed $75,000 during any month and, while any loans or commitments were
outstanding and due First Niagara, we were to maintain a minimum debt service
coverage ratio of 1.10x, to be measured at December 31, 2008. The minimum debt
service coverage ratio was 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 was no requirement for annual repayment of all principal
on the First Niagara Line of Credit and it was payable on demand. The purpose of
the First Niagara Line of Credit was to provide working capital. The amount
outstanding on the First Niagara Line of Credit was $431,000 at December 31,
2008.




On
February 4, 2009, although the Company was current with the payment schedules
for its Real Estate Mortgage, Term Note and a line of credit with First Niagara
(together, the “Credit Facilities”), the Company received a notice from First
Niagara that an event of default had occurred under the Loan Documents related
to the Credit Facilities, consisting of, among other things, the Company’s
failure to comply with a maximum monthly net loss covenant under the First
Niagara Line of Credit.


F-15


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


On March
12, 2009, the Company entered into a Forbearance Agreement (the “Forbearance
Agreement”) addressing the Company’s non-compliance with the maximum monthly net
loss and the minimum debt service coverage ratio covenants (“Existing
Defaults”). Under the terms of the Forbearance Agreement, First Niagara forbore
from exercising its rights and remedies arising under the Loan Documents from
the Existing Defaults. The Forbearance Agreement was to be in effect until June
1, 2009; unless earlier terminated or thereafter extended (the “Forbearance
Period”). Details on the terms of the Forbearance Agreement and certain
subsequent extensions of and amendments to the Forbearance Agreement can be
found in the caption titled “FNFG Forbearance Agreement” in the Company’s
Quarterly Report on Form 10-Q filed with the SEC on August 14,
2009.




On July
6, 2009, the Company and First Niagara entered into a Letter Agreement (the
“July Letter Agreement”), which further amended the Forbearance Agreement. The
July Letter Agreement extended the Forbearance Period to September 30, 2009,
unless earlier terminated by First Niagara upon default or extended by mutual
agreement, and required the Company to close on a full refinancing of the First
Niagara Line of Credit on or before July 31, 2009. The Company did refinance the
First Niagara Line of Credit with Rosenthal & Rosenthal, Inc. (“Rosenthal”)
on July 1, 2009.




ROSENTHAL LINE OF
CREDIT




On July
1, 2009 (the “Closing Date”), we entered into a Financing Agreement (the
“Refinancing Agreement”) with Rosenthal to refinance the First Niagara Line of
Credit. Under the Refinancing Agreement, Rosenthal agreed to provide the Company
with up to $1,500,000 under a revolving secured line of credit (“Rosenthal Line
of Credit”) that is collateralized by a first security interest in all of the
Company’s receivables, inventory, and intellectual property, and a second
security interest in our machinery and equipment, leases, leasehold
improvements, furniture and fixtures. The maximum availability of $1,500,000
(“Maximum Availability”) is subject to an availability formula (the
“Availability Formula”) based on certain percentages of accounts receivable and
inventory, and elements of the Availability Formula are subject to periodic
review and revision by Rosenthal. Upon entering into the Refinancing Agreement,
our availability under the Line of Credit (“Loan Availability”) was $1,170,000.
From the Loan Availability, we obtained approximately $646,000 to pay off funds
drawn against the line of credit with First Niagara. The Company has used, and
will continue to use, the remaining Loan Availability for working
capital.




We were
charged a facility fee of 1% of the amount of the Maximum Facility, which was
payable on the Closing Date and is payable on each anniversary of the Closing
Date thereafter. Under the Refinancing Agreement, we will also pay an
administrative fee of $1,500 per month for as long as the Rosenthal Line of
Credit is in place.




