**FORM
      10-KSB**




**SECURITIES
      AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**








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





For
      the
      fiscal year ended December 31, 2006





o
            **TRANSITION
                REPORT UNDER 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**


(Name
      of
      Small Business Issuer 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 12106**
              (Address
                of principal executive offices)
            **12106**
              (Zip
                Code)





Issuer's
      telephone number (800) 227-1243





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





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





**Common
                Shares, $0.01 Par value**Title
                of each class




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





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of registrant's knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





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


o
      Yes x No





State
      issuer's revenues for its most recent fiscal year: $13,838,000





The
      aggregate market value of 18,245,613 voting Common Shares held by non-affiliates
      of the issuer was approximately $20,799,999 based on the average bid and asked
      prices of the issuer’s Common Shares, $.01 par value, as reported on the NASDAQ
      Capital Market on March 21, 2007.





As
      of
      March 21, 2007, the issuer had outstanding 21,719,768 Common Shares, $.01 par
      value.





Documents
      Incorporated by reference:





(1)
            The
                Proxy Statement for the Annual Meeting of Shareholders for the year
                ending
                December 31, 2006 in Part III of this Form
                10-KSB





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







Transition
      Small Business Disclosure Format: o
      YES x N O








**American
      Bio Medica Corporation**





**Index
      to Annual Report on Form 10-KSB**


**For
      the fiscal year ended December 31, 2006**





**PAGE****PART
                  I**Item
                1.
            
            Description
                of Business
            1Item
                2.
            
            Description
                of Property
            16Item
                3.
            
            Legal
                Proceedings
            16Item
                4.
            
            Submission
                of Matters to Vote of Security Holders
            16**PART
                II**16Item
                5.
            
            Market
                for Common Equity and Related Shareholder Matters
            18Item
                6.
            
            Management’s
                Discussion and Analysis or Plan of Operations
            26Item
                7.
            
            Financial
                Statements
            26Item
                8.
            
            Changes
                in and Disagreements with Accountants on Accounting and Financial
                Disclosure
            26Item
                8A.
            
            Controls
                and Procedures
            26Item
                8B.
            
            Other
                Information
            26**PART
                III**Item
                9.
            
            Directors,
                Executive Officers, Promoters and Control Persons and Corporate
                Governance; Compliance with Section 16(a) of the Exchange
                Act
            26Item
                10.
            
            Executive
                Compensation
            26Item
                11.
            
            Security
                Ownership of Certain Beneficial Owners and Management and Related
                Shareholder Matters
            26Item
                12.
            
            Certain
                Relationships and Related Transactions; and Director
                Independence
            27Item
                13.
            
            Exhibits
            28Item
                14.
            
            Principal
                Accountant Fees and Services
            29**Signatures**
            
            
            S-1









*This
      Form 10-KSB 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-KSB 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 our actual
      results could differ materially from those anticipated from the forward-looking
      statements depending on various important factors. These important factors
      include our history of losses, the uncertainty of acceptance of current and
      new
      products in our markets, competition in our markets, and the other factors
      discussed in our "Risk Factors" found on page 10.*




**PART
      I**




**ITEM
      1. DESCRIPTION OF BUSINESS**





**Business
      Development**





Our
      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 to change our name to American Bio
      Medica Corporation (“ABMC” or “the Company”). Our principal business office is
      located at 122 Smith Road, Kinderhook, New York, 12106. We also have a research
      & development (“R&D”) and production facility located at 603 Heron
      Drive, Unit #3, Logan Township, New Jersey, 08085.





**Our
      Business**





We
      develop, manufacture and sell immunoassay diagnostic test kits, primarily for
      the immediate, point of collection testing (“POCT”) for drugs of abuse. Our
      drugs of abuse screening products offer employers, law enforcement, government,
      health care and education professionals, self-contained, one-step screening
      devices capable of identifying illicit drug use within minutes.





In
      addition to the manufacture and sale of drugs of abuse screening products,
      in
      late 2001 we began performing contract strip manufacturing for other POCT
      diagnostic companies. While we do not currently derive a significant portion
      of
      our revenues from contract manufacturing, we expect to continue to explore
      additional applications for our technology and as a result, contract
      manufacturing could become a greater portion of our revenues in the future.





Based
      on
      a number of industry analyst reports, the POCT market is approximately $1.6
      billion annually and it is expected to grow at a rate of approximately 10%
      annually. Our long-term objective is to provide an extensive product portfolio
      to this expanding POCT market.





**Our
      Products**





**Rapid
      Drug Screen** **Ò** **:** Our
      primary product line, the Rapid Drug Screen, or RDS® is a patented, rapid, POCT
      kit that detects the presence or absence of 2 to 10 drugs of abuse
      simultaneously in a single urine specimen. We offer a number of standard
      configurations of the RDS and we can also produce, on special order, or if
      a
      market demands, tests that can screen for any quantity (from 2 - 10) or
      configuration of classes of drugs.





The
      RDS
      detects the following classes of drugs: cocaine (available with a cutoff level
      of either 150 ng/ml or 300 ng/ml), THC (marijuana), opiates (available with
      a
      cutoff level of either 300 ng/ml or 2000 ng/ml), amphetamine, PCP,
      benzodiazepines, methamphetamines, barbiturates, tricyclic antidepressants,
      methadone, MDMA (Ecstasy) (an illegal designer drug), oxycodone (a synthetic
      opiate found in several legitimate and effective pain medications, including
      OxyContin®, but is being used by drug abusers to create a heroin-like high),
      propoxyphene (a mild narcotic analgesic structurally related to methadone that
      can be habit forming and therefore abused) and buprenorphine (a drug being
      used
      in a new office-based treatment for addiction to prescription pain relievers
      and
      other opiate drugs, including heroin).





To
      use
      our RDS product, an individual slides a panel into a self-contained, disposable,
      urine-filled cup and within minutes accurate results are shown on the panel.
      A
      single line in the test window indicates a positive reading, and a double line
      indicates a negative reading for the presence of drugs. We believe that this
      ease of use is a competitive advantage over lab products, as well as products
      that need to add reagents, manipulate the test or utilize trained professionals
      to understand results.




1





There
      have been a number of studies that have reported on the RDS’s accuracy and
      reliability, including the Rosita Roadside Study conducted in Europe which
      rated
      the RDS products “Very Good” for user friendliness, the highest rating given to
      any of the products in the study. In addition, a study conducted by the
      Department of Health and Human Services ranked the RDS the most accurate
      multi-drug device for all drugs when compared to GC/MS (Gas Chromatography/Mass
      Spectrometry), a laboratory test consisting of a combination of two
      microananlytical techniques: GC, a separation technique, and MS, an
      identification technique.





One
      of
      the problems that may occur in POCT for drugs of abuse is fraud or evasion
      practiced by the person being tested. The most prevalent method of avoiding
      adverse test results is the substitution, by the person being tested, of a
      hidden “clean” urine sample, which he or she brings to the test. As a
      consequence, each of our urine drug screens contains a temperature sensor,
      which
      helps prevent the substitution of another urine sample. A substituted sample
      would normally be of a lower temperature than a sample produced from the body
      on
      the spot. In addition, both our urine and saliva-based drug screens (See
“OralStat” on this page) contain a control line, designed to assure the test
      administrator that the test is working properly and that the reagents are
      present and not destroyed by any outside agent. Should the control line not
      appear, the administrator is instructed to void the test and re-test the
      individual by obtaining another sample. A positive result is normally confirmed
      by laboratory testing.





**Rapid
      One®:** Our
      patented Rapid One product line consists of single drug tests, each of which
      screens for the presence or absence of a single drug of abuse in a urine
      specimen. The Rapid One product line utilizes the same technology as the RDS.
      It
      includes a single dip platform, an identification and date area, and does not
      require the use of pipettes or reagents. 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 means of allowing
      screening of an additional drug. The Rapid One product line consists of the
      following classes of drugs: cocaine (available with a cutoff level of either
      150
      ng/ml or 300 ng/ml), THC (marijuana), opiates (available with a cutoff level
      of
      either 300 ng/ml or 2000 ng/ml), amphetamine, PCP, benzodiazepines,
      methamphetamines, barbiturates, tricyclic antidepressants, methadone, oxycodone,
      MDMA (Ecstasy), propoxyphene and buprenorphine.





**Rapid
      TEC®:** The
      patented Rapid TEC contains 1 or 2 drug testing strips and each of these strips
      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.





**OralStat®:** Our
      OralStat is a patent-pending, innovative POCT system for the detection of drugs
      of abuse in oral fluids. The technology of OralStat provides test results within
      minutes with enhanced sensitivity and detection comparable to laboratory based
      oral fluids tests. The test requires no messy saliva collection or handling.
      OralStat can simultaneously test for six drugs in each device. Currently, the
      assays available on the OralStat are amphetamines, methamphetamine,
      benzodiazepine, cocaine, methadone, opiates, PCP and marijuana.





**Rapid
      Reader®:** The
      Rapid
      Reader is a compact, portable device that, when connected to any computer,
      captures a picture of the test results on an ABMC drug screen using a
      high-resolution camera. The Rapid Reader's proprietary software analyzes this
      image and interprets the results. The information is then sent to a data
      management system, which enables the user to interpret, store, transmit and
      print the drug test results. The Rapid Reader system can only be used to
      interpret and record the results of ABMC drug screens. As this product virtually
      eliminates human error in the interpretation and recording of drug screen
      results and allows secure electronic sharing and storing of test results, the
      Rapid Reader may alleviate concerns any potential customer may have about using
      POCT for drugs of abuse. The Company believes that the Rapid Reader will enable
      us to secure the business of customers that would otherwise not use a point
      of
      collection test for drugs of abuse. We shipped our first order of Rapid Reader
      devices in February 2004, and since that time, the Rapid Reader continues to
      be
      well received by current and new customers.




2





**RDS
      InCup®:** The RDS
      InCup is an all-inclusive point of collection test for drugs of abuse that
      incorporates collection and testing of the sample in a single device. Once
      the
      donor provides a sample the results are available within a few minutes without
      any manipulation of the sample or the device. The Company offers a number of
      standard versions of the RDS InCup and we can custom manufacture any
      configuration or combination of 2 to 12 drugs per device. The RDS InCup is
      an
      extension of the Rapid Drug Screen line of tests using the same RDS test strips
      and offers customers a fast, accurate and easy method for determining the drug
      use status of an individual. We began manufacturing and shipping the RDS InCup
      in July 2004 and it continues to be well received by customers in our core
      markets. In January 2006, we began to offer our customers the option of
      including within the RDS InCup, a test strip to detect adulterants in the urine
      sample (an adulterant is a substance added to a urine specimen in an attempt
      to
“beat” a drug test).





**Rapid
      TOXTM:** In
      July
      2005, we launched the Rapid TOX, a cost effective drug screen in a horizontal
      cassette platform that simultaneously detects two to ten drugs of abuse in
      a
      single urine specimen. The Rapid TOX uses the same drug testing strip that
      is in
      the Rapid TEC (see “Rapid TEC” on page 2). Rapid TOX can be used by pipetting,
      or dropping, a urine specimen into a channel in the cassette, or the cassette
      can be dipped into a urine specimen. Each channel contains a single drug testing
      strip that contains the chemistry to detect more than one class of drug of
      abuse. Each Rapid TOX device contains one or two channels. Rapid TOX, like
      our
      other point of collection tests for drugs of abuse, provides accurate results
      within minutes in an inexpensive, easy to use format.





We
      shipped our first order of Rapid TOX devices in September 2005. The feedback
      we
      have received from our customers and potential customers indicates that the
      Rapid TOX is being well received in our core markets.





**Other
      products**





In
      addition to the products we manufacture, we also distribute a number of point
      of
      collection tests that detect the presence or absence of adulterants and alcohol.
      These tests are manufactured by unaffiliated third parties. Two of these
      products are sold under ABMC-owned trademarks; the Rapid AlcoTEC alcohol test
      and the Rapid Check test for adulterant. We do not derive a significant portion
      of our revenues from the sale of these products.




**Contract
      Manufacturing**





We
      provide bulk strip contract manufacturing services to a number of non-affiliated
      POCT diagnostic companies. Currently we manufacture test components for the
      detection of:


·
                TB
                    (Tuberculosis: a highly contagious disease responsible for more
                    deaths
                    than any other infectious disease according to the World Health
                    Organization)


·
              HIV
                  (Human Immunodeficiency Virus: the virus that causes
                  AIDS)


·
              RSV
                  (Respiratory Syncytial Virus: the most common cause of lower respiratory
                  tract infections in children
                  worldwide)


·
              Fetal
                  amniotic membrane rupture


·
              Lactoferin:
                  a protein with documented anti-viral, anti-microbial, and immune
                  modulating/enhancing effects


·
              Fumonisins:
                  environmental toxins produced by molds that grow on agricultural
                  commodities in the field or during
                  storage


·
              Aflatoxins:
                  potent toxic, carcinogenic, mutagenic, immunosuppressive agents,
                  produced
                  as secondary metabolites on a variety of food
                  products


·
              DON
                  (deoxynivalenol): a type B trichothecene (a biological toxin) that
                  occurs
                  in grains such as wheat, barley, oats, rye, and maize, rice, sorghum.
                  DON
                  poisonings occur both in humans and farm
                  animals


·
              Ige
                  (Immunoglobulin E): One of five classes of immunoglobulins made
                  by humans
                  that seems to protect against invading
                  parasites





We
      do not
      currently derive a significant portion of our revenues from contract
      manufacturing.




3




**Product
      Distribution**





We
      have a
      two-pronged distribution strategy that focuses both on growing business through
      our direct sales team and with valued third party distribution partners. We
      sell
      our products primarily through a staff of highly experienced and well-trained
      sales professionals with drugs of abuse testing experience. In addition we
      sell
      through third party distribution channels.





Our
      direct sales force consists of a vice president of sales & marketing, 5
      regional sales managers, a director of government sales, 2 international sales
      managers and a staff of 8 inside sales representatives. They call on
      non-clinical accounts directly and support our worldwide distribution network.
      We also employ a marketing manager, product manager, a national account trainer
      and national customer service representative. 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
      have
      entered into non-exclusive, non-clinical domestic market distribution
      agreements, as well as exclusive and non-exclusive non-domestic market
      distribution agreement, with a number of distributors. These agreements permit
      our distributors to sell non-competitive products of other manufacturers and
      permit us to sell our test kits to other distributors within and outside the
      territory of each distributor, except in those instances in which exclusive
      distribution rights may have been granted. In some instances, a distributor
      may
      be allowed to sell competitive product if certain annual volume minimums of
      ABMC
      products are met. The agreements are cancelable by either the distributor or
      us,
      with or without cause, upon 60 days written notice.





We
      will
      continue to recruit and utilize third party distribution partners for select
      markets, including corporate/workplace, government/corrections/law enforcement,
      international and education, in addition to selling directly in these markets
      and to key customers. We intend to enter into a distribution agreement with
      a
      multinational diagnostics company for sales to the clinical market.





**Our
      Markets**





*Corporate/Workplace* **





Our
      direct sales force and our inside sales representatives sell our products to
      the
      Corporate/Workplace market. We also have a nationwide network of distributors
      and administrators of workplace drug testing programs that sell our drugs of
      abuse product line in this market. We believe that the market for utilization
      of
      POCT for pre-employment and random employee testing is expanding.





·
              In
                  their December 2004 report (the most recent reported 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 percent 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.




·
              By
                  far the largest component of the economic cost noted above is loss
                  of
                  productivity at $128.6 billion. Productivity losses represent work
                  in the
                  labor market and in household production that was never performed,
                  but
                  could reasonably be expected to have been performed absent the
                  impact of
                  drug abuse.




·
              According
                  to the 2005 SAMHSA (Substance Abuse Mental Health Services Administration)
                  National Survey on Drug Use and Health released in September 2006,
                  of the
                  17.2 million illicit drug users aged 18 or older in 2005, 12.9
                  million
                  (74.8%) were employed either full or part
                  time.





Not
      only
      are there financial benefits of drug testing, but a drug-free environment is
      a
      safer one. Incentives encourage employers to adopt Drug Free Workplace Programs.
      Drug testing is an integral part of a Drug Free Workplace Program. In some
      states, there are workman’s compensation and unemployment insurance premium
      reductions, tax deductions and other incentives for adopting these programs.
      The
      Drug Free Workplace Act requires employers receiving federal contracts of
      $100,000 or more to enact a Drug Free Workplace program (the Federal Acquisition
      Streamlining Act of 1994 raised the threshold of contracts covered by the Drug
      Free Workplace Act from $25,000 to those exceeding $100,000).




4





*Government,
      Corrections and Law Enforcement*





Our direct
        and inside sales teams sell our drugs of abuse screening products in the
        Government, Corrections and Law Enforcement market. This market includes
        federal, state and county level agencies, including correctional facilities,
        pretrial agencies, probation, drug courts and parole departments at the federal
        and state levels and juvenile correctional facilities.





·
              According
                  to the Bureau of Justice Statistics (“BOJ”), the number of adults in the
                  correctional population has been increasing. In 2005, just over
                  7 million
                  people in the United States were on probation, in jail or prison,
                  or on
                  parole. Of this over 7 million people, approximately 2.19 million
                  were
                  inmates in federal and state prisons or local jails and approximately
                  4.94
                  million were individuals on probation or parole.


·
              According
                  to the BOJ, the number of arrests for drug abuse violations has
                  also been
                  increasing. In 2005 alone, there were 1.85 million arrests for
                  drug abuse
                  violations.Drug
                  abuse violationsare 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.


·
              According
                  to the Federal Bureau of Prisons, as of December 31, 2006 approximately
                  half of the federal prison population was sentenced as drug
                  offenders.





