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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

|(Mark One) |                                                                                           
|---------- | ------------------------------------------------------------------------------------------
|           |                                                                                           
|x          | Quarterly   report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 
|           |                                                                                           
|           | For the quarterly period ended   December 31, 2005                                        
|           |                                                                                           
|           | OR                                                                                        
|           |                                                                                           
|o          | Transition   report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|           |                                                                                           
|           | Commission File Number  000-19720                                                         

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

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

|3240 Whipple Road                                    
|-----------------------------------------------------
|Union City, California  94587                        
|(Address   of principal executive offices)           
|                                                     
|(510) 675-6500                                       
|(Registrants   telephone number including area code)

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes
x No  
o

Indicate by check mark whether the
registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act):   Yes
x No  
o

Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
  Yes
oNo  
x

As of February 6, 2006, there were 20,080,179 shares of the registrants common stock outstanding.

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ABAXIS, INC.Report on Form 10-Q  For the Quarter Ended December 31, 2005

TABLE OF CONTENTS

|        | PART I.  FINANCIAL INFORMATION                                                                        |   
|------- | ----------------------------------------------------------------------------------------------------- | --
|        |                                                                                                       |   
|Item 1. | Condensed Financial Statements   (Unaudited):                                                         |   
|        |                                                                                                       |   
|        | Condensed   Statements of Operations for the three and nine months ended December 31,   2005 and 2004 | 3 
|        |                                                                                                       |   
|        | Condensed   Balance Sheets at December 31, 2005 and March 31, 2005                                    | 4 
|        |                                                                                                       |   
|        | Condensed   Statements of Cash Flows for the nine months ended December 31, 2005 and 2004             | 5 
|        |                                                                                                       |   
|        | Notes   to Condensed Financial Statements                                                             | 6 
|        |                                                                                                       |   
|Item 2. | Managements Discussion and   Analysis of Financial Condition and Results of Operations               | 10
|        |                                                                                                       |   
|Item 3. | Quantitative and Qualitative   Disclosures About Market Risk                                          | 29
|        |                                                                                                       |   
|Item 4. | Controls and Procedures                                                                               | 29
|        |                                                                                                       |   
|        | PART II.  OTHER INFORMATION                                                                           |   
|        |                                                                                                       |   
|Item 1. | Legal Proceedings                                                                                     | 30
|        |                                                                                                       |   
|Item 2. | Unregistered Sales of Equity   Securities and Use of Proceeds                                         | 30
|        |                                                                                                       |   
|Item 3. | Defaults Upon Senior Securities                                                                       | 30
|        |                                                                                                       |   
|Item 4. | Submission of Matters to a Vote of   Security Holders                                                 | 30
|        |                                                                                                       |   
|Item 5. | Other Information                                                                                     | 30
|        |                                                                                                       |   
|Item 6. | Exhibits                                                                                              | 30
|        |                                                                                                       |   
|        | Signatures                                                                                            | 32

2

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PART I:  FINANCIAL INFORMATION

ITEM 1.  CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Abaxis, Inc. Condensed Statements of Operations  (Unaudited)

|                                                       |  | Three Months Ended    December 31, |            | Nine Months Ended    December 31, |  
|------------------------------------------------------ |  | ---------------------------------- | ---------- | --------------------------------- | -
|                                                       |  |                                    |            |                                   |  
|                                                       |  | 2005                               |            | 2004                              |  
|                                                       |  |                                    |            |                                   |  
|Revenues:                                              |  |                                    |            |                                   |  
|Product sales, net                                     |  | $                                  | 17,346,000 |                                   | $
|Development and licensing revenue                      |  |                                    | 98,000     |                                   |  
|                                                       |  |                                    |            |                                   |  
|Total   revenues                                       |  |                                    | 17,444,000 |                                   |  
|                                                       |  |                                    |            |                                   |  
|Costs   and operating expenses:                        |  |                                    |            |                                   |  
|Cost of product sales                                  |  |                                    | 7,605,000  |                                   |  
|Selling, general and administrative                    |  |                                    | 5,537,000  |                                   |  
|Research and development                               |  |                                    | 1,491,000  |                                   |  
|                                                       |  |                                    |            |                                   |  
|Total   costs and operating expenses                   |  |                                    | 14,633,000 |                                   |  
|                                                       |  |                                    |            |                                   |  
|Income   from operations                               |  |                                    | 2,811,000  |                                   |  
|Interest   and other income                            |  |                                    | 119,000    |                                   |  
|Interest   and other expense                           |  |                                    | (7,000     | )                                 |  
|                                                       |  |                                    |            |                                   |  
|Income   before income taxes                           |  |                                    | 2,923,000  |                                   |  
|Income   tax provision                                 |  |                                    | 1,072,000  |                                   |  
|                                                       |  |                                    |            |                                   |  
|Net   income                                           |  | $                                  | 1,851,000  |                                   | $
|                                                       |  |                                    |            |                                   |  
|Basic   net income per share                           |  | $                                  | 0.09       |                                   | $
|                                                       |  |                                    |            |                                   |  
|Diluted   net income per share                         |  | $                                  | 0.09       |                                   | $
|                                                       |  |                                    |            |                                   |  
|Weighted   average common shares outstanding - basic   |  |                                    | 20,027,000 |                                   |  
|                                                       |  |                                    |            |                                   |  
|Weighted   average common shares outstanding - diluted |  |                                    | 21,585,000 |                                   |  
|                                                       |  |                                    |            |                                   |  

See notes to unaudited condensed financial statements.

3

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Abaxis, Inc.Condensed Balance Sheets (Unaudited)

|                                                                                                                                                                 |  | December 31,    2005 |             | March 31,    2005 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------- | ----------- | ----------------- | -
|                                                                                                                                                                 |  |                      |             |                   |  
|ASSETS                                                                                                                                                           |  |                      |             |                   |  
|Current   assets:                                                                                                                                                |  |                      |             |                   |  
|Cash   and cash equivalents                                                                                                                                      |  | $                    | 7,389,000   |                   | $
|Short-term   investments                                                                                                                                         |  |                      | 21,193,000  |                   |  
|Trade   receivables (net of allowances of $532,000 at December 31, 2005 and $482,000   at March 31, 2005)                                                        |  |                      | 13,667,000  |                   |  
|Inventories                                                                                                                                                      |  |                      | 10,020,000  |                   |  
|Prepaid   expenses                                                                                                                                               |  |                      | 377,000     |                   |  
|Net   deferred tax asset  current                                                                                                                               |  |                      | 2,336,000   |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Total current assets                                                                                                                                             |  |                      | 54,982,000  |                   |  
|Property   and equipment, net                                                                                                                                    |  |                      | 9,644,000   |                   |  
|Intangible   assets, net                                                                                                                                         |  |                      | 544,000     |                   |  
|Deposits   and other assets                                                                                                                                      |  |                      | 78,000      |                   |  
|Net   deferred tax asset - non-current                                                                                                                           |  |                      | 15,043,000  |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Total   assets                                                                                                                                                   |  | $                    | 80,291,000  |                   | $
|                                                                                                                                                                 |  |                      |             |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                             |  |                      |             |                   |  
|Current   liabilities:                                                                                                                                           |  |                      |             |                   |  
|Accounts   payable                                                                                                                                               |  | $                    | 5,486,000   |                   | $
|Accrued   payroll and related expenses                                                                                                                           |  |                      | 2,822,000   |                   |  
|Other   accrued liabilities                                                                                                                                      |  |                      | 1,078,000   |                   |  
|Warranty   reserve                                                                                                                                               |  |                      | 393,000     |                   |  
|Deferred   revenue                                                                                                                                               |  |                      | 830,000     |                   |  
|Income   tax payable                                                                                                                                             |  |                      | 131,000     |                   |  
|Current   portion of capital lease obligations                                                                                                                   |  |                      |            |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Total current liabilities                                                                                                                                        |  |                      | 10,740,000  |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Deferred   rent                                                                                                                                                  |  |                      | 481,000     |                   |  
|Deferred   revenue, less current portion                                                                                                                         |  |                      | 864,000     |                   |  
|Commission   obligation, less current portion                                                                                                                    |  |                      | 16,000      |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Total non-current liabilities                                                                                                                                    |  |                      | 1,361,000   |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Commitments   and contingencies (Note 6)                                                                                                                         |  |                      |             |                   |  
|Shareholders   equity:                                                                                                                                          |  |                      |             |                   |  
|Common stock, no par value: authorized shares -   35,000,000; issued and outstanding shares - 20,066,618 at December 31, 2005   and 19,891,607 at March 31, 2005 |  |                      | 95,791,000  |                   |  
|Accumulated deficit                                                                                                                                              |  |                      | (27,868,000 | )                 |  
|Accumulated other comprehensive income                                                                                                                           |  |                      | 267,000     |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Total shareholders equity                                                                                                                                       |  |                      | 68,190,000  |                   |  
|                                                                                                                                                                 |  |                      |             |                   |  
|Total   liabilities and shareholders equity                                                                                                                     |  | $                    | 80,291,000  |                   | $
|                                                                                                                                                                 |  |                      |             |                   |  

See notes to unaudited condensed financial statements.

4

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Abaxis, Inc. Condensed Statements of Cash Flows  (Unaudited)

|                                                                                    |  | Nine Months Ended   December 31, |            
|----------------------------------------------------------------------------------- |  | -------------------------------- | -----------
|                                                                                    |  |                                  |            
|                                                                                    |  | 2005                             |            
|                                                                                    |  |                                  |            
|Operating activities:                                                               |  |                                  |            
|Net   income                                                                        |  | $                                | 5,150,000  
|Adjustments   to reconcile net income to net cash provided by operating activities: |  |                                  |            
|Depreciation and amortization                                                       |  |                                  | 1,586,000  
|Loss on disposal of property and equipment                                          |  |                                  | 7,000      
|Stock option income tax benefits                                                    |  |                                  | 278,000    
|Common stock issued for employee benefit plans                                      |  |                                  | 43,000     
|Stock-based compensation                                                            |  |                                  | (12,000    
|Changes in assets and liabilities:                                                  |  |                                  |            
|Trade receivables                                                                   |  |                                  | (3,158,000 
|Inventories                                                                         |  |                                  | (1,658,000 
|Prepaid expenses                                                                    |  |                                  | (95,000    
|Net deferred tax assets  current                                                   |  |                                  | 2,341,000  
|Deposits and other assets                                                           |  |                                  | 18,000     
|Net deferred tax assets  non-current                                               |  |                                  | (11,000    
|Accounts payable                                                                    |  |                                  | 1,636,000  
|Accrued payroll and related expenses                                                |  |                                  | 955,000    
|Other accrued liabilities                                                           |  |                                  | 421,000    
|Warranty reserve                                                                    |  |                                  | 148,000    
|Income tax payable                                                                  |  |                                  | (40,000    
|Deferred rent                                                                       |  |                                  | 19,000     
|Deferred revenue                                                                    |  |                                  | (359,000   
|Long-term commission obligation                                                     |  |                                  | (5,000     
|                                                                                    |  |                                  |            
|Net   cash provided by operating activities                                         |  |                                  | 7,264,000  
|                                                                                    |  |                                  |            
|Investing activities:                                                               |  |                                  |            
|Purchase   of short-term investments                                                |  |                                  | (20,926,000
|Proceeds   from maturities of short-term investments                                |  |                                  | 16,787,000 
|Purchase   of property and equipment                                                |  |                                  | (2,364,000 
|Proceeds   from disposal of property and equipment                                  |  |                                  |           
|                                                                                    |  |                                  |            
|Net   cash used in investing activities                                             |  |                                  | (6,503,000 
|                                                                                    |  |                                  |            
|Financing activities:                                                               |  |                                  |            
|Repayment   of capital lease obligations                                            |  |                                  | (16,000    
|Exercise   of warrants and common stock options                                     |  |                                  | 868,000    
|                                                                                    |  |                                  |            
|Net   cash provided by financing activities                                         |  |                                  | 852,000    
|                                                                                    |  |                                  |            
|Net   increase in cash and cash equivalents                                         |  |                                  | 1,613,000  
|Cash   and cash equivalents at beginning of period                                  |  |                                  | 5,776,000  
|                                                                                    |  |                                  |            
|Cash   and cash equivalents at end of period                                        |  | $                                | 7,389,000  
|                                                                                    |  |                                  |            
|Supplemental cash   flow information:                                               |  |                                  |            
|Cash paid for interest                                                              |  | $                                | 4,000      
|                                                                                    |  |                                  |            
|Cash paid for income taxes, net of refunds                                          |  | $                                | 428,000    
|                                                                                    |  |                                  |            
|Non-cash investing   and financing activities:                                      |  |                                  |            
|Issuance of common stock for payment of dividends   payable                         |  | $                                |           
|                                                                                    |  |                                  |            
|Change in unrealized gains on short-term investments                                |  | $                                | 196,000    
|                                                                                    |  |                                  |            

See notes to unaudited condensed financial statements.

