The Company offers its point-of-care blood chemistry analyzer system with a total of 19 test methods. The Company's repertoire of test methods includes albumin, amylase, alkaline phosphates (ALP), alanine aminotransferase (ALT), aspartate aminotransferase (AST), calcium, creatinine, creatine kinase (CK), glucose, glutamyl transferase (GGT), potassium, total bilirubin, total cholesterol, urea nitrogen (BUN), total protein, uric acid, thyroxine (T4), CO₂ and sodium. Seventeen of these tests are marketed for both human and veterinary markets. Tests for uric acid are marketed only in the human market, and tests for T4 are marketed exclusively in the veterinary market. The Company markets its reagent products by configuring these 19 test methods in panels that are designed to meet a variety of clinical diagnostic needs. The Company currently offers 5 multi-test reagent disc products in the human medical market and 6 reagent discs in the veterinary market.

Abaxis' focus in fiscal 2001 will continue to be in markets where the Company believes it 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 and expanding its marketing effort to the US armed forces. Internationally, the Company will continue to focus its sales effort in Europe. Revenues from Asia and Latin America have been difficult to achieve due to unfavorable foreign exchange rates and poor economic conditions. The Company has re-allocated marketing and sales expenses from Asia and Latin America to the United States and European markets.

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 currently operates in one segment.

In fiscal year ended March 31, 2000, one customer accounted for 45% of total revenue. One customer accounted for 39%, respectively, of total revenues for the fiscal year ended March 31, 1999. Three customers accounted for 29%, 19% and 13%, respectively, of total revenues for the fiscal year ended March 31, 1998.

The Company's research and development expenses were $3,534,000, $2,627,000 and $1,635,000 in fiscal 2000, 1999 and 1998, respectively. The increase in research and development expenditures is primarily due to investment in increasing the number of tests available for the VetScan and Piccolo.

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 laboratories using automated batch testing equipment have become the norm in providing physicians the diagnostic test results 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 systems allowed testing closer to 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 diagnostic testing. In the veterinary market blood testing has become more important to veterinarians by providing them valuable diagnostic information. Veterinarians have historically relied on the services of the centralized laboratories. The same factors affecting the human diagnostic market, however, also impact veterinary practices. Small desk top instruments such as the Dade Behring Analyst, Kodak DT60, and Idexx VetTest have 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 market research, 55% of the veterinarians in the United States do not perform in-house testing despite its advantages.

Abaxis believes that a key element of the patient-centered, cost-constrained health care model in the year 2001 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 turnaround time, is portable and low 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 patient information management systems.

Abaxis has developed a blood analysis system incorporating all of these criteria into a 6.9 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 and eliminates the necessity of multiple visits to the doctor's office. 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.

In March 1999 the Company signed an OEM and distribution agreement with MELET Schloesing Laboratoires (MELET) through which the Company will market and sell the MELET Hematology instrument and reagents and MELET will market and sell the DXS System and Piccolo. The Company will market the hematology instrument as the VetScan HMT in the veterinary market and the Piccolo HMT in the human medical market (collectively HMT). Under the agreement, the Company has the right to market the HMT in the United States, Canada, Mexico, the United Kingdom, Australia and Israel. The Company launched the VetScan HMT in the United States, Australia and Israel in the first quarter of fiscal year 2000. The Company will be required to complete clinical studies in order to obtain the necessary regulatory approvals to sell the Piccolo HMT. These studies are expected to be done during fiscal year 2001. There can be no assurance that these clinical studies for the Piccolo HMT will be successful.

MELET will market and sell the DXS System and Piccolo in France, Austria, Belgium, the Netherlands and the Middle East excluding Israel. Melet launched the DXS System in the first quarter of fiscal year 2000.

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 with 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 human 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 2000, a total of five reagent disc products were 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 Critical Care Profile introduced to the market in March 1999. The Critical Care Profile adds electrolyte testing capability, which includes sodium, potassium, CO₂, as well as ALT, creatinine, BUN and glucose. As of June 2000, the Company offered a total of six reagent disc products to its veterinary customers.

