UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004.

OR

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

For The Transiton Period From __________To __________.

COMMISSION FILE NUMBER 0-19271

IDEXX LABORATORIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE		01-0393723
(State of incorporation)		(IRS Employer Identification No.)
One IDEXX Drive, Westbrook, Maine		04092
(Address of principal executive offices)		(ZIP Code)

207-856-0300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of October 29, 2004, 33,650,985 shares of the registrant’s Common Stock, $.10 par value, were outstanding.

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

INDEX


PART I		FINANCIAL INFORMATION	Page

	Item 1.	Financial Statements

		Consolidated Balance Sheets as of September 30, 2004 and
		December 31, 2003	3

		Consolidated Statements of Operations for the three and nine months
		ended September 30, 2004 and 2003	4

		Consolidated Statements of Cash Flows for the nine months
		ended September 30, 2004 and 2003	5

		Notes to Consolidated Financial Statements	6

	Item 2.	Management's Discussion and Analysis of Financial Condition
		and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

	Item 4.	Controls and Procedures	26

PART II		OTHER INFORMATION


	Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	26

	Item 6.	Exhibits	27

SIGNATURES			28

PART I FINANCIAL INFORMATION
Item 1. Financial Statements

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(Unaudited)

	September 30,			December 31,
	2004			2003
ASSETS
Current Assets:
Cash and cash equivalents	$	146,534		$	186,717
Short-term investments		50,040			33,988
Accounts receivable, less reserves of $1,465 and $1,950 in 2004 and 2003,
respectively		57,950			53,976
Inventories		85,998			75,333
Deferred income taxes		13,860			13,775
Other current assets		6,038			6,800

Total current assets		360,420			370,589

Long-term Investments		18,386			35,082

Property and Equipment, at cost:
Land		2,169			1,202
Buildings		5,225			5,213
Leasehold improvements		31,610			23,139
Machinery and equipment		50,317			44,843
Office furniture and equipment		37,828			34,802
Construction in progress		5,392			2,824

		132,541			112,023
Less accumulated depreciation and amortization		74,212			66,799

		58,329			45,224

Other Long-term Assets:
Goodwill and other intangible assets, net of accumulated amortization of
$36,114 and $35,451 for 2004 and 2003, respectively		69,663			61,766
Other noncurrent assets, net		5,606			9,214

		75,269			70,980

Total Assets	$	512,404		$	521,875

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	18,786		$	19,160
Accrued expenses		15,270			21,521
Accrued employee compensation and related expenses		21,087			20,792
Accrued taxes		16,782			21,091
Accrued marketing and customer programs		11,241			6,762
Warranty and extended maintenance agreement reserves		2,626			2,250
Notes payable		674			494
Deferred revenue		7,511			8,275

Total current liabilities		93,977			100,345

Long-term Liabilities:
Deferred tax liabilities		1,503			236
Notes payable		500			--
Warranty and extended maintenance agreement reserves		993			1,444
Deferred revenue		6,231			5,772

Total long-term liabilities		9,227			7,452

Commitments and Contingencies (Note 7):
Partner's Interest in Consolidated Subsidiary		471			786

Stockholders' Equity:
Common stock, $0.10 par value; Authorized: 60,000 shares; Issued: 45,155
and 44,390 shares in 2004 and 2003, respectively		4,516			4,439
Additional paid-in capital		408,509			383,249
Deferred equity-based compensation; Issued: 13 and 3 units in 2004
and 2003, respectively		620			138
Retained earnings		301,747			240,350
Accumulated other comprehensive income		6,477			4,565
Treasury stock (11,440 and 9,711 shares in 2004 and 2003, respectively),
at cost		(313,140	)		(219,449	)

Total stockholders' equity		408,729			413,292

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	512,404		$	521,875

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

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

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Revenue:
Product revenue	$	99,996	$	91,692	$	306,026	$	267,011
Service revenue		34,115		28,369		98,881		84,143

		134,111		120,061		404,907		351,154
Cost of Revenue:
Cost of product revenue		39,899		41,665		128,178		122,495
Cost of service revenue		23,154		19,306		66,623		58,436

		63,053		60,971		194,801		180,931

Gross profit		71,058		59,090		210,106		170,223

Expenses:
Sales and marketing		21,132		18,222		62,794		51,743
General and administrative		12,698		9,206		36,523		29,396
Research and development		8,824		8,376		26,029		24,017

Income from operations		28,404		23,286		84,760		65,067
Interest income		830		734		2,315		2,188

Income before provision for income taxes
and partner's interest		29,234		24,020		87,075		67,255
Provision for income taxes		9,647		8,047		25,993		22,530
Partner's interest in loss of subsidiary		109		--		315		--