5

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ABAXIS, INC.NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

1.   Significant Accounting Policies

Basis of Presentation

The condensed unaudited financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  These condensed unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2005.  The unaudited condensed financial statements included herein reflect all normal recurring adjustments, which are, in the opinion of management, necessary to state fairly the results of operations and financial position for the periods presented.  Certain reclassifications have been made to prior periods financial statements to conform to the current period presentation.  The results for the period ended December 31, 2005 are not necessarily indicative of the results to be expected for the entire fiscal year ending March 31, 2006 or for
any future period.

Comprehensive Income -Comprehensive income consists of net income and other comprehensive income, which was comprised of unrealized gains on investments.

For the three and nine months ended December 31, 2005 and 2004, the components of comprehensive income consisted of the following:

|                                |  | Three Months Ended    December 31, |           | Nine Months Ended    December 31, |  
|------------------------------- |  | ---------------------------------- | --------- | --------------------------------- | -
|                                |  |                                    |           |                                   |  
|                                |  | 2005                               |           | 2004                              |  
|                                |  |                                    |           |                                   |  
|Net   income                    |  | $                                  | 1,851,000 |                                   | $
|Other   comprehensive income:   |  |                                    |           |                                   |  
|Unrealized gains on investments |  |                                    | 106,000   |                                   |  
|                                |  |                                    |           |                                   |  
|Comprehensive   income          |  | $                                  | 1,957,000 |                                   | $
|                                |  |                                    |           |                                   |  

Stock-Based Compensation -The Company has adopted the disclosure provisions of SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure  an amendment of FASB Statement No. 123, Accounting for Stock-Based Compensation.  These disclosure provisions require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The Company did not change to using the fair value based method of accounting for stock-based employee compensation as permitted by the voluntary transition provisions of SFAS 148; and therefore, adoption of SFAS No. 148 did not have an impact on the financial position, results of operations or cash flows of the Company.

Had compensation cost been recognized based on the fair value at the date of grant, the Companys net income and basic and diluted net income per share would have been as follows:

|                                                                                                                            |  | Three Months Ended    December 31, |            | Nine Months Ended    December 31, |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------- | ---------- | --------------------------------- | -
|                                                                                                                            |  |                                    |            |                                   |  
|                                                                                                                            |  | 2005                               |            | 2004                              |  
|                                                                                                                            |  |                                    |            |                                   |  
|Net   income:                                                                                                               |  |                                    |            |                                   |  
|As reported                                                                                                                 |  | $                                  | 1,851,000  |                                   | $
|Less   stock-based compensation expense determined under the fair value method for   all awards, net of related tax effects |  |                                    | (1,354,000 | )                                 |  
|                                                                                                                            |  |                                    |            |                                   |  
|Pro forma net income                                                                                                        |  | $                                  | 497,000    |                                   | $
|                                                                                                                            |  |                                    |            |                                   |  
|Basic   and diluted net income per share:                                                                                   |  |                                    |            |                                   |  
|As reported  basic                                                                                                         |  | $                                  | 0.09       |                                   | $
|Pro forma  basic                                                                                                           |  | $                                  | 0.02       |                                   | $
|As reported  diluted                                                                                                       |  | $                                  | 0.09       |                                   | $
|Pro forma  diluted                                                                                                         |  | $                                  | 0.02       |                                   | $

The pro forma information presented above for the three and nine months ended December 31, 2005 includes approximately $1,067,000 of stock-based employee compensation related to the accelerated vesting of certain options in December 2005.

6

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The Companys calculations were made using the Black-Scholes option pricing model, based on a multiple option valuation approach, and forfeitures were recognized as they occurred.  The following are the weighted average assumptions:

|                          |  | Three Months Ended    December 31, |         | Nine Months Ended    December 31, | 
|------------------------- |  | ---------------------------------- | ------- | --------------------------------- | 
|                          |  |                                    |         |                                   | 
|                          |  | 2005                               |         | 2004                              | 
|                          |  |                                    |         |                                   | 
|Expected   life of option |  |                                    | 6 years |                                   | 
|Risk-free   interest rate |  |                                    | 4.26    | %                                 | 
|Dividend   yield          |  |                                    | 0.00    | %                                 | 
|Volatility                |  |                                    | 46      | %                                 | 

New Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R).  SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees.  Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).  SFAS 123R will be effective for the Companys first quarter of fiscal 2007, which starts April 1, 2006, and requires the use of the Modified Prospective Application
Method.  Under this method, SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date.  Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered.

On December 5, 2005, the Board of Directors approved full acceleration of unvested stock options with an exercise price of $19.12 or greater previously granted under the Abaxis, Inc. 1998 Stock Option Plan held by Company officers and employees.  The primary purpose of the acceleration of vesting was to minimize future compensation expense the Company would otherwise recognize in its financial statements with respect to these accelerated options as a result of SFAS 123R.  The aggregate estimated compensation expense associated with these accelerated options that would have been recognized in its financial statements after adoption of SFAS 123R was approximately $1,067,000.  As a result, options to purchase 144,810 shares of the Companys common stock, including 126,873 shares held by the Companys executive officers, became immediately exercisable as of December 5, 2005.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of Accounting Research Bulletin ARB No. 43, Chapter 4, Inventory Pricing to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges.  SFAS No. 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The adoption of SFAS No. 151 is not expected to have a material impact on the Companys financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20, Accounting Changes and FASB SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements.  SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle.  Under previous guidance, changes in accounting principle were recognized as a cumulative affect in the net income of the period of the change.  The new statement requires retrospective application of changes in accounting principle, limited to the direct effects of the change, to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.  SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for
as a change in accounting estimate effected by a change in accounting principle.  The statement also requires that correction of errors in previously issued financial statements should be termed a restatement.  SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 is not expected to have a material impact on the Companys financial statements.

2.  Net Income Per Share

Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of shares of common stock outstanding.  Diluted net income per share is computed by dividing net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding.

7

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The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share:

|                                               |  | Three Months Ended    December 31, |            | Nine Months Ended    December 31, | 
|---------------------------------------------- |  | ---------------------------------- | ---------- | --------------------------------- | 
|                                               |  |                                    |            |                                   | 
|                                               |  | 2005                               |            | 2004                              | 
|                                               |  |                                    |            |                                   | 
|                                               |  | (number of shares)                 |            | (number of shares)                | 
|Weighted   average common shares outstanding - |  |                                    |            |                                   | 
|Denominator   for basic net income per share   |  |                                    | 20,027,000 |                                   | 
|Effect   of dilutive securities:               |  |                                    |            |                                   | 
|Stock options and warrants                     |  |                                    | 1,558,000  |                                   | 
|                                               |  |                                    |            |                                   | 
|Denominator   for diluted net income per share |  |                                    | 21,585,000 |                                   | 
|                                               |  |                                    |            |                                   | 

Diluted net income per share does not include the effect of the following common equivalent shares related to outstanding stock options and warrants, using the treasury stock method, as their effect would be antidilutive for the three and nine months ended December 31, 2005 and 2004:

|                                    |  | Three Months Ended    December 31, |           | Nine Months Ended    December 31, | 
|----------------------------------- |  | ---------------------------------- | --------- | --------------------------------- | 
|                                    |  |                                    |           |                                   | 
|                                    |  | 2005                               |           | 2004                              | 
|                                    |  |                                    |           |                                   | 
|                                    |  | (number of shares)                 |           | (number of shares)                | 
|Options   to purchase common stock  |  |                                    | 1,240,000 |                                   | 
|Warrants   to purchase common stock |  |                                    | 97,000    |                                   | 
|                                    |  |                                    |           |                                   | 
|                                    |  |                                    | 1,337,000 |                                   | 
|                                    |  |                                    |           |                                   | 

3.  Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market and consist of the following:

|                 |  | December 31,    2005 |            | March 31,    2005 |  
|---------------- |  | -------------------- | ---------- | ----------------- | -
|                 |  |                      |            |                   |  
|Raw   materials  |  | $                    | 6,108,000  |                   | $
|Work-in-process  |  |                      | 2,329,000  |                   |  
|Finished   goods |  |                      | 1,583,000  |                   |  
|                 |  |                      |            |                   |  
|                 |  | $                    | 10,020,000 |                   | $
|                 |  |                      |            |                   |  

4.  Warranty Reserves

The Company provides for the estimated future costs to be incurred under the Companys standard warranty obligations of one to two years.  Estimated contractual warranty obligations are recorded when related sales are recognized and any additional amounts are recorded when such costs are probable and can be reasonably estimated.

The warranty reserve activity is summarized as follows for the three and nine month periods ended December 31, 2005 and 2004:

|                                 |  | Three Months Ended    December 31, |         | Nine Months Ended    December 31, |  
|-------------------------------- |  | ---------------------------------- | ------- | --------------------------------- | -
|                                 |  |                                    |         |                                   |  
|                                 |  | 2005                               |         | 2004                              |  
|                                 |  |                                    |         |                                   |  
|Balance   beginning of period    |  | $                                  | 317,000 |                                   | $
|Provision   for warranty expense |  |                                    | 103,000 |                                   |  
|Warranty   costs incurred        |  |                                    | (27,000 | )                                 |  
|                                 |  |                                    |         |                                   |  
|Balance   end of period          |  | $                                  | 393,000 |                                   | $
|                                 |  |                                    |         |                                   |  

5.  Line of Credit

The Company has established a line of credit with Comerica Bank-California which provides for borrowings of up to $2,000,000.  The line of credit terminates upon notification by either party and the outstanding balance is payable upon demand.  The line of credit bears interest at the banks prime rate minus 0.25%, which totaled 7.00% at December 31, 2005, and is payable monthly.  Of the $2,000,000 available, $410,000 was committed to secure a letter of credit for the Companys facilities lease at December 31, 2005.  At December 31, 2005, there was no amount outstanding under the Companys line of credit.  The weighted average interest rate on the line of credit during the three months ended December 31, 2005 and 2004 was 6.72% and 4.69%, respectively.

8

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The line of credit agreement contains certain financial covenants, which are evaluated on a quarterly basis.  Included in these financial covenants, among other stipulations, is a requirement that the Company have a minimum net income of $25,000 before preferred stock dividends and accretion in any three quarters of a fiscal year, provided that any loss before preferred stock dividends and accretion on preferred stock incurred in the remaining quarter is not to exceed $250,000.  The Company is also required to be profitable, as defined, on a fiscal year to date basis beginning with the six month period ending September 30, 2005 and to have net income before preferred stock dividends and accretion on preferred stock of $1,150,000 for the fiscal year ending March 31, 2006.  In addition, the Company is required to have a quick ratio, as defined, of not less than 2.00 to 1.00, cash flow coverage, as defined, of not less than 1.25 to 1.00, debt to net
worth ratio, as defined, not greater than 1.00 to 1.00 and to maintain a tangible effective net worth, as defined, of not less than $25,731,000.  At December 31, 2005, the Company was in compliance with these covenants.

Borrowings under the line of credit are collateralized by the Companys net book value of assets of $68.2 million at December 31, 2005 including its intellectual property.

6.  Commitments and Contingencies

In November 2003, the Company entered into an OEM agreement with Diatron Messtechnik GmbH (DIATRON) of Austria to purchase DIATRON hematology instruments.  Under the terms of the agreement, the Company is committed to purchase a minimum number of hematology units from DIATRON once the product was qualified for sale.  Qualification occurred in May 2004 and accordingly, the Company has minimum purchase commitments.  As of December 31, 2005, the outstanding commitment for fiscal 2006 through 2009 was $0, $1,698,000, $2,558,000 and $2,558,000, respectively.

7.  Income Taxes

The Companys effective tax rate was 37% for the three and nine months ended December 31, 2005, and 32% and 38% for the three and nine months ended December 31, 2004, respectively.  The decrease in the effective tax rate for the three months ended December 31, 2004 as compared to the nine months ended December 31, 2004 was due to a reduction in the projected effective tax rate for the fiscal year ended March 31, 2005.

