##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2008
 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)
  þ o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
  o þ




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##### 



ABAXIS, INC.
Form 10-Q
 For the Quarter Ended September 30, 2008
 TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Condensed Consolidated Financial Statements (Unaudited):Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30,
2008 and 2007
    
    
    3Condensed Consolidated Balance Sheets as of September 30, 2008 and March 31, 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2008 and 2007
    
    
    5Notes to the Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34Item 4T. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    46Item 3. Defaults Upon Senior Securities
    
    
    46Item 4. Submission of Matters to a Vote of Security Holders
    
    
    46Item 5. Other Information
    
    
    46Item 6. Exhibits
    
    
    46SIGNATURES
    
    
    47Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Condensed Consolidated Financial Statements (Unaudited)
 ABAXIS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
(In thousands, except share and per share data)
 Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    27,688
    
    
    $
    25,192
    
    
    $
    52,260
    
    
    $
    48,123Cost of revenues
    
    
    12,346
    
    
    
    11,335
    
    
    
    23,415
    
    
    
    21,250Gross profit
    
    
    15,342
    
    
    
    13,857
    
    
    
    28,845
    
    
    
    26,873Operating expenses:Research and development
    
    
    2,082
    
    
    
    1,822
    
    
    
    4,079
    
    
    
    3,475Sales and marketing
    
    
    6,494
    
    
    
    6,381
    
    
    
    12,321
    
    
    
    11,610General and administrative
    
    
    1,952
    
    
    
    1,538
    
    
    
    3,614
    
    
    
    3,189Total operating expenses
    
    
    10,528
    
    
    
    9,741
    
    
    
    20,014
    
    
    
    18,274Income from operations
    
    
    4,814
    
    
    
    4,116
    
    
    
    8,831
    
    
    
    8,599Interest and other income (expense), net
    
    
    326
    
    
    
    529
    
    
    
    788
    
    
    
    1,028Income before income taxes
    
    
    5,140
    
    
    
    4,645
    
    
    
    9,619
    
    
    
    9,627Income tax provision
    
    
    1,843
    
    
    
    1,757
    
    
    
    3,546
    
    
    
    3,641Net income
    
    $
    3,297
    
    
    $
    2,888
    
    
    $
    6,073
    
    
    $
    5,986Net income per share:Basic net income per share
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.28
    
    
    $
    0.28Diluted net income per share
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.27
    
    
    $
    0.27Shares used in the calculation of net income per share:Weighted average common shares outstanding  basic
    
    
    21,779,000
    
    
    
    21,448,000
    
    
    
    21,757,000
    
    
    
    21,380,000Weighted average common shares outstanding  diluted
    
    
    22,304,000
    
    
    
    22,110,000
    
    
    
    22,363,000
    
    
    
    22,103,000Share-based compensation expense by function:Cost of revenues
    
    $
    40
    
    
    $
    35
    
    
    $
    75
    
    
    $
    55Research and development
    
    
    53
    
    
    
    36
    
    
    
    114
    
    
    
    71Sales and marketing
    
    
    121
    
    
    
    88
    
    
    
    258
    
    
    
    168General and administrative
    
    
    220
    
    
    
    130
    
    
    
    388
    
    
    
    252Total share-based compensation expense
    
    $
    434
    
    
    $
    289
    
    
    $
    835
    
    
    $
    546
   3




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ABAXIS, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(In thousands, except share data)
 September 30,
    
    
    March 31,2008
    
    
    2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    34,572
    
    
    $
    17,219Short-term investments
    
    
    34,998
    
    
    
    6,991Trade receivables (net of allowances
of $313 at September 30, 2008 and $272
at March 31, 2008)
    
    
    21,613
    
    
    
    20,873Inventories, net
    
    
    17,580
    
    
    
    18,657Prepaid expenses
    
    
    1,093
    
    
    
    427Net deferred tax asset  current
    
    
    3,204
    
    
    
    2,426Total current assets
    
    
    113,060
    
    
    
    66,593Long-term investments
    
    
    
    
    
    
    35,463Property and equipment, net
    
    
    14,865
    
    
    
    14,599Intangible assets, net
    
    
    338
    
    
    
    375Other assets
    
    
    23
    
    
    
    5Net deferred tax asset  non-current
    
    
    3,771
    
    
    
    3,868Total assets
    
    $
    132,057
    
    
    $
    120,903LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,956
    
    
    $
    6,421Accrued payroll and related expenses
    
    
    4,231
    
    
    
    4,277Other accrued liabilities
    
    
    2,312
    
    
    
    1,369Deferred revenue
    
    
    934
    
    
    
    807Warranty reserve
    
    
    1,617
    
    
    
    1,219Total current liabilities
    
    
    14,050
    
    
    
    14,093Non-current liabilities:Deferred rent
    
    
    217
    
    
    
    286Deferred revenue
    
    
    1,439
    
    
    
    1,146Warranty reserve
    
    
    625
    
    
    
    729Total non-current liabilities
    
    
    2,281
    
    
    
    2,161Commitments and contingencies (Note 8)Shareholders equity:Preferred stock, no par value; 5,000,000
shares authorized; no shares issued and
outstanding
    
    
    
    
    
    
    Common stock, no par value; 35,000,000 shares authorized;
21,791,000 and 21,706,000 shares issued and outstanding
at September 30, 2008 and at March
31, 2008, respectively
    
    
    113,013
    
    
    
    109,031Retained earnings (accumulated deficit)
    
    
    3,106
    
    
    
    (2,967
    )Accumulated other comprehensive loss
    
    
    (393
    )
    
    
    (1,415
    )Total shareholders equity
    
    
    115,726
    
    
    
    104,649Total liabilities and shareholders equity
    
    $
    132,057
    
    
    $
    120,903
   4




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ABAXIS, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
(In thousands)
 Six Months EndedSeptember 30,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    6,073
    
    
    $
    5,986Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization
    
    
    2,066
    
    
    
    1,656(Gain) loss on disposal of property and equipment
    
    
    (8
    )
    
    
    2Share-based compensation expense
    
    
    835
    
    
    
    546Excess tax benefits from share-based awards
    
    
    (3,085
    )
    
