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<SEC-DOCUMENT>0000891618-97-002790.txt : 19970701
<SEC-HEADER>0000891618-97-002790.hdr.sgml : 19970701
ACCESSION NUMBER: 0000891618-97-002790
CONFORMED SUBMISSION TYPE: 10-K405
PUBLIC DOCUMENT COUNT: 8
CONFORMED PERIOD OF REPORT: 19970331
FILED AS OF DATE: 19970630
SROS: NASD

FILER:

COMPANY DATA:
COMPANY CONFORMED NAME: ABAXIS INC
CENTRAL INDEX KEY: 0000881890
STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835]
IRS NUMBER: 770213001
STATE OF INCORPORATION: CA
FISCAL YEAR END: 0331

FILING VALUES:
FORM TYPE: 10-K405
SEC ACT: 1934 Act
SEC FILE NUMBER: 000-19720
FILM NUMBER: 97633150

BUSINESS ADDRESS:
STREET 1: 1320 CHESAPEAKE TERRACE
CITY: SUNNYVALE
STATE: CA
ZIP: 94089
BUSINESS PHONE: 4087340200

MAIL ADDRESS:
STREET 2: 1320 CHESAPEAKE TERRACE
CITY: SUNNYVALE
STATE: CA
ZIP: 94089
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K405
<SEQUENCE>1
<DESCRIPTION>FORM 10-K405
<TEXT>

<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K

(Mark One)

[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the fiscal year ended March 31, 1997 or

Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1937 For the transition period from ______ to ______

Commission file number 000-19720

ABAXIS, INC.
(Exact name of registrant as specified in its charter)

California 77-0213001
- --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer Identification No.)

1320 Chesapeake Terrace
Sunnyvale, CA 94089
(Address of principal executive offices)
Registrant's telephone number, including area code, is (408) 734-0200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No par value
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ X ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant, as of June 16, 1997 was approximately $33,648,540 based upon the
closing sale price reported for such date on the NASDAQ National Market. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
officers and directors of the registrant have been excluded because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purpose.

The number of shares of the registrant's Common Stock outstanding as of
June 16, 1997, was 11,854,153.

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Proxy Statement for the Annual Meeting of Shareholders of
Abaxis, Inc. tentatively scheduled to be held on September 9, 1997 are
incorporated by reference in Part III of this Report on Form 10-K.

This report, including exhibits, consists of 72 pages. The exhibit index is
located on page 44.

<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
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<S> <C> <C> <C>
PART I.......................................................................................... 4
ITEM 1. BUSINESS..................................................................... 4
General...................................................................... 4
In-vitro Diagnostic Testing.................................................. 5
Abaxis Products.............................................................. 6
Customer Segments and Distribution........................................... 9
Competition.................................................................. 11
Manufacturing................................................................ 11
Government Regulation........................................................ 13
Intellectual Property........................................................ 15
Employees.................................................................... 16

ITEM 2. PROPERTIES................................................................... 16

ITEM 3. LEGAL PROCEEDINGS............................................................ 17

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS...................................................................... 17

PART II......................................................................................... 17
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON
EQUITY AND RELATED STOCKHOLDER
MATTERS...................................................................... 17

ITEM 6. SELECTED FINANCIAL DATA...................................................... 18

ITEM 7. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................ 18

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA......................................................................... 24

Report of Deloitte & Touche LLP, Independent Auditors........................ 25
Report of Ernst & Young LLP, Independent Auditors............................ 26
Balance Sheets at March 31, 1997 and 1996.................................... 27
Statements of Operations for the Years Ended March 31, 1997, 1996 and
1995......................................................................... 28
Statements of Shareholders' Equity........................................... 29
Statements of Cash Flows for the Years Ended March 31, 1997, 1996 and
1995......................................................................... 30
Notes to Financial Statements................................................ 31

PART II......................................................................................... 39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT................................................................... 39
</TABLE>

2
<PAGE> 3
TABLE OF CONTENTS
(continued)

<TABLE>
<CAPTION>
Page
----
<S> <C> <C> <C>
ITEM 11. EXECUTIVE COMPENSATION....................................................... 41

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................................... 41

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS................................................................. 41

PART IV......................................................................................... 41
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.......................................................................... 41

(a) 1. Financial Statements..................................................... 41
2. Financial Statements Schedules........................................... 41
3. Exhibits................................................................. 42
(b) Reports on Form 8-K.......................................................... 42

SIGNATURES...................................................................................... 43
EXHIBITS INDEX.................................................................................. 44
</TABLE>

3
<PAGE> 4
PART I

This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that reflect the Company's current
view with respect to future events and financial performance. The future events
described in these statements involve risks and uncertainties, among them risks
and uncertainties related to the market acceptance of its products and
continuing development of its products, including required FDA clearance and
other government approvals, risks associated with manufacturing and distributing
its products on a commercial scale, including complying with Federal and State
food and drug regulations, general market conditions and competition. When used
in this report, the words "anticipates", "believes", "expects", "intends",
"plans", "future", and similar expressions identify forward-looking statements.
Actual results could differ materially from those projected in the
forward-looking statements as a result of factors set forth throughout this
document.

ITEM 1. BUSINESS

GENERAL

Abaxis, Inc. (the "Company") develops, manufactures and markets portable blood
analysis systems for use in any patient-care setting to provide clinicians with
rapid blood constituent measurements. The Company's products consist of a
compact 6.9 kilogram analyzer and a series of single-use plastic disks called
reagent discs that contain all the chemicals required to perform a panel of up
to 12 tests. The system can be operated with minimal training and performs
multiple routine tests on whole blood, serum or plasma using either venous or
fingerstick samples. The system provides test results in less than 15 minutes
with the precision and accuracy equivalent to a clinical laboratory analyzer.
The Company currently markets this system for veterinary use under the name
VetScan(R) and in the human medical market under the name Piccolo(R).

The Company offers its point-of-care blood analyzer system with a total of 18
test methods. The Company's repertoire of test methods includes albumin,
amylase, alkaline phosphates (ALP), alanine aminotransferase (ALT), asparatate
aminotransferase (AST), direct bilirubin, calcium, creatinine, creatine kinase
(CK), glucose, glutamyl transferase (GGT), potassium, total bilirubin, total
cholesterol, urea nitrogen (BUN), total protein, uric acid, and thyroxine (T4).
Thirteen of these tests are marketed for both human and veterinary markets,
while two tests, uric acid and direct bilirubin, are marketed only in the human
market, and three tests, CK, T4 and potassium, are marketed exclusively in the
veterinary market. The Company markets its reagent products by configuring these
18 test methods in panels that are designed to meet a variety of clinical
diagnostic needs. The Company currently offers seven multi-test reagent disc
products in the human medical market and six reagent discs in the veterinary
market.

During fiscal 1997, the Company continued to be successful in the US veterinary
market. By the end of the fiscal year, the Company had installed a total of 767
VetScan systems in the US, an 83% increase from its customer base of 409 VetScan
systems a year earlier. The addition of two national institutional customers,
Veterinary Centers of America ("VCA") and VetSmart, contributed significantly to
the Company's new system placements. Both customers purchased the Company's
VetScan systems to replace systems from the Company's competitors. The Company
began selling its VetScan systems to VCA hospitals in September 1996 and through
May 1997, a total of 88 systems were installed in a number of VCA's 155
free-standing animal hospitals. In March 1997, the Company signed an agreement
with VetSmart, to provide during the next twelve months, 105 VetScan analyzers
and 80,000 reagent discs for use in VetSmart pet hospitals. Through May 1997,
the Company has installed 91 VetScan systems in VetSmart pet hospitals located
in PetSmart stores nationwide.

4
<PAGE> 5
feasibility and clinical utility of the Piccolo systems in the often rugged
environment encountered by the Navy. In March 1997, the Company announced that
it had been awarded a contract with a potential contract value of up to $7.5
million to provide the US Navy and the Marine Corps its Piccolo Point-of-Care
Blood Analyzer and reagent disc products. The contract calls for a maximum order
of approximately 345 Piccolo systems and 250,000 reagent discs. Through May
1997, the Company has shipped 72 Piccolo analyzers under this contract and
another 43 analyzers have been ordered, but not yet shipped. There can be no
assurance that the Company will receive orders for the maximum order quantity
under the conditions of the contract.

The Company believes that its current menu of 15 reagent test methods for its
Piccolo systems are suitable for certain niche human market segments, such as
the military, but not broad enough to fulfill the diagnostic needs of
physician's office practices. One of the key factors to the Company's future
success depends on the Company's ability to identify and develop new test
methods that will allow the Company to penetrate the human diagnostic market.
During fiscal 1997, the Company received 510(k) clearance from the Food and Drug
Administration ("FDA") for its GGT test. Completion of GGT allowed the Company
to release the Liver Panel Plus reagent disc product in October 1996, which is
currently being sold to the US Navy. The Company also completed development of
CK during fiscal 1997 which allowed the Company to release a new Equine Profile
reagent disc product into the veterinary market in June 1997. This method will
be entered into clinical trials during fiscal 1998 for inclusion in new reagent
disc products for the medical market. The Company has identified ten additional
test methods that are likely candidates to enhance its ability to penetrate the
human medical market, as well as broadening its market coverage in the
veterinary market. In January 1997, the Company allocated resources to begin the
feasibility phase to develop four electrolyte test methods: bicarbonate,
chloride, potassium, and sodium. The Company expects to conclude the feasibility
phase of these four tests by the end of summer 1997 and if the results are
favorable, proceed with developing these tests into marketable products for both
the human and the veterinary markets. The Company estimates that development of
these four test methods as a group will take approximately 18 months to complete
and should be available during the second half of fiscal 1999. In addition to
investing its own resources in expanding the test menu, the Company signed a
nonbinding letter of intent with Teramecs Co., Ltd. and Daiichi Pure Chemicals
Co., Ltd. in April 1997 to jointly develop additional test methods for use on
the Piccolo analyzer. The product development collaboration will focus on
commercializing targeted methods for lipids, proteins, and enzymes. The Company
expects to sign a definitive agreement in 1997. There can be no assurance that
the Company will be able to develop these new test methods, conclude a
definitive agreement with Teramecs and Daiichi Pure Chemicals, or if the test
methods were developed, be able to successfully market these methods.