The Company continues to develop new products that the Company believes will provide further opportunities for growth in the human and veterinary markets. The Company is working on the development of tests for chloride, triglycerides, phosphorous, magnesium and HDL tests. Clinical trials of these test methods are expected during fiscal 2001 and 2002. Additional 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.

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 18 reagent test methods is 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 DXS System are primarily companion animal hospitals, animal clinics with mixed practices of small animals, birds and reptiles, equine practitioners, veterinary referral hospitals, and private toxicology laboratories and university and government toxicology research laboratories.

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, 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 decisions. The Company plans to achieve its direct sales objectives by employing highly skilled sales specialists and eventually sales teams which will work closely with providers in performing studies to show that the use of the Piccolo point-of-care blood chemistry analyzer rather than laboratory alternatives can provide better outcomes at a lower cost.

Abaxis is using distributors for those customers who 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. 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 fiscal 2000, the Company entered into a co-promotion with Abbott Laboratories for two years with an option, exercisable by Abbott for three additional years. Under this agreement, Abbott will co-promote one of the Company's products in the United States and Canada. 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.

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 14 additional distribution agreements with regional distributors. In addition to selling through distributors, the Company directly supplies its DXS System products to Veterinary Centers of America (VCA), the nation's largest veterinary hospital chain. The Company intends to enter into arrangements with additional distributors as well as pursue direct sales where appropriate. There can be no assurance that the Company will be successful in securing arrangements with additional distributors or that any of the Company's distributors will devote the necessary resources to be successful in their efforts to commercialize the Company's products.

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 distribution agreements in the following countries: Argentina, Austria, France, Germany, Greece, Israel, Hong Kong, Italy, Japan, Korea, Mexico, New Zealand, Norway, Portugal, Spain, Switzerland, Turkey and 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 with national regulators 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 system for resale only to 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 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), 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 1998, Teramecs received regulatory approval to market the VetScan system from the Japanese Ministry of Agriculture, Forestry and Fishery (Nosuisho). There can be no assurance that Teramecs and Daiichi will be successful in marketing any Abaxis products.

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 other 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 continue to 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 dedicated sales force. There is no assurance that the Company will be able to continue to compete successfully.

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 current Good Manufacturing Practices ("cGMP") for medical devices. The Company is inspected 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 DXS System products to comply with all of the government regulations applicable to the human market, the Company has established all of its manufacturing operations to be cGMP and Quality System Regulations ("QSR") compliant as this ensures product quality and integrity regardless of end use or patient. There can be no assurance that the Company can successfully pass a re-inspection by the FDA or the State of 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:

The analyzer used in the Piccolo and Vetscan system 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 1998, 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 on these crucial items. There can be no assurance that the Company will not experience a material interruption of supply of components from single source vendors.

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 one manufacturer to mold the disks and has four qualified molds. The Company has qualified a second site by the same manufacturer. The Company has four more production molds, which it expects to qualify by the end of fiscal 2001 to better expand its supply source. The Company is also working with its supplier to improve yields and increase capacity on the existing production molds. While the Company has increased the number of 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 in the fiscal year 2001. 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 2001, that capacity will be doubled, quality and yield will improve or that the Company will not experience significant time requirements and additional cost associated with qualification of the autoline.

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.

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) 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 20 test methods from the FDA. Abaxis is currently and plans to continue developing additional tests that will require clearance 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 cGMP and QSR 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 applicable requirements or regulations.

The Piccolo system is also affected by the Clinical Laboratory Improvement Amendments of 1988 ("CLIA"), which are 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", "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 the Health Care Financing Administration ("HCFA") which 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.

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. There can be no assurance that future interpretations made by the FDA, the HCFA, the 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.

The government regulations discussed above generally do not apply to the Company's DXS System 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 DXS System products are subject to government approvals. In Japan, veterinary diagnostic devices are regulated by the Ministry of Agriculture, Forestry and Fishery, and thus the DXS System must be approved by such Ministry prior to being marketed in Japan. Teramecs, the Company's Japanese distributor, received approval for the VetScan system in 1997.

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 chemistry 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 has pursued the development of a patent portfolio to protect its technology. As of June 2000, the Company has filed 22 United States patent applications. The following 20 patents have been issued:

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 executing 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 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.