    
    (138
    )Deferred income taxes
    
    
    2,332
    
    
    
    3,266Changes in assets and liabilities:Trade receivables, net
    
    
    (740
    )
    
    
    (2,417
    )Inventories, net
    
    
    (160
    )
    
    
    (1,971
    )Prepaid expenses
    
    
    (666
    )
    
    
    363Other assets
    
    
    (18
    )
    
    
    14Accounts payable
    
    
    (1,465
    )
    
    
    (1,254
    )Accrued payroll and related expenses
    
    
    (46
    )
    
    
    332Other accrued liabilities
    
    
    943
    
    
    
    (73
    )Deferred rent
    
    
    (69
    )
    
    
    (47
    )Deferred revenue
    
    
    420
    
    
    
    (166
    )Warranty reserve
    
    
    294
    
    
    
    447Net cash provided by operating activities
    
    
    6,706
    
    
    
    6,546Cash flows from investing activities:Purchases of available-for-sale investments
    
    
    
    
    
    
    (19,575
    )Purchases of held-to-maturity investments
    
    
    (7,090
    )
    
    
    (14,176
    )Proceeds from redemptions of available-for-sale investments
    
    
    8,550
    
    
    
    Proceeds from maturities of held-to-maturity investments
    
    
    7,090
    
    
    
    27,868Purchases of property and equipment
    
    
    (1,074
    )
    
    
    (1,680
    )Proceeds from disposal of property and equipment
    
    
    20
    
    
    
    Net cash provided by (used in) investing activities
    
    
    7,496
    
    
    
    (7,563
    )Cash flows from financing activities:Proceeds from issuance of common stock under stock plans, net
    
    
    66
    
    
    
    1,516Excess tax benefits from share-based awards
    
    
    3,085
    
    
    
    138Net cash provided by financing activities
    
    
    3,151
    
    
    
    1,654Net increase in cash and cash equivalents
    
    
    17,353
    
    
    
    637Cash and cash equivalents at beginning of period
    
    
    17,219
    
    
    
    10,183Cash and cash equivalents at end of period
    
    $
    34,572
    
    
    $
    10,820Supplemental disclosure of cash flow information:Cash paid for interest
    
    $
    
    
    
    $
    4Cash paid for income taxes, net of refunds
    
    $
    478
    
    
    $
    150Supplemental disclosure of non-cash flow information:Change in unrealized gain (loss) on investments, net of tax
    
    $
    1,022
    
    
    $
    Transfers of equipment between inventory and property and equipment, net
    
    $
    1,233
    
    
    $
    881Capitalized share-based compensation
    
    $
    (4
    )
    
    $
    9Common stock withheld for employee taxes in connection with share-based compensation
    
    $
    275
    
    
    $
    109
   5




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ABAXIS, INC.
 
 NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 NOTE 1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
 Description of Business.
  Basis of Presentation.
  Reclassifications.
 Use of Estimates in Preparation of Financial Statements.
 NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
     6




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Financial Liabilities
 NOTE 3. FAIR VALUE MEASUREMENTS
       As of September 30, 2008Quoted Prices
    
    
    Significantin Active
    
    
    Other
    
    
    SignificantMarkets for
    
    
    Observable
    
    
    UnobservableIdentical Assets
    
    
    Inputs
    
    
    InputsLevel 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssetsCash and cash equivalents(1)
    
    $
    34,572
    
    
    $
    
    
    
    $
    
    
    
    $
    34,572Short-term investments:Certificate of deposits
    
    
    6,991
    
    
    
    
    
    
    
    
    
    
    
    6,991Auction rate securities
    
    
    
    
    
    
    
    
    
    
    28,007
    
    
    
    28,007Total assets at fair value
    
    $
    41,563
    
    
    $
    
    
    
    $
    28,007
    
    
    $
    69,570
 
 (1)
    
    Cash and cash equivalents as of September 30, 2008 consisted of $23.4 million in cash and $11.2
million in cash equivalents, consisting of money market mutual funds.    7




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Auction RateSecuritiesBalance at March 31, 2008
    
    $
    35,463Redemptions during the period
    
    
    (4,000
    )Transfers
    
    
    Total gain or loss (realized or unrealized)Included in earnings (loss)
    
    
    Included in other comprehensive loss
    
    
    96Balance at June 30, 2008
    
    $
    31,559Redemptions during the period
    
    
    (4,550
    )Transfers
    
    
    Total gain or loss (realized or unrealized)Included in earnings (loss)
    
    
    Included in other comprehensive loss
    
    
    998Balance at September 30, 2008
    
    $
    28,007
  8




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NOTE 4. INVESTMENTS
  September 30, 2008Unrealized
    
    
    FairCost
    
    
    Gain (Loss)
    
    
    ValueShort-term investmentsHeld-to-maturity:Certificate of deposits
    
    $
    6,991
    
    
    $
    
    
    
    $
    6,991Available-for-sale:Auction rate securities
    
    
    28,425
    
    
    
    (418
    )
    
    
    28,007Total short-term investments
    
    $
    35,416
    
    
    $
    (418
    )
    
    $
    34,998
 March 31, 2008Unrealized
    
    
    FairCost
    
    
    Gain (Loss)
    
    
    ValueShort-term investmentsHeld-to-maturity:Certificate of deposits
    
    $
    2,974
    
    
    $
    
    
    
    $
    2,974Municipal bonds
    
    
    4,017
    
    
    
    
    
    
    
    4,017Total short-term investments in held-to-maturity
    
    $
    6,991
    
    
    $
    
    
    
    $
    6,991Long-term investmentsAvailable-for-sale:Auction rate securities
    
    $
    36,975
    
    
    $
    (1,512
    )
    
    $
    35,463Total long-term investments in available-for-sale
    
    $
    36,975
    
    
    $
    (1,512
    )
    
    $
    35,463
   NOTE 5. INVENTORIES, NET
  September 30,
    
    
    March 31,2008
    
    
    2008Raw materials
    
    $
    7,873
    
    
    $
    9,067Work-in-process
    
    
    2,677
    
    
    
    4,315Finished goods
    
    
    7,030
    
    
    
