September 30,   March 31,
                                                       2002          2002
                                                  -----------   -----------
Raw materials................................... $ 2,930,000  $  2,289,000
Work-in-process.................................   1,730,000     1,580,000
Finished goods..................................   1,102,000     1,689,000
                                                  -----------   -----------
                                                 $ 5,762,000  $  5,558,000
                                                  ===========   ===========

In March 2002, the Company terminated certain line of credit and equipment financing loans and entered into new line of credit and equipment financing loans with Comerica Bank-California. The new line of credit provides for borrowings of up to $5,250,000, based on the Company's outstanding accounts receivables and inventory, as defined by the bank: up to $4,000,000 is collateralized by domestic receivables and up to $1,250,000 is collateralized by foreign receivables. This new line of credit bears interest at the prime rate, which was 4.75% at September 30, 2002, and is payable monthly. Of the $4,000,000 domestic line of credit, $820,000 was committed to secure a letter of credit for the Company's facilities lease. The domestic line of credit terminates upon notification by either party and the outstanding balance is payable upon demand. The foreign line of credit expired in September 2002 and was renewed until September 2003. The Company's weighted average interest rate on borrowings under its line of credit facilities during the three months ended September 30, 2002 and 2001 was 4.75% and 7.43%, respectively. The Company paid down $1,000,000 of its domestic line of credit during the three and six months ended September 30, 2002. At September 30, 2002, the amount outstanding under the Company's line of credit, which consists of both domestic and foreign borrowings, was $1,000,000 and $2,062,000 was available for additional borrowings. In October 2002, the Company paid down the $1,000,000 remaining balance of its domestic line of credit.

The balance of the new equipment financing loan at September 30, 2002 was $1,167,000. The equipment loan bears interest at the prime rate plus 1%, which was 5.75% at September 30, 2002, and is payable in monthly installments of principal and interest totaling approximately $42,000 over a period of three years. The weighted average interest rate on equipment financing loans during the three months ended September 30, 2002 and 2001 was 5.75% and 7.93%, respectively.

The line of credit and equipment financing agreements contain certain financial covenants, which are evaluated on a quarterly basis. Included in these financial covenants, among other stipulations, is a requirement that the Company have a minimum net income of $25,000 before preferred stock dividends and accretion in any three quarters of a fiscal year, provided that any loss before preferred stock dividends and accretion incurred in the remaining quarter is not to exceed $250,000. The Company is also required to be profitable, as defined, on a fiscal year to date basis beginning with the six month period ending September 30 and to have net income before preferred stock dividends and accretion on preferred stock of $1,150,000 for the fiscal year ending March 31, 2003. In addition, the Company is required to have a minimum liquidity coverage, as defined, of not less than 1.25 to 1.00, cash flow coverage, as defined, of not less than 1.20 to 1.00, debt to net worth ratio, as defined, not greater than 1.00 to 1.00 and to maintain a tangible effective net worth, as defined, of not less than $15,000,000 to be increased by 100% of any net equity capital raised and a minimum of 50% of net income. At September 30, 2002, the Company was in compliance with all of these covenants.

Borrowings under the line of credit and equipment financing loans are secured by a pledge of the Company's net book value of assets of $24.5 million at September 30, 2002 including its intellectual property.

The Company currently operates in one segment and develops, manufactures and markets portable blood analysis systems for use in any patient care setting to provide clinicians with rapid blood constituent measurements. The following is a summary of revenues from external customers for each group of products and services provided by the Company (rounded in thousands):

                                                      Three Months Ended         Six Months Ended
                                                        September 30,              September 30,
                                                  -------------------------  -------------------------
                                                     2002          2001         2002          2001
                                                  -----------   -----------  -----------   -----------
Blood chemistry analyzers....................... $ 2,572,000  $  2,062,000    4,570,000     4,915,000
Reagent discs and kits..........................   5,416,000     4,237,000   10,262,000     8,602,000
Other...........................................     631,000       420,000    1,168,000       764,000
                                                  -----------   -----------  -----------   -----------
  Product sales, net............................   8,619,000     6,719,000   16,000,000    14,281,000
Development and licensing
  revenue.......................................      81,000        65,000      116,000       100,000
                                                  -----------   -----------  -----------   -----------
Total revenues.................................. $ 8,700,000  $  6,784,000   16,116,000    14,381,000
                                                  ===========   ===========  ===========   ===========

Two distributors, Vedco Inc. and DVM Resources accounted for 35% and 11%, respectively, of total revenues for the three-month period ended September 30, 2002, and 48% and 5%, respectively, of total revenues for the three- month period ended September 30, 2001. Vedco Inc. and DVM Resources accounted for 36% and 9%, respectively, of total revenues for the six-month period ended September 30, 2002, and 47% and 6%, respectively, of total revenues for the six-month period ended September 30, 2001. The following is a summary of revenues by geographic region based on customer location (rounded in thousands):

                                                      Three Months Ended         Six Months Ended
                                                        September 30,              September 30,
                                                  -------------------------  -------------------------
                                                     2002          2001         2002          2001
                                                  -----------   -----------  -----------   -----------
United States .................................. $ 7,484,000  $  5,911,000   13,777,000  $ 12,673,000
Europe .........................................     989,000       595,000    1,797,000     1,117,000
Asia and Latin America..........................     227,000       278,000      542,000       591,000
                                                  -----------   -----------  -----------   -----------
Total .......................................... $ 8,700,000  $  6,784,000   16,116,000  $ 14,381,000
                                                  ===========   ===========  ===========   ===========

Substantially all of the Company's long-lived assets are located in the United States.