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, 2000, the Company had a total of 113 full-time employees. Thirteen employees, including four Ph.D's continued to further the Company's research and development activities while also managing the manufacturing process development. Seventy-three employees worked in manufacturing operations devoting their time to manufacturing the DXS System and Piccolo products as well as supporting development activities as necessary. Seventeen employees, including one Ph.D, were selling and marketing the DXS System and Piccolo products. The remaining ten 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, 2000, the Company had 9 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.

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. The Company anticipates entering into a new lease agreement for 91,124 square feet of office, research and development and manufacturing space in a building in Union City, California.

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.

No items were submitted to a vote of security holders.

The Company's initial public offering was completed in January 1992. From that date, the Company's common stock has been traded 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, 1998 are exhibited in the table below, as represented by the high and low daily trade closing sales prices as reported by NASDAQ:

As of June 9, 2000, there were 236 shareholders of record and approximately 4,800 beneficial shareholders. Abaxis has never paid dividends on its common stock and does not anticipate paying cash dividends in the foreseeable future.

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

In fiscal 2000, the Company's US revenues accounted for 82% of its total revenues versus 84% in fiscal 1999, international revenues accounted for 18% versus 16% in fiscal 1999. The increase in the share of the international revenue is due to an increase in the European market. The European market increased to 13% of total revenues in fiscal 2000 from 9% in fiscal 1999.

During the year ended March 31, 2000, the Company placed 1,602 point-of-care blood chemistry analyzers worldwide (a 108% increase from fiscal 1999 shipments of 771 point-of-care blood chemistry analyzers). The increase in instrument sales reflects higher unit shipments primarily in the United States and Europe and the introduction of the VetScan HMT. Reagent discs shipped during fiscal 2000 were approximately 1,084,000, an increase of 45% compared to fiscal 1999 shipments of approximately 748,000 reagent discs. Most (98%) of these reagent disc shipments were for veterinary applications. The increase in reagent disc shipments during fiscal 2000 is consistent with the Company's belief that there will be recurring reagent disc revenue as the Company's product lines mature. This growth is mostly attributable to the expanded installed base of DXS System and higher consumption rates of institutional users. There can be no assurance growth in revenues or unit sales will continue or that the Company will be able to increase production to meet increased product demand.

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 condition. Until sales volume of the Company's products, particularly its reagent discs, increases significantly so as to offset associated fixed costs and to realize certain manufacturing economies of scale, the Company may experience further losses. The Company believes that it needs to complete the development of the four electrolyte discs in order to make a significant impact in the human medical market. The Company is currently preparing to enter clinical trials for chloride. There is no assurance that the products will be successfully developed or that the FDA will approve the marketing application. The Company believes that period to period comparisons of its results of operations are not necessarily meaningful. There has been little or no impact on the Company's business due to changing prices.

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 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 Discrete Lyophilization Process, to other companies' products. This process allows the production of an accurate, precise amount of active chemical ingredients in the form of a soluble bead. 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 contracts with Becton Dickinson Immunocytometry Systems and Pharmacia Biotech, Inc. to either supply products or license Orbos technology. The Company is currently working with other companies to determine potential suitability of the Orbos technology to these companies' products. 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.

During fiscal 2000, the Company reported total revenues of approximately $23,230,000, a $9,883,000 or 74% increase from fiscal 1999 total revenues of approximately $13,347,000. During fiscal 1999, the Company reported total revenues of approximately $13,347,000, a $1,160,000 or 10% increase from fiscal 1998 total revenues of approximately $12,187,000. Revenue increases in fiscal 2000 compared to fiscal 1999 were due to increased unit sales of DXS Systems and reagent discs in the US and Europe. Revenue increases in fiscal 1999 compared to fiscal 1998 were due to increased unit sales of VetScan systems and reagent discs in the US and Europe.