    5,275Inventories, net
    
    $
    17,580
    
    
    $
    18,657
 NOTE 6. WARRANTY RESERVES
  Instruments.
  9




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Reagent Discs.
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Balance at beginning of period
    
    $
    2,115
    
    
    $
    910
    
    
    $
    1,948
    
    
    $
    847Provision for warranty expense
    
    
    512
    
    
    
    612
    
    
    
    1,019
    
    
    
    874Warranty costs incurred
    
    
    (385
    )
    
    
    (228
    )
    
    
    (725
    )
    
    
    (427
    )Balance at end of period
    
    
    2,242
    
    
    
    1,294
    
    
    
    2,242
    
    
    
    1,294Non-current portion of warranty reserve
    
    
    625
    
    
    
    346
    
    
    
    625
    
    
    
    346Current portion of warranty reserve
    
    $
    1,617
    
    
    $
    948
    
    
    $
    1,617
    
    
    $
    948
 NOTE 7. LINE OF CREDIT
   
    
    The Company must have a minimum net income of $25,000 before preferred stock dividends and
accretion on preferred stock 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 required to be profitable, as defined, on a fiscal year to date basis
beginning, with respect to the current fiscal year, with the six month period ended September
30, 2008 and to have net income before preferred stock dividends and accretion on preferred
stock of at least $1.2 million for the fiscal year ending March 31, 2009.
    
    The Company is required to comply with certain financial covenants as follows:
 Financial Covenants
    
    RequirementsQuick ratio, as defined
    
    Not less than 2.00 to 1.00Cash flow coverage, as defined
    
    Not less than 1.25 to 1.00Debt to net worth ratio, as defined
    
    Not greater than 1.00 to 1.00Tangible effective net worth, as defined
    
    Not less than $25.7 million
   10




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NOTE 8. COMMITMENTS AND CONTINGENCIES
 Purchase Commitments.
 Litigation.
 NOTE 9. SHARE-BASED COMPENSATION
    Cash Flow Impact
  Equity Compensation Plans
  2005 Equity Incentive Plan.
   11




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1992 Outside Directors Stock Option Plan.
  Stock Options
   Stock Option Activity
  Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    AggregateExercise
    
    
    Remaining
    
    
    IntrinsicNumber of
    
    
    Price
    
    
    Contractual
    
    
    ValueShares
    
    
    Per Share
    
    
    Life (Years)
    
    
    (In thousands)Outstanding at March 31, 2008
    
    
    1,044,000
    
    
    $
    7.82Granted
    
    
    
    
    
    
    Exercised
    
    
    (53,000
    )
    
    
    6.45Canceled or forfeited
    
    
    (1,000
    )
    
    
    12.99Outstanding at September 30, 2008
    
    
    990,000
    
    
    $
    7.89
    
    
    
    3.30
    
    
    $
    12,005Vested and expected to vest at September 30, 2008
    
    
    990,000
    
    
    $
    7.89
    
    
    
    3.30
    
    
    $
    11,999Exercisable at September 30, 2008
    
    
    984,000
    
    
    $
    7.87
    
    
    
    3.28
    
    
    $
    11,949
   12




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Restricted Stock Units
  
    
    Restricted stock unit awards to employees:Four year time-based vesting as follows: five
percent vesting after the first year; additional 10 percent after the second year; additional
15 percent after the third year; and the remaining 70 percent after the fourth year of
continuous employment with the Company.
    
    Restricted stock unit awards to non-employee directors:100 percent vesting after one year
of continuous service to the Company.
   Restricted Stock Unit Activity
  WeightedAverageNumber of
    
    
    Grant DateShares
    
    
    Fair Value(1)Unvested at March 31, 2008
    
    
    494,000
    
    
    $
    23.21Granted
    
    
    244,000
    
    
    
    23.92Vested
    
    
    (43,000
    )
    
    
    23.18Canceled or forfeited
    
    
    (9,000
    )
    
    
    20.63Unvested at September 30, 2008
    
    
    686,000
    
    
    $
    23.50
 
 (1)
    
    The weighted average grant date fair value of restricted stock units is based on the number of
shares and the closing market price of the Companys common stock on the date of grant.  NOTE 10. NET INCOME PER SHARE
   13




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Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    3,297
    
    
    $
    2,888
    
    
    $
    6,073
    
    
    $
    5,986Denominator:Weighted average common shares outstanding  basic
    
    
    21,779,000
    
    
    
    21,448,000
    
    
    
    21,757,000
    
    
    
    21,380,000Weighted average effect of dilutive securities:Stock options
    
    
    509,000
    
    
    
    658,000
    
    
    
    549,000
    
    
    
    707,000Restricted stock units
    
    
    16,000
    
    
    
    4,000
    
    
    
    57,000
    
    
    
    10,000Warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000Weighted average common shares outstanding  diluted
    
    
    22,304,000
    
    
    
    22,110,000
    
    
    
    22,363,000
    
    
    
    22,103,000Net income per share:Basic net income per share
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.28
    
    
    $
    0.28Diluted net income per share
    
    $
    0.15
    
    
    $
    0.13
    
    
    $
    0.27
    
    
    $
    0.27
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average number of shares underlying antidilutive stock options and warrants
    
    
    159,000
    
    
    
    218,000
    
    
    $
    
    
    
    
    218,000Weighted average exercise price per share underlying antidilutive stock options and warrants
    
    $
    21.65
    
    
    $
    21.65
    
    
    $
    
    
    
    $
    21.66
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Weighted average number of shares underlying antidilutive restricted stock units
    
    
    375,000
    
    
    
    387,000
    
    
    
    178,000
    
    
    
    192,000
 NOTE 11. INCOME TAXES
   NOTE 12. COMPREHENSIVE INCOME
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    3,297
    
    
    $
    2,888
    
    
    $
    6,073
    
    
    $
    5,986Other comprehensive income:Change in unrealized gain (loss) on investments, net of tax
    
    
    939
    
    
    
    
    
    
    
    1,022
    
    
    
