NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a)	Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of June 30, 2013 and for the six-month periods ended June 30, 2013 and 2012, respectively, have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, which are normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures made are adequate to provide for fair presentation. The interim financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2012, previously filed with the SEC.

On May 30, 2012, the Company effected a 1-for-8 reverse split of its common stock. This was done to allow the Company to move to the NASDAQ trading market from the QTCQB market, which occurred on June 7, 2012. As a result of the reverse stock split, the outstanding 63,967,263 common shares were reduced to 7,995,918 outstanding common shares on May 30, 2012. The effect of the reverse stock split has been retroactively reflected for all periods in these financial statements.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company's condensed consolidated financial position as of June 30, 2013, its condensed consolidated results of operations for the three- and six-month periods ended June 30, 2013 and 2012, respectively, and its condensed consolidated cash flows for the six-month periods ended June 30, 2013 and 2012, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

Revenue Recognition

The Company recognizes revenue for product sales in accordance with ASC 605, which provides that revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Revenue typically is recognized at time of shipment. Sales are recorded net of discounts, rebates and returns.

For certain contracts, the Company recognizes revenue from non-milestone contracts and grant revenues when earned. Grants are invoiced after expenses are incurred. Revenues from projects or grants funded in advance are deferred until earned. As of June 30, 2013 and December 31, 2012, all advanced revenues were earned.

The Company follows Financial Accounting Standards Board ("FASB") authoritative guidance ("guidance") prospectively for the recognition of revenue under the milestone method. The Company applies the milestone method of revenue recognition for certain collaborative research projects defining milestones at the inception of the agreement.

Inventories:

Inventories consist of the following at:

	June 30, 2013		December 31, 2012
Raw materials	$	1,794,792	$	1,418,071
Work in process		902,718		561,530
Finished goods		1,150,785		508,470
	$	3,848,295	$	2,488,071

Earnings Per Share:

On May 30, 2012, the Company effected a 1-for-8 reverse split of its common stock. This was done to allow the Company to move to the NASDAQ trading market from the OTCQB market, which occurred on June 7, 2012. As a result of the stock split, the outstanding 63,967,263 common shares were reduced to 7,995,918 outstanding common shares on May 30, 2012. The effect of the reverse stock split has been retroactively reflected for all periods in these financial statements.

Basic earnings per share is computed by dividing net income or loss by the weighted-average number of common shares outstanding for the period. Diluted income per share reflects the potential dilution from the exercise or conversion of other securities into common stock, but only if dilutive. The following securities, presented on a common share equivalent basis for the three and six-month periods ended June 30, 2013 and 2012, have been included in the earnings per share computations:

	For the three months ended		For the six months ended
	June 30, 2013	June 30, 2012	June 30, 2013	June 30, 2012
Basic	9,259,506	7,987,105	8,664,478	7,960,714

Diluted	9,259,506	8,525,199	9,230,840	8,512,770

The following securities, presented on a common share equivalent basis for the three and six-month periods ended June 30, 2013 and 2012, have been included in the diluted per share computations as the exercise prices of these securities were less than the stock price as of June 30, 2013 and 2012, respectively:

	For the three months ended		For the six months ended
	June 30, 2013	June 30, 2012	June 30, 2013	June 30, 2012

1999 and 2008 Plan Stock Options	532,523	538,094	566,362	552,056

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

There were 169,662 and 99,594 options outstanding as of June 30, 2013 and 2012, respectively, that were not included in the calculation of diluted per common share equivalent for the three and six months ended June 30, 2013 and 2012, respectively, because the effect would have been anti-dilutive as of June 30, 2013 and 2012, respectively.

Employee Stock Option Plan:

The Company had a 1999 Stock Option Plan ("SOP"). The total number of options available under the SOP was 375,000. As of June 30, 2013, there were 93,750 outstanding options under this SOP. No additional options may be issued under the SOP because it is more than 10 years after its adoption.

