**UNITED
        STATES SECURITIES 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, 2007**
 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 such 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 a
        large accelerated filer, an accelerated filer, or a non-accelerated filer.
        See
        definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
        the Exchange Act. (Check one):
  Large
        accelerated filer o   Accelerated
        filer x   Non-accelerated
        filer o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
  Yes o  No x
  As
        of
        February 6, 2008, there were 21,674,000 shares of the Registrant’s common stock
        outstanding.
  1
   **ABAXIS,
        INC.**
 **Form
        10-Q**
 **For
        the Quarter Ended December 31, 2007**
 
 **TABLE
        OF CONTENTS**
 
 Page**PART
                  I. FINANCIAL INFORMATION**
              ****Item
                  1.
              Condensed
                  Financial Statements (Unaudited):Condensed
                  Statements of Operations for the Three andNineMonths
                  EndedDecember31,
                  2007 and 2006
              3Condensed
                  Balance Sheets as of December 31, 2007 and March 31, 2007
              4Condensed
                  Statements of Cash Flows for the Nine Months Ended December 31,
                  2007 and
                  2006
              5Notes
                  to the Unaudited Condensed Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of Operations
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              29Item
                  4.
              Controls
                  and Procedures
              29**PART
                  II. OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              30Item
                  1A.
              Risk
                  Factors
              30Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              39Item
                  3.
              Defaults
                  Upon Senior Securities
              39Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              40Item
                  5.
              Other
                  Information
              40Item
                  6.
              Exhibits
              40**SIGNATURES**
              41
   2
  **PART
        I. FINANCIAL INFORMATION**
  **Item
        1. Condensed Financial Statements (Unaudited)**
  **ABAXIS,
        INC.**
 **CONDENSED
        STATEMENTS OF OPERATIONS**
 **(Unaudited)**
  **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Revenues
                
                $
                25,690,000
                
                $
                22,018,000
                
                $
                73,813,000
                
                $
                63,413,000Cost
                    of revenues
                
                
                12,081,000
                
                
                10,439,000
                
                
                33,331,000
                
                
                28,839,000Gross
                    profit
                
                
                13,609,000
                
                
                11,579,000
                
                
                40,482,000
                
                
                34,574,000Operating
                    expenses:Research
                    and development
                
                
                1,629,000
                
                
                1,495,000
                
                
                5,104,000
                
                
                4,731,000Sales
                    and marketing
                
                
                6,056,000
                
                
                5,302,000
                
                
                17,666,000
                
                
                15,306,000General
                    and administrative
                
                
                1,571,000
                
                
                1,262,000
                
                
                4,760,000
                
                
                4,232,000Total
                    operating expenses
                
                
                9,256,000
                
                
                8,059,000
                
                
                27,530,000
                
                
                24,269,000Income
                    from operations
                
                
                4,353,000
                
                
                3,520,000
                
                
                12,952,000
                
                
                10,305,000Interest
                    and other income (expense), net
                
                
                552,000
                
                
                491,000
                
                
                1,580,000
                
                
                1,194,000Income
                    before income taxes
                
                
                4,905,000
                
                
                4,011,000
                
                
                14,532,000
                
                
                11,499,000Income
                    tax provision
                
                
                1,700,000
                
                
                1,235,000
                
                
                5,341,000
                
                
                4,208,000Net
                    income
                
                $
                3,205,000
                
                $
                2,776,000
                
                $
                9,191,000
                
                $
                7,291,000Net
                    income per share:Basic
                    net income per share
                
                $
                0.15
                
                $
                0.13
                
                $
                0.43
                
                $
                0.35Diluted
                    net income per share
                
                $
                0.14
                
                $
                0.13
                
                $
                0.41
                
                $
                0.33Shares
                    used in the calculation of net income per share:Weighted
                    average common shares outstanding - basic
                
                
                21,561,000
                
                
                20,766,000
                
                
                21,441,000
                
                
                20,547,000Weighted
                    average common shares outstanding - diluted
                
                
                22,359,000
                
                
                21,939,000
                
                
                22,208,000
                
                
                21,871,000Share-based
                    compensation expense by function:Cost
                    of revenues
                
                $
                33,000
                
                $
                26,000
                
                $
                88,000
                
                $
                52,000Research
                    and development
                
                
                39,000
                
                
                32,000
                
                
                110,000
                
                
                90,000Sales
                    and marketing
                
                
                91,000
                
                
                75,000
                
                
                259,000
                
                
                228,000General
                    and administrative
                
                
                122,000
                
                
                85,000
                
                
                374,000
                
                
                235,000Total
                    share-based compensation expense
                
                $
                285,000
                
                $
                218,000
                
                $
                831,000
                
                $
                605,000
 See accompanying Notes
        to
        the Unaudited Condensed Financial Statements.
  3
   **ABAXIS,
        INC.**
 **CONDENSED
        BALANCE SHEETS**
 **(Unaudited)**
  **December
                    31,**
                
                **March
                    31,****2007**
                
                **2007****ASSETS**Current
                    assets:Cash
                    and cash equivalents
                
                $
                11,792,000
                
                $
                10,183,000Short-term
                    investments
                
                
                43,966,000
                
                
                35,028,000Trade
                    receivables (net of allowances of $204,000 at December 31, 2007
                    and
                    $542,000 atMarch
                    31, 2007)
                
                
                20,862,000
                
                
                16,929,000Inventories,
                    net
                
                
                18,020,000
                
                
                14,813,000Prepaid
                    expenses
                
                
                677,000
                
                
                1,321,000Net
                    deferred tax asset - current
                
                
                4,133,000
                
                
                8,979,000Total
                    current assets
                
                
                99,450,000
                
                
                87,253,000Property
                    and equipment, net
                
                
                13,982,000
                
                
                12,662,000Intangible
                    assets, net
                
                
                394,000
                
                
                450,000Other
                    assets
                
                
                19,000
                
                
                38,000Net
                    deferred tax asset - non-current
                
                
                2,469,000
                
                
                2,312,000Total
                    assets
                
                $
                116,314,000
                
                $
                102,715,000**LIABILITIES
                    AND SHAREHOLDERS’ EQUITY**Current
                    liabilities:Accounts
                    payable
                
                $
                7,047,000
                
                $
                6,505,000Accrued
                    payroll and related expenses
                
                
                3,587,000
                
                
                3,830,000Other
                    accrued liabilities
                
                
                1,422,000
                
                
                1,169,000Deferred
                    revenue
                
                
                780,000
                
                
                917,000Warranty
                    reserve
                
                
                1,157,000
                
                
                315,000Total
                    current liabilities
                
                
                13,993,000
                
                
                12,736,000Non-current
                    liabilities:Deferred
                    rent
                
                
                320,000
                
                
                391,000Deferred
                    revenue
                
                
                1,210,000
                
                
                1,244,000Warranty
                    reserve
                
                
                496,000
                
                
                532,000Total
                    non-current liabilities
                
                
                2,026,000
                
                
                2,167,000Commitments
                    and contingencies (Note 7)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; 21,624,000
                    and
                    21,207,000 shares issued and outstandingat
                    December 31, 2007 and at March 31, 2007, respectively
                
                
                106,574,000
                
                
                103,282,000Accumulated
                    deficit
                
                
                (6,279,000
                )
                
                (15,470,000
                )Total
                    shareholders' equity
                
                
                100,295,000
                
                
                87,812,000Total
                    liabilities and shareholders' equity
                
                $
                116,314,000
                
                $
                102,715,000
  See
        accompanying Notes to the Unaudited Condensed Financial Statements.
   4
 **ABAXIS,
        INC.**
 **CONDENSED
        STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
  **Nine
                    Months Ended****December
                    31,****2007**
                
                **2006****Operating
                    activities:**Net
                    income
                
                $
                9,191,000
                
                $
                7,291,000Adjustments
                    to reconcile net income to net cash provided by operating
                    activities:Depreciation
                    and amortization
                
                
                2,563,000
                
                
                1,931,000Loss
                    on disposal of property and equipment
                
                
                2,000
                
                
                31,000Share-based
                    compensation expense
                
                
                831,000
                
                
                605,000Excess
                    tax benefits from share-based awards
                
                
                (270,000
                )
                
                -Common
                    stock issued for employee benefit plans
                
                
                -
                
                
                66,000Changes
                    in assets and liabilities:Trade
                    receivables, net
                
                
                (3,933,000
                )
                
                (903,000
                )Inventories,
                    net
                
                
                (4,501,000
                )
                
                (3,638,000
                )Prepaid
                    expenses
                
                
                914,000
                
                
                (1,132,000
                )Other
                    assets
                
                
                19,000
                
                
                31,000Net
                    deferred tax assets
                
                
                4,689,000
                
                
                3,895,000Accounts
                    payable
                
                
                542,000
                
                
                2,359,000Accrued
                    payroll and related expenses
                
                
                (243,000
                )
                
                (724,000
                )Other
                    accrued liabilities
                
                
                253,000
                
                
                577,000Deferred
                    rent
                
                
                (71,000
                )
                
                (63,000
                )Deferred
                    revenue
                
                
                (171,000
                )
                
                69,000Warranty
                    reserve
                
                
                806,000
                
                
                84,000Other
                    long-term liabilities
                
                
                -
                
                
                68,000Net
                    cash provided by operating activities
                
                
                10,621,000
                
                
                10,547,000**Investing
                    activities:**Purchases
                    of available-for-sale investments
                
                
                (20,575,000
                )
                
                (60,183,000
                )Purchases
                    of held-to-maturity investments
                
                
                (21,167,000
                )
                
                -Proceeds
                    from maturities of available-for-sale investments
                
                
                -
                
                
                53,532,000Proceeds
                    from maturities of held-to-maturity investments
                
                
                32,804,000
                
                
                -Purchases
                    of property and equipment
                
                
                (2,522,000
                )
                
                (2,355,000
                )Net
                    cash used in investing activities
                
                
                (11,460,000
                )
                
                (9,006,000
                )**Financing
                    activities:**Proceeds
                    from issuance of common stock under stock plans, net
                
                
                2,178,000
                
                
                3,212,000Proceeds
                    from exercises of warrants
                
                
                -
                
                
                86,000Excess
                    tax benefits from share-based awards
                
                
                270,000
                
                
                -Net
                    cash provided by financing activities
                
                
                2,448,000
                
                
                3,298,000Net
                    increase in cash and cash equivalents
                
                
                1,609,000
                
                
                4,839,000Cash
                    and cash equivalents at beginning of period
                
                
                10,183,000
                
                
                10,164,000Cash
                    and cash equivalents at end of period
                
                $
                11,792,000
                
                $
                15,003,000**Supplemental
                    disclosure of cash flow information:**Cash
                    paid for interest
                
                $
                4,000
                
                $
                4,000Cash
                    paid for income taxes, net of refunds
                
                $
                340,000
                
                $
                450,000**Supplemental
                    disclosure of non-cash information:**Change
                    in unrealized gains on short-term investments, net of tax
                
                $
                -
                
                $
                47,000Transfers
                    of equipment between inventory and property and equipment
                
                $
                1,307,000
                
                $
                1,496,000
 
  See
        accompanying Notes to the Unaudited Condensed Financial Statements.
  5
  **ABAXIS,
        INC.**
 **NOTES
        TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS**
  **NOTE
        1. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING
        POLICIES**
  **Description
        of Business.**  Abaxis,
        Inc. (the “Company”), incorporated in California in 1989, develops,
        manufactures, markets and sells portable blood analysis systems for use in
        the
        human or veterinary patient-care setting to provide clinicians with rapid
        blood
        constituent measurements.
  **Basis
        of Presentation** **.** The
        unaudited condensed financial statements included herein have been prepared
        by
        the Company pursuant to the rules and regulations of the Securities and Exchange
        Commission (the “SEC”). 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. The results for the three and nine month
        periods ended December 31, 2007 are not necessarily indicative of the results
        to
        be expected for the entire fiscal year ending March 31, 2008 or for any future
        period.
  These
        unaudited condensed financial statements should be read in conjunction with
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations and 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,
        2007.
  **Reclassifications.** Certain
        reclassifications have been made to prior periods’ financial statements to
        conform to the current period presentation. These reclassifications had no
        material impact on previously reported results of operations or financial
        position.
  **Use
        of Estimates in Preparation of Financial Statements.** The
        preparation of financial statements in accordance with accounting principles
        generally accepted in the United States of America, requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and disclosure of contingent assets and liabilities at the date
        of
        the financial statements and the reported amounts of revenues and expenses
        during the reporting period. Such management estimates include allowance
        for
        doubtful accounts, sales and other allowances, inventory reserves, income
        taxes,
        valuation allowance for net deferred tax assets, share-based compensation
        and
        warranty reserves. Actual results may differ from these estimates.
  **NOTE
        2. RECENT ACCOUNTING PRONOUNCEMENTS**
  **FIN
        48**
  Effective
        April 1, 2007, the Company adopted the provisions of Financial Accounting
        Standards Board (“FASB”) Interpretation 48, “Accounting for Uncertainty in
        Income Taxes - an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
        clarifies the accounting for uncertainty in income taxes recognized in an
        enterprise’s financial statements in accordance with FASB Statement No. 109 and
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of tax positions taken or expected
        to be
        taken in a tax return. FIN 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition. As a result of implementing FIN 48, the Company
        did
        not change the amount of unrecognized tax benefits related to tax positions
        taken in prior periods. The Company did not have any unrecognized tax benefits
        as of April 1, 2007, the date of adoption, or as of December 31, 2007. Upon
        adoption of FIN 48, the Company’s policy to include interest and penalties
        related to gross unrecognized tax benefits within its provision for income
        taxes
        did not change. For the three and nine months ended December 31, 2007, the
        Company did not recognize any interest and penalties related to unrecognized
        tax
        benefits. The Company files income tax returns in the United States federal
        jurisdiction and various states. The Company is not under examination for
        any of
        these jurisdictions.
  **SFAS
        No. 157**
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which clarifies
        the definition of fair value, establishes guidelines for measuring fair value
        and expands financial statement disclosures regarding fair value measurements.
        SFAS No. 157 will be effective for the Company on April 1, 2008. The Company
        is
        currently evaluating the impact of adopting SFAS No. 157 on its financial
        position, cash flows and results of operations.
  **SFAS
        No. 159**
  In
        February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
        permits entities to choose, at specified election dates, to measure eligible
        items at fair value (the “fair value option”). Unrealized gains and losses on
        instruments for which the fair value option has been elected are reported
        in
        earnings at each subsequent reporting period. SFAS No. 159 will be effective
        for
        the Company on April 1, 2008. The Company is currently evaluating the impact
        of
        adopting SFAS
        No.
        159 on its
        financial position, cash flows and results of operations.
  6
  **NOTE
        3** **.
        SHORT-TERM INVESTMENTS**
  As
        of
        December 31, 2007 and March 31, 2007, investments were classified as short-term
        investments. The contractual maturities for certificate
        of deposits, corporate debt securities and municipal bonds were
        less
        than one year. Auction
        rate securities with maturities beyond one year were classified as short-term
        investments, based on their highly liquid nature and due to the frequency
        with
        which the interest rate is reset.
  Short-term
        investments classified as available-for-sale are reported at fair value at
        the
        balance sheet date. Auction rate securities are recorded at amortized cost,
        which approximates fair market value due to their variable interest rates.
        Short-term investments classified as held-to-maturity are reported at amortized
        cost at the balance sheet date because the Company has both the intent and
        ability to hold the investments until they mature.
  The
        amortized cost, unrealized gains and market value of short-term investments
        were
        as follows:
 **December
                    31, 2007**
                