Abaxis' focus for the coming year will continue to be in markets where the
Company can receive immediate economic rewards while at the same time developing
new products that will allow the Company to expand into other market segments in
the following year. Domestically, the Company expects to continue to focus on
growing its presence in the veterinary markets, fulfilling the Company's
contract with the Navy, and expanding its marketing effort to the other military
branches. Internationally, the Company will continue to focus its sales effort
in Europe and Japan as well as explore markets in new countries in Asia and
Latin America.

IN-VITRO DIAGNOSTIC TESTING

More than 20 billion blood tests are performed annually worldwide. These blood
tests are performed mostly in commercial laboratories, hospitals, urgent care
centers or physicians' offices. Sales of in-vitro diagnostic products for use by
these facilities to conduct blood testing total approximately $15 billion per
year. Although over 1,000 different tests are performed on blood, fewer than 50
different tests account for 70% of all blood testing. These tests are considered
the "gatekeepers" of medical care as physicians routinely use them to diagnose
and monitor the treatment of disease. A significant portion of the top 50 tests
prescribed by physicians fall in the clinical chemistry category. In-vitro
diagnostic products sold for the purpose of conducting clinical chemistry tests
represent approximately 32% of the total $15 billion market, while diagnostic
testing products for immunoassay represent another 33% of the market. With such
a large volume of testing, centralized

5
<PAGE> 6
laboratories using automated batch testing equipment have become the norm in
providing physicians the blood test information they need to make medical
treatment decisions.

The current worldwide focus on reducing medical care costs while maintaining
quality of care has encouraged the movement of blood testing out of the central
laboratories into the patient care setting. This trend began in the early 1980s
with the introduction of handheld devices that could perform one or two tests.
In the mid-1980s, small desktop instruments such as the Abbott VISION and the
Kodak DT60 (now marketed by Johnson and Johnson) were introduced for use in
doctors' offices and hospital satellite laboratories. While these products
allowed testing nearer the patient, they still required skilled technicians and
were limited to performing one test at a time. As a result, multiple tests could
not be performed economically and turnaround time was not significantly
enhanced.

In the United States, there are approximately 40,000 veterinarians who generate
annual billings of approximately $600 million in diagnostics. In the veterinary
market in the last two decades, blood testing has gained more importance to the
veterinarian to provide them invaluable diagnostic information. Veterinarians
started out by relying on the services of the centralized laboratories. The same
factors affecting the human diagnostic market also impact veterinary practices.
Some of the small desk top instruments such as the Dupont Analyst, Kodak DT6,
and Idexx VetTest have also been marketed to veterinarians to perform in-house
blood testing. While these products have made in-house testing possible for
veterinarians, they still require skilled technicians to properly use and
maintain these products. As a result, based on the Company's marketing research,
65% of the veterinarians are still not converted to in-house testing even though
the advantages of in-house testing are clearly evident.

Abaxis believes that a key element of the patient-centered, cost-constrained
health care model in the 1990s and beyond will be the availability of blood
analysis systems in the patient care setting that are easily and reliably
operated by caregivers and provide accurate, real time results for making
immediate clinical decisions. The optimal system uses whole blood, has built-in
calibration and quality control, provides quick turn around time and is portable
and low in cost. In addition, the optimal near-patient system should be easy to
use by people with no special training and capable of transmitting test results
instantly to a patient information management system.

Abaxis has developed a blood analysis system incorporating all of these criteria
into a 6.5 kilogram analyzer and a series of menu-specific, single-use reagent
discs. The system is essentially a compact portable laboratory that can be
easily carried to the patient. Each reagent disc is pre-configured with multiple
analytes and contains all the reagents necessary to perform a fixed menu of
tests. Taking the system to the patient care site instead of shipping the sample
to a central laboratory makes blood testing and analysis as easy as measuring
the patient's blood pressure, temperature, and heart rate. Additional advantages
of near-patient testing include eliminating errors from sample handling,
transcription, and transportation, which, studies have shown, may cause up to
85% of reporting errors.

ABAXIS PRODUCTS

Point-of-Care Blood Analyzer

The Company's Point-of-Care Blood Analyzer is a portable spectrophotometer,
which is a device that measures the absorption of light at various wavelengths.
A variable speed motor is used to spin the reagent disc for sample processing.
The chemical reactions in the disc's cuvettes are measured optically by
detecting the light absorbance of the solutions in the cuvettes at
pre-determined wavelengths. The absorbances are converted to clinically relevant
units by the measurement microprocessor. Results are stored by the interface
microprocessor, sent to a RS232 port and printed on result cards by an internal
thermal printer. The features of the analyzer include small required sample size
(100 (mu)L) of whole blood, serum or plasma, intelligent quality control system
that includes many self-test functions to ensure quality results, built-in
instrument self calibration, built-in

6
<PAGE> 7
printer, quick turn-around time of less than 15 minutes, minimal operational
training and ease of information transmission using a computer port on the
analyzer. The Company markets this analyzer for veterinary use under the name
VetScan and for the human medical market under the name Piccolo.

Reagent Discs

The reagent discs are designed to handle almost all technical steps of blood
chemistry testing automatically. The discs first separate a whole blood sample
into plasma and blood cells, meter the required quantity of plasma and diluent,
mix the plasma and diluent, and deliver the mixture to the reagent chambers,
called cuvettes, along the disc perimeter. The diluted plasma dissolves and
mixes with the reagent beads initiating the chemical reactions which are
monitored by the analyzer. The discs are 8-cm diameter, single-use devices
constructed from three ultrasonically welded injection molded plastic parts. The
base and the middle piece create the chambers, cuvettes, and passageways for
processing the whole blood and mixing plasma with diluent and reagents. The top
piece, referred to as the bar code ring, is imprinted with bar codes that
contain disc-specific calibration information. In the center of the disc is a
plastic diluent container sealed with polyethylene-laminated foil. Spherical
lyophilized reagent beads are placed in the cuvettes during disc manufacturing.
Upon completion of the analysis, used discs may be placed back into their foil
pouches to minimize human contact with blood prior to proper disposal.

To perform a panel of tests, the operator collects a blood sample via finger
puncture or venipuncture (the latter requiring a trained phlebotomist). The
operator then transfers the sample into the reagent disc. The operator places
the disc into the analyzer drawer, and enters patient, physician, and operator
identification numbers. The analyzer spins the disc to separate cells from
plasma, meters and mixes plasma and diluent, distributes diluted plasma to the
cuvettes, and monitors chemical reactions. In less than 15 minutes, results are
printed out on a result card with an adhesive backing for inclusion in the
patient's medical record. A computer port enables transmission of patient
results to external computers for data management.

The Company introduced its Piccolo system to the marketplace in November 1995
with two reagent discs, General Health Panel 8 and General Health Panel 11. In
November 1996, the Company introduced the Liver Panel Plus 9 disc, which was
enabled by the 510(k) clearance of the GGT test received from the FDA in
September 1996. Subsequently, the Company has released four other differently
configured reagent disc products to meet different physicians' needs, mostly in
the international markets. As of June 1997, a total of seven reagent disc
products are marketed worldwide for use with the Piccolo system.

The VetScan system was introduced in the US veterinary market in July 1994. The
Company initially launched the system with the Diagnostic Profile, a nine-test
reagent product. Since then, the Company has added new test methods and new
reagent disc products targeted to fulfill different veterinary diagnostic needs.
The newest addition to the VetScan family of reagent products was the Equine
Profile introduced to the market in June 1997. The Equine Profile was optimized
with test methods useful for providing indications of the health condition of
horses, particularly in the areas of hepatic dysfunction and muscle damage. As
of June 1997, the Company offers a total of six reagent disc products to its
veterinary customers.

7
<PAGE> 8
The following table exhibits all the reagent disc products marketed by the
Company today in both the human medical and veterinary markets worldwide.

[REAGENT DISC PRODUCTS TABLE]

Orbos Process

The dry reagents used in the Company's reagent discs are produced using a
proprietary technology called the Orbos Discrete Lypholization Process. This
process allows the production of an accurate, precise amount of active chemical
ingredient in the form of a soluble bead. The Orbos process involves
flash-freezing a drop of liquid reagent to form a solid bead and then
freeze-drying the bead to remove water. The Orbos beads are stable in dry form
and dissolve rapidly in aqueous solutions. The Company believes that the Orbos
process has broad applications in products where delivery of active ingredients
in a stable, pre-metered format is desired. The Company currently has a
licensing agreement with Pharmacia Biotech and a supply contract with Becton
Dickinson and Company for products produced using the Orbos process. Abaxis is
continuing to investigate potential applications with other companies. There can
be no assurance that the Company will be able to discover and/or develop any new
applications.

Future Products

Abaxis plans to develop a series of reagent discs with various tests for use
with the Piccolo and VetScan systems. In January 1997, the Company began
feasibility studies for four electrolyte tests: bicarbonate, chloride,
potassium, and sodium. The Company expects to conclude the feasibility phase of
these four tests by the end of summer 1997 and, if the results are favorable,
proceed with developing these tests into marketable products for both the human
and the veterinary markets. For the human market, the Company plans on
incorporating these tests into new panels consistent with the codes in the 1998
version of the new Current Procedures Terminology ("CPT") manual published by
the American Medical Association ("AMA"). These new CPT codes represent a set of
tests performed in standardized panels released in late March 1997, by the
Health Care Financing Administration ("HCFA"), the federal agency that
administers the Medicare and Medicaid programs. The American Medical Association
originally proposed eight standardized panels and the HCFA adopted four of these
panels, with some modifications, effective July 1, 1997. The four fixed-test
panels are: electrolytes, comprehensive metabolic, hepatic function, and basic
metabolic. Abaxis currently has all the tests for the hepatic function panel,
and will have all required tests for the additional three panels with the
development of the four electrolyte tests.

