Form: 10-K405

Annual report [Sections 13 and 15(d), S-K Item 405]

March 27, 1998

Documents

SELECTED FINANCIAL DATA

Published on March 27, 1998


Exhibit 13


SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the
Company for each of the years ended December 31, 1993, 1994, 1995, 1996 and
1997. The selected consolidated financial data presented below for the five-year
period ended December 31, 1997 have been derived from the Company's consolidated
financial statements, which have been audited by Arthur Andersen LLP,
independent public accountants. These financial data should be read in
conjunction with the consolidated financial statements, related notes and other
financial information appearing elsewhere in this Form 10-K.





YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
--------- ---------- ----------- ---------- ----------
(in thousands, except per share data)

STATEMENT OF OPERATIONS DATA:
Revenue............................. $93,062 $126,363 $188,602 $267,677 $262,970
Cost of revenue..................... 37,981 53,224 80,860 113,270 134,231
------- -------- -------- --------- --------
Gross Profit........................ 55,081 73,139 107,742 154,407 128,739
Expenses:
Sales and marketing............ 22,751 29,078 47,490 66,950 73,213
General and administrative..... 10,799 13,112 17,092 28,271 42,899
Research and development....... 6,891 8,244 10,192 12,195 17,057
Non-recurring operating charge. -- -- -- -- 34,500
Acquisition costs.............. 725 -- -- -- --
------ ------- ------- -------- -------
Income (loss) from operations....... 13,915 22,705 32,968 46,991 (38,930)
Interest income, net................ 1,127 1,588 4,068 8,332 6,670
Arbitration charge.................. -- 1,459 -- -- --
------ ------- ------- -------- -------
Net income (loss) before provision
for (benefit of) income taxes....... 15,042 22,834 37,036 55,323 (32,260)

Provision for (benefit of) income
taxes............................... 5,388 9,498 15,542 22,682 (11,140)
------- -------- ------- -------- --------
Net income (loss)................... $ 9,654 $ 13,336 $ 21,494 $ 32,641 $(21,120)
======= ======== ======== ======== ========
Net income (loss) per share:
Basic.............................. $ 0.31 $ 0.42 $ 0.65 $ 0.88 $ (0.56)
Net income (loss) per share:
Diluted............................ 0.29 0.40 0.61 0.83 (0.56)
Weighted average shares outstanding:
Basic 30,696 31,383 32,946 37,082 37,974
Weighted average shares outstanding:
Diluted............................ 33,118 33,525 35,362 39,519 37,974






YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
--------- ------------ ------------ ----------- ---------
(in thousands)
BALANCE SHEET DATA:

Working capital........ $62,483 $ 76,575 $ 228,565 $ 250,590 $ 199,902
Total assets........... 97,967 121,741 312,540 373,852 377,048
Total debt............. -- -- 1,687 3,000 4,087
Stockholders' equity .. 83,631 99,786 279,125 322,725 302,733


1




MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

- - RESULTS OF OPERATIONS

1997 Compared to 1996

Revenue for 1997 decreased 2% to $263.0 million, from $267.7 million in
1996. The decrease in revenue in 1997 compared to 1996 is primarily attributable
to decreased sales of veterinary instruments, feline test products and canine
test products. Veterinary instrument sales decreased 42%. The decrease
principally related to sales of fewer units and, to a lesser degree, lower
average unit prices for those instruments. The Company expects that instrument
sales will continue to decline as the Company's market penetration increases.
The lower feline and canine product sales were principally due to a program
designed to reduce U.S. distributor inventories of these products. Sales of
these products decreased 34% and 27%, respectively. These decreases were offset
in part by increased sales of veterinary laboratory services, resulting from the
inclusion of a full year of revenues from the four veterinary laboratories
acquired in 1996, the inclusion of revenue from the veterinary practice
management software companies acquired in the first and third quarters of 1997,
and increased sales of food and environmental testing products, principally
attributable to the acquisitions of Acumedia Manufacturers, Inc. in January
1997, and Idetek, Inc. in August 1996.

International revenue decreased 8% to $83.9 million, or 32% of total
Company revenue, in 1997, compared to $91.5 million, or 34% of total Company
revenue, in 1996. Revenue decreased 14% in Europe and 10% in the Pacific Rim
region (Japan, Taiwan and Australia), while revenue increased 29% in Canada and
South America. Revenues transacted in local currencies decreased 8% in Europe
and 3% in the Pacific Rim region, while revenue transacted in local currencies
in Canada and South America increased 30%. The non-currency decrease in sales in
Europe and the Pacific Rim principally relates to fewer unit sales of veterinary
instruments and, to a lesser extent, feline test products. Revenue increases in
Canada and South America are primarily attributable to increased sales of food
and environmental products.

Gross profit as a percentage of revenue was 49% for 1997 compared to 58%
for 1996. The decrease in gross margin is due to less efficient manufacturing
operations caused by lower production volumes; declining average sale prices of
veterinary instruments; a $2.9 million provision for inventory in conjuction
with the non-recurring charge discussed below; the revenue mix impact of lower
sales of higher margin veterinary test products, offset by higher sales of lower
margin veterinary laboratory services and practice management software products
and services; an increase in fixed costs associated with expansion of the
veterinary laboratory business; additional costs associated with the Company's
new distribution center; and certain fixed veterinary service and repair costs
spread over lower veterinary sales volumes.

Sales and marketing expenses were 28% and 25% of revenue in 1997 and 1996,
respectively. The increase as a percentage of revenue and the dollar increase of
$6.3 million were principally attributable to domestic sales and marketing costs
remaining constant while revenue from veterinary test products and veterinary
instruments declined and to additional sales and marketing expenses associated
with the veterinary laboratory businesses acquired in 1996 and veterinary
practice management software businesses acquired in 1997, offset in part by
reductions in European sales and marketing expenses resulting from workforce
reductions.

Research and development expenses were 6% and 5% of revenue in 1997 and
1996, respectively. The increase as a percentage of revenue and the dollar
increase of $4.9 million reflected additional resources and related overhead to
support product development and the addition of veterinary practice management
software development expenses associated with the acquisitions of the veterinary
practice management software businesses discussed above.

General and administrative expenses were 16% and 11% of revenue in 1997 and
1996, respectively. The increase as a percentage of revenue and the dollar
increase of $14.6 million were principally attributable to additional general
and administrative expense associated with acquired businesses, principally
veterinary laboratory businesses and veterinary practice management software
businesses; additional expenses associated with geographic expansion; additional
amortization of goodwill and other intangibles associated with business
acquisitions; currency

2


losses; and an additional provision for bad debts. These increases were offset
in part by a reduction in management bonuses.

On September 29, 1997 the Company announced that it would incur a
non-recurring operating charge of $28.0 million and on February 2, 1998 the
Company announced that it would increase the amount of the charge to $34.5
million. The non-recurring operating charge includes the write-downs and
write-offs of certain assets and the accrual of costs related to a significant
workforce reduction. The charge includes approximately $13.2 million to write
off in-process research and development costs associated with the acquisition of
Professionals' Software, Inc. and the Advanced Veterinary Systems business in
1997; approximately $8.0 million to settle a patent infringement lawsuit brought
by Barnes-Jewish Hospital, including associated legal costs; approximately $9.0
million in severance benefits and related costs associated with workforce
reductions in veterinary practice management software businesses, veterinary
laboratory businesses and certain other domestic and international operations,
and other facility closures; approximately $2.7 million to provide for idle
capacity and lease terminations resulting from consolidation of veterinary
practice management software operations and the closing of the Company's
Sunnyvale, California research and development facility; and approximately $1.6
million to write off assets associated with technology no longer pursued by the
Company.

Net interest income was $6.7 million in 1997 compared to $8.3 million in
1996. The decrease in interest income was due to lower cash and investment
balances during 1997 compared to 1996, due to cash invested in business
acquisitions and in additional fixed assets.

The Company's effective tax rate was 35% in 1997 compared to 41% in 1996.
The change in the effective rate was primarily attributable to the write-off of
non-deductible intangible assets discussed in the non-recurring operating
charge.

1996 Compared to 1995

Revenue for 1996 increased 42% to $267.7 million from $188.6 million in
1995. The increase in revenue was principally attributable to increased sales of
consumables used in the Company's veterinary instruments, veterinary laboratory
services resulting from acquisitions of veterinary reference laboratories,
canine test products, and a quantitative thyroid instrument introduced in the
first quarter of 1996. Price increases in the veterinary clinical products also
contributed to the increase in revenue.

International revenue increased 41% to $91.5 million in 1996 compared to
$65.0 million in 1995. Increased revenue in Europe, which included revenue of
Grange Laboratories Ltd. and Ubitech Aktiebolag acquired during 1996, accounted
for 44% of the increase in international revenue and increased revenue in Japan
accounted for 33% of the increase in international revenue for 1996 compared to
1995. The remaining increase was primarily attributable to increased revenues in
Canada, Asia and Australia. Revenue of the Company's European subsidiaries,
transacted in local currencies, increased 28% in 1996 compared to 1995. In U.S.
dollars, the European revenue increase was 24% to $59.9 million in 1996 compared
to $48.2 million for 1995.

Gross profit as a percentage of revenue was 58% for 1996 compared to 57%
for 1995. Operating and purchasing efficiencies and higher selling prices of
certain veterinary clinical chemistry products exceeded the unfavorable impact
of product mix, which resulted principally from lower margins generated by the
acquisitions of veterinary reference laboratories in 1996.