A
      significant number of individuals on parole or probation, or within federal,
      state and local correctional facilities and jails, have one or more conditions
      to their sentence required by the court or probation agency including periodic
      drug testing and substance abuse treatment. Our products are aimed at this
      and
      other similar markets.





*Rehabilitation
      Centers*





Our
      direct sales team and our network of distributors sell our products in the
      Rehabilitation Center market. This market for our products includes people
      in
      treatment for substance abuse. There is a high frequency of testing in this
      market. For example, in many residence programs, patients are tested each time
      they leave the facility and each time they return. In outpatient programs,
      patients are generally tested on a weekly basis.




*International
      Markets*





We
      sell
      our products primarily through distributors in the International market. We
      have
      entered into distribution agreements (exclusive and non-exclusive) with
      companies in several countries and are pursuing a course of multinational
      distribution of our products through both clinical and non-clinical distribution
      companies. As of December 21, 2006, we had 17 distributors or customers
      representing 33 foreign countries.




*Clinics,
      Physicians, and Hospitals*





The
      Clinic, Physician and Hospital market t includes emergency rooms, physician
      offices, hospitals and clinics and rehabilitation facilities associated with
      hospitals. In April 2006, the Drug Abuse Warning Network (a public health
      surveillance system that monitors drug-related visits to hospital emergency
      department and drug-related deaths investigated by medical examiners and
      coroners) estimated that of the nearly 2 million drug related emergency
      department visits in 2004; nearly 1.3 million were associated with drug misuse
      or abuse. Our RDS nine panel test is used in this market as it provides fast
      and
      accurate results when time is critical. In August 2006, we announced that we
      entered into a non-exclusive Supply Agreement with Nanogen (NASDAQ:NGEN) under
      which Nanogen will market our point of collection drug tests, under their own
      brand name, to customers in hospital-related markets.




5




*Educational
      Market*





According
      to the December 2006 University of Michigan Monitoring the Future study, 15%
      of
      8 th graders,
      29% of 10 th graders
      and 37% of 12 th graders
      had used an illicit drug within the 12 months prior to the study. Furthermore,
      the study reported that approximately half of young people have tried an illicit
      drug by the time they finish high school. We believe our products could be
      an
      integral part of helping schools implement testing programs due to their ease
      of
      use and immediate, accurate results.





In
      June
      2002, the Supreme Court ruled that public middle and high schools could require
      drug tests for students in extracurricular activities including athletics,
      band,
      choir, and other activities without violating their privacy rights. Drug tests
      can be required without any suspicion of drug use, and applies to students
      in
      grades 7 through 12 who sign up for activities such as sports, cheerleading,
      band, academic teams, and other extracurricular activities. Students can be
      tested at the start of the school year and then randomly throughout the year. ** It
      is our
      opinion that this decision aids schools in making the decision to implement
      a
      drug-testing program. We did not focus considerable sales and marketing efforts
      in the Educational market in 2006 and sales in this market are currently
      minimal. The Company may expand its efforts in the future and derive more
      significant sales from this market in the future.





*Consumer/Over-the-Counter*





Our
      point
      of collection drug tests are not currently available for sale in this market,
      as
      we have not yet received the necessary marketing clearance from the Food and
      Drug Administration (“FDA”). In December 2003, FDA issued a revised draft
      guidance for manufacturers of drug abuse screening tests that updated two
      previous draft guidance documents published in November 2000 thereby clarifying
      current FDA thinking for both laboratory and non-laboratory (workplace, sports,
      insurance, and home) tests. As of the date of this report, there has not been
      any further revised draft guidance since December 2003. The Company continues
      to
      evaluate these draft guidelines to determine whether to obtain the required
      marketing clearance to sell in this market in the future.





*Additional
      Markets*





We
      believe that the Department of Transportation (“DOT”) and the federally
      regulated markets could be a future market for our products. Presently, the
      DOT
      market is not available to any point of collection drug of abuse testing device.
      Federal law requires that anyone with a commercial driver’s license be randomly
      tested for use of drugs of abuse and that certified laboratories be used in
      these testing situations. We believe that there is potential for growth in
      this
      market as the regulatory agencies are considering implementing new guidelines
      that will permit the use of point of collection testing devices for drugs of
      abuse.





**Competition**





We
      compete on the following factors:




·
              pricing;


·
              quality
                  of product;


·
              ease
                  and user-friendliness of products;
                  and


·
              customer
                  and technical support
                  services





*Pricing* :
      The
      pricing structure within the point of collection drug testing market is highly
      competitive and currently our products are cost competitive. Pricing pressures
      increase significantly when comparing our product pricing with the pricing
      of
      point of collection drug tests manufactured outside of the United States. In
      order to meet the price pressure caused primarily by these foreign manufacturers
      (see Risk Factor, “Cost Competitive” on page 12), ABMC continues to evaluate all
      aspects of its manufacturing and assembly processes to identify any areas of
      cost savings to improve gross margins, in addition to evaluating new, lower
      cost
      product alternatives for its customers.




6





*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 and in that study the RDS was ranked the most accurate multi-drug
      device for all drugs when compared to GC/MS (Gas Chromatography/Mass
      Spectrometry), a laboratory test consisting of a combination of two
      microanalytical techniques: GC, a separation technique, and MS, an
      identification technique. Another study 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: C* ompetitors’
      point of collection drug tests generally use a collection or delivery method
      different than our point of collection drug tests. Our urine based products
      do
      not require pipetting of the specimen, adding or mixing of reagents or other
      manipulation of the device by the user (in fact, even our Rapid TOX (see page
      3)
      product offers the option of dipping the test into the urine specimen rather
      than pipetting the specimen). In The Rosita Roadside Study conducted in Europe,
      the RDS products were ranked “Very Good” for user friendliness, the highest
      rating given to any of the products in the study.





*Customer
      and technical support:* Customer
      and technical support are becoming more important in the point of collection
      drug testing market as individuals being tested become more knowledgeable about
      how to “beat” a drug test. Questions related to test administration, drug cross
      reactivity, drug metabolism, and other such matters are becoming areas in which
      clarification is sometimes needed by customers using these devices. ABMC
      provides its customers with customer and technical support 24 hours a day,
      seven
      days a week, 365 days a year. Most of our competitors do not offer such service
      to their customers.





*Point
      of collection urine based drug tests*





Competition
      to our point of collection urine-based products comes from point of collection
      tests developed by companies including, but not limited to, Varian Inc., Medtox
      Scientific, Inc., Biosite Diagnostics, and a number of smaller diagnostic
      companies in the urine point of collection testing market, including some
      manufacturers located outside of the United States.





*Point
      of Collection saliva based drug tests*





Competition
      to our point of collection saliva-based products come from point of collection
      tests developed by companies including, but not limited to and OraSure
      Technologies, Inc. (“OraSure”) and Varian, Inc. (“Varian”). OraSure’s saliva
      testing product is actually a laboratory-based product, not a point of
      collection test like our OralStat device (See “OralStat” on page 2). Laboratory
      tests are more expensive and take longer to produce results than our products.





*Laboratory
      Testing*





Aside
      from point of collection tests offering immediate results, some of our
      competitors offer traditional laboratory testing, where a sample is sent to
      a
      laboratory for analysis. Laboratory-based testing is generally more expensive
      than point of collection testing and it takes longer to receive the test
      results.





*Hair
      Testing*





Some
      competitors offer hair testing where a hair sample is sent to a laboratory
      for
      analysis. This form of drug testing is also more expensive and takes longer
      to
      produce results than our products. The detection period for hair testing is
      also
      quite limited in that it does not detect recent illicit drug usage.





*Rapid
      Reader Competition*





There
      are
      a number of companies with products that are competitive with our Rapid Reader
      device. It is our opinion that our Rapid Reader is unrivaled in the market
      as
      not only does it store, transmit and print the results of our drug tests but
      it
      also interprets the results of our drug tests, virtually eliminating the
      possibility of human error. In addition, our Rapid Reader is currently the
      only
      all-inclusive drug screen interpretation and data management system 510(k)
      cleared by FDA (see “Government Regulations” on page 8 for description of FDA
      510(k) clearance) **.**




7





**Manufacturing**





Our
      facility in Kinderhook, New York houses assembly and packaging of our products
      in addition to administration. We continue to contract-out the printing and
      manufacture of plastic components used in our products. We manufacture all
      of
      our own individual test strips and we manufacture test strips for unaffiliated
      third parties (see “Contract Manufacturing on page 3) at our R&D and bulk
      manufacturing facility in Logan Township, New Jersey. We contract with a third
      party for the t manufacture of the Rapid Reader product.




**Patents
      and Trademark** **s/Licenses**





To
      date,
      we hold 25 patents related to the Rapid Drug Screen, Rapid One and OralStat
      products, including 4 U.S. design patents and 6 utility patents. We currently
      have 9 United States patent applications pending, and 4 foreign patent
      applications pending.





We
      have
      registered the “Rapid Drug Screen” trademark in the United States, Canada,
      Mexico, Chile, Europe and Russia. We have also registered Rapid One and its
      logo, Rapid TEC and its logo, RDS, OralStat, InCup, Rapid Reader and our
      corporate logos in the United States. We have 2 additional trademark
      applications pending in the United States.





On
      February 28, 2006, we entered into a non-exclusive Sublicense Agreement with
      an
      unaffiliated third party related to certain patents allowing us to expand our
      contract manufacturing operations. Under this Sublicense Agreement, we must
      pay
      a non-refundable fee of $175,000 over the course of 2 years, of which $75,000
      was paid in the first quarter of 2006. The next payment of $50,000 is scheduled
      for the first quarter of 2007. We are also required to pay royalties for
      products we manufacture that fall within the scope of these patents. (See Note
      I
      [4] on page F-20)





On
      March
      29, 2006, we entered into a royalty agreement with Integrated Bio Technology
      Corporation (“IBC”). IBC is the owner of the RSV test and previously purchased
      the tests from ABMC for resale to IBC’s distributor, via a contract
      manufacturing agreement. At December 31, 2005, IBC had outstanding amounts
      due
      to ABMC totaling approximately $119,000. To address this outstanding balance,
      and to streamline the delivery of product to IBC’s distributor, we agreed to
      work directly with IBC’s distributor to receive orders, manufacture product and
      execute all invoicing and collection directly from the distributor. On January
      1, 2006, the Company began paying a royalty equal to 20% of total sales to
      IBC.
      We only pay 25% of royalties earned during the first two years, with the
      remaining 75% applied to amounts currently owed to ABMC by IBC. If the entire
      amount receivable from IBC is not earned through royalties during the first
      two
      years of the term of the royalty agreement, all payments to IBC will cease
      until
      the full amount owed to ABMC is satisfied.





**Research
      and Development**





Our
      R&D efforts are continually focused on enhancing and/or maintaining the
      performance and reliability of our drug testing strips. During 2006 our R&D
      team completed development of a new test to detect Buprenorphine, a test for
      a
      new detection level of cocaine, and continued to make enhancements to our
      OralStat point of collection test for drugs of abuse in oral fluids. The R&D
      team also continued the development process on contract manufacturing projects.
      Our R&D expenditures were $660,000 for the fiscal year ended December 31,
      2006, of which $25,000 was borne directly by a customer, compared to $683,000
      for the fisca l
      year
      ending December 31, 2005.





**Government
      Regulations**





The
      development, testing, manufacture and sale of our point of collection drugs
      test
      and possible additional biomedical products, are subject to regulation by the
      United States and foreign regulatory agencies. Pursuant to the Federal Food,
      Drug, and Cosmetic Act, and the regulations promulgated thereunder, FDA
      regulates the pre-clinical and clinical testing, manufacture, labeling,
      distribution and promotion of medical devices. If ABMC fails to comply with
      applicable requirements, we may be subject to fines, injunctions, civil
      penalties, recall or seizure of products, total or partial suspension of
      production, failure of the government to grant pre-market clearance or
      pre-market approval for devices, withdrawal of marketing clearances or approvals
      and criminal prosecution.




8





Our
      products fall under the category of 510(k) submissions to FDA. A 510(k) is
      a
      premarketing submission made to FDA to demonstrate that the device to be
      marketed is as safe and effective, that is, substantially equivalent, to a
      legally marketed device that is not subject to premarket approval. Applicants
      must compare their 510(k) device to one or more similar devices currently on
      the
      U.S. market and make and support their substantial equivalency claims. A legally
      marketed device is a device that was legally marketed prior to May 28, 1976
      (preamendments device), or a device that has been reclassified from Class III
      to
      Class II or I, or a device which has been found to be substantially equivalent
      to such a device through the 510(k) process, or one established through
      Evaluation of Automatic Class III Definition. The legally marketed device(s)
      to
      which equivalence is drawn is known as the "predicate" device(s). Applicants
      must submit descriptive data and, when necessary, performance data to establish
      that their device is substantially equivalent to a predicate
      device.





Although
      FDA clearance is not required for non-clinical markets (such as
      corporate/workplace and government/corrections), it is required for clinical
      markets (such as hospitals and physicians).





We
      have
      received 510(k) clearance for our:




·
              9
                  panel RDS test. With this approval and the approvals obtained related
                  to
                  our Rapid One dipsticks, 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 allowing ABMC to provide clinical customers with
                  various
                  configurations of 2 to 14 classes of drugs of abuse.


·
              Rapid
                  Reader in July 2005. This was the first all-inclusive drug screen
                  result
                  interpretation and data management system that received 510(k)
                  clearance
                  from FDA. The clearance allows ABMC to provide the Rapid Reader
                  to
                  customers in clinical markets.


·
              Rapid
                  TOX in May 2006. The clearance allows ABMC to provide the Rapid
                  TOX to
                  customers in clinical markets.


·
              Test
                  for Cocaine at a detection level of 150 ng/ml. ABMC had previously
                  received clearance to detect Cocaine at 300 ng/ml. This new clearance
                  allows ABMC to provide its customers in the clinical market with
                  a more
                  sensitive point of collection drug test for Cocaine as well as
                  the
                  original detection level of 300
                  ng/ml.


·
              Test
                  for Buprenorphine in August 2006. The clearance allows ABMC to
                  provide the
                  test for Buprenorphine to customers in the clinical
                  market.





ABMC
      has
      not yet submitted its OralStat to FDA for 510(k) clearance. Pending submission
      for FDA 510(k) clearance, the OralStat is labeled and made available “for
      forensic use only”, which means for use in legal determinations only; it is not
      intended or promoted for a health or medical use or purpose. As of the date
      of
      this report, no point of collection oral fluid test has received FDA 510(k)
      marketing clearance.





Furthermore,
      in order to sell our products in Canada after November 2003, the Company must
      comply with ISO13485, the International Standards Organization's Directive
      for
      Quality Systems for Medical Devices (MDD or Medical Device Directive), and
      in
      order to sell our products in the European Union after November 2003, the
      Company must obtain CE marking for our products (in the European Union, a "CE"
      mark is affixed to the product for easy identification of quality products).
      Collectively, these standards are similar to the U.S. Federal Regulations
      enforced by FDA, and are a reasonable assurance
      to the customer that the manufacturing of our products is conducted in a
      consistent manner to help ensure that quality, defect-free goods are produced.
      As of the date of this report, we have received approval and the right to bear
      the CE mark on our Rapid Drug Screen, Rapid One, Rapid TEC, InCup and OralStat
      products, meaning that our products comply with the essential requirements
      of
      the In Vitro Diagnostic Directive 98/79/EC and may be legally marketed within
      the European Union and display the CE Mark. We received our ISO13485, 2003
      compliance certification in August 2006 and have acquired the license to sell
      our RDS, Rapid One and Rapid TEC products in Canada. We have submitted for,
      and
      currently awaiting the approval of Rapid TOX for CE certification in Europe
      and
      a license to sell the Rapid TOX product in Canada.




9





Due
      to
      the nature of the manufacture of our point of collection tests and the material
      used in such manufacture, ABMC does not incur any material costs or effects
      associated with compliance with environmental laws.




**Employees**





Currently,
      we have approximately 131 employees, of which 120 are full-time and 11 are
      part-time. **** None
      of
      our employees are covered by collective bargaining agreements, and we believe
      our relations with our employees are good.





**Risk
      Factors**





**We
      have a limited operating history, which may make it difficult to accurately
      forecast our future revenues and other operating results.**





We
      began
      selling our drugs of abuse screening products in 1996 and began providing
      contract manufacturing services for other companies in late 2001. As a result,
      we have only a limited operating history upon which one may evaluate our
      business and prospects. Our limited operating history may make it difficult
      or
      impossible for analysts or investors to accurately forecast regarding our future
      revenues and other operating results and the price of our securities could
      decline substantially. ******





**We
      have a history of incurring net losses.**





Since
      inception in 1992 through the fiscal transition period ending December 31,
      2001,
      we incurred net losses. We began earning profits in the fiscal year ending
      December 31, 2002 and continued to be profitable through December 31, 2004.
      However, in the fiscal year ending December 31, 2005, we incurred a net loss
      of
      $376,000. In the fiscal year end December 31, 2006, we reported net income
      of
      $196,000. As of December 31, 2006, we have an accumulated deficit of $13.3
      million. We expect to continue to make substantial expenditures for sales and
      marketing, product development and other 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. Our failure to do so
      will result in our incurring additional losses.





**Our
      products are sold in limited markets and the failure of any one of them to
      achieve widespread market acceptance would significantly harm our results of
      operation.**





We
      offer
      a number of point of collection tests for drugs of abuse that are sold in
      limited markets, and we currently derive most of our revenues from sales of
      our
      point of collection tests for drugs of abuse. Based upon actual results in
      2006
      and given current levels of operating expenses, we must achieve approximately
      $3.7 million in quarterly revenues 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.