8.  Product Category, Customer and Geographic Information

The Company operates in one segment and develops, manufactures and markets portable blood analysis systems for use in any veterinary or human patient-care setting to clinicians with rapid blood constituent measurement requirements.  The following is a summary of revenues from external customers for each group of products and services provided by the Company:

|                                    |  | Three Months Ended    December 31, |            | Nine Months Ended    December 31, |  
|----------------------------------- |  | ---------------------------------- | ---------- | --------------------------------- | -
|                                    |  |                                    |            |                                   |  
|                                    |  | 2005                               |            | 2004                              |  
|                                    |  |                                    |            |                                   |  
|Instruments                         |  | $                                  | 6,478,000  |                                   | $
|Reagent   discs and kits            |  |                                    | 9,815,000  |                                   |  
|Other                               |  |                                    | 1,053,000  |                                   |  
|                                    |  |                                    |            |                                   |  
|Product sales, net                  |  |                                    | 17,346,000 |                                   |  
|Development   and licensing revenue |  |                                    | 98,000     |                                   |  
|                                    |  |                                    |            |                                   |  
|Total   revenues                    |  | $                                  | 17,444,000 |                                   | $
|                                    |  |                                    |            |                                   |  

The following is a summary of revenues by customer group:

|                    |  | Three Months Ended    December 31, |            | Nine Months Ended    December 31, |  
|------------------- |  | ---------------------------------- | ---------- | --------------------------------- | -
|                    |  |                                    |            |                                   |  
|                    |  | 2005                               |            | 2004                              |  
|                    |  |                                    |            |                                   |  
|Medical   Market    |  | $                                  | 2,858,000  |                                   | $
|Veterinary   Market |  |                                    | 13,735,000 |                                   |  
|Other               |  |                                    | 851,000    |                                   |  
|                    |  |                                    |            |                                   |  
|Total   revenues    |  | $                                  | 17,444,000 |                                   | $
|                    |  |                                    |            |                                   |  

9

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The following is a summary of revenues by geographic region based on customer location:

|                         |  | Three Months Ended    December 31, |            | Nine Months Ended    December 31, |  
|------------------------ |  | ---------------------------------- | ---------- | --------------------------------- | -
|                         |  |                                    |            |                                   |  
|                         |  | 2005                               |            | 2004                              |  
|                         |  |                                    |            |                                   |  
|United   States          |  | $                                  | 14,777,000 |                                   | $
|Europe                   |  |                                    | 1,750,000  |                                   |  
|Asia   and Latin America |  |                                    | 917,000    |                                   |  
|                         |  |                                    |            |                                   |  
|Total   revenues         |  | $                                  | 17,444,000 |                                   | $
|                         |  |                                    |            |                                   |  

One distributor, Henry Schein, Inc., accounted for 14% of total revenues for the three months ended December 31, 2005.  One distributor, DVM Resources, accounted for 19% of total revenues for the three months ended December 31, 2004.  Two distributors, Henry Schein, Inc. and DVM Resources, accounted for 15% and 14%, respectively, of total revenues for the nine months ended December 31, 2005.  Two distributors, Vedco, Inc. and DVM Resources, accounted for 20% and 16%, respectively, of total revenues for the nine months ended December 31, 2004.

At December 31, 2005, two distributors accounted for 16% and 13%, respectively, of trade receivables.  At December 31, 2004, two distributors accounted for 24% and 13%, respectively, of trade receivables.

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

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

This Managements Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements which reflect Abaxis current views with respect to future events and financial performance.  In this report, the words will, anticipates, believes, expects, future, intends, plans, and similar expressions identify forward-looking statements.  These forward-looking statements are subject to certain risks and uncertainties, including but not limited to those discussed below, that could cause actual results to differ materially from historical results or those anticipated.  Such risks and uncertainties include the market acceptance of our products and the continuing development of our products, required United States Food and Drug Administration (FDA) clearance and other government approvals, risks
associated with manufacturing and distributing our products on a commercial scale, free of defects, risks related to the introduction of new instruments manufactured by third parties, risks associated with entering the human diagnostic market on a larger scale, risks related to the protection of the Companys intellectual property or claims of infringement of intellectual property asserted by third parties, risks involved in carrying of inventory, risks associated with the ability to attract, train and retain competent sales personnel, general market conditions and competition.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Abaxis assumes no obligation to update any forward-looking statements as circumstances change.

Business Overview

Abaxis, Inc. (us or we), incorporated in California in 1989, develops, manufactures and markets portable blood analysis systems for use in any veterinary or human patient-care setting to provide clinicians with rapid blood constituent measurements.  Our principal offices are located at 3240 Whipple Road, Union City, California 94587 and our telephone number is (510) 675-6500.  Our Internet address is www.abaxis.com.We make available free of charge on or through our Internet website our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  Our common stock trades on the Nasdaq National Market under the symbol ABAX.

Our primary product is a blood analysis
system, consisting of a compact, 6.9 kilogram (15 pounds) portable analyzer and
a series of single-use plastic discs, called reagent discs, containing all the
chemicals required to perform a panel of up to 13 tests on veterinary patients
and 14 tests on human patients.  The system can be operated with minimal
training and performs multiple routine tests on whole blood, serum or plasma
samples.  The system provides test results in less than 14 minutes with the
precision and accuracy equivalent to a clinical laboratory analyzer.  We
currently market this system for veterinary use under the name VetScan® and in the human medical market under the name Piccolo®.

Through April 2004, we marketed a veterinary hematology analyzer under the name VetScan HMT, which provided a complete blood count including a three-part white blood cell differential in less than 2 minutes and required only 12 μL (microliters) of whole blood.  It provided results for eight selectable species, plus two user configurable programs.  We marketed one type of reagent kit with this analyzer.  We purchased the hematology analyzer and reagent kits from Melet Schloesing Laboratoires of France.  We continue to support and service our current population of VetScan HMT hematology customers.

10

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In May 2004, we introduced a veterinary hematology instrument (VetScan HMII) that offers an 18-parameter CBC (complete blood count) analysis, including a three-part white blood cell differential for the diagnostic assessment of patients by the veterinarian in their clinic.  We entered into an original equipment manufacturing (OEM) agreement with Diatron Messtechnik GmbH (DIATRON) of Austria to purchase the DIATRON hematology instruments commencing in the fiscal quarter that the instruments were qualified, which was the first quarter of fiscal 2005.  We market the combination of the VetScan and the VetScan HMII under the name VetScan DXS.

In January 2006, we introduced the VetScan VS2, the next generation in-clinic veterinary diagnostic chemistry, electrolytes, immunoassay and blood gas instrument.  The VetScan VS2 features a high-resolution, full color, touch screen that provides the flexibility to test multiple species.  The design offers simple menu-driven choices to quickly and easily change instrument settings, select from five different languages, input customized species reference ranges, as well as perform a variety of other tasks.  The VetScan VS2 also offers direct compatibility with a range of peripheral devices such as external keyboard and printers for data entry and output.  We manufacture the VetScan VS2 in our manufacturing facilities in Union City, California.

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

Results of Operations

Total Revenues

Revenues by Product and Services

The following is a summary of revenues for each group of products and services provided by the Company for the three and nine months ended December 31, 2005 and 2004:

|                                    |  | Three Months Ended    December 31, |            |      |   |                        |   |            |           | Nine Months Ended    December 31, |  |      |   |                        |            |            |  
|----------------------------------- |  | ---------------------------------- | ---------- | ---- | - | ---------------------- | - | ---------- | --------- | --------------------------------- |  | ---- | - | ---------------------- | ---------- | ---------- | -
|                                    |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|                                    |  | 2005                               |            | 2004 |   | Increase/   (Decrease) |   | %   Change |           | 2005                              |  | 2004 |   | Increase/   (Decrease) |            | %   Change |  
|                                    |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Instruments                         |  | $                                  | 6,478,000  |      | $ | 4,082,000              |   | $          | 2,396,000 |                                   |  | 59   | % | $                      | 15,554,000 |            | $
|Percentage of total revenues        |  |                                    | 37         | %    |   | 34                     | % |            |           |                                   |  |      |   |                        | 32         | %          |  
|Reagent   discs and kits            |  |                                    | 9,815,000  |      |   | 7,465,000              |   |            | 2,350,000 |                                   |  | 31   | % |                        | 29,865,000 |            |  
|Percentage of total revenues        |  |                                    | 56         | %    |   | 62                     | % |            |           |                                   |  |      |   |                        | 61         | %          |  
|Other                               |  |                                    | 1,053,000  |      |   | 481,000                |   |            | 572,000   |                                   |  | 119  | % |                        | 2,975,000  |            |  
|Percentage of total revenues        |  |                                    | 6          | %    |   | 4                      | % |            |           |                                   |  |      |   |                        | 6          | %          |  
|                                    |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Product   sales, net                |  |                                    | 17,346,000 |      |   | 12,028,000             |   |            | 5,318,000 |                                   |  | 44   | % |                        | 48,394,000 |            |  
|Development   and licensing revenue |  |                                    | 98,000     |      |   | 35,000                 |   |            | 63,000    |                                   |  | 180  | % |                        | 736,000    |            |  
|Percentage of total revenues        |  |                                    | 1          | %    |   | <1                     | % |            |           |                                   |  |      |   |                        | 1          | %          |  
|                                    |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Total   revenues                    |  | $                                  | 17,444,000 |      | $ | 12,063,000             |   | $          | 5,381,000 |                                   |  | 45   | % | $                      | 49,130,000 |            | $
|                                    |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  

Instruments

In the three months ended December 31, 2005, total revenues from instrument sales increased 59% or $2,396,000, as compared to the three months ended December 31, 2004.  In the United States veterinary market, sales of VetScan and hematology systems increased 59% or $788,000 and 20% or $308,000, respectively, primarily due to a marketing promotion and an increase in sales personnel in the United States to promote our products.  In the medical market, Piccolo systems sold in the United States market (excluding the U.S. Military) increased 294% or $872,000 due to sales to distributors.  In the third quarter of fiscal 2006, we entered into a formal distribution agreement with PSS World Medical, Inc. to sell and market Piccolo systems and the medical reagent discs.

11

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In the nine months ended December 31, 2005, total revenues from instrument sales increased 25% or $3,149,000, as compared to the nine months ended December 31, 2004.  Total VetScan systems sales increased 26% or $1,425,000 with increases in sales of 22% or $917,000 in the United States and 29% or $333,000 in Europe.  The increase in the United States market was primarily due to a marketing promotion in the first and third quarters of fiscal 2006 and an increase in sales personnel in the United States to promote our products.  The increase in the Europe market was primarily due to an increase in sales to distributors.  Net Piccolo systems sales increased 44% or $1,122,000.  Piccolo systems sold in the United States market (excluding the U.S. Military) increased 135% or $1,431,000 due to sales to distributors.  In the third quarter of fiscal 2006, we entered into a formal distribution agreement with PSS World Medical, Inc. to sell and
market Piccolo systems and the medical reagent discs.  The net increase in Piccolo systems sold was offset by a decrease of Piccolo systems sold to the U.S. Military of 28% or $313,000, which is due to changes in the activities of the U.S. Military.

Reagent Discs and Kits

In the three months ended December 31, 2005, total revenues from medical and veterinary reagent discs and veterinary hematology reagent kits increased 31% or $2,350,000, as compared to the three months ended December 31, 2004.  In the nine months ended December 31, 2005, total revenues from medical and veterinary reagent discs and veterinary hematology reagent kits increased 21% or $5,111,000, as compared to the nine months ended December 31, 2004.  The net increase in revenue from reagent discs and kits was primarily due to the expanded installed base of our instruments.

Other

In the three months ended December 31, 2005, total revenues from other products increased 119% or $572,000, as compared to the three months ended December 31, 2004.  The increase in other products in the three months ended December 31, 2005 was primarily due to an increase in revenue from maintenance contracts offered to customers from time to time as part of incentives in the form of free goods in connection with the sale of our products.

In the nine months ended December 31, 2005, total revenues from other products increased 86% or $1,373,000, as compared to the nine months ended December 31, 2004.  The increase in other products in the nine months ended December 31, 2005 was due to an increase in revenue from our supply contract with Becton, Dickinson and Company for products using the Orbos® Discrete Lyophilization Process, which is based on seasonal demands.  Also, the increase in revenue was due to maintenance contracts offered to customers from time to time as part of incentives in the form of free goods in connection with the sale of our products.

Development and Licensing Revenue

In the three and nine months ended December 31, 2005, total revenues from development and licensing increased 180% or $63,000 and 311% or $557,000, respectively, as compared to the three and nine months ended December 31, 2004.  The increase in development and licensing revenue in the nine months ended December 31, 2005 was primarily due to an agreement to license a portion of our patent portfolio covering lyophilization technology to Cepheid.

Revenues by Customer Group

The following is a summary of revenues by customer group for the three and nine months ended December 31, 2005 and 2004:

|                             |  | Three Months Ended    December 31, |            |      |   |                        |   |            |           | Nine Months Ended    December 31, |  |      |   |                        |            |            |  
|---------------------------- |  | ---------------------------------- | ---------- | ---- | - | ---------------------- | - | ---------- | --------- | --------------------------------- |  | ---- | - | ---------------------- | ---------- | ---------- | -
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|                             |  | 2005                               |            | 2004 |   | Increase/   (Decrease) |   | %   Change |           | 2005                              |  | 2004 |   | Increase/   (Decrease) |            | %   Change |  
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Medical   Market             |  | $                                  | 2,858,000  |      | $ | 1,877,000              |   | $          | 981,000   |                                   |  | 52   | % | $                      | 7,879,000  |            | $
|Percentage of total revenues |  |                                    | 16         | %    |   | 16                     | % |            |           |                                   |  |      |   |                        | 16         | %          |  
|Veterinary   Market          |  |                                    | 13,735,000 |      |   | 9,909,000              |   |            | 3,826,000 |                                   |  | 39   | % |                        | 38,454,000 |            |  
|Percentage of total revenues |  |                                    | 79         | %    |   | 82                     | % |            |           |                                   |  |      |   |                        | 78         | %          |  
|Other                        |  |                                    | 851,000    |      |   | 277,000                |   |            | 574,000   |                                   |  | 207  | % |                        | 2,797,000  |            |  
|Percentage of total revenues |  |                                    | 5          | %    |   | 2                      | % |            |           |                                   |  |      |   |                        | 6          | %          |  
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Total   revenues             |  | $                                  | 17,444,000 |      | $ | 12,063,000             |   | $          | 5,381,000 |                                   |  | 45   | % | $                      | 49,130,000 |            | $
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  

12

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#### Medical Market

Revenues from the medical market increased 52% or $981,000 in the three months ended December 31, 2005, as compared to the three months ended December 31, 2004.  We sold a total of 105 Piccolo systems in the three months ended December 31, 2005, a 110% increase from the 50 Piccolo systems sold in the three months ended December 31, 2004.  Revenues from Piccolo systems sales increased 121% or $740,000 primarily due to an increase of Piccolo systems sold in the United States market (excluding the U.S. Military) of 294% or $872,000 due to sales to distributors.  In the third quarter of fiscal 2006, we entered into a formal distribution agreement with PSS World Medical, Inc. to sell and market Piccolo systems and the medical reagent discs.

