UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1997    Commission File Number - 1-10184

                           ABATIX ENVIRONMENTAL CORP.
             (Exact name of registrant as specified in its charter)

          Delaware                                             75-1908110
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization                            Identification number)

8311 Eastpoint Drive, Suite 400, Dallas, Texas                   75227
(Address of principal executive offices)                      (Zip Code)

Registrant's telephone number, including area code:        (214) 381-1146

Securities registered pursuant to Section 12 (b) of the Act:      None

Securities registered pursuant to Section 12 (g) of the Act:  Common Stock

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  twelve  months  (or for  such  shorter  period  that the
registrant  was required to file such  reports) and (2) has been subject to such
filing 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. [ ]

1,937,564 shares of common stock,  $.001 par value,  were issued and outstanding
on March 23, 1998.

The  aggregate   market  value  of  the   Registrant's   common  stock  held  by
nonaffiliates  of the  Registrant  as of the close of business on March 23, 1998
(an aggregate of 922,764 shares out of a total of 1,937,564  shares  outstanding
at that time) was  $3,229,674  computed by reference to the closing bid price of
$3 1/2 on March 23, 1998.

Portions of the  Registrant's  proxy  statement  for its 1998 annual  meeting of
stockholders are incorporated into Part III, herein, by this reference thereto.

<PAGE>

                                     PART I

ITEM 1. BUSINESS

(a)      DEVELOPMENT OF BUSINESS

Abatix  Environmental Corp.  ("Abatix" or the "Company") markets and distributes
personal protection and safety equipment, and durable and nondurable supplies to
the asbestos  and lead  abatement,  industrial  safety and  hazardous  materials
industries.  In addition to these products,  the Company also distributes  tools
and tool supplies to the construction industry.

The Company began operations in May 1983 as an industrial  safety supply company
located in Dallas, Texas, and was originally incorporated in Texas as T&T Supply
Company,  Inc.  ("T&T") in March 1984.  T&T expanded its  operations to become a
supplier  to the  asbestos  abatement  industry  in  January  1986.  Abatix  was
incorporated in Delaware on December 5, 1988 to effect and complete an Agreement
and Plan of Merger  with T&T on December  9, 1988.  Unless the context  provides
otherwise,  all references to the Company  include T&T and the Company's  wholly
owned subsidiary, International Enviroguard Systems, Inc. ("IESI").

The  Company  opened  its  Nederland,  Texas  sales  office  in May 1988 and its
Hayward,  California  distribution  location in December 1988.  During 1989, the
Company expanded its customer base to supply the hazardous materials remediation
industry.

In March  1989,  the  Company  completed  its  initial  public  offering  of its
securities  with the sale of 300,000  units,  each  consisting  of two shares of
common stock and one  redeemable  common stock purchase  warrant,  at a price of
$5.00 per unit.  Net proceeds of  $1,135,251  were  realized  from the offering.
Pursuant to provisions of the initial public  offering,  the Company issued,  on
March 2, 1990, a notice of redemption to the warrantholders in respect of all of
its outstanding redeemable common stock purchase warrants which were exercisable
at $3.00 per share.  An  aggregate  of 231,983 of such  warrants  was  exercised
pursuant to the notice.  In total,  290,983 warrants were exercised,  8,917 were
redeemed  and 100 were not  presented,  resulting  in net  proceeds of $805,616.
Proceeds  from the exercise of the warrants  enabled the Company to increase its
capital base and expand its operations.

In February  1990,  the Company  expanded  its Hayward  location  and opened its
Houston, Texas office/warehouse location. In August 1991, the Company opened its
Santa Fe Springs,  California  office/warehouse location and, in April 1992, the
Nederland,  Texas  location was converted to a warehouse  location and was later
combined  with  the  Houston,   Texas  location.   In  August  1992,  sales  and
administrative  staff were added to the Santa Fe Springs  facility  to  initiate
distribution services to the construction tools supply industry.

On October 5, 1992, the Company  entered into and  consummated an Asset Purchase
Agreement  with  International   Enviroguard  Systems,  Inc.  ("IES"),  a  Texas
corporation, pursuant to which the Company assumed the operation of this company
and issued  250,000 shares of the Company's  $.001 par value common stock.  IES,

                                       2
<PAGE>

based in Corpus Christi,  Texas,  was a manufacturer of sorbents,  primarily for
the hazardous materials  industry.  The Company transferred the assets purchased
and  liabilities  assumed to IESI,  a Delaware  corporation  wholly owned by the
Company.

In response to  improved  competitive  conditions,  the Company  began  asbestos
abatement  supply  distribution  operations in Phoenix and Denver in January and
February of 1993, respectively,  and Seattle in January 1994. The Company opened
a  distribution  center in Corpus  Christi,  Texas in June 1994 as an attempt to
more fully utilize the IESI facilities.

During 1994, because of increased  purchasing power, the Company,  through IESI,
began  to  import   certain   products  sold  through  not  only  the  Company's
distribution   channels,   but  other  distribution   companies  not  in  direct
competition  with  Abatix.  The  Company  will  continue  to review  the  direct
importation of products to obtain lower costs.

In December 1994, because of the significant use of cash, the negative impact on
earnings and the limited  potential  for  progress  towards  profitability,  the
Company  announced  plans to discontinue the sorbent  manufacturing  business of
IESI.  This process was completed  during the second  quarter of 1995;  however,
IESI continues to import products.

The Corpus  Christi  location  was closed as of  September  30,  1995  primarily
because  the  projected  costs to  operate  the  facility  exceeded  the  market
potential.  As was done prior to opening the Corpus Christi  location,  Abatix's
Houston facility will serve the central and south Texas area.

In  October  1995,  the  Company  expanded  its  Phoenix  location  to  initiate
distribution  services to the construction  tools supply  industry.  In December
1995, the newest facility opened in Las Vegas.  Although the Las Vegas operation
will handle the entire product line, its primary focus is the construction  tool
industry.

The  Company's  lease  agreement on the  building  that was occupied by both the
operations of IESI and the Corpus Christi branch  included an option to purchase
the  building.   In  March  1996,  the  Company   purchased  this  facility  and
simultaneously  sold the building to a third party. This transaction  terminated
the Company's lease  obligation.  Concurrent with the sale, the Company reversed
the  remaining  reserves  resulting in the special  credit and the earnings from
discontinued operations in 1996.

The Company,  based on local market conditions,  intends to expand and diversify
the  revenue  base  by  developing  its  full  product  line  in all  locations.
Acquisitions and the hiring of experienced  personnel are two alternatives  that
will continue to be explored to accomplish this goal.

(b)      FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The Company is considered to be in one industry segment for financial  reporting
purposes;  therefore,  no financial  information is presented regarding industry
segments.

                                       3
<PAGE>

(c)      NARRATIVE DESCRIPTION OF BUSINESS

ASBESTOS ABATEMENT INDUSTRY BACKGROUND

Between 1900 and the early 1970's,  asbestos was extensively used for insulation
and fireproofing in industrial,  commercial and governmental  facilities as well
as  private  residences  in  the  United  States  and  in  other  industrialized
countries.  It is estimated that in the United States,  approximately 20 percent
of  all   buildings,   excluding   residences  and  schools,   contain   friable
asbestos-containing   materials  that  are  brittle,  readily  crumble  and  are
susceptible  to  the  release  of  asbestos  dust.   Various  diseases  such  as
asbestosis,  lung cancer and  mesothelioma,  linked to the  exposure to airborne
asbestos,  and the presence of asbestos in insulation,  service applications and
finishing  materials  have given rise to the concern about exposure to asbestos.
Public  awareness of the health  hazards  posed by asbestos has increased as the
results of continuing  medical  studies have become  widely known.  Business and
other  publications  and  studies  have  listed  asbestos  abatement  as  one of
America's critical problems,  and legislation  previously introduced to the U.S.
Congress  refers to asbestos as "one of the most dangerous  substances  known to
science." A study  performed  in the 1980's,  predicted  that as many as 225,000
Americans will die of asbestos  related  ailments  before the year 2000 and that
there are  currently  65,000  known cases of  asbestosis.  Litigation  involving
claimants exposed to asbestos has forced several firms to seek the protection of
the bankruptcy  courts, and the volume of pending claims has inundated state and
Federal courts  throughout the country,  thus  prompting  many  commentators  to
propose legislative solutions.

The United States Environmental Protection Agency ("EPA") estimated, in a survey
conducted  in 1984,  that  asbestos  is present  in 30  percent of the  nation's
110,000  schools and in 20 percent of the  nation's 3.6 million  government  and
commercial buildings.  Maintenance,  repair,  renovation or other activities can
disturb  asbestos-containing  material  and, if disturbed  or damaged,  asbestos
fibers  become  airborne  and  pose a  hazard  to  building  occupants  and  the
environment.

Prompted by such concerns,  Congress,  in 1984, authorized the EPA to spend $800
million for asbestos  abatement  in schools  under the  Asbestos  School  Hazard
Abatement Act. In October 1986,  Congress passed the Asbestos  Hazard  Emergency
Response Act ("AHERA") which mandates inspections for asbestos,  the adoption of
asbestos abatement plans and the removal of asbestos from schools and facilities
scheduled for demolition.  In addition,  state and local  governments  have also
adopted asbestos-related regulations.

Notwithstanding  such  legislative  impetus and  continued  awareness  of health
related hazards associated with asbestos, the budgetary constraints and the lack
of improvement in the industrial  sectors continue to limit the number and scope
of asbestos  abatement  projects.  However,  as the U.S.  economy  improves  and
commercial  real  estate  demand  increases,  the Company  believes  the overall
industry will also improve on a limited basis.

                                       4
<PAGE>

LEAD ABATEMENT INDUSTRY BACKGROUND

The hazards of  lead-based  paint have been known for many years;  however,  the
federal and state regulations requiring  identification,  disclosure and cleanup
have been  minimal.  In early 1996,  the EPA and the  Department  of Housing and
Urban Development  unveiled rules regarding  lead-based paint in the residential
markets.  These  rules give home buyers the right to test for  lead-based  paint
before any contracts are signed. In addition, although a landlord or home seller
is not required to test for lead-based paint, the rules do require disclosure of
a known lead hazard.