Series E Convertible Preferred Stock - In March 2002 and April 2002, the Company sold 3,750 and 3,620 shares of Series E convertible preferred stock (the "Series E Preferred") at a per share price of $1,000, resulting in net cash proceeds to the Company aggregating $6,812,000. The Company recorded stock offering proceeds receivable of $3,446,000 for the first closing of Series E Preferred at March 31, 2002. The proceeds were received by the Company on April 3, 2002. The Series E Preferred is non-voting and pays an annual cumulative dividend of 6.5% of the original issue price per share, payable semiannually in cash or shares of common stock at the Company's election. Upon the liquidation of, dissolution of, winding-up of, or change of control in Abaxis, holders of the Series E Preferred are entitled to receive $1,000 per share, the original issue price, plus any accrued but unpaid dividends, as a liquidation preference prior to Abaxis making any distributions to holders of common stock.

During the three months ended September 30, 2002, certain holders of Series E Preferred converted 1,800 shares into 276,922 shares of common stock. The remaining shares of Series E Preferred automatically converts into 856,924 shares of common stock upon the earlier of: (i) the first date following March 28, 2003 on which the closing per share price of Abaxis common stock exceeds $12.00 for twenty consecutive trading days (the "Automatic Price Conversion Date"), or (ii) March 28, 2007; provided, however, that if the closing sales price of the common stock as reported on Nasdaq National Market System is less than $6.50 for each of the twenty (20) consecutive trading days immediately prior to and including March 28, 2007, then the Series E preferred stock will convert into common stock automatically upon the earlier to occur of (A) March 28, 2008, or (B) the Automatic Price Conversion Date. The shares may also be converted at the option of the holder at any time. The number of common shares into which the Series E convertible preferred stock is convertible is subject to adjustment for anti-dilution, stock splits, and other certain events.

Each Series E Preferred investor received a warrant to purchase 50 shares of common stock for each preferred share acquired. The common stock warrants are valid for five years and exercisable at $7.00 per share. Approximately $1,235,000 of the aggregate proceeds were attributed to the value of the warrants and allocated to common stock. The fair value of the warrants was determined using the Black-Scholes option-pricing model with the following assumptions: contractual life of five years, volatility of 78.6%, risk free interest rate of 4.57%-4.92% and no dividends during the contractual term. In connection with the sale of the Series E convertible preferred stock the Company issued to advisors for services a fully-vested warrant to purchase 113,385 shares of its common stock at an exercise price of $6.50 per share and 25,000 shares of its common stock. The aggregate value of these warrants and shares of common stock of $601,000 was recorded as a stock issuance cost. The value of the warrants was determined using the Black-Scholes option pricing model with assumptions substantially consistent with those used for valuing the warrants issued to the investors.

In accordance with the provisions of Emerging Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No. 98-5 `Accounting for Convertible Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios', to Certain Convertible Securities", which became effective in November 2000, the allocated value of the Series E convertible preferred stock contained a beneficial conversion feature calculated based on the difference between the effective conversion price of the proceeds allocated to the Series E convertible preferred stock and the fair market value of the common stock at the date of issuance. The Company determined an aggregate dividend charge of $957,000 representing the value of the beneficial conversion feature.

The amounts recorded in the Company's financial statements for the three and six months ended September 30, 2002, representing the amounts attributed to the closings in April 2002, were as follows: net cash proceeds - $3,366,000 ($254,000 of issuance costs incurred), allocation to warrants issued to investors - $590,000, warrants issued to advisors for services - $361,000, and the amount of the dividend charge related to the value of beneficial conversion feature - $370,000.

On March 28, 2002, Idexx Laboratories, Inc., the Company's principal competitor in the veterinary diagnostic market, filed a complaint in the United States District Court for the District of Maine (Civil Action Docket No. 02-69-P-H) alleging that a canine heartworm test produced for the Company by a third party, S.A. Scientific, Inc., and sold using the Abaxis brand infringes on U.S. Patents Nos. 4,965,187 and 4,939,096 held by Idexx. In addition to claiming unspecified monetary damages, Idexx requested that the Court issue a preliminary injunction to prevent Abaxis and S.A. Scientific, Inc. from making, using, selling, offering to sell in the United States or importing into the United States the canine heartworm test until a trial on the merits of the claim is completed. The Company has incurred and will continue to incur expenses in the defense of such claims. For the three and six months ended September 30, 2002, revenues from sales of canine heartworm test were $224,000 and $467,000, respectively. On September 3, 2002, the United States District Court of Maine granted a preliminary injunction in favor of Idexx, under which the Company cannot, pending the resolution of patent litigation by Idexx against the Company, make, use, sell, offer to sell or import the enjoined version of the VetScan Canine Heartworm Antigen Test manufactured by S.A. Scientific, Inc. of San Antonio, Texas in the United States. This injunction will adversely affect the Company's revenues. The Company has filed an appeal of the Court's preliminary injunction to the Court of Appeals for the Federal Circuit.

Although the parties are currently engaged in pre-trial motions and depositions, the parties have entered into negotiations to begin mediation and potentially reach a settlement of the Idexx claims. If a settlement is not reached, management intends to defend the Company vigorously. On May 8, 2002, the Company entered into an agreement with S.A. Scientific, Inc. under which the two parties agreed to joint representation by counsel to defend the legal action filed by Idexx. The Company's portion of legal and related costs to defend the legal action filed by Idexx were $505,000 and $729,000, for the three and six months ended September 30, 2002, respectively.