Interest
on outstanding borrowings (which do not exceed the Availability Formula) is
payable monthly and is charged at variable annual rates equal to (a) 4% above
the JPMorgan Chase Bank prime rate (“Prime Rate”) (never to be deemed to be
below 4%) for amounts borrowed with respect to eligible accounts receivable (the
“Effective Rate”), and (b) 5% above the Prime Rate for amounts borrowed with
respect to eligible inventory (the “Inventory Rate”). Any loans or advances that
exceed the Availability Formula will be charged at the rate of 3% per annum in
excess of the Inventory Rate (the “Over-Advance Rate”). If we were to default
under the Refinancing Agreement, interest on outstanding borrowings would be
charged at the rate of 3% per annum above the Over-Advance Rate. The minimum
interest charges payable to Rosenthal each month are $4,000.




So long
as any obligations are due under the Rosenthal Line of Credit, we must maintain
working capital of not less than $2,000,000 and tangible net worth, as defined
by the Refinancing Agreement, of not less than $4,000,000 at the end of each
fiscal quarter. Under the Refinancing Agreement, tangible net worth is defined
as (a) the aggregate amount of all Company assets (in accordance with U.S.
GAAP), excluding such other assets as are properly classified as intangible
assets under U.S. GAAP, less (b) the aggregate amount of liabilities (excluding
liabilities that are subordinate to Rosenthal). Failure to comply with the
working capital and tangible net worth requirements defined under the
Refinancing Agreement would constitute an event of default and all amounts
outstanding would, at Rosenthal’s option, be immediately due and payable without
notice or demand. Upon the occurrence of any such default, in addition to other
remedies provided under the Agreement, we would be required to pay to Rosenthal
a charge at the rate of the Over-Advance Rate plus 3% per annum on the
outstanding balance from the date of default until the date of full payment of
all amounts to Rosenthal. However, in no event would the default rate exceed the
maximum rate permitted by law.


F-16


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


The
Refinancing Agreement terminates on May 31, 2012; however, we may terminate the
Agreement on any anniversary of the Closing Date with at least 90 days and not
more than 120 days advance written notice to Rosenthal. If we elect to terminate
the Refinancing Agreement prior to the expiration date, we will pay to Rosenthal
a fee of (a) 3% of the Maximum Availability if such termination occurs prior to
the first anniversary of the Closing Date, (b) 2% of the Maximum Availability if
such termination occurs on or after the first anniversary of the Closing Date
but prior to the second anniversary of the Closing Date, and (c) 1% of the
Maximum Availability if such termination occurs on or after the second
anniversary of the Closing Date. The Line of Credit is payable on demand and
Rosenthal may terminate the Refinancing Agreement at any time by giving the
Company 45 days advance written notice. (See Note I [2] – Stockholders’ Equity;
Stock options for additional conditions to the Refinancing
Agreement).




The
amount outstanding on this Line of Credit at December 31, 2009 was $260,000.
$238,000 of this amount outstanding was collateralized by accounts receivable at
an interest rate of 8%, and $22,000 was collateralized by inventory at an
interest rate of 9%.  Additional Loan Availability was $391,000, for a
total Loan Availability of $651,000 as of December 31, 2009. We incurred $41,000
in costs related to this refinancing. These costs are being amortized over the
term of the Rosenthal Line of Credit. We amortized $7,000 of these costs during
the year ended December 31, 2009.




NOTE
G - 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, 2009
                            
                            
                            Year Ended
                              December 31, 2008Tax
      expense at federal statutory rate
                            
                            
                            34
                            %
                            
                            
                            34
                            %State
      tax expense, net of federal tax effect
                            
                            
                            5
                            
                            
                            
                            5Deferred
      income tax asset valuation allowance
                            
                            
                            (39
                            )
                            
                            
                            (39
                            )Effective
      income tax rate
                            
                            
                            0
                            %
                            
                            
                            0
                            %


F-17


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


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





Year Ended
                                December 31, 2009
                              
                              
                              Year Ended
                                December 31, 2008Inventory
                              
                              $
                              27,000
                              
                              
                              $
                              35,000Inventory
      allowance
                              
                              
                              98,000
                              
                              
                              