Many  asbestos  abatement  contractors  added lead  abatement  to their range of
services in an attempt to enter a market  considered  to be in its infancy.  The
asbestos  abatement  contractors  bring  equipment,  a trained labor force,  and
experience working in a regulatory  environment to the lead abatement  industry.
Although the Company does not anticipate these rules to result in an increase of
lead  abatement  projects,  management  is  encouraged  by these rules and their
opportunities.  Such  rules  could  create a  long-term  positive  impact on the
Company through  expenditures  for equipment and supplies to ensure the safe and
proper removal and disposal of lead paint.

SAFETY AND HAZARDOUS MATERIALS INDUSTRIES BACKGROUND

The EPA and the Occupational Safety and Health Administration ("OSHA"), together
over  time,  have   established   numerous  rules  and   regulations   governing
environmental  protection and worker safety and health.  The demand for supplies
and  equipment  by U.S.  businesses  and  governments  to meet  these  rules and
regulations has resulted in the creation of a multi-billion dollar industry.

As research  identifies the degree of  environmental  or health risk  associated
with various substances and working conditions, new rules and regulations can be
expected.  These actions  inevitably will require more expenditures for supplies
and equipment for handling, remediation and disposal of hazardous substances and
the creation of safe living and working conditions.

CONSTRUCTION TOOLS SUPPLY INDUSTRY BACKGROUND

Besides  the normal  hand and power  tools,  and  associated  consumable  parts,
supplied to the  construction  industry,  the EPA and OSHA have also established
certain rules and  regulations  governing the protection of the  environment and
the protection of workers in this industry.

Currently,  the Company supplies the construction tools industry in its Santa Fe
Springs, Phoenix and Las Vegas facilities. This industry is directly tied to the
local economies and more  specifically,  the real estate conditions within those
markets.  The real estate  market in the Las Vegas area is strong  with  vacancy
rates for commercial  properties low and rental rates high. The condition of the
real estate industry in the Los Angeles and Phoenix areas remains stable.

                                       5
<PAGE>

GEOGRAPHIC DISTRIBUTION OF BUSINESS

The Company distributes over 9,000 personal protection,  safety, hazardous waste
remediation and  construction  tool products to over 4,000  customers  primarily
located in the Southwest, Midwest and Pacific Coast. Approximately 53 percent of
its products are sold to asbestos and lead abatement contractors,  25 percent to
the industrial  safety market,  11 percent to construction  related firms and 11
percent to other firms,  including hazardous material  contractors.  The Company
believes a majority of its sales for the foreseeable  future will continue to be
made  to  asbestos  and  lead  abatement  contractors,  project  organizers  and
managers.  At present, the Company estimates its share of the asbestos abatement
supply market to be  approximately  15 to 20 percent in the  geographic  markets
served by the Company. The Company considers its relationship with its customers
to be excellent.

The Company  maintains  24-hours-a-day/7-days-a-week  telephone  service for its
customers and typically delivers supplies and equipment within two or three days
of receipt  of an order.  The  Company is  prepared  to provide  products  on an
expedited  basis in response to requests from abatement  contractors who require
immediate  deliveries because their work is often performed during  non-business
hours,  involves  substantial  costs  because  of the  specialized  labor  crews
involved or may arise on short notice as a result of exigent conditions.

The Company  maintains  sales,  distribution  and warehouse  centers in Santa Fe
Springs and  Hayward,  California,  in Dallas and  Houston,  Texas,  in Phoenix,
Arizona, in Las Vegas, Nevada, in Denver, Colorado, and in Kent, Washington.

EQUIPMENT AND SUPPLIES

The Company buys products from  manufacturers  based on orders received from its
customers as well as anticipated needs based on prior buying patterns,  customer
inquiries  and  industry  experiences.  The Company  maintains  an  inventory of
disposable  products  and  commodities  as well  as low  cost  equipment  items.
Approximately  85  percent  of the  Company's  sales  for  1997  and 1996 are of
disposable  items and commodity  products  which are sold to customers at prices
ranging  from under  $1.00 to $50.00.  The balance of sales is  attributable  to
items consisting of lower priced equipment  beginning at $20.00 to major product
assemblies  such as  decontamination  trailers  which  retail for  approximately
$15,000.  The Company  currently does not  manufacture or lease any products and
does not perform  any repairs  thereon.  The  Company  distributes  on a limited
basis, disposable items under its own private label.

Except with  regard to certain  specialty  equipment  associated  with  asbestos
abatement  activities  such as  filtration,  vacuum  and  pressure  differential
systems, many of the Company's products can be used interchangeably  within many
of the industries it supplies.  Equipment  distributed  by the Company  includes
manufacturers' product descriptions and instructions pertaining to use.

                                       6
<PAGE>

MARKETING

The Company's  marketing program is conducted by its sales  representatives,  as
well as by senior  management and the general  managers at each of its operating
facilities.  These sales  representatives  are  compensated  by a combination of
salary and/or commission which is based upon negotiated sales standards.

BACKLOG

Substantially  all the  Company's  products are shipped to  customers  within 48
hours following  receipt of the order,  therefore backlog is not material to the
Company's operations.

INFLATION

The inflation  rate for the U.S.  economy has averaged  approximately  3 percent
annually  over the past  several  years,  with the 1997  inflation  rate below 2
percent. The 1998 inflation rate is projected to be in the 2 to 3 percent range.
The  Company  believes  inflation  has not been a  substantial  concern nor will
inflation have a material impact to the Company's operations or profitability in
the near term, if inflation remains stable. The Company  anticipates it would be
able to pass along  increases in product  costs to its  customers in the form of
higher selling prices, thereby having no effect on product margins.

ENVIRONMENTAL IMPACT

The Company distributes a variety of products in the asbestos abatement industry
all of which require the Company to maintain on file Material Safety Data Sheets
("MSDS") that inform all  purchasers  and users of any  potential  hazards which
could occur if the products spilled or leaked.  Although the Company provides no
assurance, it reviews all products that could have a potential for environmental
hazards  and tries to  ensure  the  products  are safe for on site  storage  and
distribution.  The Company  currently  distributes no products it believes would
create an  environmental  hazard if leaked or  spilled.  The  Company has safety
procedures in place to minimize any impact if a product were to leak or spill.

SEASONALITY

Historically,  the  asbestos  abatement  services  and supply  business has been
seasonal as a result of the substantial number of abatement  contracts performed
in  educational  facilities  during the summer  months or during other  vacation
periods.  The Company  believes the  non-educational  or private  sector,  which
includes the  industrial,  commercial  and  residential  markets,  is an area of
potential  growth,  and that seasonality is not a major  characteristic of these
markets.  In addition to the private  sector  asbestos  business,  the Company's
expansion  of  the  hazardous  material   remediation,   industrial  safety  and
construction  tools  supply  markets  have  mitigated  any  seasonal  impacts of
government asbestos projects.

                                       7
<PAGE>

GOVERNMENT REGULATION

As a  supplier  of  products  manufactured  by others to the  asbestos  and lead
abatement,  industrial safety and hazardous  materials  industry,  the Company's
operations  are not  substantially  affected  by  federal  laws and  regulations
including  those  promulgated by the EPA and OSHA.  Most of the  contractors and
other purchasers of the Company's  equipment and supplies are subject to various
government   regulations,   and  developments  in  legislation  and  regulations
affecting  manufacturers  and purchasers of the Company's  products could have a
substantial effect on the Company.

COMPETITION

The asbestos and lead  abatement,  industrial  safety,  hazardous  materials and
construction tools supply businesses are highly  competitive.  These markets are
served by a limited  number of large national firms as well as many local firms,
none of who can be characterized as controlling the market. The Company competes
on the basis of price,  delivery,  credit  arrangements  and product variety and
quality.  The Company's business is not characterized by substantial  regulatory
or economic barriers to entry. Additional companies could enter the asbestos and
lead abatement,  industrial safety,  hazardous  materials and construction tools
supply  industries  and may have  greater  financial,  marketing  and  technical
resources than the Company

EMPLOYEES

As of February 28, 1998, the Company  employed a total of 78 full time employees
including 3 executive  officers,  8 managers,  40  administrative  and marketing
personnel  and  27  clerical  and  warehouse  personnel.  The  Company  believes
relations with its employees are excellent.

ITEM 2.  DESCRIPTION OF PROPERTIES

The Company's headquarters are located in Dallas, Texas and occupy approximately
3,200 square feet of leased general office space in conjunction  with the Dallas
branch. This lease expires in July 1999. The eight distribution facilities lease
a total of 105,145  square feet of general  office and  warehouse  space.  These
facilities  range in size from 6,875 square feet to 24,000 with leases  expiring
between January 1999 and March 2002.

ITEM 3. LEGAL PROCEEDINGS

The  Company  was  also  named  as  a  third  party   defendant  in  a  wrongful
death/product  liability  lawsuit  filed in the  District  Court of the State of
Texas for the County of Bexar (MARIBEL FLORES VS. OLMOS ENVIRONMENTAL  SERVICES,
INC.,  NUTEC  INDUSTRIAL   CHEMICAL,   INC.  AND  WALTER  J.  LYSSY,   Case  No.
96-CI-12845).  In early 1998,  this  lawsuit was  settled  within its  insurance
policy limits.  In addition to the accident that resulted in death,  three other
people were severely burned. A settlement was reached with these burn victims in
early 1998,  prior to any lawsuit being filed.  This  settlement was also within
the Company's insurance policy limits.

                                       8
<PAGE>

The Company was named as a defendant in a product liability lawsuit filed in the
Superior  Court of the  State of  California  for the  County  of Los  Angeles -
Central District  (PLACIDO ALVAREZ VS. ABATIX  ENVIRONMENTAL  CORP., ET AL, Case
No.  BC133537).  The Company is currently  receiving  indemnification  under the
manufacturer's   insurance  and  legal   representation   at  the  cost  of  the
manufacturer.  At this time, the Company does not anticipate any material impact
on its financial position or results of operations as a result of this case.