This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect Abaxis' current views with respect to future events and financial performance. In this report, the words "will", "anticipates", "believes", "expects", "future", "intends", "plans", and similar expressions identify forward-looking statements. These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, that could cause actual results to differ materially from historical results or those anticipated. Such risks and uncertainties include market acceptance of Abaxis' products and continuing development of its products, obtaining required Food and Drug Administration ("FDA") clearance and other government approvals, risks associated with manufacturing and distributing products on a commercial scale, including complying with Federal and state food and drug regulations, and general market conditions and competition. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Abaxis assumes no obligation to update any forward-looking statements as circumstances change.

In the three months ended September 30, 2002, our domestic revenues accounted for 86% of our total revenues versus 87% in the three months ended September 30, 2001. In the six months ended September 30, 2002, the Company's domestic revenues accounted for 85% of total revenues versus 88% in the six months ended September 30, 2001. International revenues accounted for 14% of total revenues in the three months ended September 30, 2002 versus 13% in the three months ended September 30, 2001. In the six months ended September 30, 2002, international revenues accounted for 15% of total revenues versus 12% in the six months ended September 30, 2001. The reason for the decrease in domestic revenues and commensurate increase in international revenues as a percentage of total revenues was due primarily to our strategy to expand European markets.

Sales for any future periods are not predictable with a significant degree of certainty. We generally operate with limited order backlog because our products typically are shipped shortly after orders are received. As a result, product sales in any quarter are generally dependent on orders booked and shipped in that quarter. Our expense levels, which are to a large extent fixed, are based in part on our expectations of future revenues. Accordingly, we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any such shortfall would negatively affect our operating results and financial condition. Our sales may be adversely impacted by pricing pressure from competitors. Our ability to be consistently profitable will depend, in part, on our ability to increase our sales volumes of our VetScan DXS and Piccolo products and to compete with other competitors successfully. We believe that period to period comparisons of our results of operations are not necessarily meaningful.

There has been little or no impact on our business due to inflation.

We continue to explore the application of our proprietary technology used to produce the dry reagents used in the reagent discs, called the Orbos Discrete Lyophilization Process, to other companies' products. This process allows the production of an accurate, precise amount of active chemical ingredients in the form of a soluble bead. We believe that the Orbos process has broad applications in products where delivery of active ingredients in a stable, pre-metered format is desired. We have contracts with Becton Dickinson Immunocytometry Systems and Amersham Biosciences Corp. (formerly Pharmacia Biotech, Inc.) to either supply products or license Orbos technology. We are currently working with other companies to determine the potential suitability of the Orbos technology to these companies' products. As resources permit, we will pursue other development, licensing or manufacturing agreement opportunities for our Orbos technology with other companies. There can be no assurances, however, that other applications will be identified or that additional agreements with us will result.

During the three months ended September 30, 2002, we reported total revenues of $8,700,000, a $1,916,000 or 28% increase from total revenues of $6,784,000 for the three months ended September 30, 2001. The revenue increase was due to an increase of $510,000 in instrument sales, an increase of $1,179,000 in reagent sales and an increase of $227,000 in other sales most of which was due to sales from the canine heartworm tests. Our instrument and reagent sales accounted for 30% and 63%, respectively, of our product sales in the three months ended September 30, 2002 compared to 31% and 63%, respectively, of our product sales in the three months ended September 30, 2001. During the six months ended September 30, 2002, we reported total revenues of $16,116,000, a $1,735,000 or 12% increase from total revenues of $14,381,000 for the six months ended September 30, 2001. Our instrument and reagent sales accounted for 29% and 64%, respectively, of our product sales in the six months ended September 30, 2002 compared to 34% and 60%, respectively, of our product sales in the six months ended September 30, 2001.

During the three months ended September 30, 2002, we reported development and licensing revenues of $81,000, a $16,000 or 25% increase from development and licensing revenues of $65,000 for the three months ended September 30, 2001. During the six months ended September 30, 2002, we reported development and licensing revenues of $116,000, a $16,000 or 16% increase from development and licensing revenues of $100,000 for the six months ended September 30, 2001. The fluctuations in development and licensing revenue are due to changes in our customers' use of our Orbos technology.

Total revenues in the U.S. for the three months ended September 30, 2002 were $7,484,000, a $1,573,000 or 27% increase from total U.S. revenues of $5,911,000 for the three months ended September 30, 2001. Total revenues in the U.S. for the six months ended September 30, 2002 were $13,777,000, a $1,104,000 or 9% increase from total U.S. revenues of $12,673,000 for the six months ended September 30, 2001.

Total revenues in Europe for the three months ended September 30, 2002 were $989,000, a $394,000 or 66% increase from revenues of $595,000 for the three months ended September 30, 2001. Total revenues in Europe for the six months ended September 30, 2002 were $1,797,000, a $680,000 or 61% increase from revenues of $1,117,000 for the six months ended September 30, 2001. The increase in revenues reflects both an increase in instrument sales of approximately $273,000 and reagent sales of approximately $407,000.

Total revenues in Asia and Latin America for the three months ended September 30, 2002 were $227,000, a $51,000 or 18% decrease from revenues of $278,000 for the three months ended September 30, 2001. Total revenues in Asia and Latin America for the six months ended September 30, 2002 were $542,000, a $49,000 or 8% decrease from revenues of $591,000 for the six months ended September 30, 2001. The slight decrease in revenues in Asia and Latin America reflects a decrease in reagent sales of approximately $12,000 and a decrease in instrument sales of $37,000.