8
<PAGE> 9
Additional future test methods development for other disc products will be
targeted at specific applications based on fulfilling clinical needs. The
Company's current focus of test methods development is in clinical chemistry. In
addition to clinical chemistry, the Company has demonstrated its ability to
perform immunoassay tests in its blood analysis system by successfully
developing its Thyroxine (T4) test in the veterinary market. The Company
believes other homogeneous immunoassay methods can be performed in its discs to
measure a wide assortment of low concentration blood analytes, such as
therapeutic drugs and drugs of abuse.

There can be no assurance that Abaxis will be able to develop any of these
potential products. While the Company believes that its technology will allow it
to develop reagent disc products in the future to provide a variety of
additional blood tests, there can be no assurance that such future products will
be developed, that such products will receive required regulatory clearance, or
that the Company will be able to manufacture or market such products
successfully.

CUSTOMER SEGMENTS AND DISTRIBUTION

The Company has been marketing its VetScan Systems products for less than three
years and has only recently begun marketing its Piccolo System products.
Accordingly, the Company has very limited marketing and distribution experience.
Further, the Company has limited resources to devote to marketing and
distribution, including building a sales and marketing organization or
establishing an extensive distribution network. There can be no assurance that
the Company can build a successful sales and marketing organization, establish
effective distribution arrangements, that such arrangements will be successful
in marketing Abaxis products, or that the costs associated with marketing and
distribution will not be excessive. Although the Company has established some
international distributors, it has limited experience and resources in marketing
and distributing its products in international markets. There can be no
assurance that the Company will be successful in marketing the Piccolo System
and VetScan System products internationally.

Customer Segments

Abaxis sells its Point-of-Care Blood Analyzer products and reagent discs either
directly or through distributors depending on the needs of the customer segment.
In the delivery of human or veterinary care there are many kinds of providers
and a multitude of sites where Abaxis products could be used as an alternative
to relying on a central laboratory for blood test information. The Company
believes that its current Piccolo System menu of 15 reagent test methods are
suitable for certain niche market segments of the human medical market. These
niche market segments include military installations (ships, field hospitals and
mobile care units), urgent care and walk-in clinics (free-standing or
hospital-connected), home care providers (national, regional or local), nursing
homes, acute care hospitals, ambulance companies, dialysis centers, hospital
labs and draw stations. The Company believes that its veterinary reagent product
offerings meet a substantial part of the clinical diagnostic needs of
veterinarians. Potential customers for the VetScan System are primarily
companion animal hospitals, animal clinics with mixed practices of small
animals, birds and reptiles, equine practitioners with mobile facilities and
private toxicology laboratories and university and government toxicology
research laboratories.

Distribution Within the US

Abaxis sells its products directly to those customers who serve large human
patient populations with employed caregivers such as the military, hospitals,
and managed care organizations. As a result of health care reform in the US, the
Company expects a consolidation of providers with more centralized purchasing of
medical products based on the standardization of care and the use of patient
outcome studies to influence purchase decision. The Company plans to achieve its
direct sales objectives by employing highly skilled sales specialists and
eventually sales teams which will need to work closely with providers in
performing studies to show that the use of the Piccolo Point-of-Care Blood
Analyzer rather than laboratory alternatives can provide better outcomes at less
cost.

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<PAGE> 10
Abaxis is using distributors for those customers which desire to purchase
reagent discs frequently and in small quantities. These distributors also
contribute to identifying potential customers and introducing the product, but
often need the support of Abaxis personnel in closing the sale. In the US, human
and veterinary product distributors are generally of two types - large companies
that primarily serve hospitals, clinics and large health maintenance
organizations (HMOs) nationwide using multiple warehouses and extensive
transportation systems, and smaller companies that provide the daily supplies
needed by office-based physicians. In the human market, national firms sell
thousands of products, including furniture, capital equipment, surgical
instruments and a myriad of consumables. The smaller companies generally direct
their product offerings to those items a physician uses daily in caring for
primarily ambulatory patients. These firms also may sell lower priced equipment
such as diagnostic instruments which are used in conjunction with consumable
reagents. The Company currently has non-exclusive distribution agreements with
Allegiance Healthcare Corporation (formerly Baxter Healthcare) and Sage London
of Canada.

Veterinarians are served similarly to office-based physicians by small local
firms, some with national affiliations. The Company currently has a
non-exclusive agreement with VedCo, Inc., a national network of 14 independent
distributors with 23 sales offices in the US. The Company also has three
additional distribution agreements with regional distributors. In addition to
selling through distributors, the Company directly supplies its VetScan products
to two national institutional customers, VCA, the nation's largest veterinary
hospital chain, and VetSmart, the nation's largest chain of veterinary service
clinics.

As of March 31, 1997, the Company had limited internal resources in sales and
marketing with twelve employees involved in both domestic and international
sales activity. In order to more fully realize the market potential for Abaxis
products, the Company intends to enter into distribution arrangements with
additional distributors as well as pursue direct sales where appropriate. There
can be no assurance that any of the Company's distributors will devote the
necessary resources to be successful in their efforts to commercialize the
Company's products.

Distribution Outside the US.

The Company's international sales and marketing objectives include identifying
and defining the market segments in each country by product, and then focusing
on specific objectives for each segment in each country. These specific
objectives include modification and expansion of distribution and distributor
training and monitoring to ensure the attainment of sales goals.

The Company currently has exclusive distribution agreements in the following
countries: Argentina, Austria, France, Germany, Greece, Hong Kong, Italy, Japan,
Korea, Mexico, New Zealand, the Netherlands, Norway, Portugal, Puerto Rico,
South Africa, Spain, Switzerland, and in the United Kingdom. Each distributor
agreement contains a number of requirements that must be met to retain
exclusivity, including minimum order quantity commitments, trade show and
promotion requirements and a specified number of demonstration analyzer
requirements. In most cases, the foreign distributors need to either go through
an FDA-equivalent approval process or clinical trials/market evaluations with
their local opinion leaders in the medical field. Each distributor is
responsible for obtaining the required approvals. There can be no assurance that
any of the Company's distributors will be successful in obtaining proper
approvals for Abaxis products in their respective countries or that these
distributors will be successful in marketing Abaxis products. The Company plans
to enter into additional distribution agreements to enhance its international
distribution base and solidify its international presence. There can be no
assurance that the Company will be successful in entering into any additional
distributor agreements.

Abaxis is party to a series of agreements with Teramecs, the Company's Japanese
distributor, involving funded research, distribution and manufacturing rights
and an equity investment by Teramecs in the Company. Under these agreements
Abaxis has granted Teramecs, subject to certain restrictions, the exclusive
right to distribute Abaxis products in Japan, an option to obtain a license to
manufacture the Piccolo systems for resale only to

10
<PAGE> 11
Abaxis or in Japan and access to future Abaxis technology. Teramecs has
provided $1,000,000 of research funding (which was recognized as revenue by
Abaxis in fiscal 1994) and is obligated to purchase minimum quantities of
products annually commencing in June 1996 in order to maintain exclusive
distribution rights in Japan. In the event Teramecs exercises its option to
manufacture Abaxis products, it must pay the Company an additional license fee,
purchase from Abaxis the reagent beads for the products it manufactures, and pay
royalties on the sale of such products. In August 1996, with the regulatory
approval from the Japanese Ministry of Health and Welfare (Koseisho) of the
Piccolo system, Teramecs contracted with Daiichi Pure Chemical to provide more
extensive market coverage to sell and distribute the Piccolo system in the
Japanese human medical markets under the name Lunaspin. During fiscal 1997,
Teramecs also completed clinical trials of the Abaxis VetScan system and
submitted for regulatory approval to market in Japan. The Company expects
regulatory approval of the VetScan system from the Japanese Ministry of
Agriculture, Forestry and Fishery (Nosuisho) during the summer of 1997. There
can be no assurance of regulatory approval of the VetScan system, or that
Teramecs and Daiichi can be successful in marketing any Abaxis products.

COMPETITION

Abaxis' competition includes clinical laboratories, hospitals and independent
laboratories and manufacturers of bench top multi-test analyzers and other
near-patient test systems. Blood analysis is a well established field in which
there are a number of competitors which have substantially greater financial
resources and larger, more established marketing, sales and service
organizations than the Company. No assurance can be given that the Company's
products will be competitive with existing or future products or services of
such competitors.

Historically, most human medical testing has been performed in the hospital or
commercial laboratory setting. Clinical laboratories have traditionally been
effective at processing large panels of tests using skilled technicians and
complex equipment. The Company's products compete with the clinical laboratories
with respect to range of tests offered, the immediacy of results and cost
effectiveness. While Abaxis cannot provide the same range of tests, the Company
believes that its products will provide a sufficient breadth of test menus to
compete successfully with clinical laboratories on the basis of immediacy of
results and cost effectiveness. The Company's products compete with products in
the marketplace with respect to ease-of-use, the ability to conduct tests
without a skilled technician, the ability to conduct multiple test panels,
breadth of tests, built-in calibration and quality control, cost effectiveness
and quality of results.

Most of the Company's current and potential competitors have significantly
greater financial and other resources than Abaxis, and the Company expects that
competition will be intense. In particular, most of these competitors have large
sales forces and well-developed channels of distribution. To compete, the
Company must develop effective channels of distribution and a focused direct
sales force. There is no assurance that the Company will be able to compete
successfully.

MANUFACTURING

Abaxis began manufacturing its VetScan products for the commercial market during
fiscal 1995. The Company began manufacturing Piccolo products for commercial
sale in fiscal 1996. To produce and commercially ship Piccolo products, the
Company must have a license to manufacture medical products in the State of
California, where the Company conducts its principal manufacturing activities,
and have approval from the FDA as a medical device manufacturer. In May 1996,
the Company received its license to manufacture from the State of California. In
September 1996, the FDA granted the Company's manufacturing facility "in
compliance" status, according to the regulations for Good Manufacturing
Practices ("GMP") for medical devices. The Company is scheduled for inspection
by the FDA and the State of California on a routine basis, typically once every
24 months. Although the Company is not required when manufacturing the VetScan
products, to comply with some of the government regulations applicable to the
human market, the Company has tried to establish its manufacturing operations
with procedures and controls comparable to GMP to ensure the same quality
products. There can be no assurance that the Company can successfully pass a
re-inspection by the FDA or the State of

11
<PAGE> 12
California or any other future inspections. There can be no assurance that the
Company can comply with all current or future government manufacturing
requirements and regulations.

