NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

a)	Basis of Presentation:

The preceding (a) condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited financial statements, and (b) the unaudited interim condensed consolidated financial statements as of September 30, 2014 and for the three- and nine-month periods ended September 30, 2014 and 2013, 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, 2013, previously filed with the SEC.

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 September 30, 2014, its condensed consolidated results of operations for the three- and nine-month periods ended September 30, 2014 and 2013, respectively, and its condensed consolidated cash flows for the nine-month periods ended September 30, 2014 and 2013, 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.

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 payments 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 September 30, 2014 and December 31, 2013, respectively, all advanced revenues had been 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:

	September 30, 2014		December 31, 2013
Raw materials	$	1,967,880	$	1,710,627
Work in process		606,795		464,481
Finished goods		1,400,575		1,013,618
	$	3,975,250	$	3,188,726

Earnings Per Share:

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 nine-month periods ended September 30, 2014 and 2013, have been included in the earnings per share computations:

	For the three months ended		For the nine months ended
	September 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013
Basic	9,611,139	9,324,783	9,503,084	8,886,998

Diluted	9,611,139	9,824,019	9,503,084	9,433,152

CHEMBIO DIAGNOSTICS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2014

(UNAUDITED)

The following securities, presented on a common share equivalent basis for the three and nine-month periods ended September 30, 2014 and 2013, have been included in the diluted per share computations as the exercise prices of these securities were less than the stock price as of September 30, 2014 and 2013, respectively:

	For the three months ended		For the nine months ended
	September 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013
1999, 2008 and 2014 Plan Stock Options	-	499,236	-	546,154

There were 547,825 and 169,662 options outstanding as of September 30, 2014 and 2013, respectively, that were not included in the calculation of diluted per common share equivalent for the three months ended September 30, 2014 and 2013, respectively. There were 649,465 and 169,662 options outstanding as of September 30, 2014 and 2013, respectively, that were not included in the calculation of diluted per common share equivalent for the nine months ended September 30, 2014 and 2013, respectively, because the effect would have been anti-dilutive as of September 30, 2014 and 2013, 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 September 30, 2014, there were no 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 at the time of the initial stock option grant. As of September 30, 2014, there were 336,826 options exercised and 355,251 options outstanding under the SIP.

On March 13, 2014, the Company issued 206,868 stock options to its new CEO under a NASDAQ Rule, which allows for the issuance of options outside of a plan for newly hired employees. These options are still outstanding as of June 30, 2014 and reflected in the stock option activity table below.

Effective June 19, 2014, the Company's stockholders voted to approve the 2014 Stock Incentive Plan ("2014-SIP"), with 800,000 shares of Common Stock available to be issued. Under the terms of the 2014-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 at the time of the initial stock option grant. As of September 30, 2014, there were no options exercised, 93,750 options outstanding and 706,250 options or shares still available to be issued under the 2014-SIP.

The weighted average estimated fair value, at their respective dates of grant, of stock options granted in the nine-month periods ended September 30, 2014 and 2013 was $2.42 and $5.39 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:

	For the three months ended		For the nine months ended
	September 30, 2014	September 30, 2013	September 30, 2014	September 30, 2013
Expected term (in years)	-	-	6.3	3.0
Expected volatility	0.00%	0.00%	61.50 % - 96.11 %	93.80 %- 101.30%
Expected dividend yield	0%	0%	0 %	0 %
Risk-free interest rate	0.00%	0.00%	0.83 % - 1.52 %	0.34 % - 0.40%

The Company's results for the three-month periods ended September 30, 2014 and 2013 include share-based compensation expense totaling $118,800 and $62,200, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($- and $500, respectively), research and development ($8,400 and $21,600, respectively) and selling, general and administrative expenses ($110,400 and $40,100, respectively). The results for the nine-month periods ended September 30, 2014 and 2013 include share-based compensation expense totaling $336,900 and $284,100, respectively. Such amounts have been included in the Condensed Consolidated Statements of Operations within cost of goods sold ($700 and $13,900, respectively), research and development ($36,100 and $83,900, respectively) and selling, general and administrative expenses ($300,100 and $186,300, respectively). An operating expense, resulting in income tax benefit, has been recognized in the statement of operations for share-based compensation arrangements.

Stock option compensation expense for the three and nine-month periods ended September 30, 2014 and 2013 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

SEPTEMBER 30, 2014

(UNAUDITED)

The following table provides stock option activity for the nine months ended September 30, 2014:

Stock Options	Number of Shares			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2013		656,398		$	2.57	1.65 years	$	801,888

Granted		343,750			3.43
Exercised		(318,750	)		1.04
Forfeited/expired/cancelled		(25,529	)		3.17
Outstanding at September 30, 2014		655,869		$	3.62	4.17 years	$	243,644

Exercisable at September 30, 2014		265,619		$	3.67	2.19 years	$	132,469

As of September 30, 2014, there was $666,500 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 2.52 years. The total fair value of stock options vested during the nine-month periods ended September 30, 2014 and 2013 was approximately $283,000 and $39,000, 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 nine months ended
	September 30, 2014		September 30, 2013		September 30, 2014		September 30, 2013
Africa	$	541,944	$	1,030,108	$	1,791,749	$	2,887,328
Asia		6,058		32,011		80,815		82,229
Europe		34,205		5,540		105,230		82,869
North America		2,479,410		2,199,090		9,012,447		7,484,668
South America		4,186,264		5,777,965		8,410,274		9,882,501
	$	7,247,881	$	9,044,714	$	19,400,515	$	20,419,595

Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of:

	September 30, 2014		December 31, 2013
Accounts payable – suppliers	$	1,505,137	$	1,815,369
Accrued commissions		753,777		371,905
Accrued royalties / license fees		772,614		1,028,286
Accrued payroll		247,565		328,564
Accrued vacation		228,779		203,444
Accrued bonuses		-		317,372
Accrued expenses – other		311,399		244,550
TOTAL	$	3,819,271	$	4,309,490