In
      addition, we began selling our RDS and Rapid One point of collection tests
      for
      drugs of abuse in 1996 (later than most of our primary competitors), and cannot
      predict whether they will gain further widespread market acceptance. Achieving
      market acceptance for our drug tests will require substantial marketing efforts
      and expenditure of significant funds to inform potential customers and
      distributors of the distinctive characteristics, benefits and advantages of
      our
      test kits. A number of our products have only recently been introduced in the
      marketplace (with our most recent additions being the OralStat and RDS InCup,
      introduced in July 2004 and the Rapid TOX, introduced in July 2005). We have
      no
      history upon which to base market or customer acceptance of these products.
      Introduction of the OralStat, RDS InCup and Rapid TOX have required, and may
      continue to require substantial marketing efforts and expenditure of
      funds.




10





Due
      to
      the variety and complexity of the environments in which our customers operate,
      our products may not operate as expected. This 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.





**If
      we fail to keep up with technological factors and fail to develop our products,
      we may be at a competitive disadvantage.**





The
      point
      of collection drug testing market is highly competitive. Several companies
      produce drug tests that compete directly with our drugs of abuse product line,
      including Varian, Inc., Biosite Diagnostics and Medtox Scientific, Inc. in
      the
      urine point of collection testing market and OraSure Technologies, Inc. and
      Varian, Inc. in the saliva point of collection testing market. **** As
      new
      technologies become introduced into the point of collection testing market,
      we
      may be required to commit considerable additional efforts, time and resources
      to
      enhance our current product portfolio or develop new products. Our success
      will
      depend upon new products meeting targeted product costs and performance, in
      addition to timely introduction into the marketplace. We are subject to all
      of
      the risks inherent in product development, which could cause material delays
      in
      manufacturing.





**We
      rely on third parties for raw materials used in our drugs of abuse products
      and
      in our contract manufacturing processes.**





We
      currently have approximately 65 suppliers who provide us with the raw materials
      necessary to manufacture our point of collection drug testing strips and our
      point of collection tests for drugs of abuse. For most of our raw materials
      we
      have multiple suppliers however, there are a few chemical raw materials for
      which we only have one supplier. The loss of one or more of these suppliers,
      the
      non-performance of one or more of their materials or the lack of availability
      of
      raw materials could suspend our manufacturing process related to our drugs
      of
      abuse products. This interruption of the manufacturing process could impair
      our
      ability to fill customers’ orders as they are placed, which would put us at a
      competitive disadvantage.





Furthermore,
      we rely on a number of third parties for supply of the raw materials necessary
      to manufacture the test components we supply to other diagnostic companies
      under
      contract manufacturing agreements. For most of these raw materials we have
      multiple suppliers however, there are a few chemical raw materials for which
      we
      only have one supplier. The loss of one or more of these suppliers could suspend
      the strip manufacturing process and this interruption could impair our ability
      to perform contract manufacturing services.





**We
      have a significant amount of raw material and “work in process” inventory on
      hand that may not be used in the next twelve months if the expected
      configuration of sales orders are not received at our projected
      levels.**





We
      currently have approximately $1.8 million in raw material components for the
      manufacture of our products at December 31, 2006. 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 $2.5 million in manufactured
      testing strips, or other “work in process” inventory at December 31, 2006. The
      components of this work in process inventory have lives of 12-18 months. If
      sales orders received are not for devices that would utilize the raw material
      components, or if product developments make the raw materials obsolete, we
      may
      be required to dispose of the unused raw materials. In addition, since the
      components of the work in process inventory have lives of 12-18 months, if
      sales
      orders within the next 12-18 months are not for devices that contain the
      components of the work in process inventory, we may need to discard the unused
      work in process inventory. Beginning in 2004, we established a $100,000 reserve
      for obsolete or slow moving inventory. In late 2005, we increased this reserve
      to $250,000. There can be no assurance that this reserve will be adequate for
      2007 and/or that it will not have to be increased.




11





**We
      depend on our R&D team for product development and/or product
      enhancement.**





Product
      development and/or enhancement are performed by our R&D team. 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 us at a competitive
      disadvantage.





**Our
      products must be cost competitive and perform to the satisfaction of our
      customers.**





Cost
      competitiveness and satisfactory product performance are essential for success
      in the point of collection drug testing market. There can be no assurance that
      new products we may develop will meet projected price or performance objectives.
      In fact, price competition is increasing in the point of collection testing
      markets as additional foreign (i.e. non-U.S. based companies) manufacturers
      enter the market. Foreign manufacturers have lower manufacturing costs and
      therefore can offer their products at a lower cost than a U.S. manufacturer.
      These lower costs include but are not limited to costs for labor, materials,
      regulatory compliance and insurance.





Moreover,
      there can be no assurance that unanticipated problems will not arise with
      respect to technologies incorporated into our test kits or that product defects,
      affecting product performance, will not become apparent after commercial
      introduction of our additional test kits. In the event that we are required
      to
      remedy defects in any of our products after commercial introduction, the costs
      to us could be significant, which could have a material adverse effect on our
      revenues or earnings.





**We
      face significant competition in the drug testing market and potential
      technological obsolescence.**





We
      face
      competition from other manufacturers of point of collection tests for drugs
      of
      abuse. Manufacturers such as Varian, Inc., Medtox Scientific, Inc., Biosite
      Diagnostics and OraSure Technologies, Inc. are better known and have far greater
      financial resources than us. The markets for point of collection tests for
      drugs
      of abuse are highly competitive. Currently the pricing of our products is cost
      competitive, however, these competitors can devote substantially more resources
      than we can to business development and they may adopt more aggressive pricing
      policies. There can be no assurance that other companies will not attempt to
      develop or market products directly competitive with our drugs of abuse product
      line. We expect other companies to develop technologies or products, which
      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 such as
      Stan
      Cipkowski, Chief Executive Officer, Keith E. Palmer, Chief Financial Officer,
      Martin Gould, Chief Scientific Officer and Todd Bailey, Vice President, Sales
      & Marketing for our future success. The loss of Messrs. Cipkowski, Palmer,
      Gould and/or Bailey could negatively impact our business and results of
      operations. We currently maintain key man insurance for Messrs. Cipkowski,
      Palmer and Gould. Although we have employment agreements in place with Messrs.
      Cipkowski and Palmer, there can be no assurance that any of our senior
      management will continue their employment .




12




**Failure
      to effectively manage our growth and expansion could adversely affect our
      business and operating results.**





We
      anticipate expansion of our operations in the future. Any failure to manage
      our
      growth effectively will result in less efficient operations, which could
      adversely affect our operating and financial results.





To
      effectively manage our growth, we must, among other things :





·
              accurately
                  estimate the number of employees we will require and the areas
                  in which
                  they will be required;


·
              upgrade
                  and expand our office infrastructure so that it is appropriate
                  for our
                  level of activity;


·
              manage
                  expansion into additional geographic areas;
                  and


·
              improve
                  and refine our operating and financial
                  systems.








We
      expect
      to devote considerable resources and management time to improving our operating
      and financial systems to manage our growth. Failure to accomplish any of these
      objectives would impede our ability to deliver products and services in a timely
      fashion, fulfill existing customer orders and attract and retain new customers;
      these impediments would have a material adverse effect on our financial
      condition, results of operations and cash flows.




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





Approval
      from FDA is not currently required for the sale of our products in non-clinical
      markets, but is required in the clinical and over-the-counter (“OTC”) markets.
      Although our point of collection drug tests have met FDA requirements for
      professional use, we have not obtained OTC clearance from FDA. The workplace
      market is one of our primary markets and if any additional FDA clearance is
      required to sell in this market, this additional cost may cause us to raise
      the
      price of our products making it difficult to compete with other point of
      collection products or laboratory based testing, thereby negatively impacting
      our revenues. Furthermore, there can be no assurance that if we are required
      to
      apply for additional FDA clearances they will be granted. If such clearance
      is
      not granted, we would be unable to sell our products in the workplace market
      and
      our revenues would be negatively impacted. Although we are currently unaware
      of
      any changes in regulatory standards related to the clinical and OTC markets,
      if
      regulatory standards were to change in the future, there can be no assurance
      that FDA will grant us the approvals, if and when we apply for them, required
      to
      comply with the changes.





We
      rely
      on intellectual property rights, and we may not be able to obtain patent or
      other protection for our technology, products or services.





We
      rely
      on a combination of patent, copyright, trademark and trade secret laws,
      confidentiality procedures and contractual provisions to protect our proprietary
      technology, products and services. We also believe that factors such as the
      technological and creative skills of our personnel, new product developments,
      frequent product enhancements and name recognition are essential to establishing
      and maintaining our technology leadership position. Our personnel are bound
      by
      non-disclosure agreements. If personnel leave our employment, in some cases
      we
      would be required to protect our intellectual property rights pursuant to common
      law theories, which may be less protective than provisions of employment,
      non-competition or non-disclosure 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 25 U.S. and foreign
      patents relating to the RDS, Rapid One and OralStat products. We have additional
      patent applications pending in the United States, and other countries, related
      to our point of collection drug tests. 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.




13





**Potential
      issuance and exercise of new options and warrants and exercise of outstanding
      options and warrants could adversely affect the value of our
      securities.**





The
      Board
      of Directors of the Company has adopted 4 Nonstatutory Stock Option Plans
      providing for the granting of options to employees, directors, and consultants
      (see Notes H [1] and H [2]. As of December 31, 2006, there were 3,993,080
      options issued and outstanding under all four plans combined. In the fiscal
      year
      ended December 31, 2005, the Company’s Board of Directors accelerated the
      vesting periods of all outstanding options not yet fully vested to vest 100%
      on
      December 14, 2005. As of December 31, 2006 3,918,080 options were exercisable.
      As of December 31, 2006, there were 9,500 options available for issuance under
      the Fiscal 2000 Plan and 739,420 options available for issuance under the Fiscal
      2001 Plan. There are no options available for issuance under either the Fiscal
      1997 Plan or the Fiscal 1998 Plan and there are no options issued and
      outstanding under either the Fiscal 1997 Plan or the Fiscal 1998 Plan. As
      options expire or are cancelled under the Fiscal 1997 and Fiscal 1998 Plans,
      they are not re-issued.





As
      of
      December 31, 2006, there were 150,000 warrants outstanding and exercisable.
      On
      December 2, 2003, we issued a warrant, exercisable during a 5 year period
      beginning December 2, 2003, to purchase 300,000 common shares of our stock
      at an
      exercise price of $1.15 per share to Brean Murray as compensation as our
      financial advisor. In June 2004, we 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 (a copy of this amendment was filed
      as
      Exhibit 10.19.1 to the Company’s Form 10QSB for the quarter ended June 30,
      2004).





If
      these
      options or 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 or 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 and
      warrants would cause further dilution of our securities. The options and
      warrants are subject to, or contain certain anti-dilution protection that may
      result in the issuance of additional shares under some circumstances including,
      but not limited to, paying of a dividend in common shares, a declaration of
      a
      dividend payable in a form other than common shares in an amount that has a
      material effect on the price of common shares, a combination or consolidation
      of
      the outstanding common shares (by reclassification or otherwise) into a lesser
      number of common shares, a recapitalization, a spin-off or a similar occurrence,
      or in the case of the warrants, a sale of our common shares, or a security
      convertible into common shares, for consideration per share less than the
      exercise price of the warrants.





**Substantial
      resale of restricted securities may depress the market price of our
      securities.**





There
      are
      4,379,055 common shares presently issued and outstanding as of the date hereof
      that are “restricted securities” as that term is defined under the Securities
      Act of 1933, as amended, (the “Securities Act”) and in the future may be sold in
      compliance with Rule 144 of the Securities Act, or pursuant to a Registration
      Statement filed under the Securities Act. Rule 144 provides that a person
      holding restricted securities for a period of one year or more may, in any
      three
      month period, sell those securities in unsolicited brokerage transactions or
      in
      transactions with a market maker, in an amount equal to the greater of one
      percent of our outstanding common shares or the average weekly trading volume
      for the prior four weeks. Sales of unrestricted shares by affiliates of the
      Company are also subject to the same limitation upon the number of shares that
      may be sold in any three-month period. Investors should be aware that sales
      under Rule 144 or 144(k), or pursuant to a registration statement filed under
      the Act, may depress the market price of our Company’s securities in any market
      that may develop for such shares.




14




**We
      may need additional funding for our existing and future
      operations.**





The
      Company believes that its current cash balances, and cash generated from future
      operations will be sufficient to fund operations for the next twelve months.
      This estimate is based on certain assumptions and there can be no assurance
      that
      unanticipated costs will not be incurred. Future events, including the problems,
      delays, expenses and difficulties which may be encountered in establishing
      and
      maintaining a substantial market for our products, could make cash on hand
      insufficient to fund operations. If cash generated from operations is
      insufficient to satisfy the Company's working capital and capital expenditure
      requirements, the Company may be required to sell additional equity or debt
      securities or obtain additional credit facilities. There can be no assurance
      that such financing will be available or that the Company will be able to
      complete financing on satisfactory terms, if at all. Any such equity financing
      may result in further dilution to existing shareholders.





**Our
      ability to retain and attract market makers is important to the continued
      trading of our securities.**





Our
      common shares trade on the NASDAQ Capital Market under the symbol “ABMC”. In the
      event that the market makers cease to function as such, public trading in our
      securities will be adversely affected or may cease entirely.




**If
      we fail to meet the continued listing requirements of the NASDAQ Capital Market,
      our securities could be delisted.**





Our
      securities are listed on the NASDAQ Capital Market. The NASDAQ Stock Market's
      Marketplace Rules impose requirements for companies listed on the NASDAQ Capital
      Market to maintain their listing status, including but not limited to minimum
      common share bid price of $1.00, and $2,500,000 in shareholders' equity or
      $500,000 in net income in the last fiscal year. As of the date of this report
      our common shares are not trading below the minimum bid requirement but as
      recently as February 2007, our common shares were trading below the minimum
      bid
      requirement (see Current Reports on Form 8-K filed with the Securities and
      Exchange Commission (“SEC”) on August 28, 2006, February 21, 2007 and February
      23, 2007). Failing to meet the minimum bid requirements may result in delisting
      of the Company’s securities.





Delisting
      could reduce the ability of investors to purchase or sell our securities as
      quickly and as inexpensively as they have done historically and could subject
      transactions in our securities to the penny stock rules. Furthermore, failure
      to
      obtain listing on another market or exchange may make it more difficult for
      traders to sell our securities. Broker-dealers may be less willing or able
      to
      sell or make a market in our securities because of the penny stock disclosure
      rules. Not maintaining a listing on a major stock market may result in a
      decrease in the trading price of our securities due to a decrease in liquidity
      and less interest by institutions and individuals in investing in our
      securities. Delisting from the NASDAQ Capital Market would also make it more
      difficult for us to raise capital in the future. ****





**In
      the future, we will incur 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.**





In
      the
      near future, we will incur significant legal, accounting and other expenses.
      The
      Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"), as well as new rules
      subsequently implemented by the SEC, have imposed various new requirements
      on
      public companies. Our management and other personnel will need to devote a
      substantial amount of time to these new compliance initiatives. Moreover, these
      rules and regulations will increase our legal and financial compliance costs
      and
      will 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, commencing for our fiscal year ended December 31,
      2007, management must perform system and process evaluation and testing on
      the
      effectiveness of our internal controls over financial reporting, as required
      by
      Section 404 of the Sarbanes-Oxley Act. Subsequently commencing in our fiscal
      year ended December 31, 2008, 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.




15





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. Our compliance with Section
      404 will require that we incur substantial accounting expense and expend
      significant management efforts. We currently do not have an internal audit
      group, and we will need to hire additional accounting and financial staff with
      appropriate public company experience and technical accounting knowledge.





Moreover,
      if we are not able to comply with the requirements of Section 404 in a timely
      manner, or if we or our independent registered public accounting firm identifies
      deficiencies in our internal controls over financial reporting that are deemed
      to be material weaknesses, the market price of our stock 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.





**ITEM
      2. DESCRIPTION OF P** **ROPERTY**





In
      November 2001, we purchased our Kinderhook, New York facility and the
      surrounding 107 acres. We obtained a mortgage from Hudson River Bank & Trust
      Company (now First Niagara Financial Group (“FNFG”)) in the amount of $360,000,
      a loan in the amount of $240,000 from the New York State Business Development
      Corporation and a loan from the Columbia Economic Development Corporation in
      the
      amount of $120,000. On March 31, 2003 the Company sold approximately 85 acres
      of
      land at its Kinderhook headquarters for $150,000. On November 6, 2006, we
      refinanced our loans with these three entities and obtained a new loan through
      FNFG, in the amount of $775,000. In addition to the payoff of these previous
      loans, we received proceeds of $154,239 after closing costs and accrued
      interest, to be used to refinance other existing debt (See Current Report on
      Form 8-K filed with the SEC on November 9, 2006).





In
      August
      2002, we combined a lease for 4,000 square feet of space and a lease for 5,200
      square feet of space into one lease for our New Jersey facility. In
      December 2006, we obtained an additional 5,200 square feet of leased space.
      The
      total monthly cost of the combined 14,400 square feet is $7,143. (A copy of
      the
      most recent amendments to the lease is attached as an exhibit to this report
      on
      Form 10-KSB).





**ITEM
      3. LEGAL PROCEEDINGS**





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





**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




None.





**PART
      II**





**ITEM
      5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDERS
      MATTERS**





*Market
      Information*





Our
      common shares trade on the National Association of Securities Dealers Automated
      Quotation System Capital Market (NASDAQ Capital Market) under the symbol ABMC.





From
      January 1, 2006 through August 21, 2006 our common stock purchase warrants
      (“warrants”) traded on the NASDAQ Capital Market under the symbol ABMCW. The
      common stock purchase warrants expired on August 22, 2006 and ceased trading.




16





The
      following table sets forth the high and low sale prices of our securities as
      reported by the NASDAQ Capital Market for the periods indicated.