Total revenue in the US for fiscal 2000 was approximately $19,037,000, a $7,858,000 or 70% increase from fiscal 1999 of approximately $11,179,000. Total revenue in Europe for fiscal 2000 was approximately $2,911,000, a $1,701,000 or 141% increase from fiscal 1999 of approximately $1,210,000. Total revenue in Asia and Latin America was approximately $1,282,000, a $324,000 or 34% increase from fiscal 1999 of approximately $958,000. Although revenue increased in Asia and Latin America, it has not recovered to past levels of sales due to unfavorable currency and economic conditions. The Company does not expect revenues from Asia and Latin America to significantly recover in fiscal year 2001, if ever. The Company has shifted sales and marketing resources from the Asian and Latin American markets to the US and European markets.

Total revenue in the US for fiscal 1999 was approximately $11,179,000, a $2,546,000 or 30% increase from fiscal 1998 of approximately $8,633,000. Total revenue in Europe for fiscal 1999 was approximately $1,210,000, a $404,000 or 50% increase from fiscal 1998 of approximately $806,000. Total revenue in Asia and Latin America in fiscal 1999 was approximately $958,000, a $1,790,000 or 65% decrease from fiscal 1998 of approximately $2,748,000.

In fiscal year 2000, one customer accounted for 45% of total revenue. One customer accounted for 39% of total revenue for the fiscal year ended March 31, 1999. Three customers accounted for 29%, 19% and 13%, respectively, of total revenues for the fiscal year ended March 31, 1998.

Cost of product sales for the year ended March 31, 2000 was approximately $12,141,000 or 52% of total revenues, as compared to approximately $9,530,000 or 71% of total revenues in fiscal year 1999. In fiscal year 1998 cost of product sales was approximately $10,461,000 or 86% of total revenues. The decrease in cost of product sales as a percent of revenue for the year ending March 31, 2000 as compared to the year ended March 31, 1999 was primarily a function of continued increases in sales volume of reagent discs and lower unit costs resulting from improved manufacturing processes. The decrease in cost of product sales from fiscal 1999 to 1998 was due to lower unit costs resulting from better standardized manufacturing processes.

 Research and Development Expense

The Company incurred research and development expenses of approximately $3,534,000 in fiscal 2000 compared with $2,627,000 in fiscal 1999 and approximately $1,635,000 in fiscal 1998. The $907,000 or 35% increase in research and development expenses in fiscal 2000 compared to fiscal 1999 is the result of an increase in headcount. The $992,000 or 61% increase in research and development expenses in fiscal 1999 compared to fiscal 1998 is the result of increased spending in the development of new test methods, in particular the new Critical Care Profile disk the Company launched in March 1999.

Research and development activities accounted for 15% of total revenue during fiscal 2000 as compared to 20% of total revenue during fiscal 1999 and 13% during fiscal 1998. The Company expects the dollar amount of research and development expenses to increase in fiscal 2001 from fiscal 2000 but remain the same as a percentage of total revenue, as the Company completes development and clinical trials 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 expenses were approximately $8,173,000 or 35% of total revenue in fiscal 2000 compared to $5,352,000 or 40% of total revenues in fiscal 1999, and approximately $4,741,000 or 39% of total revenues in fiscal 1998. The increase in selling, general and administrative expenses of $2,821,000 or 53% for fiscal 2000 is primarily the result of an increase in headcount. The increase in selling, general and administrative expenses for fiscal 1999 as compared to fiscal 1998 of $611,000 or 13% is primarily the result of launching new products and an increase in headcount.

The Company expects the dollar amount of selling, general and administrative expense to increase in fiscal 2001 from fiscal 2000 but decline as a percent of total revenue, to meet staffing and support demands associated with increased sales.

Interest income totaled approximately $149,000 in fiscal 2000 compared to $183,000 for fiscal 1999 and $370,000 in fiscal 1998. Other income, for fiscal 2000, included $38,000 of currency gain and a $24,000 state income tax refund.

The Company incurred interest expense of approximately $170,000 on equipment and working capital loans during fiscal 2000, net of capitalized interest of approximately $236,000 on the purchase and installation of the new automated disk production line and other manufacturing equipment in construction. Included in interest expense, for fiscal 2000, was a cancellation fee of $43,000 for the Company's previous line of credit. The Company incurred interest expense of approximately $231,000 on an equipment loan and a working capital loan during fiscal 1999, net of capitalized interest of approximately $67,000 on the purchase and installation of the new automated disk production line. The Company incurred interest expense of approximately $73,000 on an equipment loan during fiscal 1998. The Company expects interest expense to increase in fiscal 2001 to meet working capital requirements associated with an increase in sales.