Research and development expenses were $935,000, or 11% of total revenues, in the three months ended September 30, 2002, compared to $949,000, or 14% of total revenues, in the three months ended September 30, 2001. Research and development expenses were $1,940,000, or 12% of total revenues, in the six months ended September 30, 2002, compared to $1,844,000, or 13% of total revenues, in the six months ended September 30, 2001. We expect the dollar amount of research and development expenses to increase in the fiscal year ending March 31, 2003 as compared to fiscal year ended March 31, 2002 and slightly increase as a percentage of total revenues as we continue to allocate resources for development and clinical trials of new test methods to expand our test menus. There can be no assurance, however, that we will undertake such research and development activities in future periods or, if we do, that such activities will be successful.

Income tax expense totaled $3,000 for the three months ended September 30, 2002 compared to income tax expense of $0 for the three months ended September 30, 2001. Income tax expense in these two periods primarily represents taxes on the portion of taxable income for which net operating loss carry-forwards could not be utilized under the federal alternative minimum tax rules. Income tax expense totaled $13,000 for the six months ended September 30, 2002 compared to $4,000 for the six months ended September 30, 2001.

As of September 30, 2002, we had $10,631,000 in cash and cash equivalents. We expect to incur substantial additional costs to support our future operations, including further commercialization of our products and development of new test methods that will allow us to expand our veterinary market and further penetrate the human diagnostic market; acquisition of capital equipment for our manufacturing facility, which includes the ongoing costs related to continuing development of our current and future products; and additional pre-clinical testing and clinical trials for our current and future products.

We anticipate that our existing capital resources, debt financing, and anticipated revenue from the sales of our products will be adequate to satisfy our currently planned operating and financial requirements through the next twelve months. Our future capital requirements will largely depend upon the increased market acceptance of our point-of-care blood analyzer products. However, our sales in the human medical market are not predictable due to our limited experience with our products in that market.

Net cash provided by operating activities during the six months ended September 30, 2002 was $1,539,000 compared to net cash provided by operating activities of $963,000 in the six months ended September 30, 2001. Net cash provided by operating activities was due primarily to net income of $406,000 plus depreciation and amortization of $773,000, a decrease of $296,000 in prepaid expenses and increases totaling $702,000 in accounts payable and deferred rent. These sources of cash were partially offset by increases totaling $462,000 in trade receivables, inventories, deposits and other assets and decreases in accrued payroll and related expenses, warranty reserve, other accrued liabilities, deferred revenue and long-term commission obligations totaling $154,000.

Net cash used in investing activities for the six months ended September 30, 2002 was $670,000 as compared to net cash used of $416,000 for the six months ended September 30, 2001. The increase in net cash used is due to an increase in the purchases of property and equipment.

Net cash provided by financing activities for the six months ended September 30, 2002 was $5,664,000 as compared to net cash used of $96,000 for the six months ended September 30, 2001. Net cash provided by financing activities for the six months ended September 30, 2002 was primarily the result of net cash proceeds from issuance of Series E preferred stock of $6,812,000 and the exercise of common stock options of $148,000 offset by repayments on the line of credit of $1,000,000 and equipment financing and lease obligations of $296,000. Net cash provided by financing activities for the six months ended September 30, 2001 was primarily the result of proceeds from the exercise of common stock options of $289,000 offset by repayment on equipment financing and lease obligations of $385,000.

Series E Convertible Preferred Stock - In March 2002 and April 2002, we sold 3,750 and 3,620 shares, respectively, of Series E convertible preferred stock (the "Series E Preferred") at a per share price of $1,000, resulting in aggregate net cash proceeds to us of $6,812,000. We recorded stock offering proceeds receivable of $3,446,000 for the first closing of Series E Preferred at March 31, 2002. The proceeds were received by us on April 3, 2002. The Series E Preferred is non-voting and pays an annual cumulative dividend of 6.5% of the original issue price per share, payable semi-annually either in cash or shares of common stock at our election. Upon the liquidation of, dissolution of, winding-up of, or change of control in Abaxis, holders of the Series E Preferred are entitled to receive $1,000 per share, the original issue price, plus any accrued but unpaid dividends, as a liquidation preference prior to our making any distributions to holders of our common stock.

In accordance with the provisions of Emerging Issues Task Force (EITF) Issue 00-27, "Application of EITF Issue No. 98-5. "Accounting for Convertible Securities with Beneficial Conversion Features of Contingently Adjustable Conversion Ratios to Certain Convertible Securities", the allocated value of the Series E convertible preferred stock contained a beneficial conversion feature calculated based on the difference between the effective conversion price of the proceeds allocated to the Series E convertible preferred stock and the fair market value of the common stock at the date of issuance. According, we determined an aggregate dividend charge of $957,000 representing the value of the beneficial conversion feature.

The amounts recorded in our financial statements for the three and six months ended September 30, 2002, representing the amounts attributed to the closings in April 2002, were as follows: net cash proceeds - $3,366,000 ($254,000 of issuance costs incurred), allocation to warrants issued to investors - $590,000, warrants issued to advisors for services - $361,000, and the amount of the dividend charge related to the beneficial conversion feature - $370,000.