Common
      Shares





Fiscal
                year ending December 31, 2006
            
            High
            
            LowQuarter
                ending December 31, 2006
            
            $
            0.99
            
            $
            0.87Quarter
                ending September 30, 2006
            
            $
            1.03
            
            $
            0.85Quarter
                ending June 30, 2006
            
            $
            1.17
            
            $
            0.87Quarter
                ending March 31, 2006
            
            $
            1.15
            
            $
            0.87





Fiscal
                year ending December 31, 2005
            
            High
            
            LowQuarter
                ending December 31, 2005
            
            $
            1.26
            
            $
            1.01Quarter
                ending September 30, 2005
            
            $
            1.11
            
            $
            0.78Quarter
                ending June 30, 2005
            
            $
            1.00
            
            $
            0.72Quarter
                ending March 31, 2005
            
            $
            1.64
            
            $
            0.84





Warrants





Fiscal
                year ending December 31, 2006
            
            High
            
            LowQuarter
                ending December 31, 2006
            
            
            NA
            
            
            NAQuarter
                ending September 30, 2006(1)
            
            $
            0.17
            
            $
            0.01Quarter
                ending June 30, 2006
            
            $
            1.00
            
            $
            0.03Quarter
                ending March 31, 2006
            
            $
            0.40
            
            $
            0.03




(1)
              Notes
                  tradingJuly
                  1, 2006 through August 21, 2006. Common stock purchase warrants
                  that had
                  been trading expired on August 22,2006. Actual last date of trading
                  due to
                  expiration was August 17,
                  2006.





Fiscal
                year ending December 31, 2005
            
            High
            
            LowQuarter
                ending December 31, 2005
            
            $
            0.28
            
            $
            0.05Quarter
                ending September 30, 2005
            
            $
            0.32
            
            $
            0.18Quarter
                ending June 30, 2005
            
            $
            0.40
            
            $
            0.02Quarter
                ending March 31, 2005
            
            $
            0.60
            
            $
            0.08




*Holders*





As
      of
      March 21, 2007, there were approximately 4,500 holders of our securities. As
      of
      March 21, 2007 there were outstanding 21,719,768 common shares.





*Dividends*





The
      Company has not declared any dividends on our common shares and does not expect
      to do so in the foreseeable future. Future earnings, if any, will be retained
      for use in the Company's business.





*Securities
      authorized for issuance under equity compensation plans*





The
      Board
      of Directors of the Company has adopted 4 Nonstatutory Stock Option Plans that
      have subsequently been approved by the shareholders, providing for the granting
      of options to employees, directors, and consultants. As of December 31, 2006,
      there were 3,993,080 options issued and outstanding under all four plans
      combined. As of December 31, 2006, there were 748,920 options available for
      issuance under the plans.




17





On
      December 2, 2003, under a Financial Advisory Agreement, the Company issued
      a 5
      year warrant to purchase 150,000 common shares of ABMC stock at an exercise
      price of $1.15 to Brean Murray & Co.





The
      following table summarizes this information as of December 31, 2006, with
      respect to compensation plans (including individual compensation arrangements)
      under which our common stock is authorized for issuance:





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding
                options,
              warrants
                and rights
              (a)
            
            Weighted-average
                exercise price of outstanding options,
              warrants
                and rights
              (b)
            
            Number
                of securities remaining available for future issuance
              under
                equity compensation plans (excluding securities
              reflected
                in column (a)
              (c)Equity
                Compensation Plans approved by security holders
            
            
            3,993,080
            
            $
            1.32
            
            
            748,920Equity
                Compensation Plans not approved by security holders
            
            
            150,000
            
            $
            1.15
            
            
            NA








**Recent
      sales of unregistered securities**





None.





**ITEM
      6.****MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS**





*The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements. In order to comply with the terms of the safe
      harbor, the Company notes that except for the description of historical facts
      contained herein, this Form 10-KSB contains certain forward-looking statements
      that involve risks and uncertainties as detailed herein and from time to time
      in
      the Company's filings with the Securities and Exchange Commission and elsewhere.
      Such statements are based on Management's current expectations and are subject
      to a number of factors and uncertainties, which could cause actual results
      to
      differ materially from those, described in the forward-looking statements.
      These
      factors include, among others: (a) the Company's fluctuations in sales and
      operating results, risks associated with international operations and
      regulatory, competitive and contractual risks and product development; (b)
      the
      ability to achieve strategic initiatives, including but not limited to the
      ability to achieve sales growth across the business segments through a
      combination of enhanced sales force, new products, and customer service; and
      (c)
      acquisitions.*





**Critical
      Accounting Policies and Estimates**





American
      Bio Medica Corporation's (“ABMC’s”) discussion and analysis of its financial
      condition and results of operations are based upon ABMC's financial statements,
      which have been prepared in accordance with accounting principles generally
      accepted in the United States of America. The preparation of these financial
      statements requires ABMC to make estimates and judgments that affect the
      reported amounts of assets, liabilities, revenues and expenses, and related
      disclosure of contingent assets and liabilities. On an on-going basis, ABMC
      evaluates its estimates, including those related to product returns, bad debts,
      inventories, income taxes, warranty obligations, and contingencies and
      litigation. ABMC bases its estimates on historical experience and on various
      other assumptions that are believed to be reasonable under the circumstances,
      the results of which form the basis for making judgments about the carrying
      values of assets and liabilities that are not readily apparent from other
      sources. Actual results may differ from these estimates under different
      assumptions or conditions.





ABMC
      believes the following critical accounting policies affect its more significant
      judgments and estimates used in the preparation of its financial statements.
      ABMC records estimated reductions to revenue for customer returns and allowances
      based on historical experience. If market conditions were to decline, ABMC
      may
      take actions to increase customer incentive offerings possibly resulting in
      an
      incremental reduction of gross margins. ABMC recognizes revenue upon shipment
      to
      customers. ABMC maintains allowances for doubtful accounts for estimated losses
      resulting from the inability of its customers to make required payments. If
      the
      financial condition of ABMC's customers were to deteriorate, resulting in an
      impairment of their ability to make payments, additional allowances may be
      required. ABMC writes down its inventory for estimated obsolescence or
      unmarketable inventory equal to the difference between the cost of inventory
      and
      the net realizable value based upon assumptions about future demand and market
      conditions. If actual market conditions are less favorable than those projected
      by management, additional inventory write-downs may be required. ABMC records
      a
      valuation allowance to reduce its deferred tax assets to the amount that is
      more
      likely than not to be realized. While ABMC has considered future taxable income
      and ongoing prudent and feasible tax planning strategies in assessing the need
      for the valuation allowance, in the event ABMC were to determine that it would
      be able to realize its deferred tax assets in the future in excess of its net
      recorded amount, an adjustment to the deferred tax asset would increase income
      in the period such determination was made.




18





In
      December 2004, the FASB issued SFAS No. 123 (revised 2004), *Share-Based
      Payment,* (“SFAS No. 123(R)”), which amends SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      (“SFAS
      No. 123”) *,* and
      supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees.* SFAS No. 123(R) requires compensation expense to be recognized for all
      share-based payments made to employees based on the fair value of the award
      at
      the date of grant, eliminating the intrinsic value alternative allowed by
      SFAS No. 123. Generally, the approach to determining fair value under
      the original pronouncement has not changed. However, there are revisions to
      the
      accounting guidelines established, such as accounting for forfeitures, which
      will change our accounting for stock-based awards in the future. We adopted
      SFAS No. 123(R) on January 1, 2006.





On
      December 14, 2005 the Company accelerated the vesting date of all outstanding
      stock options, issued prior to that date, that were not yet fully vested, to
      that date. The pro-forma income or expense in Note A [13] reflects this
      acceleration.




SFAS No. 123(R)
      also requires the benefits of tax deductions in excess of recognized
      compensation cost to be reported as a financing cash flow, rather than as an
      operating cash flow as required under current literature. This requirement
      will
      reduce our net operating cash inflows and increase our net financing cash flows
      in periods after adoption. The impact that this change in reporting will have
      on
      future periods cannot be determined at this time because the benefit recognized
      is dependent upon attributes that vary for each option exercise.





**Results
      of operations for the twelve months ended December 31, 2006 as compared to
      the
      twelve months ended December 31, 2005**





Net
      sales
      increased to $13.8 million for the twelve months ended December 31, 2006 as
      compared to $13.0 million for the twelve months ended December 31, 2005,
      representing an increase of $800,000 or 6%. The increase is attributable to
      growth in international sales as well as contract manufacturing.





During
      the twelve months ended December 31, 2006, the Company continued its program
      to
      market and distribute its primary product, the Rapid Drug Screen, together
      with
      its oral fluid test (OralStat), InCup, Rapid TEC, and Rapid TOX. To further
      enhance the Company’s portfolio of products and to continue to meet the market
      needs for alternative tests and test methods, throughout 2006 the Company
      submitted applications for, and received FDA 510(k) clearance on its Rapid
      TOX
      cassette products (in May 2006), its more sensitive test for Cocaine detection
      (in June 2006) and its test to detect Buprenorphine (in August
      2006).





The
      Company continued to see increases in its contract manufacturing sales during
      2006. Products the Company was contracted to manufacture in 2006 included a
      point of collection test for HIV, a point of collection test for the detection
      of a ruptured fetal amniotic membrane, a point of collection test for the
      detection of Respiratory Syncytial Virus (“RSV”), a juvenile respiratory disease
      and several mycotoxin tests. Contract manufacturing contributed $824,000, or
      6%
      of net revenue, during 2006 and $181,000, or 1% in 2005. The Company reached
      an
      agreement with the initial third party developer and the current distributor
      of
      the RSV test in December 2005. Under the terms of the agreement the Company
      works directly with the distributor to streamline the manufacturing, production
      and delivery of the RSV test, and pays a royalty to the initial third party
      developer.




19





Cost
      of
      goods sold for the twelve months ended December 31, 2006 was $7.0 million,
      or
      51% of net sales, unchanged from $7.0 million, or 54% of net sales, for the
      twelve months ended December 31, 2005. Included in the cost of sales in 2005
      are
      inventory disposals of approximately $225,000 resulting from enhancements made
      to the Company’s OralStat product during 2005. An additional $45,000 of aging
      Rapid TEC inventory components were disposed of during 2005 with the
      introduction of the Rapid TOX product during the fourth quarter. Further, the
      introduction of our Rapid TOX product required additional expenditures in labor
      and overhead to manufacture and assemble the initial working inventory prior
      to
      the product’s introduction. This resulted in increases in manufacturing and
      assembly expense causing an increase in the cost of sales during the fourth
      quarter of 2005. Reliance on outside assembly to supplement in-house production
      during times of increased demand for products also contributed to higher cost
      of
      sales during 2005.





At
      the
      end of 2005, the Company increased its reserve for slow moving and obsolete
      inventory from $100,000 to $250,000. This increase was consistent with the
      increased diversity of products being offered by the Company as well as changes
      to the Company’s sales dynamics. Such changes in sales dynamics included the
      shift of customers purchasing the Company’s newer products rather than more
      established products. This shift resulted in residual stocks of inventory
      components for products for which demand has declined. In the aggregate,
      $425,000, or 6%, of the cost of goods sold in 2005 relates to these necessary
      disposals, and the increase in the reserve for slow moving and obsolete
      inventory. There were no similar disposals of inventory during 2006 and the
      Company believes its current reserve of $250,000 is adequate.





Costs
      of
      raw materials, with the exception of some petroleum by-product based components,
      remained relatively unchanged during 2006. With the introduction of several
      new
      products, material costs have increased in the aggregate and the Company is
      required to maintain higher inventory to stock all necessary components.
      Aggregate labor costs and overhead associated with manufacturing increased
      slightly during the twelve months ended December 31, 2006 and pricing has
      remained relatively consistent to allow the Company to be competitive in the
      marketplace. The increase in labor cost stems from the greater diversity and
      complexity of the new products and the reliance on temporary resources to
      increase output capacity.





Operating
      expenses for the fiscal year ended December 31, 2006 increased by $167,000,
      or
      3%, to $6,552,000, or 47% of net sales, compared to $6,385,000, or 49% of net
      sales, for the fiscal year ended December 31, 2005. Decreases of $77,000 in
      research and development and $20,000 in selling and marketing expenses were
      offset by an increase of $264,000 in general and administrative expense,
      primarily due to license amortization and investor relations expense.





The
      Company received other income equal to $10,000 in 2006 attributable to a grant,
      having also received $10,000 in 2002, 2003 and 2005. The original grant was
      received from the Columbia Economic Development Corporation in two parts and
      totaled $75,000 as of December 31, 2004. The Company received a final
      installment of $25,000 in the first quarter of 2005. Under the terms of the
      grant, the Company is obligated to return a portion of the grant if the employee
      levels in the Kinderhook facility fall below 45 employees at any time during
      the
      year. The portion of the grant to be repaid declined from 100% in 2002 to 90%
      in
      2003 to 80% in 2004 and 70% in 2005, and is expected to decline an additional
      10% each year until 2013. The employment at the Kinderhook facility did not
      drop
      below 45 employees at any time during 2006 or 2005.





As
      a
      result of the adoption of the September 2006 Securities and Exchange Commission
      issued Staff Accounting Bulletin (SAB) 108 (see Effect of Recent Accounting
      Pronouncements found on page 25), the Company has included a cumulative
      adjustment for a vacation accrual in its financial statements for the year
      ended
      December 31, 2006 that has not been previously recorded. This liability of
      $80,000 has accumulated steadily over a ten year period. The vacation accrual
      has been evaluated each year and with each successive year adjustment considered
      immaterial to both the current year and the prior year. At December 31, 2006
      unpaid vacation was estimated to be approximately $80,000, which is material
      to
      the financial statements under the SAB 108.




20




Research
      and development





Research
      and development (“R&D”) expenses for the twelve months ended December 31,
      2006 were $606,000, or 4% of net sales, a decrease of $77,000, or 11%, compared
      to $683,000, or 5% of net sales for the twelve months ended December 31, 2005.
      The decrease in expense is due primarily to the departure of a senior member
      of
      the R&D group in late 2005 and the subsequent reorganization of that
      department resulting in operating savings. Further, in August 2006 the Company
      entered into a supply agreement with Nanogen, a manufacturer of cardiac marker
      devices used in hospitals and laboratories, seeking to augment their product
      with the Company’s drugs of abuse panels. The Company received $25,000 for an
      initial evaluation of this opportunity and development of an integration plan.
      This $25,000 is included as a reduction of expense in R&D during 2006,
      consistent with similar projects conducted in prior years. The initial
      evaluation appeared beneficial to both organizations and development continues.
      The R&D group also focused on: finalizing development of our test for
      Buprenorphine, our more sensitive cocaine test and our Rapid TOX cassette
      product as well as the development of another version of our OralStat product
      to
      be sold as an alternative to the current configuration, and evaluation of
      several new contract manufacturing opportunities.





Selling
      and marketing





Selling
      and marketing expenses were $3,325,000, or 24% of net sales, in 2006, compared
      to $3,345,000, or 26% of net sales in 2005, a decrease of $20,000 or less than
      1%. The slight decrease in expense is primarily due to savings in commissions,
      travel and entertainment related expense, advertising, and trade shows. These
      savings were partially offset by increases in consulting expense and royalty
      expense stemming from the agreement reached with the contract-manufacturing
      customer for whom the RSV test is manufactured. The Company is re-focusing
      its
      resources to grow its inside sales department. Due to attrition and some planned
      reductions of regional sales staff during the third and fourth quarters of
      2006,
      the Company increased the number of individuals in its inside sales group to
      focus on developing more workplace customers. As of December 31, 2006 the
      Company employed 17 sales professionals in total, comprised of a vice president
      of sales & marketing, 6 regional sales representatives, 8 insides sales
      representatives and 2 international sales representatives.




General
      and administrative




General
      and administrative expenses were $2,621,000, or 19% of net sales, in 2006,
      compared to $2,357,000, or 18% of net sales, in 2005, representing an increase
      of $264,000 or 11%. Driving this were increases in investor relations, quality
      assurance, salaries and wages, consulting fees, accounting fees, legal fees
      for
      patents and licenses, fees related to the sublicense entered into during 2005,
      and non-cash compensation. Savings in insurance, legal fees not related to
      patents and licenses, and postage partially offset these increases. Investor
      relations expense increased due to an agreement entered into during the third
      quarter of 2005 with an investor relations firm as well as increased travel
      related expenses. The agreement with the investor relations firm included cash
      payments of $9,000 per month and the issuance of 75,000 shares of common stock.
      The Company terminated this agreement in the fourth quarter of 2006. The common
      stock was issued during December 2005 and resulted in a non-cash expense of
      $88,000 in the fiscal year ended December 31, 2005. In the fourth quarter of
      2006 the Company contracted a new investor relations firm. The agreement is
      month-to-month at a cost of $2,500 per month. Non-cash compensation in 2006
      stems from the issuance of stock options to two employees, the Chief Financial
      Officer and the Vice President of Product Development. Total non-compensation
      expense in 2006 was $37,000.





Management
      believes that the amount of research and development, selling and marketing
      and
      general and administrative costs may increase as the Company creates the
      necessary infrastructure to continue: to develop new products and enhance its
      current products to meet the changing needs of the point of collection testing
      markets, to grow our contract manufacturing operations, promotion of our
      products in our markets, and to institute changes necessary to comply with
      various new public company reporting requirements including but not limited to
      requirements related to internal controls over financial reporting.