Revenues from reagent discs sold in the medical market increased 16% or $194,000, as we sold 142,000 reagent discs in the three months ended December 31, 2005, as compared to 115,000 reagent discs sold in the three months ended December 31, 2004.  The net increase in revenue from reagent discs was primarily attributed to an increase in sales of 88% or $375,000 in the United States market (excluding the U.S. Military) due to the expanded installed base of our Piccolo systems.  The net increase in reagent discs was offset by a decrease of reagent discs sold to the U.S. Military of 36% or $238,000.

Revenues from the medical market increased 29% or $1,779,000 in the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  We sold a total of 300 Piccolo systems in the nine months ended December 31, 2005, a 46% increase from the 205 Piccolo systems sold in the nine months ended December 31, 2004.  Revenues from Piccolo systems sales increased 44% or $1,122,000 due to an increase of Piccolo systems sold in the United States market (excluding the U.S. Military) of 135% or $1,431,000 offset by a decrease of Piccolo systems sold to the U.S. Military of 28% or $313,000.  The increase in the United States market (excluding the U.S. Military) was due to sales to distributors.  In the third quarter of fiscal 2006, we entered into a formal distribution agreement with PSS World Medical, Inc. to sell and market Piccolo systems and the medical reagent discs.

Revenues from reagent discs sold in the medical market increased 16% or $536,000, as we sold 394,000 reagent discs in the nine months ended December 31, 2005, as compared to 314,000 reagent discs sold in the nine months ended December 31, 2004.  The net increase in revenue from reagent discs was primarily attributed to an increase in sales of 76% or $939,000 in the United States market (excluding the U.S. Military) due to the expanded installed base of our Piccolo systems.  The net increase in reagent discs was offset by a decrease of reagent discs sold to the U.S. Military of 27% or $517,000.

Veterinary Market

Revenues from the veterinary market increased 39% or $3,826,000 in the three months ended December 31, 2005, as compared to the three months ended December 31, 2004.  We sold a total of 671 VetScan and hematology systems in the three months ended December 31, 2005, a 53% increase from the 439 instruments sold in the three months ended December 31, 2004.  Total sales of VetScan and hematology systems in the United States increased 38% or $1,096,000 due to a marketing promotion in the third quarter of fiscal 2006 and an increase in sales personnel in the United States to promote our products.  VetScan and hematology systems sold also increased in Asia and Latin America by 216% or $337,000.  In September 2005, our distribution partner in Japan received clearance from the Japanese regulatory agency to import and market our complete line of medical reagent discs, the Piccolo system, as well as all veterinary reagent discs, the VetScan DXS system,
with the exception of those products containing the Bile Acid assay.

Revenues from reagent discs and kits sold in the veterinary market increased 34% or $2,156,000 in the three months ended December 31, 2005, as compared to the three months ended December 31, 2004.  We sold 655,000 reagent discs in the three months ended December 31, 2005, as compared to 477,000 reagent discs sold in the three months ended December 31, 2004.  The unit increase of reagent discs was due to a higher consumption rate of users and to the expanded installed base of our instruments.  Also, we sold 3,379 hematology reagent kits in the three months ended December 31, 2005, as compared to 3,728 hematology reagent kits in the three months ended December 31, 2004.  The unit decrease of hematology reagent kits was due to inventory stocking adjustments by distributors.

Revenues from the veterinary market increased 22% or $6,835,000 in the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  We sold a total of 1,534 VetScan and hematology systems in the nine months ended December 31, 2005, a 26% increase from the 1,221 instruments sold in the nine months ended December 31, 2004.  Sales of VetScan and hematology systems in the United States increased 14% or $1,165,000 due to marketing promotions during the first and third quarters of fiscal 2006 and an increase in sales personnel in the United States to promote our products.  VetScan and hematology systems sold also increased in Asia and Latin America by 101% or $418,000.  In September 2005, our distribution partner in Japan received clearance from the Japanese regulatory agency to import and market our complete line of medical reagent discs, the Piccolo system, as well as all veterinary reagent discs, the VetScan DXS
system, with the exception of those products containing the Bile Acid assay.  VetScan and hematology systems sold increased in Europe by 36% or $444,000 due to sales to distributors.

Revenues from reagent discs and kits sold in the veterinary market increased 21% or $4,575,000 in the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  We sold 2,041,000 reagent discs in the nine months ended December 31, 2005, as compared to 1,685,000 reagent discs sold in the nine months ended December 31, 2004.  The unit increase of reagent discs was due to a higher consumption rate of users and to the expanded installed base of our instruments.  Also, we sold 9,394 hematology reagent kits in the nine months ended December 31, 2005, as compared to 10,575 hematology reagent kits sold in the nine months ended December 31, 2004.  The unit decrease of hematology reagent kits was due to inventory stocking adjustments by distributors.

13

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Other

In the three months ended December 31, 2005, total revenues from other products increased 207% or $574,000, as compared to the three months ended December 31, 2004, primarily due to an increase in revenue from maintenance contracts offered to customers from time to time as part of incentives in the form of free goods in connection with the sale of our products.

In the nine months ended December 31, 2005, total revenues from other products increased 129% or 1,576,000, as compared to the nine months ended December 31, 2004.  The increase in other products was attributed to an increase in revenue from our supply contract with Becton, Dickinson and Company of $457,000, which is based on seasonal demands; an increase in development and licensing revenue of $557,000, primarily from an agreement to license a portion of our patent portfolio covering lyophilization technology to Cepheid; and an increase in revenue from maintenance contracts offered to customers from time to time as part of incentives in the form of free goods in connection with the sale of our products.

Revenues by Geographical Location

The following is a summary of revenues by geographic region based on customer location for the three and nine months ended December 31, 2005 and 2004:

|                             |  | Three Months Ended    December 31, |            |      |   |                        |   |            |           | Nine Months Ended    December 31, |  |      |   |                        |            |            |  
|---------------------------- |  | ---------------------------------- | ---------- | ---- | - | ---------------------- | - | ---------- | --------- | --------------------------------- |  | ---- | - | ---------------------- | ---------- | ---------- | -
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|                             |  | 2005                               |            | 2004 |   | Increase/   (Decrease) |   | %   Change |           | 2005                              |  | 2004 |   | Increase/   (Decrease) |            | %   Change |  
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|United   States              |  | $                                  | 14,777,000 |      | $ | 10,062,000             |   | $          | 4,715,000 |                                   |  | 47   | % | $                      | 41,815,000 |            | $
|Percentage of total revenues |  |                                    | 85         | %    |   | 83                     | % |            |           |                                   |  |      |   |                        | 85         | %          |  
|Europe                       |  |                                    | 1,750,000  |      |   | 1,424,000              |   |            | 326,000   |                                   |  | 23   | % |                        | 5,234,000  |            |  
|Percentage of total revenues |  |                                    | 10         | %    |   | 12                     | % |            |           |                                   |  |      |   |                        | 11         | %          |  
|Asia   and Latin America     |  |                                    | 917,000    |      |   | 577,000                |   |            | 340,000   |                                   |  | 59   | % |                        | 2,081,000  |            |  
|Percentage of total revenues |  |                                    | 5          | %    |   | 5                      | % |            |           |                                   |  |      |   |                        | 4          | %          |  
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Total   revenues             |  | $                                  | 17,444,000 |      | $ | 12,063,000             |   | $          | 5,381,000 |                                   |  | 45   | % | $                      | 49,130,000 |            | $
|                             |  |                                    |            |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  

United States

Total revenues in the United States increased 47% or $4,715,000 for the three months ended December 31, 2005, as compared to the three months ended December 31, 2004.  Veterinary reagent discs sales increased 49% or $2,165,000 due to both a higher consumption rate of institutional users and to the expanded installed base of our VetScan systems.  Medical reagent discs sales in the United States market (excluding the U.S. Military) increased 88% or $375,000 due to the expanded installed base of our Piccolo systems.  The net increase in medical reagent discs was offset by a decrease in medical reagent discs sold to the U.S. Military of 36% or $238,000.

In the three months ended December 31, 2005, instrument sales in the United States increased 55% or $1,858,000.  Sales of our Piccolo systems in the United States market (excluding the U.S. Military) increased 294% or $872,000 while sales of our Piccolo systems to the U.S. Military decreased 57% or $110,000.  Sales of our VetScan systems increased 59% or $788,000 and sales of our hematology systems increased 20% or $308,000 due to a marketing promotion in the third quarter of fiscal 2006 and an increase in sales personnel in the United States to promote our products.

Total revenues from other products increased 125% or $581,000 for the three months ended December 31, 2005, as compared to the three months ended December 31, 2004 primarily due to an increase in revenue from maintenance contracts offered to customers from time to time as part of incentives in the form of free goods in connection with the sale of our products.

Total revenues in the United States increased 26% or $8,510,000 for the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  Veterinary reagent discs sales increased 26% or $4,126,000 due to both a higher consumption rate of institutional users and to the expanded installed base of our VetScan systems.  Hematology reagent kits decreased 13% or $262,000 due to inventory stocking adjustments by distributors.  Medical reagent discs sales in the United States market (excluding the U.S. Military) increased 76% or $939,000 due to the expanded installed base of our Piccolo systems.  The net increase in medical reagent discs was offset by a decrease of 27% or $517,000 in medical reagent discs sold to the U.S. Military.

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In the nine months ended December 31, 2005, instrument sales in the United States increased 22% or $2,283,000.  Sales of our Piccolo systems in the United States market (excluding the U.S. Military) increased 135% or $1,431,000 while sales of our Piccolo systems to the U.S. Military decreased 28% or $313,000.  Sales of our VetScan systems increased 22% or $917,000 and sales of our hematology systems increased 6% or $248,000 due to marketing promotions in the first and third quarters of fiscal 2006 and an increase in sales personnel in the United States to promote our products.

Total revenues from other products increased 88% or $1,384,000 for the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  The increase in other products was primarily attributed to an increase in revenue from our supply contract with Becton, Dickinson and Company of $457,000 which is based on seasonal demands.  Also, the increase in revenue was due to maintenance contracts offered to customers from time to time as part of incentives in the form of free goods in connection with the sale of our products.

Revenues from development and licensing increased 311% or $557,000 for the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004, primarily from an agreement to license a portion of our patent portfolio covering lyophilization technology to Cepheid.

One distributor, Henry Schein, Inc., accounted for 14% of total revenues for the three months ended December 31, 2005.  One distributor, DVM Resources, accounted for 19% of total revenues for the three months ended December 31, 2004.  Two distributors, Henry Schein, Inc. and DVM Resources, accounted for 15% and 14%, respectively, of total revenues for the nine months ended December 31, 2005.  Two distributors, Vedco, Inc. and DVM Resources, accounted for 20% and 16%, respectively, of total revenues for the nine months ended December 31, 2004.

Europe

Total revenues in Europe increased 23% or $326,000 for the three months ended December 31, 2005, as compared to the three months ended December 31, 2004.  Total revenues from instrument sales increased 44% or $238,000, primarily due to an increase of VetScan systems sold to distributors.

Total revenues in Europe increased 25% or $1,043,000 for the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  Revenues from instrument sales increased 27% or $424,000 primarily due to an increase of VetScan and hematology systems sold to distributors.  Revenues from reagent discs and hematology reagent kits sold increased 24% or $622,000 due to the expanded installed base of our instruments in both the medical and veterinary markets.

Asia and Latin America

Total revenues in Asia and Latin America increased 59% or $340,000 for the three months ended December 31, 2005, as compared to the three months ended December 31, 2004.  Revenues from instrument sales increased 155% or $300,000 primarily due to an increase of VetScan and hematology systems sold to distributors.

Total revenues in Asia and Latin America increased 44% or $637,000 for the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004.  Revenues from instrument sales increased 98% or $442,000 due to an increase of VetScan and hematology systems sold to distributors.  Revenues from reagent discs and hematology reagent kits sold increased 21% or $203,000 due to sales to distributors.  In September 2005, our distribution partner in Japan received clearance from the Japanese regulatory agency to import and market our complete line of medical reagent discs, the Piccolo system, as well as all veterinary reagent discs, the VetScan DXS system, with the exception of those products containing the Bile Acid assay.