                **March
                    31, 2007****Amortized**
                
                **Unrealized**
                
                **Market**
                
                **Amortized**
                
                **Unrealized**
                
                **Market****Cost**
                
                **Gains**
                
                **Value**
                
                **Cost**
                
                **Gains**
                
                **Value**Available-for-sale:Auction
                    rate securities
                
                $
                36,975,000
                
                $
                -
                
                $
                36,975,000
                
                $
                16,400,000
                
                $
                -
                
                $
                16,400,000Total
                    available-for-sale
                
                
                36,975,000
                
                
                -
                
                
                36,975,000
                
                
                16,400,000
                
                
                -
                
                
                16,400,000Held-to-maturity:Corporate
                    debt securities
                
                
                -
                
                
                -
                
                
                -
                
                
                18,628,000
                
                
                -
                
                
                18,628,000Certificate
                    of deposits
                
                
                2,974,000
                
                
                -
                
                
                2,974,000
                
                
                -
                
                
                -
                
                
                -Municipal
                    bonds
                
                
                4,017,000
                
                
                -
                
                
                4,017,000
                
                
                -
                
                
                -
                
                
                -Total
                    held-to-maturity
                
                
                6,991,000
                
                
                -
                
                
                6,991,000
                
                
                18,628,000
                
                
                -
                
                
                18,628,000Total
                    short-term investments
                
                $
                43,966,000
                
                $
                -
                
                $
                43,966,000
                
                $
                35,028,000
                
                $
                -
                
                $
                35,028,000
  **NOTE** **4** **.
        INVENTORIES, NET**
  Inventories,
        net, include material, labor and overhead, and are stated at the lower of
        cost
        (first-in, first-out method) or market. Components of inventories, net, were
        as
        follows:
 **December
                    31,**
                
                **March
                    31,****2007**
                
                **2007**Raw
                    materials
                
                $
                8,337,000
                
                $
                7,974,000Work-in-process
                
                
                4,454,000
                
                
                3,203,000Finished
                    goods
                
                
                5,229,000
                
                
                3,636,000Inventories,
                    net
                
                $
                18,020,000
                
                $
                14,813,000
  **NOTE
        5.** **WARRANTY
        RESERVES**
  The
        Company provides for the estimated future costs to be incurred under the
        Company’s standard warranty obligation on its instruments. Starting on July 1,
        2007, the Company provides for the estimated future costs to be incurred
        under
        the Company’s warranty obligation on its reagent discs as part of warranty
        reserves. Prior to July 1, 2007, the Company maintained a provision for
        defective reagent discs as part of sales allowances.
  **Instruments.** Since
        the beginning of fiscal 2006, the Company’s standard warranty obligation on
        instruments is two years. The estimated contractual warranty obligation is
        recorded when the related revenue is recognized and any additional amount
        is
        recorded when such cost is probable and can be reasonably estimated. The
        estimated accrual for warranty exposure is based on historical experience,
        estimated product failure rates, material usage, freight incurred in repairing
        the instrument after failure and known design changes.
  **Reagent
        Discs.** Beginning
        on July 1, 2007, the Company recorded a provision for defective reagent discs
        when the related sale is recognized and any additional amount is recorded
        when
        such cost is probable and can be reasonably estimated. The warranty cost
        includes the replacement costs and freight of a defective reagent disc. Prior
        to
        July 1, 2007, the Company recorded a provision for defective reagent discs
        as
        part of sales allowances since the Company primarily issued a credit to
        customers for defective reagent discs. Starting
        on July 1, 2007, the
        provision for defective reagent discs is recorded as part of warranty reserves,
        since the Company replaces defective reagent discs rather than issue a credit
        to
        customers. To date, the change has not had a material impact on the Company’s
        financial statements and the Company believes the change will not have a
        material impact on the financial statements in the future.
  The
        Company evaluates its estimates for warranty reserves on an ongoing basis
        and
        believes it has the ability to reasonably estimate warranty costs. However,
        unforeseeable changes in factors may impact the estimate for warranty and
        such
        changes could cause a material change in the Company’s warranty reserve accrual
        in the period in which the change was identified.
  7
  The
        changes in the Company’s accrued warranty reserve during the three and nine
        months ended December 31, 2007 includes a provision for warranty costs and
        replacement costs for reagent discs. The change in the Company’s accrued
        warranty reserve during the three and nine months ended December 31, 2007
        and
        2006, was as follows:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Balance
                    at beginning of period
                
                $
                1,294,000
                
                $
                578,000
                
                $
                847,000
                
                $
                472,000Provision
                    for warranty expense
                
                
                625,000
                
                
                102,000
                
                
                1,499,000
                
                
                299,000Warranty
                    costs incurred
                
                
                (266,000
                )
                
                (52,000
                )
                
                (693,000
                )
                
                (143,000
                )Balance
                    at end of period
                
                
                1,653,000
                
                
                628,000
                
                
                1,653,000
                
                
                628,000Non-current
                    portion of warranty reserve
                
                
                496,000
                
                
                331,000
                
                
                496,000
                
                
                331,000Current
                    portion of warranty reserve
                
                $
                1,157,000
                
                $
                297,000
                
                $
                1,157,000
                
                $
                297,000
  **NOTE
        6. LINE OF CREDIT**
  The
        Company has 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 any 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, 2007, 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, 2007. At December 31, 2007, there was no amount
        outstanding under the Company’s line of credit. The weighted average interest
        rates on the line of credit during the three months ended December 31, 2007
        and
        2006 were 7.27% and 8.00%, respectively.
  The
        line
        of credit agreement contains certain financial covenants, which are evaluated
        on
        a quarterly basis. At December 31, 2007, the Company was in compliance with
        each
        of these covenants. Included in these financial covenants, among other
        stipulations, are the following requirements:
  ·
            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 the six month period ended September 30, 2007
                and to
                have net income before preferred stock dividends and accretion on
                preferred stock of at least $1,150,000 for the fiscal year ending
                March
                31, 2008.  ·
            The
                Company is required to comply with certain financial covenants as
                follows:  **Financial
                  Covenants**
              **Requirements**Quick
                  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 $25,731,000
  Borrowings
        under the line of credit are collateralized by the Company’s net book value of
        assets of $100.3 million at December 31, 2007, including its intellectual
        property.
  **NOTE
        7. COMMITMENTS AND CONTINGENCIES**
  **Purchase
        Commitments.** In
        November 2003, the Company entered into an original equipment manufacturing
        (“OEM”) agreement with Diatron Messtechnik GmbH (“Diatron”) of Austria to
        purchase Diatron hematology instruments. The Diatron hematology instruments
        are
        currently supplied by Diatron MI Kft. Under the terms of the OEM agreement,
        the
        Company became committed to purchase a minimum number of hematology instruments
        through fiscal 2009 from Diatron once the product was qualified for sale,
        which
        occurred in May 2004. In September 2006, the terms of the OEM agreement were
        revised with respect to the purchase commitments. Under the amended OEM
        agreement, the Company committed to purchase a minimum number of hematology
        instruments during fiscal 2008. During the three months ended December 31,
        2007,
        the Company completed all of its purchase commitment requirements with Diatron
        under the revised OEM agreement. Accordingly, there is no outstanding purchase
        commitment to Diatron at December 31, 2007.
  **Litigation.** The
        Company is involved from time to time in various litigation matters in the
        normal course of business. The Company does not believe that the ultimate
        resolution of these matters will have a material effect on its financial
        position or results of operations.
  8
  **NOTE
        8. SHARE-BASED COMPENSATION**
  On
        April
        1, 2006, the Company adopted the provisions of SFAS No. 123 (revised 2004),
        “Share-Based Payment” (“SFAS No. 123(R)”) using
        the modified prospective method. SFAS No. 123(R) requires the measurement
        and
        recognition of compensation expense for all share-based payment awards made
        to
        employees and directors, including stock options and restricted stock units
        based on their fair values, in the Company’s results of operations. The
        share-based compensation expense includes expense for unvested awards at
        March
        31, 2006 and all awards granted subsequent to March 31, 2006. Share-based
        compensation expense for the unvested awards outstanding at March 31, 2006
        is
        based on the grant-date fair value as used in calculating the pro forma
        disclosures in prior period financial statements in accordance with the
        provisions of SFAS No. 123, “Accounting for Stock-Based
        Compensation.”
  Prior
        to
        April 1, 2006, the Company accounted for share-based awards to employees
        and
        directors using the intrinsic value method supplemented by pro forma disclosures
        in accordance with Accounting Principles Board Opinion No. 25 “Accounting for
        Stock Issued to Employees” and other related guidance and, therefore, no
        employee compensation cost had been recognized for share-based awards in
        financial statements prior to April 1, 2006 because the Company issued stock
        options with an exercise price equal to the market value at the date of
        grant.
  Non-cash
        compensation expense recognized for share-based awards during the three months
        ended December 31, 2007 and 2006 was $285,000 and $218,000, respectively,
        and
        during the nine months ended December 31, 2007 and 2006 was $831,000 and
        $605,000, respectively. Capitalized share-based compensation cost at December
        31, 2007 and 2006 was $26,000 and $14,000, respectively, which was included
        in
        inventory on the Company’s balance sheet.
  Prior
        to
        adopting SFAS No. 123(R), the Company presented all tax benefits resulting
        from
        exercises of stock options as cash flows from operating activities in its
        Statements of Cash Flows. SFAS No. 123(R) requires cash flows resulting from
        excess tax benefits to be classified as a part of cash flows from financing
        activities. Excess tax benefits are realized tax benefits from tax deductions
        for exercised stock options and vested restricted stock units in excess of
        the
        deferred tax asset attributable to share-based compensation expense for such
        share-based awards. Excess
        tax benefits classified as a financing cash inflow for the three months ended
        December 31, 2007 and 2006 were $132,000 and $0, respectively, and for
        the
        nine months ended December 31, 2007 and 2006 were $270,000 and $0, respectively.
  **Equity
        Compensation Plans**
  The
        Company’s share-based compensation plans are described below.
  **2005
        Equity Incentive Plan.** The
        Company’s 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and
        amended the Company’s 1998 Stock Option Plan. The Equity Incentive Plan allows
        for the awards of stock options, stock appreciation rights, restricted stock
        awards, restricted stock units, performance shares, performance units, deferred
        compensation awards or other share-based awards to employees, directors and
        consultants. The Equity Incentive Plan provides for the issuance of a maximum
        of
        4,886,000 shares, of which 446,000 shares of common stock were available
        for
        future issuance as of December 31, 2007.
  Options
        granted to employees and directors generally expire ten years from the grant
        date. Options granted to employees generally become exercisable over a period
        of
        four years based on cliff-vesting terms and continuous employment. Options
        granted to non-employee directors generally become exercisable over a period
        of
        one year based on monthly vesting terms and continuous service. See the “Stock
        Options” section in this Note 8 for additional information.
  Restricted
        stock units awarded to employees generally vest over a period of four years
        and
        the awards may also be subject to accelerated vesting upon achieving certain
        performance-based milestones and continuous employment during the vesting
        period. Restricted stock units awarded to non-employee directors generally
        vest
        in full one year after the grant date based on continuous service. See the
        “Restricted Stock Units” section in this Note 8 for additional
        information.
  **1992
        Outside Directors’ Stock Option Plan.** Under
        the
        Company’s 1992 Outside Directors’ Stock Option Plan (the “Directors Plan”),
        options to purchase shares of common stock were automatically granted, annually,
        to non-employee directors. Options under the Directors Plan were nonqualified
        stock options and were granted at the fair market value on the date of grant
        and
        expired ten years from the date of grant. Options granted to non-employee
        directors generally become exercisable over a period of one year based on
        monthly vesting terms and continuous service .
        The
        Directors Plan provided for the issuance of a maximum of 250,000 shares.
        As of
        December 31, 2007, all outstanding options under the Directors Plan were
        fully
        vested and fully exercisable and no shares of common stock were available
        for
        future issuance because the time period for granting options expired in
        accordance with the terms of the Directors Plan in June 2002.
  The
        Company’s current practice is to issue new shares of common stock from its
        authorized shares for share-based awards.
  9
  **Stock
        Options**
  Prior
        to
        April 1, 2006, the Company granted stock options to employees, with an exercise
        price equal to the closing market price of the Company’s common stock on the
        date of grant and with cliff-vesting terms over four years, conditional on
        continuous employment with the Company. In addition, prior to April 1, 2006,
        the
        Company granted stock options to non-employee directors with an exercise
        price
        equal to the closing market price of the Company’s common stock on the date of
        grant and became exercisable over a period of one year based on monthly vesting
        terms, conditional on continuous service to the Company.
  The
        Company used the Black-Scholes option pricing model to determine the fair
        value
        of stock options granted prior to March 31, 2006. The fair value of each
        stock
        option granted was estimated on the date of the grant using the Black-Scholes
        option pricing model, based on a multiple option valuation approach, and
        forfeitures were recognized as they occurred. There were no stock options
        granted during fiscal 2007 or during the first nine months of fiscal 2008.
        As of December 31,
        2007,
        the total unrecognized compensation expense related to stock options granted
        amounted to $67,000, which is expected to be recognized over a weighted average
        period of 0.54 years.
  The
        following table summarizes information regarding options outstanding and
        options
        exercisable at December 31, 2007 and the changes during the nine-month period
        then ended:
 **Weighted**
                
                **Weighted****Average**
                
                **Average****Exercise**
                
                **Remaining**
                
                **Aggregate****Number
                    of**
                
                **Price**
                
                **Contractual**
                
                **Intrinsic****Shares**
                
                **Per
                    Share**
                
                **Life
                    (Years)**
                
                **Value**Outstanding
                    at March 31, 2007
                
                
                1,577,000
                
                $
                7.82Granted
                
                
                -
                
                
                -Exercised
                
                
                (401,000
                )
                
                5.70Canceled
                    or forfeited
                
                
                (50,000
                )
                
                20.71Outstanding
                    at December 31, 2007
                
                
                1,126,000
                
                $
                8.00
                
                
                4.05
                
                $
                31,360,000Vested
                    and expected to vest at December 31, 2007
                
                
                1,124,000
                
                $
                8.00
                
                
                4.04
                
                $
                31,307,000Exercisable
                    at December 31, 2007
                
                
                1,102,000
                
                $
                7.92
                
                
                3.99
                
                $
                30,801,000
  The
        aggregate intrinsic value in the table above represents the pre-tax intrinsic
        value, based on the Company’s closing stock price as of December 31, 2007, that
        would have been received by the option holders had all option holders exercised
        their stock options as of that date. Total intrinsic value of stock options
        exercised during the three months ended December 31, 2007 and 2006, was
        $4,257,000 and $1,190,000, respectively, and during the nine months ended
        December 31, 2007 and 2006, was $8,282,000 and $9,415,000, respectively.
        Cash
        proceeds from the exercise of stock options during the three months ended
        December 31, 2007 and 2006 were $663,000 and $352,000, respectively, and
        during
        the nine months ended December 31, 2007 and 2006 were $2,288,000 and $3,212,000,
        respectively.
  **Restricted
        Stock Units**
  The
        Company grants restricted stock unit awards to employees and directors as
        part
        of its share-based compensation program which began in fiscal 2007. The
        restricted stock unit awards entitle holders to receive shares of common
        stock
        at the end of a specified period of time. Vesting for restricted stock unit
        awards is based on continuous employment or service of the holder. Upon vesting,
        the equivalent number of common shares are typically issued net of tax
        withholdings. If the vesting conditions are not met, unvested restricted
        stock
        unit awards will be forfeited. Generally, the restricted stock unit awards
        vest
        according to one of the following time-based vesting schedules:
  ·
            *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.**  Certain
        restricted stock unit awards to employees may also be subject to accelerated
        vesting upon achieving certain performance-based milestones. Additionally,
        the
        Compensation Committee of the Company’s Board of Directors (the “Compensation
        Committee”), in its discretion, may provide in the event of a change in control
        for the acceleration of vesting and/or settlement of the restricted stock
        unit
        held by a participant upon such conditions and to such extent as determined
        by
        the Compensation Committee. The Board has adopted an executive change in
        control
        severance plan, which it may terminate or amend at any time, that provides
        that
        awards granted to executive officers will accelerate fully on a change of
        control. The vesting of non-employee director awards granted under the Equity
        Incentive Plan automatically will accelerate in full upon a change in control.
  The
        fair
        value of restricted stock unit awards used in the Company’s expense recognition
        method is measured based on the number of shares granted and the closing
        market
        price of the Company’s common stock on the date of grant. Such value is
        recognized as an expense over the corresponding requisite service period.
        The
        Company’s policy is to recognize the expense based on the vested portions of the
        awards. The share-based compensation expense is reduced for an estimate of
        the
        restricted stock unit awards that are expected to be forfeited. The forfeiture
        estimate is based on historical data and other factors, and compensation
        expense
        is adjusted for actual results. As of December 31, 2007, the total unrecognized
        compensation expense related to restricted stock unit awards granted amounted
        to
        $9,306,000, which is expected to be recognized over a weighted average period
        of
        2.83 years.
  10
  The
        following table summarizes restricted stock unit activity for the nine months
        ended December 31, 2007:
 **Weighted****Average****Number
                    of**
                