In addition to the development of standardized manufacturing processes and
quality control programs for the entire manufacturing process, the Company's
manufacturing activities are concentrated in the following three primary areas:

Point-of-Care Blood Analyzer

The analyzer used in the Piccolo and VetScan systems employs a variety of
components designed or specified by Abaxis, including a variable speed motor,
microprocessors, a liquid crystal display, a result card printer, a
spectrophotometer and other electronic components. These components are
manufactured by several third party vendors that have been qualified and
approved by Abaxis and then assembled by contract manufacturers for Abaxis. The
components are assembled at the Abaxis facility into the finished product and
completely tested to ensure that the finished product meets product
specifications. The analyzer uses technologically advanced components, many of
which are available only from single source vendors. During fiscal 1997, the
Company was successful in identifying potential alternate suppliers of some
critical components and will continue to work on qualifying additional vendors
to protect its source of supply. There can be no assurance that the Company will
not experience a material interruption of supply of components from single
source vendors.

Reagent Disc

The molded plastic disks used in the manufacture of the reagent disc are
manufactured to the Company's specification by an established injection molding
manufacturer. To achieve the precision required for accurate test results, the
disks must be molded to very narrow tolerances. The Company believes only a few
manufacturers are capable of manufacturing to such tolerances. To date, the
Company has qualified only one manufacturer to mold the disks and only has a
single mold. The Company expects to qualify a second production mold by the end
of summer 1997 to better protect its supply source. While the Company has
duplicated parts of the disk molding tools to strengthen and better protect its
line of supply, the inability of its injection molding manufacturer to supply
sufficient disks would have a material adverse impact on the Company's results
of operations.

The Company assembles the reagent discs by using the molded plastic disks,
loading the disk with reagents and then ultrasonically welding together the top
and bottom pieces. The Company has begun development of an automated disc
assembly line ("autoline") to provide anticipated capacity for future demand and
to improve production efficiency. The Company expects to have this autoline
fully operational by the end of fiscal 1998. The autoline is expected to double
the Company's capacity while improving quality and yield. The qualification of
the autoline could involve significant time and cost and could entail some
initial unforeseen production problems. There can be no assurance that the
autoline will be fully operational within fiscal 1998, the capacity will be
doubled, quality and yield will improve or that the Company will not experience
significant time requirements and additional cost with the qualification of the
autoline.

Reagent Beads

The reagent discs contain diluent and all the dry reagent chemistry beads
necessary to perform blood analyses. Abaxis purchases chemicals from third party
suppliers and formulates the raw materials, using proprietary processes, into
beads at the proper concentration and consistency to facilitate placement in the
reagent disc and provide homogeneous dissolution and mixing when contacted by
the diluted plasma. The Company is dependent on single source vendors for some
of the chemicals and the loss of any one supplier of chemicals would materially
adversely affect the results of operations. The Company is currently evaluating
additional vendor sources to better protect its lines of supplies in the future.
There can be no assurances that the Company can qualify additional vendor
sources.

12
<PAGE> 13
GOVERNMENT REGULATION

Piccolo System

Abaxis' Piccolo products are regulated under the 1976 Medical Device Amendments
to the Food, Drug and Cosmetic Act (the "Amendment"). The Company's current
products are Class II devices requiring the submission of a 510(k) FDA
pre-market notification to substantiate label claims prior to marketing. In its
submission, the Company must, among other things, establish that the product to
be marketed is "substantially equivalent" to a product that was on the market
prior to the Amendment or to a product that has previously been cleared under
the 510(k) process. The typical process for clearance of 510(k)'s can be three
months to over a year and the FDA must issue a written order finding substantial
equivalence.

To date, Abaxis has received market clearance for its portable blood analyzer
and 16 test methods from the FDA. Abaxis is currently and plans to continue
developing additional tests that will be required to be cleared through the FDA.
There can be no assurance that Abaxis will receive marketing clearance for any
of its future products.

The Amendment also requires the Company to manufacture its products in
accordance with the GMP regulations using facilities registered to manufacture
the Company's products. The Company's facility is subject to periodic
inspections by the FDA. In addition, the use of the Company's facilities may be
regulated by various state agencies. There can be no assurance that the Company
will be able to maintain facility compliance with requirements or regulations.

The Piccolo system is also affected by the Clinical Laboratory Improvement
Amendments of 1988 ("CLIA"), which is intended to ensure the quality and
reliability of all medical testing in the United States regardless of where
tests are performed. Under CLIA regulations, laboratory tests are divided into
three categories: "waived or simple", "moderately complex" and "highly complex."
The Company's current products, under these regulations, are classified in the
"moderately complex" category, which would require that any location using these
products be certified as a laboratory. Initial certification would require the
laboratory to obtain a registration certificate from HCFA, which certificate
would be issued if the laboratory (1) agrees to notify HCFA within 30 days of
any change in its ownership, name or location, (2) agrees to treat proficiency
testing samples in the same manner as patient specimens and (3) remits the
registration fee. Within two years of registration certificate issuance,
laboratories would be inspected to determine compliance with the CLIA
requirements. The CLIA regulations require laboratories to meet specified
standards in the areas of personnel qualification, administration, participation
in proficiency testing, patient test management, quality control/assurance,
laboratory information systems and inspections. There can be no assurance that
CLIA regulations will not have a materially adverse impact on the Company and
its ability to market and sell its products.

In July 1996, the Company filed an application to the Center for Disease Control
("CDC") for its Piccolo systems to be waived from the CLIA regulations. If
granted, users of the product can then avoid many of the burdens imposed on
users of moderately complex tests. To have the Piccolo placed in the waived
category, the Company must conduct field studies at three non-laboratory sites
using at least 20 operators each who have no medical laboratory training and can
operate the Piccolo system with directions that require no more than seventh
grade reading skills. The Company met with the CDC in February 1997 to review
its application. CDC has requested more detailed performance data, which the
Company is in the process of collecting. To date, only a few companies have
received waived category status for their tests and approval time from CDC
appears to be over a year or two. Although the review process for a CLIA license
application could potentially be very lengthy and costly, the Company believes
that its Piccolo products fulfill all requirements for obtaining a waived
status. There can be no assurance that the Company will be able to obtain a
waived status for its Piccolo systems, or that if such waived status was
granted, it will enhance the Company's ability to place Piccolo systems.

13
<PAGE> 14
Federal and state regulations regarding the manufacture and sale of health care
products and diagnostic devices are subject to future change. The Company cannot
predict what material impact, if any, such changes might have on its business.
In addition, some foreign markets require obtaining foreign regulatory
clearances of the Company's products before they can be distributed in those
countries. There can be no assurance that the Company will be able to obtain
regulatory clearances for its products in the US or in foreign markets.

Although Abaxis believes that it will be able to comply with all applicable
regulations of the FDA and of the State of California, current regulations
depend heavily on administrative interpretations, and there can be no assurance
that future interpretations made by the FDA, HCFA, CDC or other regulatory
bodies, with possible retroactive effect, will not adversely affect the Company.

Third party payers can indirectly affect the pricing or the relative
attractiveness of the Company's products by regulating the maximum amount of
reimbursement they will provide for blood testing services. For example, the
reimbursement of fees for blood testing services for Medicare beneficiaries is
set by the HCFA. If the reimbursement amounts for blood testing services are
decreased in the future, it may decrease the amount which physicians and
hospitals are able to recover for such services and consequently the price the
Company can charge for its products. If adequate coverage and reimbursement
levels are not provided by government and third-party payers for use of the
Company's products, the market acceptance of those products would be adversely
affected.

VetScan System

The government regulations discussed above generally do not apply to the
Company's VetScan products in the US. Internationally, among the countries where
the Company currently has established distribution arrangements, to the
Company's knowledge, Japan is the only market where VetScan products are subject
to government approvals. In Japan, veterinary diagnostic devices are regulated
by the Ministry of Agriculture, Forestry and Fishery, and thus the VetScan
system must be approved by such Ministry prior to being marketed in Japan.
Teramecs, the Company's Japanese distributor, has submitted its application for
distribution of the VetScan system in Japan. The Company expects to receive
approval by the end of summer 1997, however there can be no assurance that the
Ministry of Agriculture, Forestry and Fishery will approve distribution of the
VetScan system in Japan.

In order to maintain high quality standards for all its products, the Company is
using the same manufacturing facilities to manufacture all Point-of-Care Blood
Analyzers whether they be for the Piccolo or VetScan system products and
therefore is following the same manufacturing processes and procedures where
practical. The Company intends to comply with prudent development and
manufacturing practices applicable to the veterinary diagnostic industry.

14
<PAGE> 15
INTELLECTUAL PROPERTY

The Company has pursued the development of a patent portfolio to protect its
technology. As of June 16, 1997, the Company has filed 25 United States patent
applications. The following 17 patents have been issued:

<TABLE>
<CAPTION>
Patent No. Description Issue Date
- ---------- ----------- ----------
<S> <C> <C>

5,061,381 Apparatus and Method for Separating Cells from Biological Fluids October 29, 1991

5,122,284 Apparatus and Method for Optically Analyzing Biological Fluids June 16, 1992

5,173,193 Centrifugal Rotor Having Flow Partition December 22, 1992

5,242,606 Sample Metering Port for Analytical Rotor Having Overflow Chamber September 7, 1993

5,275,016 Cryogenic Apparatus January 4, 1994

5,304,348 Diluent Container for Analytical Rotor April 19, 1994

5,403,415 Method and Device for Ultrasonic Welding April 4, 1995

5,409,665 Simultaneous Cuvette Filling with Means to isolate Cuvettes April 25, 1995

5,413,762 Reagent Testing and Analytical Composition May 9, 1995

5,457,053 Reagent Container for Analytical Rotor October 10, 1995

5,472,603 Analytical Rotor with Dye Mixing Chamber December 5, 1995

5,478,750 Methods for Photometric Analysis December 26, 1995

5,518,930 Simultaneous Cuvette Filling with means to isolate Cuvettes May 21, 1996

5,590,052 Error Checking in Blood Analyzer December 31, 1996

5,591,643 Simplified Inlet Channels January 7, 1997

5,599,411 Method and Device for Ultrasonic Welding February 4, 1997

5,624,597 Reagent Compositions for Analytical Testing April 29, 1997
</TABLE>

The Company's policy is to file patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company also relies upon trade secrets, know-how, continuing
technological innovations and licensing opportunities to develop and maintain
its competitive position. The Company has filed under the Patent Cooperation
Treaty for international patent protection, and is selectively filing patents in
countries where the Company expects to market its product.