                              120,000Share-based
      compensation
                              
                              
                              1,126,000
                              
                              
                              
                              1,350,000Allowance
      for doubtful accounts
                              
                              
                              26,000
                              
                              
                              
                              41,000Property,
      plant and equipment
                              
                              
                              (76,000
                              )
                              
                              
                              (108,000
                              )Accrued
      compensation
                              
                              
                              30,000
                              
                              
                              
                              31,000Other
                              
                              
                              16,000
                              
                              
                              
                              18,000Net
      operating loss carry-forward
                              
                              
                              4,334,000
                              
                              
                              
                              3,998,000Total
      gross deferred income tax assets
                              
                              
                              5,581,000
                              
                              
                              
                              5,485,000Less
      deferred income tax assets valuation allowance
                              
                              
                              (5,581,000
                              )
                              
                              
                              (5,485,000
                              )Net
      deferred income tax assets
                              
                              $
                              0
                              
                              
                              $
                              0




The
valuation allowance for deferred income tax assets as of December 31, 2009 and
December 31, 2008 was $5,581,000 and $5,485,000, respectively.  The
net change in the deferred income tax assets valuation allowance was an increase
of $96,000 for the year ended December 31, 2009. The net change in the deferred
income tax assets valuation allowance was an increase of $383,000 for the year
ended December 31, 2008.




At
December 31, 2009, the Company had Federal and New York State net operating loss
carry-forwards for income tax purposes of approximately $11,112,000. Our net
operating loss carry-forwards began to expire in 2009, however, we recorded a
net loss for 2009, which resulted in an increase in our net operating loss
carry-forwards. In assessing the realizability of deferred income tax assets,
management considers whether or not it is more likely than not that some portion
or all deferred income tax assets will be realized. The ultimate realization of
deferred income 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
H – OTHER EXPENSE




Other
expense for the years ended December 31, 2009 and December 31, 2008 is mainly
comprised of losses on disposals of property, plant and equipment of $35,000 and
$4,000, respectively.  In addition, during the year ended December 31,
2008, $19,000 of accrued penalties related to a sales tax liability was
incurred. Other expense is offset by other income, which is mainly comprised of
amounts earned from a grant of $100,000 received from the Columbia Economic
Development Corporation during the years ended December 31, 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, 2009 and December 31, 2008 was $30,000 and
$40,000, respectively. 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 57 and 61 at
December 31, 2009 and December 31, 2008, respectively. The amount of the grant
recognized in each of the years ended December 31, 2009 and December 31, 2008
was $10,000.


F-18


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


NOTE
I – STOCKHOLDERS’ EQUITY




[1]           Stock option plans:There are
currently two option plans, the Fiscal 2000 Non-statutory Stock Option Plan (the
“2000 Plan”) and the Fiscal 2001 Non-statutory Stock Option Plan (the “2001
Plan”), together the “Plans”. The Plans have been adopted by our Board of
Directors and approved by our shareholders. The 2000 Plan provides 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.
Options granted under the Plans have lives of 10 years and vest over periods
from 0 to 4 years. 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.




[2]           Stock options:During the year
ended December 31, 2009, the Company issued options to purchase 550,000 shares
of common stock under the 2001 Plan.




As a
condition to the Rosenthal Line of Credit closing, the Company’s Chief Executive
Officer, Stan Cipkowski  (“Cipkowski”) was required to execute a
Validity Guarantee (the “Validity Guarantee”). Under the Validity Guarantee,
Cipkowski provides representations and warranties with respect to the validity
of the Company’s receivables and guarantees the accuracy of the Company’s
reporting to Rosenthal related to the Company’s receivables and inventory. The
Validity Guarantee places Cipkowski’s personal assets at risk in the event of a
breach of such representations, warranties and guarantees. As part of the
compensation for his execution of the Validity Guarantee, on July 1, 2009,
Cipkowski was awarded an option grant representing 500,000 common shares of the
Company under the Company’s 2001 Plan, at an exercise price of $0.20, the
closing price of the Company’s common shares on the date of the grant. The
option grant vests over three years in equal installments.