As of March 31, 2000, the Company had approximately $2,049,000 in cash and cash equivalents. The Company expects to incur substantial additional costs to support its future operations, including further commercialization of its products and development of new test methods that will allow the Company to further penetrate the human diagnostic market; acquisition of capital equipment for the Company's manufacturing facilities, which includes the ongoing costs related to continuing development of its current and future products; completion of development and implementation of an automated manufacturing line to provide capacity for increased commercial volumes; and additional pre-clinical testing and clinical trials for its current and future products.

Net cash used in operating activities during fiscal 2000 was $1,653,000 compared to $4,891,000 in fiscal 1999 and $2,111,000 net cash used in operating activities during fiscal 1998. The decrease in net cash used in operating activities in fiscal 2000 compared to fiscal 1999 was primarily due to a decrease in net loss by $3,633,000.

Net cash used in investing activities for fiscal 2000 was $2,009,000 as compared to net cash provided of $3,278,000 for fiscal 1999 compared to $870,000 net cash used in investing activities for fiscal 1998. The change from net cash provided in fiscal 1999 to net cash used in 2000 was due primarily to an increase in the purchase of property and equipment in fiscal 2000 and maturities of available-for-sale securities in fiscal 1999. The change from net cash used by investing activities in fiscal 1998 to net cash provided by investing activities for fiscal 1999 was primarily the result of maturities of available-for-sale securities in 1999 offset by an increase in the purchase of property and equipment.

Net cash provided by financing activities for fiscal 2000 was $285,000 as compared to $5,338,000 for fiscal 1999 and $3,246,000 for fiscal 1998. Cash provided by financing activities for fiscal 2000 is the primarily the result of proceeds of borrowings under a line of credit and equipment financing, net of repayments, of $138,000 and net proceeds from the issuance of common stock of $152,000. Cash provided by financing activities for fiscal 1999 was primarily the result of net proceeds from the issuance of preferred stock of $3,581,000, proceeds of borrowings under a line-of-credit and equipment financing arrangements, net of repayments, of $1,741,000. Cash provided by financing activities for fiscal 1998 is the result of net proceeds from issuance of common and preferred stock of $2,809,000 and net proceeds from equipment financing of $437,000.

The Company currently has $1,229,000 available under the line of credit. The line of credit is collateralized by the Company's accounts receivable, bears interest at the prime rate (9.0% at March 31, 2000) plus 1%, and expires in November 2000. There can be no assurance that the Company will be able to extend the line of credit for another year.

In fiscal 2000, the Company entered into a co-promotion agreement with Abbott Laboratories for two years with an option, exercisable by Abbott for three additional years. Under this agreement, Abbott will co-promote one of the Company's products in the United States and Canada. Abbott will receive a commission payable over an approximate eight-year period. The present value of the commission obligation is recorded concurrently with the sales using a discount rate of 9.75%. In addition, Abbott will provide up to $5 million in financing to support the Company's expansion of manufacturing capacity. Such borrowings will bear interest at 1.6% below prime, with interest payable quarterly and principal repayment no later than December 31, 2007. The difference between the discounted interest rate and the Company's incremental borrowing rate will be amortized over the initial two year terms of the agreement, beginning with the draw down of such financing which had not occurred at March 31, 2000. In addition, Abbott agreed to provide additional financing at 1.6% below prime to support additional sales programs contemplated by the Company. At March 31, 2000, accrued commission obligations totaled $360,000 and no borrowings had been drawn.

The Company anticipates that its existing capital resources, debt financing and anticipated revenue from the sales of its products will be adequate to satisfy its currently planned operating and financial requirements through the next twelve months. The Company's future capital requirements will largely depend upon the increased market acceptance of its point-of-care blood chemistry analyzer products. However, the Company's sales are not predictable due to its limited market experience with its products. In the event the sales are significantly below the anticipated level, the Company may need to obtain additional equity or debt financing. There can be no assurance that any such financing will be available on terms acceptable to the Company, if at all, and any additional equity financing may be dilutive to shareholders, while debt financing may involve restrictive covenants.