    Comprehensive income
    
    $
    4,236
    
    
    $
    2,888
    
    
    $
    7,095
    
    
    $
    5,986
  14




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##### Table of Contents



NOTE 13. SEGMENT REPORTING INFORMATION
   Medical Market
  Veterinary Market
   Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Medical Market
    
    $
    6,015
    
    
    $
    5,643
    
    
    $
    12,544
    
    
    $
    10,450Veterinary Market
    
    
    19,945
    
    
    
    17,989
    
    
    
    36,558
    
    
    
    34,425Other(1)
    
    
    1,728
    
    
    
    1,560
    
    
    
    3,158
    
    
    
    3,248Total revenues
    
    
    27,688
    
    
    
    25,192
    
    
    
    52,260
    
    
    
    48,123Cost of revenues:Medical Market
    
    
    2,775
    
    
    
    2,805
    
    
    
    5,808
    
    
    
    5,248Veterinary Market
    
    
    8,020
    
    
    
    7,889
    
    
    
    14,847
    
    
    
    14,848Other(1)
    
    
    1,551
    
    
    
    641
    
    
    
    2,760
    
    
    
    1,154Total cost of revenues
    
    
    12,346
    
    
    
    11,335
    
    
    
    23,415
    
    
    
    21,250Gross profit:Medical Market
    
    
    3,240
    
    
    
    2,838
    
    
    
    6,736
    
    
    
    5,202Veterinary Market
    
    
    11,925
    
    
    
    10,100
    
    
    
    21,711
    
    
    
    19,577Other(1)
    
    
    177
    
    
    
    919
    
    
    
    398
    
    
    
    2,094Gross profit
    
    $
    15,342
    
    
    $
    13,857
    
    
    $
    28,845
    
    
    $
    26,873
 
 (1)
    
    Represents unallocated items, not specifically identified to any particular business segment.  15




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##### Table of Contents



NOTE 14. REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS
 Revenue Information
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,Revenues by Product Category
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Instruments
    
    $
    6,892
    
    
    $
    7,462
    
    
    $
    14,694
    
    
    $
    13,926Reagent discs and kits
    
    
    18,734
    
    
    
    15,680
    
    
    
    33,627
    
    
    
    29,939Other products
    
    
    1,317
    
    
    
    1,598
    
    
    
    2,427
    
    
    
    3,335Product sales, net
    
    
    26,943
    
    
    
    24,740
    
    
    
    50,748
    
    
    
    47,200Development and licensing revenue
    
    
    745
    
    
    
    452
    
    
    
    1,512
    
    
    
    923Total revenues
    
    $
    27,688
    
    
    $
    25,192
    
    
    $
    52,260
    
    
    $
    48,123
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,Revenues by Geographic Region
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007North America
    
    $
    22,482
    
    
    $
    21,071
    
    
    $
    42,777
    
    
    $
    40,240Europe
    
    
    4,341
    
    
    
    3,175
    
    
    
    7,726
    
    
    
    6,232Asia Pacific and rest of the world
    
    
    865
    
    
    
    946
    
    
    
    1,757
    
    
    
    1,651Total revenues
    
    $
    27,688
    
    
    $
    25,192
    
    
    $
    52,260
    
    
    $
    48,123
 Significant Concentrations
  Three Months Ended
    
    
    Six Months EndedGeographical
    
    
    September 30,
    
    
    September 30,Distributor
    
    Location
    
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Walco International, Inc., d/b/a DVM Resources
    
    United States
    
    
    11
    %
    
    
    13
    %
    
    
    <10
    %
    
    
    14
    %
  NOTE 15. SUBSEQUENT EVENTS
   16




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
  BUSINESS OVERVIEW
 10-Q,
  
    
    Medical Market: We currently market the blood analysis system in the medical market under
the name Piccolo xpress. Through October 2006, we marketed the blood analysis
system in the medical market as the Piccolo®, now referred to as the Piccolo
Classic. We continue to support and service our current population of Piccolo xpress and
Piccolo Classic chemistry analyzers.
    
    Veterinary Market: We currently market the blood analysis system in the veterinary market
under the name VetScan VS2®. Through March 2006, we marketed the blood analysis
system in the veterinary market as the VetScan®, now referred to as the VetScan
Classic. We continue to support and service our current population of VetScan VS2 and VetScan
Classic chemistry analyzers.
    17




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##### Table of Contents



CRITICAL ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS
   Revenue Recognition and Deferred Revenue.
   Distributor and Customer Rebates.
 Sales and Other Allowances.
  18




---



##### Table of Contents



Allowance for Doubtful Accounts.
 Warranty Reserves.
   Inventories.
 Long-Lived Assets.
 Income Taxes.
 Share-Based Compensation Expense.
  
    
    Risk-free interest rate: The risk-free interest rate is based on U.S. Treasury yields in
effect at the time of grant for the expected term of the option.
    
    Expected stock price volatility: We estimate the volatility of our common stock at the
date of grant based on the historical volatility of our common stock.
  19




---



##### Table of Contents




    
    Expected term: We estimate the expected term of stock options granted based on historical
exercise and post-vesting termination patterns, which we believe are representative of future
behavior.
    
    Expected dividends: We have not paid cash dividends on our common stock and we do not
anticipate paying cash dividends in the foreseeable future; consequently, we use an expected
dividend yield of zero.
   Fair Value Measurements.
     RESULTS OF OPERATIONS
   20




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##### Table of Contents



Total Revenues
 Revenues by Geographic Region and by Product Category.
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    
    PercentRevenues by Geographic Region
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeNorth America
    
    $
    22,482
    
    
    $
    21,071
    
    
    $
    1,411
    
    
    
    7
    %
    
    $
    42,777
    
    
    $
    40,240
    
    
    $
    2,537
    
    
    
    6
    %Percentage of total revenues
    
    
    81
    %
    
    
    84
    %
    
    
    
    
    
    
    
    
    
    
    82
    %
    
    
    84
    %Europe
    
    
    4,341
    
    
    
    3,175
    
    
    
    1,166
    
    
    
    37
    %
    
    
    7,726
    
    
    
    6,232
    
    
    
    1,494
    
    
    
    24
    %Percentage of total revenues
    
    
    16
    %
    
    
    13
    %
    
    
    