                **Grant
                    Date****Shares**
                
                **Fair
                    Value (1)**Unvested
                    at March 31, 2007
                
                
                295,000
                
                $
                24.66Granted
                
                
                263,000
                
                
                21.61Vested
                
                
                (22,000
                )
                
                25.06Forfeited
                
                
                (46,000
                )
                
                23.11Unvested
                    at December 31, 2007
                
                
                490,000
                
                $
                23.16
 
 (1)
        The
        weighted average grant date fair value of restricted stock units is based
        on the
        number of shares granted and the closing market price of the Company’s common
        stock on the date of grant.
  **NOTE
        9. 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 common shares outstanding
        during
        the period. Diluted net income per share is computed by dividing the 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 using
        the
        treasury stock method. Dilutive potential common shares outstanding include
        outstanding stock options, restricted stock units and warrants.
  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**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Numerator:Net
                    income
                
                $
                3,205,000
                
                $
                2,776,000
                
                $
                9,191,000
                
                $
                7,291,000Denominator:Weighted
                    average common shares outstanding - basic
                
                
                21,561,000
                
                
                20,766,000
                
                
                21,441,000
                
                
                20,547,000Weighted
                    average effect of dilutive securities:Stock
                    options
                
                
                707,000
                
                
                1,057,000
                
                
                720,000
                
                
                1,192,000Restricted
                    stock units
                
                
                91,000
                
                
                4,000
                
                
                43,000
                
                
                2,000Warrants
                
                
                -
                
                
                112,000
                
                
                4,000
                
                
                130,000Weighted
                    average common shares outstanding - diluted
                
                
                22,359,000
                
                
                21,939,000
                
                
                22,208,000
                
                
                21,871,000Net
                    income per share:Basic
                    net income per share
                
                $
                0.15
                
                $
                0.13
                
                $
                0.43
                
                $
                0.35Diluted
                    net income per share
                
                $
                0.14
                
                $
                0.13
                
                $
                0.41
                
                $
                0.33
  The
        Company excluded the following stock options and warrants from the computation
        of diluted weighted average shares outstanding because the exercise price
        of the
        stock options and warrants was greater than the average market price of the
        Company’s common stock during the period and, therefore, the inclusion of these
        stock options and warrants would be antidilutive to net income per
        share:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Weighted
                    average number of shares underlying antidilutive stock options and
                    warrants
                
                
                -
                
                
                223,000
                
                
                -
                
                
                222,000Weighted
                    average exercise price per share underlying antidilutive stock
                    options and
                    warrants
                
                $
                -
                
                $
                21.65
                
                $
                -
                
                $
                21.66
  The
        Company excluded the following restricted stock units from the computation
        of
        diluted weighted average shares outstanding because the inclusion of these
        awards would be antidilutive to net income per share:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Weighted
                    average number of shares underlying antidilutive restricted stock
                    units
                
                
                -
                
                
                294,000
                
                
                4,000
                
                
                195,000
   11
  **NOTE
        10. INCOME TAXES**
  The
        Company’s effective tax rate for the three months ended December
        31 ,
        2007
        and 200 6
        was 35%
        and 31%, respectively .
        The
        Company’s effective tax rate for both nine months ended December
        31 ,
        2007
        and 2006 was 37%. The increase in the effective tax rate for the three months
        ended December 31,
        2007,
        as compared to the three months ended December 31,
        2006,
        was primarily due to the retroactive extension of the federal research and
        development tax credit in the three months ended December 31, 2006, which
        temporarily expired during the first six months of September 30, 2006, partially
        offset by a change in the Company’s investment portfolio, resulting in a tax
        benefit in the three months ended December 31, 2007.
  **NOTE
        11. COMPREHENSIVE INCOME**
  The
        following is a summary of comprehensive income for the three and nine months
        ended December 31, 2007 and 2006:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Net
                    income
                
                $
                3,205,000
                
                $
                2,776,000
                
                $
                9,191,000
                
                $
                7,291,000Other
                    comprehensive income:Change
                    in unrealized gains on short-term investments, net of tax
                
                
                -
                
                
                (13,000
                )
                
                -
                
                
                47,000Comprehensive
                    income
                
                $
                3,205,000
                
                $
                2,763,000
                
                $
                9,191,000
                
                $
                7,338,000
  **NOTE
        12. SEGMENT REPORTING INFORMATION**
  Operating
        segments are defined as components of an enterprise about which separate
        financial information is available that is evaluated regularly by the chief
        operating decision maker, or decision making group, in deciding how to allocate
        resources and in assessing performance.
  The
        Company develops, manufactures, markets and sells portable blood analysis
        systems for use in the human or veterinary patient-care setting to provide
        clinicians with rapid blood constituent measurements. The Company identifies
        its
        reportable segments as those customer groups that represent more than 10%
        of the
        combined revenue or gross profit or loss of all reported operating segments.
        The
        Company manages its business on the basis of the following two reportable
        segments: (i) the medical market and (ii) the veterinary market, which are
        based
        on the products sold by market and customer group. Each reportable segment
        has
        similar manufacturing processes, technology and shared infrastructures. The
        accounting policies for segment reporting are the same as for the Company
        as a
        whole.
  **Medical
        Market**
  In
        the
        medical market reportable segment, the Company serves a worldwide customer
        group
        consisting of military installations (ships, field hospitals and mobile care
        units), physicians office practices across all specialties, urgent care and
        walk-in clinics (free-standing or hospital-connected), home care providers
        (national, regional or local), nursing homes, ambulance companies, oncology
        treatment clinics, hospital labs and draw stations. The products manufactured
        and sold in this segment primarily consist of Piccolo chemistry analyzers
        and
        medical reagent discs.
  **Veterinary
        Market**
  In
        the
        veterinary market reportable segment, the Company serves a worldwide customer
        group consisting of companion animal hospitals, animal clinics with mixed
        practices of small animals, birds and reptiles, equine and bovine practitioners,
        veterinary emergency clinics, veterinary referral hospitals, universities,
        government, pharmaceutical companies, biotechnology companies and private
        research laboratories. The products manufactured and sold in this segment
        primarily consist of VetScan chemistry analyzers, hematology analyzers,
        veterinary reagent discs and hematology reagent kits.
  The
        segment information for prior periods has been restated to conform to the
        current presentation of reportable segments for the three and nine months
        ended
        December 31, 2007 and 2006. The table below summarizes revenues, cost of
        revenues and gross profit from the two operating segments.
  12
   **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006****Revenues:**Medical
                    Market
                
                $
                6,005,000
                
                $
                4,656,000
                
                $
                16,455,000
                
                $
                12,506,000Veterinary
                    Market
                
                
                18,073,000
                
                
                16,312,000
                
                
                52,498,000
                
                
                47,013,000Unallocated
                    amounts
                
                
                1,612,000
                
                
                1,050,000
                
                
                4,860,000
                
                
                3,894,000Total
                    revenues
                
                
                25,690,000
                
                
                22,018,000
                
                
                73,813,000
                
                
                63,413,000**Cost
                    of revenues:**Medical
                    Market
                
                
                2,946,000
                
                
                2,280,000
                
                
                8,194,000
                
                
                6,088,000Veterinary
                    Market
                
                
                8,677,000
                
                
                7,643,000
                
                
                23,525,000
                
                
                21,330,000Unallocated
                    amounts
                
                
                458,000
                
                
                516,000
                
                
                1,612,000
                
                
                1,421,000Total
                    cost of revenues
                
                
                12,081,000
                
                
                10,439,000
                
                
                33,331,000
                
                
                28,839,000**Gross
                    profit:**Medical
                    Market
                
                
                3,059,000
                
                
                2,376,000
                
                
                8,261,000
                
                
                6,418,000Veterinary
                    Market
                
                
                9,396,000
                
                
                8,669,000
                
                
                28,973,000
                
                
                25,683,000Unallocated
                    amounts
                
                
                1,154,000
                
                
                534,000
                
                
                3,248,000
                
                
                2,473,000Gross
                    profit
                
                $
                13,609,000
                
                $
                11,579,000
                
                $
                40,482,000
                
                $
                34,574,000
  **NOTE
        13** **.
        REVENUES BY PRODUCT CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT
        CONCENTRATIONS**
  **Revenue
        Information**
  The
        following is a summary of revenues for each group of products and services
        provided by the Company:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****Revenues
                    by Product Category**
                
                **2007**
                
                **2006**
                
                **2007**
                
                **2006**Instruments
                
                $
                8,393,000
                
                $
                8,369,000
                
                $
                22,319,000
                
                $
                21,667,000Reagent
                    discs and kits
                
                
                15,305,000
                
                
                12,239,000
                
                
                45,244,000
                
                
                36,629,000Other
                    products
                
                
                1,462,000
                
                
                964,000
                
                
                4,797,000
                
                
                3,728,000Product
                    sales, net
                
                
                25,160,000
                
                
                21,572,000
                
                
                72,360,000
                
                
                62,024,000Development
                    and licensing revenues
                
                
                530,000
                
                
                446,000
                
                
                1,453,000
                
                
                1,389,000Total
                    revenues
                
                $
                25,690,000
                
                $
                22,018,000
                
                $
                73,813,000
                
                $
                63,413,000
  The
        following is a summary of revenues by geographic region based on customer
        location:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****Revenues
                    by Geographic Region**
                
                **2007**
                
                **2006**
                
                **2007**
                
                **2006**North
                    America
                
                $
                21,628,000
                
                $
                18,221,000
                
                $
                61,868,000
                
                $
                52,652,000Europe
                
                
                3,397,000
                
                
                2,781,000
                
                
                9,629,000
                
                
                7,543,000Asia
                    Pacific and rest of the world
                
                
                665,000
                
                
                1,016,000
                
                
                2,316,000
                
                
                3,218,000Total
                    revenues
                
                $
                25,690,000
                
                $
                22,018,000
                
                $
                73,813,000
                
                $
                63,413,000
  **Significant
        Concentrations**
  Revenues
        from significant customers as a percentage of total revenues were as
        follows:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****Geographical**
                