Line of Credit and Long-Term Debt - In March 2002, we terminated certain line of credit and equipment financing loans and entered into new line of credit and equipment financing loans with Comerica Bank-California. The new line of credit provides for borrowings of up to $5,250,000, based on our outstanding accounts receivables and inventory, as defined by the bank: up to $4,000,000 is collateralized by domestic receivables and up to $1,250,000 is collateralized by foreign receivables. This new line of credit bears interest at the prime rate, which was 4.75% at September 30, 2002, and is payable monthly. Of the $4,000,000 domestic line of credit, $820,000 was committed to secure a letter of credit for our facilities lease. The domestic line of credit terminates upon notification by either party and the outstanding balance is payable upon demand. The foreign line of credit expired in September 2002 and was renewed until September 2003. The weighted average interest rate on borrowings under our line of credit facilities during the three months ended September 30, 2002 and 2001 was 4.75% and 7.43%, respectively. We paid down $1,000,000 of our domestic line of credit during the three and six months ended September 30, 2002. At September 30, 2002, the amount outstanding under our line of credit, which consists of both domestic and foreign borrowings, was $1,000,000 and $2,062,000 was available for additional borrowings. In October 2002, we paid down the $1,000,000 remaining balance of our domestic line of credit.

The balance of the new equipment financing loan at September 30, 2002 was $1,167,000. The equipment loan bears interest at the prime rate plus 1%, which was 5.75% at September 30, 2002, and is payable in monthly installments of principal and interest totaling approximately $42,000 over a period of three years. The weighted average interest rate on equipment financing loans during the three months ended September 30, 2002 and 2001 was 5.75% and 7.93%, respectively.

The line of credit and equipment financing agreements contain certain financial covenants, which are evaluated on a quarterly basis. Included in these financial covenants, among other stipulations, is a requirement that we have a minimum net income of $25,000 before preferred stock dividends and accretion in any three quarters of a fiscal year, provided that any loss before preferred stock dividends and accretion incurred in the remaining quarter is not to exceed $250,000. We are also required to be profitable, as defined, on a fiscal year to date basis beginning with the six month period ending September 30 and to have net income before preferred stock dividends and accretion on preferred stock of $1,150,000 for the fiscal year ending March 31, 2003. In addition, we are required to have a minimum liquidity coverage, as defined, of not less than 1.25 to 1.00, cash flow coverage, as defined, of not less than 1.20 to 1.00, debt to net worth ratio, as defined, not greater than 1.00 to 1.00 and to maintain a tangible effective net worth, as defined, of not less than $15,000,000 to be increased by 100% of any net equity capital raised and a minimum of 50% of net income. At September 30, 2002, we were in compliance with all of these covenants.

Borrowings under the line of credit and equipment financing loans are secured by a pledge of our net book value of assets of $24.5 million at September 30, 2002 including our intellectual property.

Critical Accounting Policies - We have identified certain accounting policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to the identified critical accounting policies on our business operations are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2002 filed with the Securities and Exchange Commission. The impact and associated risks of the identified critical accounting policies for the three months ended September 30, 2002 are consistent with the discussions in our Annual Report on Form 10-K for the fiscal year ended March 31, 2002.

New Accounting Pronouncements - In September 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of long-lived assets and the associated asset retirement costs. We adopted SFAS No. 143 effective April 1, 2002. The adoption of SFAS No. 143 did not have a significant impact on our financial position or result of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. We adopted SFAS No. 144 effective April 1, 2002. The adoption did not have a significant impact on our financial position or result of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 generally requires that any gains or losses on extinguishment of debt in current or prior periods be classified as other income (expense). We adopted SFAS No. 145 effective April 1, 2002. The adoption did not have a significant impact on our financial position or result of operations.

• the market acceptance of our products;
• our continuing development of our products;
• obtaining required Food and Drug Administration clearance and other federal, state and local government approvals;
• the manufacture and distribution of our products on a commercial scale;
• general market conditions; and
• competition.

When used in these risk factors, the words "anticipates," "believes," "expects," "intends," "plans," "future," and similar expressions identify forward-looking statements. Our actual results could differ materially from those that we project in the forward-looking statements as a result of factors that we have set forth throughout this document as well as factors of which we are currently not aware.

Although we believe that our blood analyzers offer consumers many advantages, including substantial cost savings, in terms of the actual product and implementation of it procedurally, the medical market is highly regulated, structured and often slow to change. If we are unable to convince large numbers of medical clinics, hospitals and other points-of-care of the benefits of our products, we will suffer lost sales and could fail to achieve anticipated revenue.

• further commercialization of our products and development of new test methods to allow us to further penetrate the human diagnostic market and the veterinary diagnostic market;
• our need to acquire capital equipment for our manufacturing facilities, which includes the ongoing implementation of our semi-automated manufacturing lines to provide capacity for the production of commercial volumes of our products;
• research and design costs related to the continuing development of our current and future products; and
• additional pre-clinical testing and clinical trials for our current and future products.

To the extent that our existing resources and anticipated revenue from the sale of our products are insufficient to fund our activities, we will have to raise additional funds from the issuance of public or private securities. We may not be able to raise additional funding, or if we are able to, we may not be able to raise funding on acceptable terms. We may dilute then-existing shareholders if we raise additional funds by issuing new equity securities. Alternatively, we may have to relinquish rights to certain of our technologies, products and/or sales territories if we are required to obtain funds through arrangements with collaborative partners. If we are unable to raise needed funds, we may be required to curtail our operations significantly. This would materially adversely affect our operating results and financial condition.