Cost of Product Sales

|                               |  | Three Months Ended    December 31, |           |      |   |                        |   |            |           | Nine Months Ended    December 31, |  |      |   |                        |            |            |  
|------------------------------ |  | ---------------------------------- | --------- | ---- | - | ---------------------- | - | ---------- | --------- | --------------------------------- |  | ---- | - | ---------------------- | ---------- | ---------- | -
|                               |  |                                    |           |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|                               |  | 2005                               |           | 2004 |   | Increase/   (Decrease) |   | %   Change |           | 2005                              |  | 2004 |   | Increase/   (Decrease) |            | %   Change |  
|                               |  |                                    |           |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Cost   of product sales        |  | $                                  | 7,605,000 |      | $ | 5,994,000              |   | $          | 1,611,000 |                                   |  | 27   | % | $                      | 21,372,000 |            | $
|Percentage   of total revenues |  |                                    | 44        | %    |   | 50                     | % |            |           |                                   |  |      |   |                        | 44         | %          |  

Cost of product sales includes the costs associated with manufacturing, assembly, package, warranty repairs, test and quality assurance for our instruments, reagent discs and hematology reagents and manufacturing overhead, including costs of personnel and equipment associated with manufacturing support.  The increase in cost of product sales in absolute dollars during the three and nine months ended December 31, 2005, as compared to the three and nine months ended December 31, 2004 was due to an increase in the sales volume of instruments and reagent discs.  As a percentage of total revenues, cost of product sales decreased due to the lower unit costs of hematology reagents; the lower unit costs of manufacturing reagent discs from improved manufacturing processes and absorption of fixed costs of our facilities.  As a percentage of total revenues, the decrease in cost of product sales in the nine months ended December 31, 2005 was also attributed by
an increase in revenue from our supply contract with Becton, Dickinson and Company and by an increase in development and licensing revenue.

15

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Selling, General and Administrative Expense

|                                               |  | Three Months Ended    December 31, |           |      |   |                        |   |            |           | Nine Months Ended    December 31, |  |      |   |                        |            |            |  
|---------------------------------------------- |  | ---------------------------------- | --------- | ---- | - | ---------------------- | - | ---------- | --------- | --------------------------------- |  | ---- | - | ---------------------- | ---------- | ---------- | -
|                                               |  |                                    |           |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|                                               |  | 2005                               |           | 2004 |   | Increase/   (Decrease) |   | %   Change |           | 2005                              |  | 2004 |   | Increase/   (Decrease) |            | %   Change |  
|                                               |  |                                    |           |      |   |                        |   |            |           |                                   |  |      |   |                        |            |            |  
|Selling,   general and administrative expenses |  | $                                  | 5,537,000 |      | $ | 3,716,000              |   | $          | 1,821,000 |                                   |  | 49   | % | $                      | 15,404,000 |            | $
|Percentage   of total revenues                 |  |                                    | 32        | %    |   | 31                     | % |            |           |                                   |  |      |   |                        | 31         | %          |  

Selling, general and administrative expenses consist primarily of salaries and benefits, commissions and travel related expenses for personnel engaged in selling, advertising, costs associated with promotional and other marketing expenses, customer service and technical service and general corporate functions, including accounting, human resources and legal.  The increase in selling, general and administrative expenses in absolute dollars during the three and nine months ended December 31, 2005 as compared to the three and nine months ended December 31, 2004 was due to personnel-related costs resulting from an increase in headcount in various divisions such as sales and marketing, customer service and technical service, to support the growth in both our veterinary and medical markets.

Research and Development Expense

|                                    |  | Three Months Ended    December 31, |           |      |   |                        |   |            |         | Nine Months Ended    December 31, |  |      |   |                        |           |            |  
|----------------------------------- |  | ---------------------------------- | --------- | ---- | - | ---------------------- | - | ---------- | ------- | --------------------------------- |  | ---- | - | ---------------------- | --------- | ---------- | -
|                                    |  |                                    |           |      |   |                        |   |            |         |                                   |  |      |   |                        |           |            |  
|                                    |  | 2005                               |           | 2004 |   | Increase/   (Decrease) |   | %   Change |         | 2005                              |  | 2004 |   | Increase/   (Decrease) |           | %   Change |  
|                                    |  |                                    |           |      |   |                        |   |            |         |                                   |  |      |   |                        |           |            |  
|Research   and development expenses |  | $                                  | 1,491,000 |      | $ | 1,311,000              |   | $          | 180,000 |                                   |  | 14   | % | $                      | 4,554,000 |            | $
|Percentage   of total revenues      |  |                                    | 9         | %    |   | 11                     | % |            |         |                                   |  |      |   |                        | 9         | %          |  

Research and development expenses consist of salaries and benefits, related expenses associated with the development of new tests and test methods, product improvements and enhancement of existing products and clinical trials.  The increase in research and development expenses in absolute dollars during the three and nine months ended December 31, 2005, as compared to the three and nine months December 31, 2004 relates to new product development in both the medical and veterinary markets.  The higher investments in research and development primarily resulted in the completion of the next generation in-clinic veterinary diagnostic chemistry analyzer, the VetScan VS2, that was released in January 2006 and ongoing work on the in-clinic human diagnostic chemistry analyzer, the Piccolo-Xpress.  Other projects included Equine Profile with Electrolytes, Renal Panel with Magnesium, C-reactive protein method, CK-MB method and preparation of submission for
CLIA waived status on ALB, ALP, TBIL, GGT, AMY and TP methods.  We anticipate the dollar amount of research and development expenses to increase in fiscal 2006 from fiscal 2005 but remain consistent as a percentage of total revenues, as we complete new products for both the medical and veterinary markets.  There can be no assurance, however, that we will undertake such research and development activities in future periods or, if we do, that such activities will be successful.

Interest and Other Income (Expense), Net

The following table sets forth our interest and other income (expense), net for the three and nine months ended December 31, 2005 and 2004:

|                             |  | Three Months Ended    December 31, |         |      |   |            | Nine Months Ended    December 31, |      |    |      |  
|---------------------------- |  | ---------------------------------- | ------- | ---- | - | ---------- | --------------------------------- | ---- | -- | ---- | -
|                             |  |                                    |         |      |   |            |                                   |      |    |      |  
|                             |  | 2005                               |         | 2004 |   | %   Change |                                   | 2005 |    | 2004 |  
|                             |  |                                    |         |      |   |            |                                   |      |    |      |  
|Interest   and other income  |  | $                                  | 119,000 |      | $ | 94,000     |                                   |      | 27 | %    | $
|Interest   and other expense |  |                                    | (7,000  | )    |   | (4,000     | )                                 |      | 75 | %    |  
|                             |  |                                    |         |      |   |            |                                   |      |    |      |  
|                             |  | $                                  | 112,000 |      | $ | 90,000     |                                   |      | 24 | %    | $
|                             |  |                                    |         |      |   |            |                                   |      |    |      |  

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Interest and Other Income

Interest and other income primarily consists of interest earned on cash, cash equivalents and short-term investments and realized gains on short-term investments.  The increase in interest and other expense in the three and nine months ended December 31, 2005, as compared to the three and nine months ended December 31, 2004, was primarily due to higher average invested balances and realized gains on short-term investments.

Interest and Other Expense

Interest and other expense primarily consists of interest incurred on our capital lease, co-promotion agreement with Abbott Laboratories, currency losses and net loss on disposal of equipment.  The decrease in interest and other expense in the nine months ended December 31, 2005, as compared to the nine months ended December 31, 2004, was primarily due to a decrease on our net loss on disposal of equipment.

Income Tax Provision

|                       |  | Three Months Ended    December 31, |           | Nine Months Ended    December 31, |  
|---------------------- |  | ---------------------------------- | --------- | --------------------------------- | -
|                       |  |                                    |           |                                   |  
|                       |  | 2005                               |           | 2004                              |  
|                       |  |                                    |           |                                   |  
|Income   tax provision |  | $                                  | 1,072,000 |                                   | $
|Effective   tax rate   |  |                                    | 37        | %                                 |  

For the three months ended December 31, 2005 and 2004, the effective tax rate was 37% and 32%, respectively.  For the nine months ended December 31, 2005 and 2004, the effective tax rate was 37% and 38%, respectively.  The decrease in the effective tax rate for the three months ended December 31, 2004 as compared to the nine months ended December 31, 2004 was due to a reduction in the projected effective tax rate for the fiscal year ended March 31, 2005.

Liquidity and Capital Resources

As of December 31, 2005, we had $28,582,000 in cash, cash equivalents and short-term investments as compared to $22,634,000 at March 31, 2005.

|                            |  | December 31,
2005 |            | March 31,
 2005 |   | Increase/
 (Decrease) | 
|--------------------------- |  | ----------------- | ---------- | --------------- | - | --------------------- | 
|                            |  |                   |            |                 |   |                       | 
|Cash   and cash equivalents |  | $                 | 7,389,000  |                 | $ | 5,776,000             | 
|Short-term   investments    |  |                   | 21,193,000 |                 |   | 16,858,000            | 
|                            |  |                   |            |                 |   |                       | 
|                            |  | $                 | 28,582,000 |                 | $ | 22,634,000            | 
|                            |  |                   |            |                 |   |                       | 

Cash provided (used) in the nine months ended December 31, 2005 and 2004 were as follows:

|                                          |  | Nine Months Ended    December 31, |           
|----------------------------------------- |  | --------------------------------- | ----------
|                                          |  |                                   |           
|                                          |  | 2005                              |           
|                                          |  |                                   |           
|Cash   provided by operating activities   |  | $                                 | 7,264,000 
|Cash   used in investing activities       |  |                                   | (6,503,000
|Cash   provided by financing activities   |  |                                   | 852,000   
|                                          |  |                                   |           
|Net increase in cash and cash equivalents |  | $                                 | 1,613,000 
|                                          |  |                                   |           

Operating Activities During the nine months ended December 31, 2005, we generated $7,264,000 of cash from operating activities compared to $4,466,000 during the nine months ended December 31, 2004.  The cash provided was primarily the result of net income of $5,150,000, adjusted for the effects of non-cash expenses including depreciation and amortization of $1,586,000, stock option income tax benefits of $278,000 and a decrease in current net deferred tax assets of $2,341,000.

Our net trade receivable balances were $13,667,000 and $10,509,000 as of December 31, 2005 and March 31, 2005, respectively.  The increase of $3,158,000 in our receivable balance was due to higher sales during the third quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005.  Inventories increased to $10,020,000 as of December 31, 2005 from $8,355,000 as of March 31, 2005, primarily related to purchases due to a higher projected sales volume.  Current net deferred tax assets decreased to $2,336,000 as of December 31, 2005 from $4,677,000 as of March 31, 2005, as a result of the utilization of net operating losses on income during the nine months ended December 31, 2005.

17

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Accounts payable increased to $5,486,000 as of December 31, 2005 from $3,850,000 as of March 31, 2005, primarily related to the timing and payments of services and inventory purchases.  Accrued payroll and related expenses increased to $2,822,000 as of December 31, 2005 from $1,867,000 as of March 31, 2005, as a result of personnel-related costs due to an increase in employee-related benefits and an increase in headcount, primarily in sales and marketing to support the growth in both our veterinary and medical businesses.  Other accrued liabilities increased to $1,078,000 as of December 31, 2005 from $657,000 as of March 31, 2005, primarily due to marketing promotions to customers and accrued expenses related to professional services.  The non-current portion of deferred revenue decreased to $864,000 as of December 31, 2005 from $1,146,000 as of March 31, 2005, due to the reduction of incentives in the form of free goods given to
customers.

Net cash provided by operating activities for the nine months ended December 31, 2004 was $4,466,000.  This was primarily the result of net income of $3,545,000 offset by the effects of non-cash expenses including depreciation and amortization of $1,376,000, stock option income tax benefits of $493,000, an increase in current net deferred tax assets of $137,000 and a decrease in non-current net deferred tax assets of $1,644,000.  Other changes included a decrease of $176,000 in prepaid expenses, deposits and other assets.  The total increase of $2,310,000 in accounts payable, deferred rent, deferred revenue, warranty reserve, income tax payable and other accrued liabilities mainly related to purchases of inventory in the third quarter of fiscal 2005 and an increase in deferred revenue from marketing promotions to customers.

Uses of cash from operating activities included an increase in trade receivables of $1,385,000, mainly due to several slow-paying customers.  An increase of $2,043,000 in inventories related to purchases in the third quarter of fiscal 2005 due to a higher projected sales volume.  Decreases totaling $1,522,000 in accrued payroll and related expenses and long-term commission obligation were primarily due to a reduction in accrued profit sharing and accrued bonus at December 31, 2004 since the Company did not meet the qualifiers for profit sharing and bonus in the third quarter of fiscal 2005.

We anticipate that we will incur incremental additional costs to support our future operations, including further additional pre-clinical testing and clinical trials for our current and future products; research and design costs related to the continuing development of our current and future products; and acquisition of capital equipment for our manufacturing facility, which includes the ongoing costs related to the continuing development of our current and future products.