                **December
                    31,**
                
                **December
                    31,****Distributor**
                
                **Location**
                
                **2007**
                
                **2006**
                
                **2007**
                
                **2006**Walco
                    International, Inc., d/b/a DVM Resources
                
                
                United
                    States
                
                
                12
                %
                
                13
                %
                
                13
                %
                
                15
                %
  At
        December 31, 2007, one distributor in the United States accounted for 16%
        of the
        Company’s trade receivables. At December 31, 2006, two distributors in the
        United States accounted for 14% and 10%, respectively, of the Company’s trade
        receivables.
  13
  **Item
        2.****Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
  **FORWARD-LOOKING
        STATEMENTS**
  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 “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “future,” “intends,” “may,” “might,” “plans,”
“projects,” “will,” 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, in Part II, Item 1A of
        this
        report and in our most recent Annual Report on Form 10-K filed with the
        Securities and Exchange Commission, that could cause actual results to differ
        materially from historical results or those anticipated. Such risks and
        uncertainties include, but are not limited to, 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
        Abaxis’ 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. (“Abaxis,” “us” or “we”) was incorporated in California in 1989. Our
        principal offices are located at 3240 Whipple Road, Union City, California
        94587. Our telephone number is (510) 675-6500 and 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 Global
        Market under the symbol “ABAX.”
  We
        develop, manufacture, market and sell portable blood analysis systems for
        use in
        the human or veterinary patient-care setting to provide clinicians with rapid
        blood constituent measurements. Our primary product is a blood analysis system,
        consisting of a compact 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 14 tests on human patients and 13 tests on veterinary patients.
        We manufacture the system in our manufacturing facilities in Union City,
        California and we market our blood chemistry analyzers in both the medical
        market and in the veterinary market, as described below.
  ·
            Medical
                Market: We currently market the blood analysis system in the medical
                market under the name Piccolo xpressTM.
                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.  In
        September 2007, we introduced a veterinary hematology instrument under the
        name
        VetScan HM5. The VetScan HM5 offers a 22-parameter complete blood count (CBC)
        analysis, including a five-part cell counter specifically designed for
        veterinary applications. In May 2004, we introduced a veterinary hematology
        instrument that offers an 18-parameter CBC analysis, including a three-part
        white blood cell differential, marketed originally as the VetScan HMII, and
        is
        now referred to as the VetScan HM2 TM .
        We
        currently purchase the hematology instruments from Diatron MI Kft. of Budapest,
        Hungary. Through April 2004, we marketed a veterinary hematology instrument
        under the name VetScan HMT. We continue to support and service our current
        population of VetScan HM5, VetScan HM2, VetScan HMII and VetScan HMT hematology
        instruments.
  Our
        sales
        for any future periods are not predictable with a significant degree of
        certainty, and may depend on a number of factors outside of our control,
        including inventory or timing considerations by our distributors. We generally
        operate with a 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.
        In addition, 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 the sales volumes of our Piccolo and VetScan 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.
  14
  **CRITICAL
        ACCOUNTING POLICIES, ESTIMATES AND JUDGMENTS**
  Our
        financial statements are prepared in accordance with accounting principles
        generally accepted in the United States. The preparation of these financial
        statements requires management to make estimates and assumptions that affect
        the
        reported amounts of assets and liabilities at the date of the financial
        statements and revenues and expenses during the reporting period. On an on-going
        basis, we evaluate our estimates and the sensitivity of these estimates to
        deviations in the assumptions used in making them. We base our estimates
        on
        historical experience and on various other assumptions that are believed
        to be
        reasonable under the circumstances. However, there can be no assurance that
        our
        actual results will not differ from these estimates.
  We
        have
        identified the policies below as critical because they are not only important
        to
        understanding our financial condition and results of operations, but also
        because application and interpretation of these policies requires both judgment
        and estimates of matters that are inherently uncertain and unknown. Accordingly,
        actual results may differ materially from our estimates. The impact and any
        associated risks related to these policies on our business operations are
        discussed below. A more detailed discussion on the application of these and
        other accounting policies are included in our Annual Report on Form 10-K
        for the
        fiscal year ended March 31, 2007.
  **Revenue
        Recognition and Deferred Revenue.** Our
        primary customers are distributors and direct customers in both the medical
        and
        veterinary markets. Revenues from product sales, net of estimated sales
        allowances and rebates, are recognized when (i) evidence of an arrangement
        exists, (ii) upon shipment of the products to the customer, (iii) the sales
        price is fixed or determinable and (iv) collection of the resulting receivable
        is reasonably assured. Rights of return are not provided.
  We
        recognize revenue associated with extended maintenance agreements ratably
        over
        the life of the contract. Amounts collected in advance of revenue recognition
        are recorded as a current or non-current liability based on the time from
        the
        balance sheet date to the future date of revenue recognition.
  We
        provide incentives in the form of free goods or extended maintenance agreements
        to customers in connection with the sale of our instruments. Revenue from
        such
        sales is allocated separately to the instruments and incentives based on
        the
        relative fair value of each element. Revenue allocated to incentives is deferred
        until the goods are shipped to the customer or is recognized ratably over
        the
        life of the maintenance contract.
  We
        periodically offer trade-in programs to customers for trading in an existing
        instrument to purchase a new instrument and we will either provide incentives
        in
        the form of free goods or reduce the sales price of the instrument. These
        incentives in the form of free goods are recorded according to the policies
        described above.
  **Distributor
        and Customer Rebates.** We
        offer
        distributor pricing rebates and customer incentives from time to time. The
        distributor pricing rebates are offered to distributors upon meeting the
        sales
        volume requirements during a qualifying period. The distributor pricing rebates
        are recorded as a reduction to gross revenue during the qualifying period.
        Cash
        rebates are offered to customers who purchase specific instruments during
        a
        promotional period. The cash rebate is recorded as a reduction to gross revenue.
  **Sales
        and Other Allowances.** We
        estimate a provision for defective reagent discs as part of sales allowances
        when we issue credits to customers for defective reagent discs. We also
        establish, upon shipment of our products to distributors, a provision for
        potentially defective reagent discs, based on historical experience. The
        provision for potentially defective reagent discs was recorded in sales
        allowances, using internal data available to estimate the level of inventory
        in
        the distribution channel, the lag time for customers to report defective
        reagent
        discs and the historical experience of defective reagent discs. Starting
        on July
        1, 2007, the provision for potentially defective reagent discs is now recorded
        as part of warranty reserves, instead of sales allowances, since we replace
        defective reagent discs rather than issue a credit to customers. Changes
        in our
        estimates for accruals related to provisions for defective reagent discs
        have
        not been material to our financial position or results of operations. In
        the
        future, the actual defective reagent discs may exceed our estimates, which
        could
        adversely affect our financial results.
  **Allowance
        for Doubtful Accounts.** We
        maintain an allowance for doubtful accounts based on our assessment of the
        collectibility of the amounts owed to us by our customers. In determining
        the
        amount of the allowance, we make judgments about the creditworthiness of
        customers which is mostly determined by the customer’s payment history and the
        outstanding period of accounts. We specifically identify amounts that we
        believe
        to be uncollectible and the allowance for doubtful accounts is adjusted
        accordingly. An additional allowance is recorded based on certain percentages
        of
        our aged receivables, using historical experience to estimate the potential
        uncollectible and our assessment of the general financial condition of our
        customer base. If our actual collections experience changes, revisions to
        our
        allowances may be required, which could adversely affect our operating
        income.
  **Warranty
        Reserves.** We
        provide for the estimated future costs to be incurred under our standard
        warranty obligation on our instruments. Since the beginning of fiscal 2006,
        our
        standard warranty obligation on instruments is two years. The estimated
        contractual warranty obligation is recorded when the related revenue is
        recognized and any additional amount is recorded when such cost is probable
        and
        can be reasonably estimated. W hile
        we
        engage in product quality programs and processes, including monitoring and
        evaluating the quality of our suppliers, our estimated
        accrual for warranty exposure is based on historical experience, estimated product
        failure rates, material usage and freight incurred in repairing the instrument
        after failure and
        known
        design changes .
  15
  A
        provision for defective reagent discs is recorded when related sales are
        recognized and any additional amounts are recorded when such costs are probable
        and can be reasonably estimated, at which time they are included in cost
        of
        revenues. Prior to July 1, 2007, we primarily issued a credit to customers
        for
        defective reagent discs and, therefore, the provision for estimated costs
        for
        defective reagent discs, which includes the replacement costs and freight
        of a
        defective reagent disc, was recorded as part of sales and other allowances.
        Starting on July 1, 2007, the
        provision for defective reagent discs is now recorded as part of warranty
        reserves, since we replace defective reagent discs rather than issue a credit
        to
        customers.
  We
        analyze the adequacy of the ending accrual balance of warranty reserves each
        quarter. The determination of warranty reserves requires us to make estimates
        of
        the expected costs to repair or replace the instruments and to replace defective
        reagent discs under warranty. If actual repair or replacement costs of
        instruments or replacement costs of reagent discs differ significantly from
        our
        estimates, adjustments to cost of revenues may be required. ****
  **Inventories.** We
        state
        inventories at the lower of cost or market, cost being determined using standard
        costs which approximates the first-in, first-out (FIFO) method. Inventories
        include material, labor and overhead. We establish provisions for excess,
        obsolete and unusable inventories after evaluation of future demand and market
        conditions. If future demand or actual market conditions are less favorable
        than
        those estimated by management or if a significant amount of the material
        were to
        become unusable, additional inventory write-downs may be required, which
        would
        have a negative effect on our operating income.
  **Long-Lived
        Assets.** The
        carrying value of our long-lived assets is reviewed for impairment, in
        accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever
        events or changes in circumstances indicate that the carrying amount of an
        asset
        may not be recoverable. We look to current and future profitability, as well
        as
        current and future undiscounted cash flows, excluding financing costs, as
        primary indicators of recoverability. An impairment loss would be recognized
        when the sum of the undiscounted future net cash flows expected to result
        from
        the use of the asset and its eventual disposal is less than the carrying
        amount.
        If impairment is determined to exist, any related impairment loss is calculated
        based on fair value.
  **Income
        Taxes.** We
        account for income taxes under the provisions of SFAS No. 109, “Accounting for
        Income Taxes” (“SFAS No. 109”). Under this method, deferred tax assets and
        liabilities are determined based on the differences between the financial
        statement carrying amounts of existing assets and liabilities and their
        respective tax bases. Deferred tax assets and liabilities are measured using
        enacted tax rates expected to apply to taxable income in the years in which
        those temporary differences are expected to be recovered or settled. Valuation
        allowances are established, when necessary, to reduce deferred tax assets
        to the
        amounts to be recovered.
  Effective
        April 1, 2007, we adopted the provisions of Financial Accounting Standards
        Board
        (“FASB”) Interpretation 48, “Accounting for Uncertainty in Income Taxes - an
        interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the
        accounting for uncertainty in income taxes recognized in the financial
        statements in accordance with SFAS No. 109 and prescribes a recognition
        threshold and measurement attribute for the financial statement recognition
        and
        measurement of tax positions taken or expected to be taken in a tax return.
        FIN
        48 also provides guidance on derecognition, classification, interest and
        penalties, accounting in interim periods, disclosure and transition. As a
        result
        of implementing FIN 48, we did not change the amount of unrecognized tax
        benefits related to tax positions taken in prior periods. We did not have
        any
        unrecognized tax benefits as of April 1, 2007, the date of adoption, or as
        of
        December 31, 2007. Upon adoption of FIN 48, our policy to include interest
        and
        penalties related to gross unrecognized tax benefits within our provision
        for
        income taxes did not change. For the three and nine months ended December
        31,
        2007, we did not recognize any interest and penalties related to unrecognized
        tax benefits. We file income tax returns in the United States federal
        jurisdiction and various states. We are not under examination for any of
        these
        jurisdictions.
  **Share-Based
        Compensation Expense.**  On
        April
        1, 2006, we adopted SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
        No. 123(R)”) using
        the modified prospective method and therefore have not restated prior periods’
results. Under the fair value provisions of SFAS
        No.
        123(R), we recognize share-based compensation expense, net of an estimated
        forfeiture rate, for those shares expected to vest over the requisite service
        period of the award to employees and directors. Prior to April 1, 2006, we
        accounted for share-based awards to employees and directors using the intrinsic
        value method in accordance with Accounting Principles Board Opinion No. 25,
        “Accounting for Stock Issued to Employees” and other related guidance and,
        therefore, no employee compensation cost had been recognized for share-based
        awards in financial statements prior to fiscal 2007 because we issued stock
        options with an exercise price equal to the market value at the date of grant.
  We
        use
        the Black-Scholes option pricing model to determine the fair value of stock
        options granted prior to March 31, 2006. Determining the appropriate fair
        value
        model and calculating the fair value of share-based awards requires highly
        subjective assumptions, as described below.
  ·
            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
                over a term of one year.  ·
            Expected
                term: We estimate the expected term of stock options granted based
                on
                historical exercise 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.  16
  For
        restricted stock units, the assumptions to calculate compensation expense
        is
        based on the fair value of the Company’s stock at the grant date. As
        a
        result, if factors change and we use different assumptions, our share-based
        compensation expense could be materially different in the future.
  As
        required by SFAS No. 123(R), employee share-based compensation expense
        recognized is calculated based on the awards expected to vest and reduced
        for
        estimated forfeitures. The forfeiture rate is estimated based on historical
        data
        of our share-based awards that are granted, exercised and cancelled and upon
        historical experience of employee turnover, and compensation expense is adjusted
        for actual results. Changes in estimated forfeiture rates and differences
        between estimated forfeiture rates and actual experience may result in
        significant, unanticipated increases or decreases in share-based compensation
        expense from period to period. To the extent we revise our estimate of the
        forfeiture rate in the future, our share-based compensation expense could
        be
        materially impacted in the quarter of revision, as well as in following
        quarters.
  **RESULTS
        OF OPERATIONS**
  Abaxis
        develops, manufactures, markets and sells portable blood analysis systems
        for
        use in the human or veterinary patient-care setting to provide clinicians
        with
        rapid blood constituent measurements. We operate in two segments: (i) the
        medical market and (ii) the veterinary market. See “Segment Results” in this
        section for a detailed discussion.
  **Total
        Revenues**
  **Revenues
        by Geographic Region and by Product Category.** Revenues
        by geographic region based on customer location and revenues by product category
        during the three and nine months ended December 31,
        2007
        and 2006 were as follows:
 **Three
                    Months Ended**
                
                
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****Revenues
                    by Geographic Region**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**North
                    America
                
                $
                21,628,000
                
                $
                18,221,000
                
                $
                3,407,000
                
                
                19
                %
                $
                61,868,000
                
                $
                52,652,000
                
                $
                9,216,000
                
                
                18
                %Percentage
                    of total revenues
                
                
                84
                %
                
                83
                %
                
                
                
                
                
                
                
                84
                %
                
                83
                %Europe
                
                
                3,397,000
                
                
                2,781,000
                
                
                616,000
                
                
                22
                %
                
                9,629,000
                
                
                7,543,000
                
                
                2,086,000
                
                
                28
                %Percentage
                    of total revenues
                
                
                13
                %
                
                13
                %
                
                
                
                
                
                
                
                13
                %
                
                12
                %Asia
                    Pacific and rest of the world
                
                
                665,000
                
                
                1,016,000
                
                
                (351,000
                )
                
                (35
                %)
                
                2,316,000
                
                
                3,218,000
                
                
                (902,000
                )
                
                (28
                %)Percentage
                    of total revenues
                
                
                3
                %
                
                4
                %
                
                
                
                
                
                
                
                3
                %
                
                5
                %Total
                    revenues
                
                $
                25,690,000
                
                $
                22,018,000
                
                $
                3,672,000
                
                
                17
                %
                $
                73,813,000
                
                $
                63,413,000
                
                $
                10,400,000
                
                
                16
                %
  **Three
                    Months Ended**
                
                
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****Revenues
                    by Product Category**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**Instruments
                
                $
                8,393,000
                
                $
                8,369,000
                
                $
                24,000
                
                
                -
                
                $
                22,319,000
                
                $
                21,667,000
                
                $
                652,000
                
                
                3
                %Percentage
                    of total revenues
                
                
                33
                %
                
                38
                %
                
                
                
                
                
                
                
                30
                %
                
                34
                %Reagent
                    discs and kits
                
                
                15,305,000
                
                
                12,239,000
                
                
                3,066,000
                
                
                25
                %
                
                45,244,000
                
                
                36,629,000
                
                
                8,615,000
                
                
                24
                %Percentage
                    of total revenues
                
                
                59
                %
                
                56
                %
                
                
                
                
                
                
                
                61
                %
                
                58
                %Other
                    products
                
                
                1,462,000
                
                
                964,000
                
                
                498,000
                
                
                52
                %
                
                4,797,000
                
                
                3,728,000
                
                
                1,069,000
                
                
                29
                %Percentage
                    of total revenues
                
                
                6
                %
                
                4
                %
                
                
                
                
                
                
                
                7
                %
                
                6
                %Product
                    sales, net
                
                
                25,160,000
                
                
                21,572,000
                
                
                3,588,000
                
                
                17
                %
                
                72,360,000
                
                
                62,024,000
                
                
                10,336,000
                
                
                17
                %Percentage
                    of total revenues
                
                
                98
                %
                
                98
                %
                
                
                
                
                
                
                
                98
                %
                
                98
                %Development
                    and licensing revenues
                
                
                530,000
                
                
                446,000
                
                
                84,000
                
                
                19
                %
                
                1,453,000
                
                
                1,389,000
                
                
                64,000
                
                
                5
                %Percentage
                    of total revenues
                
                
                2
                %
                
                2
                %
                
                
                
                
                
                
                
