ABATIX CORP. AND SUBSIDIARY

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Three Month Period Ended June 30, 2002 Compared to Three Month Period Ended June 30, 2001.

Consolidated net sales for the three months ended June 30, 2002, increased 8 percent to $15,944,000 from $14,783,000 in 2001. The Abatix operating segment net sales grew 9 percent to $15,403,000 in 2002 and the IESI operating segment net sales decreased 12 percent to $541,000 in 2002. The increase in revenue is primarily attributable to the expanding awareness of toxic molds in homes and buildings throughout the U.S., partially offset by a decline in revenues to the construction and industrial manufacturing industries.

Gross profit in the second quarter of 2002 of $4,642,000 increased 16 percent from gross profit in 2001 of $4,019,000 due to increased sales volume and increased gross margin rates due to changes in the sales mix. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 29 percent and 27 percent for 2002 and 2001, respectively.

Selling, general and administrative expenses for the second three months of 2002 of $3,946,000 increased 20 percent over 2001 expenses of $3,300,000. The increase in selling, general and administrative expenses is due primarily to increased labor costs in anticipation of continued growth. These expenses were 25 percent and 22 percent of sales for 2002 and 2001 respectively.

Interest expense of $53,000 decreased approximately $43,000 from 2001 interest expense of $96,000. Lower interest rates in 2002 contributed to reduced interest expense in the current year. The Company’s credit facilities are variable rate notes tied to the Company’s lending institution’s prime rate. Increases in the prime rate could negatively affect the Company’s earnings.

Net earnings for the three months ended June 30, 2002, of $397,000, or $.23 per share, increased $29,000 from net earnings of $368,000, or $.22 per share, for the same period in 2001. The increase in net earnings is primarily due to increased sales volume and lower interest expense, partially offset by higher general and administrative expenses.

Six Month Period Ended June 30, 2002 Compared to Six Month Period Ended June 30, 2001.

Consolidated net sales for the six months ended June 30, 2002, increased 11 percent to $29,894,000 from $26,916,000 in 2001. The Abatix operating segment net sales grew 12 percent to $28,883,000 in 2002 and the IESI operating segment net sales decreased 6 percent to $1,011,000 in 2002. The increase in revenue is primarily attributable to the expanding awareness of toxic molds in homes and buildings throughout the U.S., partially offset by a decline in revenues to the construction and industrial manufacturing industries.

Gross profit in the first six months of 2002 of $8,666,000 increased 17 percent from gross profit in 2001 of $7,407,000 due to increased sales volume. The Company’s gross profit margins, expressed as a percentage of sales, were approximately 29 percent for 2002 and 28 percent for 2001. Although overall margins are expected to remain in the 28 to 29 percent range in 2002, competitive pressures or substantial changes in product mix could negatively impact any and all efforts by the Company to maintain or improve product margins.

Selling, general and administrative expenses for the first six months of 2002 of $7,567,000 increased 22 percent over 2001 expenses of $6,230,000. The increase in selling, general and administrative expenses is due primarily to increased labor costs in anticipation of continued growth. These expenses were 25 percent of sales for 2002 and 23 percent of sales for 2001. Selling, general and administrative expenses are expected to be approximately 25 percent of sales for the year ended December 31, 2002.

Interest expense of $110,000 decreased $78,000 from 2001 interest expense of $188,000. Lower interest rates in 2002 contributed to reduced interest expense in the current year. The Company’s credit facilities are variable rate notes tied to the Company’s lending institution’s prime rate. Increases in the prime rate could negatively affect the Company’s earnings.

Net earnings for the six months ended June 30, 2002, of $120,000 or $.07 per share, decreased $444,000 from net earnings of $564,000, or $.33 per share, for the same period in 2001. The decrease in net earnings is primarily due to the implementation of FASB Statement No. 142.

Liquidity and Capital Resources

The Company’s working capital requirements historically result from the growth of its accounts receivable and inventories, partially offset by increased accounts payable and accrued expenses, associated with increases in sales volume. Net cash provided by operations during the first six months of 2002 of $644,000 resulted from the increase in accounts payable and net earnings adjusted for non-cash charges, partially offset by an increase in accounts receivable. Cash flow from operations for the entire year of 2002 is expected to be positive, although at any given point, it may be negative.

Cash used in non-operating activities during the first six months of 2002 resulted primarily from payments of notes payable to the bank. In addition, the Company purchased $591,000 of fixed assets consisting of autos, computers, furniture and leasehold improvements for the Los Angeles facility.

The Company maintains an $8,000,000 working capital line of credit at a commercial lending institution. The working capital line of credit agreement allows the Company to borrow up to 80 percent of the book value of eligible trade receivables plus the lesser of 40 percent of eligible inventory or $2,000,000. As of August 2, 2002, there are advances outstanding under this credit facility of $5,264,000. Based on the borrowing formula, the Company had the capacity to borrow an additional $2,736,000 as of August 2, 2002. The Company also maintains a $550,000 capital equipment credit facility providing for borrowings at 80 percent of cost on purchases. The advances outstanding under this credit facility as of August 2, 2002, were $131,000. Both credit facilities are payable on demand and bear a variable rate of interest computed at the prime rate less 25 basis points.

Management believes the Company’s current credit facilities, together with cash provided by operations, will be sufficient for its capital and liquidity requirements for the next twelve months. In the event the Company pursues acquisitions and is unable to use its common stock as payment or opens additional locations, the Company might need to negotiate with a lender to secure additional borrowings to finance such activities.

Except for the historical information contained herein, the matters set forth in this Form 10-Q are forward looking and involve a number of risks and uncertainties. Among the factors that could cause actual results to differ materially are the following: the continued long-term impact of the September 11, 2001, tragic events on the commercial construction and domestic preparedness markets, the long-term impact of insurance coverage on mold remediation jobs, adverse weather conditions, inability to hire and train quality people or retain current personnel, changes in interest rates and strong competition. In addition, increases in oil prices or shortages in oil supply could significantly impact the Company’s petroleum based products and its ability to supply those products at a reasonable price.