Summary of AMERICAN BIO MEDICA CORP

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our financial condition and results of operations. The discussion should be read in conjunction with the Financial Statements contained herein and the notes thereto. Certain statements contained in this Annual Report on Form 10-K, including, without limitation, statements containing the words "believes", "anticipates", "estimates", "expects", "intends", "projects", and words of similar import, are forward looking as that term is defined by the Private Securities Litigation Reform Act of 1995, or 1995 Act, and releases issued by the SEC. These statements are being made pursuant to the provisions of the 1995 Act and with the intention of obtaining the benefits of the "Safe Harbor" provisions of the 1995 Act. We caution that any forward looking statements made herein are not guarantees of future performance and that actual results may differ materially from those in such forward looking statements as a result of various factors, including, but not limited to, any risks detailed herein, including the "Risk Factors" section contained in Item 1A of this Form 10-K, or detailed in our most recent reports on Form 10-Q and Form 8-K and from time to time in our other filings with the SEC and amendments thereto. We are not undertaking any obligation to update publicly any forward-looking statements. Readers should not place undue reliance on these forward-looking statements.

Overview and Plan of Operations

During the year ended December 31, 2008 ("2008"), we sustained a net loss of $850,000 from net sales of $12,657,000, and had net cash used in operating activities of $303,000. During the year ended December 31, 2007 ("2007"), the Company sustained a net loss of $990,000 from net sales of $13,872,000, and had net cash used in operating activities of $605,000.

During the twelve months ended December 31, 2008, we continued our program to market and distribute our urine and oral fluid point of collection drug tests. In 2008, we also received 510(k) clearance for our Rapid TOX Cup product line, and we were granted a CLIA waiver related to our Rapid TOX product line. Both of these products were developed to provide our customers with more cost effective testing options while maintaining the level of quality to which our customers have become accustomed. We expect these marketing clearances to open up new markets for us. In addition, we anticipate that the CLIA waiver will have a positive impact on sales to our lab partner.

During 2008, we took steps to improve our financial position. Beginning in April 2008, we implemented a number of cost cutting initiatives including, but not limited to, reducing the number of employees in our selling and marketing, research and development and general and administrative departments. We also continue to take steps to reduce manufacturing costs related to our products to increase our gross margin. Unfortunately, in the fourth quarter of 2008, the global economic crisis began to have a more negative impact on our sales and we began to see a more substantial decline. Therefore, while results from operations have improved when comparing 2008 to 2007, the improvement is less than what was expected.

ABMC's sales strategy continues to be a focus on direct sales, while identifying new contract manufacturing operations and pursuing new national accounts. Simultaneously with these efforts, we continue to focus on the development of new products to address market trends and needs. During 2008, we continued to market and distribute our urine and oral fluid based point of collection tests for drugs of abuse, our Rapid Reader® drug screen result and data management system, and performed contract manufacturing services for unaffiliated third parties.

The Company's continued existence is dependent upon several factors, including our ability to raise revenue levels and reduce costs to generate positive cash flows, and to sell additional shares of our common stock to fund operations and/or obtain additional credit facilities, if and when necessary.

Critical Accounting Policies and Estimates

ABMC's discussion and analysis of its financial condition and results of operations are based upon ABMC's financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Note A to our financial statements, describes the significant accounting policies and methods used in the preparation of our financial statements.

Use of Estimates: The preparation of these financial statements requires ABMC to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, ABMC evaluates its estimates, including those related to product returns, bad debts, inventories, income taxes, warranty obligations, contingencies and litigation. Estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue & Returns: ABMC records estimated reductions to revenue for customer returns and allowances based on historical experience. If market conditions were to decline, actions may be taken to increase customer incentive offerings possibly resulting in an incremental reduction of gross margins. Revenue is recognized upon shipment to customers.