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

None

                                     PART II

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

(a) The Company's  common stock trades on The Nasdaq SmallCap Market tier of The
Nasdaq Stock Market under the symbol "ABIX".  The following table sets forth the
high and low bid  quotations  for the common  stock for the  periods  indicated.
These quotations reflect prices between dealers, do not include retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.

                                         Common Stock
                                          Bid Price
                                 -----------------------------
         1996                       High              Low
------------------------         ------------      -----------
     First Quarter            $     4 1/2       $      3
    Second Quarter                    5              3 5/8
     Third Quarter                    5              2 7/8
    Fourth Quarter                  4 1/8            2 7/8

         1997
------------------------
     First Quarter            $     3 3/8       $    2 1/2
    Second Quarter                 3 15/16           2 3/16
     Third Quarter                  3 3/8              2
    Fourth Quarter                 3 7/16            2 1/2


On March 24, 1998, the closing bid price for the common stock was $3 1/2.

(b) As of March 24,  1998,  the  approximate  number of holders of record of the
Company's common stock was 700.

                                       9
<PAGE>

(c) The Company has never paid cash  dividends on its common stock.  The Company
presently  intends to retain any future earnings to finance the expansion of its
business or repay borrowings on its lines of credit and does not anticipate that
any cash  dividends  will be paid in the  foreseeable  future.  Future  dividend
policy will depend on the Company's earnings,  capital  requirements,  expansion
plans,  financial conditions and other relevant factors.  Although the Company's
notes  payable to bank do not restrict the payment of  dividends,  they required
the Company to have a minimum net worth at December 31, 1997.  The notes payable
to bank also required the Company to have specified  quarterly net income levels
through 1997.

(d)  Since  November  1994,  the Board of  Directors  authorized  management  to
purchase  476,500 shares of the Company's common stock. As of December 31, 1997,
the Company has purchased 476,250 shares.

                                       10
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

The tables below set forth,  in summary  form,  selected  financial  data of the
Company.  This data, which is not covered by the independent  auditors'  report,
should be read in conjunction  with the  consolidated  financial  statements and
notes thereto which are included  elsewhere  herein (amounts in thousands except
per share amounts).
<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                           ------------------------------------------------------------------------
                                              1997            1996           1995           1994           1993
                                           -----------     -----------    -----------    -----------     ----------
<S>                                        <C>             <C>            <C>            <C>             <C>
Selected Operating Results:
   Net sales                               $   34,955      $   33,067     $   27,632     $  25,982       $  19,085
   Gross profit                            $    9,651      $    9,202     $    7,977     $   7,164       $   5,354

   Earnings from continuing operations
                                           $      841      $      734     $      813     $     580       $     283
   Earnings (loss) from discontinued
     operations, net of income taxes                -              22              -          (363)           (144)
   Cumulative effect of change in
     accounting principle                           -               -              -             -              20
                                           -----------     -----------    -----------    -----------     ----------
   Net earnings                            $      841      $      756     $      813     $      217      $     159
                                           ===========     ===========    ===========    ===========     ==========

Basic earnings (loss) per common share:
   Earnings from continuing operations     $      .43      $      .35     $      .37     $      .25      $     .13
   Earnings (loss) from discontinued
     operations                                     -             .01              -           (.16)          (.07)
   Cumulative effect of change in
     accounting principle                           -               -              -              -            .01
                                           -----------     -----------    -----------    -----------     ----------
   Net earnings                            $      .43      $      .36     $      .37     $      .09      $     .07
                                           ===========     ===========    ===========    ===========     ==========

Diluted earnings (loss) per common share:
   Earnings from continuing operations     $      .43      $      .35     $      .36     $      .25      $     .12
   Earnings (loss) from discontinued
     operations                                     -             .01              -           (.16)          (.06)
   Cumulative effect of change in
     accounting principle                           -               -              -              -            .01
                                           -----------     -----------    -----------    -----------     ----------
   Net earnings                            $      .43      $      .36     $      .36     $      .09      $     .07
                                           ===========     ===========    ===========    ===========     ==========

Weighted average shares outstanding:
     Basic                                    1,934           2,076          2,207          2,311           2,205
                                           ===========     ===========    ===========    ===========     ==========
     Diluted                                  1,934           2,111          2,238          2,330           2,304
                                           ===========     ===========    ===========    ===========     ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                     As of December 31,
                                           ------------------------------------------------------------------------
                                              1997            1996           1995           1994           1993
                                           -----------     -----------    -----------    -----------     ----------
<S>                                        <C>             <C>            <C>            <C>             <C>
Selected Balance Sheet Data:
   Current assets                          $    9,003      $    9,722     $    8,230     $    7,426      $    6,605
   Current liabilities                          4,676           6,219          4,659          4,208           3,669
   Total assets                                 9,854          10,678          8,977          8,184           7,341
   Total liabilities                            4,676           6,219          4,659          4,283           3,724
   Retained earnings                            4,085           3,244          2,488          1,674           1,457
   Stockholders' equity                         5,178           4,459          4,318          3,901           3,618
</TABLE>

                                       11
<PAGE>



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

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

RESULTS OF CONTINUING OPERATIONS

Net sales from  continuing  operations  for the year  ended  December  31,  1997
increased 6 percent to  $34,955,000  from  $33,067,000 in 1996 due to efforts to
further expand and diversify the customer base. The increase is also a result of
the  general  economic  recovery  in  the  geographic  regions  serviced  by the
Company's facilities.  The improved economic conditions,  if maintained,  should
provide the ability for the Company to grow its revenues in 1998.  These efforts
also provide the  groundwork  for  broadening  the Company's  revenues among its
different markets, thereby decreasing its dependence on any one of its markets.

Industry-wide  sales of  asbestos  abatement  products  are  expected  to remain
relatively flat for the  foreseeable  future.  The Company  believes the current
U.S.  economy  expansion will  positively  impact its operations.  However,  the
asbestos   abatement  industry  will  likely  diminish  over  time  as  asbestos
containing  materials,  last used in construction during 1977-1980,  are removed
from  schools,  office  buildings,  homes and  factories.  A 1992 estimate by an
industry  analyst  predicted that as much as $80 billion may be spent nationwide
over a 20 year period for asbestos  removal,  of which the Company  estimates $8
billion  relates to abatement  supplies.  Approximately  $2 billion in abatement
supplies is estimated  to be spent during this 20 year period in the  geographic
areas served by the Company's eight distribution centers. At this potential rate
of  expenditure,  and at a presently  estimated 15 to 20 percent market share of
the  asbestos  abatement  markets  served  by  the  Company,   the  current  and
intermediate  term effects of the diminishing  market are not expected to have a
material adverse impact on the Company.

Sales to the hazardous materials remediation, industrial safety and construction
tools supply markets are increasing both in absolute amounts and as a percentage
of revenues to the Company.  The Company  plans to expand its  customer  base in
these areas through internal growth and additional salespeople and expects these
revenues to increase at a faster rate than the asbestos abatement revenues.

Gross profit in 1997 of $9,651,000 increased 5 percent from gross profit in 1996
of $9,202,000 due to increased volume. As expected, margins varied somewhat from
location to location due to sales mix and local market conditions. The Company's
gross profit  margins,  expressed as a percentage of sales,  were 28 percent for
1997 and 1996. Overall margins are expected to remain at their current levels in
1998.  However, as experienced in 1996,  competitive  pressures could negatively
impact  any and all  efforts  by the  Company to  maintain  or  improve  product
margins.

Selling,  general and administrative expenses for 1997 of $7,953,000 increased 3
percent  over  1996  expenses  of  $7,708,000.  The  increase  was  attributable
primarily to higher  employment  costs as a result of  additional  marketing and
support personnel. Selling, general and

                                       12
<PAGE>

administrative  expenses were 23 percent of sales for both 1997 and 1996.  These
expenses are expected to remain in their current range for 1998.

In March 1996,  the Company's  lease  obligation  for its closed Corpus  Christi
branch was terminated. This lease termination enabled the Company to reverse all
remaining reserves, resulting in the 1996 special credit.

Other expense, net, of $365,000 in 1997 increased 2 percent over 1996 expense of
$356,000. This increase is primarily due to increased interest expense resulting
from higher  borrowings on the Company's  working capital line of credit to fund
the  growth in  inventory  and the growth in  receivables  during the first nine
months of the year.  Since the  Company's  lines of credit are tied to the prime
rate,  any  increases in the prime rate would  negatively  affect the  Company's
earnings.

See note 5 to the consolidated  financial statements for a description of income
taxes.

The Company's  credit  policies  remain  stringent,  and amounts written off are
below  industry  experience.  Days of  sales  in net  accounts  receivable  were
unchanged  from 1996 to 1997.  The Company  believes  the  reserve for  doubtful
accounts is adequate.

RESULTS OF DISCONTINUED OPERATIONS

The Company  realized  earnings  of $22,000 or $.01 per share from  discontinued
operations in 1996, resulting from the termination of the lease obligation.

NET RESULTS

Net  earnings in 1997 of $841,000 or $.43 per share  increased  $85,000 from net
earnings of $756,000 or $.36 per share in 1996.  The 11 percent  increase in net
earnings  is  primarily  due to  increased  volume,  partially  offset by higher
general and administrative expenses. In addition, the 1996 net earnings included
a special credit and income from discontinued operations.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

RESULTS OF CONTINUING OPERATIONS

Net sales from  continuing  operations  for the year  ended  December  31,  1996
increased 20 percent to $33,067,000  from  $27,632,000 in 1995 due to efforts to
further expand and diversify the customer base. The increase is also a result of
the  general  economic  recovery  in  the  geographic  regions  serviced  by the
Company's  facilities.  In addition,  1996 included a full year of operation for
the Company's Las Vegas facility.