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an entity recognizes all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Adoption of this statement will not impact the Company's financial position, results of operations or cash flows. The Company is required to adopt this statement in the first quarter of fiscal year 2002.

The future events that we describe in these risk factors involve risks and uncertainties, among them are risks and uncertainties related to:

1. the market acceptance of our products;

2. our continuing development of our products;

3. obtaining required Food and Drug Administration clearance and other federal, state and local government approvals;

4. the manufacture and distribution of our products on a commercial scale;

5. general market conditions; and

6. competition.

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

WE ARE NOT PROFITABLE; WE MUST INCREASE SALES OF OUR PICCOLO AND DXS SYSTEM PRODUCTS TO BE PROFITABLE

As of March 31, 2000, we have been profitable for two quarters since our formation in 1989. Although we have had two profitable quarters, there can be no assurance that there will be profitable quarters in the future. We have incurred cumulative net losses of approximately $61 million. Our ability to be consistently profitable will depend, in part, on our ability to increase our sales volumes of our DXS System and Piccolo products. Increasing our sales volume of our products will depend upon our ability to:

• continue to develop our products;
• increase our sales and marketing activities;
• increase our manufacturing activities; and
• effectively compete against current and future competitors.

We cannot assure you that we will be able to successfully increase our sales volumes of our products to achieve profitability.

WE ARE NOT ABLE TO PREDICT SALES IN FUTURE QUARTERS AND A NUMBER OF FACTORS AFFECT OUR PERIODIC RESULTS

We are not able to accurately predict our sales in future quarters. In any quarter, we derive a significant portion of our revenues from sales to a limited number of distributors who resell our products to the ultimate user. While we are better able to predict sales of our reagent discs, as we sell these discs primarily for use with analyzers that we sold in prior periods, we generally are unable to predict with much certainty sales of our analyzers, as we typically sell our analyzers to new users. Accordingly, our sales in any one quarter are not indicative of our sales in any future period. In addition, we generally operate with limited order backlog, because we ship our products shortly after we receive the orders from our customers. As a result, our product sales in any quarter are generally dependent on orders that we receive and ship in that quarter. We base our expense levels, which are to a large extent fixed, in part on our expectations as to future revenues. We may be unable to reduce our spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, any such shortfall would immediately materially and adversely impact our operating results and financial condition. In addition, we have historically experienced a decrease in our sales, especially in Europe, in our second and third quarters. Accordingly, we believe that period to period comparisons of our results of operations are not necessarily meaningful.

Our periodic operating results have varied in the past. In the future, we expect our periodic operating results to vary significantly depending on, but not limited to, a number of factors, including:

• the level of competition in the markets in which we compete;
• the size and timing of sales orders that we receive from our customers;
• market acceptance of our current and future products;
• new product announcements made by us or our competitors;
• changes in our pricing structures or the pricing structures of our competitors;
• our ability to develop, introduce and market new products on a timely basis;
• the costs, and possible supply constraints, of the components that we use to build our products;
• our manufacturing capacities and our ability to increase the scale of these capacities;
• the mix of product sales between our analyzer and our reagent disc products;
• the different sales channels available to us;
• the limited size of our sales force;
• the amount we spend on research and development;
• changes in our strategy;
• changes in our key personnel;
• changes in regulatory matters; and
• general economic trends in the economy.