Effective June 3, 2008, the Company's stockholders voted to approve the 2008 Stock Incentive Plan ("SIP"), initially with 625,000 shares of Common Stock available to be issued. At the Annual Stockholder meeting on September 22, 2011, the Company's stockholders voted to approve an increase to the shares of Common Stock issuable under the SIP by 125,000 to 750,000. Under the terms of the SIP, the Compensation Committee of the Company's Board has the discretion to select the persons to whom awards are to be granted and the number of shares of common stock to be covered by each grant. Awards can be incentive stock options, restricted stock and/or restricted stock units. The awards become vested at such times and under such conditions as determined by the Compensation Committee. As of June 30, 2013, there were 144,220 options exercised, 562,648 options outstanding and 43,132 options or shares still available to be issued under the SIP.

The weighted average estimated fair value, at their respective dates of grant, of stock options granted in the three- and six-month periods ended June 30, 2013 and 2012 was $5.39 and $2.80 per share, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon the historical volatility of our stock. The expected term is based on historical information.

The assumptions made in calculating the fair values of options granted during the periods indicated are as follows (no options issued in the three months ended June 30, 2012):

	For the three months ended		For the six months ended
	June 30, 2013	June 30, 2012	June 30, 2013	June 30, 2012
Expected term (in years)	3.5	n/a	3	5
Expected volatility	93.80 %	n/a	93.80 % - 101.30 %	115.77 %
Expected dividend yield	0 %	n/a	0 %	0 %
Risk-free interest rate	0.34 %	n/a	0.34 % - 0.40 %	0.36 %

The Company's results for the three-month periods ended June 30, 2013 and 2012 include share-based compensation expense totaling $84,000 and $44,000, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($26,000 and $5,000, respectively), research and development ($22,000 and $9,000, respectively) and selling, general and administrative expenses ($36,000 and $30,000, respectively). The results for the six-month periods ended June 30, 2013 and 2012 include share-based compensation expense totaling $222,000 and $177,000, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($56,000 and $20,000, respectively), research and development ($62,000 and $57,000, respectively) and selling, general and administrative expenses ($104,000 and $100,000, respectively). The income tax benefit has been recognized in the statement of operations for share-based compensation arrangements.

Stock option compensation expense for the three and six-month periods ended June 30, 2013 and 2012 is based on the estimated fair value, at the date of issuance, of options outstanding, which is being amortized on a straight-line basis over the requisite service period for each vesting portion of the award, except for those that vested immediately and for which the estimated fair value was expensed immediately.

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

The following table provides stock option activity for the six months ended June 30, 2013:

Stock Options	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2012		731,646		$	2.23	2.19 years	$	3,460,686

Granted		51,360		$	5.39
Exercised		(117,380	)	$	1.53
Forfeited/expired/cancelled		(9,228	)	$	3.99
Outstanding at June 30, 2013		656,398		$	2.45	2.16 years	$	1,698,863

Exercisable at June 30, 2013		446,432		$	1.74	1.50 years	$	1,535,980

As of June 30, 2013, there was $282,000 of net unrecognized compensation cost related to stock options that have not vested, which is expected to be recognized over a weighted average period of approximately 2.17 years. The total fair value of stock options vested during the three-month periods ended June 30, 2013 and 2012 was approximately $174,000 and $206,000, respectively.

Geographic Information:

U.S. GAAP establishes standards for the manner in which business enterprises report information about operating segments in financial statements and requires that those enterprises report selected information. It also establishes standards for related disclosures about products and services, geographic areas, and major customers.

The Company produces only one group of similar products known collectively as "rapid medical tests". Management believes that it operates in a single business segment. Net product sales by geographic area are as follows:

	For the three months ended				For the six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Africa	$	1,009,899	$	442,833	$	1,857,221	$	1,520,569
Asia		31,353		254,003		50,619		266,481
Europe		69,324		7,753		76,929		33,331
North America		2,464,060		2,545,376		5,285,578		5,266,136
South America		1,487,055		2,561,225		4,104,534		5,087,825
	$	5,061,691	$	5,811,190	$	11,374,881	$	12,174,342

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2013

(UNAUDITED)

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

	June 30, 2013		December 31, 2012
Accounts payable – suppliers	$	1,992,452	$	1,686,431
Accrued commissions		154,119		238,150
Accrued royalties / license fees		761,986		583,923
Accrued payroll		244,821		262,439
Accrued vacation		257,179		181,636
Accrued bonuses		325,500		155,663
Accrued expenses – other		193,374		195,681
TOTAL	$	3,929,431	$	3,303,923