Gross  profit in 1996 of  $9,202,000  increased  15 percent from gross profit in
1995 of  $7,977,000  due to  increased  revenues.  As expected,  margins  varied
somewhat from location to location due to sales mix and local market conditions.
The Company's gross profit margins, expressed as a

                                       13
<PAGE>

percentage of sales, decreased to 28 percent for 1996 compared to 29 percent for
1995, primarily as a result of pressure from low-price competition.

Selling, general and administrative expenses for 1996 of $7,708,000 increased 22
percent  over  1995  expenses  of  $6,342,000.  The  increase  was  attributable
primarily to the higher employment costs as a result of additional marketing and
support personnel and a full year of operations in Las Vegas.  Selling,  general
and administrative expenses were 23 percent of sales for both 1996 and 1995.

In the third quarter of 1995,  the Company  incurred a special charge of $80,000
to accrue  for  future  lease  commitments  resulting  from the  closure  of its
distribution  center in Corpus Christi,  Texas. The  noncancelable  lease was to
expire in September 1999. The Company's lease agreement on the building that was
occupied by both the operations of IESI and the Corpus  Christi branch  included
an option  enabling the Company to purchase  the  building.  In March 1996,  the
Company purchased this facility and simultaneously  sold the building to a third
party.  This  transaction  terminated the Company's lease obligation and enabled
the Company to reverse all  remaining  reserves  resulting  in the 1996  special
credit.

Other  expense,  net, of $356,000 in 1996 increased 43 percent over 1995 expense
of $248,000.  This  increase is  primarily  due to  increased  interest  expense
resulting from higher borrowings on the Company's working capital line of credit
to fund the growth in receivables  and inventory.  Since the Company's  lines of
credit  are tied to the  prime  rate,  any  increases  in the prime  rate  would
negatively affect the Company's earnings.

See note 5 to the consolidated  financial statements for a description of income
taxes.

The Company's  credit  policies  remain  stringent,  and amounts written off are
below industry  experience.  Days of sales in net accounts receivable  increased
one day from 1995 to 1996.

RESULTS OF DISCONTINUED OPERATIONS

The Company  realized  earnings  of $22,000 or $.01 per share from  discontinued
operations,  resulting  from the  termination  of the lease  obligation in March
1996.

NET RESULTS

Net  earnings in 1996 of $756,000 or $.36 per share  decreased  $57,000 from net
earnings of $813,000  or $.36 per share in 1995.  The 7 percent  decrease in net
earnings  is  due  to  lower  product  margins,  higher  selling,   general  and
administrative and interest  expenses.  This decline was partially offset by the
increased sales volume.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital  requirements  historically result from the growth
of its accounts receivable and inventories, offset by increased accounts payable

                                       14
<PAGE>

and accrued  expenses,  associated  with  significant  increases in sales volume
and/or the addition of new  locations.  Net cash provided by  operations  during
1997 of $2,133,000 resulted  principally from the net earnings,  the decrease in
accounts  receivable,  the  non-cash  charge to earnings  for  depreciation  and
amortization and the receipt of the income tax receivable.

Cash  requirements for non-operating  activities during 1997 resulted  primarily
from the working capital line of credit payments,  the purchases of property and
equipment amounting to $286,000 and the repurchase of the Company's common stock
totaling  $213,000.  The working capital line of credit  payments  occurred as a
result of significant  collections of accounts  receivable in the second half of
1997. The equipment  purchases in 1997 were primarily delivery vehicles,  office
furniture  and  computer  equipment.  The Company  repurchased  its common stock
because  of the  Board  of  Directors'  belief  that it was  undervalued  in the
marketplace.  The  repurchase  of common  stock and  purchases  of property  and
equipment were funded by borrowings on the Company's lines of credit.

Cash  flow  from  operations  for the  entire  year of  1998 is  expected  to be
break-even,  although at any given point,  it may be negative.  Break-even  cash
flow from  operations is expected  because the rate of revenue growth in 1998 is
projected  to be  higher  than  1997,  but at a  level  that  will  not  require
significant net cash flows from operations.

Capital  expenditures  for 1998 are expected to  approximate  those in 1997. The
Company currently has no plans to expand  geographically in 1998,  however,  the
Company will continue to search for geographic  locations that would  complement
the existing infrastructure.  If another location were to be opened in 1998, the
Company would fund the startup expenses through its lines of credit.

The Company is reviewing its business for potential  Year 2000 issues.  Although
the entire  scope  related to this issue is unknown at this time,  the impact to
the Company's financial statements for compliance with Year 2000 problems is not
expected  to be  material.  Anticipated  cash  requirements  in 1998 for capital
expenditures,  including  those related to the Year 2000 issue,  if any, will be
satisfied from operations and borrowings on the lines of credit, as required.

The  Company  maintains  a  $5,500,000  working  capital  line  of  credit  at a
commercial  lending  institution  that  allows  the  Company  to borrow up to 80
percent of the book value of eligible  trade  receivables  plus the lesser of 40
percent of eligible  inventory  or  $1,500,000.  As of March 2, 1998,  there are
advances  outstanding  under this credit  facility of  $1,949,000.  Based on the
borrowing  formula,  the  Company  had the  capacity  to  borrow  an  additional
$3,433,000 as of March 2, 1998.  The Company also  maintains a $550,000  capital
equipment  credit  facility  providing  for  borrowings at 80 percent of cost on
purchases.  The advances  outstanding  under this credit facility as of March 2,
1998 were  $420,000.  Both  credit  facilities  are payable on demand and bear a
variable  rate of interest  computed at the prime rate plus  one-quarter  of one
percent.

Management  believes,  that based on its equity position,  the Company's current
credit  facilities can be expanded during the next twelve months,  if necessary,

                                       15
<PAGE>

and that these  facilities,  together with cash provided by operations,  will be
sufficient  for its  capital  and  liquidity  requirements  for the next  twelve
months.

The Company has retained Banc One Capital  Corporation ("Banc One") as strategic
advisors.  The exclusive  agreement is for Banc One to render financial advisory
and  investment  banking  services in connection  with  evaluating the Company's
strategic alternatives.

Except for the historical information contained herein, the matters set forth in
this  Form  10-K  are  forward  looking  and  involve  a  number  of  risks  and
uncertainties.  Among the  factors  that could  cause  actual  results to differ
materially are the following: federal funding of environmental related projects,
general  economic and  commercial  real estate  conditions in the local markets,
changes in interest  rates,  inability to pass on price  increases to customers,
unavailability  of products,  strong  competition and loss of key personnel.  In
addition,  many of the Company's products are petroleum based.  Increases in oil
prices or shortages in supply could significantly  impact the Company's business
and its ability to supply customers with certain products at a reasonable price.

NEW ACCOUNTING STANDARDS

In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive  Income"
("Statement  130").  Statement 130 is effective for fiscal years beginning after
December  15,  1997  and  requires   companies  to  report  all   components  of
comprehensive  income in a financial  statement  that is displayed with the same
prominence  as other  financial  statements.  Management of the Company does not
expect the adoption of Statement 130 to have a material  impact on the Company's
currently reported results of operations.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise  and  Related  Information"   ("Statement  131").  Statement  131  is
effective for financial  statements  for periods  beginning  after  December 15,
1997;  however,  application in interim periods is not required until the second
year of application. Since Statement 131 only requires financial and descriptive
information be disclosed about an entity's reportable operating segments,  there
will be no impact on the Company's financial position or results of operations.

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated  financial statements and supplementary data are included under
Item 14(a)(l) and (2) of this Report.

                                       16
<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
FINANCIAL DISCLOSURE.

None

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

This Item 10 is incorporated  herein by reference from the Company's  definitive
Proxy  Statement to be filed with the  Securities  and Exchange  Commission  not
later than one hundred twenty (120) days after December 31, 1997.

ITEM 11.  EXECUTIVE COMPENSATION

This Item 11 is incorporated  herein by reference from the Company's  definitive
Proxy  Statement to be filed with the  Securities  and Exchange  Commission  not
later than one hundred twenty (120) days after December 31, 1997.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

This Item 12 is incorporated  herein by reference from the Company's  definitive
Proxy  Statement to be filed with the  Securities  and Exchange  Commission  not
later than one hundred twenty (120) days after December 31, 1997.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This Item 13 is incorporated  herein by reference from the Company's  definitive
Proxy  Statement to be filed with the  Securities  and Exchange  Commission  not
later than one hundred twenty (120) days after December 31, 1997.

                                     PART IV

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

(a)  1 and 2. CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE

The consolidated financial statements and financial statement schedule listed on
the index to consolidated  financial statements on page F-l are filed as part of
this Form l0-K.

(b)  REPORTS ON FORM 8-K

None

                                       17
<PAGE>

(c)  EXHIBITS

(1)(a)  Form  of  Underwriting   Agreement  (filed  as  Exhibit  (1)(a)  to  the
     Registration Statement on Form S-18, filed February 9, 1989).

(1)(b) Form of  Selected  Dealer  Agreement  (filed  as  Exhibit  (1)(b)  to the
     Registration Statement on Form S-18, filed January 11, 1989).

(1)(c) Warrant  Solicitation  Agent and Exercise Fee Agreement (filed as Exhibit
     (l)(c) to the Report on Form 10-K for the year ended December 31, 1989).

(2)(a) Agreement of Merger (filed as Exhibit (2) to the  Registration  Statement
     on Form S-18, filed January 11, 1989).

(2)(b) Asset Purchase  Agreement  (filed as Exhibit (2)(b) to the Report on Form
     8-K, filed October 19, 1992).

(3)(a)(1)  Certificate  of  Incorporation  (filed as  Exhibit  (3)(a)(1)  to the
     Registration  Statement  on  Form  S-18,  filed  January  11,  1989;  filed
     electronically  as Exhibit  3(i)(a) to the Form 10-Q for the quarter  ended
     September 30, 1995, filed on November 9, 1995).

(3)(a)(2)  Certificate of Amendment of Certificate  of  Incorporation  (filed as
     Exhibit (3)(a)(2) to the Registration Statement on Form S-18, filed January
     11, 1989; filed  electronically as Exhibit 3(i)(b) to the Form 10-Q for the
     quarter ended September 30, 1995, filed on November 9, 1995).