The
calculated fair value of the Cipkowski options was $0.156 per share. The fair
value of the Cipkowski option grant was estimated utilizing the Black-Scholes
option-pricing model. The following weighted average assumptions were used:
dividend yield of 0%; risk-free interest rate of 4.34%, expected life of 10
years; and stock price volatility of 69%. The value of the Cipkowski grant
totaled $78,000, which the Company will recognize in share-based payment expense
amortized over the required service period of 3 years. The Company recognized
$12,000 in share-based payment expense for this grant in the year ended December
31, 2009, and as of December 31, 2009, there was $66,000 in unrecognized expense
and 30 months remaining.




As
another condition to the Rosenthal Line of Credit closing, the Company’s
President and Chairman of the Board, Edmund Jaskiewicz (“Jaskiewicz”) was
required to execute an Agreement of Subordination and Assignment (“Subordination
Agreement”) related to $124,000 owed to Jaskiewicz by the Company as of June 29,
2009 (the “Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz
Debt is not payable, is junior in right to the Rosenthal Line of Credit and no
payment may be accepted or retained by Jaskiewicz unless and until the Company
has paid and satisfied in full any obligations to Rosenthal. Furthermore, the
Jaskiewicz Debt was assigned and transferred to Rosenthal as collateral for the
Rosenthal Line of Credit.




As
compensation for his execution of the Subordination Agreement, on July 1, 2009
Jaskiewicz was awarded an option grant representing 50,000 common shares of the
Company under the Company’s 2001 Plan, at an exercise price of $0.20, the
closing price of the Company’s common shares on the date of the grant. The
option grant was immediately exercisable.


F-19


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


The
calculated fair value of the Jaskiewicz option was $0.156. The fair value of the
Jaskiewicz stock option grant was estimated utilizing the Black-Scholes
option-pricing model. The following weighted average assumptions were used:
dividend yield of 0%; risk-free interest rate of 4.34%, expected life of 10
years; and stock price volatility of 69%. The value of the Jaskiewicz grant
totaled $8,000 and the Company recognized this share-based payment expense fully
in the year ended December 31, 2009.




During
the year ended December 31, 2008, the Company did not issue any options to
purchase shares of common stock.




The
figures contained within the tables below have been rounded to the nearest
thousand.




Stock
option activity for the years ended December 31, 2009 and December 31, 2008 is
summarized as follows:




Year Ended December 31,
                        2009
                      
                      
                      Year Ended December 31,
                        2008Shares
                      
                      
                      WeightedAverage
                        ExercisePrice
                      
                      
                      Shares
                      
                      
                      Weighted
                        AverageExercise
                        PriceOptions
      outstanding at beginning of year
                      
                      
                      3,762,000
                      
                      
                      $
                      1.34
                      
                      
                      
                      3,968,000
                      
                      
                      $
                      1.32Granted
                      
                      
                      550,000
                      
                      
                      
                      0.20
                      
                      
                      
                      0
                      
                      
                      NAExercised
                      
                      
                      0
                      
                      
                      NA
                      
                      
                      
                      0
                      
                      
                      NACancelled/expired
                      
                      
                      (740,000
                      )
                      
                      $
                      2.33
                      
                      
                      
                      (206,000
                      )
                      
                      $
                      1.01Options
      outstanding at end of year
                      
                      
                      3,572,000
                      
                      
                      $
                      0.96
                      
                      
                      
                      3,762,000
                      
                      
                      $
                      1.34Options
      exercisable at end of year
                      
                      
                      3,072,000
                      
                      
                      $
                      1.08
                      
                      
                      
                      3,762,000
                      
                      
                      $
                      1.34




The
following table presents information relating to stock options outstanding as of
December 31, 2009:




Options Outstanding
                  
                  
                  Options ExercisableWeighted
                  
                  
                  Weighted
                  
                  
                  