Accounts Receivable & Allowance for Doubtful Accounts: ABMC maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of ABMC's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventory: ABMC will write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the net realizable value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Valuation Allowance: ABMC records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

Results of operations for the twelve months ended December 31, 2008, compared to the twelve months ended December 31, 2007

Net Sales: Net sales decreased 8.8% in 2008 compared to net sales in 2007. We experienced declines in our Government/Corrections/Law Enforcement market throughout 2008 as a result of general economic conditions and price pressure from foreign competitors. Our Corporate/Workplace market was also negatively impacted by the global economic crisis in 2008. Beginning in the third quarter of 2008, sales in our national account division, which primarily sells in the Corporate/Workplace market, declined as the downturn of the economy negatively impacted new and existing employment levels; historically we have seen year over year growth in this division. These decreases in Corporate/Workplace and Government/Corrections/Law Enforcement markets were offset by an increase in sales in the International market, primarily through increased sales in Latin America, and an increase in contract manufacturing sales. We expect to continue to see declines in Corporate/Workplace market as a result of declines in the employment levels of our customers, and increased price pressure in the Government/Corrections/Law Enforcement market, until such time that the economy begins to recover; we expect that we will continue to experience declines in net sales. We will continue to focus our sales efforts on national accounts, direct sales and contract manufacturing, while striving to reduce manufacturing costs, which could enable us to be more cost competitive.

Cost of goods sold: Cost of goods sold was relatively unchanged year over year; in 2008, cost of goods sold was 58.4% of net sales, and in 2007 cost of goods sold was 58.7% of net sales. When comparing cost of goods sold in 2008 to cost of goods sold in 2007, until the fourth quarter of 2008 we were able to improve cost of goods sold as a percentage of sales through manufacturing efficiencies as a result of automation, even with increased costs in raw materials required to manufacture our products. In the fourth quarter of 2008, the unanticipated sharp decline in sales due to the downturn of the economy negatively impacted our cost of goods sold; more specifically, our labor and overhead costs and raw material expenditures were not in line with the level of sales achieved in the fourth quarter. Subsequent to the fourth quarter, we reduced manufacturing labor and overhead costs and raw material expenditures in efforts to improve cost of goods sold going forward in 2009, anticipating that sales will continue to decline until the economy begins to recover.

Affecting cost of goods sold in 2007 were disposals of certain inventory components manufactured during the introduction of the new Rapid TOX product in the fourth quarter of fiscal year ended December 31, 2005, inventory disposals of expired products, and disposals of components as a result of product improvements. In the fourth quarter of 2008, we increased our reserve for slow moving and obsolete inventory from $250,000 to $308,000 and we believe this increased reserve is currently adequate.

Operating Expenses: Operating expenses for 2008 decreased 10.6% when compared to operating expenses in 2007. Operating expenses as a percentage of sales also improved to 46.5% of net sales in 2008, compared to 47.5% of net sales in 2007. Decreases in cost associated with our CLIA waiver application as well as the implementation of cost cutting initiatives implemented in research and development, selling and marketing, and general and administrative resulted in expense reductions in all three divisions. The reductions were partially offset by certain increases provided in the following detail:

Research and development ("R&D")

R&D expenses for 2008 decreased 15.8% when compared to R&D expenses in 2007. Savings in salaries and benefits, consulting fees, FDA compliance costs, supplies, travel, phone, patent/license fees and depreciation were minimally offset by increases in facilities costs. This reduction in expenses is primarily a result of personnel reductions made in the first half of 2008 as part of our cost cutting initiatives. In addition, in June 2008, our Vice President of Product Development retired. The former vice president received a payment of $35,000, equal to half his annual salary of $70,000. We paid this in 3 equal monthly installments of approximately $11,666 each beginning July 31, 2008, with the last payment being made on September 30, 2008. We do not expect to fill this position in the future. Throughout 2008, our R&D department continued to focus their efforts on the enhancement of our current products and exploration of contract manufacturing opportunities.

Selling and marketing

Selling and marketing expenses for 2008 decreased 11.1% when compared to selling and marketing expenses in 2007. Reductions in sales salaries and commissions, travel expense, trade show related expenses, consulting fees and depreciation were partially offset by increases in postage, advertising expense, royalty expense, marketing salaries and miscellaneous expenses. As with R&D, the expense reductions in selling and marketing are as a result of our cost cutting initiatives that began in the first half of 2008. The increase in miscellaneous expense is attributed to a settlement of a claim related to a product return. Throughout 2008, we promoted our products through selected advertising, participation at high profile trade shows and other marketing activities. Our direct sales force continued to focus their selling efforts in our targets markets, which include but are not limited to, Corporate/Workplace, and Government/Corrections/Law Enforcement. In addition, beginning in the fourth quarter of 2008, our direct sales force began to focus more efforts on the Clinical/Physician/Hospital market, as a result of our receipt of a CLIA waiver related to our Rapid TOX product line.