Sales and marketing expenses were 25% of revenue in 1996 and 1995. The
dollar increase of $19.5 million was principally attributable to additional
personnel in sales functions worldwide.

3



Research and development expenses were 5% of revenue in 1996 and 1995. The
dollar increase of $2.0 million reflected additional resources and related
overhead to support product development.

General and administrative expenses were 11% and 9% of revenue in 1996 and
1995, respectively. The increase as a percentage of revenue and the dollar
increase of $11.2 million were principally attributable to additional operating
expenses and acquisition costs associated with acquisitions and higher legal
expenses in 1996.

Net interest income was $8.3 million in 1996 compared to $4.1 million in
1995. The increase in interest income was due to higher invested cash balances
outstanding during 1996 versus 1995, due in large part to a public stock
offering completed in September 1995 that generated approximately $153.0 million
in net proceeds.

The Company's effective tax rate was 41% in 1996 compared to 42% in 1995.
The decrease in the effective tax rate was principally attributable to income
generated in states with lower income tax rates.

- - LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1997, the Company had $142.5 million of cash, cash
equivalents, and short-term investments and $199.9 million of working capital.

The Company's total capital budget for 1998 is approximately $20.0 million.
Under the terms of certain supply agreements with suppliers of the Company's
hematology instruments and consumables, slides for its VetTest instruments and
certain raw materials, the Company has aggregate commitments to purchase
approximately $31.8 million of products in 1998.

The Company believes that current cash and short-term investments, which
include net proceeds from the offering of the Company's Common Stock in 1995,
and funds generated from operations, will be sufficient to fund the Company's
operations for the foreseeable future.

- - FUTURE OPERATING RESULTS

The future operating results of the Company are subject to a number of
factors, including without limitation the following:

The Company's business has grown significantly over the past several years
as a result of both internal growth and acquisitions of products and businesses.
The Company has consummated a number of acquisitions since 1992, including six
acquisitions in 1996 and five acquisitions in 1997, and plans to make additional
acquisitions. Identifying and pursuing acquisition opportunities, integrating
acquired products and businesses, and managing growth require a significant
amount of management time and skill. There can be no assurance that the Company
will be effective in identifying and effecting attractive acquisitions,
assimilating acquisitions or managing future growth.

The Company has experienced and may experience in the future significant
fluctuations in its quarterly operating results. Factors such as the
introduction and market acceptance of new products and services, the mix of
products and services sold and the mix of domestic versus international revenue
could contribute to this quarterly variability. The Company operates with
relatively little backlog and has few long-term customer contracts and
substantially all of its product and service revenue in each quarter results
from orders received in that quarter, which makes the Company's financial
performance more susceptible to an unexpected downturn in business and more
unpredictable. In addition, the Company's expense levels are based in part on
expectations of future revenue levels, and a shortfall in expected revenue could
therefore result in a disproportionate decrease in the Company's net income.

The markets in which the Company competes are subject to rapid and
substantial technological change. The Company encounters, and expects to
continue to encounter, intense competition in the sale of its current and future

4


products and services. Many of the Company's competitors and potential
competitors have substantially greater capital, manufacturing, marketing, and
research and development resources than the Company.

The Company's future success will depend in part on its ability to continue
to develop new products and services both for its existing markets and for any
new markets the Company may enter in the future. The Company believes that it
has established a leading position in many of the markets for its animal health
diagnostic products and services, and the maintenance and any future growth of
its position in these markets is dependent upon the successful development and
introduction of new products and services. The Company also plans to devote
significant resources to the growth of its veterinary laboratory business,
veterinary practice management software business, and its business in the food,
hygiene and environmental markets and to the development of an animal
pharmaceutical product business, where the Company's operating experience and
product and technology base are more limited than in its animal health
diagnostic product markets. There can be no assurance that the Company will
successfully complete the development and commercialization of products and
services for existing and new businesses.

The Company's success is heavily dependent upon its proprietary
technologies. The Company relies on a combination of patent, trade secret,
trademark and copyright law to protect its proprietary rights. There can be no
assurance that patent applications filed by the Company will result in patents
being issued, that any patents of the Company will afford protection against
competitors with similar technologies, or that the Company's non-disclosure
agreements will provide meaningful protection for the Company's trade secrets
and other proprietary information. Moreover, in the absence of patent
protection, the Company's business may be adversely affected by competitors who
independently develop substantially equivalent technologies. In addition, the
Company licenses certain technologies used in its products from third parties,
and the Company may be required to obtain licenses to additional technologies in
order to continue to sell certain products. There can be no assurance that any
technology licenses which the Company desires or is required to obtain will be
available on commercially reasonable terms.

From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. In particular, the Company has
received notices claiming that certain of the Company's immunoassay products
infringe third-party patents. Except as noted in "Legal Proceedings" with
respect to the patent infringement suit filed by Synbiotics Corporation, the
Company is not aware of any pending litigation with respect to such claims.
Patent litigation frequently is complex and expensive and the outcome of patent
litigation can be difficult to predict. There can be no assurance that the
Company will prevail in any infringement proceedings that have been or may be
commenced against the Company, and an adverse outcome may preclude the Company
from selling certain products or require the Company to pay damages or make
additional royalty or other payments with respect to such sales. In addition,
from time to time other types of lawsuits are brought against the Company,
wherein an adverse outcome could adversely affect the Company's results of
operations. See "Legal Proceedings."

Certain components used in the Company's products are currently available
from only one source and others are available from only a limited number of
sources. The Company's inability to develop alternative sources if and as
required in the future, or to obtain sufficient sole or limited source
components as required, could result in cost increases or reductions or delays
in product shipments. Certain technologies licensed by the Company and
incorporated into its products are also available from a single source, and the
Company's business may be adversely affected by the expiration or termination of
any such licenses or any challenges to the technology rights underlying such
licenses. In addition, the Company currently purchases or is contractually
required to purchase certain of the products that it sells from one source.
Failure of such sources to supply product to the Company may have a material
adverse effect on the Company's business.

In 1997, international revenue was $83.9 million and accounted for 32% of
total revenue, and the Company expects that its international business will
continue to account for a significant portion of its total revenue. Foreign
regulatory bodies often establish product standards different from those in the
United States, and designing products in compliance with such foreign standards
may be difficult or expensive. Other risks associated with foreign operations
include possible disruptions in transportation of the Company's products, the
differing product and service needs of foreign customers, difficulties in
building and managing foreign operations, fluctuations in the

5


value of foreign currencies, import/export duties and quotas, and unexpected
regulatory, economic or political changes in foreign markets.


The development, manufacturing, distribution and marketing of certain of
the Company's products and provision of its services, both in the United States
and abroad, are subject to regulation by various domestic and foreign
governmental agencies. Delays in obtaining, or the failure to obtain, any
necessary regulatory approvals could have a material adverse effect on the
Company's future product and service sales and operations. Any acquisitions of
new products, services and technologies may subject the Company to additional
areas of government regulations.

The Company is conducting an evaluation of its information technology
systems and its products for Year 2000 compliance. The Company's worldwide
accounting system is Year 2000 compliant, and Year 2000 issues related to its
other information technology systems will be addressed through planned upgrades
prior to 2000. A substantial majority of the Company's products, including its
instrument-based diagnostic systems and a majority of its installed base of
veterinary practice management software systems, already are Year 2000
compliant. The Company expects that by the end of 1998 all practice management
systems offered by the Company will be Year 2000 compliant. The costs of
upgrading the Company's information technology systems and its practice
management systems are not expected to be material to the Company's financial
condition or results of operations. The Company has commenced an evaluation of
the Year 2000 compliance of its vendors, but at this time cannot predict the
extent to which its vendors will have Year 2000 problems and the impact of any
such problems on the Company.

The development, manufacture, distribution and marketing of the Company's
products and provision of its services involve an inherent risk of product
liability claims and associated adverse publicity. Although the Company
currently maintains liability insurance, there can be no assurance that the
coverage limits of the Company's insurance policies will be adequate. Such
insurance is expensive, difficult to obtain and may not be available in the
future on acceptable terms or at all.


6





FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULE


Page
----



- Report of Independent Public Accountants................................. 8

- Consolidated Balance Sheets as of December 31, 1996 and 1997............. 9

- Consolidated Statements of Operations for the Years Ended December 31,
1995, 1996 and 1997.................................................... 10

- Consolidated Statements of Stockholders' Equity for the Years Ended
December 31,1995, 1996 and 1997........................................ 11

- Consolidated Statements of Cash Flows for the Years Ended December 31,
1995, 1996 and 1997.................................................... 12

- Notes to Consolidated Financial Statements............................... 13

- Schedule II
Valuation and Qualifying Accounts...................................... 30



7




REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To IDEXX Laboratories, Inc.:

We have audited the accompanying consolidated balance sheets of IDEXX
Laboratories, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These consolidated financial statements and the
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of IDEXX
Laboratories, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.

Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. The schedule has been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly states, in all material
respects, the financial data required to be set forth therein in relation to the
basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 12, 1998

8




IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)



DECEMBER 31,
----------------------
1996 1997
-------- --------
ASSETS

Current Assets:
Cash and cash equivalents ...................................... $127,741 $106,972
Short-term investments ......................................... 45,896 35,502
Accounts receivable, less reserves of $4,001 and
$5,082 in 1996 and 1997, respectively ........................ 66,633 47,341
Inventories .................................................... 48,402 60,174
Deferred income taxes .......................................... 5,363 15,396
Other current assets ........................................... 7,682 8,832
-------- --------
Total current assets ...................................... 301,717 274,217
-------- --------
Long-Term Investments ............................................... 7,255 11,134
Property and Equipment, at cost:
Leasehold improvements ......................................... 15,150 16,596
Machinery and equipment ........................................ 21,667 25,432
Office furniture and equipment ................................. 17,348 23,731
Land ........................................................... 890 1,193
Buildings ...................................................... 4,202 4,462
-------- --------
59,257 71,414
Less-- Accumulated depreciation and amortization ............... 22,863 30,387
-------- --------
36,394 41,027
Other Assets, net ................................................... 28,486 50,670
-------- --------
$373,852 $377,048
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................... $ 18,692 $ 12,472
Accrued expenses ............................................... 23,872 42,147
Notes payable .................................................. 3,000 4,087
Deferred revenue ............................................... 5,563 15,609
-------- --------
Total current liabilities ................................. 51,127 74,315
-------- --------
Commitments and Contingencies (Note 5)
Stockholders' Equity:
Preferred Stock, $1.00 par value -- Authorized --
500 shares None issued and outstanding ....................... -- --
Series A Junior Participating Preferred Stock, $1.00 par
value Designated -- 100 shares of Preferred Stock
None issued and outstanding .................................. -- --
Common Stock, $0.10 par value-- Authorized--
60,000 shares Issued and outstanding -- 37,774
shares in 1996 and 38,169 shares in 1997 ..................... 3,777 3,817
Additional paid-in capital ..................................... 253,118 257,275
Retained earnings .............................................. 67,376 46,256
Cumulative translation adjustment .............................. (1,546) (4,615)
-------- --------
Total stockholders' equity ................................ 322,725 302,733
-------- --------
$373,852 $377,048
======== ========


The accompanying notes are an integral part of these consolidated financial
statements.

9



IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)




Years Ended December 31,
---------------------------------
1995 1996 1997
-------- -------- --------

Revenue...................................... $188,602 $267,677 $262,970
Cost of revenue.............................. 80,860 113,270 134,231
-------- -------- --------
Gross profit............................ 107,742 154,407 128,739
-------- -------- --------
Expenses:
Sales and marketing..................... 47,490 66,950 73,213
General and administrative.............. 17,092 28,271 42,899
Research and development................ 10,192 12,195 17,057
Non-recurring operating charge.......... -- -- 34,500
--------- --------- --------
Income (loss) from operations...... 32,968 46,991 (38,930)
Interest income, net......................... 4,068 8,332 6,670
--------- --------- --------
Net income (loss) before provision
for (benefit of) income taxes...... 37,036 55,323 (32,260)

Provision for (benefit of) income taxes...... 15,542 22,682 (11,140)
-------- -------- --------
Net income (loss).................. $ 21,494 $ 32,641 $(21,120)
======== ======== ========

Earnings (loss) per share: Basic............ $ 0.65 $ 0.88 $ (0.56)
======== ======== ========
Earnings (loss) per share: Diluted.......... $ 0.61 $ 0.83 $ (0.56)
======== ======== ========



The accompanying notes are an integral part of these consolidated financial
statements.

10




IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)




COMMON STOCK
------------------------ ADDITIONAL CUMULATIVE TOTAL
NUMBER $0.10 PAID-IN RETAINED TRANSLATION STOCKHOLDERS'
OF SHARES PAR VALUE CAPITAL EARNINGS ADJUSTMENT EQUITY
----------- --------- ----------- ------------ -------------- ------------

BALANCE, December 31, 1994 ...... 31,543 $3,154 $ 73,263 $ 23,728 $ (360) $ 99,785

Sale of Common Stock,
net of issuance
costs ..................... 4,600 460 152,504 -- -- 152,964
Exercise of stock
options, including
the tax benefit ........... 406 41 5,039 -- -- 5,080
Net income .................. -- -- -- 21,494 -- 21,494
Translation
Adjustment ................ -- -- -- -- (198) (198)
------- ------ -------- -------- ------- ---------
BALANCE, December 31, 1995 ....... 36,549 3,655 230,806 45,222 (558) 279,125

Issuance of Common
Stock
for acquisition of
Idetek, Inc. .............. 393 39 10,539 (10,487) -- 91
Exercise of stock
options, including the
tax benefit ............... 832 83 11,773 -- -- 11,856
Net income .................. -- -- -- 32,641 -- 32,641
Translation
Adjustment ................ -- -- -- -- (988) (988)
------- ------ -------- -------- ------- ---------
BALANCE, December 31, 1996 ....... 37,774 3,777 253,118 67,376 (1,546) 322,725

Issuance of common stock in
settlement of VetTest
acquisition................ 6 1 87 -- -- 88
Exercise of stock
options, including the
tax benefit ............... 389 39 4,070 -- -- 4,109
Net loss .................... -- -- -- (21,120) -- (21,120)
Translation
Adjustment ................ -- -- -- -- (3,069) (3,069)
------- ------ -------- -------- ------- ---------
BALANCE, December 31, 1997 ....... 38,169 $3,817 $257,275 $ 46,256 $(4,615) $ 302,733
======= ====== ======== ======== ======= =========


The accompanying notes are an integral part of these consolidated financial
statements.

11



IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)




YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
--------- --------- ---------

Cash Flows From Operating Activities:
Net income (loss) ..................................... $ 21,494 $ 32,641 $(21,120)
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities
Depreciation and amortization .................... 5,742 10,390 14,425
Non-cash portion of non-recurring
operating charge ............................... -- -- 14,800
Changes in assets and liabilities, net
of acquisition(s):
Accounts receivable ......................... (19,587) (18,875) 23,712
Inventories ................................. (7,403) (19,246) (11,218)
Other current assets ........................ (3,211) (6,370) (8,400)
Accounts payable ............................ 1,625 6,062 (7,200)
Accrued expenses ............................ 8,787 9,349 8,983
Deferred revenue ............................ 1,956 1,299 (483)
-------- -------- --------
Net cash provided by
operating activities ................. 9,403 15,250 13,499
-------- -------- --------
Cash Flows From Investing Activities:
Increase in investments, net .......................... (22,800) (5,116) 6,515
Purchases of property and equipment ................... (15,860) (11,783) (12,507)
Increase in other assets .............................. (106) (1,859) (3,699)
Acquisition(s) of business(es), net of cash
acquired ............................................ (3,500) (19,709) (23,047)
-------- -------- --------
Net cash used in investing
Activities .............................. (42,266) (38,467) (32,738)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from issuance of common stock, net
of issuance costs: ................................... 152,964 -- --
Proceeds from issuance of (repayment of)
notes payable ........................................ 1,687 (1,887) (1,509)
Proceeds from the exercise of stock options ............ 2,484 4,580 3,048
-------- -------- --------
Net cash provided by
financing activities .................... 157,135 2,693 1,539
-------- -------- --------
Net effect of Exchange Rate Changes ........................ (198) (987) (3,069)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents .............................................. 124,074 (21,511) (20,769)
Cash and Cash Equivalents, Beginning of Year ............... 25,178 149,252 127,741
-------- -------- --------
Cash and Cash Equivalents, End of Year ..................... $149,252 $127,741 $106,972
======== ======== ========
Supplemental Disclosure of Cash Flow
Information:
Interest paid during the year ......................... $ 19 $ 299 $ 405
======== ======== ========
Income taxes paid during the year ..................... $ 12,073 $ 12,883 $ 8,706
======== ======== ========
Supplemental Disclosure of Noncash Financing
Activity:
Issuance of common stock for
acquisition of Idetek, Inc. ......................... $ -- $ 91 $ --
======== ======== ========
Issuance of common stock in settlement of
VetTest acquisiton .................................. $ -- $ -- $ 88
======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements.



12





IDEXX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

IDEXX Laboratories, Inc. and subsidiaries (the "Company") develop,
manufacture and distribute products and provide services for the animal health,
food, hygiene and environmental markets. The Company is a developer,
manufacturer and distributor of biology-based detection systems, a developer and
distributor of chemistry-based detection systems, a provider of laboratory
testing, specialized consulting and veterinary pharmacy services, and a
developer and provider of veterinary practice management software systems and
related services. The Company's animal health, food, hygiene and environmental
detection products and services are sold worldwide.

The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as discussed below and elsewhere in
the notes to the consolidated financial statements. The preparation of these
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.

(a) Consolidation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material intercompany
transactions and balances have been eliminated in consolidation.

(b) Inventories

Inventories include material, labor and overhead, and are stated at the
lower of cost (first-in, first-out) or market. The components of inventories are
as follows (in thousands):


DECEMBER 31,
---------------------
1996 1997
------- -------

Raw materials ...................... $10,080 $ 9,235
Work-in-process .................... 6,606 8,421
Finished goods ..................... 31,716 42,518
------- -------
$48,402 $60,174
======= =======


(c) Depreciation and Amortization

The Company provides for depreciation and amortization using the
declining-balance and straight-line methods by charges to operations in amounts
that allocate the cost of property and equipment over their estimated useful
lives as follows (in thousands):


ESTIMATED
ASSET CLASSIFICATION USEFUL LIFE
------------------------------------------ -------------

Leasehold improvements ................... Life of lease
Machinery and equipment .................. 3-5 Years
Office furniture and equipment ........... 5-7 Years
Buildings ................................ 40 Years


13



(d) Other Assets

Other assets are as follows:

DECEMBER 31,
-----------------
DESCRIPTION USEFUL LIFE 1996 1997
-------------------------- ----------- ------- -------

Patents and trademarks.... 10 Years $ 9,406 $ 9,348
Goodwill.................. 5-40 Years 19,586 32,256
Non-compete agreements.... 3-5 Years 4,000 4,000
Other intangibles......... 5-10 Years 3,756 8,665
------- -------
36,748 54,269
Accumulated amortization.. 9,196 14,219
------- -------
Intangible assets, net.... $27,552 $40,050
Other assets.............. 934 10,620
------- -------
$28,486 $50,670
======= =======


Substantially all of the patents and trademarks were acquired in connection
with the acquisition of a product line of VetTest S.A. ("VetTest") in 1992.
Goodwill primarily results from acquisitions (see Note 15). Other intangibles
include subscriber lists, prepaid royalties and organization costs. Other assets
include long-term deferred tax asset, long-term non-trade receivables and
long-term deposits. Amortization of intangible assets was $2.0 million, $3.4
million and $5.0 million for the years ended December 31, 1995, 1996 and 1997,
respectively. The Company continually assesses the realizability of these assets
in accordance with the Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and determined that no impairment has occurred.