                2
                %
                
                2
                %Total
                    revenues
                
                $
                25,690,000
                
                $
                22,018,000
                
                $
                3,672,000
                
                
                17
                %
                $
                73,813,000
                
                $
                63,413,000
                
                $
                10,400,000
                
                
                16
                %
  ***Three
        Months Ended December 31, 2007 Compared to Three Months Ended December 31,
        2006***
  **North
        America** **.** During
        the three months ended December 31, 2007, total revenues in North America
        increased 19%, or $3,407,000, as
        compared to the three months ended December
        31 ,
        2006.
        Components of the change in North America were as follows:
  17
  ***Instruments.***  During the
        three
        months ended December
        31 ,
        200 7 ,
        total
        revenues from instruments sold in North America increased 3%, or $176,000,
        as
        compared to the three months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Sales
        of our Piccolo chemistry analyzers in North America (excluding the U.S.
        government) increased 35%, or $529,000, primarily due to increased sales
        to
        distributors. Sales of our Piccolo chemistry analyzers to the U.S. government
        increased 76%, or $137,000.
  (ii)
        Sales of our VetScan chemistry
        analyzers in North
        America decreased 39%, or $1,209,000, primarily due to a shift in our sales
        and
        marketing focus from an instrument only emphasis to a focus on both instrument
        and reagent discs as a result of the manufacturing issues that we experienced
        in
        previous quarters. Sales of our hematology instruments in North America
        increased 41%, or $719,000, primarily due to the release of our VetScan HM5
        in
        September 2007.
  ***Reagent
        discs and kits.*** **  During the
        three
        months ended December
        31, 2007 ,
        total
        revenues from reagent discs and kits sold in North America increased 26%,
        or
        $2,638,000, as compared to the three months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Medical reagent discs sales in North America (excluding the U.S. government )
        increased 17%, or $298,000, primarily due to the expanded installed base
        of our
        Piccolo chemistry analyzers. Medical reagent discs sold to the U.S. government
        decreased 13%, or $81,000.
  (ii)
        Veterinary reagent discs sales in North America increased 32%, or $2,255,000,
        primarily due to the expanded installed base of our VetScan chemistry
        analyzers . Sales of
        hematology reagent kits in North America increased 21%, or $166,000.
  ***Other
        products.*** During the
        three
        months ended December
        31 ,
        2007,
        total revenues from other products sold in North America increased 54%, or
        $509,000, as compared to the three months ended December
        31 ,
        2006.
        The net increase in other products was primarily due to an increase in demand
        from Becton, Dickinson and Company for products using the Orbos Discrete
        Lyophilization Process, which is based on seasonal demands.
  ***Development
        and licensing.*** During the
        three
        months ended December
        31 ,
        2007,
        total revenues from development and licensing in North America increased
        19%, or
        $84,000, as compared to the three months ended December
        31 ,
        2006.
  ***Significant
        concentration.*** One
        distributor in the United States, DVM Resources, accounted for 12% and 13%
        of
        total worldwide revenues for the three months ended December
        31 ,
        2007
        and 2006, respectively.
  **Europe** **.**  During
        the three months ended December 31, 2007, total revenues in Europe increased
        22%, or $616,000, as
        compared to the three months ended December
        31, 2006 .
        Components of the change in Europe were as follows:
  ***Instruments.***  During the
        three
        months ended December
        31 ,
        2007,
        total revenues from instruments sold in Europe increased 7%, or $81,000,
        as
        compared to the three months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Sales
        of our Piccolo chemistry analyzers in Europe increased
        144%, or $312,000, primarily due to increased sales to distributors.
  (ii)
        Sales of our VetScan chemistry analyzers in Europe decreased 34%, or $318,000, primarily due to decreased sales to distributors.
        Sales of our hematology instruments in Europe increased 97%, or $87,000.
  ***Reagent
        discs and kits.***  During the
        three
        months ended December
        31 ,
        2007,
        total revenues from reagent discs and kits sold in Europe increased 35%,
        or
        $533,000, as compared to the three months ended December
        31, 2006 .
        The
        primary factors of the change were as follows:
  (i)
        Medical reagent discs sales in Europe increased 43%, or $94,000.
  (ii)
        Veterinary reagent discs sales in Europe increased 36%, or $448,000, primarily
        due to the expanded installed base of our VetScan chemistry analyzers. Sales
        of
        hematology reagent kits in Europe decreased 16%, or $9,000.
  ***Other
        products.*** During the
        three
        months ended December
        31 ,
        2007,
        total revenues from other products sold in Europe increased 33%, or $2,000,
        as
        compared to the three months ended December
        31, 2006 .
  **Asia
        Pacific and rest of the world** **.**  During
        the three months ended December 31, 2007, total revenues in Asia
        Pacific and rest of the world decreased 35%, or $351,000, as
        compared to the three months ended December
        31 ,
        2006.
        Components of the change in Asia Pacific and rest of the world were as
        follows:
  ***Instruments.***  During the
        three
        months ended December
        31 ,
        2007,
        total revenues from instruments sold in Asia Pacific and rest of the world
        decreased 41%, or $233,000, as compared to the three months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  18
  (i)
        Sales
        of our Piccolo chemistry analyzers in Asia Pacific and rest of the world
        increased 200%, or $30,000.
  (ii)
        Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the
        world
        decreased 81%, or $382,000, primarily in Japan due to the termination of
        a
        distribution arrangement during the first quarter of fiscal 2008. Sales of
        our
        hematology instruments in Asia Pacific and rest of the world increased 147%,
        or
        $119,000.
  ***Reagent
        discs and kits.*** During the
        three
        months ended December
        31 ,
        2007,
        total revenues from reagent discs and kits sold in Asia Pacific and rest
        of the
        world decreased 24%, or $105,000, as compared to the three months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Medical reagent discs sales in Asia Pacific and rest of the world increased
        19%,
        or $3,000.
  (ii)
        Veterinary reagent discs sales in Asia Pacific and rest of the world decreased
        22%, or $80,000. Sales of hematology reagent kits in Asia Pacific and rest
        of
        the world decreased 51%, or $28,000.
  ***Other
        products.*** During the
        three
        months ended December
        31 ,
        2007,
        total revenues from other products sold in Asia Pacific and rest of the world
        decreased 87%, or $13,000, as compared to the three months ended December
        31 ,
        2006.
  ***Nine
        Months Ended December 31, 2007 Compared to Nine Months Ended December 31,
        2006***
  **North
        America** **.** During
        the nine months
        ended December 31, 2007, total revenues in North America increased 18%, or
        $9,216,000, as
        compared to the nine months ended December
        31 ,
        2006.
        Components of the change in North America were as follows:
  ***Instruments.***  During the
        nine
        months ended December
        31 ,
        200 7 ,
        total
        revenues from instruments sold in North America increased 4%, or $773,000,
        as
        compared to the nine months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Sales
        of our Piccolo chemistry analyzers in North America (excluding the U.S.
        government) increased 32%, or $1,280,000, primarily due to increased sales
        to
        distributors. Sales of our Piccolo chemistry analyzers to the U.S. government
        decreased 3%, or $22,000.
  (ii)
        Sales of our VetScan chemistry analyzers in North America decreased 28%,
        or
        $2,041,000, primarily due to a shift in our sales and marketing focus from
        an
        instrument only emphasis to a focus on both instrument and reagent discs
        as a
        result of the manufacturing issues that we experienced in previous quarters.
        Sales of our hematology instruments in North America increased 30%, or
        $1,556,000, primarily due to the release of our VetScan HM5 in September
        2007.
  ***Reagent
        discs and kits.*** **  During the nine months
        ended December
        31, 2007 ,
        total
        revenues from reagent discs and kits sold in North America increased 24%,
        or
        $7,331,000, as compared to the nine months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Medical reagent discs sales in North America (excluding the U.S. government)
        increased 36%, or $1,571,000, primarily due to the expanded installed base
        of
        our Piccolo chemistry analyzers. Medical reagent discs sold to the U.S.
        government decreased 6%, or $107,000.
  (ii)
        Veterinary reagent discs sales in North America increased 26%, or $5,688,000,
        primarily due to the expanded installed base of our VetScan chemistry analyzers.
        Sales of hematology reagent kits in North America increased 8%, or $179,000.
  ***Other
        products.*** During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from other products sold in North America increased 29%, or
        $1,048,000, as compared to the nine months ended December
        31 ,
        2006.
        The net increase in other products was primarily due to an increase in demand
        from Becton, Dickinson and Company for products using the Orbos Discrete
        Lyophilization Process, which is based on seasonal demands.
  ***Development
        and licensing.*** During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from development and licensing in North America increased
        5%, or
        $64,000, as compared to the nine months ended December
        31 ,
        2006.
  ***Significant
        concentration.*** One
        distributor in the United States, DVM Resources, accounted for 13% and 15%
        of
        total worldwide revenues for the nine months ended December
        31 ,
        2007
        and 2006, respectively.
  **Europe** **.**  During
        the nine months
        ended December 31, 2007, total revenues in Europe increased 28%, or $2,086,000, as
        compared to the nine months ended December
        31 ,
        2006.
        Components of the change in Europe were as follows:
  ***Instruments.***  During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from instruments sold in Europe increased 26%, or $721,000,
        as
        compared to the nine months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  19
  (i)
        Sales
        of our Piccolo chemistry analyzers in Europe increased
        152%, or $652,000, primarily due to increased sales to distributors.
  (ii)
        Sales of our VetScan chemistry analyzers in Europe increased 1%, or $5,000. Sales of our hematology instruments in Europe increased 21%, or $64,000.
  ***Reagent
        discs and kits.***  During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from reagent discs and kits sold in Europe increased 28%,
        or
        $1,329,000, as compared to the nine months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Medical reagent discs sales in Europe increased 45%, or $262,000, primarily
        due
        to the expanded installed base of our Piccolo chemistry analyzers.
  (ii)
        Veterinary reagent discs sales in Europe increased 26%, or $1,072,000, primarily
        due to the expanded installed base of our VetScan chemistry analyzers. Sales
        of
        hematology reagent kits in Europe decreased 3%, or $5,000.
  ***Other
        products.*** During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from other products sold in Europe increased 116%, or $36,000,
        as
        compared to the nine months ended December
        31 ,
        2006.
  **Asia
        Pacific and rest of the world** **.**  During
        the nine months
        ended December 31, 2007, total revenues in Asia
        Pacific and rest of the world decreased 28%, or $902,000, as
        compared to the nine months ended December
        31 ,
        2006.
        Components of the change in Asia Pacific and rest of the world were as
        follows:
  ***Instruments.***  During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from instruments sold in Asia Pacific and rest of the world
        decreased 49%, or $842,000, as compared to the nine months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Sales
        of our Piccolo chemistry analyzers in Asia Pacific and rest of the world
        increased 500%, or $100,000.
  (ii)
        Sales of our VetScan chemistry analyzers in Asia Pacific and rest of the
        world
        decreased 69%, or $791,000. Sales of our hematology instruments in Asia Pacific
        and rest of the world decreased 27%, or $151,000. The decrease in veterinary
        instruments was primarily in Japan due to the termination of a distribution
        arrangement during the first quarter of fiscal 2008.
  ***Reagent
        discs and kits.*** During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from reagent discs and kits sold in Asia Pacific and rest
        of the
        world decreased 3%, or $45,000, as compared to the nine months ended December
        31 ,
        2006.
        The primary factors of the change were as follows:
  (i)
        Medical reagent discs sales in Asia Pacific and rest of the world increased
        77%,
        or $49,000.
  (ii)
        Veterinary reagent discs sales in Asia Pacific and rest of the world decreased
        2%, or $31,000. Sales of hematology reagent kits in Asia Pacific and rest
        of the
        world decreased 41%, or $63,000.
  ***Other
        products.*** During the
        nine
        months ended December
        31 ,
        2007,
        total revenues from other products sold in Asia Pacific and rest of the world
        decreased 54%, or $15,000, as compared to the nine months ended December
        31 ,
        2006.
  **Segment
        Results**
  ***Three
        Months Ended December 31, 2007 Compared to Three Months Ended December 31,
        2006***
  The
        following table presents revenues, cost of revenues, gross profit and percentage
        of revenues by operating segments for the three months ended December 31,
        2007
        and 2006:
  20
 **Three
                      Months Ended****December
                      31,**
                  
                  **Change****Percent
                      of**
                  
                  
                  
                  **Percent
                      of**
                  
                  **Increase/**
                  
                  **Percent****2007**
                  
                  **Revenues
                      (1)**
                  
                  **2006**
                  
                  **Revenues
                      (1)**
                  
                  **(Decrease)**
                  
                  **Change****Revenues:**Medical
                      Market
                  
                  $
                  6,005,000
                  
                  
                  100
                  %
                  $
                  4,656,000
                  
                  
                  100
                  %
                  $
                  1,349,000
                  
                  
                  29
                  %Percentage
                      of total revenues
                  
                  
                  23
                  %
                  
                  
                  
                  
                  21
                  %Veterinary
                      Market
                  
                  
                  18,073,000
                  
                  
                  100
                  %
                  
                  16,312,000
                  
                  
                  100
                  %
                  
                  1,761,000
                  
                  
                  11
                  %Percentage
                      of total revenues
                  
                  
                  70
                  %
                  
                  
                  
                  
                  74
                  %Unallocated
                      amounts
                  
                  
                  1,612,000
                  
                  
                  
                  
                  
                  1,050,000
                  
                  
                  
                  
                  
                  562,000
                  
                  
                  54
                  %Percentage
                      of total revenues
                  
                  
                  7
                  %
                  
                  
                  
                  
                  5
                  %Total
                      revenues
                  
                  
                  25,690,000
                  
                  
                  
                  
                  
                  22,018,000
                  
                  
                  
                  
                  
                  3,672,000
                  
                  
                  17
                  %**Cost
                      of revenues:**Medical
                      Market
                  
                  
                  2,946,000
                  
                  
                  49
                  %
                  
                  2,280,000
                  
                  
                  49
                  %
                  
                  666,000
                  
                  
                  29
                  %Veterinary
                      Market
                  
                  
                  8,677,000
                  
                  
                  48
                  %
                  
                  7,643,000
                  
                  
                  47
                  %
                  
                  1,034,000
                  
                  
                  14
                  %Unallocated
                      amounts
                  
                  
                  458,000
                  
                  
                  
                  
                  
                  516,000
                  
                  
                  
                  
                  
                  (58,000
                  )
                  
                  (11
                  %)Total
                      cost of revenues
                  
                  
                  12,081,000
                  
                  
                  
                  
                  
                  10,439,000
                  
                  
                  
                  
                  
                  1,642,000
                  
                  
                  16
                  %**Gross
                      profit:**Medical
                      Market
                  
                  
                  3,059,000
                  
                  
                  51
                  %
                  
                  2,376,000
                  
                  
                  51
                  %
                  
                  683,000
                  
                  
                  29
                  %Veterinary
                      Market
                  
                  
                  9,396,000
                  
                  
                  52
                  %
                  
                  8,669,000
                  
                  
                  53
                  %
                  
                  727,000
                  
                  
                  8
                  %Unallocated
                      amounts
                  
                  
                  1,154,000
                  
                  
                  
                  
                  
                  534,000
                  
                  
                  
                  
                  
                  620,000
                  
                  
                  116
                  %Gross
                      profit
                  
                  $
                  13,609,000
                  
                  
                  
                  
                  $
                  11,579,000
                  
                  
                  
                  
                  $
                  2,030,000
                  
                  
                  18
                  %
 
 (1)
        The
        percentage reported is based on revenues by operating segment.
  **Medical
        Market**
  **Revenues** **for
        Medical Market Segment**
  During the
        three
        months ended December 31, 2007, total revenues in the medical market increased
        29%, or $1,349,000, as compared to the three months ended December 31, 2006.
        Components of the change were as follows:
  ***Instruments.*** Total
        revenues from our Piccolo chemistry analyzers increased 52%, or $1,008,000,
        during the three months ended December 31, 2007, as compared to the three
        months
        ended December 31, 2006. We sold a total of 238 Piccolo chemistry analyzers
        during the three months ended December 31, 2007, as compared to 164 Piccolo
        chemistry analyzers sold during the three months ended December 31, 2006.
        The
        changes in revenues were attributed to (a) an increase in revenues in North
        America (excluding the U.S. government) of 35%, or $529,000, primarily due
        to
        increased sales to distributors; (b) an increase in Piccolo chemistry analyzers
        sold to the U.S. government of 76%, or $137,000; (c) an increase in revenues
        in Europe
        of 144%,
        or
        $312,000, primarily due to increased sales to distributors; and (d) an increase
        in revenues in Asia Pacific and rest of the world of 200%, or
        $30,000.
  ***Reagent
        discs.*** Total
        revenues from reagent discs sold in the medical market increased 12%, or
        $314,000,  during
        the three months ended December 31, 2007, as compared to the three months
        ended
        December 31, 2006. We sold 316,000 medical reagent discs during the three
        months
        ended December 31, 2007, as compared to 284,000 medical reagent discs sold
        during the three months ended December 31, 2006. The total increase in revenues
        from medical reagent discs was primarily attributed to the expanded installed
        base of our Piccolo chemistry analyzers and was comprised of (a) an increase
        in
        revenues in North America (excluding the U.S. government) of 17%, or $298,000;
        (b) an increase in revenues in Europe of 43%, or $94,000; and (c) an increase
        in
        revenues in Asia Pacific and rest of the world of 19%, or $3,000. The increase
        was partially offset by a decrease in medical reagent discs sold to the U.S.
        government of 13%, or $81,000.
  **Gross
        Profit for Medical Market Segment**
  Gross
        profit for the medical market segment increased 29%, or $683,000, during
        the
        three months ended December 31, 2007, as compared to the three months ended
        December 31, 2006. Gross profit percentage for the medical market segment
        during
        each of the three months ended December 31, 2007 and 2006 was 51%. In absolute
        dollars, the increase in gross profit for the medical market segment was
        due to
        (a) an increase in Piccolo chemistry analyzers and medical reagent discs
        sold
        during the three months ended December 31, 2007 and (b) higher average selling
        prices of Piccolo chemistry analyzers and medical reagent discs during the
        three
        months ended December 31, 2007.
  21
  **Veterinary
        Market**
  **Revenues** **for
        Veterinary Market Segment**
  During the
        three
        months ended December 31, 2007, total revenues in the veterinary market
        increased 11%, or $1,761,000, as compared to the three months ended December
        31,
        2006. Components of the change were as follows:
  ***Instruments.*** We sold
        a total of 642
        VetScan chemistry analyzers and hematology instruments during
        the three months ended December 31, 2007, as compared to 748 veterinary
        instruments sold during the three months ended December 31, 2006. The primary
        factors of the change were as follows:
  (i)
        Sales
        of our VetScan chemistry analyzers decreased 42%, or $1,909,000, comprised
        of
        (a) a decrease in revenues in North America of 39%, or $1,209,000, primarily
        due
        to a shift in our sales and marketing focus from an instrument only emphasis
        to
        a focus on both instrument and reagent discs as a result of the manufacturing
        issues that we experienced in previous quarters; (b) a decrease in revenues
        in
        Europe of 34%, or $318,000, primarily due to decreased sales to distributors;
        and (c) a decrease in revenues in Asia Pacific and rest of the world of 81%,
        or
        $382,000, primarily in Japan due to the termination of a distribution
        arrangement during the first quarter of fiscal 2008.
  (ii)
        Sales of our hematology instruments increased 48%, or $925,000, comprised
        of (a)
        an increase in revenues in North America of 41%, or $719,000; (b) an increase
        in
        revenues in Europe of 97%, or $87,000; and (c) an increase in revenues in
        Asia
        Pacific and rest of the world of 147%, or $119,000. The increase in revenues
        from our hematology instruments is primarily due to the release of the VetScan
        HM5 in September 2007.
  ***Reagent
        discs and kits.*** Total
        revenues from reagent discs and hematology reagent kits sold in the veterinary
        market increased 29%, or $2,752,000, during the three months ended December
        31,
        2007, as compared to the three months ended December 31, 2006. The primary
        factors of the change were as follows:
  (i)
        Total
        revenues from reagent discs sold in the veterinary market increased 30%,
        or
        $2,623,000, during the three months ended December 31, 2007, as compared
        to the
        three months ended December 31, 2006. We sold 896,000 veterinary reagent
        discs
        during the three months ended December 31, 2007, as compared to 721,000
        veterinary reagent discs sold during the three months ended December 31,
        2006.
        The increase in revenues from veterinary reagent discs was primarily attributed
        to the expanded installed base of our VetScan chemistry analyzers and was
        comprised of (a) an increase in revenues in North America of 32%, or $2,255,000
        and (b) an increase in revenues in Europe of 36%, or $448,000. The
        increase was partially offset by a decrease in revenues in Asia Pacific and
        rest
        of the world of 22%, or $80,000.
  (ii)
        Total revenues from hematology reagent kits sold in the veterinary market
        increased 14%, or $129,000, during the three months ended December 31, 2007,
        as
        compared to the three months ended December
        31 ,
        2006.
        The increase in revenues from hematology reagent kits was attributed to (a)
        an
        increase in revenues in North America of 21%, or $166,000, partially offset
        by
        (b) a decrease in revenues in Europe of 16%, or $9,000 and (c) a decrease
        in
        revenues in Asia Pacific and rest of the world of 51%, or $28,000.
  **Gross
        Profit for Veterinary Market Segment**
  Gross
        profit for the veterinary market segment increased 8%, or $727,000, during
        the
        three months ended December 31, 2007, as compared to the three months ended
        December 31, 2006. Gross profit percentages for the veterinary market segment
        during the three months ended December 31, 2007 and 2006 were 52% and 53%,
        respectively. In absolute dollars, the increase in gross profit for the
        veterinary market segment was due to an increase in veterinary reagent discs
        sold during the three months ended December 31, 2007.
  ***Nine
        Months Ended December 31, 2007 Compared to Nine Months Ended December 31,
        2006***
  The
        following table presents revenues, cost of revenues, gross profit and percentage
        of revenues by operating segments for the nine months ended December 31,
        2007
        and 2006:
  22
 **Nine
                    Months Ended****December
                    31,**
                