The patent position of any medical device manufacturer, including Abaxis, is
uncertain and may involve complex legal and factual issues. Consequently, even
though Abaxis is currently prosecuting its patent applications in the US and has
filed an international application under the Patent Cooperation Treaty, in
addition to actual foreign patents, the Company does not know whether any of its
applications will result in the

15
<PAGE> 16
issuance of any further patents, or, for any patents issued, whether they will
provide significant proprietary protection or will be circumvented or
invalidated. Since patent applications are maintained in the US in secrecy until
patents issue, and since publications of discoveries in the scientific or patent
literature tend to lag behind actual discoveries by several months, Abaxis
cannot be certain that it was the first creator of inventions covered by its
issued patent or pending patent applications or that it was the first to file
patent applications for such inventions. There can be no assurance that the
Company's patent applications will result in further patents being issued or
that if issued the patents will offer protection against competitors with
similar technology; nor can there be any assurance that others will not gain
patents that the Company would need to license or circumvent. Moreover, the
Company may have to participate in interference proceedings declared by the US
patent and Trademark Office to determine the priority of inventions, which could
result in substantial cost to the Company.

The Company also relies upon copyright, trademarks and unpatented trade secrets,
and no assurance can be given that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to the Company's trade secrets or disclose such technology.

Abaxis requires its employees, consultants and advisors to execute
confidentiality agreements upon the commencement of an employment or consulting
relationship with the Company. Each agreement provides that all confidential
information developed or made known to the individual during the course of the
relationship will be kept confidential and not disclosed to third parties except
in specified circumstances. In the case of employees, the agreements provide
that all inventions conceived by an individual shall be the exclusive property
of the Company, other than inventions unrelated to the Company's business and
developed entirely on the employee's own time. There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.

EMPLOYEES

The Company's success depends upon the continued contribution of its officers
and key personnel, many of whom would be difficult to replace. If certain of
these people were to leave the Company, the Company's ability to achieve its
business objective might be impeded.

As of March 31, 1997, the Company had a total of 59 full-time employees. Fifteen
employees, including three Ph.D's, continued to further the Company's research
and development activities while also driving the manufacturing process
development. Twenty-five employees worked in manufacturing operations devoting
their time to manufacturing the VetScan and Piccolo products as well as
supporting development activities as necessary. Twelve employees including one
Ph.D, were selling and marketing the VetScan and Piccolo products. The remaining
seven employees worked in general administration to support the Company's
administrative requirements. The Company also uses temporary help to assist in
carrying out certain operational duties. As of March 31, 1997, the Company had
18 temporary employees and most of them were assisting in manufacturing
operations.

None of the employees are covered by collective bargaining agreements and
management considers its relations with employees to be good.

ITEM 2. PROPERTIES

The Company occupies approximately 38,300 square feet of office, research and
development and manufacturing space in a building in Sunnyvale, California. The
Company's lease will expire in July 2000. During fiscal 1997 the Company had
adequate space to satisfy all its needs. The Company believes that it may

16
<PAGE> 17
need additional space during fiscal year 1998 for warehousing purposes. Should
the need for additional space arise, the Company believes that suitable
additional space will be available on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in litigation in the normal course of business. In the
opinion of management, the ultimate resolution of these matters will not have a
material effect on the Company's financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's initial public offering was completed in January 1992. From that
date, the Company's common stock has been traded in on the Nasdaq National
Market under the symbol ABAX.

The high and low prices for the Company's common stock during each quarter since
April 1, 1995 are exhibited in the table below, as represented by the high and
low daily trade closing sales prices.

<TABLE>
<CAPTION>
Fiscal 1996 High Low
----------- ---- ---
<S> <C> <C>
First Quarter $7.125 $4.625
Second Quarter $9.125 $6.750
Third Quarter $8.625 $5.000
Fourth Quarter $6.875 $5.625

Fiscal 1997
-----------
First Quarter $7.125 $4.125
Second Quarter $6.000 $3.375
Third Quarter $5.750 $2.625
Fourth Quarter $4.250 $2.500

Fiscal 1998
-----------
First Quarter (through June 16, 1997) $3.375 $2.750
</TABLE>

As of June 16, 1997, there were 267 shareholders of record and approximately
4,700 beneficial shareholders. Abaxis has never paid dividends on its common
stock and does not anticipate paying cash dividends in the foreseeable future.

On January 31, 1997, the Company issued 32,000 shares of Common Stock to a
consultant in payment for investor relations consulting services provided to the
Company during 1996. These shares were valued at $3.875 per share, the closing
market price for the Company's Common Stock as reported by Nasdaq on January 10,
1997. This issuance was made pursuant to Section 4(2) under the Securities Act
of 1933.

On April 30, 1997, the Company issued warrants to Transamerica Business Credit
Corporation ("Transamerica") for the purchase of 106,667 shares of common stock
at an initial exercise price of $3.00 per share. The warrants will expire April
30, 2004. The warrants were issued as part of a $2,000,000 equipment line of
credit agreement with Transamerica. The warrants and shares issuable have not
been registered under the Securities Act of 1933.

17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data of the Company are qualified by reference
to and shall be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and with the consolidated
financial statements, related notes and other financial information included
elsewhere in this report.

<TABLE>
<CAPTION>
Years Ended March 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues $ 7,294,000 $ 2,948,000 $ 1,044,000 $ 1,163,000 $ --
------------ ------------ ------------ ------------ ------------

Operating expenses:
Cost of product sales 7,661,000 4,883,000 2,587,000 -- --
Research and development 1,315,000 1,326,000 4,166,000 8,540,000 7,529,000
Selling, general and administrative 4,867,000 3,482,000 3,504,000 2,175,000 1,577,000
------------ ------------ ------------ ------------ ------------

Total costs and operating expenses 13,843,000 9,691,000 10,257,000 10,715,000 9,106,000
------------ ------------ ------------ ------------ ------------

Loss from operations (6,549,000) (6,743,000) (9,213,000) (9,552,000) (9,106,000)

Interest income and other 360,000 547,000 376,000 874,000 1,197,000
Interest expense -- -- (149,000) (240,000) (131,000)
------------ ------------ ------------ ------------ ------------

Net loss $ (6,189,000) $ (6,196,000) $ (8,986,000) $ (8,918,000) $ (8,040,000)
============ ============ ============ ============ ============

Net loss per share $ (0.59) $ (0.65) $ (1.24) $ (1.43) $ (1.30)
============ ============ ============ ============ ============

Shares used in calculating
net loss per share 10,502,646 9,466,084 7,268,315 6,226,087 6,176,142
============ ============ ============ ============ ============

Years Ended March 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash, cash equivalents, and
short-term investments $ 5,321,000 $ 7,778,000 $ 7,195,000 $ 5,573,000 $ 9,801,000

Working capital 6,825,000 7,912,000 7,109,000 3,971,000 6,887,000

Long-term investments -- 500,000 700,000 4,500,000 10,943,000

Total assets 11,977,000 13,046,000 12,147,000 13,569,000 23,370,000

Long-term portion of notes payable
and capital lease obligation -- -- -- 1,089,000 1,489,000

Total shareholders' equity 9,358,000 10,726,000 10,436,000 10,003,000 18,752,000
</TABLE>

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

OVERVIEW

18
<PAGE> 19
fingerstick samples. The system provides test results in less than 15 minutes
with the precision and accuracy equivalent to a clinical laboratory. The Company
currently markets this system for veterinary use under the name VetScan and in
the human medical market under the name Piccolo.

During fiscal 1997, the Company continued to increase its customer base. The
Company shipped a record number of its Point-of-Care Blood Analyzers during the
year: 703 analyzers (up 142% or 413 units from last fiscal year), with 407
analyzers placed domestically and 296 analyzers placed internationally. In the
US, the Company placed 362 VetScan systems and 45 Piccolo systems.
Internationally, the Company shipped 169 Piccolo systems and 127 VetScan
systems. Two hundred systems were shipped to Japan, 90 systems to Europe and the
balance to other various countries. In addition to the analyzer placement, the
Company shipped a total of 225,250 reagent discs, and approximately 78% of these
reagent discs (up 177% or 144,000 units from last year) were consumed by the US
veterinary market where the Company has shipped more than 700 VetScan systems.

On June 20, 1996, the Board of Directors of Abaxis announced the appointment of
Clinton H. Severson as President and Chief Executive Officer, succeeding Gary H.
Stroy. Mr. Stroy remains as Chairman of the Board. As Chairman of the Board, Mr.
Stroy's focus is on business development and strategic corporate alliances for
the Company. Mr. Severson brings to the Company an extensive background in the
medical diagnostic arena and expertise in international distribution and product
development.

During fiscal 1997, the Company continued to be successful in the US veterinary
market. By the end of the fiscal year, the Company had installed a total of 767
VetScan systems in the US, an 83% increase from its customer base of 409 VetScan
systems a year earlier. The addition of two national institutional customers,
Veterinary Centers of America ("VCA") and VetSmart, contributed significantly to
the Company's new system placements. Both customers purchased the Company's
VetScan systems to replace systems from the Company's competitors. The Company
began selling its VetScan systems to VCA hospitals in September 1996 and through
May 1997, a total of 88 systems were installed in a number of VCA's 155
free-standing animal hospitals. In March 1997, the Company signed an agreement
with VetSmart to provide during the next twelve months, 105 VetScan systems and
80,000 reagent discs for use in VetSmart pet hospitals. Through May 1997, the
Company has installed 91 VetScan systems in VetSmart pet hospitals located in
PetSmart stores nationwide. There can be no assurance that VCA or VetSmart will
place additional orders for VetScan systems or reagent discs beyond the terms of
current agreements or purchase orders.