(e) Stock-Based Compensation Plans

The Company accounts for stock-based compensation plans under the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under SFAS
No. 123, the Company elected the disclosure method and will continue to account
for stock-based compensation plans under Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees (See Note 8).

(f) Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. This statement requires that the Company recognize a current tax
liability or asset for current taxes payable or refundable and a deferred tax
liability or asset for the estimated future tax effects of temporary differences
and carryforwards to the extent they are realizable.

(g) Revenue Recognition

The Company recognizes product revenue at the time of shipment. The Company
recognizes revenue from non-cancellable software licenses upon product shipment
as collection is probable and no significant vendor obligations remain at the
time of shipment. Service revenue is recognized at the time the service is
performed. Service and maintenance revenue is billed in advance and recognized
over the life of the contracts, usually one year.

(h) Research and Development and Software Development Costs

In accordance with SFAS No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company has evaluated the
establishment of technological feasibility of its various products during the
development phase. Due to the dynamic changes in the market, the Company has
concluded that it cannot determine technological feasibility until the
development phase of the project is nearly complete. The Company charges all
research and development expenses to operations in the period incurred as the
costs from the point of technological feasibility to first product release are
immaterial.

14




(i) Foreign Currency Translation and Foreign Exchange Contracts

Assets and liabilities of the Company's foreign subsidiaries are translated
using the exchange rate in effect at the balance sheet date. Revenue and expense
accounts are translated using a weighted average of exchange rates in effect
during the period. Cumulative translation gains and losses are shown in the
accompanying consolidated balance sheets as a separate component of
stockholders' equity. Exchange gains and losses arising from transactions
denominated in foreign currencies are included in current operations. Included
in general and administrative expenses are foreign currency transaction losses
of $359,000, gains of $369,000 and losses of $511,000 for the years ended
December 31, 1995, 1996 and 1997, respectively.

The Company enters into foreign currency exchange contracts of its
anticipated intercompany and third party inventory purchases for the next twelve
months in order to minimize the impact of foreign currency fluctuations on these
transactions. The Company's accounting policies for these contracts are based on
the Company's designation of such instruments as hedging transactions. The
Company also utilizes some natural hedges to mitigate its transaction and
commitment exposures. The contracts the Company enters into are firm foreign
currency commitments, and therefore market gains and losses are deferred until
the contract matures, which is the period the related obligation is settled. The
Company enters into these exchange contracts with large multinational financial
institutions. As of December 31, 1997, the unrecorded gains on these contracts
totaled $280,000 and the foreign currency contracts, which extend through
December 31, 1998, consisted of the following (in thousands):

Currency Sold US Dollar Equivalent
Pound sterling $ 5,001
Deutsche mark 4,044
Canadian dollar 3,690
French franc 2,352
Australian dollar 1,791
-------
$16,878
=======

There were no contracts outstanding at December 31, 1996.

(j) Disclosure of Fair Value of Financial Instruments and Concentration of
Credit Risk

Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The Company does not
believe significant credit risk exists at December 31, 1997. The carrying
amounts of the Company's financial instruments approximate fair market value.

(k) Earnings (Loss) per Share

In February 1997 the Financial Accounting Standards Board (FASB) issued
SFAS No. 128, Earnings per Share. The Company adopted the provisions of SFAS No.
128 for the year ended December 31, 1997 and all prior periods have been
presented in accordance with SFAS No. 128. In accordance with SFAS No. 128,
basic earnings per share is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during the year.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share, except that the denominator is increased for the
assumed exercise of dilutive options using the treasury stock method unless the
effect is antidilutive. The following is a reconciliation of shares outstanding
for basic and diluted earnings per share (in thousands):


15








1995 1996 1997

SHARES OUTSTANDING FOR BASIC EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding 32,946 37,082 37,974
====== ====== ======
SHARES OUTSTANDING FOR DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average shares outstanding 32,946 37,082 37,974
Dilutive effect of options issued to employees 2,416 2,437 --
------ ------ ------
35,362 39,519 37,974
====== ====== ======


(l) Reclassifications

Reclassifications have been made in the consolidated financial statements to
conform with the current year's presentation.

(m) New Accounting Standards

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements,
in order to measure all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income, as defined by SFAS No. 130, is the total of
net income and all other nonowner changes in equity. Under SFAS No. 130,
companies may include the cumulative total of comprehensive income as a separate
component of its stockholders' equity statement. This statement is effective for
fiscal years beginning after December 15, 1997, and is applicable on both an
interim and annual basis.

In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. Reportable segments, as defined by
this statement, correspond to the way management organizes units and evaluates
performance internally, and may be based upon products, geography, legal entity,
management structure or a combination of these methods. SFAS No. 131 is
applicable only to public, for-profit entities and is effective for years
beginning after December 15, 1997. Unless impracticable, companies would be
required to restate prior period information upon adoption.

(2) INCOME TAXES

Earnings (losses) before income taxes for each year were as follows
(in thousands):


1995 1996 1997
------- ------- --------
Domestic $29,844 $48,394 $(29,731)
International 7,192 6,929 (2,529)
------- ------- --------
$37,036 $55,323 $(32,260)
======= ======= ========

The provision for (benefit of) income tax for the years ended
December 31, 1995, 1996 and 1997 is comprised of the following (in thousands):


DECEMBER 31,
--------------------------------------
1995 1996 1997
------- ------- --------

Current
Federal ......... $ 9,964 $18,027 $ 817
State ........... 2,979 4,171 954
International ... 3,424 3,190 1,799
------- ------- --------
16,367 25,388 3,570
------- ------- --------
Deferred
Federal ......... (825) (2,070) (12,314)
State ........... -- (636) (2,396)
------- ------- --------
(825) (2,706) (14,710)
------- ------- --------
$15,542 $22,682 $(11,140)
======= ======= ========


16


The provision for (benefit of) income taxes differs from the amount computed
by applying the statutory federal income tax rate as follows:




DECEMBER 31,
-------------------
1995 1996 1997
---- ---- ----


U.S. federal statutory rate.......... 35.0% 35.0% 35.0%
State income tax, net of federal tax 5.2 4.0 4.1
benefit..............................
International income taxes........... 2.8 1.4 --
Amortization of non-deductible assets -- -- (6.7)
Non-taxable interest income.......... -- -- 4.1
Other, net........................... (1.0) 0.6 (2.0)
---- ---- ----
Effective tax rate................... 42.0% 41.0% 34.5%
==== ==== ====


The components of the domestic net deferred tax asset (liability) included
in the accompanying consolidated balance sheets are as follows (in thousands):




1996 1997
-----------------------------------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- ------- ---------

ASSETS:

Accruals $1,423 $ -- $ 6,834 $ --
Receivable reserves 1,081 -- 2,190 --
Deferred revenue 1,932 -- 3,309 --
Inventory basis differences 1,019 -- 3,229 --
Intangible basis differences -- 1,922 -- 6,130
Net operating loss carry
forwards -- 1,659 -- 1,093
------ ------ ------- ------
Total assets 5,455 3,581 15,562 7,223

LIABILITIES:
Property basis differences -- 1,512 -- 1,343
Intangible basis differences -- 573 -- 773
Other 92 -- 166 --
------ ------ ------- ------
Total liabilities 92 2,085 166 2,116

Valuation Allowance -- (2,400) -- --
------ ------ ------- ------
Net assets (liability) $5,363 $ (904) $15,396 $5,107
====== ====== ======= ======



The components of the net foreign net deferred tax assets (in thousands):




1996 1997
------------------- -----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------ --------- ------- ---------

ASSETS:

Net operating loss carry
forwards -- 572 -- 3,470
Other -- -- 199 --
---- ---- ---- ------
Total assets 572 199 3,470


LIABILITIES:
Total liabilities -- -- -- --

VALUATION ALLOWANCE -- (572) (199) (3,470)
---- ---- ---- ------
Net assets (liability) -- -- -- --
==== ==== ==== ======


During the year ended December 31, 1997, the Company incurred losses in
certain foreign subsidiaries totaling approximately $9.9 million, which


17

increased the gross foreign deferred tax asset. The Company has recorded a
valuation allowance for the assets because realizability is uncertain.

At December 31, 1997, the Company had domestic net operating losses of
approximately $3.1 million available to offset future taxable income. Net
operating loss carryforwards expire at various dates from 1999 to 2010. The Tax
Reform Act of 1986 contains provisions that limit annual availability of the net
operating loss carry forwards due to a more than 50% change in ownership that
occurred upon the acquisition of certain companies.

At December 31, 1997, the Company had net operating losses in foreign
subsidiaries of approximately $8.6 million available to offset further taxable
income. These net operating loss carryforwards expire at various dates beginning
in 2001.