                **Change****Percent
                    of**
                
                
                
                **Percent
                    of**
                
                **Increase/**
                
                **Percent****2007**
                
                **Revenues
                    (1)**
                
                **2006**
                
                **Revenues
                    (1)**
                
                **(Decrease)**
                
                **Change****Revenues:**Medical
                    Market
                
                $
                16,455,000
                
                
                100
                %
                $
                12,506,000
                
                
                100
                %
                $
                3,949,000
                
                
                32
                %Percentage
                    of total revenues
                
                
                22
                %
                
                
                
                
                20
                %Veterinary
                    Market
                
                
                52,498,000
                
                
                100
                %
                
                47,013,000
                
                
                100
                %
                
                5,485,000
                
                
                12
                %Percentage
                    of total revenues
                
                
                71
                %
                
                
                
                
                74
                %Unallocated
                    amounts
                
                
                4,860,000
                
                
                
                
                
                3,894,000
                
                
                
                
                
                966,000
                
                
                25
                %Percentage
                    of total revenues
                
                
                7
                %
                
                
                
                
                6
                %Total
                    revenues
                
                
                73,813,000
                
                
                
                
                
                63,413,000
                
                
                
                
                
                10,400,000
                
                
                16
                %**Cost
                    of revenues:**Medical
                    Market
                
                
                8,194,000
                
                
                50
                %
                
                6,088,000
                
                
                49
                %
                
                2,106,000
                
                
                35
                %Veterinary
                    Market
                
                
                23,525,000
                
                
                45
                %
                
                21,330,000
                
                
                45
                %
                
                2,195,000
                
                
                10
                %Unallocated
                    amounts
                
                
                1,612,000
                
                
                
                
                
                1,421,000
                
                
                
                
                
                191,000
                
                
                13
                %Total
                    cost of revenues
                
                
                33,331,000
                
                
                
                
                
                28,839,000
                
                
                
                
                
                4,492,000
                
                
                16
                %**Gross
                    profit:**Medical
                    Market
                
                
                8,261,000
                
                
                50
                %
                
                6,418,000
                
                
                51
                %
                
                1,843,000
                
                
                29
                %Veterinary
                    Market
                
                
                28,973,000
                
                
                55
                %
                
                25,683,000
                
                
                55
                %
                
                3,290,000
                
                
                13
                %Unallocated
                    amounts
                
                
                3,248,000
                
                
                
                
                
                2,473,000
                
                
                
                
                
                775,000
                
                
                31
                %Gross
                    profit
                
                $
                40,482,000
                
                
                
                
                $
                34,574,000
                
                
                
                
                $
                5,908,000
                
                
                17
                %
 
 (1)
        The
        percentage reported is based on revenues by operating segment.
  **Medical
        Market**
  **Revenues** **for
        Medical Market Segment**
  During the nine months
        ended December 31, 2007, total revenues in the medical market increased 32%,
        or
        $3,949,000, as compared to the nine months ended December 31, 2006. Components
        of the change were as follows:
  ***Instruments.*** Total
        revenues from our Piccolo chemistry analyzers increased 39%, or $2,010,000,
        during the nine months ended December 31, 2007, as compared to the nine months
        ended December 31, 2006. We sold a total of 593 Piccolo chemistry analyzers
        during the nine months ended December 31, 2007, as compared to 461 Piccolo
        chemistry analyzers sold during the nine months ended December 31, 2006.
        The
        changes in revenues were attributed to (a) an increase in revenues in North
        America (excluding the U.S. government) of 32%, or $1,280,000, primarily
        due to
        increased sales to distributors; (b) an increase in revenues in Europe
        of 152%,
        or
        $652,000, primarily due to increased sales to distributors; and (c) an increase
        in revenues in Asia Pacific and rest of the world of 500%, or $100,000. The
        increase in revenues was partially offset by a decrease in Piccolo chemistry
        analyzers sold to the U.S. government of 3%, or $22,000.
  ***Reagent
        discs.*** Total
        revenues from reagent discs sold in the medical market increased 26%, or
        $1,775,000,  during
        the nine months ended December 31, 2007, as compared to the nine months ended
        December 31, 2006. We sold 928,000 medical reagent discs during the nine
        months
        ended December 31, 2007, as compared to 741,000 medical reagent discs sold
        during the nine months ended December 31, 2006. The total increase in revenues
        from medical reagent discs was primarily attributed to the expanded installed
        base of our Piccolo chemistry analyzers and was comprised of (a) an increase
        in
        revenues in North America (excluding the U.S. government) of 36%, or $1,571,000;
        (b) an increase in revenues in Europe of 45%, or $262,000; and (c) an increase
        in revenues in Asia Pacific and rest of the world of 77%, or $49,000. The
        increase in revenues was partially offset by a decrease in medical reagent
        discs
        sold to the U.S. government of 6%, or $107,000.
  **Gross
        Profit for Medical Market Segment**
  Gross
        profit for the medical market segment increased 29%, or $1,843,000, during
        the
        nine months ended December 31, 2007, as compared to the nine months ended
        December 31, 2006. Gross profit percentages for the medical market segment
        during the nine months ended December 31, 2007 and 2006 were 50% and 51%,
        respectively. In absolute dollars, the increase in gross profit for the medical
        market segment was due to (a) an increase in Piccolo chemistry analyzers
        and
        medical reagent discs sold during the nine months ended December 31, 2007
        and
        (b) higher average selling prices of Piccolo chemistry analyzers and medical
        reagent discs during the nine months ended December 31, 2007.
  23
  **Veterinary
        Market**
  **Revenues** **for
        Veterinary Market Segment**
  During the
        nine
        months ended December 31, 2007, total revenues in the veterinary market
        increased 12%, or $5,485,000, as compared to the nine months ended December
        31,
        2006. Components of the change were as follows:
  ***Instruments.*** We sold
        a total of 1,735 VetScan chemistry analyzers and hematology instruments during
        the nine months ended December 31, 2007, as compared to 1,896 veterinary
        instruments sold during the nine months ended December 31, 2006. The primary
        factors of the change were as follows:
  (i)
        Sales
        of our VetScan chemistry analyzers decreased 27%, or $2,827,000, comprised
        of
        (a) a decrease in revenues in North America of 28%, or $2,041,000, primarily
        due
        to a shift in our sales and marketing focus from an instrument only emphasis
        to
        a focus on both instrument and reagent discs as a result of the manufacturing
        issues that we experienced in previous quarters and (b) a decrease in revenues
        in Asia Pacific and rest of the world of 69%, or $791,000, primarily in Japan
        due to the termination of a distribution arrangement during the first quarter
        of
        fiscal 2008. The decrease in revenues was partially offset by an increase
        in
        revenues in Europe of 1%, or $5,000.
  (ii)
        Sales of our hematology instruments increased 24%, or $1,469,000, comprised
        of
        (a) an increase in revenues in North America of 30%, or $1,556,000, primarily
        due to the release of the VetScan HM5 in September 2007 and (b) an increase
        in
        revenues in Europe of 21%, or $64,000. The increase in revenues was partially
        offset by a decrease in revenues in Asia Pacific and rest of the world of
        27%,
        or $151,000, primarily in Japan due to the termination of a distribution
        arrangement during the first quarter of fiscal 2008.
  ***Reagent
        discs and kits.*** Total
        revenues from reagent discs and hematology reagent kits sold in the veterinary
        market increased 23%, or $6,840,000, during the nine months ended December
        31,
        2007, as compared to the nine months ended December 31, 2006. The primary
        factors of the change were as follows:
  (i)
        Total
        revenues from reagent discs sold in the veterinary market increased 25%,
        or
        $6,729,000, during the nine months ended December 31, 2007, as compared to
        the
        nine months ended December 31, 2006. We sold 2,666,000 veterinary reagent
        discs
        during the nine months ended December 31, 2007, as compared to 2,228,000
        veterinary reagent discs sold during the nine months ended December 31, 2006.
        The increase in revenues from veterinary reagent discs was primarily attributed
        to the expanded installed base of our VetScan chemistry analyzers and was
        comprised of (a) an increase in revenues in North America of 26%, or $5,688,000
        and (b) an increase in revenues in Europe of 26%, or $1,072,000. The increase
        was partially offset by a decrease in revenues in Asia Pacific and rest of
        the
        world of 2%, or $31,000.
  (ii)
        Total revenues from hematology reagent kits sold in the veterinary market
        increased 4%, or $111,000, during the nine months ended December 31, 2007,
        as
        compared to the nine months ended December 31, 2006. The increase in revenues
        from hematology reagent kits was attributed to (a) an increase in revenues
        in
        North America of 8%, or $179,000, partially offset by (b) a decrease in revenues
        in Europe of 3%, or $5,000 and (c) a decrease in revenues in Asia Pacific
        and
        rest of the world of 41%, or $63,000.
  **Gross
        Profit for Veterinary Market Segment**
  Gross
        profit for the veterinary market segment increased 13%, or $3,290,000, during
        the nine months ended December 31, 2007, as compared to the nine months
        ended December 31, 2006. Gross profit percentage for the veterinary market
        segment during each of the nine months ended December 31, 2007 and 2006 was
        55%.
        In absolute dollars, the increase in gross profit for the veterinary market
        segment was due to (a) an increase in veterinary reagent discs sold during
        the
        nine months ended December 31, 2007, partially offset by (b) a decrease in
        VetScan chemistry analyzers sold during the nine months ended December 31,
        2007
        and (c) higher manufacturing costs on the VetScan VS2 chemistry analyzers
        during
        the nine months ended December 31, 2007.
  **Cost
        of Revenues**
  The
        following sets forth, for the periods indicated, our cost
        of
        revenues :
 **Three
                    Months Ended**
                
                
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**Cost
                    of revenues
                
                $
                12,081,000
                
                $
                10,439,000
                
                $
                1,642,000
                
                
                16
                %
                $
                33,331,000
                
                $
                28,839,000
                
                $
                4,492,000
                
                
                16
                %Percentage
                    of total revenues
                
                
                47
                %
                
                47
                %
                
                
                
                
                
                
                
                45
                %
                
                45
                %
   24
  Cost
        of revenues includes
        the costs associated with manufacturing, assembly, packaging, warranty repairs,
        test and quality assurance for our instruments, reagent discs and hematology
        reagent kits and manufacturing overhead, including costs of personnel and
        equipment associated with manufacturing support.
  *Three
        and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
        Ended
        December 31, 2006*
  The
        increase in cost of revenues, in absolute dollars, during the three and nine
        months ended December 31, 2007, as compared to the three and nine months
        ended
        December 31, 2006, was primarily due to (a) an increase in the sales volume
        of
        medical and veterinary reagent discs and (b) an increase in costs associated
        with manufacturing the VetScan
        VS2 and Piccolo xpress chemistry analyzers.
  **Operating
        Expenses**
  **Research
        and Development**
  The
        following sets forth, for the periods indicated, our research and development
        expenses:
 **Three
                    Months Ended**
                
                
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**Research
                    and development expenses
                
                $
                1,629,000
                
                $
                1,495,000
                
                $
                134,000
                
                
                9
                %
                $
                5,104,000
                
                $
                4,731,000
                
                $
                373,000
                
                
                8
                %Percentage
                    of total revenues
                
                
                6
                %
                
                7
                %
                
                
                
                
                
                
                
                7
                %
                
                7
                %
  Research
        and development expenses consist of personnel costs (including salaries,
        benefits and share-based compensation expense), consulting expenses and
        materials and related expenses associated with the development of new tests
        and
        test methods, product improvements and enhancement of existing products and
        clinical trials.
  *Three
        and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
        Ended
        December 31, 2006*
  The
        increase in research and development expenses, in absolute dollars, during
        the
        three and nine months ended December 31, 2007, as compared to the three and
        nine
        months ended December 31, 2006, was primarily due to new product development
        and
        enhancement of existing products and clinical trials. Research and development
        expenses are based on the project activities planned and the level of spending
        depend on budgeted expenditures. The projects primarily relate to new product
        development in both the medical and veterinary markets and costs related
        to
        compliance with FDA regulations and clinical trials. Share-based compensation
        expense during the three months ended December 31, 2007 and 2006, was $39,000
        and $32,000, respectively, and during the nine months ended December 31,
        2007
        and 2006, was $110,000 and $90,000, respectively.
  We
        anticipate the dollar amount of research and development expenses to increase
        in
        fiscal 2008 from fiscal 2007 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.
  **Sales
        and Marketing**
  The
        following sets forth, for the periods indicated, our sales and marketing
        expenses:
 **Three
                    Months Ended**
                
                
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**Sales
                    and marketing expenses
                
                $
                6,056,000
                
                $
                5,302,000
                
                $
                754,000
                
                
                14
                %
                $
                17,666,000
                
                $
                15,306,000
                
                $
                2,360,000
                
                
                15
                %Percentage
                    of total revenues
                
                
                24
                %
                
                24
                %
                
                
                
                
                
                
                
                24
                %
                
                24
                %
  Sales
        and
        marketing expenses consist of personnel costs (including salaries, benefits
        and
        share-based compensation expense), commissions and travel-related expenses
        for
        personnel engaged in selling, costs associated with advertising, lead
        generation, marketing programs, trade shows, and services related to customer
        and technical support.
  *Three
        and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
        Ended
        December 31, 2006*
  The
        increase in sales and marketing expenses, in absolute dollars, during the
        three
        and nine months ended December 31, 2007, as compared to the three and nine
        months ended December 31, 2006, was primarily due to personnel-related costs
        resulting from an increase in headcount in various divisions including sales
        and
        marketing, customer service and technical service, to support the growth
        in both
        our medical and veterinary markets. Share-based compensation expense during
        the
        three months ended December 31, 2007 and 2006, was $91,000 and $75,000,
        respectively, and during the nine months ended December 31, 2007 and 2006,
        was
        $259,000 and $228,000, respectively.
  25
  **General
        and Administrative**
  The
        following sets forth, for the periods indicated, our general
        and administrative expenses:
 **Three
                    Months Ended**
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**General
                    and administrative expenses
                
                $
                1,571,000
                
                $
                1,262,000
                
                $
                309,000
                
                
                24
                %
                $
                4,760,000
                
                $
                4,232,000
                
                $
                528,000
                
                
                12
                %Percentage
                    of total revenues
                
                
                6
                %
                
                6
                %
                
                
                
                
                
                
                
                6
                %
                
                7
                %
  General
        and administrative expenses consist of personnel costs (including salaries, benefits and share-based compensation expense), and
        expenses for outside professional services related to general corporate
        functions, including accounting, human resources and legal.
  *Three
        and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
        Ended
        December 31, 2006*
  The
        increase in general and administrative expenses, in absolute dollars, during
        the
        three and nine months ended December 31, 2007, as compared to the three and
        nine
        months ended December 31, 2006, was primarily due to an increase in
        personnel-related costs, which includes share-based compensation expense.
        Share-based compensation during the three months ended December 31, 2007
        and
        2006, was $122,000 and $85,000, respectively, and during the nine months
        ended
        December 31, 2007 and 2006, was $374,000 and $235,000, respectively.
  **Interest
        and Other Income (Expense), Net**
  The
        following sets forth, for the periods indicated, our interest and other income
        (expense), net:
 **Three
                    Months Ended**
                