    
    
    
    
    
    
    
    15
    %
    
    
    13
    %Asia Pacific and rest of the world
    
    
    865
    
    
    
    946
    
    
    
    (81
    )
    
    
    (9
    %)
    
    
    1,757
    
    
    
    1,651
    
    
    
    106
    
    
    
    6
    %Percentage of total revenues
    
    
    3
    %
    
    
    3
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    3
    %Total revenues
    
    $
    27,688
    
    
    $
    25,192
    
    
    $
    2,496
    
    
    
    10
    %
    
    $
    52,260
    
    
    $
    48,123
    
    
    $
    4,137
    
    
    
    9
    %
 Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    
    PercentRevenues by Product Category
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeInstruments
    
    $
    6,892
    
    
    $
    7,462
    
    
    $
    (570
    )
    
    
    (8
    %)
    
    $
    14,694
    
    
    $
    13,926
    
    
    $
    768
    
    
    
    6
    %Percentage of total revenues
    
    
    25
    %
    
    
    30
    %
    
    
    
    
    
    
    
    
    
    
    28
    %
    
    
    29
    %Reagent discs and kits
    
    
    18,734
    
    
    
    15,680
    
    
    
    3,054
    
    
    
    19
    %
    
    
    33,627
    
    
    
    29,939
    
    
    
    3,688
    
    
    
    12
    %Percentage of total revenues
    
    
    68
    %
    
    
    62
    %
    
    
    
    
    
    
    
    
    
    
    64
    %
    
    
    62
    %Other products
    
    
    1,317
    
    
    
    1,598
    
    
    
    (281
    )
    
    
    (18
    %)
    
    
    2,427
    
    
    
    3,335
    
    
    
    (908
    )
    
    
    (27
    %)Percentage of total revenues
    
    
    4
    %
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    5
    %
    
    
    7
    %Product sales, net
    
    
    26,943
    
    
    
    24,740
    
    
    
    2,203
    
    
    
    9
    %
    
    
    50,748
    
    
    
    47,200
    
    
    
    3,548
    
    
    
    8
    %Percentage of total revenues
    
    
    97
    %
    
    
    98
    %
    
    
    
    
    
    
    
    
    
    
    97
    %
    
    
    98
    %Development and licensing revenue
    
    
    745
    
    
    
    452
    
    
    
    293
    
    
    
    65
    %
    
    
    1,512
    
    
    
    923
    
    
    
    589
    
    
    
    64
    %Percentage of total revenues
    
    
    3
    %
    
    
    2
    %
    
    
    
    
    
    
    
    
    
    
    3
    %
    
    
    2
    %Total revenues
    
    $
    27,688
    
    
    $
    25,192
    
    
    $
    2,496
    
    
    
    10
    %
    
    $
    52,260
    
    
    $
    48,123
    
    
    $
    4,137
    
    
    
    9
    %
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
 North America .
 Instruments.
    Reagent discs and kits.
   21




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##### Table of Contents



Other products.
 Development and licensing. ®
 Significant concentration.
 Europe .
 Instruments.
    Reagent discs and kits.
    Other products.
 Asia Pacific and rest of the world .
 Instruments.
     22




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Reagent discs and kits.
    Other products.
 Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007
 North America .
 Instruments.
    Reagent discs and kits.
    Other products.
 Development and licensing. ®
 Significant concentration.
  23




---



##### Table of Contents



Europe .
 Instruments.
    Reagent discs and kits.
    Other products.
 Asia Pacific and rest of the world .
 Instruments.
    Reagent discs and kits.
    Other products.
  24




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##### Table of Contents



Segment Results
 Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007
  Three Months EndedSeptember 30,
    
    
    ChangePercent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/
    
    
    Percent2008
    
    
    Revenues(1)
    
    
    2007
    
    
    Revenues(1)
    
    
    (Decrease)
    
    
    ChangeRevenues:Medical Market
    
    $
    6,015
    
    
    
    100
    %
    
    $
    5,643
    
    
    
    100
    %
    
    $
    372
    
    
    
    7
    %Percentage of total revenues
    
    
    22
    %
    
    
    
    
    
    
    22
    %Veterinary Market
    
    
    19,945
    
    
    
    100
    %
    
    
    17,989
    
    
    
    100
    %
    
    
    1,956
    
    
    
    11
    %Percentage of total revenues
    
    
    72
    %
    
    
    
    
    
    
    72
    %Other(2)
    
    
    1,728
    
    
    
    
    
    
    
    1,560
    
    
    
    
    
    
    
    168
    
    
    
    11
    %Percentage of total revenues
    
    
    6
    %
    
    
    
    
    
    
    6
    %Total revenues
    
    
    27,688
    
    
    
    
    
    
    
    25,192
    
    
    
    
    
    
    
    2,496
    
    
    
    10
    %Cost of revenues:Medical Market
    
    
    2,775
    
    
    
    46
    %
    
    
    2,805
    
    
    
    50
    %
    
    
    (30
    )
    
    
    (1
    %)Veterinary Market
    
    
    8,020
    
    
    
    40
    %
    
    
    7,889
    
    
    
    44
    %
    
    
    131
    
    
    
    2
    %Other(2)
    
    
    1,551
    
    
    
    
    
    
    
    641
    
    
    
    
    
    
    
    910
    
    
    
    142
    %Total cost of revenues
    
    
    12,346
    
    
    
    
    
    
    
    11,335
    
    
    
    
    
    
    
    1,011
    
    
    
    9
    %Gross profit:Medical Market
    
    
    3,240
    
    
    
    54
    %
    
    
    2,838
    
    
    
    50
    %
    
    
    402
    
    
    
    14
    %Veterinary Market
    
    
    11,925
    
    
    
    60
    %
    
    
    10,100
    
    
    
    56
    %
    
    
    1,825
    
    
    
    18
    %Other(2)
    
    
    177
    
    
    
    
    
    
    
    919
    
    
    
    
    
    
    
    (742
    )
    
    
    (81
    %)Gross profit
    
    $
    15,342
    
    
    
    
    
    
    $
    13,857
    
    
    
    
    
    
    $
    1,485
    
    
    