As of December 31, 1997, unremitted earnings in subsidiaries outside the
United States totaled $13.5 million, on which no United States taxes have been
provided. The Company's intention is to reinvest these earnings permanently or
to repatriate the earnings only when tax effective to do so. It is not practical
to estimate the amount of additional taxes that might be payable upon
repatriation of foreign earnings; however, the Company believes that United
States foreign tax credits would largely eliminate any United States taxes or
offset any foreign withholding taxes.

(3) CASH EQUIVALENTS, SHORT-TERM AND LONG-TERM INVESTMENTS

The Company accounts for investments under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Accordingly, the Company's
cash equivalents, short-term and long-term investments are classified as
held-to-maturity and are recorded at amortized cost which approximates fair
market value.

Cash equivalents are short-term, highly liquid investments with original
maturities of less than three months. Short-term investments are investment
securities with original maturities of greater than three months but less than
one year and consist of the following (in thousands):

DECEMBER 31,
---------------------
1996 1997
------- -------
U.S. treasury bills...... $30,856 $20,047
Municipal bonds.......... 15,040 6,140
Certificates of deposit.. -- 6,749
Commercial paper......... -- 2,016
Foreign bonds............ -- 550
------- -------
$45,896 $35,502
======= =======

Long-term investments are investment securities with original maturities of
greater than one year and consist of the following (in thousands):

DECEMBER 31,
--------------------
1996 1997
------ -------
Municipal bonds......... $3,255 $10,165
U.S. treasury bills..... 4,000 --
Foreign bonds........... -- 515
Certificates of deposit. -- 454
------ -------
$7,255 $11,134
====== =======


(4) NOTES PAYABLE

In connection with the Cardiopet Incorporated ("Cardiopet") acquisition (see
Note 15(a)), the Company issued unsecured notes payable. The notes bore interest
at 9% and were repaid in full in February 1996.

18


In connection with the acquisition of the business of Consolidated
Veterinary Diagnostics, Inc. ("CVD") (see Note 15(b)), the Company issued an
unsecured note payable for $3.0 million, of which $3.0 million and $2.0 million
was outstanding at December 31, 1996 and 1997, respectively. The note bears
interest at 8% and is due in $1.0 million installments in July 1997, 1998 and
1999.

In connection with the merger of Idetek, Inc. ("Idetek") (see Note 15(d)),
the Company assumed a note payable in the amount of $200,000. The note was paid
in full in September 1996.

In connection with the Acumedia Manufacturers, Inc. ("Acumedia") acquisition
(see Note 15(e)), the Company issued unsecured notes payable for $1.5 million,
which was outstanding at December 31, 1997. The notes bore interest at 6% and
were repaid in January 1998.

In connection with the Central Veterinary Diagnostic Laboratory acquisition
(see Note 15(b)) the Company issued an unsecured note payable for $900,000
Australian Dollars ($587,000) which was outstanding at December 31, 1997. The
note bears interest at 6%.

(5) COMMITMENTS AND CONTINGENCIES

The Company leases its facilities under operating leases which expire
through 2008. In addition, the Company is responsible for the real estate taxes
and operating expenses related to these facilities. Minimum annual rental
payments under these agreements are as follows (in thousands):

YEARS ENDING
DECEMBER 31,
--------------
1998.......... $ 3,825
1999.......... 3,164
2000.......... 2,427
2001.......... 2,317
2002.......... 2,099
Thereafter.... 10,155
-------
$23,987
=======

Rent expense charged to operations under operating leases was approximately
$2.1 million, $3.2 million and $3.8 million for the years ended December 31,
1995, 1996 and 1997, respectively.

Under the terms of certain supply agreements with suppliers of the Company's
hematology instruments and consumables, slides for its VetTest instruments, and
certain raw materials, the Company has aggregate commitments to purchase
approximately $31.8 million of products in 1998.

From time to time the Company has received notices alleging that the
Company's products infringe third-party proprietary rights. In particular, the
Company has received notices claiming that certain of the Company's immunoassay
products infringe third-party patents. Except as noted below with respect to the
patent infringement suit filed by Synbiotics Corporation, the Company is not
aware of any pending litigation with respect to such claims. Patent litigation
frequently is complex and expensive, and the outcome of patent litigation can be
difficult to predict. There can be no assurance that the Company will prevail in
any infringement proceedings that have been or may be commenced against the
Company. A significant portion of the Company's revenue in 1997 was attributable
to products incorporating certain immunoassay technologies and products relating
to the diagnosis of canine heartworm infection. If the Company were to be
precluded from selling such products or required to pay damages or make
additional royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely affected.

On February 4, 1993, the Company acquired Environetics, Inc.
("Environetics"), which brought a patent infringement suit with Stephen C.
Edberg, Ph.D. against Millipore Corporation ("Millipore") in the U.S. District
Court for the District of Connecticut on September 30, 1992 (the "Millipore I
suit"). The complaint in the Millipore I suit was subsequently amended to add as
additional plaintiffs Access Medical Systems, Inc., a subsidiary of the

19
Company ("Access"), and Stephen C. Wardlaw, M.D. The primary relief sought by
the plaintiffs was an injunction against Millipore which would prevent Millipore
from selling the Colisure product for the detection of E. coli and total
coliforms in water. The plaintiffs believe the Colisure product infringes U.S.
Patent No. 4,925,789 (the "`789 Patent") covering the Company's Colilert
product, under which Access and Environetics have an exclusive license from Drs.
Edberg and Wardlaw. In addition, on July 26, 1995 the Company, Environetics,
Access and Drs. Edberg and Wardlaw brought a second patent infringement suit
against Millipore in the U.S. District Court for the District of Connecticut
(the "Millipore II suit"). The principal relief sought by the plaintiffs in the
Millipore II suit was an injunction against Millipore which would prevent
Millipore from selling the Colisure product which the plaintiffs believe also
infringes U.S. Patent No. 5,429,933 (the " `933 Patent"), which covers the
Colilert product. The `933 Patent, which is related to the `789 Patent, was
issued in July 1995 to Dr. Edberg, and is exclusively licensed to Access and
Environetics. In November 1997, the Company and Millipore entered into an
agreement in principle to settle the Millipore I and II suits. Under the terms
of the agreement, which was finalized in March 1998, Millipore acknowledged the
validity of the `789 and `933 Patents and agreed to an injunction against
infringement of the patents. Millipore also transferred the Colisure product to
the Company in March 1998.

On February 24, 1995, CDC Technologies, Inc. ("CDC Technologies") filed suit
against the Company in the U.S. District Court for the District of Connecticut.
In its complaint, CDC Technologies alleges that the Company's conduct in, and
its relationships with its distributors in connection with, the distribution of
the Company's hematology products (i) violate federal and state antitrust
statutes, (ii) violate Connecticut statutes regarding unfair trade practices,
and (iii) constitute a civil conspiracy and interfere with CDC Technologies'
business relations. The relief sought by CDC Technologies includes treble
damages for antitrust violations, as well as compensatory and punitive damages,
and an injunction to prevent the Company from interfering with CDC Technologies'
relations with distributors. The Company has filed an answer denying the
allegations in CDC Technologies' complaint. The Company is unable to assess the
likelihood of an adverse result or estimate the amount of any damages the
Company may be required to pay. Any adverse outcome resulting in the payment of
damages would adversely affect the Company's results of operations.

On November 18, 1997, Synbiotics Corporation ("Synbiotics") filed suit
against the Company in the U.S. District Court for the Southern District of
California for infringement of U.S. Patent No. 4,789,631 issued December 6, 1988
(the " `631 Patent"). The `631 Patent, which is owned by Synbiotics, claims
certain assays, methods and compositions for the diagnosis of canine heartworm
infection. The primary relief sought by Synbiotics is an injunction against the
Company which would prevent the Company from selling canine heartworm diagnostic
products which infringe the `631 Patent, as well as treble damages for past
infringement. This suit was not served on the Company within the time period
specified under applicable court rules and therefore is expected to be dismissed
by the court, however Synbiotics would not be precluded from filing a new suit
in the future. While the Company believes that it has meritorious defenses
against claims of infringement of the `631 Patent, the Company is unable to
assess the likelihood of an adverse result or estimate the amount of any damages
the Company may be required to pay. If the Company is precluded from selling
canine heartworm diagnostic products or required to pay damages or make
additional royalty or other payments with respect to such sales, the Company's
business and results of operations could be materially and adversely affected.

On January 9, 1998, a complaint was filed in the U.S. District Court for the
District of Maine captioned ROBERT A. ROSE V. DAVID E. SHAW, ERWIN F. WORKMAN,
JR., E. ROBERT KINNEY AND IDEXX LABORATORIES, INC. The plaintiff purports to
represent a class of purchasers of the common stock of the Company from July 19,
1996 through March 24, 1997. The complaint claims that the defendants violated
Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission Rule 10b-5 promulgated pursuant thereto, by virtue of false or
misleading statements made during the class period. The complaint also claims
that the individual defendants are liable as "control persons" under Section
20(a) of that Act. In addition, the complaint claims that the individual
defendants sold some of their own common stock of the Company, during the class
period, at times when the market price for the stock allegedly was inflated.
While the Company and the other defendants deny the allegations and will defend
this suit vigorously, the Company is unable to assess the likelihood of an
adverse result or estimate the amount of damages which the Company may be
required to pay. Any adverse outcome resulting in the payment of damages would
adversely affect the Company's results of operations.