                
                
                
                
                **Nine
                    Months Ended****December
                    31,**
                
                **Change**
                
                **December
                    31,**
                
                **Change****Increase/**
                
                **Percent**
                
                
                
                
                
                **Increase/**
                
                **Percent****2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**
                
                **2007**
                
                **2006**
                
                **(Decrease)**
                
                **Change**Interest
                    and other income (expense), net
                
                $
                552,000
                
                $
                491,000
                
                $
                61,000
                
                
                12
                %
                $
                1,580,000
                
                $
                1,194,000
                
                $
                386,000
                
                
                32
                %
  Interest
        and other income (expense), net, consists primarily of interest income earned
        on
        cash, cash equivalents and short-term investments.
  *Three
        and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
        Ended
        December 31, 2006*
  The
        increase in interest and other income (expense), net, during the three and
        nine
        months ended December
        31 ,
        2007,
        as compared to the three and nine months ended December 31, 2006, was primarily
        attributed to interest income in our investment portfolio resulting from
        higher
        average invested balances compared to the same periods in fiscal
        2007.
  **Income
        Tax Provision**
  The
        following sets forth, for the periods indicated, our income tax
        provision:
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****December
                    31,**
                
                **December
                    31,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Income
                    tax provision
                
                $
                1,700,000
                
                $
                1,235,000
                
                $
                5,341,000
                
                $
                4,208,000Effective
                    tax rate
                
                
                35
                %
                
                31
                %
                
                37
                %
                
                37
                %
  *Three
        and Nine Months Ended December 31, 2007 Compared to Three and Nine Months
        Ended
        December 31, 2006*
  The
        increase in the effective tax rate for the three months ended December 31,
        2007,
        as compared to the three months ended December 31, 2006, was primarily due
        to
        the retroactive extension of the federal research and development tax credit
        in
        the three months ended December 31, 2006, which temporarily expired during
        the
        first six months of fiscal 2007, partially offset by a change in our investment
        portfolio resulting in a tax benefit in the three months ended December 31,
        2007.
  We
        adopted the provisions of FASB Interpretation No. 48, “Accounting for
        Uncertainty in Income Taxes” (“FIN No. 48”) on April 1, 2007. As a result of
        implementing FIN No. 48, we did not change the amount of unrecognized tax
        benefits related to tax positions taken in prior periods. We did not have
        any
        unrecognized tax benefits as of April 1, 2007, the date of adoption, or as
        of
        December 31, 2007. Our policy to include interest and penalties related to
        gross
        unrecognized tax benefits within our provision for income taxes did not change.
        During the three and nine months ended December 31, 2007, we did not recognize
        any interest and penalties related to unrecognized tax benefits.
  26
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  Total
        cash, cash equivalents and short-term
        investments at December 31, 2007 and March 31, 2007 were as follows:
 **December
                    31,**
                
                **March
                    31,****2007**
                
                **2007**Cash
                    and cash equivalents
                
                $
                11,792,000
                
                $
                10,183,000Short-term
                    investments
                
                
                43,966,000
                
                
                35,028,000Total
                    cash, cash equivalents and short-term investments
                
                $
                55,758,000
                
                $
                45,211,000Percentage
                    of total assets
                
                
                48
                %
                
                44
                %
  **Cash
        Flow Changes**
  Cash
        provided (used) in the nine months ended December 31, 2007 and 2006 were
        as
        follows:
 **Nine
                    Months Ended****December
                    31,****2007**
                
                **2006**Net
                    cash provided by operating activities
                
                $
                10,621,000
                
                $
                10,547,000Net
                    cash used in investing activities
                
                
                (11,460,000
                )
                
                (9,006,000
                )Net
                    cash provided by financing activities
                