General and administrative ("G&A")

G&A expenses for 2008 decreased 8.9% when compared to G&A expenses in 2007. G&A was also positively impacted by our cost cutting initiatives. Decreases in investor relations expense, insurance costs, consulting fees, licenses and permits, outside service fees and repairs and maintenance were partially offset by increases in quality assurance salaries and supplies, general and administrative salaries and benefits, legal fees, miscellaneous expense, bad debts and bank service fees. The increase in miscellaneous expense stems from establishing a reserve against a long term receivable. In addition, the costs associated with our CLIA waiver application for our Rapid TOX product line were only $13,000 in 2008, compared to $236,000 in 2007. 2007 also included non-cash compensation of $26,000 related to the amortization of expense of options issued to two employees in 2006, our former Chief Financial Officer and our former Vice President of Product Development; this expense did not occur in 2008.

In 2008, we implemented a number of cost cutting initiatives and we believe that our current infrastructure is sufficient to support our business. However, additional investments in research and development, selling and marketing and general and administrative may be necessary to develop new products in the future and enhance our current products to meet the changing needs of the point of collection testing market, to grow our contract manufacturing operations, to promote our products in our markets and to institute changes that may be necessary to comply with various new public company reporting requirements including but not limited to requirements related to internal controls over financial reporting.

Other income and expense: Other expense incurred during 2008 consisted of losses on disposals of assets and penalties accrued on a sales tax liability. This was offset by other income earned attributable to a grant received in 2002, 2003 and 2005. The Company received the original grant from the Columbia Economic Development Corporation in three parts totaling $100,000. The final installment of $25,000 was received in the first quarter of 2005. The grant is convertible to a loan based upon a percentage of the grant declining from 90% of the grant amount in 2003 to 0% in 2012. The grant is convertible to a loan only if the employment levels in the Kinderhook facility drop below 45 employees at any time during the year. The employment levels in the Kinderhook facility were 61 and 81 at December 31, 2008 and December 31, 2007, respectively. The amount of other income earned on this grant was $10,000 in 2008 and 2007.

In 2008 and 2007, we incurred interest expense related to our loans and lines of credit with FNFG. In 2008 and 2007, we earned interest on our cash accounts.

Results of operations for the twelve months ended December 31, 2007, compared to the twelve months ended December 31, 2006 ("2006")

Net Sales: Net sales increased less than 1% in 2007 compared to net sales in 2006. The slight increase is attributed to increases in our Corporate/Workplace market (through increases in national account sales) and International markets, which were offset by decreases in the Government/Corrections/Law Enforcement market and contract manufacturing. The decrease in the Government/Corrections/Law Enforcement markets is a result of price pressures in the market due to competition with foreign manufacturers. The decrease in contract manufacturing sales is primarily a result of timing of the receipt of orders from one of our contract manufacturing customers.

Cost of goods sold: The increase in cost of goods sold in 2007 from 2006 was primarily as a result of increased costs in overhead and labor, stemming from the greater diversity and complexity of new products as well as increases in some material costs. Also affecting cost of goods sold in 2007 are disposals of certain inventory components manufactured during the introduction of our Rapid TOX product, inventory disposals of expired product and disposals of components as a result of product enhancements.

Operating expenses: Operating expenses remained relatively unchanged in 2007 when compared to operating expenses in 2006. Increases in research and development and general and administrative were offset by a decrease in selling and marketing expenses.

Research and Development

R&D expenses increased in 2007 when compared to 2006. The increase in R&D expense was due to increases in salaries and facilities costs, which were partially offset by savings in consulting fees, and compliance costs. In 2006, we received a non-refundable fee of $25,000 from a customer for a development plan that was included as a reduction in expense in R&D in 2006; this did not recur in 2007.

Selling and marketing

Selling and marketing decreased in 2007 when compared to 2006. This reduction is primarily a result of savings in salary and royalty expense, which was offset by increases in commission expense, advertising and trade show expense.