(6) NON-RECURRING OPERATING CHARGE

20
On September 29, 1997 the Company announced a non-recurring operating
charge of $28.0 million and on February 2, 1998 the Company announced that it
would increase the amount of the charge to $34.5 million. The non-recurring
operating charge includes the write-downs and write-offs of certain assets and
accrual of costs related to a significant workforce reduction. The charge
consists of the following (in thousands):

Write-off of in-process research and development $13,200
Legal settlement and related costs 8,000
Severance, benefits and related costs 9,000
Idle capacity and lease termination costs 2,700
Asset Impairment 1,600
-------
$34,500
=======

As of December 31, 1997, $11.9 million was included in accrued expenses relating
to the non-recurring operating charge.

During 1997 the Company acquired two veterinary practice management
software companies (see Note 15 (f)). To assist in the allocation of purchase
price associated with these acquisitions, the Company obtained an independent
appraisal. That appraisal identified approximately $13.2 million as in-process
research and development, which has been charged to operations in accordance
with FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method.

In September 1997, the Company settled a patent infringement suit brought by
Barnes-Jewish Hospital ("BJH") regarding IDEXX's heartworm diagnostic products.
The total costs of the settlement, including legal fees, were charged to the
non-recurring operating charge. Under the settlement, the Company agreed to pay
BJH $5.5 million for prior sales of the Company's product and to pay a royalty
based on all future sales.

The Company has terminated the employment of a total of 228 employees. Of
this total, 79 employees are associated with the consolidation of the veterinary
practice management software business into the Eau Claire, Wisconsin facility,
57 employees are associated with the consolidation of sales, marketing and
distribution operations in Europe, 33 employees are associated with reductions
in domestic sales and marketing operations, 18 employees are associated with
reductions in sales and marketing operations in the Pacific Rim region, 16
employees are associated with the closure of the Sunnyvale, California research
and development facility and 25 employees are associated with reduction in
positions in management and financial operations. As of December 31, 1997,
approximately 40 employees have terminated employment, and the Company expects
that the remainder will leave in the first half of 1998.

As discussed above, the Company is consolidating certain veterinary practice
management software operations into the Eau Claire, Wisconsin facility and has
closed the leased Sunnyvale, California research and development facility. As a
result of these consolidations, the Company has leased facilities which have
become excess until the end of their respective lease terms. Additionally, the
Company has determined that it will not pursue certain immunoassay technology
with respect to which it has invested a total of $1.6 million in fixed assets
and license fees.

(7) STOCKHOLDERS' EQUITY

(a) Preferred Stock

The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
500,000 shares of Preferred Stock, $1.00 par value per share ("Preferred
Stock"), in one or more series. Each such series of Preferred Stock shall have
such number of shares, designations, preferences, voting powers, qualifications
and special or relative rights or privileges as shall be determined by the Board
of Directors, which may include, among others, dividend rights, voting rights,
redemption and sinking fund provisions, liquidation preferences, conversion
rights and preemptive rights.


21

(b) Series A Junior Participating Preferred Stock

On December 17, 1996, the Company designated 100,000 shares of Preferred
Stock as Series A Junior Participating Preferred Stock ("Series A Stock") in
connection with its Shareholder Rights Plan (see Note 9). In general, each share
of Series A Stock will: (i) be entitled to a minimum preferential quarterly
dividend of $10 per share and to an aggregate dividend of 1000 times the
dividend declared per share of Common Stock, (ii) in the event of liquidation,
be entitled to a minimum preferential liquidation payment of $1000 per share
(plus accrued and unpaid dividends) and to an aggregate payment of 1000 times
the payment made per share of Common Stock, (iii) have 1000 votes, voting
together with the Common Stock, (iv) in the event of any merger, consolidation
or other transaction in which Common Stock is exchanged, be entitled to receive
1000 times the amount received per share of Common Stock and (v) not be
redeemable. These rights are protected by customary antidilution provisions.

(c) Stock Split

The accompanying consolidated financial statements and related notes for all
periods presented have been adjusted to reflect a two-for-one stock split of the
Common Stock, effected in the form of a stock dividend, on June 5, 1995.

(8) STOCK-BASED COMPENSATION PLANS

At December 31, 1997, the Company had nine stock-based compensation plans,
which are described below. The Company accounts for these plans under the
provisions of SFAS No. 123. Under SFAS No. 123 the Company elected the
disclosure method and will continue to account for stock-based compensation
plans under APB Opinion No. 25. Accordingly, no compensation cost has been
recognized for these plans. Had compensation cost for the Company's nine
stock-based compensation plans been determined consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and net income (loss) per common
and common equivalent share would have been reduced to the following pro forma
amounts (in thousands):




DECEMBER 31,
-------------------------------------
1995 1996 1997
------- ------- --------


Net income (loss):
As Reported.......................................... $21,494 $32,641 $(21,120)
Pro Forma............................................ $20,182 $28,278 $(30,563)
Net income (loss) per share:
Basic: As Reported................................... $ 0.65 $ 0.88 $ (0.56)
Basic: Pro Forma..................................... $ 0.61 $ 0.76 $ (0.80)
Diluted: As Reported................................. $ 0.61 $ 0.83 $ (0.56)
Diluted: Pro Forma................................... $ 0.57 $ 0.72 $ (0.80)


Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.

(a) The 1984 Plan

During 1984, the Company established a stock option plan (the "1984 Plan"),
under which key employees were granted options to purchase Common Stock at
exercise prices not less than the fair market value as of the date of grant, as
determined by the Board of Directors. On April 24, 1991, the Board of Directors
terminated the 1984 Plan such that no further options may be granted under the
Plan.

(b) The 1991 Plan

During 1991, the Board of Directors approved the 1991 Stock Option Plan
which, as amended, provides for grants up to 6,475,000 incentive and
nonqualified stock options at the discretion of the Compensation Committee of
the Board of Directors. Incentive stock options are granted at the fair market
value on the date of grant and expire 10 years from the date of grant. Incentive
stock options for greater than 10% shareholders are granted at 110% of the fair
market value and expire five years from the date of grant. Nonqualified options
may be granted at no less than 100% of the fair market value on the date of
grant. Income tax benefits attributable to certain exercised stock


22

options are credited to additional paid-in capital. The vesting schedule of all
options is determined by the Compensation Committee of the Board of Directors at
the time of grant.

(c) The 1991 Director Option Plan

During 1991, the Board of Directors approved the 1991 Director Option Plan
(as amended, the "1991 Director Plan") pursuant to which Directors who are not
officers or employees of the Company may receive nonstatutory options to
purchase shares of the Company's Common Stock. The time period for granting
options under the 1991 Director Plan expired in accordance with the terms of the
plan in June 1996.

(d) The 1997 Director Option Plan

During 1997, the Board of Directors approved the 1997 Director Option Plan
(the "1997 Director Plan") pursuant to which Directors who are not officers or
employees of the Company may receive nonstatutory options to purchase shares of
the Company's Common Stock. A total of 300,000 shares of Common Stock may be
issued under the 1997 Director Plan.

(e) ETI Corporation Plan

During 1991, the Board of Directors of ETI approved a Stock Option Plan (the
"ETI Plan"). The ETI Plan provided for the grant of up to 100,000 nonqualified
stock options at the discretion of the Board of Directors of ETI. Options were
granted at the fair market value on the date of grant and expire five years from
the date of grant. The options vest over a four-year period from the date of
grant.

In connection with the merger of ETI and the Company, all outstanding ETI
options became exercisable, in accordance with their original vesting schedule,
for shares of the Company's Common Stock at the same rate at which outstanding
shares of ETI common stock were exchanged for shares of the Company's Common
Stock in the merger. In addition, the exercise price for the options was
proportionately adjusted in accordance with the adjustment to the number of
shares.

(f) Idetek, Inc. Plans

During 1986, the Board of Directors of Idetek approved the 1985 Incentive
Stock Option Plan (the "1985 Idetek Plan"). Options were granted at the fair
market value on the date of grant and expire 10 years from the date of grant.
Options for greater than 10% shareholders were granted at no less than 110% of
the fair market value and expire five years from the date of grant. The 1985
Idetek Plan was terminated by the Board of Directors of Idetek as to future
grants.

During 1987, the Board of Directors of Idetek approved the 1987 Stock Option
Plan (the "1987 Idetek Plan"), which provides for the grant of both incentive
and nonqualified stock options. Incentive stock options were granted at the fair
market value on the date of grant and expire 10 years from the date of grant.
Incentive stock options for greater than 10% shareholders were granted at 110%
of the fair market value and expire five years from the date of grant.
Nonqualified options were granted at 85% of the fair market value on the date of
grant and expire five years from the date of grant. The Company does not intend
to grant any options under the 1987 Idetek Plan in excess of the options
currently outstanding.

In February 1996, the Board of Directors of Idetek approved two separate,
single participant fixed term incentive stock option agreements with certain of
its key executive officers. Options were granted to the individual participant
named in the agreement at prices established by the Board of Directors of Idetek
and such options expire 10 years from the date of grant.

In connection with the merger of Idetek and the Company, all outstanding
Idetek options became exercisable, in accordance with their original vesting
schedule or terms, for shares of the Company's Common Stock at the same rate at
which outstanding shares of Idetek common stock were exchanged for shares of the
Company's Common

23

Stock in the merger. In addition, the exercise price for the options was
proportionately adjusted in accordance with the adjustment to the number of
shares.