Consequently, we cannot estimate the ultimate impact on our financial condition, results of operations or cash flows. In the event that the Court finds in favor of Idexx at trial, we may be forced to pay Idexx monetary damages, be permanently enjoined from selling the enjoined version of the canine heartworm product manufactured by S.A. Scientific, be required to seek a license agreement with Idexx pertaining to the patents, or a combination thereof. Further, we believe that offering a canine heartworm product is an important component of our suite of veterinary products and, in the event that we are permanently enjoined from selling the canine heartworm antigen test manufactured by S.A. Scientific, we may be unable to either develop an alternate canine heartworm product that does not infringe upon the Idexx patents or Idexx may offer us commercially unfeasible terms for licensing their patents. Consequently, our ability to further penetrate the veterinary market would be limited and thus our revenues and overall financial condition would be adversely affected. Even if we are successful in defending against the Idexx action, the defense of such claims has been and will continue to be expensive and may divert our management's focus away from running our business which would thus adversely affect our results of operations.

As of September 30, 2002, we have filed 25 patent applications in the United States and have been issued 23 patents. Additionally, we have filed several international patent applications covering the same subject matter as our domestic applications. The patent position of any medical device manufacturer, including Abaxis, is uncertain and may involve complex legal and factual issues. Consequently, we may not be issued any additional patents, either domestically or internationally. Furthermore, our patents may not provide significant proprietary protection because there is a chance that they will be circumvented or invalidated. We cannot be certain that we were the first creator of the inventions covered by our issued patents or pending patent applications, or that we were the first to file patent applications for these inventions, because (1)  the United States Patent and Trademark Office maintains all patent applications in secrecy until it issues the patents and (2)  publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months. We may have to participate in interference proceedings, which are proceedings in front of the U.S.  Patent and Trademark Office, to determine who will be issued a patent. These proceedings could be costly and could be decided against us.

We also rely upon copyrights, trademarks and unpatented trade secrets. Others may independently develop substantially equivalent proprietary information and techniques that would undermine our proprietary technologies. Further, others may gain access to our trade secrets or disclose such technology. Although we require our employees, consultants and advisors to execute agreements that require that our corporate information be kept confidential and that any inventions by these individuals are property of Abaxis, there can be no assurance that these agreements will provide meaningful protection or adequate remedies for our trade secrets in the event of unauthorized use or disclosure of such information. The unauthorized dissemination of our confidential information would negatively impact our business.

We use several key components that are currently available from limited or sole sources as discussed below:

We operate on a purchase order basis with all of the suppliers of our molded plastic reagent disks, reagent chemicals, and blood analyzer components and thus these suppliers are under no contractual obligation to supply us with their products or to do so at specified prices. Although we believe that there are potential alternate suppliers available for these critical components, to date we have not qualified additional vendors beyond those referenced above.

We Compete With Larger, Better Established Entities Such As Hospitals And Commercial Laboratories

Blood analysis is a well established field in which there are a number of competitors that have substantially greater financial resources and larger, more established marketing, sales and service organizations than we do. We compete with the following organizations:

Historically, hospitals and commercial laboratories perform the most human medical testing, and commercial laboratories perform the most veterinary medical testing. We have identified five principal factors that customers typically use to evaluate our products and those of our competitors. These factors are:

• range of tests offered;  
• the immediacy of results;  
• cost effectiveness;
• ease of use; and
• reliability of results.

By regulating the maximum amount of reimbursement they will provide for blood testing services, third party payors, such as HMOs, pay-per-service insurance plans, Medicare and Medicaid, can indirectly affect the pricing or the relative attractiveness of our human testing products. For example, the Health Care Financing Administration sets the level of reimbursement of fees for blood testing services for Medicare beneficiaries. If third party payors decrease the reimbursement amounts for blood testing services, it may decrease the amount that physicians and hospitals are able to charge patients for such services. Consequently, we will need to charge less for our products. If the government and third party payors do not provide for adequate coverage and reimbursement levels to allow health care providers to use our products, the demand for our products will decrease.

• Need for FDA Certification for Our Medical Device Products

Our Piccolo products are regulated under the 1976 Medical Device Amendments to the Food, Drug and Cosmetic Act, which is administered by the Food and Drug Administration. The FDA classified our initial Piccolo products as "Class  II" devices. Class II devices require us to submit to the FDA a pre-market notification form or 510(k). The FDA uses the 510(k) to substantiate product claims that are made by medical device manufacturers prior to marketing. In our 510(k) notification, we must, among other things, establish that the product we plan to market is "substantially equivalent" to (1) a product that was on the market prior to the adoption of the 1976 Medical Device Amendment or (2) to a product that the FDA has previously cleared under the 510(k) process. The FDA review process of a 510(k) notification can last anywhere from three months to over a year, and the FDA must issue a written order finding "substantial equivalence" before a company can market a medical device. To date, we have received market clearance from the FDA for our Piccolo System and 19 reagent tests that we have on five reagent discs. We are currently developing additional tests that the FDA will have to clear through the 510(k) notification procedures. These new test products are crucial for our success in the human diagnostic market. If we do not receive 510(k) clearance for a particular product, we will not be able to sell that product in the United States.

• Need to Comply with Manufacturing Regulations

The 1976 Medical Device Amendment also requires us to manufacture our Piccolo products in accordance with Good Manufacturing Practices guidelines. Current Good Manufacturing Practice requirements are set forth in the quality system regulation. These requirements regulate the methods used in, and the facilities and controls used for, the design, manufacture, packaging, storage, installation and servicing of our medical devices intended for human use. Our manufacturing facility is subject to periodic audits. In addition, various state regulatory agencies may regulate the manufacture of our products. For example, we have obtained a license from the State of California to manufacture our products. In September 1996, the FDA granted our manufacturing facility "in compliance" status, based on the regulations for Good Manufacturing Practices for medical devices. We are scheduled for inspection by the FDA and the State of California on a routine basis, typically once every 24 months. The most recent inspection was by the State of California in April 2001 with licensing for the new Union City facility granted in early May 2001. We cannot assure you that we will successfully pass a re- inspection by the FDA or the State of California. In addition, we cannot assure you that we can comply with all current or future government manufacturing requirements and regulations. If we are unable to comply with the regulations, or if we do not pass routine inspections, our business and results of operations will be materially adversely affected.