(3)(a)(3)  Certificate of Amendment of Certificate  of  Incorporation  (filed as
     Exhibit  (3)(i)(c)  to the Form 10-Q for the quarter  ended  September  30,
     1995,  filed November 9, 1995; filed  electronically  as Exhibit 3(i)(c) to
     the Form 10-Q for the quarter ended  September 30, 1995,  filed on November
     9, 1995).

(3)(b) Bylaws  (filed as Exhibit  (3)(b) to the  Registration  Statement on Form
     S-18, filed January 11, 1989; filed  electronically as Exhibit 3(ii) to the
     Form 10-Q for the quarter ended  September  30, 1995,  filed on November 9,
     1995).

(4)(a) Specimen  Certificate  of Common  Stock  (filed as Exhibit  (4)(a) to the
     Registration Statement on Form S-18, filed January 8, 1989).

(4)(b) Specimen of Redeemable  Common Stock  Purchase  Warrant (filed as Exhibit
     (4)(b) to the Registration Statement on Form S-18, filed February 9, 1989).

(4)(c) Form of Warrant to be sold to  Culverwell & Co.,  Inc.  (filed as Exhibit
     (4)(c) to the Registration Statement on Form S-18, filed February 9, 1989).

                                       18
<PAGE>

(4)(d) Warrant  Agency  Agreement  between  the  Registrant  and North  American
     Transfer Company (filed as Exhibit (4)(d) to the Registration  Statement on
     Form S-18, filed February 9, 1989).

(9)(a)(ii) Form of Escrow  Agreement  with State  Street Bank and Trust  Company
     (filed as Exhibit  (9)(a)(ii) to the  Registration  Statement on Form S-18,
     filed January 11, 1989).

(10)(a) Employment  Agreement with Terry W. Shaver (filed as Exhibit  (10)(a) to
     the Registration Statement on Form S-18, filed January 11, 1989).

(10)(a)(i) Employment  Agreement with Terry W. Shaver effective  January 2, 1991
     (filed as Exhibit  (10)(a)(i) to the Report on Form 10-K for the year ended
     December 31, 1990).

(10)(a)(ii) Employment  Agreement with Terry W. Shaver effective January 4, 1993
     (filed as Exhibit (10)(a)(ii) to the Report on Form 10-K for the year ended
     December 31, 1992).

(10)(a)(iii) Employment Agreement with Terry W. Shaver effective January 1, 1995
     (filed  as  Exhibit  (10)(a)(iii)  to the  Report on Form 10-K for the year
     ended December 31, 1994).

(10)(a)(iv) Employment  Agreement with Terry W. Shaver effective January 1, 1997
     (filed as Exhibit (10)(a)(iv) to the Report on Form 10-K for the year ended
     December 31, 1996).

(10)(b) Employment  Agreement with Gary L. Cox (filed as Exhibit  (10)(b) to the
     Registration Statement on Form S-18, filed January 11, 1989).

(10)(b)(i)  Employment  Agreement  with Gary L. Cox  effective  January  2, 1991
     (filed as Exhibit  (10)(b)(i) to the Report on Form 10-K for the year ended
     December 31, 1990).

(10)(b)(ii)  Employment  Agreement  with Gary L. Cox  effective  January 4, 1993
     (filed as Exhibit (10)(b)(ii) to the Report on Form 10-K for the year ended
     December 31, 1992).

(10)(b)(iii)  Employment  Agreement  with Gary L. Cox effective  January 1, 1995
     (filed  as  Exhibit  (10)(b)(iii)  to the  Report on Form 10-K for the year
     ended December 31, 1994).

(10)(b)(iv)  Employment  Agreement  with Gary L. Cox  effective  January 1, 1997
     (filed as Exhibit (10)(b)(iv) to the Report on Form 10-K for the year ended
     December 31, 1996).

(10)(c) Revolving  Credit Agreement with Texas American  Bank/Duncanville,  N.A.
     (filed as Exhibit (10)(c) to the Registration Statement on Form S-18, filed
     January 11, 1989).

                                       19
<PAGE>

(10)(d) Demand Credit Facility with Comerica  Bank-Texas dated February 15, 1989
     (filed as Exhibit  (10)(d) to the Report on Form 10-Q for the Quarter ended
     March 31, 1989, filed May 15,1989).

(10)(e) Demand  Credit  Facility with  Comerica  Bank-Texas  dated June 15, 1989
     (filed as Exhibit  (10)(e) to the Report on Form 10-Q for the Quarter ended
     June 30, 1989, filed August 11, 1989).

(10)(e)(i) Demand Credit Facility with Comerica  Bank-Texas  dated March 1, 1993
     (filed as Exhibit  (10)(e)(i) to the Report on Form 10-K for the year ended
     December 31, 1992).

(10)(e)(ii) Demand Credit Facility with Comerica Bank-Texas  extension,  renewal
     and increase dated June 1, 1993 (filed as Exhibit (10)(e)(ii) to the Report
     on Form 10-K for the year ended December 31, 1993).

(10)(e)(iii) Demand Credit Facility with Comerica Bank-Texas extension,  renewal
     and increase dated September 22, 1994 (filed as Exhibit (10)(e)(iii) to the
     Report on Form 10-K for the year ended December 31, 1994).

(10)(f) Employment  Agreement with S. Stanley French  effective  October 1, 1992
     (filed as  Exhibit  (10)(f) to the Report on Form 8-K,  filed  October  19,
     1992).

(22) Information Statement dated September 1, 1995 (filed as Exhibit (22) to the
     Report on Form 10-K for the year ended December 31, 1995).

(23) Consent of Independent Auditors.*

(27) Financial Data Schedule for the twelve months ended December 31, 1997.*

*               Filed herewith as part of the Company's electronic filing.

                                       20
<PAGE>

                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this Report to be signed on its
behalf by the undersigned,  thereunto duly authorized, on the 13th day of March,
1998.


                             ABATIX ENVIRONMENTAL CORP.



                             By: /s/ Terry W. Shaver
                                 Terry W. Shaver

                             President, Chief Executive Officer
                             and Director (Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant,  and
in the capacities and on the date indicated.

Signatures                 Title                                     Date


/s/ Terry W. Shaver        President, Chief Executive Officer    March 13, 1998
Terry W. Shaver            and Director (Principal Executive Officer)


/s/ Gary L. Cox            Executive Vice President,             March 13, 1998
Gary L. Cox                Chief Operating Officer and Director


/s/ Lamont C. Laue         Director                              March 13, 1998
------------------
Lamont C. Laue


/s/ Donald N. Black        Director                              March 13, 1998
-------------------
Donald N. Black


/s/ Frank J. Cinatl        Vice President and Chief Financial    March 13, 1998
Frank J. Cinatl, IV        Officer (Principal Accounting Officer)

                                       21
<PAGE>

                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY

                   Index to Consolidated Financial Statements

                                                                          Page
Independent Auditors' Report                                               F-2

Financial Statements:
  Consolidated Balance Sheets as of December 31, 1997 and 1996             F-3

  Consolidated Statements of Operations for the years ended
    December 31, 1997, 1996 and 1995                                       F-4

  Consolidated Statements of Stockholders' Equity for the years
    ended December 31, 1997, 1996 and 1995                                 F-5

  Consolidated Statements of Cash Flows for the years ended
    December 31, 1997, 1996 and 1995                                       F-6

  Notes to Consolidated Financial Statements                               F-7


Financial Statement Schedule:
  II - Valuation and Qualifying Accounts for the years ended
        December 31, 1997, 1996 and 1995                                   S-1

All  other   schedules  have  been  omitted  as  the  required   information  is
inapplicable  or the  information  required  is  presented  in the  consolidated
financial statements or the notes thereto.

                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


The Board of Directors and Stockholders
Abatix Environmental Corp.:


We have audited the consolidated  financial  statements of Abatix  Environmental
Corp. and subsidiary as listed in the accompanying index. In connection with our
audits  of the  consolidated  financial  statements  we also  have  audited  the
financial  statement  schedule  as  listed  in  the  accompanying  index.  These
consolidated  financial  statements  and  financial  statement  schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedule based on our audits.

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, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Abatix Environmental
Corp.  and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December  31,  1997 in  conformity  with  generally  accepted  accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole,  presents  fairly,  in all material  respects,  the information set forth
therein.



                              KPMG Peat Marwick LLP


Dallas, Texas
February 20, 1998

                                      F-2
<PAGE>
<TABLE>
<CAPTION>

                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY

                           Consolidated Balance Sheets
                           December 31, 1997 and 1996

                                                                                    1997             1996
                                                                                -------------    -------------
<S>                                                                             <C>              <C>
                                     Assets
Current assets:
   Cash                                                                         $    304,947     $    310,288
   Trade accounts receivable, net of allowance for doubtful accounts of
     $495,092 in 1997 and $376,117 in 1996 (note 4)                                4,768,279        5,295,849
   Inventories (note 4)                                                            3,538,355        3,440,557
   Refundable income taxes                                                                 -          285,784
   Prepaid expenses and other assets                                                 249,426          285,791
   Deferred income taxes (note 5)                                                    142,466          103,723
                                                                                -------------    -------------
       Total current assets                                                        9,003,473        9,721,992

Receivables from officers and employees                                               73,729           76,347
Property and equipment, net (notes 3 and 4)                                          632,120          763,643
Deferred income taxes (note 5)                                                       115,531           80,168
Other assets                                                                          29,396           35,822
                                                                                -------------    -------------
                                                                                $  9,854,249     $ 10,677,972
                                                                                =============    =============

            Liabilities and Stockholders' Equity Current liabilities:
Notes payable to bank (note 4)                                                  $  3,010,733     $  4,786,935
Accounts payable                                                                   1,230,107        1,066,427
Accrued compensation                                                                 107,272          106,090
Other accrued expenses                                                               328,460          259,997
                                                                                -------------    -------------
       Total current liabilities                                                   4,676,572        6,219,449
                                                                                -------------    -------------