    11
    %
 
 (1)
    
    The percentages reported are based on revenues by operating segment.(2)
    
    Represents unallocated items, not specifically identified to any particular business segment. Medical Market
 Revenues for Medical Market Segment
  Instruments.
 Reagent discs.
 Gross Profit for Medical Market Segment
   25




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##### Table of Contents



Veterinary Market
 Revenues for Veterinary Market Segment
  Instruments.
   Reagent discs and kits.
   Gross Profit for Veterinary Market Segment
   26




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##### Table of Contents



Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007
  Six Months EndedSeptember 30,
    
    
    ChangePercent of
    
    
    
    
    
    
    Percent of
    
    
    Increase/
    
    
    Percent2008
    
    
    Revenues(1)
    
    
    2007
    
    
    Revenues(1)
    
    
    (Decrease)
    
    
    ChangeRevenues:Medical Market
    
    $
    12,544
    
    
    
    100
    %
    
    $
    10,450
    
    
    
    100
    %
    
    $
    2,094
    
    
    
    20
    %Percentage of total revenues
    
    
    24
    %
    
    
    
    
    
    
    22
    %Veterinary Market
    
    
    36,558
    
    
    
    100
    %
    
    
    34,425
    
    
    
    100
    %
    
    
    2,133
    
    
    
    6
    %Percentage of total revenues
    
    
    70
    %
    
    
    
    
    
    
    72
    %Other(2)
    
    
    3,158
    
    
    
    
    
    
    
    3,248
    
    
    
    
    
    
    
    (90
    )
    
    
    (3
    %)Percentage of total revenues
    
    
    6
    %
    
    
    
    
    
    
    6
    %Total revenues
    
    
    52,260
    
    
    
    
    
    
    
    48,123
    
    
    
    
    
    
    
    4,137
    
    
    
    9
    %Cost of revenues:Medical Market
    
    
    5,808
    
    
    
    46
    %
    
    
    5,248
    
    
    
    50
    %
    
    
    560
    
    
    
    11
    %Veterinary Market
    
    
    14,847
    
    
    
    41
    %
    
    
    14,848
    
    
    
    43
    %
    
    
    (1
    )
    
    
    <(1
    %)Other(2)
    
    
    2,760
    
    
    
    
    
    
    
    1,154
    
    
    
    
    
    
    
    1,606
    
    
    
    139
    %Total cost of revenues
    
    
    23,415
    
    
    
    
    
    
    
    21,250
    
    
    
    
    
    
    
    2,165
    
    
    
    10
    %Gross profit:Medical Market
    
    
    6,736
    
    
    
    54
    %
    
    
    5,202
    
    
    
    50
    %
    
    
    1,534
    
    
    
    29
    %Veterinary Market
    
    
    21,711
    
    
    
    59
    %
    
    
    19,577
    
    
    
    57
    %
    
    
    2,134
    
    
    
    11
    %Other(2)
    
    
    398
    
    
    
    
    
    
    
    2,094
    
    
    
    
    
    
    
    (1,696
    )
    
    
    (81
    %)Gross profit
    
    $
    28,845
    
    
    
    
    
    
    $
    26,873
    
    
    
    
    
    
    $
    1,972
    
    
    
    7
    %
 
 (1)
    
    The percentages reported are based on revenues by operating segment.(2)
    
    Represents unallocated items, not specifically identified to any particular business segment. Medical Market
 Revenues for Medical Market Segment
  Instruments.
 Reagent discs.
 Gross Profit for Medical Market Segment
   27




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##### Table of Contents



Veterinary Market
 Revenues for Veterinary Market Segment
  Instruments.
   Reagent discs and kits.
   Gross Profit for Veterinary Market Segment
  Cost of Revenues
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    ChangeCost of revenues
    
    $
    12,346
    
    
    $
    11,335
    
    
    $
    1,011
    
    
    
    9
    %
    
    $
    23,415
    
    
    $
    21,250
    
    
    $
    2,165
    
    
    10
    %Percentage of total revenues
    
    
    45
    %
    
    
    45
    %
    
    
    
    
    
    
    
    
    
    
    45
    %
    
    
    44
    %
  28




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##### Table of Contents



Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
   Operating Expenses
 Research and Development
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeResearch and development
expenses
    
    $
    2,082
    
    
    $
    1,822
    
    
    $
    260
    
    
    
    14
    %
    
    $
    4,079
    
    
    $
    3,475
    
    
    $
    604
    
    
    
    17
    %Percentage of total revenues
    
    
    8
    %
    
    
    7
    %
    
    
    
    
    
    
    
    
    
    
    8
    %
    
    
    7
    %
  Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
   Sales and Marketing
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeSales and marketing expenses
    
    $
    6,494
    
    
    $
    6,381
    
    
    $
    113
    
    
    
    2
    %
    
    $
    12,321
    
    
    $
    11,610
    
    
    $
    711
    
    
    
    6
    %Percentage of total revenues
    
    
    23
    %
    
    
    25
    %
    
    
    
    
    
    
    
    
    
    
    24
    %
    
    
    24
    %
  29




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Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
  General and Administrative
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeGeneral and administrative expenses
    
    $
    1,952
    
    
    $
    1,538
    
    
    $
    414
    
    
    
    27
    %
    
    $
    3,614
    
    
    $
    3,189
    
    
    $
    425
    
    
    
    13
    %Percentage of total revenues
    
    
    7
    %
    
    
    6
    %
    
    
    
    
    
    
    
    
    
    
    7
    %
    
    
    7
    %
  Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
  Interest and Other Income (Expense), Net
  Three Months Ended
    
    
    
    
    
    
    
    
    
    
    Six Months EndedSeptember 30,
    
    
    Change
    
    
    September 30,
    
    
    ChangeIncrease/
    
    
    Percent
    
    
    
    
    
    
    
    
    
    
    Increase/
    
    
    Percent2008
    
    
    2007
    
    
    (Decrease)
    
    
    Change
    
    
    2008
    
    
    2007
    
    
    (Decrease)
    
    
    ChangeInterest and other income (expense), net
    
    $
    326
    
    
    $
    529
    
    
    $
    (203
    )
    