• Effects of the Clinical Laboratory Improvement Amendments on Our Products

Our Piccolo products are affected by the Clinical Laboratory Improvement Amendments of 1988. The Clinical Laboratory Improvement Amendments are intended to insure the quality and reliability of all medical testing in the United States regardless of where tests are performed. The current Clinical Laboratory Improvement Amendments divide laboratory tests into three categories: "simple," "moderately complex" and "highly complex." Tests performed using the Piccolo system are in the "moderately complex" category. This category requires that any location in which testing is performed be certified as a laboratory. Hence, we can only sell our Piccolo products to customers who meet the standards of a laboratory. To receive "laboratory" certification, a testing facility must be certified by the Health Care Financing Administration. After the testing facility receives a "laboratory" certification, it must then meet the Clinical Laboratory Improvement Amendments regulations. Because we can only sell our Piccolo products to testing facilities that are certified "laboratories," the market for our products is correspondingly constrained. Consequently, the market for our Piccolo products will be confined to those testing facilities that are certified as "laboratories" and our growth will be limited accordingly.

•  We Are Subject to Various Federal, State and Local Regulations

Federal and state regulations regarding the manufacture and sale of health care products and diagnostic devices may change. We cannot predict what impact, if any, such changes would have on our business. In addition, as we continue to sell in foreign markets, we may have to obtain additional governmental clearances in those markets. We may not be able to obtain regulatory clearances for our products in the United States or in foreign markets, and the failure to obtain these regulatory clearances will materially adversely affect our business and results of operations.

Although we believe that we will be able to comply with all applicable regulations of the Food and Drug Administration and of the State of California, including Quality System Regulations, current regulations depend on administrative interpretations. Future interpretations made by the Food and Drug Administration, the Health Care Finance Administration or other regulatory bodies may adversely affect our business.

We May Inadvertently Produce Defective Products, Which May Subject Us to Significant Warranty Liabilities or Product Liability Claims And We May Have Insufficient Product Liability Insurance

Our business involves applying sophisticated methods to raw materials and producing defect-free medical test equipment. Although we have established procedures for quality control on both the raw materials that we receive from suppliers and our manufactured final products, these procedures may prove inadequate to detect a defect that either occurs in limited quantities or that we have not anticipated. Should we inadvertently ship defective products, we may be subject to substantial claims under our warranty policy. Further, our business exposes us to potential product liability risks, which are inherent in the testing, manufacturing and marketing of human and veterinary medical products. We currently maintain product liability insurance. We believe that this insurance is adequate for our needs, taking into account the risks involved and cost of coverage. However, our product liability insurance may be insufficient to cover potential liabilities. In addition, in the future the coverage that we require may be unavailable on commercially reasonable terms, if at all. Even with our current insurance coverage, a mass product defect, product liability claim or recall could materially adversely affect our business or our financial condition.

We are subject to stringent federal, state and local laws, rules, regulations and policies that govern the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes. In particular, we are subject to laws, rules and regulations governing the handling and disposal of biohazardous materials used in the development and testing of our products. We handle and dispose of human and veterinary blood samples for testing (whole blood, plasma, serum) and we pay approximately $40,000 per year to comply with applicable environmental regulations. Although we believe that we have complied with applicable laws and regulations in all material respects and have not been required to take any action to correct any noncompliance, we may have to incur significant costs to comply with environmental regulations if our manufacturing to commercial levels continues to increase. In addition, if a government agency determines that we have not complied with these laws, rules and regulations, we may have to pay significant fines and/or take remedial action that would be expensive.

Our success depends on the efficient and uninterrupted operation of our manufacturing operations, which are co-located with our corporate headquarters in Union City, California. A failure of manufacturing operations, be it in the development and manufacturing of our VetScan or Piccolo analyzers or the reagent discs used in the analyzers could result in our inability to supply customer demand.

We do not have a backup facility to provide redundant manufacturing capacity in the event of a system failure. Accordingly, if our Union City location experienced a system failure, or regulatory problem that temporarily shut-down our manufacturing facility, our manufacturing ability would become unavailable until we were able to bring an alternative facility online, a process which could take several weeks or even months. These manufacturing operations are also vulnerable to damage from fire, floods, earthquakes, power loss, telecommunications failures, break-ins and similar events. Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur. Additionally, our computer servers may be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions.

During 2001, the western United States (and California in particular) experienced repeated episodes of diminished electrical power supply. If such episodes recur, certain of our operations or facilities may be subject to "rolling blackouts" or other unscheduled interruptions of electrical power. The prospect of such unscheduled interruptions may continue for the foreseeable future and we are unable to predict either their occurrence, duration or cessation. In addition, due to these power supply shortages, we may be subject to significantly greater power costs which may adversely affect our financial results.

Fluctuations In Foreign Exchange Rates And The Possible Lack Of Financial Stability In Foreign Countries Could Prevent Overseas Sales Growth

Although our international sales are denominated in U.S. dollars, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets. Our operating results could also be adversely affected by the economic conditions of our overseas markets.