 WE MAY NEED ADDITIONAL FUNDING IN THE FUTURE AND THESE FUNDS MAY NOT BE AVAILABLE TO US

We believe that our existing capital resources, bank and equipment financing loans and anticipated revenue from the sales of our products will be adequate to satisfy our currently planned operating and financial requirements through fiscal year 2001, although no assurances can be given. We will need additional funds, however, if we do not achieve anticipated revenues, from the sale of our Piccolo and DXS System products. In addition, we expect to incur substantial additional costs to support our future operations, including:

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

WE HAVE LIMITED MARKETING AND DISTRIBUTION EXPERIENCE AND FEW RESOURCES TO DEVOTE TO MARKETING AND DISTRIBUTION; OUR INTERNATIONAL SALES EFFORTS ARE CHARACTERIZED BY A HIGH DEGREE OF DISTRIBUTOR TURNOVER

We have been marketing our Vetscan System products for less than five years in the veterinary diagnostic market, and we have less than four years in marketing the Piccolo System in the human diagnostic market. We have only recently begun marketing our Vetscan HMT products in the veterinary diagnostic market. Accordingly, we have very limited marketing and distribution experience, especially in the human diagnostic market. Further, we have limited resources to devote to marketing and distribution. In particular, we have only seventeen full-time sales personnel involved in our sales and marketing activities. While these individuals work with our distribution partners both domestically and internationally to extend our market reach, the primary selling activities are often done by these individuals. If we are to increase our sales, we will need to increase the size of our sales force. However, we may be constrained from growing our sales force by our financial resources and the availability of qualified sales personnel. This means that we may not be able to build an effective sales and marketing organization, or we may not be able to establish an extensive and effective distribution network. We cannot assure you that:

• we will be able to build a successful sales and marketing organization;
• we will be able to establish effective distribution arrangements;
• any distribution arrangements that we are able to establish will be successful in marketing our products; or
• the costs associated with marketing and distributing our products will not be excessive.

Although we have established some international distributors, we have limited experience and resources in marketing and distributing our products in international markets. Moreover, we have experienced a high degree of turnover among our international distributors. This high degree of turnover makes it difficult for us to establish a steady distribution network overseas. Consequently, we may not be successful in marketing our Piccolo System and DXS System products internationally.

WE NEED TO DEVELOP ADDITIONAL REAGENT DISCS FOR THE HUMAN DIAGNOSTIC MARKET IF WE ARE TO COMPETE IN THAT MARKET

We have developed a blood analysis system that consists of a portable blood analyzer and single-use reagent discs. Each reagent disc performs a series of standard blood tests. We believe that it is necessary to develop additional series of reagent discs with various tests for use with the Piccolo and DXS systems. Currently, we have primarily developed reagent discs suitable for the veterinary diagnostic market. In order to be competitive in the more lucrative human diagnostic market, we need to develop additional reagent discs that include certain standard tests for which the medical community receives reimbursements from third party payors such as HMOs and Medicare. The tests that we need to develop to compete in the human diagnostic market include the standard electrolyte tests -- potassium, sodium, chloride and carbon dioxide -- and lipid tests. Currently, we are in clinical testing for the potassium, sodium and carbon dioxide tests, but we are still developing the chloride and lipid tests. We may not be able to develop these new reagent discs on a timely and cost effective basis. Also, we may not be able to obtain regulatory clearance for these new reagent discs. Further, even if we gain regulatory approval, we may not be able to successfully manufacture or market the reagent discs. Our failure to meet one or more of these challenges will materially adversely affect our operating results and financial condition.

WE RELY ON DISTRIBUTORS TO SELL OUR PRODUCTS; WE RELY ON SOLE DISTRIBUTOR ARRANGEMENTS IN A NUMBER OF COUNTRIES

We distribute our products primarily through distributors. As a result, we are dependent upon these distributors to sell our products and to assist us in promoting and creating a demand for our products. We have a number of distributors in the United States who distribute our DXS System products, although one of these distributors has accounted for a majority of our sales in the United States to date. We believe that our future growth depends on the efforts of these distributors. If one of our distributors were to stop selling our products, we may not be able to replace it. Further, many of our distributors may carry our competitors' products, and may promote our competitors' products over our own products. Finally, we do not have at this time distribution partners in the United States who distribute our products for the human diagnostic market.

We currently have exclusive distribution agreements in Argentina, Australia, Austria, France, Germany, Greece, Hong Kong, Italy, Japan, Korea, Mexico, New Zealand, Norway, Portugal, Spain, Switzerland, Turkey and the United Kingdom.