    
    (38
    )%
    
    $
    788
    
    
    $
    1,028
    
    
    $
    (240
    )
    
    
    (23
    )%
  Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
  Income Tax Provision
  Three Months Ended
    
    
    Six Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Income tax provision
    
    $
    1,843
    
    
    $
    1,757
    
    
    $
    3,546
    
    
    $
    3,641Effective tax rate
    
    
    36
    %
    
    
    38
    %
    
    
    37
    %
    
    
    38
    %
  30




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Three and Six Months Ended September 30, 2008 Compared to Three and Six Months Ended September 30,
2007
   LIQUIDITY AND CAPITAL RESOURCES
  September 30,
    
    
    March 31,2008
    
    
    2008Cash and cash equivalents
    
    $
    34,572
    
    
    $
    17,219Short-term investments
    
    
    34,998
    
    
    
    6,991Long-term investments
    
    
    
    
    
    
    35,463Total cash, cash equivalents and investments
    
    $
    69,570
    
    
    $
    59,673Percentage of total assets
    
    
    53
    %
    
    
    49
    %
 Cash Flow Changes
  Six Months EndedSeptember 30,2008
    
    
    2007Net cash provided by operating activities
    
    $
    6,706
    
    
    $
    6,546Net cash provided by (used in) investing activities
    
    
    7,496
    
    
    
    (7,563
    )Net cash provided by financing activities
    
    
    3,151
    
    
    
    1,654Net increase in cash and cash equivalents
    
    $
    17,353
    
    
    $
    637
  Operating Activities
       31




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Investing Activities
  Investments.
 Property and Equipment.
 Financing Activities
  Line of Credit
   32




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
    
    We must have a minimum net income of $25,000 before preferred stock dividends and accretion
on preferred stock 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 required to be profitable, as defined, on a fiscal year to date basis beginning,
with respect to the current fiscal year, with the six month period ended September 30, 2008
and to have net income before preferred stock dividends and accretion on preferred stock of at
least $1.2 million for the fiscal year ending March 31, 2009.
    
    We are required to comply with certain financial covenants as follows:
 Financial Covenants
    
    RequirementsQuick ratio, as defined
    
    Not less than 2.00 to 1.00Cash flow coverage, as defined
    
    Not less than 1.25 to 1.00Debt to net worth ratio, as defined
    
    Not greater than 1.00 to 1.00Tangible effective net worth, as defined
    
    Not less than $25.7 million
  Purchase Commitments
  Contingencies
  Off-Balance Sheet Arrangements
  Financial Condition
  RECENT ACCOUNTING PRONOUNCEMENTS
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
     33




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Foreign Currency Rate Fluctuations
     
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   34




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Changes in Internal Control over Financial Reporting
   Inherent Limitations on Controls and Procedures
  
 Item 4T. Controls and Procedures
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 RISK FACTORS THAT MAY AFFECT OUR PERFORMANCE
    We are not able to predict sales in future quarters and a number of factors affect our periodic
results, which makes our quarterly operating results less predictable.
   35




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
    
    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 blood chemistry analyzers and our reagent disc
products;
    
    the amount we spend on research and development; and
    
    changes in our strategy.
 We would fail to achieve anticipated revenue if the market does not accept our products.
    We could fail to achieve anticipated revenue if problems related to the manufacture of our new
blood chemistry analyzers are not resolved.
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We have invested a significant portion of our cash in auction rate securities, the market for which
is currently illiquid. Funds associated with certain of our auction rate securities may not be
accessible for an undetermined period of time and our auction rate securities may experience an
other than temporary decline in value, which would adversely affect our statement of operations.
   We rely on patents and other proprietary information, the loss of which would negatively affect our
business.
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We must increase sales of our Piccolo and VetScan products or we may not be able to maintain
profitability.
  
    
    continue to improve our existing products and develop new and innovative products;
    
    increase our sales and marketing activities;
    
    effectively manage our manufacturing activities; and
    
    effectively compete against current and future competitors.
  We must continue to develop our sales, marketing and distribution experience in the human
diagnostic market or our business will not grow.
  
    
    we will be able to establish and maintain effective distribution arrangements in the human
diagnostic market;
    
    any distribution arrangements that we are able to establish will be successful in marketing
our products; or
    
    the costs associated with sales, marketing and distributing our products will not be
excessive.
  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 to
pay material uninsured claims.
    38




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We must effectively train and integrate the members of our sales team in order to achieve our
anticipated revenue or expand our business.
  We need to successfully manufacture and market additional reagent discs for the human diagnostic
market if we are to compete in that market.
  We rely primarily on distributors to sell our products and we rely on sole distributor arrangements
in a number of countries. Our failure to successfully develop and maintain these relationships
could adversely affect our business.
      39




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We depend on limited or sole suppliers for several key components in our products, many of whom we
have not entered into contractual relationships with and failure of our suppliers to provide the
components to us could harm our business.
  
    
    Reagent Discs:Two injection-molding manufacturers, C. Brewer & Co. and Nypro, 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 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 stand-alone products: 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., Toyobo Specialties (formerly Shinko American Inc.) and Sigma Aldrich Inc.
    
    Blood Chemistry Analyzer Components:Our blood analyzer products use several
technologically-advanced components that we currently purchase from a limited number of
vendors, including components from Hamamatsu Corporation and PerkinElmer, Inc. and components
from a single-source supplier, UDT Sensors (a division of OSI Optoelectronics). Our analyzers
also use a printer that is primarily made by Seiko North America Corporation. The loss of the
supply of any of these components could force us to redesign our blood chemistry analyzers.
    
    Hematology Instruments and Reagents:Our hematology instruments are manufactured by
Diatron Messtechnik GmbH in Hungary and are purchased by us as a completed instrument. In
addition, to date, we have qualified only three suppliers to produce the reagents for our
hematology instruments: Clinical Diagnostic Solutions, Inc., Diatron and Mallinckrodt Baker
BV.
   We may not be able to compete effectively with larger, more established entities or their products,
or with future organizations or future products, which could cause our sales to decline.
  