We anticipate that our existing capital resources, available line of credit and anticipated revenue from the sales of our products will be adequate to satisfy our currently planned operating and financial requirements through at least the next twelve months.  Our future capital requirements will largely depend upon the increased market acceptance of our point-of-care blood analyzer products.  However, our sales for any future periods are not predictable with a significant degree of certainty.  Regardless, we may seek to raise additional funds to pursue strategic acquisition opportunities.

Investing Activities Net cash used in investing activities during the nine months ended December 31, 2005 and 2004 were $6,503,000 and $1,884,000, respectively.  The cash used during the nine months ended December 31, 2005 related to purchases of $20,926,000 in short-term investments consisting of corporate obligations and U.S. Treasury and Agency securities offset by the maturities of various types of short-term investments of $16,787,000.  Cash used in investing activities also included purchases of property and equipment of $2,364,000 and $1,891,000 in the nine months ended December 31, 2005 and 2004, respectively, primarily to support both our increased product demand and our goal of more efficient production lines, as well as our new product introduction.

We anticipate that we will continue to purchase property and equipment necessary in the normal course of our business.

Financing Activities Net cash provided by financing activities for the nine months ended December 31, 2005 was $852,000, which primarily included net cash proceeds of $868,000 from the exercise of common stock options and warrants.  Net cash provided by financing activities for the nine months ended December 31, 2004 was $1,234,000, which primarily included net cash proceeds of $1,251,000 from the exercise of common stock options and warrants.

Line of Credit We have established a line of credit with Comerica Bank-California which provides for borrowings of up to $2,000,000.  The line of credit terminates upon notification by either party and the outstanding balance is payable upon demand.  The line of credit bears interest at the banks prime rate minus 0.25%, which totaled 7.00% at December 31, 2005, and is payable monthly.  Of the $2,000,000 available, $410,000 was committed to secure a letter of credit for our facilities lease at December 31, 2005.  At December 31, 2005, there was no amount outstanding under our line of credit.  The weighted average interest rate on the line of credit during the three months ended December 31, 2005 and 2004 was 6.72% and 4.69%, respectively.

The line of credit agreement contains certain financial covenants, which are evaluated on a quarterly basis.  Included in these financial covenants, among other stipulations, is a requirement that we have a minimum net income of $25,000 before preferred stock dividends and accretion in any three quarters of a fiscal year, provided that any loss before preferred stock dividends and accretion on preferred stock incurred in the remaining quarter is not to exceed $250,000.  We are also required to be profitable, as defined, on a fiscal year to date basis beginning with the six month period ending September 30, 2005 and to have net income before preferred stock dividends and accretion on preferred stock of $1,150,000 for the fiscal year ending March 31, 2006.  In addition, we are required to have a quick ratio, as defined, of not less than 2.00 to 1.00, cash flow coverage, as defined, of not less than 1.25 to 1.00, debt to net worth ratio, as defined,
not greater than 1.00 to 1.00 and to maintain a tangible effective net worth, as defined, of not less than $25,731,000.  At December 31, 2005, we were in compliance with these covenants.

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Borrowings under the line of credit are collateralized by our net book value of assets of $68.2 million at December 31, 2005 including our intellectual property.

Critical Accounting Policies We have identified certain accounting policies as critical to our business operations and the understanding of our results of operations.  The impact and any associated risks related to the identified critical accounting policies on our business operations are discussed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 filed with the Securities and Exchange Commission.

Contingencies We are involved from time to time in various litigation matters in the normal course of business.   We believe that the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.

New Accounting Pronouncements On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R).  SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of Opinion 25 to stock compensation awards issued to employees.  Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).  SFAS 123R will be effective for the Companys first quarter of fiscal 2007, which starts April 1, 2006, and requires the use of the Modified Prospective Application
Method.  Under this method, SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date.  Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption shall be recognized as the remaining requisite services are rendered.

On December 5, 2005, our Board of Directors approved full acceleration of unvested stock options with an exercise price of $19.12 or greater previously granted under the Abaxis, Inc. 1998 Stock Option Plan held by Company officers and employees.  The primary purpose of the acceleration of vesting was to minimize future compensation expense we would otherwise recognize in our financial statements with respect to these accelerated options as a result of SFAS 123R.  The aggregate estimated compensation expense associated with these accelerated options that would have been recognized in our financial statements after adoption of SFAS 123R was approximately $1,067,000.  As a result, options to purchase 144,810 shares of our common stock, including approximately 126,873 shares held by the Companys executive officers, became immediately exercisable as of December 5, 2005.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs  an amendment of Accounting Research Bulletin ARB No. 43, Chapter 4, Inventory Pricing to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and requires that those items be recognized as current-period charges.  SFAS No. 151 also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.  The adoption of SFAS No. 151 is not expected to have a material impact on our financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20, Accounting Changes and FASB SFAS No. 3 Reporting Accounting Changes in Interim Financial Statements.  SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle.  Under previous guidance, changes in accounting principle were recognized as a cumulative affect in the net income of the period of the change.  The new statement requires retrospective application of changes in accounting principle, limited to the direct effects of the change, to prior periods financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.  SFAS No. 154 also requires that a change in depreciation, amortization or depletion method for long-lived, nonfinancial assets be accounted for
as a change in accounting estimate effected by a change in accounting principle.  The statement also requires that correction of errors in previously issued financial statements should be termed a restatement.  SFAS No. 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.  The adoption of SFAS No. 154 is not expected to have a material impact on our financial statements.

RISK FACTORS THAT MAY AFFECT OUR PERFORMANCE

Our future performance is subject to a number of risks.  If any of the following risks actually occur, our business could be harmed and the trading price of our common stock could decline.  You should also refer to other information contained in our annual report for the fiscal year ended March 31, 2005, as filed on Form 10-K, including the financial statements included therein and the notes related thereto.

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

We Have Only Recently Become Consistently Profitable; We Must Increase Sales Of Our Piccolo And VetScan DXS Products To Maintain Profitability

We have not recognized a net loss attributable to common shareholders in the last twelve fiscal quarters ended December 31, 2005.  As of December 31, 2005, we have incurred cumulative net losses of $27.9 million.  Our ability to be consistently profitable will depend, in part, on our ability to increase our sales volumes of our Piccolo and VetScan DXS products.  Increasing the sales volume of our products will depend upon our ability to:

| | continue   to develop our products;                          
|- | -------------------------------------------------------------
|  |                                                              
| | increase   our sales and marketing activities;               
|  |                                                              
| | effectively   manage our manufacturing activities; and       
|  |                                                              
| | effectively   compete against current and future competitors.

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

We Are Not Able To Predict Sales In Future Quarters And A Number Of Factors Affect Our Periodic Results

We are not able to accurately predict our sales in future quarters.  Our revenue in the veterinary market are derived primarily by selling to distributors who resell our products to the ultimate user.  In December 2004, we terminated our relationship with Vedco, Inc., a warehousing cooperative for member distributors who sold Abaxis products to their respective customers, as part of the realignment of our distribution channel.  During the third and fourth quarters of fiscal 2005, we worked with other U.S. based regional and national distributors, which included American Veterinary Supply Corp., DVM Resources, Henry Schein, Inc., IVESCO, TradeWinds Trading Company and Western Medical Supply, to expand their sales and services to support the customers served by other Vedco distributors.  In the third quarter of fiscal 2005, we negotiated direct distributor agreements with Vedco members
Merritt Veterinary Supply and Miller Veterinary Supply.  We continue to enter into additional distributor relationships to expand our distribution base.

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

Our periodic operating results have varied in the past.  In the future, we anticipate our periodic operating results to vary significantly depending on, but not limited to, a number of factors, including, in addition to those factors discussed elsewhere in this section:

| | new product announcements made by us or our   competitors;                               
|- | -----------------------------------------------------------------------------------------
|  |                                                                                          
| | changes in our pricing structures or the pricing   structures of our competitors;        
|  |                                                                                          
| | our ability to develop, introduce and market new   products on a timely basis;           
|  |                                                                                          
| | our manufacturing capacities and our ability to   increase the scale of these capacities;
|  |                                                                                          
| | the mix of product sales between our analyzer and   our reagent disc products;           
|  |                                                                                          
| | the amount we spend on research and development; and                                     
|  |                                                                                          
| | changes in our strategy.                                                                 

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We Could Fail to Achieve Anticipated Revenue If The Market Does Not Accept Our Products

Our core compact blood chemistry analyzer product differs substantially from current blood chemistry analyzers on the market.  Our primary competition is from centralized laboratories that offer a greater number of tests than our products, but do so at a greater cost and requiring more time.  We also compete with other point-of-care analyzers that cost more, require more maintenance and offer a narrower range of tests.  However, these point-of-care analyzers are generally marketed by larger companies which have greater resources for sales and marketing, in addition to a recognized brand name and established distribution relationships.

Historically we have marketed our VetScan analyzer to veterinarians and we have relatively limited experience in large scale sales of our Piccolo analyzer into the human medical market.  We continue to develop new animal blood tests that we cannot be assured will be accepted by the veterinary market.  Although we believe that our blood analyzers offer consumers many advantages, including according to our analyses substantial cost savings, in terms of the actual product and implementation of it procedurally, these advantages involve changes to current standard practices, such as using large clinical laboratories, that will require changes in both the procedures and mindset of care providers.  The human medical market in particular is highly regulated, structured, difficult to penetrate and often slow to adopt new product offerings.  If we are unable to convince large numbers of medical
clinics, hospitals and other point-of-care environments of the benefits of our products, we will suffer lost sales and could fail to achieve anticipated revenue.

We Are Dependent Upon Our Profitability, And If We Cannot Remain Profitable We May Need Additional Funding In The Future And These Funds May Not Be Available To Us

We believe that our existing capital resources, available line of credit and anticipated revenue from the sales of our products will be adequate to satisfy our currently planned operating and financial requirements through March 31, 2007, although no assurances can be given.  The terms of our line of credit contain a number of covenants concerning financial tests that we must meet that are more fully detailed in the agreements that we have filed with the SEC as exhibits to our periodic reports.

Further, we expect to incur incremental additional costs to support our future operations, including:

| | further commercialization of our products and   development of new test methods to allow us to further penetrate the human   diagnostic market and the veterinary diagnostic market;  
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                       
| | our need to acquire capital equipment for our   manufacturing facilities, which includes the ongoing costs related to the   continuing development of our current and future products;
|  |                                                                                                                                                                                       
| | research and design costs related to the continuing   development of our current and future products; and                                                                             
|  |                                                                                                                                                                                       
| | additional pre-clinical testing and clinical trials   for our current and future products.                                                                                            

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

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We Rely On Patents And Other Proprietary Information, The Loss Of Any Of Which Would Negatively Affect Our Business

As of December 31, 2005, 35 patent applications have been filed on behalf of Abaxis with the United States Patent and Trademark Office, of which 29 have been issued.  Additionally, we have filed several international patent applications covering the same subject matter as our domestic applications.  The patent position of any medical device manufacturer, including Abaxis, is uncertain and may involve complex legal and factual issues.  Consequently, we may not be issued any additional patents, either domestically or internationally.  Furthermore, our patents may not provide significant proprietary protection because there is a chance that they will be circumvented or invalidated.  We cannot be certain that we were the first creator of the inventions covered by our issued patents or pending patent applications, or that we were the first to file patent applications for these
inventions, because (1) the United States Patent and Trademark Office maintains all patent applications that are not filed in any foreign jurisdictions in secrecy until it issues the patents (unless a patent application owner files a request for publication) and (2) publications of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months.  We may have to participate in interference proceedings, which are proceedings in front of the U.S. Patent and Trademark Office, to determine who will be issued a patent.  These proceedings could be costly and could be decided against us.

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

We Continue to Develop Our Marketing And Distribution Experience In the Human Diagnostic Market

Although we have gained experience marketing our VetScan DXS system products in the veterinary diagnostic market, we have much less experience in marketing the Piccolo system in the human diagnostic market.  Accordingly, we have limited sales, marketing and distribution experience, especially in the human diagnostic market.  We cannot assure you that:

| | we will   be able to establish and maintain effective distribution arrangements in the   human medical market;  
|- | ----------------------------------------------------------------------------------------------------------------
|  |                                                                                                                 
| | any   distribution arrangements that we are able to establish will be successful in   marketing our products; or
|  |                                                                                                                 
| | the costs   associated with marketing and distributing our products will not be   excessive.                    

Should we fail to effectively develop our marketing and distribution efforts, our growth will be limited and our results of operations will be adversely affected.

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

Our business exposes us to potential warranty and product liability risks which are inherent in the testing, manufacturing and marketing of human and veterinary medical products.  We strive to apply sophisticated methods to raw materials and produce defect-free medical test equipment.  Although we have established procedures for quality control on both the raw materials that we receive from suppliers and our manufactured final products, these procedures may prove inadequate to detect a defect that either occurs in limited quantities or that we have not anticipated.  We believe that our Piccolo and VetScan systems detect the vast majority of errors that occur on our reagent discs and automatically reject such tests, prompting the medical provider to retest the patient.  However, our Piccolo and VetScan systems may be unable to detect errors which could result in the misdiagnosis of
human or veterinary patients.