21







**LIQUIDITY
      AND CAPITAL RESOURCES AS OF DECEMBER 31, 2006**





The
      Company's cash requirements depend on numerous factors, including product
      development activities, penetration of the direct sales market, market
      acceptance of our new products, and effective management of inventory levels
      in
      response to sales forecasts. The Company expects to devote capital resources
      to
      continue product development, expand manufacturing capacity and continue
      research and development activities. The Company will examine other growth
      opportunities including strategic alliances and expects such activities will
      be
      funded from existing cash and cash equivalents, issuance of additional equity
      or
      additional borrowings, subject to market and other conditions. The Company
      believes that our current cash balances, together with cash generated from
      future operations will be sufficient to fund operations for the next twelve
      months. If cash generated from operations is not sufficient to satisfy the
      Company's working capital and capital expenditure requirements, the Company
      may
      be required to sell additional equity or obtain additional credit facilities.
      There is no assurance that such financing will be available or that the Company
      will be able to complete financing on satisfactory terms, if at all.





The
      Company’s working capital increased $300,000 to $4,856,000 at December 31, 2006,
      compared to $4,556,000 million at December 31, 2005. The Company has
      historically satisfied net working capital requirements through cash from
      operations and occasional proceeds from the exercise of stock options and
      warrants (approximately $600,000 since 2002). The last private placement of
      equity securities with institutional investors took place in August 2001. Net
      income of $196,000 in 2006 compared to a net loss of $376,000 in 2005, together
      with reductions in accounts payable and increases in inventory, offset by
      non-cash expenditures for depreciation and non-cash compensation expense and
      increases in accrued expense resulted in cash provided by operations of $342,000
      for the twelve months ending December 31, 2006. The primary uses of cash during
      2006 were the purchase of inventory components and the purchase of approximately
      $803,000 of property, plant and equipment. Included in operating results in
      2005
      are $225,000 of inventory disposals and an increase in the inventory reserve
      of
      $150,000. The Company has never paid any dividends on its common shares and
      anticipates that all future earnings, if any, will be retained for use in the
      Company's business.





At
      December 31, 2006 and 2005, the Company had cash and cash equivalents of
      $641,000 and $446,000 respectively. In addition, the Company
      has a revolving line of credit in the maximum amount of $875,000 with First
      Niagara Financial Group, Inc. ("FNFG"). The line is not to exceed 70% of
      accounts receivable less than 60 days. The purpose of the line of credit is
      to
      provide working capital. The interest rate is .25% above the FNFG prime rate.
      The Company is required to maintain net worth (stockholders’ equity) greater
      than $5 million and working capital greater than $4 million. Further the Company
      is required to maintain a minimum Debt Service Coverage ratio of not less than
      1.2:1.0 measured at each fiscal year end beginning December 31, 2006. Debt
      Service Coverage Ratio is defined as Net Operating Income divided by Annual
      principal and interest payments on all loans relating to subject property.
      There
      is no requirement for repayment of all principal annually on this line of
      credit. The amount outstanding on this line of credit at December 31, 2006
      was
      $163,000.





The
      Company obtained an additional line of credit from FNFG for $75,000 during
      the
      first quarter of 2006. The line of credit is to be used exclusively for payments
      on a sublicense agreement entered into during the first quarter of 2006. The
      interest rate is .50% above the FNFG prime rate and principal may be repaid
      at
      any time and borrowed again as needed. There is no requirement for repayment
      of
      all principal annually on this line of credit. The Company intends to repay
      the
      funds drawn down on this line within one year to allow borrowing of additional
      amounts related to future payments due under the Sublicense Agreement. The
      amount outstanding on this line of credit at December 31, 2006 was $13,000.
      Both
      lines are secured by all
      of
      the assets and personal property of the Company, wherever located, now owned
      or
      hereafter acquired, including accounts receivable, contract rights, health
      care
      insurance receivables, chattel paper, inventory, equipment, instruments,
      including promissory notes, investment property, documents, deposit accounts,
      general intangibles, including payment intangibles and supporting obligations.





On
      November 6, 2006, the Company closed on a real estate mortgage refinancing
      related to its facility in Kinderhook, New York. The new loan through First
      Niagara Financial Group (“FNFG”) is in the amount of $775,000 and has a term of
      ten (10) years with a twenty (20) year amortization. The interest rate is fixed
      at 7.50% for the first five (5) years. Beginning with year six (6) and through
      the end of the loan term, the rate changes to 2% above the Federal Home Loan
      Bank of New York five (5) year term, fifteen (15) year Amortization Advances
      Rate. The loan is collateralized by the Company's 30,000 square foot facility
      in
      Kinderhook, New York and its personal property. The Company's monthly payment
      will be $6,293 and payments commence on January 1, 2007, with the final payment
      being due on December 1, 2016. The Company received proceeds of $154,000 after
      closing costs and accrued interest, the balance being a refinance of existing
      debt. The cash received was for improvements to the Kinderhook, New York
      property, including repaving of the driveway and parking lot and replacing
      the
      roof. Carl A. Florio, a member of the Company's Board of Directors is an officer
      of FNFG however Mr. Florio was not directly involved in this
      transaction.




22





Prior
      to
      this refinancing, the Company financed the acquisition of its Kinderhook, New
      York facility through a real estate mortgage loan with FNFG, a real estate
      mortgage loan with New York Business Development Corporation (“NYBDC”), and a
      real estate mortgage loan with Columbia Economic Development Corporation
      (“CEDC”). All three of these mortgage loans were paid in full as part of this
      refinancing.





The
      Company received proceeds of $247,000 from the exercise of 260,000 warrants,
      as
      well as $85,000 for the exercise of 100,000 options during 2006.





The
      Company's primary expected short-term capital and working capital needs are:
      to
      make improvements to its manufacturing and production capabilities, maintenance
      of adequate inventory levels to support expected sales, continued support of
      its
      research and development programs, seeking new distribution opportunities and
      focusing sales efforts on high potential sectors of the drugs of abuse testing
      market.





**Effect
      of Recent Accounting Pronouncements**


****


In
      December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
      Payment", ("FAS No. 123(R)"), which amends FAS No. 123, "Accounting for
      Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for
      Stock Issued to Employees". FAS No. 123(R) requires compensation expense to
      be
      recognized for all share-based payments made to employees based on the fair
      value of the award at the date of grant, eliminating the intrinsic value
      alternative allowed by FAS No. 123. Generally, the approach to determining
      fair
      value under the original pronouncement has not changed. However, there are
      revisions to the accounting guidelines established, such as accounting for
      forfeitures, which will change our accounting for stock-based awards in the
      future.





FAS
      No.
      123(R) required adoption in the first interim or annual period beginning after
      December 15, 2005. The statement allows companies to adopt its provisions using
      either of the following transition alternatives:





(i)  The
      modified prospective method, which results in the recognition of compensation
      expense using FAS 123(R) for all share-based awards granted after the effective
      date and the recognition of compensation expense using FAS 123 for all
      previously granted share-based awards that remain unvested at the effective
      date; or





(ii)
      The
      modified retrospective method, which results in applying the modified
      prospective method and restating prior periods by recognizing the financial
      statement impact of share-based payments in a manner consistent with the pro
      forma disclosure requirements of FAS No. 123. The modified retrospective method
      may be applied to all prior periods presented or previously reported interim
      periods of the year of adoption.





ABMC
      adopted FAS No. 123(R) on January 1, 2006 using the modified prospective method.
      Because we previously accounted for share-based payments to our employees using
      the intrinsic value method, our results of operations have not included the
      recognition of compensation expense for the issuance of stock option awards.
      On
      December 14, 2005 the Company accelerated the vesting of all outstanding stock
      options that were not yet fully vested, to that date. Options granted to two
      employees during the second quarter of 2006 were accounted for in accordance
      with FAS No. 123(R).




23





FAS
      No.
      123(R) also requires the benefits of tax deductions in excess of recognized
      compensation cost, to be reported as a financing cash flow, rather than as
      an
      operating cash flow as required under current literature. This requirement
      may
      reduce our net operating cash inflows and increase our net financing cash flows
      in periods after adoption. The impact that this change in reporting will have
      on
      future periods cannot be determined at this time because the benefit recognized
      is dependent upon attributes that vary for each option exercise.





In
      May
      2005, the FASB issued FAS No. 154. "Accounting Changes and Error Corrections”
which replaced APB Opinion No. 20 and FASB Statement No. 3, "Reporting
      Accounting Changes in Interim Financial Statements", and changes the
      requirements for the accounting for and reporting of a change in accounting
      principle. This statement became effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      FAS No. 154 requires retrospective application to prior periods’ financial
      Statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. This Statement defines retrospective application as the application
      of a
      different accounting principle to prior accounting periods as if that principle
      had always been used or as the adjustment of previously issued financial
      statements to reflect a change in the reporting entity. FAS No. 154 also
      requires that a change in depreciation, amortization, or depletion method for
      long-lived, non-financial assets be accounted for as a change in accounting
      estimate effected by a change in accounting principle. The Company does not
      believe that the adoption of FAS No. 154 will have a significant effect on
      its
      financial statements.





In
      September 2006 the FASB issued FAS No. 157 "Fair Value Measurements". FAS No.
      157 defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the FASB having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. The Company does not believe that the
      adoption of FAS No. 157 will have a significant effect on its financial
      statements.





In
      June
      2006 the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes—an
      interpretation of FASB Statement No. 109”. This Interpretation clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with FASB Statement No. 109, “Accounting for
      Income Taxes” *.* This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition.





The
      evaluation of a tax position in accordance with this Interpretation is a
      two-step process. The first step is recognition: The enterprise determines
      whether it is more likely than not that a tax position will be sustained upon
      examination, including resolution of any related appeals or litigation
      processes, based on the technical merits of the position. In evaluating whether
      a tax position has met the more-likely-than-not recognition threshold, the
      enterprise should presume that the position will be examined by the appropriate
      taxing authority that would have full knowledge of all relevant information.
      The
      second step is measurement: A tax position that meets the more-likely-than-not
      recognition threshold is measured to determine the amount of benefit to
      recognize in the financial statements. The tax position is measured at the
      largest amount of benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement.





Differences
      between tax positions taken in a tax return and amounts recognized in the
      financial statements will generally result in one of the following:




a.
            An
                increase in a liability for income taxes payable or a reduction of
                an
                income tax refund receivable




b.
            A
                reduction in a deferred tax asset or an increase in a deferred tax
                liability




c.
            Both
                (a) and (b).




24




An
      enterprise that presents a classified statement of financial position should
      classify a liability for unrecognized tax benefits as current to the extent
      that
      the enterprise anticipates making a payment within one year or the operating
      cycle, if longer. An income tax liability should not be classified as a deferred
      tax liability unless it results from a taxable temporary difference (that is,
      a
      difference between the tax basis of an asset or a liability as calculated using
      this Interpretation and its reported amount in the statement of financial
      position). This Interpretation does not change the classification requirements
      for deferred taxes.





Tax
      positions that previously failed to meet the more-likely-than-not recognition
      threshold should be recognized in the first subsequent financial reporting
      period in which that threshold is met. Previously recognized tax positions
      that
      no longer meet the more-likely-than-not recognition threshold should be
      derecognized in the first subsequent financial reporting period in which that
      threshold is no longer met. Use of a valuation allowance as described in
      Statement 109 is not an appropriate substitute for the derecognition of a tax
      position. The requirement to assess the need for a valuation allowance for
      deferred tax assets based on the sufficiency of future taxable income is
      unchanged by this Interpretation. The Company does not believe that the adoption
      of FIN 48 will have a significant effect on its financial
      statements.





In
      September 2006 the Securities and Exchange Commission issued Staff Accounting
      Bulletin (SAB) 108. The
      interpretation expresses the staff’s views regarding the process of quantifying
      financial statement misstatements. The staff is aware that certain registrants
      do not consider the effects of prior year errors on current year financial
      statements, thereby allowing improper assets or liabilities to remain
      unadjusted. While these errors may not be material if considered only in
      relation to the balance sheet, correcting the errors could be material to the
      current year income statement. The interpretations in this Staff Accounting
      Bulletin were issued to address diversity in practice in quantifying financial
      statement misstatements and the potential under current practice for the build
      up of improper amounts on the balance sheet.





SAB
      108
      notes that a materiality evaluation must be based on all relevant quantitative
      and qualitative factors. This analysis generally begins with quantifying
      potential misstatements to be evaluated. The diversity in approaches for
      quantifying the amount of misstatements primarily stems from the effects of
      misstatements that were not corrected at the end of the prior year (“prior year
      misstatements”). These prior year misstatements should be considered in
      quantifying misstatements in current year financial statements.





If
      the
      misstatement that exists after recording the adjustment in the current year
      financial statements is material (considering all relevant quantitative and
      qualitative factors), the prior year financial statements should be corrected,
      even though such revision previously was and continues to be immaterial to
      the
      prior year financial statements. Correcting prior year financial statements
      for
      immaterial errors would not require previously filed reports to be
      amended.  Such correction is permitted to be made the next time the
      registrant files the prior year financial statements.





To
      provide full disclosure, registrants electing not to restate prior periods
      should reflect the effects of initially applying this guidance in their annual
      financial statements covering the first fiscal year ending after November 15,
      2006. The cumulative effect of the initial application should be reported in
      the
      carrying amounts of assets and liabilities as of the beginning of that fiscal
      year, and the offsetting adjustment should be made to the opening balance of
      retained earnings for that year. Registrants should disclose the nature and
      amount of each individual error being corrected in the cumulative adjustment.
      The disclosure should also include when and how each error being corrected
      arose
      and the fact that the errors had previously been considered
      immaterial.





Prior
      to
      SAB 108, the Company used the “roll-over” method for accounting for audit
      differences. It was determined that under the rollover method, a vacation
      accrual was not material to the financial statements taken as a whole in any
      given year. At December 31, 2006 unpaid vacation was estimated to be
      approximately $80,000, which is material to the F/S under the SAB 108. This
      liability of $80,000 has accumulated steadily over a ten-year period. A
      change
      in accounting principle has been recorded in 2006 financial statements that
      has
      not been previously recorded. The adjustment is included in the beginning
      balances (December 31, 2005) of wages payable and the accumulated deficit.




25




**ITEM
      7.****FINANCIAL
      STATEMENTS**





The
      Company's Financial Statements are set forth beginning on page F-1.


**ITEM
                  **8.****
                **CHANGES IN AND DISAGREEMENTS
                    WITH
                    ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                    DISCLOSURE**


None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





On
      March
      9, 2007, American Bio Medica Corporation carried out an evaluation, under the
      supervision and with the participation of the Chief Financial Officer and the
      Chief Executive Officer, to evaluate the effectiveness of the disclosure
      controls and procedures (as defined in Rule 13a-15(e) under the Securities
      Exchange Act of 1934, as amended ("Exchange Act")). Based on that evaluation,
      the Chief Financial Officer and the Chief Executive Officer have concluded
      that
      American Bio Medica Corporation's disclosure controls and procedures as of
      December 31, 2006, are effective for recording, processing, summarizing, and
      reporting information that is required to be disclosed in their reports under
      the Exchange Act, as amended, within the time periods specified in the
      Securities and Exchange Commission's rules and forms.





There
      were no changes in American Bio Medica Corporation’s internal controls over
      financial reporting during the fourth quarter that have materially affected,
      or
      are reasonably likely to materially affect, American Bio Medica Corporation’s
      internal control over financial reporting. The Company may be required to hire
      additional finance personnel and/or contract experts in 2007 to assist with
      ensuring compliance with the internal control and financial reporting
      requirements of Sarbanes Oxley Act of 2002.





**ITEM
      8B. OTHER INFORMATION**





None.





**PART
      III**





**ITEM
              **9.****
            **DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
                COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
                ACT**




The
      information required by this item is contained in our definitive Proxy Statement
      with respect to our Annual Meeting of Shareholders for the fiscal year ending
      December 31, 2006, 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
      10.****EXECUTIVE
      COMPENSATION**





The
      information required by this item is contained in our definitive Proxy Statement
      with respect to our Annual Meeting of Shareholders for the fiscal year ending
      December 31, 2006, under the caption “Executive Compensation”, and is
      incorporated herein by reference.





**ITEM
              **11.****
            **SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS**





The
      information required by this item is contained within Item 5. **** Market
      for Common Equity and Related Stockholders Matters earlier in this Annual Report
      on Form 10-KSB and in our definitive Proxy Statement with respect to the Annual
      Meeting of Shareholders for the fiscal year ending December 31, 2006, under
      the
      caption “Security Ownership of Management and Certain Beneficial Owners” and is
      incorporated herein by reference.




26


**ITEM
                **12.****
              **CERTAIN RELATIONSHIPS
                  AND RELATED
                  TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE**


The
      information required by this item is contained in our definitive Proxy Statement
      with respect to the Annual Meeting of Shareholder for the fiscal year ending
      December 31, 2006, under the caption “Certain Relationships and Related
      Transactions” and “Independent Directors”, and is incorporated herein by
      reference.