The Company has targeted branches of the US military as potential customers for
the Company's Piccolo Point-of-Care Blood Analyzer based on the features of the
Piccolo systems and the special requirements of the military environment. The
Company has been involved in rigorous studies with the US Navy since 1995,
evaluating the feasibility and clinical utility of the Piccolo systems in the
often rugged environment encountered by the Navy. In March 1997, the Company
announced that it had been awarded a contract with a potential contract value of
up to $7.5 million to provide the US Navy and the Marine Corps its Piccolo
Point-of-Care Blood Analyzer and reagent disc products. The contract calls for a
maximum order of approximately 345 Piccolo systems and 250,000 reagent discs.
Through May 1997, the Company has shipped 72 Piccolo systems under this contract
and another 43 systems have been ordered but not yet shipped. There can be no
assurance that the Company will receive orders for the maximum order quantity
under the conditions of the contract.

19
<PAGE> 20
reagent disc product into the veterinary market in June 1997. This method will
be entered into clinical trials during fiscal 1998 for inclusion in new reagent
disc products for the human medical market. The Company has identified ten
additional test methods that are likely candidates to enhance its ability to
penetrate the human medical market, as well as broadening its market coverage in
the veterinary market. In January 1997, the Company allocated resources to begin
the feasibility phase to develop four electrolyte test methods: bicarbonate,
chloride, potassium, and sodium. The Company expects to conclude the feasibility
phase of these four tests by the end of summer 1997 and if the results are
favorable, proceed with developing these tests into marketable products for both
the human and the veterinary markets. The Company estimates that development of
these four test methods as a group will take approximately 18 months to complete
and should be available during 1998. There can be no assurance that the Company
will be successful in the development of the test methods or that the methods
will be developed within the anticipated time frame.

For the human market, the Company plans on incorporating these tests into new
panels consistent with the codes in the 1998 version of the new Current
Procedures Terminology ("CPT") manual published by the American Medical
Association ("AMA"). These new CPT codes represent a set of tests performed in
standardized panels released in late March, 1997 by the Health Care Financing
Administration ("HCFA"), the federal agency that administers the Medicare and
Medicaid programs. The American Medical Association originally proposed eight
standardized panels and the HCFA adopted four of these panels, with some
modifications, effective July 1, 1997. The four fixed-test panels are:
electrolytes, comprehensive metabolic, hepatic function, and basic metabolic.
Abaxis currently has all the tests for the hepatic function panel, and will have
all required tests for the additional three panels with the development of the
four electrolyte tests.

In addition to investing its own resources in expanding the test menu, the
Company signed a nonbinding letter of intent with Teramecs Co., Ltd. and Daiichi
Pure Chemicals Co., Ltd. in April 1997 to jointly develop additional test
methods for use on the Piccolo analyzer. The product development collaboration
will focus on commercializing targeted methods for lipids, proteins, and
enzymes. The Company expects to sign a definitive agreement in 1997. There can
be no assurance that the Company will be able to develop these new test methods,
conclude a definitive agreement with Teramecs and Daiichi Pure Chemicals, or if
the test methods were developed, be able to successfully market these methods.

Market acceptance of the Company's Piccolo products in the US will depend in
part on all current and future regulations affecting the conditions under which
a health care practitioner may conduct medical tests using the Company's
products. One of the regulations that affects the Piccolo Systems is the
Clinical Laboratory Improvement Amendments of 1988 ("CLIA"). Under the CLIA
regulations, the Company's Piccolo systems are currently classified as
"moderately complex", which requires that any location using the Piccolo
products be certified as a laboratory. Even though the Company believes that
obtaining a CLIA license does not require significant resources for clinicians,
it can be a barrier to the Company's ability to place Piccolo systems. In July
1996, the Company filed an application to the Center for Disease Control ("CDC")
for its Piccolo systems to be waived from the CLIA regulations. The Company met
with the CDC in February 1997 to review its application. Although the review
process for a CLIA license application could potentially be very lengthy and
costly, the Company believes that its Piccolo products fulfill all requirements
for obtaining a waived status. There can be no assurance that the Company will
be able to obtain a waived status for its Piccolo systems, or that if such
waived status was granted, it will enhance the Company's ability to place
Piccolo systems. (See "Business-Government Regulation.")

Finally, the Company's success will depend on its ability to introduce
point-of-care systems and compete with laboratories removed from the
patient-care setting and with other companies that offer near-patient testing
for the alternate-site market. The imposition of more stringent government
regulations or failure to achieve success in these areas could have a materially
adverse effect on the results of operations and financial condition of the
Company. (See "Business-Competition.")

20
<PAGE> 21
Sales for any future periods are not predictable with a significant degree of
certainty. The Company generally operates with limited order backlog because its
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. The Company's expense levels, which are to a large
extent fixed, are based in part on its expectations as to future revenues.
Accordingly the Company may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. As a result, any such shortfall
would have an immediate materially adverse impact on operating results and
financial conditions. Until sales volume of the Company's products, particularly
its reagent discs, increase significantly so as to offset associated fixed costs
and to realize certain manufacturing economies of scale, sales of the Company's
products will result in further losses and adversely affect the Company's
results of operations and financial condition. The Company believes that period
to period comparisons of its results of operations are not necessarily
meaningful.

The Company's periodic operating results have in the past varied and in the
future may vary significantly depending on, but not limited to, a number of
factors, including the level of competition; the size and timing of sales
orders; market acceptance of the current and new products; new product
announcements by the Company or its competitors; changes in pricing by the
Company or its competitors; the ability of the Company to develop, introduce and
market new products on a timely basis; component costs and supply constraints;
manufacturing capacities and ability to scale up production; the mix of product
sales between the analyzers and the reagent discs; mix in sales channels; levels
of expenditure on research and development; changes in Company strategy;
personnel changes; regulatory changes; and general economic trends.

The Company continues to explore the application of its proprietary technology
used to produce the dry reagents used in the reagent discs, called the Orbos(R)
Discrete Lypholization 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. The Company believes that the Orbos
process has broad applications in products where delivery of active ingredients
in a stable, pre-metered format is desired. The Company has a supply agreement
with Becton Dickinson Immunocytometry Systems to provide products for flow and
image cytometry using the Company's Orbos technology. The Company also has a
licensing agreement with Pharmacia Biotech, Inc., granting Pharmacia exclusive
use of the Company's Orbos technology in the manufacture and sale of reagents
for molecular biology research. Revenues from these contracts are primarily
dependent upon sales of products using the Orbos technology by these other
parties, which is out of the control of the Company and therefore, may vary
significantly from quarter to quarter. The Company is currently working with
another company to determine potential suitability of the Orbos technology to
this company's product. As resources permit, the Company will pursue other
development, licensing or manufacturing agreement opportunities for its Orbos
technology with other companies. There can be no assurances, however, that other
applications will be identified or that additional agreements with the Company
will result.

RESULTS OF OPERATIONS

Revenue

During fiscal 1997, the Company reported revenues of $7,294,000, of which
$4,699,000 were from sales of Point-of-Care Blood Analyzers, $2,099,000 from
sales of reagent disc products, $407,000 from Orbos contracts and $89,000 from
other revenue. During fiscal 1996, the Company reported revenues of $2,948,000,
of which $1,807,000 were from sales of Point-of-Care Blood Analyzers, $789,000
from sales of reagent disc products, and $352,000 from Orbos contracts. During
fiscal 1995, the Company reported revenues of $1,044,000, $845,000 from the sale
of VetScan Analyzers and reagent discs and $199,000 from Orbos development
agreements. The $4,346,000 or 147% increase in revenues in fiscal 1997 compared
to fiscal 1996 was due to increased unit sales of Point-of-Care Blood Analyzers,
direct sales during the fourth quarter of fiscal 1997 of Piccolo systems to the
US military which yields higher revenue compared to distributor sales of VetScan
systems, and increased repeat reagent disc sales in both the US and
international markets. The $1,904,000 or 182% increase in revenues in fiscal
1996 compared to fiscal 1995 was primarily due to increased unit sales of

21
<PAGE> 22
VetScan Analyzers, increased repeat reagent disc sales from its existing VetScan
customers, shipments of its Piccolo systems and reagent discs which began in
November 1995, and an increase in revenues from its Orbos contracts.

Cost of Product Sales

Since the Company began recognizing revenue from the sale of its VetScan
products in the second quarter of fiscal 1995, all costs associated with
manufacturing and production have been included in cost of product sales. Cost
of product sales includes the cost of all manufacturing activities for the
Company's products, as well as the costs associated with the Company's
manufacturing capacity. Cost of product sales during fiscal 1997, 1996 and 1995
was $7,661,000, $4,883,000 and $2,587,000, respectively. The increase in cost of
product sales when comparing fiscal 1997 to fiscal 1996 of $2,778,000 or 57% was
primarily a function of the increase in sales volume, partially offset by
efficiencies resulting from standardized manufacturing processes. The increase
in cost of product sales in fiscal 1996 compared to fiscal 1995 of $2,296,000 or
89% was primarily due to the fact that the Company began commercial shipment in
July 1994 and hence only three quarters of a year of manufacturing and
production expenses were included in cost of sales during fiscal 1995.

Research and Development Expense

The Company incurred research and development expenses of $1,315,000 in fiscal
1997, compared with $1,326,000 in fiscal 1996 and $4,166,000 in fiscal 1995. The
$11,000 or less than 1% decrease in research and development expenses in fiscal
1997 compared to fiscal 1996 is mainly the result of allocation of some of the
development resources to support product manufacturing activities. The decrease
in research and development expenses in fiscal 1996 compared to fiscal 1995 was
primarily due to the classification of the manufacturing operating expenses to
cost of sales beginning July 1994, lower materials consumption for the
development of chemistry methods, and overall reduced spending as the Company
transitioned its primary focus from research and development to
commercialization. Research and development activities accounted for
approximately 9% of total operating expenses during fiscal 1997 as compared to
14% during fiscal 1996 and 41% during fiscal 1995. The Company expects the
dollar amount of research and development expenses to increase in fiscal 1998
from fiscal 1997, as the Company undertakes development of new test methods to
expand its test menus as well as other development projects. There can be no
assurance, however, that the Company will undertake such research and
development activities in future periods or, if it does, that such activities
will be successful.