Should we inadvertently ship defective products, we may be subject to substantial claims under our warranty policy or product liability law.  In addition, our policy is to credit medical providers for any defective product that we produce, including those reagent discs that are rejected by our Piccolo and VetScan systems.  Therefore, even if a mass defect within a lot or lots of reagent discs were detected by our Piccolo and VetScan systems, our need to replace such reagent discs free of charge would materially harm our financial condition.  Further, in the event that a product defect is not detected by our Piccolo system, our relatively recent expansion into the human medical market greatly increases the risk that the amount of damages involved with just one product defect would be material to our operations.  We currently maintain limited product liability insurance that we believe
is adequate for our needs, taking into account the risks involved and cost of coverage.  However, our product liability insurance and cash may be insufficient to cover potential liabilities.  In addition, in the future the coverage that we require may be unavailable on commercially reasonable terms, if at all.  Even with our current insurance coverage, a mass product defect, product liability claim or recall would materially adversely affect our business or our financial condition.

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Many of Our Sales Force Have Been Employed By Us For Less Than One Year And We Must Effectively Train And Integrate Our Sales Team In Order To Achieve Our Anticipated Revenue

At December 31, 2005, we had forty-eight full-time sales personnel involved in our sales and marketing activities, many of whom have been employed by us for a limited period of time.  While these individuals work with our distribution partners both domestically and internationally to extend our market reach, the primary selling activities are often done by these individuals.  If we are to increase our sales, we will need to train new salespeople and supervise them closely.  We also will continue hiring additional sales personnel.  If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to market our products.

We Need to Successfully Manufacture And Market Additional Reagent Discs For The Human Diagnostic Market If We Are To Compete In That Market

We have developed a blood analysis system that consists of a portable blood analyzer and single-use reagent discs.  Each reagent disc performs a series of standard blood tests.  We believe that it is necessary to develop additional series of reagent discs with various tests for use with the Piccolo and VetScan systems.  Historically, we primarily developed reagent discs suitable for the veterinary diagnostic market.  However, Abaxis has received 510(k) clearances from the FDA for 25 test methods in the human medical market.  These tests are included in standard tests for which the medical community receives reimbursements from third party payors such as HMOs and Medicare.  We may not be able to successfully manufacture or market these reagent discs.  Our failure to meet these challenges will materially adversely affect our operating results and financial
condition.

We Rely On Distributors To Sell Our Products; We Rely On Sole Distributor Arrangements In A Number Of Countries

We distribute our products primarily through distributors.  As a result, we are dependent upon these distributors to sell our products and to assist us in promoting and creating a demand for our products.  We have a number of distributors in the United States who distribute our VetScan products.  One distributor, Henry Schein, Inc., accounted for 14% of total revenues for the three months ended December 31, 2005.  One distributor, DVM Resources, accounted for 19% of total revenues for the three months ended December 31, 2004.  Two distributors, Henry Schein, Inc. and DVM Resources, accounted for 15% and 14%, respectively, of total revenues for the nine months ended December 31, 2005.  Two distributors, Vedco, Inc. and DVM Resources, accounted for 20% and 16%, respectively, of total revenues for the nine months ended December 31, 2004.  If one of our distributors were to
stop selling our products, we may not be able to replace such lost revenue.  We operate on a purchase order basis with the distributors and the distributors are under no contractual obligation to continue carrying our products.  Further, many of our distributors may carry our competitors products, and may promote our competitors products over our own products.

In December 2004, we terminated our relationship with Vedco, Inc., a warehousing cooperative for member distributors who sold Abaxis products to their respective customers, as part of the realignment of our distribution channel.  During the third and fourth quarters of fiscal 2005, we worked with other U.S. based regional and national distributors, which included American Veterinary Supply Corp., DVM Resources, Henry Schein, Inc., IVESCO, TradeWinds Trading Company and Western Medical Supply, to expand their sales and services to support the customers served by other Vedco distributors.  In the third quarter of fiscal 2005, we negotiated direct distributor agreements with Vedco members Merritt Veterinary Supply and Miller Veterinary Supply.  We believe that our future growth depends, in part, on the efforts of these distributors.  However, we plan to continue to enter into additional
distributor relationships to expand our distribution base.

In the medical market, in the third quarter of fiscal 2006, we entered into a formal distribution agreement with PSS World Medical, Inc. to sell and market Piccolo systems and the medical reagent discs.  Internationally, we have a few distributors for our products in both the human and veterinary diagnostic markets, which includes one distributor in Japan who received clearance in September 2005 from the Japanese regulatory agency to import and market our complete line of medical reagent discs, the Piccolo system, as well as all veterinary reagent discs, the Vetscan DXS system, with the exception of those products containing the Bile Acid assay in the respective country.

We currently have distributors for our products in the following countries:  Australia, Austria, Bahrain, Belgium, Canada, Denmark, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Korea, Kuwait, Macao, Mexico, the Netherlands, New Zealand, Norway, Portugal, Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, United Arab Emirates, the United Kingdom and the United States.  Our distributor in each of these countries is responsible for obtaining the necessary approvals to sell our products.  These distributors may not be successful in obtaining proper approvals for our products in their respective countries, and they may not be successful in marketing our products.  We plan to continue to enter into additional distributor relationships to expand our international distribution base and solidify our international presence.  However, we may not be successful
in entering into additional distributor relationships.  Our distributors may terminate their relationship with us at any time.  Historically, we have experienced a high degree of turnover among our international distributors.  This high degree of turnover makes it difficult for us to establish a steady distribution network overseas.  Consequently, we may not be successful in marketing our Piccolo and VetScan DXS products internationally.

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We Depend On Sole Suppliers For Several Key Components In Our Products, Many of Whom We Have Not Entered Into Contractual Relationships With

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

| | Reagent   Discs:  Two   injection molding manufacturers, C. Brewer & Co. and Nypro Oregon, Inc.,   currently make the molded plastic discs which, when loaded with reagents and   welded together, form our reagent disc products.  We believe that only a few manufacturers are capable of   producing these discs to the narrow tolerances that we require; to date, we   have only qualified these two manufacturers, with Nypro Oregon, Inc. being   qualified at two separate facilities, to manufacture the molded plastic   discs. 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Reagent   Chemicals:  We   currently depend on the following single source vendors for some of the   chemicals that we use to produce the dry reagent chemistry beads that are   either inserted in our reagent discs or sold as a stand-alone product:  Amano Enzyme USA Co., Ltd., Genzyme   Corporation, Kikkoman Corporation Biochemical Division, Microgenics   Corporation, Roche Molecular Biochemicals of Roche Diagnostics Corporation, a   division of F. Hoffmann-La Roche, Ltd., Shinko American Inc. and Sigma   Aldrich Inc.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Blood   Analyzer Components:    Our analyzer products use several technologically advanced components   that we currently purchase from two single source vendors, PerkinElmer, Inc.   and Electro Alliance, Inc.  Our   analyzers use a printer that is only made by Seiko North America   Corporation.  The loss of the supply   of any of these components could force us to redesign our analyzers.                                                                                                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | Hematology   Instrument and Reagents:    We purchase the HMII instruments from DIATRON of Austria.  To date, we have qualified two suppliers   to produce the reagents for the hematology instruments:  Mallinckrodt Baker BV and Clinical   Diagnostic Solutions, Inc.                                                                                                                                                                                                                                                                   

For our hematology instruments purchased from Diatron, we are subject to minimum purchase requirements through fiscal 2009.  We operate on a purchase order basis with all of the suppliers of our molded plastic reagent discs, reagent chemicals and blood analyzer components and thus these suppliers are under no contractual obligation to supply us with their products or to do so at specified prices.  Although we believe that there are potential alternate suppliers available for these critical components, to date we have not qualified additional vendors beyond those referenced above.

Because we are dependent on a limited number of suppliers and manufacturers for critical components to our products, we are particularly susceptible to any interruption in the supply of these products or the viability of our assembly arrangements.  The loss of any one of these suppliers or a disruption in our manufacturing arrangements could materially adversely affect our business and financial condition.

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

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

| | commercial clinical laboratories;                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                  
| | hospitals clinical laboratories; and                                                                                            
|  |                                                                                                                                  
| | manufacturers of bench top multi-test blood   analyzers and other testing systems that health care providers can use   on-site.

We May Not Be Able To Compete With These Organizations Or Their Products Or With Future Organizations Or Future Products

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

| | range of   tests offered;  
|- | ---------------------------
|  |                            
| | the   immediacy of results;
|  |                            
| | cost   effectiveness;      

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| | ease of   use; and       
|- | -------------------------
|  |                          
| | reliability   of results.

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

Competition in the human and veterinary diagnostic markets is intense.  Our principal competitors in the human diagnostic market are Alfa Wassermann S.P.A., i-STAT Corporation (which was purchased by Abbott Laboratories), Johnson & Johnson (including its subsidiary, Ortho-Clinical Diagnostics, Inc.) and Polymedco.  Our principal competitors in the veterinary diagnostic market are Idexx Laboratories, Inc. and Heska Corporation.  Most of our competitors have significantly greater financial and other resources than we do.  In particular, many of our competitors have large sales forces and well-established distribution channels.  Consequently, we must develop our distribution channels and improve our direct sales force in order to compete in these markets.

Changes In Third Party Payor Reimbursement Regulations Can Negatively Affect Our Business

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

We Are Subject To Numerous Governmental Regulations

| | Need for FDA Certification for Our   Medical Device Products
|- | ------------------------------------------------------------

Our Piccolo products are regulated under the 1976 Medical Device Amendments to the Food, Drug and Cosmetic Act, which is administered by the Food and Drug Administration.  The FDA has classified our Piccolo products as Class I and Class II devices.  These classifications require us to submit to the FDA a pre-market notification form or 510(k).  The FDA uses the 510(k) to substantiate product claims that are made by medical device manufacturers prior to marketing.  In our 510(k) notification, we must, among other things, establish that the product we plan to market is substantially equivalent to (1) a product that was on the market prior to the adoption of the 1976 Medical Device Amendment or (2) to a product that the FDA has previously cleared under the 510(k) process.  The FDA review process of a 510(k) notification can last anywhere from three
to six months, and the FDA must issue a written order finding substantial equivalence before a company can market a medical device.  As of December 31, 2005, we have received market clearance from the FDA for our Piccolo system and 25 reagent tests that we have on 12 reagent discs.  We are currently developing additional tests that the FDA will have to clear through the 510(k) notification procedures.  These new test products are crucial for our success in the human diagnostic market.  If we do not receive 510(k) clearance for a particular product, we will not be able to sell that product in the United States.

| | Need to Comply with Manufacturing   Regulations
|- | -----------------------------------------------

The 1976 Medical Device Amendment also requires us to manufacture our Piccolo products in accordance with Good Manufacturing Practices guidelines.  Current Good Manufacturing Practice requirements are set forth in the 21 CFR 820 Quality System Regulation.  These requirements regulate the methods used in, and the facilities and controls used for, the design, manufacture, packaging, storage, installation and servicing of our medical devices intended for human use.  Our manufacturing facility is subject to periodic inspections.  In addition, various state regulatory agencies may regulate the manufacture of our products.  For example, we have obtained a license from the State of California to manufacture our products.  In April 2001, the State of California Food and Drug Branch granted our manufacturing facility in compliance status, based on the regulations for
Good Manufacturing Practices for medical devices.  In May 2001, the State of California Food and Drug Branch granted licensing for our facility in Union City, California.  The most recent inspection was in March 2003 when the U.S. FDA conducted a facility inspection and verified our compliance with the 21 CFR 820 Regulation.  We cannot assure you that we will successfully pass a re-inspection by the FDA or the State of California.  In addition, we cannot assure you that we can comply with all current or future government manufacturing requirements and regulations.  If we are unable to comply with the regulations, or if we do not pass routine inspections, our business and results of operations will be materially adversely affected.

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| | Effects of the Clinical Laboratory   Improvement Amendments on Our Products
|- | ---------------------------------------------------------------------------

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

The tests included on our Lipid Panel and Lipid Panel Plus reagent discs have been granted waived status under CLIA regulations for our total cholesterol, HDL, triglycerides, ALT and AST tests when used in conjuction with our Piccolo system.  Waived status permits untrained personnel to run the Piccolo system using the Lipid Panel and Lipid Panel Plus; thus, extending the sites (doctors offices and other point-of-care environments) that can use the Piccolo system.  We cannot assure you that we will successfully receive the waived status from the FDA for other products.  Consequently, for the reagent discs that have not received CLIA waived status, the market for our Piccolo products may be confined to those testing facilities that are certified as laboratories and our growth can be limited accordingly.  However, we are engaged in an active program to test and apply for CLIA
waiver for additional analytes.

| | We Are Subject to Various Federal, State,   Local, and International Regulations
|- | --------------------------------------------------------------------------------

Federal and state regulations regarding the manufacture and sale of health care products and diagnostic devices may change.  In addition, as we continue to sell in foreign markets, we may have to obtain additional governmental clearances in those markets.  For example, in December 2003, we received certification from the British Standards Institute to the ISO 13485:1996 quality system standard for medical devices.  This quality system certification, along with successful completion of product testing to current European standards and the translation of Piccolo product documentation into the required languages, enabled us to meet the compliance requirements of the CE Mark and the current European In Vitro Device Directive.  We cannot predict what impact, if any, such current or future regulatory changes would have on our business.  We may not be able to obtain regulatory clearances
for our products in the United States or in foreign markets, and the failure to obtain these regulatory clearances will materially adversely affect our business and results of operations.