Item
      13.Exhibits





(a)
      Exhibits




27





**Number**
            
            **Description
                of Exhibits**3.5
            
            Bylaws(1)3.50
            
            Amended
                and Restated Bylaws(5)3.6
            
            Fifth
                amendment to the Certificate of Incorporation (filed as Exhibit 3.6
                to the
                Company’s Form SB-2 filed on November 21, 1996 and incorporated herein by
                reference)3.7
            
            Sixth
                amendment to the Certificate of Incorporation(5)4.2
            
            Investor
                Registration Rights Agreement, dated August 22, 2001, among American
                Bio
                Medica Corporation and the investors(4)4.3
            
            Placement
                Agent Registration Rights Agreement, dated August 22, 2001, among
                American
                Bio Medica Corporation and the placement agent and its
                sub-agents(4)4.4
            
            Form
                of Warrant Agreement and Warrant among American Bio Medica Corporation
                and
                the investors(4)4.5
            
            Form
                of Warrant Agreement and Warrant among American Bio Medica Corporation
                and
                the placement agent and its sub-agents(4)4.6
            
            Fiscal
                1997 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
                Statement for its Fiscal 1997 Annual Meeting and incorporated herein
                by
                reference) (a)4.7
            
            Services
                Agreement dated September 7, 2005 by and between the Company and
                Barretto
                Pacific Corporation(10)4.8
            
            Stock
                Grant Agreement dated September 7, 2005 by and between the Company
                and
                Barretto Pacific Corporation(10)4.14
            
            Fiscal
                1998 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
                Statement for its Fiscal 1998 Annual Meeting and incorporated herein
                by
                reference) (a)4.15
            
            Fiscal
                2000 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
                Statement for its Fiscal 2000 Annual Meeting and incorporated herein
                by
                reference) (a)4.16
            
            Common
                Stock Purchase Agreement dated April 28, 2000 by and between the
                Company
                and Seaside Partners, L.P.(2)4.17
            
            Fiscal
                2001 Nonstatutory Stock Option Plan (filed as part of the Company’s Proxy
                Statement for its Fiscal 2002 Annual Meeting and incorporated herein
                by
                reference) (a)4.18
            
            Extension
                Agreement by and between the Company and Steven Grodko4.19
            
            Registration
                Letter Agreement by and between the Company and Steven
                Grodko10.3
            
            Term
                Note with First Niagara Bank(11)10.6
            
            Contract
                of Sale dated May 19, 1999/Kinderhook, New York facility(2)10.7
            
            Agreement
                of Lease dated May 13, 1999/Kinderhook, New York facility(2)10.8
            
            Lease
                dated August 1, 1999/New Jersey facility(2)10.9
            
            Amendment
                dated March 23, 2001 to Lease dated August 1, 1999/New Jersey
                facility(3)10.10
            
            Amended
                Contract of Sale dated May, 2001/Kinderhook, New York facility(3)10.11
            
            Financial
                Advisory Agreement dated May 2, 2001 by and between Brean Murray
&
                Co., Inc. and the Company(3)10.12
            
            Employment
                contract between the Company and Robert L. Aromando, Jr. (a)(3)10.13
            
            Employment
                contract between the Company and Stan Cipkowski (a)(3)10.14
            
            Employment
                contract between the Company and Douglas Casterlin (a)(3)10.15
            
            Employment
                contract between the Company and Keith E. Palmer (a)(3)10.16
            
            Warrant
                Agreement dated November 15, 2001 by and between the Company and
                Hudson
                River Bank & Trust Company(5)10.17
            
            Amendment
                No.3 dated August 20, 2002/New Jersey facility(6)10.18
            
            Employment
                contract between the Company and Gerald A. Moore (a)(6)10.19
            
            Financial
                Advisory Agreement dated December 2, 2003 by and between Brean Murray
                & Co., Inc and the Company(7)10.19.1
            
            Settlement
                letter dated June 21, 2004 by and between Bran Murray & Co., Inc and
                the Company(8)10.20
            
            Contract
                of Sale/land-Kinderhook, NY facility(7)10.21
            
            Employment
                contract between the Company and Stan Cipkowski(a),(7)10.22
            
            Employment
                contract between the Company and Stan Cipkowski(a),(9)


10.23
            
            Employment
                contract between the Company and Stan Cipkowski(12)10.24
            
            Employment
                contract between the Company and Keith E. Palmer(12)10.25
            
            Amendment
                No 4 dated October 9, 2006/Lease of New Jersey facility10.26
            
            Amendment
                No. 5 dated January 19, 2007/Lease of New Jersey
                facility31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Executive
                Officer31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of the Chief Financial
                Officer32.1
            
            Section
                1350 Certification of the Chief Executive Officer32.2
            
            Section
                1350 Certification of the Chief Financial
                Officer


a)
              indicates
                  an employee benefit plan, management contract or compensatory plan
                  or
                  arrangement in which a named executive officer
                  participates.




28


(1)
              Filed
                  as the exhibit number listed to the Company’s Form 10-SB filed on November
                  21, 1996 and incorporated herein by reference.
  (2)
              Filed
                  as the exhibit number listed to the Company’s Form 10-KSB filed on August
                  11, 2000 and incorporated herein by
                  reference.
  (3)
              Filed
                  as the exhibit number listed to the Company’s Form 10-KSB filed on August
                  13, 2001 and incorporated herein by
                  reference.
  (4)
              Filed
                  as the exhibit number listed to the Company’s Form S-3 filed on September
                  26, 2001 and incorporated herein by
                  reference.
  (5)
              Filed
                  as the exhibit number listed to the Company’s Form 10-KSB filed on April
                  15, 2002 and incorporated herein by
                  reference.
  (6)
              Filed
                  as the exhibit number listed to the Company’s Form 10-KSB filed on March
                  31, 2003 and incorporated herein by
                  reference.
  (7)
              Filed
                  as the exhibit number listed to the Company’s Form 10-KSB filed on May 10,
                  2004 and incorporated herein by
                  reference.
  (8)
              Filed
                  as the exhibit number listed to the Company’s Form 10-QSB filed August 10,
                  2004 and incorporated herein by
                  reference.
  (9)
              Filed
                  as the exhibit number listed to the Company’s Form 10-QSB filed on
                  November 12, 2004 and incorporated herein by
                  reference.
  (10)
              Filed
                  as the exhibit number listed to the Company’s Form 10-QSB filed on
                  November 8, 2005 and subsequently amended on Form 10-QSB/A filed
                  on
                  February 24, 2006 and incorporated herein by
                  reference.
  (11)
              Filed
                  as the exhibit number listed to the Company’s Form 8-K filed on January
                  24, 2007 and incorporated herein by
                  reference.
  (12)
              Filed
                  as the exhibit number listed to the Company’s Form 10-KSB filed on March
                  31, 2006 and incorporated herein by
                  reference.




**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**





The
      information required by this item is contained in our definitive Proxy Statement
      with respect to the Annual Meeting of Shareholder for the fiscal year ending
      December 31, 2006, under the caption “Independent Public Accountants”, and is
      incorporated herein by reference.




29




**AMERICAN
        BIO MEDICA CORPORATION**
  **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/ Keith
              E.
              PalmerKeith
              E. PalmerChief
              Financial Officer(Principal
                Accounting Officer)Executive
                Vice President, Finance**Date:**March
                29, 2007





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 29, 2007 **:**




/s/
                  Stan Cipkowski
              
              Chief
                  Executive Officer & DirectorStan
                  Cipkowski
              
              (Principal
                  Executive Officer)/s/
                  Edmund Jaskiewicz
              
              Chairman
                  and PresidentEdmund
                  Jaskiewicz/s/Richard
                  P. Koskey
              
              DirectorRichard
                  P. Koskey/s/
                  Daniel W. Kollin
              
              DirectorDaniel
                  W. Kollin/s/
                  Anthony G. Costantino
              
              DirectorAnthony
                  G. Costantino/s/
                  Carl A. Florio
              
              DirectorCarl
                  A. Florio/s/
                  Keith E. Palmer
              
              Chief
                  Financial OfficerKeith
                  E. Palmer
              
              (Principal
                  Financial Officer)
                  Executive
                    Vice President, Finance




S-1





**AMERICAN
      BIO MEDICA CORPORATION**





**INDEX
      TO FINANCIAL STATEMENTS AND NOTES TO FINANCIAL STATEMENTS**




**PAGE**Report
                of Independent Registered Public Accounting Firm
            
            
            F-2Balance
                Sheets
            
            
            F-3Statements
                of Operations
            
            
            F-4State
                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, 2006 and 2005, 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. An audit includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements. An audit also includes assessing the accounting
      principles used and significant estimates made by management, as well as
      evaluating the overall financial statement presentation. We believe that our
      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, 2006 and 2005, 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.





/s/
                UHY LLPAlbany,
                New YorkMarch
                28, 2007


F-2




AMERICAN
      BIO MEDICA
      CORPORATION




**Balance
      Sheets**




**December
                31,**
            
            **December
                31,****2006**
            
            **2005****ASSETS**Current
                assetsCash
                and cash equivalents
            
            $
            641,000
            
            $
            446,000Accounts
                receivable - net of allowance for doubtful accounts of $105,000 at
                December 31, 2006 and 2005
            
            
            1,313,000
            
            
            1,370,000Inventory
                - net of reserve for slow moving and obsolete inventory of $250,000
                at
                December 31, 2006 and 2005
            
            
            4,859,000
            
            
            4,444,000Prepaid
                and other current assets
            
            
            165,000
            
            
            109,000Total
                current assets
            
            
            6,978,000
            
            
            6,369,000Property,
                plant and equipment, net
            
            
            1,982,000
            
            
            1,562,000Other
                assets
            
            
            57,000
            
            
            7,000Total
                Assets
            
            $
            9,017,000
            
            $
            7,938,000**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                liabilitiesAccounts
                payable
            
            $
            1,091,000
            
            $
            1,380,000Accrued
                expenses
            
            
            509,000
            
            
            130,000Wages
                payable
            
            
            269,000
            
            
            257,000Note
                payable
            
            
            
            
            
            7,000Patent
                sublicense current
            
            
            50,000Line
                of credit
            
            
            176,000Current
                portion of long term debt
            
            
            17,000
            
            
            29,000Current
                portion of unearned grant
            
            
            10,000
            
            
            10,000Total
                current liabilities
            
            
            2,122,000
            
            
            1,813,000Patent
                sub-license non-current
            
            
            50,000Long-term
                debt
            
            
            758,000
            
            
            592,000Unearned
                grant
            
            
            50,000
            
            
            60,000Total
                liabilities
            
            
            2,980,000
            
            
            2,465,000Commitments
                and contingenciesStockholders'
                equity:Preferred
                stock; par value $.01 per share; 5,000,000 shares authorized, none
                issued
                and outstandingCommon
                stock; par value $.01 per share; 50,000,000 shares authorized; 21,719,768
                shares issued and outstanding at December 31, 2006 and 21,359,768
                shares
                issued and outstanding at December 31, 2005
            
            
            217,000
            
            
            214,000Additional
                paid-in capital
            
            
            19,218,000
            
            
            18,853,000Accumulated
                deficit
            
            
            (13,398,000
            )
            
            (13,594,000
            )Total
                stockholders’ equity
            
            
            6,037,000
            
            
            5,473,000Total
                liabilities and stockholders’ equity
            
            $
            9,017,000
            
            $
            7,938,000




*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,**
              **2006**
            
            **For
                the Year Ended December 31,**
              **2005**Net
                sales
            
            $
            13,838,000
            
            $
            13,015,000Cost
                of goods sold
            
            
            7,035,000
            
            
            6,970,000Gross
                profit
            
            
            6,803,000
            
            
            6,045,000Operating
                expenses:Research
                and development
            
            
            606,000
            
            
            683,000Selling
                and marketing
            
            
            3,325,000
            
            
            3,345,000General
                and administrative
            
            
            2,621,000
            
            
            2,357,000Operating
                income (loss)
            
            
            251,000
            
            
            (340,000
            )Other
                income (expense):Other
                income
            
            
            10,000
            
            
            15,000Interest
                income
            
            
            7,000
            
            
            5,000Interest
                expense
            
            
            (67,000
            )
            
            (55,000
            )**Income
                (loss) before tax**
            
            
            201,000
            
            
            (375,000
            )Income
                tax
            
            
            (5,000
            )
            
            (1,000
            )**Net
                income (loss) after tax**
            
            $
            196,000
            
            $
            (376,000
            )**Basic
                and diluted income (loss) per common share**
            
            $
            .01
            
            $
            (.02
            )Weighted
                average number of shares outstanding - basic
            
            
            21,484,000
            
            
            21,310,000Dilutive
                effect of stock options and warrants
            
            
            89,000
            
            
            122,000Weighted
                average number of sharesoutstanding
                -diluted
            
            
            21,573,000
            
            
            21,432,000




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




F-4


AMERICAN
      BIO MEDICA
      CORPORATION




**Statements
      of Changes in Stockholders’ Equity**





**Common
                Stock**
            
            **Additional**
              **Paid-in**
            
            **Accumulated****Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Total****Balance-December
                31, 2004**
            
            
            **21,282,268**
            
            **$**
            **213,000**
            
            **$**
            **18,763,000**
            
            **$**
            (13,138,000
            )
            **$**
            **5,838,000**Stock
                Option/Warrant Exercise
            
            
            2,500
            
            
            
            
            
            3,000
            
            
            
            
            
            3,000Stock
                issued for investor relations advisory services
            
            
            75,000
            
            
            1,000
            
            
            87,000
            
            
            
            
            
            88,000Cumulative
                effect adjustment (Note A[13])
            
            
            
            
            
            
            
            
            
            
            
            (80,000
            )
            
            (80,000
            )Net
                (loss)
            
            
            
            
            
            
            
            
            
            
            
            (376,000
            )
            
            (376,000
            )**Balance-December
                31, 2005**
            
            
            **21,359,768**
            
            **$**
            **214,000**
            
            **$**
            **18,853,000**
            
            **$**
            (13,594,000
            )
            **$**
            **5,473,000**Stock
                Option/Warrant Exercise
            
            
            360,000
            
            
            3,000
            
            
            328,000
            
            
            
            
            
            331,000Non-cash
                compensation
            
            
            
            
            
            
            
            
            37,000
            
            
            
            
            
            37,000Net
                income
            
            
            
            
            
            
            
            
            
            
            
            196,000
            
            
            196,000**Balance-December
                31, 2006**
            
            
            **21,719,768**
            
            **$**
            217,000
            
            **$**
            **19,218,000**
            
            **$**
            (13,398,000
            )
            **$**
            **6,037,000**




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





F-5




**AMERICAN
      BIO MEDICA CORPORATION**


**Statements
      of Cash Flows**




**Year
                Ended**
            
            **Year
                Ended****December
                31,**
            
            **December
                31,****2006**
            
            **2005****Cash
                flows from operating activities:**Net
                Income
            
            $
            196,000
            
            $
            (376,000
            )Adjustments
                to reconcile net income to net cash provided by / (used in) operating
                activities:Depreciation
            
            
            376,000
            
            
            378,000Provision
                for slow moving and obsolete inventory
            
            
            
            
            
            150,000Compensatory
                stock and stock options
            
            
            37,000
            
            
            88,000Unearned
                grant
            
            
            (10,000
            )
            
            (15,000
            )Changes
                in:Accounts
                receivable
            
            
            58,000
            
            
            (262,000
            )Other
                assets
            
            
            
            
            
            (1,000
            )Inventory
            
            
            (408,000
            )
            
            (255,000
            )Prepaid
                expenses
            
            
            (8,000
            )
            
            13,000Accounts
                payable
            
            
            (288,000
            )
            
            23,000Accrued
                expenses
            
            
            378,000
            
            
            (49,000
            )Wages
                payable
            
            
            11,000
            
            
            (66,000
            )Net
                cash provided by (used in) operating activities
            
            
            342,000
            
            
            (372,000
            )**Cash
                flows from investing activities:**Purchase
                of property, plant and equipment
            
            
            (803,000
            )
            
            (133,000
            )Net
                cash used in investing activities
            
            
            (803,000
            )
            
            (133,000
            )**Cash
                flows from financing activities:**Proceeds
                from stock option exercise
            
            
            85,000Proceeds
                from warrant exercise
            
            
            247,000
            
            
            3,000Proceeds
                from convertible grant
            
            
            
            
            
            25,000Proceeds
                from line of credit
            
            
            176,000Proceeds
                from debt financing
            
            
            775,000Payments
                on debt financing
            
            
            (627,000
            )
            
            (71,000
            )Net
                cash provided by (used in) financing activities
            
            
            656,000
            
            
            (43,000
            )**Net
                increase (decrease) in cash and cash equivalents**
            
            
            195,000
            
            
            (548,000
            )Cash
                and cash equivalents - beginning of period
            
            
            446,000
            
            
            995,000Cash
                and cash equivalents - end of period
            
            $
            641,000
            
            $
            446,000**Supplemental
                disclosures of cash flow information:**Cash
                paid during the year for:Interest
            
            $
            67,000
            
            $
            54,000




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





F-6




**AMERICAN
        BIO MEDICA CORPORATION**  Notes
          to
          Financial Statements
 December
          31, 2006


**NOTE
      A - THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES**




The
      Company:




American
      Bio Medica Corporation (“ABMC” or the “Company”) was incorporated in the State
      of New York on April 10, 1986 and is in the business of developing,
      manufacturing, and marketing point of collection diagnostics test kits.




For
      the
      years ended December 31, 2006 and 2005, the Company had a net income of $196,000
      and net loss of $376,000 respectively, and had net cash provided by operating
      activities of $342,000 in 2006 and net cash used operating activities of
      $372,000 in 2005. The Company increased cash balances by $195,000 during the
      twelve months ended December 31, 2006 and decreased cash balances by $548,000
      during the twelve months ended December 31, 2005. The Company anticipates
      improvements in efficiency to lower the costs to manufacture products as
      improvements are made in the assembly processes, including initial steps taken
      in 2006 to automate the assembly of the Company’s newest product line Rapid TOX.
      As of December 31, 2006, the Company had an accumulated deficit of $13,398,000.





The
      Company believes that its current cash balances, and cash generated from future
      operations will be sufficient to fund operations for the next twelve months.
      If
      cash generated from operations is insufficient to satisfy the Company's working
      capital and capital expenditure requirements, the Company may be required to
      sell additional equity or obtain additional credit facilities. There is no
      assurance that such financing will be available or that the Company will be
      able
      to complete financing on satisfactory terms, if at all.


******


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 trade receivables due from customers for the sale of
      our
      products.  Payment terms vary on a customer-by-customer basis, and
      generally range from cash on delivery to net, 90 days.  Receivables are
      considered past due when it has exceeded its payment terms.  Accounts
      receivable have been reduced by an estimated allowance for doubtful
      accounts.  We estimate our 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.