                  
                  
                  WeightedAverage
                  
                  
                  Average
                  
                  
                  
                  
                  
                  AverageRange of Exercise
                  
                  
                  
                  
                  Exercise
                  
                  
                  Remaining
                  
                  
                  
                  
                  
                  ExercisePrice
                  
                  Shares
                  
                  
                  Price
                  
                  
                  Life in Years
                  
                  
                  Shares
                  
                  
                  Price$0.20
      - $0.99
                  
                  
                  1,585,000
                  
                  
                  $
                  0.65
                  
                  
                  
                  4.78
                  
                  
                  
                  1,085,000
                  
                  
                  $
                  0.85$1.00
      - $1.49
                  
                  
                  1,633,000
                  
                  
                  $
                  1.08
                  
                  
                  
                  3.70
                  
                  
                  
                  1,633,000
                  
                  
                  $
                  1.08$1.50
      - $1.99
                  
                  
                  189,000
                  
                  
                  $
                  1.57
                  
                  
                  
                  2.46
                  
                  
                  
                  189,000
                  
                  
                  $
                  1.57$2.00
      - $3.38
                  
                  
                  165,000
                  
                  
                  $
                  2.10
                  
                  
                  
                  0.38
                  
                  
                  
                  165,000
                  
                  
                  $
                  2.10TOTAL
                  
                  
                  3,572,000
                  
                  
                  $
                  0.96
                  
                  
                  
                  3.96
                  
                  
                  
                  3,072,000
                  
                  
                  $
                  1.08





As
of December 31, 2009, there were 263,500 options issued and outstanding under
the 2000 Plan and 3,308,080 options issued and outstanding under the 2001 Plan,
for a total of 3,571,580 options issued and outstanding as of December 31, 2009.
Of the total options issued and outstanding, 3,071,580 are fully vested as of
December 31, 2009. As of December 31, 2009, there were 736,500 options available
for issuance under the 2000 Plan and 408,920 options available for issuance
under the 2001 Plan.




[3] Warrants:




F-20


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


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.
(“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, and on August 4, 2008
issued Cantone 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. 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
Cantone warrants was $12,000, which was recognized as financing costs and is
being amortized over the term of the Series A Debentures, with $3,000 in expense
being recognized in the year ended December 31, 2009 and $1,000 in expense being
recognized in the year ended December 31, 2008. As of December 31, 2009, there
was $8,000 in unrecognized expense and 31 months remaining.


F-21


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


NOTE
J – COMMITMENTS, CONTINGENCIES AND OTHER MATTERS




[1]           Operating leases:The Company
leases office and R&D/production facilities in New Jersey under long-term,
non-cancellable operating leases through December 2011. The Company also leases
office support equipment on a month-to-month basis. At December 31, 2009, the
future minimum rental payments under these operating leases are as
follows:




2010
                    
                    
                    86,0002011
                    
                    
                    86,000$
                    172,000




Rent
expense for facilities in New Jersey was $110,000 in the year ended December 31,
2009 and $113,000 in the year ended December 31, 2008.




[2]           Employment agreements:The
Company has entered into employment agreements with its Chief Executive Officer
Stan Cipkowski (“CEO”), Chief Science Officer Martin R. Gould (“CSO”), Chief
Financial Officer Stefan Parker (“CFO”) and Executive Vice President, Operations
Douglas Casterlin (“EVP”). The agreement with the CSO 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 the CFO 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. The agreement with the EVP
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 the CEO provides for a $206,000 annual salary and was originally
for a term of one year and automatically renewed unless either party gave
advance notice of 60 days, however, on July 1, 2009, as a condition to the
Rosenthal Line of Credit closing, the Company entered into a new employment
contract with the CEO that is coterminous with the Rosenthal Line of Credit; all
other terms and provisions of the CEO’s former employment contract remain
unchanged.