Our distributor in each of these countries is responsible for obtaining the necessary approvals to sell our products. These distributors may not be successful in obtaining proper approvals for our products in their respective countries, and they may not be successful in marketing our products. We plan to enter into additional distribution agreements to expand our international distribution base and solidify our international presence. However, we may not be successful in entering into additional distributor agreements. Our distributors may, and have in the past, terminate their relationship with us at any time. If that happens, we may not be able to negotiate acceptable alternative distribution relationships.

OUR MANUFACTURING CAPACITY IS LIMITED AND WE MAY NOT BE ABLE TO EXPAND IT

We have limited manufacturing capacity. Because our products are highly complex, it is difficult for us to manufacture them through an assembly line process. While we believe that the autoline assembly system that we are installing will be adequate for our current needs, we may not be able to increase the scale of the autoline system to handle either (1) larger volume production or (2) the production of new or varied products. Further, all aspects of such a scale-up must comply with applicable governmental regulations. We may encounter significant delays or incur unforeseen costs in expanding our manufacturing capacity because of the complexities described above. In addition, we will need to continue to develop the infrastructure that we require to effectively manage our manufacturing operations. The process of manufacturing sufficient quantities of our products can be expensive, time-consuming and complex. We may not be able to successfully add technical and non-technical personnel that we need to meet the additional staffing requirements that any increase in production would require. If we are unable to develop such increased manufacturing capabilities and infrastructure with appropriate quality, at acceptable costs and on a timely basis, our business or financial condition could be materially adversely affected.

The Company's lease will expire in July 2000. The Company anticipates entering into a new lease agreement for 91,124 square feet of new office, research and development and manufacturing space in a building in Union City, California. The Company expects to move into the new facility during the third quarter of fiscal 2001. There can be no assurance that this lease agreement will be finalized on terms acceptable to the Company or that the new facility will be ready on time. There can be no assurance that the manufacturing will be validated in a timely manner.

WE DEPEND ON SOLE SUPPLIERS FOR SEVERAL KEY COMPONENTS TO OUR PRODUCTS

We use several components that are currently available from limited or sole sources. A single injection molding manufacturer currently makes the molded plastic discs which, when loaded with reagents and welded together, form our reagent disc products. We believe that only a few manufacturers are capable of producing these discs to the narrow tolerances that we require; to date, we have only qualified one manufacturer, at two different sites, to manufacture the molded plastic discs. Moreover, we currently depend on a single vendor for some of the chemicals that we use to produce the dry reagent chemistry beads. Further, our analyzer products use several technologically advanced components that are each available only from single vendors. Because we are dependent on a limited number of suppliers and manufacturers for critical components to our products, we are particularly susceptible to any interruption in the supply of these products or the viability of our assembly arrangements. The loss of one of these suppliers or a disruption in our manufacturing arrangements would materially adversely affect our business and financial condition.

COMPETITION FROM LARGER, BETTER ESTABLISHED ENTITIES SUCH AS HOSPITALS AND COMMERCIAL LABORATORIES

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

1. commercial clinical laboratories;

2. hospitals' clinical laboratories; and

3. manufacturers of bench top multi-test blood analyzers and other testing systems that health care providers can use "on-site."

We may not be able to compete with these organizations or their products or with future organizations or future products.

Historically, hospitals and commercial laboratories perform the most human medical testing, and commercial laboratories perform the most veterinary medical testing. Our products compete with the commercial and hospital laboratories with respect to:

1. range of tests offered;

2. the immediacy of results;

3. cost effectiveness;

4. ease of use; and

5. reliability of results.

We believe that we compete effectively on each of these factors except for the range of tests offered. Clinical laboratories are effective at processing large panels of tests using skilled technicians and complex equipment. While our current offering of reagent discs cannot provide the same range of tests, we believe that our products provide a sufficient breadth of test menus to compete successfully with clinical laboratories, in certain limited markets, on the basis of the other four factors. However, we cannot assure you that we will continue to be able to compete effectively on (1) cost effectiveness, (2) ease of use, (3) immediacy of results or (4) reliability of results. We also cannot assure you that we will ever be able to compete effectively on the basis of range of tests offered.