**[3]**
            **Inventory:**




Inventory
      is stated at the lower of cost or market. Labor and overhead are determined
      on
      an average cost basis and raw materials are determined on a first-in-first-out
      method. The Company has established an allowance of $250,000 for slow moving
      and
      obsolete inventory.




**[4]**
            **Income
                taxes:**




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




F-7




**AMERICAN
      BIO MEDICA
      CORPORATION**


Notes
      to
      Financial Statements


December
      31, 2006




**[5]**
            **Depreciation:**




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




**[6]**
            **Revenue
                recognition:**




The
      Company recognizes revenue when title transfers upon shipment. Sales are
      recorded net of discounts and returns. No obligation on the part of ABMC exists
      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 the obligation is not contingent on the resale of the product. The buyer's
      obligation would not be changed in the event of theft or physical destruction
      or
      damage to the product. Buyers acquiring the product for resale (i.e.
      distributor/wholesaler) have economic substance apart from that provided by
      the
      Company and the Company does not have significant obligations for future
      performance to directly bring about the resale of 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. All shipping and handling costs
      not
      recovered from customers are reported in selling and marketing expense.




**[8]**
            **Research
                and development:**




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




**[9]**
            **Income
                per common share:**




Basic
      income per common share is calculated by dividing net income by the weighted
      average number of outstanding common shares during the period. For the year
      ended December 31, 2006 diluted net income per share includes the dilutive
      effect of 1,142,000 stock options and 0 warrants. For the year ended December
      31, 2005, diluted net income per share includes the dilutive effect of 1,317,000
      stock options and 400,000 warrants.




Potential
      common shares outstanding as of December 31, 2006 and 2005:





**December
                31, 2006**
            
            **December
                31, 2005****Warrants**
            
            
            150,000
            
            
            2,223,420**Options**
            
            
            3,993,080
            
            
            4,268,080





For
      the
      twelve months ended December 31, 2006 the number of securities not included
      in
      the diluted EPS, because the effect would have been anti-dilutive, were
      3,001,080. For the twelve months ended December 31, 2005 the number of
      securities not included in the diluted EPS, because the effect would have been
      anti-dilutive, were 4,774,500. The securities would have been anti-dilutive
      because the exercise price of the securities was greater than the average market
      price of the Company’s common shares for each of the fiscal years ended December
      31, 2006 and 2005.




F-8




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




**[10]
      Use of estimates:**




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




**[11]**  **Impairment
      of long-lived assets:**




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




**[12]**
            **Financial
                Instruments:**




The
      carrying amounts of cash and cash equivalents, accounts receivable - net, other
      receivables, accounts payable, accrued expenses, and long term debt 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.




**[13]**
            **Accounting
                for stock-based
                compensation:**




In
      accordance with SFAS No. 123 (revised 2004), *Share
      Based Payment* ,
      the
      Company began to recognize compensation expense for stock options on January
      1,
      2006. The weighted average fair value of options granted during the twelve
      months ended December 31, 2006 and 2005 was approximately $0.85 and $0.73,
      respectively.




The
      following schedule reflects the pro forma impact for 2005 on net income and
      earnings per common share of accounting for our stock option grants using
      SFAS No. 123, *Accounting
      for Stock-Based Compensation* ,
      which
      would result in the recognition of compensation expense for the fair value
      of
      stock option grants. There is no pro-forma impact on 2006 as
      SFAS No. 123 (revised 2004) was adopted January 1, 2006:





**Year
                ended**
              **December
                31,**
            
            **Year
                ended**
              **December
                31,****2006**
            
            **2005**Net
                Income/(loss):As
                reported
            
            $
            196,000
            
            $
            (376,000
            )Pro
                forma
            
            
            196,000
            
            
            (1,331,000
            )Basic
                and fully diluted income/(loss) per shareAs
                reported
            
            $
            .01
            
            $
            (.02
            )Pro
                forma
            
            $
            .01
            
            $
            (.06
            )




F-9




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




**Year
                ended**
              **December
                31,**
            
            **Year
                ended**
              **December
                31,****2006**
            
            **2005**Net
                Income, as reported
            
            $
            196,000
            
            $
            (376,000
            )Stock-based
                employee compensation expense, determined under fair valuebased
                method for all awards
            
            $
            0
            
            $
            (955,000
            )Proforma
                net (loss)
            
            $
            196,000
            
            $
            (1,331,000
            )





The
      fair
      value of our stock option grants in the table above was estimated utilizing
      the
      Black-Scholes option-pricing model. The following weighted average assumptions
      were used: dividend yield of zero percent; risk-free interest rates, which
      vary
      for each grant, ranging from 4.26% to 5.15%; expected life of ten years for
      all
      grants; and stock price volatility ranging from 72% to 75%. Black-Scholes is
      a
      formula that calculates an estimated value of stock options based on
      appreciation and interest rate assumptions. Therefore, the fair value
      calculation of a stock option using Black-Scholes is not necessarily indicative
      of the actual value of a stock option.




On
      December 14, 2005 the Company accelerated the vesting date of all outstanding
      stock options, issued prior to that date, that were not yet fully vested, to
      that date. Two employees were granted stock options on June 13, 2006, the Chief
      Financial Officer and the Vice President of Product Development. The exercise
      price of the options was the same as the closing price of the stock on the
      day
      of the grant. The calculated fair value of the options was $.85 per option
      and
      assumed no forfeitures. The value of these grants totaled $63,000, which is
      being amortized over the vesting period of one year from the date of grant.
      Total expense included in 2006 was $37,000. The remaining $26,000 is included
      in
      deferred non-cash compensation.




**[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, 2006, one customer accounted for 16% of
      total accounts receivable-net. This customer, Wampole Laboratories, subsequently
      paid $156,000 in the first quarter of 2007. Wampole is the distributor of the
      RSV test, a test manufactured by ABMC under a contract manufacturing agreement
      with Integrated Bio Technology Corporation. The outstanding balance was current
      at December 31, 2006 and resulted from several large shipments in December
      2006.
      No customer represents more than 10% of accounts receivable-net at December
      31,
      2005. The Company establishes an allowance for doubtful accounts based on
      factors surrounding the credit risk of specific customers and other
      information.




The
      Company maintains certain cash balances at a financial institution that is
      federally insured and at times the balances have exceeded federally insured
      limits.




**[15]**
            **Reporting
                comprehensive income:**




The
      Company reports comprehensive income in accordance with the provisions of SFAS
      No. 130, Reporting Comprehensive Income. The provisions of SFAS No. 130 require
      the Company to report the change in the Company's equity during the period
      from
      transactions and events other than those resulting from investments by, and
      distributions to, the shareholders.  For the
      years ended December 31, 2006 and 2005 comprehensive income was the same as
      net
      income.




F-10




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




**[16]**
            **Reclassifications:**




Certain
      items have been reclassified from the prior years to conform to the current
      year
      presentation.




**[17]**
            **New
                accounting pronouncements:**




In
      December 2004, the FASB issued FAS No. 123 (revised 2004), "Share-Based
      Payment", ("FAS No. 123(R)"), which amends FAS No. 123, "Accounting for
      Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for
      Stock Issued to Employees". FAS No. 123(R) requires compensation expense to
      be
      recognized for all share-based payments made to employees based on the fair
      value of the award at the date of grant, eliminating the intrinsic value
      alternative allowed by FAS No. 123. Generally, the approach to determining
      fair
      value under the original pronouncement has not changed. However, there are
      revisions to the accounting guidelines established, such as accounting for
      forfeitures, which will change our accounting for stock-based awards in the
      future.




FAS
      No.
      123(R) required adoption in the first interim or annual period beginning after
      December 15, 2005. The statement allows companies to adopt its provisions using
      either of the following transition alternatives:





(i)
            The
                modified prospective method, which results in the recognition of
                compensation expense using FAS 123(R) for all share-based awards
                granted
                after the effective date and the recognition of compensation expense
                using
                FAS 123 for all previously granted share-based awards that remain
                unvested
                at the effective date; or




(ii)
            The
                modified retrospective method, which results in applying the modified
                prospective method and restating prior periods by recognizing the
                financial statement impact of share-based payments in a manner consistent
                with the pro forma disclosure requirements of FAS No. 123. The modified
                retrospective method may be applied to all prior periods presented
                or
                previously reported interim periods of the year of
                adoption.




ABMC
      adopted FAS No. 123(R) on January 1, 2006 using the modified prospective method.
      Because we previously accounted for share-based payments to our employees using
      the intrinsic value method, our results of operations have not included the
      recognition of compensation expense for the issuance of stock option awards.
      On
      December 14, 2005 the Company accelerated the vesting of all outstanding stock
      options that were not yet fully vested, to that date. Options granted to two
      employees during the second quarter of 2006 and were accounted for in accordance
      with FAS No. 123(R).




FAS
      No.
      123(R) also requires the benefits of tax deductions, in excess of recognized
      compensation cost, be reported as a financing cash flow, rather than as an
      operating cash flow as required under current literature. This requirement
      may
      reduce our net operating cash inflows and increase our net financing cash flows
      in periods after adoption. The impact that this change in reporting will have
      on
      future periods cannot be determined at this time because the benefit recognized
      is dependent upon attributes that vary for each option exercise.




In
      May
      2005, the FASB issued FAS No. 154. "Accounting Changes and Error Corrections”
which replaced APB Opinion No. 20 and FASB Statement No. 3, "Reporting
      Accounting Changes in Interim Financial Statements", and changes the
      requirements for the accounting for and reporting of a change in accounting
      principle. This statement became effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      FAS No. 154 requires retrospective application to prior periods’ financial
      Statements of changes in accounting principle, unless it is impracticable to
      determine either the period-specific effects or the cumulative effect of the
      change. This Statement defines retrospective application as the application
      of a
      different accounting principle to prior accounting periods as if that principle
      had always been used or as the adjustment of previously issued financial
      statements to reflect a change in the reporting entity. FAS No. 154 also
      requires that a change in depreciation, amortization, or depletion method for
      long-lived, non-financial assets be accounted for as a change in accounting
      estimate effected by a change in accounting principle. The Company does not
      believe that the adoption of FAS No. 154 will have a significant effect on
      its
      financial statements.




F-11




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




In
      September 2006 the FASB issued FAS No. 157 "Fair Value Measurements". FAS No.
      157 defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles (GAAP), and expands disclosures about
      fair value measurements. This Statement is effective for financial statements
      issued for fiscal years beginning after November 15, 2007, and interim periods
      within those fiscal years. This Statement applies under other accounting
      pronouncements that require or permit fair value measurements, the FASB having
      previously concluded in those accounting pronouncements that fair value is
      the
      relevant measurement attribute. Accordingly, this Statement does not require
      any
      new fair value measurements. However, for some entities, the application of
      this
      Statement will change current practice. The Company does not believe that the
      adoption of FAS No. 157 will have a significant effect on its financial
      statements.




In
      June
      2006 the FASB issued FIN 48 “Accounting for Uncertainty in Income Taxes—an
      interpretation of FASB Statement No. 109”. This Interpretation clarifies the
      accounting for uncertainty in income taxes recognized in an enterprise’s
      financial statements in accordance with FASB Statement No. 109, “Accounting for
      Income Taxes” *.* This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return. This Interpretation also provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition.




The
      evaluation of a tax position in accordance with this Interpretation is a
      two-step process. The first step is recognition: The enterprise determines
      whether it is more likely than not that a tax position will be sustained upon
      examination, including resolution of any related appeals or litigation
      processes, based on the technical merits of the position. In evaluating whether
      a tax position has met the more-likely-than-not recognition threshold, the
      enterprise should presume that the position will be examined by the appropriate
      taxing authority that would have full knowledge of all relevant information.
      The
      second step is measurement: A tax position that meets the more-likely-than-not
      recognition threshold is measured to determine the amount of benefit to
      recognize in the financial statements. The tax position is measured at the
      largest amount of benefit that is greater than 50 percent likely of being
      realized upon ultimate settlement.




Differences
      between tax positions taken in a tax return and amounts recognized in the
      financial statements will generally result in one of the following:




a.
              An
                  increase in a liability for income taxes payable or a reduction
                  of an
                  income tax refund receivable




b.
              A
                  reduction in a deferred tax asset or an increase in a deferred
                  tax
                  liability




c.
                Both
                    (a) and (b).




An
      enterprise that presents a classified statement of financial position should
      classify a liability for unrecognized tax benefits as current to the extent
      that
      the enterprise anticipates making a payment within one year or the operating
      cycle, if longer. An income tax liability should not be classified as a deferred
      tax liability unless it results from a taxable temporary difference (that is,
      a
      difference between the tax basis of an asset or a liability as calculated using
      this Interpretation and its reported amount in the statement of financial
      position). This Interpretation does not change the classification requirements
      for deferred taxes.




Tax
      positions that previously failed to meet the more-likely-than-not recognition
      threshold should be recognized in the first subsequent financial reporting
      period in which that threshold is met. Previously recognized tax positions
      that
      no longer meet the more-likely-than-not recognition threshold should be
      derecognized in the first subsequent financial reporting period in which that
      threshold is no longer met. Use of a valuation allowance as described in
      Statement 109 is not an appropriate substitute for the derecognition of a tax
      position. The requirement to assess the need for a valuation allowance for
      deferred tax assets based on the sufficiency of future taxable income is
      unchanged by this Interpretation. The Company does not believe that the adoption
      of FIN 48 will have a significant effect on its financial
      statements.




F-12




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




In
      September 2006 the Securities and Exchange Commission issued Staff Accounting
      Bulletin (SAB) 108. The interpretation expresses the staff’s views regarding the
      process of quantifying financial statement misstatements. The staff is aware
      that certain registrants do not consider the effects of prior year errors on
      current year financial statements, thereby allowing improper assets or
      liabilities to remain unadjusted. While these errors may not be material if
      considered only in relation to the balance sheet, correcting the errors could
      be
      material to the current year income statement. The interpretations in this
      Staff
      Accounting Bulletin were issued to address diversity in practice in quantifying
      financial statement misstatements and the potential under current practice
      for
      the build up of improper amounts on the balance sheet.




SAB
      108
      notes that a materiality evaluation must be based on all relevant quantitative
      and qualitative factors. This analysis generally begins with quantifying
      potential misstatements to be evaluated. The diversity in approaches for
      quantifying the amount of misstatements primarily stems from the effects of
      misstatements that were not corrected at the end of the prior year (“prior year
      misstatements”). These prior year misstatements should be considered in
      quantifying misstatements in current year financial statements.




If
      the
      misstatement that exists after recording the adjustment in the current year
      financial statements is material (considering all relevant quantitative and
      qualitative factors), the prior year financial statements should be corrected,
      even though such revision previously was and continues to be immaterial to
      the
      prior year financial statements. Correcting prior year financial statements
      for
      immaterial errors would not require previously filed reports to be
      amended.  Such correction is permitted to be made the next time the
      registrant files the prior year financial statements.




To
      provide full disclosure, registrants electing not to restate prior periods
      should reflect the effects of initially applying this guidance in their annual
      financial statements covering the first fiscal year ending after November 15,
      2006. The cumulative effect of the initial application should be reported in
      the
      carrying amounts of assets and liabilities as of the beginning of that fiscal
      year, and the offsetting adjustment should be made to the opening balance of
      retained earnings for that year. Registrants should disclose the nature and
      amount of each individual error being corrected in the cumulative adjustment.
      The disclosure should also include when and how each error being corrected
      arose
      and the fact that the errors had previously been considered
      immaterial.




Prior
      to
      SAB 108, the Company used the “roll-over” method for accounting for audit
      differences. It was determined that under the rollover method, a vacation
      accrual was not material to the financial statements taken as a whole in any
      given year. At December 31, 2006 unpaid vacation was estimated to be
      approximately $80,000, which is material to the F/S under the SAB 108. This
      liability of $80,000 has accumulated steadily over a ten-year period. A
      change
      in accounting principle has been recorded in 2006 financial statements that
      has
      not been previously recorded. The
      adjustment is included in the beginning balances (December 31, 2005) of wages
      payable and the accumulated deficit.




F-13




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




**NOTE
      B - INVENTORY**




Inventory
      is comprised of the following:




December
                31,
              2006
            
            December
                31,
              2005Raw
                Materials
            
            $
            1,841,000
            
            $
            2,043,000Work
                In Process
            
            
            2,485,000
            
            
            2,049,000Finished
                Goods
            
            
            783,000
            
            
            602,000Reserve
                for slow moving and obsolete inventory
            
            
            (250,000
            )
            
            (250,000
            )$
            4,859,000
            
            $
            4,444,000





**NOTE
      C - PROPERTY, PLANT AND EQUIPMENT**




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




December
                31,
              2006
            
            December
                31,
              2005Land
            
            $
            102,000
            
            $
            102,000Buildings
                and improvements
            
            
            1,288,000
            
            
            1,081,000Manufacturing
                and warehouse equipment
            
            
            1,815,000
            
            
            1,254,000Office
                equipment
            
            
            378,000
            
            
            350,0003,583,000
            
            
            2,787,000Less
                accumulated depreciation
            
            
            1,601,000
            
            
            1,225,000$
            1,982,000
            
            $
            1,562,000




Depreciation
      expense was $376,000 and $378,000 for the years ended December 31, 2006 and
      2005, respectively.




**NOTE
      D - LONG TERM DEBT**




Long-term
      debt at December 31, 2006 and December 31, 2005 consisted of the
      following:





December
                31,
              2006
            
            December
                31,
              2005**First
                Niagara Bank:**
              Mortgage
                payable in equal monthly installments of $6,293 including interest
                at
                7.50% through December 1, 2016 with a final lump sum payment of $534,000
                at maturity, collateralized by the building, land and personal
                property.
            
            $
            775,000
            
            $
            327,000**New
                York Business Development Corporation:**
              Mortgage
                payable in equal monthly installments of $1,996 including interest
                at
                7.92% through January 1, 2012 with a final lump sum payment of $164,000
                at
                maturity, collateralized by the building and land, equipment, and
                furniture and fixtures. Mortgage was refinanced in November
                2006.
            