Stockholders' equity (note 6):
   Preferred stock - $1 par value, 500,000 shares authorized; none issued                  -                -
   Common stock - $.001 par value, 5,000,000 shares authorized; issued
     2,413,814 shares in 1997 and 2,381,314 shares in 1996                             2,414            2,381
   Additional paid-in capital                                                      2,498,508        2,407,603
   Retained earnings                                                               4,084,892        3,243,786
   Treasury stock at cost, 476,250 common shares in 1997 and 392,750
     common shares in 1996                                                        (1,408,137)      (1,195,247)
                                                                                -------------    -------------
       Total stockholders' equity                                                  5,177,677        4,458,523

Commitments and contingencies (note 10)
                                                                                -------------    -------------
                                                                                $  9,854,249     $ 10,677,972
                                                                                =============    =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY

                      Consolidated Statements of Operations
                  Years ended December 31, 1997, 1996 and 1995

                                                                1997              1996              1995
                                                            -------------     -------------     -------------
<S>                                                         <C>               <C>               <C>         
Net sales                                                   $ 34,955,477      $ 33,066,831      $ 27,632,245
Cost of sales                                                 25,304,902        23,864,836        19,654,858
                                                            -------------     -------------     -------------
       Gross profit                                            9,650,575         9,201,995         7,977,387

Selling, general and administrative expenses                  (7,953,179)       (7,707,546)       (6,342,241)
Special credit (charge) (note 2)                                       -            56,711           (80,000)
                                                            -------------     -------------     -------------
       Operating profit                                        1,697,396         1,551,160         1,555,146

Other income (expense):
   Interest income                                                36,187            19,840            15,311
   Interest expense                                             (381,655)         (359,712)         (258,079)
   Other, net                                                    (19,215)          (15,944)           (5,487)
                                                            -------------     -------------     -------------
       Earnings from continuing operations before
         income taxes                                          1,332,713         1,195,344         1,306,891

Income tax expense (note 5)                                     (491,607)         (460,941)         (493,514)
                                                            -------------     -------------     -------------
       Earnings from continuing operations                       841,106           734,403           813,377

Discontinued operations (note 2):
   Earnings on discontinuance of business, net of tax
     expense of $8,348                                                 -            21,545                 -
                                                            -------------     -------------     -------------
       Net earnings                                         $    841,106      $    755,948      $    813,377
                                                            =============     =============     =============

Basic earnings per common share:
   Earnings from continuing operations                      $        .43      $        .35      $        .37
   Earnings from discontinued operations                               -               .01                 -
                                                            -------------     -------------     -------------
       Net earnings                                         $        .43      $        .36      $        .37
                                                            =============     =============     =============

Diluted earnings per common share:
   Earnings from continuing operations                      $        .43      $        .35      $        .36
   Earnings from discontinued operations                               -               .01                 -
                                                            -------------     -------------     -------------
       Net earnings                                         $        .43      $        .36      $        .36
                                                            =============     =============     =============

Weighted average shares outstanding (note 1):
     Basic                                                     1,933,896         2,076,241         2,207,456
                                                            =============     =============     =============
     Diluted                                                   1,933,896         2,110,582         2,238,312
                                                            =============     =============     =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-4
<PAGE>
<TABLE>
<CAPTION>

                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity
                  Years ended December 31, 1997, 1996 and 1995

                                      Additional
                                     Common Stock                                                Treasury Stock
                                -----------------------      Paid-in         Retained      -------------------------      Total
                                  Shares       Amount        Capital         Earnings       Shares        Amount          Equity
                                -----------   ---------    ------------    ------------    ----------   ------------   ------------
<S>                             <C>           <C>          <C>             <C>             <C>          <C>            <C>        
Balance at December 31, 1994     2,319,748    $  2,320     $ 2,279,653     $ 1,674,461        26,500    $   (55,598)   $ 3,900,836

  Purchase of treasury stock             -           -               -               -       180,600       (481,946)      (481,946)

  Exercise of stock options         46,566          46          85,465               -             -              -         85,511

  Net earnings                           -           -               -         813,377             -              -        813,377
                                -----------   ---------    ------------    ------------    ----------   ------------   ------------
Balance at December 31, 1995     2,366,314       2,366       2,365,118       2,487,838       207,100       (537,544)     4,317,778

  Purchase of treasury stock             -           -               -               -       185,650       (657,703)      (657,703)

  Exercise of stock options         15,000          15          42,485               -             -              -         42,500

  Net earnings                           -           -               -         755,948             -              -        755,948
                                -----------   ---------    ------------    ------------    ----------   ------------   ------------
Balance at December 31, 1996     2,381,314       2,381       2,407,603       3,243,786       392,750     (1,195,247)     4,458,523

  Purchase of treasury stock             -           -               -               -        83,500       (212,890)      (212,890)

  Exercise of stock options         32,500          33          90,905               -             -              -         90,938

  Net earnings                           -           -               -         841,106             -              -        841,106
                                -----------    --------    ------------    ------------    ----------   ------------   ------------
Balance at December 31, 1997     2,413,814     $ 2,414     $ 2,498,508     $ 4,084,892       476,250    $(1,408,137)   $ 5,177,677
                                ===========    ========    ============    ============    ==========   ============   ============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                  Years ended December 31, 1997, 1996 and 1995

                                                                 1997            1996            1995
                                                             -------------   -------------   -------------
<S>                                                          <C>             <C>             <C>
Cash flows from operating activities:
   Net earnings                                              $    841,106    $    755,948    $    813,377
   Adjustments to reconcile net earnings to net cash
     provided by (used in) operating activities:
     Depreciation and amortization                                378,076         392,019         337,309
     Deferred income taxes                                        (74,106)         (7,515)       (104,176)
     Loss (gain) on disposal of assets                              2,681          15,805         (11,615)
     Changes in assets and liabilities:
       Receivables                                                527,570        (925,254)         58,258
       Inventories                                                (97,798)       (352,281)       (690,024)
       Refundable income taxes                                    285,784        (285,784)              -
       Prepaid expenses and other assets                           36,365         (62,604)         (7,602)
       Net liabilities of discontinued operations                       -         (56,813)         91,627
       Accounts payable                                           163,680        (474,877)        692,816
       Accrued expenses                                            69,645         (63,121)          7,781
                                                             -------------   -------------   -------------
Net cash provided by (used in) operating activities             2,133,003      (1,064,477)      1,187,751
                                                             -------------   -------------   -------------

Cash flows from investing activities:
   Purchase of property and equipment                            (285,900)       (611,407)       (232,980)
   Proceeds from sale of property and equipment                    36,666          33,000          48,091
   Advances to officers and employees                             (25,647)        (51,270         (50,604)
   Collection of advances to officers and employees                28,265          45,500          38,712
   Other assets, primarily deposits                                 6,426           3,171         (22,057)
                                                             -------------   -------------   -------------
Net cash used in investing activities                            (240,190)       (581,006)       (218,838)
                                                             -------------   -------------   -------------

Cash flows from financing activities:
   Exercise of stock options                                       90,938          42,500          70,782
   Purchase of treasury stock                                    (212,890)       (657,703)       (481,946)
   Borrowings on notes payable to bank                         34,600,365      36,133,863      29,548,785
   Repayments on notes payable to bank                        (36,376,567)    (33,978,756)    (29,836,675)
   Principal payments on capital lease obligations                      -               -          (4,719)
                                                             -------------   -------------   -------------
Net cash (used in) provided by financing activities            (1,898,154)      1,539,904        (703,773)
                                                             -------------   -------------   -------------

Net (decrease) increase in cash                                    (5,341)       (105,579)        265,140
Cash at beginning of year                                         310,288         415,867         150,727
                                                             -------------   -------------   -------------
       Cash at end of year                                   $    304,947    $    310,288    $    415,867
                                                             =============   =============   =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                      F-6
<PAGE>

                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY
                   Notes to Consolidated Financial Statements

(1)      Summary of Significant Accounting Policies

         (a)  General

              Abatix    Environmental    Corp.    ("Abatix")    and   subsidiary
              (collectively,  the  "Company")  market  and  distribute  personal
              protection  and  safety   equipment  and  durable  and  nondurable
              supplies  predominantly,   based  on  revenues,  to  the  asbestos
              abatement  industry.  The Company also supplies  these products to
              the  industrial  safety and hazardous  materials  industries  and,
              combined  with  tools  and  tool  supplies,  to  the  construction
              industry.  At  December  31,  1997,  the  Company  operated  eight
              distribution  centers in six states. The Company  discontinued the
              sorbent  manufacturing  business of its wholly  owned  subsidiary,
              International  Enviroguard  Systems,  Inc.  ("IESI"),  a  Delaware
              corporation,   in  December  1994  (see  note  2).  However,  IESI
              continues to import disposable products sold primarily through the
              Company's distribution channels.

              The  preparation  of  financial   statements  in  conformity  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. Actual results could differ from those estimates.

              The accompanying  consolidated  financial  statements include the
              accounts  of  Abatix  and  IESI.  All  significant   intercompany
              accounts and transactions  have been eliminated in consolidation.
              Certain  amounts  have  been   reclassified  for  consistency  in
              presentation.

         (b)  Inventories

              Inventories  consist of materials and equipment for resale and are
              stated  at  the  lower  of  cost,  determined  by a  method  which
              approximates the first-in, first-out method, or market.

         (c)  Property and Equipment

              Property  and  equipment  are  stated  at cost.  Depreciation  for
              financial  statement  purposes is  provided  by the  straight-line
              method  over  the  estimated   useful  lives  of  the  depreciable
              properties.

         (d)  Long-Lived Assets

              On January 1, 1996,  the Company  adopted  Statement  of Financial
              Accounting  Standards No. 121,  "Accounting  for the Impairment of
              Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of."

                                      F-7
<PAGE>

              Adoption  and  implementation  of this  Statement  did not  have a
              material impact on the Company's  financial position or results of
              operations in any period presented.