Although we believe that we will be able to comply with all applicable regulations of the Food and Drug Administration and of the State of California, including the Quality System Regulation, current regulations depend on administrative interpretations.  Future interpretations made by the Food and Drug Administration, the Centers for Medicare and Medicaid Services (CMS) or other regulatory bodies may adversely affect our business.

We Depend On Key Members Of Our Management And Scientific Staff, And We Must Retain And Recruit Qualified Individuals If We Are To Be Competitive

We are highly dependent on the principal members of our management and scientific staff.  The loss of any of these key personnel, including in particular Clinton H. Severson, our President, Chief Executive Officer and Chairman of our Board of Directors, might impede the achievement of our business objectives.  Mr. Seversons amended and restated employment agreement with us has been filed with the SEC as an exhibit.  We are not aware of any member of our executive management team who intends to retire within one year of the date of this filing.  We currently do not maintain key man life insurance on any of our employees.  Although historically we have been relatively successful both in retaining our current management and scientific staff and attracting and retaining skilled and experienced marketing, sales and manufacturing personnel, we may not be able to employ such
personnel on acceptable terms in the future because numerous medical products and other high technology companies compete for the services of these qualified individuals.

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Standards For Compliance With Section 404 Of the Sarbanes-Oxley Act Of 2002 Are Complex, And If We Are Unable To Maintain Effective Internal Control Over Our Financial Reporting, Our Business Could Be Harmed And Our Stock Price Could Decline

Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require an annual assessment of our internal control over financial reporting by management of the Company, and attestation of our assessment by our independent registered public accountants.  The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards.

Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2005, and this assessment identified a material weakness in our internal control over financial reporting.  The Company did not maintain effective controls over the determination and reporting of the provision for income taxes.  There were errors in the annual tax provision for the fiscal year ended March 31, 2005 (which were corrected prior to the issuance of the financial statements) as a result of ineffective controls relating to insufficient formalized procedures to obtain and review documents with tax-related information in the determination of the provision of income taxes and the components of deferred income tax assets and liabilities.  Additionally, there were insufficient formalized procedures to ensure that the provision of income taxes received adequate review to
ensure that such provision is accounted for in accordance with generally accepted accounting principles.

This material weakness resulted from a design deficiency and resulted in audit adjustments to the provision for income taxes totaling $280,000.  These audit adjustments were reflected in our fiscal 2005 earnings announcement on April 28, 2005, filed on a Current Report on Form 8-K, and do not impact previously filed financial statements.  Additionally, this control deficiency could result in a future material misstatement of the Companys income tax provision (and related balance sheet accounts) that would not be prevented or detected by management.  Accordingly, management has determined that this control deficiency constitutes a material weakness.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Because of the material weakness
described above, management believes that, as of March 31, 2005, the Companys internal control over financial reporting was not effective.

Any failure to implement required new or improved controls, or difficulties encountered in our implementation could harm our operating results or prevent us from accurately reporting our financial results or cause us to fail to meet our reporting obligations in the future.  If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.

Legislative Actions, Higher Insurance Cost And Potential New Accounting Pronouncements Are Likely To Cause Our General And Administrative Expenses To Increase And Impact Our Future Financial Position And Results Of Operations

In order to comply with the Sarbanes-Oxley Act of 2002, as well as changes to Nasdaq listing standards and accounting changes by the Securities and Exchange Commission, we will be required to enhance our internal controls, hire additional personnel and utilize additional outside legal, accounting and advisory services, all of which will cause our general and administrative costs to increase.  Insurers are also likely to increase premiums as a result of the high claims rates incurred over the past year, and so our premiums for our various insurance policies, including our directors and officers insurance policies, are likely to increase.

As a Result of New Requirements Relating to Accounting Treatment For Employee Stock Options, We May Be Forced to Change Our Business Practices

We currently account for the issuance of stock options under APB Opinion No. 25, Accounting for Stock Issued to Employees.  On December 16, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R).  The new standard requires us to treat the value of the stock options granted to employees as a compensation expense.  In April 2005, the Securities and Exchange Commission amended the compliance dates and, accordingly, we will be required to record an expense for our stock-based compensation plans using the fair value method beginning on April 1, 2006.  As a result, we may decide to reduce the number of stock options granted to employees or to grant options to fewer employees.  This could affect our ability to retain existing employees and attract qualified
candidates and increase the cash compensation we would have to pay to them.

The adoption of SFAS 123R in the first quarter of fiscal 2007 would have a negative effect on our earnings.  To minimize future compensation expense that we would recognize in our financial statements, on December 5, 2005, the Board of Directors of Abaxis approved full acceleration of unvested stock options with an exercise price of $19.12 or greater previously granted under the Abaxis, Inc. 1998 Stock Option Plan held by Company officers and employees.  The pro forma effects on net income and earnings per share if we had applied the fair value recognition provisions of the original SFAS 123 on stock compensation awards (rather than applying the intrinsic value measurement provisions of Opinion 25) are disclosed in Note 1 to the condensed, unaudited financial statements.

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In October
2005, our 1998 Stock Option Plan was amended and restated as the Abaxis, Inc.
2005 Equity Incentive Plan, which allows the Company to provide as incentives,
stock options, stock appreciation rights, stock awards (stock purchase rights
and stock bonuses), restricted stock units, performance shares, performance
units, other stock-based awards and cash-based awards. The impact of this new
plan on our future earnings depends on the type of equity based incentives the
Company grants, the vesting conditions and the number of awards
granted.

We Must Comply With Strict And Potentially Costly Environmental Regulations

We are subject to stringent federal, state and local laws, rules, regulations and policies that govern the use, generation, manufacture, storage, air emission, effluent discharge, handling and disposal of certain materials and wastes.  In particular, we are subject to laws, rules and regulations governing the handling and disposal of biohazardous materials used in the development and testing of our products.  We handle and dispose of human and veterinary blood samples for testing (whole blood, plasma, serum) and we paid approximately $64,000 in fiscal 2005 to comply with applicable environmental regulations.  Although we believe that we have complied with applicable laws and regulations in all material respects and have not been required to take any action to correct any noncompliance, we may have to incur significant costs to comply with environmental regulations if our manufacturing to
commercial levels continues to increase.  In addition, if a government agency determines that we have not complied with these laws, rules and regulations, we may have to pay significant fines and/or take remedial action that would be expensive and we do not carry environmental-related insurance coverage.

System Failures Or Delays May Harm Our Business And Our Facilities And Manufacturing Operations Are Vulnerable To Natural Disasters And Other Unexpected Losses

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

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

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

Our international sales are overwhelmingly currently U.S. dollar-denominated.  As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets.  For the limited amount of our sales denominated in local currencies, we are subject to fluctuations in exchange rates between the U.S. dollar and the particular local currency.  Our operating results could also be adversely affected by the seasonality of international sales and the economic conditions of our overseas markets.

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

The market price of our common stock, like the securities of many other medical products companies, fluctuates over a wide range, and will continue to be highly volatile in the future.  During the past two years, our stock price closed at a high of $22.80 on January 26, 2004 and a low of $7.62 on April 22, 2005.  The following factors may affect the market price of our common stock:

| | fluctuation in our   operating results;                                                              
|- | -----------------------------------------------------------------------------------------------------
|  |                                                                                                      
| | announcements of   technological innovations or new commercial products by us or our   competitors;  
|  |                                                                                                      
| | changes in governmental   regulation;                                                                
|  |                                                                                                      
| | prospects and proposals   for health care reform;                                                    
|  |                                                                                                      
| | governmental or third   party payors controls on prices that our customers may pay for our products;
|  |                                                                                                      
| | developments or disputes   concerning patent or our other proprietary rights;                        

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| | public concern as to the   safety of our devices or similar devices developed by our competitors; and
|- | -----------------------------------------------------------------------------------------------------
|  |                                                                                                      
| | general market conditions.                                                                           

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

Our Shareholders Rights Plan And Our Ability To Issue Preferred Stock May Delay Or Prevent A Change Of Control Of Abaxis

Our Shareholder Rights Plan, adopted by our Board of Directors on April 22, 2003 may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire control of Abaxis.  The Shareholder Rights Plan could limit the price that investors might be willing to pay in the future for shares of our common stock.

In addition, our Board of Directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the shareholders, except to the extent required by NASDAQ rules.  The issuance of preferred stock, while providing flexibility in connection with possible financings or acquisitions or other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks with respect to interest rates on our line of credit, cash equivalent and short-term investments.

For our line of credit, which provides for borrowings of up to $2,000,000, the interest rate is equal to the banks prime rate minus 0.25%, which totaled 7.00% at December 31, 2005.  Consequently, an increase in the prime rate would expose us to higher interest expenses.  At December 31, 2005, there was no amount outstanding on our line of credit.

At December 31, 2005, our short-term investments totaled $21,193,000, consisting of corporate obligations and U.S. Treasury and Agency securities of one year or less from the date of purchase.  Our short-term investment objective is to maximize yields without significantly increased risk.

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

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended.  Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2005, because of the material weakness related to controls around the determination and reporting of the provision for income taxes.

As reported in our annual report on Form 10-K for the fiscal year ended March 31, 2005, we identified a material weakness in our internal control over financial reporting which we view as an integral part of our disclosure controls and procedures.  For additional information relating to the control deficiencies that resulted in the material weakness described above, please see the discussion under Item 9A. Controls and Procedures  Management Report on Internal Control Over Financial Reporting contained in our report on Form 10-K for the fiscal year ended March 31, 2005.  As of December 31, 2005, we have not fully remediated the material weakness.

Changes in Internal Control over Financial Reporting

During the quarter ended December 31, 2005, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

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We have implemented a remediation plan to address the ineffective controls related to the determination and reporting of the tax provision.  We have implemented improved controls to facilitate a comprehensive and detailed review of our tax accounting and reporting by ensuring that accounting personnel with the adequate experience, skills and knowledge are directly involved in the review and evaluation of tax accounting and reporting.

PART II -- OTHER INFORMATION

Item 1.  Legal Proceedings

We are from time to time involved in various litigation matters in the normal course of business.  We believe that the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Submission of Matters to a Vote of Security Holders

At our annual meeting of shareholders held on October 25, 2005, the following matters were considered and voted upon:

| | (a) | The   election of six (6) directors to hold office until the next annual meeting of   shareholders.  The votes cast and   withheld for such nominees were as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |  | IN FAVOR |            | WITHHELD | 
|-------------------------- |  | -------- | ---------- | -------- | 
|                           |  |          |            |          | 
|Clinton H. Severson        |  |          | 16,658,812 |          | 
|Richard J. Bastiani, Ph.D. |  |          | 16,686,915 |          | 
|Henk J. Evenhuis           |  |          | 16,681,145 |          | 
|Brenton G.A. Hanlon        |  |          | 16,686,915 |          | 
|Prithipal Singh, Ph.D      |  |          | 16,511,004 |          | 
|Ernest S. Tucker III, M.D. |  |          | 16,682,215 |          | 

| | (b) | The   results of voting on the ratification of the appointment of Burr, Pilger   & Mayer LLP as our independent registered public accounting firm for the   fiscal year ending March 31, 2006, were as follows:
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|IN FAVOR   |  | OPPOSED |  | ABSTAIN
|---------- |  | ------- |  | -------
|           |  |         |  |        
|17,253,235 |  | 44,947  |  | 52,424 

| | (c) | The   results of voting on the amendment and restatement of our 1998 Stock Option   Plan as the 2005 Equity Incentive Plan, were as follows:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

|IN FAVOR   |  | OPPOSED   |  | ABSTAIN
|---------- |  | --------- |  | -------
|           |  |           |  |        
|10,095,512 |  | 1,973,786 |  | 109,315

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

|Exhibit No. |  | Description of Document                                                                                                              
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                      
|31.1        |  | Certification of President and Chief Executive   Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                  
|            |  |                                                                                                                                      
|31.2        |  | Certification of Chief Financial Officer and Vice   President of Finance pursuant to Section 302 of the Sarbanes-Oxley Act of   2002.
|            |  |                                                                                                                                      
|32.1        |  | Certification of President and Chief Executive   Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                  
|            |  |                                                                                                                                      
|32.2        |  | Certification of Chief Financial Officer and Vice   President of Finance pursuant to Section 906 of the Sarbanes-Oxley Act of   2002.

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SIGNATURES

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

|                         | ABAXIS,   INC.
|------------------------ | --------------
|                         | (Registrant)  
|                         |               
|                         |               
|Date:   February 9, 2006 | BY:           
|                         |               
|                         |               
|                         |               
|                         |               
|                         |               
|                         |               
|Date:   February 9, 2006 | BY:           
|                         |               
|                         |               
|                         |               
|                         |               

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