Selling, General and Administrative Expense

Selling, general and administrative expenses were $4,867,000 in fiscal 1997,
compared to $3,482,000 in fiscal 1996 and $3,504,000 in fiscal 1995. The
increase of expense in fiscal 1997 compared to fiscal 1996 of $1,363,000 or 39%
is related primarily to launching the Piccolo products worldwide and increases
in administrative, sales and marketing staffing. The decrease in selling,
general and administrative costs for fiscal 1996 compared to fiscal 1995 was
primarily due to costs associated with launching the VetScan products in fiscal
1995 partially offset by increased marketing and sales activities in fiscal 1996
related to the preparation of launching the Piccolo products worldwide,
including signing and training international distributors.

Interest Income

Interest income totaled $332,000 for fiscal 1997, compared with $547,000 in
fiscal 1996 and $376,000 for fiscal 1995. Interest income decreased $215,000 or
39% in fiscal 1997 compared to fiscal 1996. The decrease was primarily the
result of decreased investment levels and a lower rate of return on investments
due to shorter terms of the investments. Interest income increased $171,000 or
45% from fiscal 1995 to 1996 primarily due to increased cash investment levels
in fiscal 1996. The Company incurred no interest expense during fiscal 1997 and
1996. During fiscal 1995 interest expense was $149,000, mainly for payment of
the Company's equipment loan.

22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities during fiscal 1997, was $6,818,000,
compared to $5,744,000 and $8,329,000 for fiscal 1996 and 1995, respectively.
The increase in net cash used in operating activities in fiscal 1997 compared to
fiscal 1996 was the result of increases in trade and other receivables due to
increased revenue in primarily the fourth quarter of fiscal 1997 from the same
period in fiscal 1996, increases in inventory necessary to meet production
demands for increased shipments and a decrease in trade accounts payable. The
increases in net cash used in operating activities in fiscal 1997 were partially
offset by increases in liabilities such as accrued payroll, other accrued
liabilities, warranty reserve and deferred revenue. The decrease in the net cash
used in operating activities in fiscal 1996 as compared to fiscal 1995 was
primarily attributable to the lower net loss in fiscal 1996, partially offset by
the increase in trade receivables as the Company's revenues increased in the
fourth quarter of fiscal 1996 from the same period of fiscal 1995.

Net cash provided by investing activities for fiscal 1997 was $1,842,000 as
compared to $2,564,000 of net cash used in fiscal 1996 and $4,454,000 of net
cash provided in fiscal 1995. The change from net cash used in fiscal 1996 to
net cash provided by investing activities for fiscal 1997 was primarily due to
total maturities of available-for-sale securities exceeding purchases of
available-for sale securities in fiscal 1997 resulting in a decrease of total
short-term investments. Cash provided by maturities and sales of
available-for-sale securities was partially offset by increased purchases of
property and equipment over fiscal 1996 levels. The change from net cash used in
fiscal 1996 as compared to the net cash provided in fiscal 1995 was primarily
due to net results of purchases of available-for-sale investments over
maturities and sales of available-for-sale investments, partially offset by
lower purchases of property and equipment during fiscal 1996 as compared to
fiscal 1995 when the Company set up its initial commercial manufacturing
capabilities.

Net cash provided by financing activities for fiscal 1997 was $4,821,000 as
compared to $6,439,000 of net cash provided in fiscal 1996 and $7,331,000 of net
cash provided in fiscal 1995. Net cash provided by financing activities in
fiscal 1997 and 1996 was primarily the result of offshore private placements of
preferred stock and issuance of common stock. Net cash provided by financing
activities for fiscal 1995 consisted primarily of a registered direct placement
of common stock, partially offset by principal payments made under capital lease
obligations.

As of March 31, 1997, the Company had approximately $1,436,000 in cash and cash
equivalents and $3,885,000 in short-term investments, for total cash resources
of $5,321,000. As of March 31, 1997, the Company had no credit facilities. The
Company expects to incur substantial additional costs to support its future
operations, including commercialization of its Piccolo products; development of
a sales and marketing organization to support sales and marketing activities for
the Piccolo and VetScan products; acquisition of capital equipment for the
Company's manufacturing facilities, which includes the ongoing development and
implementation of an automated manufacturing line to provide capacity for
commercial volumes; costs related to continuing development of its current and
future products; additional pre-clinical testing and clinical trials for its
current and future products; and expansion of administrative support activities.
The Company is currently contracting with a vendor to build an automated disc
assembly line to provide anticipated capacity for future demand and to improve
production efficiency. The Company currently estimates the cost of this new
production line will be approximately $1,500,000 of which approximately $945,000
was paid through March 31, 1997. The Company expects to pay the balance upon
acceptance of the equipment. In April 1997, in anticipation of taking delivery
of the automated assembly line, the Company arranged for a equipment financing
loan of up to $2,000,000, with 36 monthly payments, and a final balloon payment
equal to 10% of the original principal amount. The equipment financing loan is
collateralized by the Company's equipment and bear interest at approximately
16%. As of May 31, 1997, the Company has drawn $600,000 against this

23
<PAGE> 24
equipment financing loan. Additional manufacturing equipment will also need to
be added during fiscal 1998 to provide sufficient production capabilities.
Additionally, inventories and receivables related to the commercialization of
the VetScan and Piccolo systems could increase significantly in future periods,
which would require significant capital resources.

The Company anticipates that its existing capital resources and anticipated
revenue from the sales of its products will not be adequate to satisfy its
currently planned operating and financial requirements through fiscal 1998.
Accordingly, the Company will need to raise additional funds from public or
private financing if it is to sustain its currently planned level of operating
expenses during fiscal 1998, or in the event that the Company is unsuccessful in
raising sufficient funding, the Company will have to significantly reduce its
operating expenses, which could have a material adverse impact on the Company's
ability to develop, manufacture and market products, and hence the Company's
results of operations. There can be no assurance that any financing will be
available, or if available, be available at terms acceptable to the Company.
Furthermore, any additional equity financing may be dilutive to shareholders and
debt financing may involve restrictive covenants.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Deloitte & Touche LLP, Independent Auditors

Report of Ernst & Young LLP, Independent Auditors

Balance Sheets at March 31, 1997 and 1996

Statements of operations for each of the three years in the period
ended March 31, 1997

Statement of Shareholders' Equity for each of the three years in the
period ended March 31, 1997

Statements of Cash Flows for each of the three years in the period
ended March 31, 1997

Notes to Financial Statements

24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders of
Abaxis, Inc.:

We have audited the accompanying balance sheets of Abaxis, Inc. as of March 31,
1997 and 1996, and the related statements of operations, shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial
statements of the Company for the year ended March 31, 1995 were audited by
other auditors whose report, dated April 21, 1995, expressed an unqualified
opinion on those statements.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of March 31, 1997 and 1996,
and the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

San Jose, California
April 22, 1997 (April 30, 1997 as to Note 10)

25
<PAGE> 26
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Abaxis, Inc.

We have audited the accompanying statements of operations, shareholders' equity,
and cash flows of Abaxis, Inc. for the year ended March 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Abaxis, Inc.
for the year ended March 31, 1995, in conformity with generally accepted
accounting principles.

ERNST & YOUNG LLP
San Jose, California
April 21, 1995

26
<PAGE> 27
ABAXIS, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
March 31,
------------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C>

Current assets:
Cash and cash equivalents ................................ $ 1,436,000 $ 1,591,000
Short-term investments ................................... 3,885,000 6,187,000
Trade and other receivables .............................. 1,690,000 690,000
Interest receivable ...................................... 80,000 41,000
Inventories .............................................. 2,218,000 1,456,000
Prepaid expenses ......................................... 135,000 92,000
----------- -----------

Total current assets ............................ 9,444,000 10,057,000

Property and equipment - net ............................... 2,453,000 2,427,000
Long-term investments ...................................... 0 500,000
Deposits and other assets .................................. 80,000 62,000

Total assets ............................................... $11,977,000 $13,046,000
=========== ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable ......................................... $ 695,000 $ 1,017,000
Accrued payroll and related expenses 604,000 417,000
Other accrued liabilities ................................ 554,000 225,000
Warranty reserve ......................................... 495,000 249,000
Deferred rent ............................................ 24,000 94,000
Deferred revenue ......................................... 247,000 143,000
----------- -----------

Total current liabilities ....................... 2,619,000 2,145,000
----------- -----------

Customer deposits .......................................... - 175,000
----------- -----------

Commitments and contingencies (Note 5)

Shareholders' equity:
Convertible preferred stock, no par value: authorized
shares - 5,000,000; none issued.......................... - -
Common stock, no par value: authorized shares - 35,000,000;
issued and outstanding shares - 11,886,153 in 1997 and
9,857,628 in 1996 ....................................... 58,403,000 53,556,000
Accumulated deficit ...................................... (49,045,000) (42,830,000)
----------- -----------
Total shareholders' equity ...................... 9,358,000 10,726,000
----------- -----------

Total liabilities and shareholders' equity ................. $11,977,000 $13,046,000
=========== ===========
</TABLE>

See notes to financial statements.

27
<PAGE> 28
ABAXIS, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>

Revenues:
Product sales, net ................ $ 7,294,000 $ 2,948,000 $ 845,000
Other development revenue ......... - - 199,000
------------ ------------ ------------

Total revenues ...................... 7,294,000 2,948,000 1,044,000
------------ ------------ ------------

Costs and operating expenses:
Cost of product sales ............. 7,661,000 4,883,000 2,587,000
Research and development .......... 1,315,000 1,326,000 4,166,000
Selling, general and administrative 4,867,000 3,482,000 3,504,000
------------ ------------ ------------

Total costs and operating expenses .. 13,843,000 9,691,000 10,257,000
------------ ------------ ------------

Loss from operations ................ (6,549,000) (6,743,000) (9,213,000)
Interest and other income ........... 360,000 547,000 376,000
Interest expense .................... - - (149,000)
------------ ------------ ------------

Net loss ............................ $ (6,189,000) $ (6,196,000) $ (8,986,000)
============ ============ ============

Net loss per share .................. $ (0.59) $ (0.65) $ (1.24)
============ ============ ============

Weighted average shares outstanding . 10,502,646 9,466,084 7,268,315
============ ============ ============
</TABLE>

See notes to financial statements.