    
    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 (a listing of our competitors is listed below).
  40




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##### Table of Contents




    
    range of tests offered;
    
    immediacy of results;
    
    cost effectiveness;
    
    ease of use; and
    
    reliability of results.
   Changes in third-party payor reimbursement regulations can negatively affect our business.
  We are subject to numerous governmental regulations and regulatory changes are difficult to predict
and may be damaging to our business.
 Need for FDA Certification for Our Medical Device Products
    41




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##### Table of Contents



Need to Comply with Manufacturing Regulations
  
    
    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
manufacturing facility in Union City, California.
    
    In May 2002, we received our ISO 9001 certification, expanding our compliance with
international quality standards.
    
    In December 2003, we received ISO 13485 Quality System certification as required by the
2003 European In Vitro Device Directive. This certified our quality system specifically to
medical devices.
    
    In both March 2003 and September 2005, the FDA conducted a facility inspection and verified
our compliance with the 21 CFR 820 Regulation.
    
    In November 2006, we received our recertification to the ISO 13485:2003 Quality System
Standard for medical devices.
    
    In August 2008, the FDA conducted an additional facility inspection to verify our
compliance with 21 CFR 820 Regulation.
  Effects of the Clinical Laboratory Improvement Amendments on Our Products
  
    
    waived;
    
    moderately complex; and
    
    highly complex.
    42




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##### Table of Contents



Need to Comply with Various Federal, State, Local and International Regulations
  
    
    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 2003 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 2003 European In Vitro Device Directive.
    
    In September 2005, we received the Canadian Medical Device Conformity Assessment System
stamp on our ISO 13485 certificate to signify compliance with Health Canada regulations.
    
    In March 2006, we received our certification to the 2003 version of the ISO 13485 Quality
System Standard for medical devices.
    
    In November 2006, we received our recertification to the ISO 13485:2003 Quality System
Standard for medical devices.
   We have incurred and may continue to incur, in future periods, significant share-based compensation
charges under SFAS No. 123(R), which may adversely affect our reported financial results.
  We depend on key members of our management and scientific staff and, if we fail to retain and
recruit qualified individuals, our ability to execute our business strategy and generate sales
would be harmed.
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##### Table of Contents



We are subject to increasingly complex requirements from recent legislation requiring companies to
evaluate internal control over financial reporting.
   We may need additional funding in the future and these funds may not be available to us.
   
    
    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.
  We must comply with strict and potentially costly environmental regulations or we could pay
significant fines.
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##### Table of Contents



Our facilities and manufacturing operations are vulnerable to natural disasters and other
unexpected losses; system failures or delays may harm our business.
   Fluctuations in foreign exchange rates and the possible lack of financial stability in foreign
countries could prevent overseas sales growth.
  Our operating results could be materially affected by unanticipated changes in our tax provisions
or exposure to additional income tax liabilities.
  Our stock price is highly volatile and investing in our stock involves a high degree of risk, which
could result in substantial losses for investors.
  
    
    fluctuation in our operating results;
    
    announcements of technological innovations or new commercial products by us or our
competitors;
    
    changes in governmental regulation in the United States and internationally;
    
    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 our patents or our other proprietary rights;
    
    product liability claims and public concern as to the safety of our devices or similar
devices developed by our competitors; and
    
    general market conditions.
  45




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##### Table of Contents



Our shareholders rights plan and our ability to issue preferred stock may delay or prevent a change
of control of Abaxis.
   
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 Exhibit No.
    
    Description of Document3.1
    
    
    Restated Articles of Incorporation (Filed with the Securities and Exchange Commission as an
exhibit with our Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.)3.2
    
    
    By-laws (Filed with the Securities and Exchange Commission in our Registration Statement No.
33-44326 on December 11, 1991 and incorporated herein by reference.)3.3
    
    
    Amendment to the By-laws (Filed with the Securities and Exchange Commission as an exhibit with
our Current Report on Form 8-K on July 30, 2007 and incorporated herein by reference.)4.1
    
    
    Registration Rights Agreement, dated as of March 29, 2002 (Filed with the Securities and Exchange
Commission as an exhibit with our Current Report on Form 8-K on May 13, 2002 and incorporated
herein by reference.)4.2
    
    
    Reference is made to Exhibit 3.1, Exhibit 3.2 and Exhibit 3.3.31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    #
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    #
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 #
    
    This certification accompanies this Quarterly Report on Form 10-Q. The certification is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of Abaxis, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such
filing.  46




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##### Table of Contents



SIGNATURES
  ABAXIS, INC.(Registrant)Date: November 10, 2008
BY:

    /s/ Clinton H. SeversonClinton H. SeversonPresident, Chief Executive Officer and Director
(Principal Executive Officer) Date: November 10, 2008
    BY:
 
    /s/ Alberto R. Santa InesAlberto R. Santa InesChief Financial Officer and Vice President of Finance

(Principal Financial and Accounting Officer)  47




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description of Document3.1
    
    
    Restated Articles of Incorporation (Filed with the Securities and Exchange Commission as an
exhibit with our Annual Report on Form 10-K for the fiscal year ended March 31, 1993 and
incorporated herein by reference.)3.2
    
    
    By-laws (Filed with the Securities and Exchange Commission in our Registration Statement No.
33-44326 on December 11, 1991 and incorporated herein by reference.)3.3
    
    
    Amendment to the By-laws (Filed with the Securities and Exchange Commission as an exhibit with
our Current Report on Form 8-K on July 30, 2007 and incorporated herein by reference.)4.1
    
    
    Registration Rights Agreement, dated as of March 29, 2002 (Filed with the Securities and Exchange
Commission as an exhibit with our Current Report on Form 8-K on May 13, 2002 and incorporated
herein by reference.)4.2
    
    
    Reference is made to Exhibit 3.1, Exhibit 3.2 and Exhibit 3.3.31.1
    
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    #
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    #
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 #
    
    This certification accompanies this Quarterly Report on Form 10-Q. The certification is not deemed filed with the
Securities and Exchange Commission and is not to be incorporated by reference into any filing of Abaxis, Inc. under the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date of this Quarterly Report on Form 10-Q and irrespective of any general incorporation language contained in any such
filing.  48