            
            
            
            
            218,000**Columbia
                Economic Development Corporation:**
              Mortgage
                payable in equal monthly installments of $1,159 including interest
                at
                3.00% collateralized by building and land through January 1, 2012.
                Mortgage was refinanced in November 2006.
            
            
            
            
            
            76,000**Modern
                Mold and Tool:**
              Note
                payable in equal monthly installments of $3,729 including interest
                at
                5.00% uncollateralized through February 1, 2006.
            
            
            
            
            
            7,000775,000
            
            
            628,000Less
                current portion
            
            
            (17,000
            )
            
            (36,000
            )Non-current
                portion
            
            $
            758,000
            
            $
            592,000




F-14


AMERICAN
        BIO MEDICA
        CORPORATION
 Notes
        to
        Financial Statements
 December
        31, 2006




At
      December 31, 2006, the following are the maturities of long-term debt for each
      of the next five years:




2007
            
            $
            17,0002008
            
            
            18,0002009
            
            
            20,0002010
            
            
            22,0002011
            
            
            23,000Thereafter
            
            
            675,000$
            775,000





On
      November 6, 2006, the Company closed on a real estate mortgage refinancing
      related to its facility in Kinderhook, New York. The new loan through First
      Niagara Financial Group (“FNFG”) is in the amount of $775,000 and has a term of
      ten (10) years with a twenty (20) year amortization. The interest rate is fixed
      at 7.50% for the first five (5) years. Beginning with year six (6) and through
      the end of the loan term, the rate changes to 2% above the Federal Home Loan
      Bank of New York five (5) year term, fifteen (15) year Amortization Advances
      Rate. The loan is collateralized by the Company's 26,000 square foot facility
      in
      Kinderhook, New York and its personal property. The Company's monthly payment
      will be $6,293 and payments commence on January 1, 2007, with the final payment
      being due on December 1, 2016. The Company received proceeds of $154,000 after
      closing costs and accrued interest, the balance being a refinance of existing
      debt. The cash received was for improvements to the Kinderhook, New York
      property, including paving of the driveway and parking lot and replacing the
      roof. Carl A. Florio, a member of the Company's Board of Directors is an officer
      of FNFG however Mr. Florio was not directly involved in this
      transaction.




Prior
      to
      this refinancing, the Company financed the acquisition of its Kinderhook, New
      York facility through a real estate mortgage loan with FNFG, a real estate
      mortgage loan with New York Business Development Corporation (“NYBDC”), and a
      real estate mortgage loan with Columbia Economic Development Corporation
      (“CEDC”). All three of these mortgage loans were paid in full as part of this
      refinancing.




**NOTE
      E - LINES OF CREDIT**




The
      Company has available two lines of credit with First Niagara Financial Group,
      Inc. ("FNFG"). The first line has a maximum available line of $875,000, not
      to
      exceed 70% of accounts receivable less than 60 days for general operating use.
      The interest rate is .25% above the FNFG prime rate. The Company is required
      to
      maintain net worth (stockholder’s equity) greater than $5 million and working
      capital greater than $4 million. Further the Company is required to maintain
      a
      minimum Debt Service Coverage ratio of not less than 1.2:1.0 measured at each
      fiscal year end beginning December 31, 2006. Debt Service Coverage Ratio is
      defined as Net Operating Income divided by Annual principal and interest
      payments on all loans relating to subject property. There is no requirement
      for
      repayment of all principal annually on this line of credit. The amount
      outstanding on this line of credit was $164,000 at December 31, 2006 and $0
      at
      December 31, 2005.




F-15




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




The
      second line of credit was obtained during the first quarter of 2006 for the
      limited purpose of paying amounts associated with a sublicense agreement
      executed during the first quarter. This line is for a maximum of $75,000 with
      an
      interest rate of .50% above the FNFG prime rate and the Company is not required
      to pay the principal down to $0 during each twelve-month period. The amount
      outstanding on this line of credit at December 31, 2006 was $12,000.




**NOTE
      F - INCOME TAXES**




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





**Year
                Ended**
              **December
                31, 2006**
            
            **Year
                Ended**
              **December
                31, 2005**Tax
                (benefit)/expense at federal statutory rate
            
            
            34
            %
            
            34
            %State
                tax (benefit)/expense, net of federal tax effect
            
            
            5
            
            
            5Valuation
                allowance
            
            
            (39
            )
            
            (39
            )Effective
                income tax rate
            
            
            0
            %
            
            0
            %





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





**Year
                Ended**
              **December
                31, 2006**
            
            **Year
                Ended December 31, 2005**Inventory
            
            $
            32,000
            
            $
            29,000Inventory
                reserve
            
            
            98,000
            
            
            98,000Stock
                based compensation
            
            
            14,000
            
            
            34,000Allowance
                for doubtful accounts
            
            
            41,000
            
            
            41,000Property,
                plant, and equipment
            
            
            (261,000
            )
            
            (216,000
            )Capital
                losses
            
            
            -
            
            
            -Accrued
                compensation
            
            
            (4,000
            )
            
            13,000Net
                operating loss carry-forward
            
            
            3.498,000
            
            
            3,558,000Total
                gross deferred tax assets
            
            
            3,418.000
            
            
            3,557,000Less
                valuation allowance
            
            
            (3,418,000
            )
            
            (3,557,000
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -





The
      valuation allowance for deferred tax assets as of December 31, 2006 and 2005
      was
      $3,418,000 and $3,557,000, respectively. The net change in the valuation
      allowance was a decrease of $139,000 for the year ended December 31,
      2006.




At
      December 31, 2006 the Company has Federal and New York state net operating
      loss
      carry forwards for income tax purposes of approximately $8,765,000, which begin
      to expire in 2009. In assessing the realizability of deferred tax assets,
      management considers whether or not it is more likely than not that some portion
      or all deferred tax assets will be realized. The ultimate realization of
      deferred tax assets is dependent upon the generation of future taxable income
      during the periods in which those temporary differences become deductible.
      Management considers the projected future taxable income and tax planning
      strategies in making this assessment.




F-16




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




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




**NOTE
      G - OTHER INCOME**




Other
      income for the years ended 2006 and 2005 is comprised of amounts earned from
      a
      grant of $100,000 received from the Columbia Economic Development Corporation
      during 2002, 2003 and 2005. The grant is convertible to a loan based upon a
      percentage of the grant declining from 90% of the grant amount in 2003 to 0%
      in
      2013. The unearned portion of the grant at December 31, 2006 is $60,000. The
      grant is convertible to a loan only if the employment levels in the Kinderhook
      facility drop below 45 employees at any time during the year. The employment
      levels in the Kinderhook facility were 87 and 75 at December 31, 2006 and 2005
      respectively.




**NOTE
      H - STOCKHOLDERS’ EQUITY**




**[1]**  **Stock
      option plans:**




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




**[2]**
            **Stock
                options:**




During
      the year ended December 31, 2006, the Company issued a total of 75,000 options
      to purchase shares of common stock, all of which were issued to
      employees.




Stock
      option activity is summarized as follows:





**Year
                Ended**
              **December
                31,**
              **2006**
            
            **Year
                Ended**
              **December
                31,**
              **2005****Shares**
            
            **Weighted
                Average Exercise Price**
            
            **Shares**
            
            **Weighted****Average**
              **Exercise****Price**Options
                outstanding at beginning of year
            
            
            4,268,000
            
            $
            1.31
            
            
            4,150,000
            
            $
            1.36Granted
            
            
            75,000
            
            $
            1.05
            
            
            307,000
            
            $
            0.91Exercised
            
            
            (100,000
            )
            $
            0.85
            
            
            0
            
            
            NACancelled/expired
            
            
            (250,000
            )
            $
            1.31
            
            
            (189,000
            )
            $
            1.74Options
                outstanding at end of year
            
            
            3,993,000
            
            $
            1.32
            
            
            4,268,000
            
            $
            1.31Options
                exercisableat
                end of year
            
            
            3,918,000
            
            $
            1.32
            
            
            4,268,000
            
            $
            1.31





F-17




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




The
      following table presents information relating to stock options outstanding
      as of
      December 31, 2006:




**Options
                Outstanding**
            
            **Options
                Exercisable****Weighted****Weighted**
            
            **Average**
            
            
            
            **Weighted****Average**
            
            **Remaining**
            
            
            
            **Average****Range
                of Exercise**
            
            
            
            **Exercise**
            
            **Life
                in**
            
            
            
            **Exercise****Price**
            
            **Shares**
            
            **Price**
            
            **Years**
            
            **Shares**
            
            **Price**$0.85
                - $0.99
            
            
            1,142,000
            
            $
            0.89
            
            
            5.45
            
            
            1,142,000
            
            $
            0.89$1.00
                - $1.49
            
            
            1,773,000
            
            $
            1.07
            
            
            6.80
            
            
            1,698,000
            
            $
            1.08$1.50
                - $3.38
            
            
            1,078,000
            
            $
            2.18
            
            
            3.43
            
            
            1,078,000
            
            $
            2.18TOTAL
            
            
            3,993,000
            
            $
            1.32
            
            
            5.50
            
            
            3,918,000
            
            $
            1.32




As
      of
      December 31, 2003, there are no stock options available for issuance under
      the
      1997 or the 1998 Plan. Pursuant to the plans, as of April 30, 2000 no further
      options could be issued under the 1997 Plan and as of April 30, 2001, no further
      options could be issued under the 1998 Plan. Therefore under the 1997 and 1998
      plans, as options expire or are cancelled, they are returned to the plans
      without the possibility of being issued again. As of December 31, 2006, under
      the 1997 Plan, 1,230,625 options have been returned to the plan as a result
      of
      expirations or cancellations and will not be re-issued, and under the 1998
      Plan,
      922,000 options have been returned to the plan as a result of expirations or
      cancellations and will not be re-issued. Neither the 1997 nor the 1998 plan
      have
      any options issued and outstanding and therefore there is no potential for
      additional dilution under either the 1997 or the 1998 plans. The options
      outstanding noted in the table above are issued under either the 2000 Plan
      or
      the 2001 Plan.




**[3]**
            **Warrants:**




As
      of
      December 31, 2006, there were 150,000 warrants outstanding.




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




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




F-18




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




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




On
      November 15, 2001, the Company issued a 4 year warrant, immediately exercisable
      and non-forfeitable, to purchase 20,000 common shares of American Bio Medica
      Corporation stock at an exercise price of $1.00 per share to Hudson River Bank
      & Trust Company (now First Niagara Bank) in connection with the Company’s
      purchase of its facility located in Kinderhook, New York. The warrants are
      valued at $10,000 using the Black Scholes pricing model and the following
      assumptions, dividend yield of 0.0%, volatility of 90.8%, risk free interest
      rate of 5.1% and expected life of 5 years. The closing price of American Bio
      Medica Corporation common shares on November 15, 2001, as listed on the NASDAQ
      Capital Market, was $0.85 per share. This warrant was not exercised either
      in
      whole, or in part, and it expired naturally on November 15, 2005.




On
      December 2, 2003, we 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, we 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 American
      Bio Medica Corporation’s common shares on December 2, 2003, as listed on The
      NASDAQ Capital Market, was $1.33 per share. There was no activity related to
      this warrant issuance in the fiscal year ended December 31, 2006.




**NOTE
      I - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS**




**[1]**
            **Operating
                leases:**




The
      Company leases office and R&D/production facilities in New Jersey under
      operating leases expiring through December 2011. In addition the Company leases
      office support equipment under leases expiring through November 2009. At
      December 31, 2006, the future minimum rental payments under these operating
      leases are as follows:




2007
            
            $
            91,0002008
            
            
            91,0002009
            
            
            91,0002010
            
            
            86,0002011
            
            
            86,000$
            445,000




F-19




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




Rent
      expense for facilities in New Jersey was $52,000 for 2006 and $53,000 for
      2005.




**[2]**
            **Employment
                agreements:**




In
      December 2005, the Company entered into new employment agreements with the
      Chief
      Executive Officer and the Chief Financial Officer providing for aggregate annual
      salaries of $341,000. The agreement with the Chief Executive Officer provides
      for a $198,000 salary, is for a term of one year and automatically renews unless
      either side gives advance notice of 60 days. The agreement with the Chief
      Financial Officer provides for a $143,000 salary is for a term of one year
      and
      automatically renews unless either side gives advance notice of 60 days.




**[3]**
            **Legal:**




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




**[4]**
            **Patent
                Sublicense:**




On
      February 28, 2006, the Company entered into a non-exclusive Sublicense Agreement
      (the "Agreement") related to certain patents to allow the Company to expand
      its
      contract manufacturing operations. Under this Agreement, the Company is
      committed to pay a non-refundable fee of $175,000 over the course of 2 years,
      of
      which $75,000 was paid in the first quarter of 2006. The next payment of $50,000
      is scheduled for the first quarter of 2007. The Company would also be required
      to pay royalties for products the Company manufactures that fall within the
      scope of these patents. The Company was not obligated to pay any royalties
      in
      2006. Beginning in 2007, the Company will be obligated, in January 2008, to
      pay
      a $20,000 annual minimum royalty that can be applied against royalties on sales
      of products that fall with the scope of the sublicensed patents.




**NOTE
      J - RELATED PARTY DISCLOSURES**




During
      the fiscal years ended December 31, 2006 and December 31, 2005, the Company
      paid
      an aggregate of $120,000 and $125,000 respectively, to Edmund Jaskiewicz, the
      Company’s President and Chairman of the Board of Directors, in consideration of
      his services as patent and trademark counsel to the Company, services as a
      member of its Board of Directors, and reimbursed expenses related to same.
      At
      December 31, 2006 there were invoices totaling $25,000 payable to Mr.
      Jaskiewicz.




During
      the fiscal years ended December 31, 2006 and December 31, 2005, the Company
      paid
      an aggregate of $23,000 and $151,000, respectively, to one of our vendors for
      products and services. This amount was related to the vendor’s assembly of our
      products. The spouse of our Chief Scientific Officer owns 50% of this vendor,
      which is a private company.




During
      the fiscal years ended December 31, 2006 and December 31, 2005, the Company
      paid
      an aggregate of $58,000 and $31,000 respectively, to Alec Cipkowski. Alec
      Cipkowski is the son of the Company’s Chief Executive Officer, Stan Cipkowski.
      Alec performs information technology services for the Company updating and
      maintaining the Company website as well as supporting the Rapid Reader devices
      that are currently being used by customers. Alec is an independent contractor
      and not an employee of the Company.




F-20




AMERICAN
      BIO MEDICA
      CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




**NOTE
      K -** **FOURTH
      QUARTER ADJUSTMENTS**




During
      the fourth quarter of 2005 the Company completed modifications to its oral
      fluids product, Oralstat, and introduced the new technology to the market.
      In
      response to the acceptance of this newly formatted product all remaining
      components of Oralstat that remained in inventory were disposed of. The value
      of
      this inventory was approximately $145,000.




Also
      during the fourth quarter the Company introduced its new cassette based product
      Rapid TOX. In response to this introduction and to streamline manufacturing
      by
      removing redundancies, the Company suspended offering its Rapid TEC-2 and Rapid
      TEC-3 products. Remaining components in inventory, valued at approximately
      $45,000 were disposed of during the fourth quarter.




The
      Company increased its reserve for slow moving and obsolete inventory established
      in 2004 from $100,000 to $250,000 at the end of 2005. This increase is
      consistent with the increased diversity of products currently being offered
      and
      sales dynamics, including shifts to lower cost or substitute products from
      existing products resulting in residual stocks of inventory components for
      products for which demand has declined.




All
      of
      these adjustments increased cost of goods sold and decreased inventory during
      the fourth quarter and for the full year ending December 31, 2005.




Finally,
      during the fourth quarter of 2005 the Company issued 75,000 shares of common
      stock to Barretto Pacific Corporation, an investment relations firm, to provide
      investor relations services to the Company for one year. The shares were valued
      at approximately $88,000 and were irrevocable. This expense was included in
      general and administrative expense in the fourth quarter of 2005.




**NOTE
      L - SUBSEQUENT EVENTS**




On
      January 22, 2007, the Company entered into a Term Note (the “Note”) with First
      Niagara Financial Group (“FNFG”) in the amount of $539,000. The term of the note
      is five (5) years with a fixed interest rate of 7.17%. The Company's monthly
      payment will be $10,714 and payments will commence on February 1, 2007, with
      the
      final payment being due on January 1, 2012. The Company has the option of
      prepaying the Note in full or in part at any time during the term without
      penalty. There were no closing costs associated with this Note. The loan is
      secured by Company assets now owned or to be acquired.




The
      proceeds received were used for the purchase of three (3) pieces of automation
      equipment to enhance the Company's manufacturing process in its New Jersey
      facility. At
      December 31, 2006, the future minimum payments for this note were as
      follows:




2007
            
            $
            46,0002008
            
            
            96,0002009
            
            
            104,0002010
            
            
            111,0002011
            
            
            119,0002012
            
            
            63,000$
            539,000





F-21




AMERICAN
      BIO MEDICA CORPORATION


Notes
      to
      Financial Statements


December
      31, 2006




**NOTE
      M- GEOGRAPHIC INFORMATION**





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





**Year
                ended**
              **December
                31,**
              **2006**
            
            **Year
                ended**
              **December
                31,**
              **2005**United
                States
            
            $
            12,452,000
            
            $
            11,897,000North
                America (not domestic)
            
            
            727,000
            
            
            602,000Europe
            
            
            552,000
            
            
            396,000Asia/Pacific
                Rim
            
            
            48,000
            
            
            34,000South
                America
            
            
            59,000
            
            
            86,000$
            13,838,000
            
            $
            13,015,000




F-22