         (e)  Revenue Recognition

              Revenue is recognized when the goods are shipped.

         (f)  Earnings per Share

              Basic earnings per share is calculated  using the weighted average
              number  of common  shares  outstanding  during  each  year,  while
              diluted  earnings  per share  includes the effects of all dilutive
              securities.  As of  December  31,  1997,  there  were no  dilutive
              securities outstanding. The following table is a reconciliation of
              the weighted  average  shares used for basic and diluted  earnings
              per share for the years ended December 31, 1997, 1996 and 1995.

                                                 1997        1996        1995
                                               ---------   ---------   ---------
Weighted average shares outstanding - basic    1,933,896   2,076,241   2,207,456

Dilutive stock options and warrants                    -      34,341      30,856
                                               ---------   ---------   ---------

Weighted average shares outstanding - diluted  1,933,896   2,110,582   2,238,312
                                               =========   =========   =========

         (g)  Statements of Cash Flows

               For  purposes  of the  statements  of  cash  flows,  the  Company
               considers  all  highly  liquid  debt  instruments  with  original
               maturities  of three months or less to be cash  equivalents.  The
               Company held no cash equivalents at December 31, 1997 or 1996.

              The Company paid  interest of  $383,735,  $351,645 and $263,707 in
              1997, 1996 and 1995,  respectively,  and income taxes of $524,635,
              $736,554 and $544,200 in 1997, 1996 and 1995, respectively.

              Significant non-cash  transactions include the transfer of accrued
              compensation  totaling $14,729 to additional  paid-in capital upon
              exercise of stock options during 1995.

         (h)  Income Taxes

              The  Company  accounts  for  income  taxes  using  the  asset  and
              liability  method.  Under this method the Company records deferred
              income taxes for the temporary  differences  between the financial
              reporting basis and the tax basis of assets and liabilities at

                                      F-8
<PAGE>

              enacted tax rates  expected to be in effect when such  amounts are
              realized or settled.  The resulting  deferred tax  liabilities and
              assets are adjusted to reflect changes in tax laws or rates in the
              period that includes the enactment date.

         (i)  Stock-Based Compensation

              In October 1995, the Financial  Accounting  Standards Board issued
              Statement of Financial  Accounting  Standards No. 123, "Accounting
              for Stock-Based  Compensation"  ("Statement  123").  Statement 123
              allows  entities to continue to apply the provisions of Accounting
              Principles  Board  Opinion No. 25  ("Opinion  25") and provide pro
              forma net income and pro forma earnings per share  disclosures for
              employee  stock option  grants made in 1995 and future years as if
              the  fair-value-based  method  defined in  Statement  123 had been
              applied.  The  Company  has  elected  to  continue  to  apply  the
              provisions  of Opinion  25 and  provide  the pro forma  disclosure
              provisions of Statement 123.

(2)      Restructuring and Discontinued Operations

         On  December  15,  1994,  the  Company   announced  a  formal  plan  to
         discontinue  the sorbent  manufacturing  business of IESI.  The Company
         recorded an estimated  loss on disposal of IESI at December 31, 1994 of
         $139,487,  net of taxes.  This  estimated  loss on  disposal  primarily
         included  costs  related  to  the  remaining  lease  obligation  on the
         facility, the writedown of fixed assets and inventory to net realizable
         value  and  the  estimated  loss  from  operations  up to the  expected
         disposal  date.  The sorbent  manufacturing  operations  were  actually
         discontinued  in  1995.  Except  for  the  remaining  lease  obligation
         discussed below,  actual costs through  December 31, 1996  approximated
         management's  estimate.  Sales for the discontinued  operations of IESI
         were $142,000 in 1995.

         In the third quarter of 1995, the Company  incurred a special charge of
         $80,000 to accrue  for  future  lease  commitments  resulting  from the
         closure  of its  distribution  center in  Corpus  Christi,  Texas.  The
         noncancelable  lease  was  to  expire  in  September  1999.  Sales  and
         operating  losses for the  Corpus  Christi  branch  were  $294,000  and
         $55,000, respectively, in 1995.

         The Company's lease agreement on the building that was occupied by both
         the operations of IESI and the Corpus Christi branch included an option
         enabling  the  Company to purchase  the  building.  In March 1996,  the
         Company purchased this facility and simultaneously sold the building to
         a  third  party.  This  transaction   terminated  the  Company's  lease
         obligation.   Reversal  of  the  liability  for  the  remaining   lease
         obligation   resulted  in  the  special   credit  and   earnings   from
         discontinued operations in 1996.

                                      F-9
<PAGE>

 (3)     Property and Equipment

         A summary of  property  and  equipment  at  December  31, 1997 and 1996
follows:

                                      Estimated
                                     Useful Life         1997           1996
                                    --------------   ------------   ------------

Furniture and equipment              3 - 10 years    $ 1,676,136    $ 1,592,568
Transportation equipment             3 - 5 years         359,006        324,676
Leasehold improvements               3 - 5 years          70,915         54,609
                                                     ------------   ------------
                                                       2,106,057      1,971,853
Less accumulated depreciation and                      
     amortization                                      1,473,937      1,208,210
                                                     ------------   ------------
Net property and equipment                           $   632,120    $   763,643
                                                     ============   ============

(4)      Notes Payable to Bank

         At December 31,  1997,  the Company had two lines of credit with a bank
         that are due on demand.  A working capital  facility allows the Company
         to  borrow  up to 80  percent  of the  book  value  of  eligible  trade
         receivables  plus the  lesser of 40 percent of  eligible  inventory  or
         $1,500,000,  up to a maximum of  $5,500,000.  Under this  formula,  the
         Company had the  capability to borrow  $5,074,000 at December 31, 1997,
         of  which  approximately  $2,564,000  was  used.  A  capital  equipment
         facility  provides  for  individual   borrowings,   aggregating  up  to
         $550,000,  at 80 percent of the purchased equipment's cost. At December
         31,  1997,  the Company  had  borrowed  approximately  $447,000 on this
         facility. Each borrowing under the capital equipment line is due on the
         earlier of demand or in terms ranging from  thirty-six to sixty monthly
         installments  of  principal  and  interest.  During  1997,  the Company
         negotiated a one-quarter of one percent reduction in its rate,  thereby
         reducing  the  rate  of  interest  on  its  agreements  to  prime  plus
         one-quarter  of one  percent.  As of December  31,  1997 and 1996,  the
         Company's rate of interest on these agreements was 8.75 percent.  These
         credit facilities are secured by accounts  receivable,  inventories and
         equipment.

                                      F-10
<PAGE>

 (5)     Income Taxes

          Income tax expense  (benefit)  for the years ended  December 31, 1997,
          1996 and 1995 consists of:

                                            1997          1996          1995
                                         ----------    ----------    ----------
Continuing Operations:
  Current:
     Federal                             $ 483,323     $ 413,759     $ 542,681
     State                                  82,390        72,083        96,233
  Deferred:
     Federal                               (63,253)      (23,775)     (120,240)
     State                                 (10,853)       (1,126)      (25,160)
                                         ----------    ----------    ----------
        Income tax expense related
             to continuing operations      491,607       460,941       493,514

Discontinued operations:
  Current                                        -        (9,038)      (41,224)
  Deferred                                       -        17,386        41,224
                                         ----------    ----------    ----------

Total income tax expense                 $ 491,607     $ 469,289     $ 493,514
                                         ==========    ==========    ==========


         A  reconciliation  of the normally  expected federal income tax expense
         relating to continuing  operations  based on the U.S.  corporate income
         tax rate of 34 percent to actual  expense for the years ended  December
         31, 1997, 1996 and 1995 follows:

                                             1997          1996          1995
                                          ----------    ----------    ----------

Expected income tax expense               $ 453,122     $ 406,417     $ 444,343
Nondeductible meals and entertainment
     expense                                 11,119        13,047         7,232
State income taxes, net of related federal
     tax benefit                             47,215        46,832        46,908
Other                                       (19,849)       (5,355)       (4,969)
                                          ----------    ----------    ----------
Actual income tax expense relating to
     continuing operations                $ 491,607     $ 460,941     $ 493,514
                                          ==========    ==========    ==========

                                      F-11
<PAGE>

         The tax effects of temporary  differences that give rise to significant
         portions of the  deferred  tax assets and  liabilities  at December 31,
         1997 and 1996 follow:

                                                       1997          1996
                                                    ----------    ----------
Deferred tax assets:
     Allowance for doubtful accounts                $ 188,642     $ 143,830
     Property and equipment, principally due to
         differences in depreciation                  115,388        80,168
     Other                                                  -        11,790
                                                    ----------    ----------
         Total gross deferred tax assets              304,030       235,788

Deferred tax liabilities:
     Prepaid expenses                                 (46,033)      (51,897)
                                                    ----------    ----------
         Net deferred tax asset                     $ 257,997     $ 183,891
                                                    ==========    ==========

         Management  has  determined,  based on the  Company's  history of prior
         operating  earnings  and its  expectations  for the  future,  operating
         earnings will more likely than not be sufficient to realize the benefit
         of the deferred tax assets. Accordingly, the Company has not provided a
         valuation allowance for deferred tax assets in any period presented.

(6)      Stockholders' Equity

         Options to purchase the Company's common stock were granted to officers
         and employees  under  various stock option plans.  In November 1989 the
         Board of Directors approved, and in 1991 the Board of Directors amended
         the  Company's  Stock Option  Incentive  Plan pursuant to which two key
         executives or their  designees  could  purchase up to 180,000 shares of
         common stock at $.50 per share,  provided the Company  attained certain
         levels of pre-tax  earnings  in 1989,  1990 and 1991.  In 1990,  60,000
         options vested and, in 1992,  33,681 options vested under this plan. No
         additional shares are available for grant under this plan.

         Pursuant to a 1993  employment  agreement,  an employee was entitled to
         purchase  10,000  shares  of common  stock in each of the  three  years
         covered by the agreement if certain gross profit levels were  obtained.
         The exercise  price for these options was  established as the bid price
         of the  Company's  stock on the day after  the  employee  achieved  the
         established  gross  profit  level and expired one year from the vesting
         date. In 1994, 1995 and 1996, the employee met the predetermined  gross
         profit levels and vested in these  options.  No  additional  shares are
         available for grant under this plan.