28
<PAGE> 29
ABAXIS, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Convertible Preferred Stock Common Stock Deferred Total
--------------------------- ------------------------- Accumulated Compen- Shareholders'
Shares Amount Shares Amount Deficit sation Equity
--------- ------------ ---------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at April 1, 1994 ................ - $ - 6,260,922 $37,782,000 ($27,648,000) ($131,000) $ 10,003,000

Stock option exercises ................... - - 111,752 115,000 - - 115,000
Issuance of common stock in a public
offering, net of issuance costs
of $167,000 ............................ - - 2,347,250 9,222,000 - - 9,222,000
Amortization of deferred compensation
and cancellation of stock options ...... - - - (2,000) - 84,000 82,000
Net loss ................................. - - - - (8,986,000) - (8,986,000)
--------- ------------ ---------- ------------ ------------- ---------- -------------

Balances at March 31, 1995 ............... - - 8,719,924 47,117,000 (36,634,000) (47,000) 10,436,000

Stock option exercises ................... - - 157,704 389,000 - - 389,000
Issuance of common stock in a private
placement, net of issuance costs
of $23,000 ............................. - - 980,000 6,050,000 - - 6,050,000
Amortization of deferred compensation .... - - - - - 47,000 47,000
Net loss ................................. - - - - (6,196,000) - (6,196,000)
--------- ------------ ---------- ------------ ------------- ---------- -------------

Balances at March 31, 1996 ............... - - 9,857,628 53,556,000 (42,830,000) - 10,726,000

Stock option exercises ................... - - 20,925 67,000 - - 67,000
Issuance of Series A preferred stock in a
private placement, net of issuance costs
of $220,000 ............................ 500,000 4,780,000 - - - - 4,780,000
Preferred dividends paid ................. - - - - (26,000) - (26,000)
Conversion of preferred stock into common
stock .................................. (500,000) (4,780,000) 2,007,600 4,780,000 - - -
Net loss ................................. - - - - (6,189,000) - (6,189,000)
--------- ------------ ---------- ------------ ------------- ---------- -------------

Balances at March 31, 1997 ............... - $ - 11,886,153 $58,403,000 ($49,045,000) $ - $ 9,358,000
========= ============ ========== ============ ============= ========== =============
</TABLE>

See notes to financial statements

29
<PAGE> 30

ABAXIS, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss ............................................ $( 6,189,000) $( 6,196,000) $( 8,986,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ..................... 934,000 657,000 978,000
Amortization of deferred compensation ............. - 47,000 82,000
Changes in assets and liabilities:
Trade and other receivables ..................... (1,000,000) (405,000) (183,000)
Interest receivable ............................. (39,000) (6,000) 198,000
Inventories ..................................... (762,000) (414,000) (783,000)
Prepaid expenses ................................ (43,000) (19,000) 208,000
Deposits and other assets ....................... (18,000) (17,000) 6,000
Accounts payable ................................ (322,000) 519,000 (248,000)
Accrued payroll and related expenses ............ 187,000 99,000 (164,000)
Other accrued liabilities ....................... 505,000 (28,000) 264,000
Deferred revenue ................................ 104,000 34,000 109,000
Customer deposits ............................... (175,000) (15,000) 190,000
------------- ------------- -------------

Net cash used in operating activities ......... (6,818,000) (5,744,000) (8,329,000)
------------- ------------- -------------

Investing activities:
Purchase of available-for-sale securities ........... (27,370,000) (17,194,000) (28,026,000)
Maturities of available-for-sale securities ......... 30,172,000 15,250,000 26,337,000
Sales of available-for-sale securities .............. - - 7,323,000
Purchase of property and equipment .................. (960,000) (620,000) (1,184,000)
Capital lease deposits .............................. - - 4,000
------------- ------------- -------------

Net cash provided by (used in) investing ...... 1,842,000 (2,564,000) 4,454,000
------------- ------------- -------------

Financing activities:
Principal payments under notes payable and capital
lease obligations ................................. - - (2,006,000)
Proceeds from issuance of common and preferred ...... 4,847,000 6,439,000 9,337,000
Preferred dividends paid ............................ (26,000) - -
------------- ------------- -------------

Net cash provided by financing activities ..... 4,821,000 6,439,000 7,331,000
------------- ------------- -------------

Increase (decrease) in cash and cash equivalents ...... (155,000) (1,869,000) 3,456,000

Cash and cash equivalents at beginning of year ........ 1,591,000 3,460,000 4,000
------------- ------------- -------------

Cash and cash equivalents at end of year .............. $ 1,436,000 $ 1,591,000 $ 3,460,000
============= ============= =============
Supplemental disclosures of cash flow information -
Cash paid for interest .............................. $ - $ - $ 149,000
============= ============= =============
Noncash financing activity -
Conversion of preferred stock into common stock ..... $ 4,780,000 $ - $ -
============= ============= =============
</TABLE>

30
<PAGE> 31

ABAXIS, INC.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1997, 1996 AND 1995

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Abaxis, Inc. (the Company) was incorporated in California in 1989 and
develops, manufactures and markets portable blood analysis systems. The
Company was in the development stage until fiscal 1997.

FUTURE FINANCING - The Company expects to incur substantial costs in
fiscal 1998 related to the continued development and marketing of its
products. In addition, future capital requirements will include amounts
necessary to fund accounts receivable, inventories, and capital equipment
acquisitions. The Company does not believe that its existing capital
resources and anticipated revenue from VetScan and Piccolo product sales
will be adequate to satisfy its currently planned financial requirements
through fiscal 1998. Consequently, the Company will need to raise
additional funds from private or public financing if it is to sustain its
currently planned level of operating expenses during fiscal 1998, or in
the event that the Company is unsuccessful in raising sufficient funding,
the Company will have to significantly reduce its operating expenses.

CASH EQUIVALENTS AND INVESTMENTS - Cash equivalents consist of short-term
financial instruments with original maturities of less than 90 days from
the date of acquisition that are readily convertible into cash. Short-term
investments have maturities of less than one year from the balance sheet
date and long-term investments have maturities greater than one year from
the balance sheet date.

Investments consist primarily of marketable debt securities that are
classified as "available-for-sale" and are carried at amounts
approximating fair value. The fair values for marketable debt securities
are based on quoted market prices. Unrealized gains and losses, net of
tax, are reportable in shareholders' equity; however, such amounts have
not been material and therefore were not recorded. The cost basis of
investments is adjusted for the amortization of premiums and the accretion
of discounts to maturity, which is included in interest income. Realized
gains and losses are also included in interest income. The cost of
securities sold is based on the specific identification method.

CONCENTRATION OF CREDIT RISK - Financial instruments that potentially
subject the Company to a concentration of credit risk consist primarily of
cash, cash equivalents, short- and long-term investments, as well as
accounts receivable. The Company has placed the majority of its cash and
cash equivalents and short- and long-term investments in high-credit,
high-quality corporate notes and commercial paper.

31
<PAGE> 32
The Company sells its products primarily to organizations in the United
States, Japan and Europe. The Company monitors the credit status of its
customers on an ongoing basis and generally does not require its customers
to provide collateral or other security to support accounts receivable.
While the Company maintains allowances for potential bad debt losses, such
losses to date have not been material. At March 31, 1997, three customers
accounted for 25%, 25% and 15% of accounts receivable, respectively. At
March 31, 1996, three customers accounted for 54%, 11% and 10% of accounts
receivable, respectively.

PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation and amortization are generally provided using the
straight-line method over the shorter of the estimated useful lives of the
assets (two to five years) or the lease term.

INVENTORIES - Inventories are stated at the lower of cost (first-in,
first-out method) or market.

REVENUE RECOGNITION - Under a distribution agreement, a veterinary
products distributor has certain rights of return for products unsold by
the distributor. The Company defers recognition of such sales and profits
until the products are resold by the distributor. For direct sales and for
distributors where significant rights of return for products unsold do not
exist, revenues are recognized upon shipment. A provision for the
estimated future cost of warranty is made at the time revenue is
recognized.

INCOME TAXES - The Company accounts for income taxes using an asset and
liability approach to recording deferred taxes.

CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - The preparation of financial
statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Such management estimates include the allowance for doubtful accounts
receivable, the net realizable value of inventory, certain accruals and
warranty reserves. Actual results could differ from those estimates.

The Company operates in a dynamic industry, and accordingly, can be
affected by a variety of factors. For example, management of the Company
believes that changes in any of the following areas could have a negative
effect on the Company in terms of its future financial position and
results of operations: ability to obtain additional financing; regulatory
changes; uncertainty regarding health care reforms; fundamental changes in
the technology underlying blood testing; the ability to develop new
products that are accepted in the marketplace; competition, including, but
not limited to pricing and products or product features and services;
litigation or other claims against the Company; the adequate and timely
sourcing of inventories; and the hiring, training and retention of key
employees.

NET LOSS PER SHARE - Net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent
shares from stock options are excluded from the computation as their
effect is antidilutive.

32
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STOCK-BASED COMPENSATION - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with APB No. 25,
"Accounting for Stock Issued to Employees."

RECENTLY ISSUED ACCOUNTING STANDARD - In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). The Company is
required to adopt SFAS 128 in the third quarter of fiscal 1998.

SFAS 128 replaces current earnings per share (EPS) reporting requirements
and requires a dual presentation of basic and diluted EPS. Basic EPS
exclude dilution and is computed by dividing net income by the weighted
average of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts
to issue common stock were exercised or converted into common stock. The
adoption of SFAS 128 will not have an impact on the Company's historically
reported EPS.

2. INVESTMENTS

The amortized cost and the estimated fair value of available-for-sale
securities at March 31 are materially the same and are shown below by
contractual maturity:

<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Due in one year or less:
Commercial paper and bankers' acceptances $ - $4,987,000
Corporate debt securities ............... 3,885,000 1,200,000
---------- ----------

$3,885,000 $6,187,000
========== ==========

Due after one year through two years -
Corporate debt securities ............... $