General and Administrative

G&A expense increased in 2007 when compared to 2006. Increased regulatory costs associated with our CLIA waiver application, along with increases in investor relations expense and salaries, were offset by decreases in outside service and communication costs. Non-cash compensation of $26,000 in 2007 and $37,000 in 2006 stems from the amortization of expense of options issued to two employees in 2006, our former Chief Financial Officer and our former Vice President of Product Development.

Other income and expense: Other income earned in 2007 and 2006 was attributable to a grant received in 2002, 2003 and 2005. The Company received the original grant from the Columbia Economic Development Corporation in three parts totaling $100,000. The final installment of $25,000 was received in the first quarter of 2005. The grant is convertible to a loan based upon a percentage of the grant declining from 90% of the grant amount in 2003 to 0% in 2012. The grant is convertible to a loan only if the employment levels in the Kinderhook facility drop below 45 employees at any time during the year. The employment levels in the Kinderhook facility were 81 and 87 at December 31, 2007 and December 31, 2006, respectively. Other income was offset by losses on disposals of assets in 2007.

In 2007 and 2006, we incurred interest expense related to our loans and lines of credit with FNFG. In 2007 and 2006, we earned minimal interest on our cash accounts.

LIQUIDITY AND CAPITAL RESOURCES AS OF DECEMBER 31, 2008

The Company's cash requirements depend on numerous factors, including product development activities, penetration of the direct sales market, market acceptance of our new products, and effective management of inventory levels in response to sales forecasts. We expect to devote capital resources to continue product development and research and development activities. We will examine other growth opportunities including strategic alliances and expect such activities will be funded from existing cash and cash equivalents, issuance of additional equity or additional borrowings, subject to market and other conditions. The Company's financial statements for the fiscal year ended December 31, 2008 have been prepared assuming we will continue as a going concern. As of the date of this report, we do not believe that our current cash balances, together with cash generated from future operations and amounts available under our credit facilities will be sufficient to fund operations for the next twelve months. If cash generated from operations is not sufficient to satisfy our working capital and capital expenditure requirements, we will be required to sell additional equity or obtain additional credit facilities. There is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms, if at all.

The Company has a line of credit, a real estate mortgage and a term note ("Credit Facilities") with FNFG.

Line of Credit

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

Real Estate Mortgage

We have a real estate mortgage on our facility in Kinderhook, New York through FNFG. It has a term of 10 years with a 20 year amortization. The interest rate is fixed at 7.5% for the first 5 years and beginning with year 6 through the end of the loan term, the rate changes to 2% above the Federal Home Loan Bank of New York 5 year term, 15 year Amortization Advances Rate. Our monthly payment is $6,293 and payments commenced on January 1, 2007, with the final payment being due on December 1, 2016. The loan is collateralized by our facility in Kinderhook, New York and its personal property. The amount outstanding on this mortgage was $739,000 and $758,000 at December 31, 2008 and December 31, 2007, respectively.

Term Note

We also have a Term Note with FNFG in the amount of $539,000 (the "Note"). The term of the Note is 5 years with a fixed interest rate of 7.17%. Our monthly payment is $10,714 and payments commenced on February 1, 2007, with the final payment being due on January 23, 2012. We have the option of prepaying the Note in full or in part at any time during the term without penalty. The loan is secured by certain assets now owned or hereafter acquired. The proceeds received were used for the purchase of manufacturing automation equipment. The amount outstanding on this Note was $356,000 and $455,000 at December 31, 2008 and December 31, 2007, respectively.

Forbearance

On February 4, 2009, we were notified by FNFG, that we were in default under the Loan Documents with FNFG related to the Credit Facilities; specifically that we failed to comply with the maximum monthly net loss covenant. As a result of the default, FNFG had the right to immediately accelerate the principal amount due under our Credit Facilities, which was $1,636,635.97 as of the date of the notice, however, FNFG decided not to immediately accelerate as they expected the Company to enter into a Forbearance Agreement memorializing certain measures and conditions.

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

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

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

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

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

Working Capital

The Company's working capital decreased $887,000 at December 31, 2008, when compared to working capital at December 31, 2007. This decrease in working . . .