[3]           Legal:From time to time, the
Company is named in legal proceedings in connection with matters that arose
during the normal course of business. While the ultimate result of any such
litigation may not determinable, if the Company is unsuccessful in defending any
such litigation, the resulting financial losses could have an adverse effect on
the financial position, results or operations and cash flows of the Company. The
Company is aware of no significant litigation loss contingencies for which
management believes it is both probable that a liability has incurred and that
the amount of the loss can be reasonably estimated.




[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 was required to pay a non-refundable fee of
$175,000 over the course of two years, of which $75,000 was paid in the first
quarter of the year ended December 31, 2006, $50,000 was paid in the first
quarter of the year ended December 31, 2007, and $50,000 was paid in the first
quarter of the year ended December 31, 2008. The Company was required to pay
royalties for products it manufactures that fell within the scope of the
patents. Beginning with the year ended December 31, 2007, the Company was
obligated to pay a $20,000 annual minimum royalty (“MAR”) that could be applied
against royalties on sales of products that fell 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 the Company under the Agreement.


F-22


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


[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
the year ended December 31, 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 the year ended December 31, 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 a RSV product for them.


F-23


AMERICAN
BIO MEDICA CORPORATION
 Notes to
Financial Statements
 December
31, 2009


NOTE
K – RELATED PARTY DISCLOSURES




EDMUND M.
JASKIEWICZ




During
the years ended December 31, 2009 and December 31, 2008, the Company paid an
aggregate of $49,000 and $58,000, respectively, to Edmund Jaskiewicz, the
Company’s President and Chairman of the Board of Directors (“Jaskiewicz”), 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, 2009 there were invoices totaling
$10,000 payable to Jaskiewicz.




As a
condition to the Rosenthal Line of Credit closing, in June 2009, Jaskiewicz was
required to execute an Agreement of Subordination and Assignment (“Subordination
Agreement”) related to $124,000 owed to Jaskiewicz by the Company as of June 29,
2009 (the “Jaskiewicz Debt”). Under the Subordination Agreement, the Jaskiewicz
Debt is not payable, is junior in right to the Rosenthal Line of Credit and no
payment may be accepted or retained by Jaskiewicz unless and until the Company
has paid and satisfied in full any obligations to Rosenthal. Furthermore, the
Jaskiewicz Debt was assigned and transferred to Rosenthal as collateral for the
Rosenthal Line of Credit.




As
compensation for his execution of a Subordination Agreement, on July 1, 2009,
Jaskiewicz was awarded an option grant representing 50,000 common shares of the
Company under the Company’s 2001 Plan, at an exercise price of $0.20, the
closing price of the Company’s common shares on the date of the grant. The
option grant was immediately exercisable.




ALEC
CIPKOWSKI




During
the years ended December 31, 2009 and December 31, 2008, the Company paid an
aggregate of $66,000 and $85,000, 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
products that are currently being used by customers. 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 receives normal employee
benefits in accordance with the Company’s standard policies. Due to the timing
of pay periods, at December 31, 2009 the Company owed Alec Cipkowski
approximately $1,000, however, this amount was subsequently paid in the first
regularly scheduled payroll in the year ending December 31, 2010.




NOTE
L- SEGMENT AND GEOGRAPHIC INFORMATION




The
Company operates in one reportable segment.




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




Year Ended
                          December 31,
                          2009
                        
                        
                        Year ended
                          December 31,
                          2008United
      States
                        
                        $
                        8,787,000
                        
                        
                        $
                        11,134,000North
      America (not domestic)
                        
                        
                        694,000
                        
                        
                        
                        1,136,000Europe
                        
                        
                        96,000
                        
                        
                        
                        187,000Asia/Pacific
      Rim
                        
                        
                        58,000
                        
                        
                        
                        66,000South
      America
                        
                        
                        87,000
                        
                        
                        
                        125,000Africa
                        
                        
                        4,000
                        
                        
                        
                        9,000$
                        9,726,000
                        
                        
                        $
                        12,657,000


F-24