A summary of the status of the Company's stock option plans as of December
31, 1995, 1996 and 1997 and changes during the years then ended is presented in
the table and narrative below (in thousands, except weighted average exercise
price):



WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------

Outstanding, December 31, 1994 .................. 3,991 $ 6.72
Granted .................................... 859 22.08
Exercised .................................. (370) 4.95
Terminated ................................. (286) 9.89
----- ------
Outstanding, December 31, 1995 .................. 4,194 $ 9.81
===== ======
Exercisable, December 31, 1995 .................. 2,081 $ 4.66
===== ======
Weighted Average Fair Value of Options
Granted in 1995 ............................... $10.99
======
Granted .................................... 1,120 $39.91
Exercised .................................. (799) 4.39
Terminated ................................. (163) 13.35
----- ------
Outstanding, December 31, 1996 .................. 4,352 $18.41
===== ======
Exercisable, December 31, 1996 .................. 2,038 $ 7.17
===== ======
Weighted Average Fair Value of Options
Granted in 1996 ............................... $21.84
======
Granted .................................... 1,596 $24.14
Exercised .................................. (270) 6.64
Terminated ................................. (97) 21.45
Canceled on repricing, net ................. (494) 36.85
----- ------
Outstanding, December 31, 1997 .................. 5,087 $12.98
===== ======
Exercisable, December 31, 1997 .................. 2,422 $ 9.03
===== ======
Weighted average fair value of options
granted in 1997................................ $ 7.70
======


In April 1997 the Company implemented a Stock Option Exchange Program (the
"Program") for employees in response to the substantial decline in the trading
price of the Company's Common Stock. Under the Program employees could
voluntarily exchange unexercised stock options and receive new options at $17.35
per share. Employees also were required to forfeit between 0% and 50% of their
options based on their relative position in the Company. There were 2.0 million
options with a weighted average exercise price of $36.85 that were exchanged for
new options. 494,000 net options to acquire shares were forfeited as a result of
the Program. The other terms of the options remained essentially unchanged. The
weighted average fair value of the new options granted was $13.00 per share.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for the grants in 1995, 1996 and 1997, respectively: no
dividend yield for all years; expected volatility of 45% for 1995 and 1996 and
52% for 1997; risk-free interest rates of 6.38%, 6.18% and 6.33% for 1995, 1996
and 1997, respectively; and expected lives of 5.48 years for 1995 and 1996 and
4.55 for 1997.

At December 31, 1997, the options outstanding have the following
characteristics (shares in thousands):

24




OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
WEIGHTED AVERAGE WEIGHTED
EXERCISE NUMBER AVERAGE REMAINING NUMBER AVERAGE
PRICE OF EXERCISE CONTRACTUAL OF EXERCISE
RANGE OPTIONS PRICE LIFE OPTIONS PRICE
--------------- -------- -------- ------------ ------- --------

$ 0.50 -- $3.97 727 $ 1.92 2.14 726 $ 1.92
5.31 -- 11.38 1,043 7.56 4.79 931 7.33
12.00 -- 17.35 2,830 16.40 8.60 538 16.07
19.25 -- 78.14 487 21.29 7.27 227 22.07



(g) Employee Stock Purchase Plans

During 1994, the Board of Directors approved the 1994 Employee Stock
Purchase Plan whereby the Company had reserved up to an aggregate of 300,000
shares of Common Stock for issuance in semiannual offerings over a three-year
period. During 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan whereby the Company has reserved and may issue up to an aggregate
of 420,000 shares of Common Stock in semiannual offerings. Also during 1997 the
Board of Directors approved the 1997 International Employee Stock Purchase Plan
whereby the Company has reserved and may issue up to an aggregate of 30,000
shares of Common Stock in semiannual offerings. Stock is sold under each of
these plans at 85% of fair market value, as defined. Shares subscribed to and
issued under the plans were 35,961 in 1995, 33,281 in 1996 and 119,027 in 1997.

Under SFAS No. 123, pro forma compensation cost is recognized for the fair
value of the employees' purchase rights, which was estimated using the
Black-Scholes model with the following assumptions for 1995, 1996 and 1997,
respectively: no dividend yield for all years; an expected life of one year for
all years; expected volatility of 45% for 1995 and 1996 and 72% for 1997; and
risk-free interest rates of 6.38%, 6.18% and 6.14% for 1995, 1996 and 1997,
respectively. The weighted-average fair value of those purchase rights granted
in 1995, 1996 and 1997 was $7.98, $10.63 and $7.15 per share, respectively.

(9) PREFERRED STOCK PURCHASE RIGHTS

On December 17, 1996, the Company adopted a Shareholder Rights Plan and
declared a dividend of one preferred stock purchase right for each outstanding
share of Common Stock to stockholders of record at the close of business on
December 30, 1996. Under certain conditions, each right may be exercised to
purchase one one-thousandth of a share of Series A Stock at a purchase price of
$200. The rights will be exercisable only if a person or group has acquired
beneficial ownership of 20% or more of the Common Stock or commenced a tender or
exchange offer that would result in such a person or group owning 30% or more of
the Common Stock. The Company generally will be entitled to redeem the rights,
in whole, but not in part, at a price of $.01 per right at any time until the
tenth business day following a public announcement that a 20% stock position has
been acquired and in certain other circumstances.

If any person or group becomes a beneficial owner of 20% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Company's Board of
Directors), each right not owned by a 20% stockholder will enable its holder to
purchase such number of shares of Common Stock as is equal to the exercise price
of the right divided by one-half of the current market price of the Common Stock
on the date of the occurrence of the event. In addition, if the Company
thereafter is acquired in a merger or other business combination with another
person or group in which it is not the surviving corporation or in connection
with which its Common Stock is changed or converted, or if the Company sells or
transfers 50% or more of its assets or earning power to another person, each
right that has not previously been exercised will entitle its holder to purchase
such number of shares of common stock of such other person as is equal to the
exercise price of the right divided by one-half of the current market price of
such common stock on the date of the occurrence of the event.

(10) IDEXX RETIREMENT AND INCENTIVE SAVINGS PLAN

The Company has established the IDEXX Retirement and Incentive Savings Plan
(the "401(k) Plan"). Employees eligible to participate in the 401(k) Plan may
contribute specified percentages of their salaries, a portion of which will be
matched by the Company. In addition, the Company may make contributions to the
401(k) Plan at the discretion of the Board of Directors. There were no
discretionary contributions in 1995, 1996 or 1997.



25

(11) SIGNIFICANT CUSTOMERS

During each of the years ended December 31, 1995 and 1996 one customer
accounted for 11% and 12%, respectively, of the Company's revenue. The
significant customer in each year was a wholesale distributor of the Company's
products. No customers accounted for greater than 10% of revenue in 1997.

(12) EXPORT SALES

Domestic and export sales as a percentage of total revenue are as follows:

DECEMBER 31,
----------------------
GEOGRAPHIC AREA 1995 1996 1997
----------------- ---- ---- ----
Domestic......... 66% 66% 68%
Europe........... 25 22 20
All others....... 9 12 12
---- ---- ----
100% 100% 100%
=== ==== ====


(13) GEOGRAPHIC INFORMATION

Revenue, net income (loss) and identifiable assets for the Company's U.S.,
European and other operations for each of the three years ended December 31,
1997 are summarized as follows:




UNITED STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------

YEAR ENDED DECEMBER 31, 1995
Revenue from unaffiliated
locations............... $128,004 $48,210 $12,388 $ -- $188,602
Transfers between geographic
locations............... 28,521 -- 14 (28,535) --
-------- ------- ------- -------- --------
Total revenue............. $156,525 $48,210 $12,402 $(28,535) $188,602
======== ======= ======= ======== ========
Net income (loss)......... $ 17,680 $ 4,051 $ (385) $ 148 $ 21,494
======== ======= ======= ======== ========
Identifiable assets....... $283,836 $20,342 $ 8,331 $ 30 $312,539
======== ======= ======= ======== ========



UNITED STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------

YEAR ENDED DECEMBER 31, 1996
Revenue from unaffiliated
locations............... $182,094 $59,911 $25,672 $ -- $267,677
Transfers between geographic
locations............... 41,317 56 -- (41,373) --
-------- ------- ------- -------- --------
Total revenue............. $223,411 $59,967 $25,672 $(41,373) $267,677
======== ======= ======= ======== ========
Net income (loss)......... $ 28,543 $ 3,051 $ 1,313 $ (266) $ 32,641
======== ======= ======= ======== ========
Identifiable assets....... $328,894 $27,889 $17,160 $ (91) $373,852
======== ======= ======= ======== ========


UNITED STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
------------- ------- ------- ------------ ------------

YEAR ENDED DECEMBER 31, 1997
Revenue from unaffiliated
locations............... $186,357 $51,287 $25,326 $ -- $262,970
Transfers between geographic
locations............... 39,366 1,330 253 (40,949) --
-------- ------- ------- -------- --------
Total revenue............. $225,723 $52,617 $25,579 $(40,949) $262,970
======== ======= ======= ======== ========
Net income (loss)......... $(17,315) $ 838 $(4,338) $ (305) $(21,120)
======== ======= ======= ======== ========
Identifiable assets....... $331,364 $30,526 $15,620 $ (462) $377,048
======== ======= ======= ======== ========





26


(14) ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

DECEMBER 31,
-------------------
1996 1997
------- -------
Accrued payroll and related expenses .. $ 6,404 $ 7,174
Accrued income taxes................... 6,637 6,113
Accrued non-recurring operating
charge ............................. -- 11,940
Other accrued expenses................ 10,831 16,920
------- -------
$23,872 $42,147
======= =======


(15) ACQUISITIONS

(a) Cardiopet Incorporated

On May 11, 1995, the Company acquired Cardiopet for approximately $3.5
million in cash, notes and assumed debt. Cardiopet is a New Jersey-based company
offering cardiology, internal medicine, ultrasound, dermatology and radiology
consulting services to veterinarians. The Company has accounted for this
acquisition using the purchase method of accounting. The results of operations
have been included with those of the Company since May 12, 1995. Pro forma
information has not been presented because of immateriality.