         In 1994, the Company adopted a stock option plan (the "Plan")  pursuant
         to which the Company's  Board of Directors could grant stock options to
         officers and key employees. The Plan authorized grants of up to 140,000
         shares of  authorized  but unissued  common  stock.  Stock options were
         granted  with an exercise  price  equal to or greater  than the stock's
         fair market value at the date of grant.  At December  31,  1997,  there

                                      F-12
<PAGE>

         were no additional  shares  available for grant under the Plan. The per
         share weighted  average fair value of stock options granted during 1996
         and 1995 was $1.14 and $1.24, respectively,  on the date of grant using
         the   Black   Scholes   option-pricing   model   with   the   following
         weighted-average  assumptions:  1996 - risk-free interest rate of 7.0%,
         expected  volatility  of 58%,  expected  dividend  yield of 0%,  and an
         expected life ranging from one to two years; 1995 - risk-free  interest
         rate of 7.0%,  expected  volatility of 58%,  expected dividend yield 0%
         and an expected life of one year.

         The  Company  applied  Opinion No. 25 in  accounting  for its Plan and,
         accordingly,  no  compensation  cost has been  recognized for its stock
         options  in  the  financial  statements.  Had  the  Company  recognized
         compensation  cost  based on the fair  value at the grant  date for its
         stock  options  under  Statement  123,  there would be no effect on the
         Company's net earnings and earnings per share in 1997 and the effect on
         the  Company's  net  earnings  and earnings per share for 1996 and 1995
         would be reduced to the following pro forma amounts:

                                          1996                 1995
                                    -----------------    -----------------
Net earnings:
    As reported                         $755,948             $813,377
    Pro forma                           $743,609             $811,453

Basic earnings per share:
    As reported                           $.36                 $.37
    Pro forma                             $.36                 $.37

                                      F-13
<PAGE>

          The activity of the options  granted for the years ended  December 31,
          1995, 1996 and 1997 is as follows:
                                                                    Weighted
                                                  Number of          Average
                                                 Shares Under       Price Per
                                                    Option            Share
                                                 ------------     ------------
Outstanding at December 31, 1994                     171,566      $      2.29
     Granted                                          20,000             2.63
     Exercised                                       (46,566)            1.84
                                                 ------------
Outstanding at December 31, 1995                     145,000             2.71
     Granted                                           7,500             3.88
     Exercised                                       (15,000)            2.83
     Expired                                         (70,000)            2.46
                                                 ------------
Outstanding at December 31, 1996                      67,500             3.06
     Exercised                                       (32,500)            2.80
     Expired                                         (35,000)            2.99
                                                 ------------
Outstanding at December 31, 1997                          -                -
                                                 ============

Shares exercisable:
     December 31, 1995                                75,000      $      2.50
     December 31, 1996                                67,500             3.06
     December 31, 1997                                    -                -

         The Company granted to various consultants  warrants to purchase shares
         of common stock as part of an agreement to secure their services. These
         warrants were granted with exercise prices equal to or greater than the
         fair market  value of the  Company's  common stock on the date of grant
         and were exercisable immediately.  The activity of the warrants granted
         to various consultants is summarized in the following table:

                                                                        Weighted
                                                                        Average
                                                   Number of           Price Per
                                                    Shares               Share
                                                 ------------     ------------
Outstanding at December 31, 1994                      70,000      $      3.02
     Expired                                         (10,000)            3.50
     Canceled                                        (50,000)            2.63
                                                 ------------
Outstanding at December 31, 1995                      10,000             4.50
     Expired                                         (10,000)            4.50
                                                 ------------
Outstanding at December 31, 1996                           -               -
                                                 ============

         Since November 1994, the Board of Directors  approved the repurchase of
         476,500  shares of the Company's  common stock in the open market.  The
         Company  has  purchased  476,250  shares  of  stock  since  that  time,
         including 83,500 shares of stock during 1997.

                                      F-14
<PAGE>

(7)      Benefit Plans

         The Company has a 401(k) profit  sharing  plan.  Under the 401(k) plan,
         eligible  employees may request the Company to deduct and  contribute a
         portion  of their  salary to the plan.  The  Company  may also,  at its
         discretion,  match a portion  of  employee  contributions  to the plan.
         Contributions  by the  Company to the 401(k) plan  aggregated  $59,195,
         $46,549 and $51,358 during 1997, 1996 and 1995, respectively.

(8)      Major Vendors, Customers and Credit Risk

         Although no vendor accounted for more than 8% of purchases, one product
         class  accounted for  approximately  18% of sales during the last three
         years. A major  component of these products is petroleum.  Increases in
         oil prices or shortages in supply could significantly  impact sales and
         the Company's  ability to supply its customers with certain products at
         a reasonable price.

         The  Company's  sales,  substantially  all of which are on an unsecured
         credit basis, are to various customers from its distribution centers in
         Texas,  California,  Arizona,  Colorado,  Washington  and  Nevada.  The
         Company  evaluates credit risks on an individual basis before extending
         credit to its  customers  and it believes  the  allowance  for doubtful
         accounts adequately provides for loss on uncollectible accounts.

         Through an  acquisition in the third quarter 1996, two of the Company's
         customers  in  the  asbestos   abatement  industry  came  under  common
         ownership,  although they both remain  separate legal  entities.  As of
         December 31, 1997 and 1996, less than 1% and 16%, respectively,  of the
         trade accounts  receivable  before allowances were represented by these
         two customers.  Sales to these two companies  represented  less than 2%
         and 4% of total sales for 1997 and 1996, respectively. During 1997, the
         common owner sold both entities to different organizations.

          During 1997, 1996 and 1995, no single customer accounted for more than
          10 percent of sales.

(9)      Fair Value of Financial Instruments

         The reported amounts of financial  instruments  such as cash,  accounts
         receivable,  accounts  payable and accrued  expenses  approximate  fair
         value  because of their short  maturity.  The  carrying  value of notes
         payable to bank  approximates fair value because these instruments bear
         interest at current market rates.

                                      F-15
<PAGE>

(10)     Commitments and Contingencies

         The Company  leases  warehouse and office  facilities  under  long-term
         noncancelable  operating leases expiring at various dates through March
         2002.  The  following is a schedule of future  minimum  lease  payments
         under these leases as of December 31, 1997:

                          1998            $   541,956
                          1999                386,740
                          2000                193,063
                          2001                117,360
                          Thereafter           49,200
                                          ------------
                                          $ 1,288,319
                                          ============

         Rental expense for continuing operations under operating leases for the
         years ended December 31, 1997, 1996 and 1995 was $549,612, $491,374 and
         $341,949,  respectively.  Rental  expense for  discontinued  operations
         under  operating  leases  for the  year  ended  December  31,  1995 was
         $16,479.

         The Company has  employment  agreements  with four key  employees.  The
         agreements provide for minimum aggregate cash compensation as follows:

                          1998          $  550,400
                          1999             193,325
                          2000             111,600
                          2001             111,600
                          2002               9,300
                                        -----------
                                        $  976,225
                                        ===========

         The Company was named as a third party defendant in a product liability
         lawsuit which also asserted wrongful death. In early 1998, this lawsuit
         was settled  within its  insurance  policy  limits.  In addition to the
         accident  that  resulted  in death,  three other  people were  severely
         burned. A settlement was reached with these burn victims in early 1998,
         prior to any lawsuit being filed.  This  settlement was also within the
         Company's insurance policy limits.

         The  Company  was named as a  defendant  in another  product  liability
         lawsuit resulting in injury.  The Company is receiving  indemnification
         under  the  manufacturer's   product  liability   insurance  and  legal
         representation  at the  cost of the  manufacturer.  At this  time,  the
         Company  does not  anticipate  any  material  impact  on its  financial
         position or results of operations as a result of this case.

                                      F-16
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        Schedule II
                    ABATIX ENVIRONMENTAL CORP. AND SUBSIDIARY

                        Valuation and Qualifying Accounts
                  Years ended December 31, 1997, 1996 and 1995

                                                                    Additions
                                                  Balance at        charged to
                                                 beginning of       costs and                       Balance at
                                                     year           expenses        Deductions      end of year
                                                 ------------     ------------     ------------     ------------
<S>                                              <C>              <C>              <C>              <C>
Year ended December 31:
   Allowance for Doubtful Accounts:
       1997                                      $   376,117          215,396           96,421 A        495,092
                                                 ============     ============     ============     ============

       1996                                      $   343,750          196,772          164,405 A        376,117
                                                 ============     ============     ============     ============

       1995                                      $   169,776          221,769           47,795 A        343,750 B
                                                 ============     ============     ============     ============

   Reserve for Loss on Discontinuance of
     Business:
       1996                                      $    54,050                -           54,050 C              -
                                                 ============     ============     ============     ============

       1995                                      $   193,344                -          139,294 D         54,050
                                                 ============     ============     ============     ============

   Reserve for Loss on Closure of Branch
     Location:
       1996                                      $    72,298                -           72,298 C              -
                                                 ============     ============     ============     ============

       1995                                      $         -           80,000            7,702 E         72,298
                                                 ============    =============     ============     ============
</TABLE>

A     Represents the write-off of uncollectible accounts.
B     Amounts  include  the  allowance  for  doubtful  accounts  related  to the
      Company's  discontinued  operations,  which  had a  balance  of  $7,264 at
      December 31, 1995.
C     Primarily  represents the reversal of the reserves due to the  termination
      of  the  Company's  lease  obligation.  See  Note  2 to  the  consolidated
      financial statements.
D     Represents  the losses from  operations,  the loss on sale of fixed assets
      and the  payment  of lease  obligations.  See  Note 2 to the  consolidated
      financial statements.
E     Amount is primarily the payment of lease obligations.  See Note 2 to the 
      consolidated financial statements.

                                      S-1