                
                2,448,000
                
                
                3,298,000Net
                    increase in cash and cash equivalents
                
                $
                1,609,000
                
                $
                4,839,000
  At December
        31 ,
        2007,
        we had net working capital of $85,457,000 compared to $74,517,000 at March
        31,
        2007. Cash and cash equivalents at December
        31 ,
        2007
        were $11,792,000, compared to $10,183,000 at March 31, 2007. The increase
        in
        cash and cash equivalents was primarily due to proceeds from maturities of
        short-term investments and proceeds from exercises of stock options, partially
        offset by purchases of short-term investments and purchases of property and
        equipment.
  **Operating
        Activities**
  During
        the nine months ended December 31, 2007, we generated $10,621,000 in cash
        from
        operating activities. The cash provided by operating activities during the
        nine
        months ended December 31, 2007 was primarily the result of net income of
        $9,191,000, adjusted for the effects of non-cash adjustments including
        depreciation and amortization of $2,563,000 and share-based compensation
        expense
        of $831,000, partially offset by a decrease of $270,000 related to excess
        tax
        benefits from share-based awards and a decrease in net deferred tax assets
        of
        $4,689,000.
  Our
        net
        trade receivables increased by $3,933,000, from $16,929,000 at March 31,
        2007 to
        $20,862,000 as of December 31, 2007, primarily due to higher sales in the
        last
        month of the quarter ended December 31, 2007. Net inventories increased by
        $3,207,000, from $14,813,000 at March 31, 2007 to $18,020,000 as of December
        31,
        2007, primarily due to instrument manufacturing problems associated with
        new
        chemistry analyzers. Prepaid expenses decreased by $644,000, from $1,321,000
        at
        March 31, 2007 to $677,000 as of December 31, 2007, primarily due to the
        timing
        of payments. Current net deferred tax asset decreased by $4,846,000, from
        $8,979,000 at March 31, 2007 to $4,133,000 as of December 31, 2007, primarily
        as
        a result of the utilization of federal net operating loss carryforwards and
        California research and development tax credit carryforwards during the nine
        months ended December 31, 2007.
  Accounts
        payable increased by $542,000, from $6,505,000 at March 31, 2007 to $7,047,000
        as of December 31, 2007, primarily due to the timing and payment of services
        and
        inventory purchases. Accrued payroll and related expenses decreased by $243,000,
        from $3,830,000 at March 31, 2007 to $3,587,000 as of December 31, 2007,
        primarily due to a decrease in accrued bonus resulting from lower results
        than
        plan during the three months ended December 31, 2007. Total warranty reserves
        increased by $806,000, resulting from an increase in the current portion
        of
        warranty reserves of $842,000, from $315,000 at March 31, 2007 to $1,157,000
        as
        of December 31, 2007, partially offset by a decrease in the non-current portion
        of warranty reserves of $36,000, from $532,000 at March 31, 2007 to $496,000
        as
        of December 31, 2007. The net change in warranty reserves is based on (a)
        the
        number of instruments in standard warranty and estimated repair costs and
        (b) an
        estimate of defective reagent discs and replacement costs. Total deferred
        revenue decreased by $171,000, resulting from a decrease in the current portion
        of deferred revenue of $137,000, from $917,000 at March 31, 2007 to $780,000
        as
        of December 31, 2007, and a decrease in the non-current portion of deferred
        revenue of $34,000, from $1,244,000 at March 31, 2007 to $1,210,000 as of
        December 31, 2007, primarily due to the amortization of maintenance contracts
        offered to customers from time to time as incentives in the form of free
        goods
        in connection with the sale of our products.
  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.
  27
  **Investing
        Activities**
  Net
        cash
        used in investing activities during the nine months ended December
        31 ,
        2007
        totaled $11,460,000. This was  attributed
        to our short-term investments and property and equipment, as described below:
  **Short-term
        Investments.** Cash
        used to purchase short-term investments, consisting of auction rate securities,
        certificate of deposits, corporate debt securities and municipal bonds, totaled
        $41,742,000 during the nine months ended December 31, 2007. Cash provided
        by
        proceeds from maturities of short-term investments totaled $32,804,000 during
        the nine months
        ended December 31, 2007.
  **Property
        and Equipment** **.** Cash
        used to purchase property and equipment totaled $2,522,000 during the nine
        months ended December 31, 2007, primarily to support (a) new product
        introduction and (b) more efficient production lines. 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 during the nine months
        ended December
        31 ,
        2007
        totaled $2,448,000, primarily consisting of $2,288,000 from proceeds from
        stock
        options exercises and $ 270,000
        from excess tax benefits from share-based awards ,
        partially offset by $110,000 from payment of income withholding taxes due
        upon
        vesting of restricted stock units.
  **Line
        of Credit**
  We
        have 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 any 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,
        2007,
        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, 2007.
        At December
        31, 200 7,
        there
        was no amount outstanding under our line of credit. The weighted average
        interest rates on the line of credit during the three months ended December
        31,
        2007 and 2006 were 7.27% and 8.00%, respectively.
  The
        line
        of credit agreement contains certain financial covenants, which are evaluated
        on
        a quarterly basis. At December 31, 2007, we were in compliance with each
        of
        these covenants. Included in these financial covenants, among other
        stipulations, are the following requirements:
  ·
            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 the six month period ended September 30, 2007 and
                to have
                net income before preferred stock dividends and accretion on preferred
                stock of at least $1,150,000 for the fiscal year ending March 31,
                2008.  ·
            We
                are required to comply with certain financial covenants as
                follows:  **Financial
                  Covenants**
              **Requirements**Quick
                  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 $25,731,000
  Borrowings
        under the line of credit are collateralized by our net book value of assets
        of
        $100.3 million at December 31, 2007, including our intellectual property.
  **Purchase
        Commitments**
  A
        discussion of our amended  original
        equipment manufacturing agreement with Diatron Messtechnik GmbH is
        included in the Notes to the Unaudited Condensed Financial
        Statements.
  **Contingencies**
  We
        are
        involved from time to time in various litigation matters in the normal course
        of
        business. While the outcome of these proceedings and claims cannot be predicted
        with certainty, we do not believe that the ultimate resolution of these matters
        will have a material effect on our financial position or results of
        operations.
  **Off-Balance
        Sheet Arrangements**
  We
        have
        no off-balance sheet arrangements.
  28
  **Financial
        Condition**
  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 12 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 opportunities.
  **RECENT
        ACCOUNTING PRONOUNCEMENTS**
  A
        discussion of recent accounting pronouncements is included in Note 2 of the
        Notes to the Unaudited Condensed Financial Statements.
  **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
  **Interest
        Rate Risk**
  We
        are
        exposed to the impact of interest rate changes with respect to our short-term
        investments and line of credit.
  We
        invest
        excess cash in cash equivalents and in various types of short-term investments.
        Our investment objective is to maximize yields without significantly increased
        risk. At December 31, 2007, our short-term investments totaled $43,966,000,
        and
        there were no unrealized gains. The short-term investments at December 31,
        2007
        consisted of auction rate securities, certificate of deposits and municipal
        bonds. Although auction rate securities may have maturities beyond one year,
        these securities were classified as short-term, based on their highly liquid
        nature and due to the frequency with which the interest rate is reset;
        accordingly, we have the ability to quickly liquidate these securities. In
        addition, we have the ability to hold the certificate of deposits and municipal
        bonds until maturity and therefore, we believe
        we have no material exposure to interest rate risk .
        A
        sensitivity analysis assuming a hypothetical 10% movement in interest rates
        applied to our investment balances at December 31, 2007 indicated that such
        market movement would not have a material effect on our business, operating
        results or financial condition. We have not experienced any significant losses
        on our investment portfolio.
  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, 2007. Consequently, an increase in the prime rate would expose
        us
        to higher interest expenses. A sensitivity analysis assuming a hypothetical
        10%
        movement in the prime rate applied to our line of credit balance at December
        31,
        2007 indicated that such market movement would not have a material effect
        on our
        business, operating results or financial condition, as there was no amount
        outstanding on our line of credit at December 31, 2007.
  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.”
  **Foreign
        Currency Rate Fluctuations**
  We
        operate primarily in the United States and a majority of our revenues, cost
        of
        revenues, operating expenses and capital purchasing activities during the
        three
        and nine months ended December 31, 2007 were transacted in U.S. dollars.
        However, we are exposed to foreign currency exchange rate fluctuations on
        the
        hematology instruments and hematology reagent kits purchased from Diatron
        Messtechnik GmbH, which are denominated in Euros. Additionally, operations
        from
        our Germany sales office are stated in Euros and translated into U.S. dollars
        at
        the period-end exchange rates. To
        the
        extent the U.S. dollar strengthens against the Euro currency, the translation
        of
        the foreign currency denominated transactions may result in reduced cost
        of
        revenues and operating expenses. Similarly, our cost of revenues and operating
        expenses will increase, if the U.S. dollar weakens against Euro
        currency.
  Other
        than the foregoing, there have been no material changes in our market risk
        during the three and nine months ended December 31, 2007 compared to the
        disclosures in Part II, Item 7A of our Annual Report on Form 10-K for the
        fiscal
        year ended March 31, 2007.
  **Item
        4. Controls and Procedures**
  **Evaluation
        of Disclosure Controls and Procedures**
  Based
        on
        our management’s evaluation, with the participation of our principal executive
        officer and principal financial officer, as of the end of the period covered
        by
        this report, our principal executive officer and principal financial officer
        have concluded that our disclosure controls and procedures (which are defined
        under SEC rules as controls and other procedures of a company that are designed
        to ensure that information required to be disclosed by a company in the reports
        that it files under the Securities Exchange Act of 1934, as amended, (the
        “Exchange Act”) is recorded, processed, summarized and reported within required
        time periods), were effective.
  29
  **Changes
        in Internal Control over Financial Reporting**
  During
        the quarter ended December 31, 2007, there was 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.
  **Inherent
        Limitations on Controls and Procedures**
  A
        control
        system, no matter how well conceived and operated, can provide only reasonable,
        not absolute, assurance that the objectives of the control system are met.
        Because of its inherent limitations, internal control over financial reporting
        may not prevent or detect misstatements. Also, projections of any evaluation
        of
        effectiveness to future periods are subject to the risks that controls may
        become inadequate because of changes in conditions, or that the degree of
        compliance with the policies or procedures may deteriorate. Accordingly,
        even an
        effective system of internal control will provide only reasonable assurance
        that
        the objectives of the internal control system are met.
  **PART
        II - OTHER INFORMATION**
  **Item
        1. Legal Proceedings**
  We
        are
        involved from time to time in various litigation matters in the normal course
        of
        business. We do not believe that the ultimate resolution of these matters
        will
        have a material effect on our financial position or results of operations.
  **Item
        1A. Risk Factors**
  **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.
  When
        used
        in these risk factors, the words “anticipates,” “believes,” “continue,” “could,”
“estimates,” “expects,” “future,” “intends,” “may,” “might,” “plans,”
“projects,” “will” 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.
  In
        evaluating our business, you should carefully consider the following risks
        in
        addition to the other information in our Annual Report on Form 10-K for the
        fiscal year ended March 31, 2007 as filed with the Securities and Exchange
        Commission on June 14, 2007 .
        We note
        these factors for investors as permitted by the Private Securities Litigation
        Reform Act of 1995. It is not possible to predict or identify all such factors
        and, therefore, you should not consider any of the risks to be a complete
        statement of all the potential risks or uncertainties that we face.
  ***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.***
  We
        are
        not able to accurately predict our sales in future quarters. Our revenue
        in the
        medical and veterinary markets is derived primarily by selling to distributors
        who resell our products to the ultimate user. While we are better able to
        predict sales of our reagent discs, as we sell these discs primarily for
        use
        with blood chemistry analyzers that we sold in prior periods, we generally
        are
        unable to predict with much certainty sales of our blood chemistry analyzers,
        as
        we typically sell our blood chemistry analyzers to new users. Accordingly,
        our
        sales in any one quarter are not indicative of our sales in any future
        period.
  We
        generally operate with a 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.
  The
        sales
        cycle for our products can fluctuate, which may cause revenue and operating
        results to vary significantly from period to period. We believe the fluctuation
        is due to (i) seasonal patterns in the decision making processes by our
        independent distributors and direct customers, (ii) inventory or timing
        considerations by our distributors and (iii) on
        the
        purchasing requirements of the U.S. Military to acquire our products. Accordingly,
        we believe that period to period comparisons of our results of operations
        are
        not necessarily meaningful.
  In
        the
        future, our periodic operating results may vary significantly depending on,
        but
        not limited to, a number of factors, including:
  30
  ·  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
        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 overall cost and require 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 systems through both direct sales and distribution
        channels to veterinarians. Although we believe that in our targeted markets,
        our
        reagent disc products provide a sufficient breadth of test menus, we continue
        to
        develop new animal blood tests and we cannot be assured that the tests will
        be
        accepted by the veterinary market.
  In
        the
        human medical market, we have relatively limited experience in large scale
        sales
        of our Piccolo blood chemistry analyzer. Although we believe that our blood
        chemistry 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
        could fail to achieve anticipated revenue if problems related to the manufacture
        of our new blood chemistry analyzers are not
        resolved.***
  We
        manufacture our blood chemistry analyzers at our manufacturing facility in
        Union
        City, California. We are currently experiencing problems related to the
        manufacture of our new blood chemistry analyzer, which are primarily related
        to
        certain key components that we purchase from various suppliers. These
        manufacturing problems may be potentially related to quality on key components
        from our suppliers or to design issues of the key components required in
        our
        blood analyzer. If we are unable to resolve these manufacturing problems
        on our
        new blood chemistry analyzer, we will not be able to manufacture sufficient
        quantities to meet anticipated demand and, therefore, will not be able to
        effectively market and sell our new blood chemistry analyzer; accordingly,
        our
        revenue and business would be materially adversely affected.
  ***We
        rely on patents and other proprietary information, the loss of any would
        negatively affect our business.***
  As
        of
        December 31, 2007, 35 patent applications have been filed on our behalf with
        the
        United States Patent and Trademark Office (“USPTO”), of which 30 patents 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 us, 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 USPTO 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 USPTO, 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 .
  31
  ***We
        must continue to develop our marketing and distribution experience in the
        human
        diagnostic market or our business will not grow.***
  Although
        we have gained experience marketing our VetScan products in the veterinary
        diagnostic market, we have limited sales, marketing and distribution experience
        with our Piccolo chemistry analyzers in the human diagnostic market.
        Accordingly, we cannot assure you that:
  ·
            we
                will be able to establish and maintain effective distribution arrangements
                in the humandiagnosticmarket;  ·
            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
        must increase sales of our Piccolo and VetScan products or we may not be
        able to
        maintain profitability.***
  As
        of
        December 31, 2007, we had cumulative net losses of $6.3 million. Our ability
        to
        continue to be consistently profitable will depend, in part, on our ability
        to
        increase our sales volumes of our Piccolo and VetScan products. Increasing
        the
        sales volume of our products will depend upon, among other things, 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
        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.***
  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. Our Piccolo and VetScan chemistry analyzers may
        be
        unable to detect all 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 chemistry
        analyzers. Therefore, even if a mass defect within a lot or lots of reagent
        discs were detected by our Piccolo and VetScan chemistry analyzers, 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 chemistry
        analyzer, 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.
  32
  ***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 or expand our business.***
  As
        of
        December 31, 2007, we have 68 full-time sales personnel directly involved
        in our
        sales and marketing activities, many of whom have been employed by us for
        a
        limited period of time. If we are to increase our direct sales, we will need
        to
        train new sales personnel 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 resources 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 chemistry
        analyzers. Historically, we have developed reagent discs suitable for the
        human
        medical and veterinary diagnostic markets. We have received 510(k) clearances
        from the U.S. Food and Drug Administration (“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 and we rely on sole distributor
        arrangements in a number of countries. Our failure to successfully maintain
        these relationships could adversely affect our ability to*** ***achieve
        our anticipated revenue or expand our business*** ***.***
  We
        sell
        our medical and veterinary 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 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. One distributor, DVM Resources, accounted for 12%
        and 13%
        of our total worldwide revenues for the three months ended December 31, 2007
        and
        2006, respectively, and for 13% and 15% of our total worldwide revenues for
        the
        nine months ended December 31, 2007 and 2006, respectively.
  We
        have a
        number of distributors in the United States who distribute our VetScan products.
        While we continue to enter into arrangements with veterinary distributors,
        we
        have also terminated our distribution relationships with the veterinary division
        of Henry Schein in May 2006. While we have in the past, and expect to in
        the
        future, support
        those customers who were previously supplied products by Henry Schein through
        our current distributor base and direct service, the loss of these or other
        distributors may negatively affect our future revenues. Accordingly,
        if one or more of our distributors were to stop selling our products in the
        future, we may experience a temporary sharp decline in our sales revenue
        or we
        may experience a delay in our sales revenue.
  In
        the
        United States medical market, we have a few distributors for our Piccolo
        products. We entered into formal distribution agreements with McKesson
        Medical-Surgical Inc. in our first quarter of fiscal 2008, Cardinal Health
        in
        our fourth quarter of fiscal 2007, Henry Schein’s Medical Group in our first
        quarter of fiscal 2007 and PSS World Medical, Inc. in our third quarter of
        fiscal 2006, to sell and market Piccolo chemistry analyzers and medical reagent
        discs. We depend on these distributors to assist us in promoting market
        acceptance of our Piccolo chemistry analyzers.
  Internationally,
        we have only a few distributors for our products in both the medical and
        veterinary diagnostic markets. We terminated our distributor agreement with
        T.
        Chatani & Co., Ltd. in Japan in the first quarter of fiscal 2008 and,
        although T. Chatani & Co., Ltd has agreed to continue to service Abaxis
        customers, which includes selling our reagent discs and hematology reagent
        kits,
        for a limited period, our total product sales to T. Chatani & Co., Ltd.
        under the arrangement have significantly decreased and, as a result, our
        quarterly revenues has been adversely impacted. In October 2007, we signed
        an
        exclusive distribution agreement with Central Scientific Commerce, Inc.,
        (CSC)
        to distribute the complete line of Abaxis medical and veterinary products
        in
        Japan. In the third quarter of fiscal 2008, CSC began the process of registering
        our new instruments, the VetScan VS2, VetScan HM5 and Piccolo xpress in Japan,
        but we have not yet made any sales of instruments to CSC under the new
        agreement. Accordingly, an inability of, or any delays by, our distributor
        in
        receiving the necessary approvals can adversely impact our instrument revenues
        in Japan. We cannot assure you that our new distribution relationship with
        CSC
        will be as successful as our prior distribution arrangement, or at
        all.
  We
        currently have distributors that carry either our medical or veterinary products
        in the following countries: Australia, Austria, Bahrain, Belgium, Canada,
        Denmark, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Korea,
        Macao, the Netherlands, New Zealand, Portugal, Romania ,
        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
        new and existing products. These distributors may not be successful in obtaining
        proper approvals for our new and existing 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 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 products
        internationally.
  33
  ***We
        depend on 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 materials to us could harm our
        business.***
  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, 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 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 the following single source vendors:
                  PerkinElmer, Inc. and UDT Sensors. Our analyzers 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 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. To date,
                  we
                  have qualified three suppliers to produce the reagents for our
                  hematology
                  instruments: Clinical Diagnostic Solutions, Inc., Diatron and Mallinckrodt
                  Baker BV.
  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
        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 the next
        12
        months, 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,
        and
        these tests are more fully explained herein under the subheading “Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations . ”
  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.  34
  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.
  ***We
        may not be able to compete effectively with larger, better established entities
        or their products, or with future organizations or future products, which
        could
        cause our sales to decline.***
  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” (a listing of our competitors is
                  listed below).
  Historically,
        hospitals and commercial laboratories performed most human diagnostic testing,
        and commercial laboratories performed 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 include:
 ·
                range
                    of tests offered;
 ·
                  immediacy
                      of results;
 ·
                      cost
                          effectiveness;
 ·
                          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 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 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.), Kodak (DT60
        analyzer), Polymedco and Roche (Reflotron system). 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 (the “CMS”) set 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.
  35
  ***We
        are subject to numerous governmental regulations and any regulatory changes
        are
        difficult to predict and may be damaging to our
        business.***
  **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 FDA. 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) 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, 2007, we
        have
        received market clearance from the FDA for our Piccolo chemistry analyzer
        and 25
        reagent tests that we have on 13 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
        medical 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. Although
        we have obtained a license from the State of California to manufacture our
        products, various state regulatory agencies may regulate the manufacture
        of our
        products. To date, we have complied with the following:
  ·
            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 September 2005 and March 2003, 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.  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.
  **Effects
        of the Clinical Laboratory Improvement Amendments on Our
        Products**
  Our
        Piccolo products are also affected by the Clinical Laboratory Improvement
        Amendments (the “CLIA”) of 1988. The CLIA are intended to insure the quality and
        reliability of all medical testing in the United States regardless of where
        tests are performed. The current CLIA regulations divide laboratory tests
        into
        the following three categories:
  ·
            waived;  ·
            moderately
                complex; and  ·
            highly
                complex.  36
  Many
        of
        the tests performed using the Piccolo chemistry analyzer 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 some Piccolo
        products to customers who meet the standards of a laboratory. To receive
        “laboratory” certification, a testing facility must be certified by the CMS.
        After the testing facility receives a “laboratory” certification, it must then
        meet the CLIA regulations. Because we can only sell some Piccolo products
        to
        testing facilities that are certified “laboratories,” the market for some
        products is correspondingly constrained.
  In
        October 2007, the FDA granted waived status under CLIA regulations for the
        following analytes when used in conjunction with the Piccolo xpress and Piccolo
        Classic chemistry analyzers for the medical market: chloride (CL-), potassium
        (K+), sodium (NA+) and total carbon dioxide (TCO2).
  Prior
        to
        the end of fiscal 2007, the FDA granted waived status under CLIA regulations
        for
        the following tests when used in conjunction with our Piccolo chemistry
        analyzer: alanine aminotransferase (ALT), albumin (ALB), alkaline phosphatase
        (ALP), amylase (AMY), aspartate aminotransferase (AST), calcium (CA), creatinine
        (CRE), gamma glutamyltransferase (GGT), glucose (GLU), high-density lipoprotein
        cholesterol (HDL), total bilirubin (TBIL), total protein (TP), triglycerides
        (TRIG), total cholesterol (CHOL), urea nitrogen (BUN) and uric acid (UA).
        Accordingly, we can offer the following Piccolo reagent discs as waived tests
        to
        the medical market: Basic Metabolic Panel, Comprehensive Metabolic Panel,
        Electrolyte Panel, General Chemistry 6, General Chemistry 13, Kidney Check,
        Lipid Panel, Lipid Panel Plus and Liver Panel Plus. Waived status permits
        untrained personnel to run the Piccolo chemistry analyzer using these tests;
        thus, extending the sites (doctors’ offices and other point-of-care
        environments) that can use the Piccolo chemistry analyzer.
  We
        cannot
        assure you that we will successfully receive CLIA 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 waivers for additional analytes.
  **Need
        to Comply with Various Federal, State, Local and International
        Regulations**
  Federal,
        state, local and international 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. Foreign certifications that we
        have
        received include the following, among others:
  ·
            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
        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
        FDA and of the State of California, including the Quality System Regulation,
        current regulations depend on administrative interpretations. Future
        interpretations made by the FDA, 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 or our ability
        to
        execute our business strategy and generate sales could be
        harmed.***
  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 Securities and Exchange Commission as an exhibit. Although historically
        we
        have been relatively successful both in retaining our current management
        and
        scientific staff, as well as 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. We currently do not maintain key man life insurance on any of
        our
        employees.
  37
  ***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 internal control
        over
        financial reporting by our management and an attestation of its assessment
        by an
        independent registered public accounting firm. The standards that must be
        met
        for management to assess the internal control over financial reporting as
        effective are new and complex, 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 our fiscal years ended March 31, 2007 and 2006. Although
        we
        received an unqualified opinion on our financial statements for the fiscal
        years
        ended March 31, 2007 and 2006, and on the effectiveness of our internal control
        over financial reporting as of March 31, 2007 and 2006, the steps we have
        taken
        to date and the steps we are still in the process of taking to improve the
        reliability of our financial statements in the future are subject to continued
        management review, as well as oversight by the audit committee of our board
        of
        directors. The assessment for our fiscal year ended March 31, 2005 identified
        a
        material weakness in our internal control over financial reporting related
        to
        ineffective controls over the determination and reporting of the provision
        for
        income taxes. The control deficiency identified in fiscal 2005 could have
        resulted in a future material misstatement of our income tax provision (and
        related balance sheet accounts) that would not have been prevented or detected
        by management. Any failure to implement required new or improved controls,
        or
        difficulties encountered in implementation could harm operating results or
        prevent us from accurately reporting financial results or cause a failure
        to
        meet our reporting obligations in the future. If our management cannot assess
        our internal control over financial reporting as effective, or our independent
        registered public accounting firm is unable to provide an unqualified
        attestation report on such assessment, investor confidence and our share
        value
        may be negatively impacted.
  ***Our
        operating results could be materially affected by unanticipated changes in
        our
        tax provisions or exposure to additional income tax
        liabilities.***
  Our
        determination of our tax liability (like any company’s determination of its tax
        liability) is subject to review by applicable tax authorities. Any adverse
        outcome of such a review could have an adverse effect on our operating results
        and financial condition. In addition, the determination of our provision
        for
        income taxes and other tax liabilities requires significant judgment including
        our determination of whether a valuation allowance against deferred tax assets
        is required. Although we believe our estimates and judgments are reasonable,
        the
        ultimate tax outcome may differ from the amounts recorded in our financial
        statements and may materially affect our financial results in the period
        or
        periods for which such determination is made.
  ***We
        must comply with strict and potentially costly environmental regulations
        or we
        could pay significant fines.***
  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), which cost approximately $82,000 in
        fiscal
        2007, and includes other environmental health and safety expenses 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.
  ***Our
        facilities and manufacturing operations are vulnerable to natural disasters
        and
        other unexpected losses; system failures or delays may harm our
        business.***
  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 blood
        chemistry analyzers or the reagent discs used in the blood chemistry 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 location in Union City, California
        experienced a system failure or regulatory problem that temporarily shuts
        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.
  38
  ***Fluctuations
        in foreign exchange rates and the possible lack of financial stability in
        foreign countries could prevent overseas sales
        growth.***
  Our
        international sales are currently overwhelmingly 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, which could result in substantial losses for
        investors.***
  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 quarter ended December 31, 2007, the closing
        sale prices of our common stock on the NASDAQ Global Market ranged from $22.76
        to $39.74 per share and the closing sale price for our quarter ended December
        31, 2007 was $35.86 per share. During the last eight fiscal quarters ended
        December 31, 2007, our stock price closed at a high of $39.74 on December
        24,
        2007 and a low of $16.70 on January 3, 2006. Many factors may affect the
        market
        price of our common stock, including:
  ·
            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 our patents or our other proprietary rights;  ·
            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
        2. Unregistered Sales of Equity Securities and Use of Proceeds**
  Not
        applicable.
  **Item
        3. Defaults Upon Senior Securities**
  Not
        applicable.
  39
  **Item
        4. Submission of Matters to a Vote of Security Holders**
  At
        our
        annual meeting of shareholders held on October 25, 2007, 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:
  **Nominee**
              **FOR**
              **WITHHELD**Clinton
                  H. Severson
              19,040,275
              307,250Richard
                  J. Bastiani, Ph.D.
              19,040,442
              307,083Henk
                  J. Evenhuis
              19,065,618
              281,907Brenton
                  G.A. Hanlon
              19,033,342
              314,183Prithipal
                  Singh, Ph.D.
              18,091,107
              1,253,418Ernest
                  S. Tucker III, M.D.
              19,040,528
              306,997
  (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, 2008, were as follows:
  **FOR**
              **AGAINST**
              **ABSTAIN**19,253,398
              54,754
              39,373
  **Item
        5. Other Information**
  Not
        applicable.
  **Item
        6. Exhibits**
  **Exhibit
                  No.**
              **Description
                  of Document****3.1**
              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**
              Form
                  of Warrant Agreement issued to purchasers of Series E Convertible
                  Preferred Stock (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.)**4.3**
              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 2002**31.2**
              Certification
                  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                  Act of 2002**32.1#**
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act of 2002**32.2#**
              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.
  40
 
 **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
                11, 2008
              By:
              /s/
                Clinton H. SeversonClinton
                H. SeversonPresident,
                  Chief
                  Executive Officer and Director
                (Principal Executive Officer)  Date: February
                  11, 2008
                By:
                /s/
                  Alberto
                  R. Santa InesAlberto
                  R. Santa InesChief
                    Financial Officer andVice President****of
                    Finance
                  (Principal Financial and Accounting Officer)
  41