(b) Veterinary Reference Laboratories

The Company's 1996 and 1997 consolidated results of operations include the
results of operations of four veterinary reference laboratory businesses
acquired in 1996 for aggregate purchase prices of approximately $21.3 million in
cash, plus the assumption of certain liabilities.

The Company's 1997 consolidated results of operations also include the
results of operations of a veterinary reference laboratory business acquired in
1997 for an aggregate purchase price of approximately $844,000 in cash, the
issuance of $587,000 in unsecured notes payable, plus the assumption of certain
liabilities.

In connection with the acquisitions, the Company entered into non-compete
agreements for a period of up to five years with certain of the entities, and
their stockholders or former stockholders. The Company has accounted for these
acquisitions under the purchase method of accounting. The results of operations
of each of these businesses has been included in the Company's consolidated
results of operations since each of their respective dates of acquisition. The
Company has not presented pro forma financial information relating to any of
these acquisitions because of immateriality. These acquisitions are as follows:

- On March 29, 1996, the Company acquired all of the capital stock of
VetLab, Inc. which operated two veterinary reference laboratories in
Texas.

- On April 2, 1996, the Company, through its wholly-owned subsidiary
IDEXX Laboratories, Limited, acquired substantially all of the assets
and assumed certain of the liabilities of Grange Laboratories Ltd.,
which operated veterinary reference laboratories in the United
Kingdom.

- On May 15, 1996, the Company acquired all of the capital stock of
Veterinary Services, Inc., which operated veterinary reference
laboratories in Colorado, Illinois and Oklahoma.

- On July 12, 1996, the Company acquired substantially all of the assets
and assumed certain of the liabilities of CVD, which operated
veterinary reference laboratories in Northern California, Oregon and
Nevada.

- On December 1, 1997, the Company, through its wholly-owned subsidiary
IDEXX Laboratories Pty. Ltd., acquired certain assets and assumed
certain liabilities of Lording & Friend Pty. Ltd. and Clinpath Pty.
Ltd. (operating under the name Central Veterinary Diagnostic
Laboratory), which operated a veterinary reference laboratory in
Australia.

The VetLab, VSI and CVD businesses are now part of IDEXX Veterinary
Services, Inc., a wholly-owned subsidiary of the Company.

(c) Ubitech Aktiebolag


27

On July 18, 1996, the Company acquired all of the capital stock of Ubitech
Aktiebolag (now named IDEXX Scandinavia AB ("IDEXX AB")) for $400,000 plus the
assumption of certain liabilities. IDEXX AB, located in Uppsala, Sweden,
manufactures and distributes diagnostic test kits for the livestock industry.
The Company has accounted for this acquisition under the purchase method of
accounting. The results of operations of IDEXX AB have been included in the
Company's consolidated results of operations since the date of acquisition. Pro
forma information has not been presented because of immateriality.

(d) Idetek, Inc.

On August 29, 1996, the Company acquired by merger Idetek by issuing 436,804
shares of its Common Stock, of which approximately 10% are held in escrow, in
exchange for all of the outstanding capital stock of Idetek. In addition,
outstanding options to purchase shares of Idetek capital stock became options to
acquire 110,191 shares of the Company's Common Stock at prices ranging from
$3.13 to $78.14. The value of the shares of the Company's Common Stock issued or
reserved for issuance as a result of the merger totaled approximately $20
million. Idetek, previously located in Sunnyvale, California, manufactured and
distributed detection tests for the food, agricultural and environmental
industries. The Company entered into employment agreements for up to three
years. The Company has accounted for this acquisition by merger as a
"pooling-of-interests". The results of operations of Idetek have been included
in the Company's consolidated results of operations since the date of the
merger. The Company has not restated its financial statements because of
immateriality.

(e) Acumedia Manufacturers, Inc.

On January 30, 1997, the Company acquired all of the capital stock of
Acumedia Manufacturers, Inc. ("Acumedia") for $3.1 million and the issuance of
$1.5 million in notes payable. The Company also agreed to pay an additional
$250,000 based on the results of operations in each of 1997 and 1998. Based on
results for 1997, the Company will pay $250,000, which will be treated as
additional purchase price. Any amount paid for 1998 also will be treated as
additional purchase price. Acumedia, located in Baltimore, Maryland,
manufactures and distributes dehydrated culture media for testing in the food
industry. The Company also entered into employment agreements for up to three
years with certain former stockholders. The Company has accounted for this
acquisition under the purchase method of accounting and the Company has included
the results of operations in its consolidated results of operations since the
date of acquisition. Pro forma information has not been presented because of
immateriality.

(f) Veterinary Practice Management Software Providers

The Company's consolidated results of operations include the results of
operations of two veterinary practice management software businesses acquired in
1997. These businesses were acquired for an aggregate purchase price of
approximately $19.5 million in cash. The Company paid an additional $500,000 as
additional purchase price in February 1998. In connection with these
acquisitions, the Company entered into employment and non-competition agreements
for up to three years with certain former stockholders. The Company has not
presented pro forma financial information because of immateriality. These
acquisitions are as follows:

- On March 13, 1997, the Company acquired all of the capital stock of
National Information Systems Corporation, located in Eau Claire,
Wisconsin, which operated under the trade name of Advanced Veterinary
Systems ("AVS").

- On July 18, 1997, the Company acquired all of the capital stock of
Professionals' Software, Inc. ("PSI"), located in Effingham, Illinois.

(g) Wintek Bio-Science Inc.

On July 1, 1997, the Company, through its wholly-owned subsidiary, IDEXX
Laboratories (Taiwan), Inc., acquired certain assets and assumed certain
liabilities of Wintek Bio-Science Inc. ("Wintek") for $960,000. Wintek, located
in Taipei, Taiwan, distributes diagnostic products to veterinarians and
hospitals in Taiwan. The Company


28

also entered into employment and non-competition agreements with the owners of
Wintek for up to five years. The Company has accounted for this acquisition
under the purchase method of accounting and the Company has included the results
of operations in its consolidated results of operations since the date of
acquisition. Prior to the acquisition, Wintek distributed the Company's products
in Taiwan, however, the annual sales of products to Wintek were immaterial. Pro
forma information has not been presented because of immateriality.


(16) SERVICE REVENUE

Service revenue, which includes laboratory service revenue and maintenance
and repair revenue, was less than 10% of total revenue in 1995 and 1996. In
1997, service revenue totaled approximately $46.6 million. The cost of service
revenue in 1997 totaled approximately $28.4 million.

(17) INFORMATION REGARDING CLASSES OF SIMILAR PRODUCTS OR SERVICES (UNAUDITED)

Approximately 75%, 72% and 57% of the Company's revenues were derived from
the sale of professional office diagnostic products in 1995, 1996 and 1997,
respectively, with approximately 46%, 46% and 39% of revenues, respectively,
attributable to sales of test kits, and approximately 29%, 27% and 18% of
revenues, respectively, attributable to sales of instruments.

Approximately 15% of the Company's 1997 revenues were derived from
veterinary laboratory and consulting services.

(18) SUMMARY OF QUARTERLY DATA (UNAUDITED)

A summary of quarterly data follows (in thousands, except per share data):




1996 QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------

Revenue............................ $57,400 $65,875 $69,837 $74,565
Gross profit....................... 32,893 37,295 40,476 43,743
Operating income................... 9,540 11,078 12,702 13,671
Net income......................... 6,960 7,893 8,551 9,236
Earnings per share: Basic.......... 0.19 0.21 0.23 0.25
Earnings per share: Diluted........ 0.18 0.20 0.22 0.23
1997 QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------- -------- ------------ -----------

Revenue............................ $60,534 $58,890 $71,728 $71,818
Gross profit....................... 31,666 28,914 35,940 32,219
Operating loss..................... (273) (5,235) (25,986) (7,436)
Net income (loss).................. 895 (2,068) (16,854) (3,093)
Earnings (loss) per share: Basic... 0.02 (0.05) (0.44) (0.08)
Earnings (loss) per share: Diluted. 0.02 (0.05) (0.44) (0.08)


29



SCHEDULE II



IDEXX LABORATORIES, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS
(in thousands)




BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF YEAR EXPENSES WRITE-OFFS OF YEAR
---------- ---------- ---------- -------

Allowance for Doubtful Accounts:
December 31, 1995........... $1,654 944 88 2,510
December 31, 1996........... 2,510 1,723 232 4,001
December 31, 1997........... 4,001 2,246 1,165 5,082



30




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

The Common Stock is quoted on the Nasdaq National Market under the symbol
IDXX. The following table sets forth for the periods indicated the high and low
closing sale prices per share of the Common Stock as reported on the Nasdaq
National Market.

HIGH LOW
------- -------
CALENDAR 1996
First Quarter.... $53 1/2 $40 1/4
Second Quarter... 49 37
Third Quarter.... 46 1/4 30 1/2
Fourth Quarter... 45 1/4 30
CALENDAR 1997
First Quarter.... $38 1/2 $11
Second Quarter... 15 7/8 9 1/4
Third Quarter.... 19 5/8 12 1/4
Fourth Quarter... 21 1/8 12 3/4

As of December 31, 1997, there were 1,654 holders of record of the Company's
Common Stock.

The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business.


31