Our Stock Price Is Highly Volatile And Investing In Our Stock Involves A High Degree Of Risk

The market price of our common stock, like the securities of many other medical products companies, fluctuates over a wide range, and will continue to be highly volatile in the future. During the past two fiscal years, our stock price traded at a high of $8.06 on April 6, 2000 and a low of $2.69 on April 5, 2001. The following factors may affect the market price of our common stock:

      Because our stock price is so volatile, investing in our common stock is highly risky. A potential investor must be able to withstand the loss of his entire investment in our common stock.

For our accounts receivable line of credit, the interest rate is equal to the prime rate. Consequently, an increase in the prime rate would expose us to higher interest expenses. The balance on our accounts receivable line of credit was $1,000,000 as of September 30, 2002. Based on this balance, for each 1% increase in the prime rate, we would pay approximately $2,500 of additional interest each quarter.

All of our sales are denominated in US dollars, except for sales under our OEM agreement to provide VetScan systems to MELET which are denominated in Euros. Sales to MELET during the three months ended September 30, 2002 were less than 3% of our total revenues. There was no amount owed by MELET at September 30, 2002.

As a matter of management policy, we do not currently enter into transactions involving derivative financial instruments. In the event we do enter into such transactions in the future, such items will be accounted for in accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", in which case we will formally document all relationships between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking such hedge transactions.

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

On March 28, 2002, Idexx Laboratories, Inc., our principal competitor in the veterinary diagnostic market, filed a complaint in the United States District Court for the District of Maine (Civil Action Docket No. 02-69-P-H) alleging that a canine heartworm test produced for us by a third party, S.A. Scientific, Inc., and sold using the Abaxis brand infringes on U.S. Patents Nos. 4,965,187 and 4,939,096 held by Idexx. In addition to claiming unspecified monetary damages, Idexx requested that the Court issue a preliminary injunction to prevent Abaxis and S.A. Scientific from making, using, selling, offering to sell in the United States or importing into the United States the canine heartworm test until a trial on the merits of the claim is completed. We have incurred and will continue to incur expenses in the defense of such claims and management's attention may be diverted from its operations. For the three and six months ended September 30, 2002, revenues from sales of canine heartworm test were $224,000 and $467,000, respectively. On September 3, 2002, the United States District Court of Maine granted a preliminary injunction in favor of Idexx, under which we cannot, pending the resolution of patent litigation by Idexx against us, make, use, sell, offer to sell or import the enjoined version of the VetScan Canine Heartworm Antigen Test manufactured by S.A. Scientific, Inc. of San Antonio, Texas in the United States. This injunction will adversely affect our revenues. We disagree with the Court's opinion and we have filed an appeal of the Court's preliminary injunction to the Court of Appeals for the Federal Circuit.

The parties are currently engaged in negotiations to begin mediation and potentially reach a settlement of the Idexx claims, in addition to continuing pre-trial motions and depositions. Although we believe that the Court's ruling is erroneous and, absent an out-of-court settlement, we intend to defend ourselves vigorously, the outcome of the dispute cannot be predicted with certainty. On May 8, 2002, we entered into an agreement with S.A. Scientific under which we agreed to joint representation by counsel to defend the legal action filed by Idexx. Our portion of legal and related costs to defend legal action filed by Idexx were $505,000 and $729,000, for the three and six months ended September 30, 2002, respectively.

None

None

On October 22, 2002, Abaxis held its 2002 Annual Meeting of Shareholders (the "Annual Meeting"). At the Annual Meeting, all five of the director nominees eligible for re-election were re-elected for one-year terms to the Board of Directors and an increase of 500,000 shares for shares reserved under the Abaxis 1998 Stock Option Plan was approved. However, Abaxis' reincorporation into Delaware, along with associated changes in Abaxis'

certificate of incorporation and bylaws, was not approved.

On November 7, 2002, the Board of Directors amended Abaxis' Bylaws to increase the size of the Board from six to seven members. Concurrently, the Board of Directors appointed Henk J. Evenhuis to fill the newly created vacancy on the Board and in addition appointed Mr. Evenhuis to the audit committee of the Board. Mr. Evenhuis served from 1999 to 2002 as Vice President and Chief Financial Officer of Fair Isaac &. Co. (NYSE: FIC), a developer of credit scoring systems and analytical technology, and from 1987 to 1997 as Executive Vice President and Chief Financial Officer of Lam Research Corporation (Nasdaq: LRCX), a semiconductor equipment company.

Abaxis is hereby filing two exhibits as Exhibits 10.32 and 10.33 that were inadvertently omitted from prior periodic filings. Specifically, Abaxis is filing a June 1997 letter from Abaxis to Pharmacia Biotech, Inc. pertaining to the two companies' commercial relationship. In addition, Abaxis is filing a December 1997 letter from Abaxis to Becton Dickinson in which Abaxis notified Becton Dickinson that under the terms of the Abaxis Supply Agreement dated September 16, 1994, exclusivity under the agreement had lapsed.

(b) Reports on Form 8-K

On September 3, 2002, we filed a Current Report on Form 8-K to announce that the Federal District Court for the District of Maine had entered a preliminary injunction against us and S.A. Scientific, Inc. under which we are enjoined from selling our canine heartworm antigen test pending the resolution of litigation pending against us.

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 11, 2002

Date: November 11, 2002

I, Alberto R. Santa Ines, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Abaxis, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 11, 2002

/s/ Alberto R. Santa Ines
Alberto R. Santa Ines
Chief Financial Officer and

Vice President, Finance