Net income	$	19,696	$	15,973	$	61,397	$	44,725

Earnings per Share:
Basic	$	0.58	$	0.46	$	1.78	$	1.31

Diluted	$	0.56	$	0.44	$	1.70	$	1.25

Weighted Average Shares Outstanding:
Basic		34,050		34,408		34,467		34,109

Diluted		35,467		35,977		36,120		35,706

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

	For the Nine Months Ended September 30,
	2004			2003
Cash Flows from Operating Activities:
Net income	$	61,397		$	44,725
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization		13,190			14,257
Partner's interest in loss of subsidiary		(315	)		--
Provision for (recovery of) uncollectible accounts		(214	)		122
Provision for deferred income taxes		3,051			1,821
Tax benefit on exercise of nonqualified stock options and disqualifying
dispositions		7,721			11,540
Provision for deferred equity-based compensation		91			88
Changes in assets and liabilities, net of acquisitions:
Accounts receivable		(3,365	)		(3,589	)
Inventories		(10,483	)		5,977
Other assets		(158	)		927
Accounts payable		(416	)		3,080
Accrued liabilities		(1,957	)		13,135
Deferred revenue		(335	)		(327	)

Net cash provided by operating activities		68,207			91,756

Cash Flows from Investing Activities:
Purchase of short- and long-term investments		(30,793	)		(49,156	)
Sales and maturities of short- and long-term investments		31,366			33,557
Purchase of property and equipment		(23,431	)		(13,370	)
Acquisition of equipment leased to customers		(1,951	)		(1,736	)
Acquisition of intangible assets and businesses, net of cash acquired		(6,839	)		(575	)

Net cash used in investing activities		(31,648	)		(31,280	)

Cash Flows from Financing Activities:
Payment of notes payable		(356	)		(510	)
Purchase of treasury stock		(94,004	)		(23,505	)
Proceeds from exercise of stock options		17,550			25,165

Net cash provided (used) by financing activities		(76,810	)		1,150

Net effect of exchange rates on cash		68			1,443

Net increase (decrease) in cash and cash equivalents		(40,183	)		63,069
Cash and cash equivalents at beginning of period		186,717			113,788

Cash and cash equivalents at end of period	$	146,534		$	176,857

Supplemental Disclosure of Cash Flow Information:
Interest paid	$	33		$	10
Income taxes paid	$	17,914		$	3,828
Supplemental Disclosure of Non-Cash Information:
Value of mature shares exchanged in stock option exercises	$	64		$	4,897

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

The accompanying unaudited, consolidated financial statements of IDEXX Laboratories, Inc. (“IDEXX” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the requirements of Regulation S-X, Rule 10-01 for financial statements required to be filed as a part of the Form 10-Q.

The accompanying interim consolidated financial statements reflect, in the opinion of the Company’s management, all adjustments necessary for a fair presentation of the financial position and results of operations. The results of operations for the three and nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the full year or any future period. These financial statements should be read in conjunction with this Form 10-Q for the three and nine months ended September 30, 2004, and the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission.

Reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.

Stock-Based Compensation

The Company measures costs related to employee stock-based compensation plans in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and elects to disclose the pro forma impact of accounting for stock-based compensation plans under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – An Amendment of FASB No. 123” (collectively, “SFAS No. 123, as Amended”). Accordingly, no employee compensation cost has been recognized for these plans based on SFAS No. 123, as Amended.

Had compensation cost for the Company’s stock-based compensation and employee stock purchase plans been determined consistent with the provisions of SFAS No. 123, as Amended, the Company’s net income and net income per common and common equivalent share would have been reduced to the following pro forma amounts (in thousands, except per share amounts):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
Net income:
As reported	$	19,696		$	15,973		$	61,397		$	44,725
Pro forma stock-based employee compensation,
net of tax		(2,000	)		(1,657	)		(5,775	)		(5,785	)

Pro forma net income	$	17,696		$	14,316		$	55,622		$	38,940

Earnings per share:
Basic: as reported	$	0.58		$	0.46		$	1.78		$	1.31
Basic: pro forma		0.52			0.42			1.61			1.14
Diluted: as reported		0.56			0.44			1.70			1.25
Diluted: pro forma		0.50			0.40			1.55			1.10

In order to determine the pro forma impact under SFAS No. 123, as Amended, 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:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Dividend yield	None		None		None		None
Expected volatility	40.0	%	54.8	%	40.0	%	54.8	%
Risk-free interest rate	3.6	%	3.2	%	3.6	%	3.2	%
Expected life from vesting date to exercise date, in years	2.8		3.1		2.8		3.1

Options granted to Directors vest fully on the first anniversary of the date of grant. Options granted to employees during the nine months ended September 30, 2004 and the year ended December 31, 2003 vest over five years at a rate of 20% per year on each anniversary of the date of grant.

In order to determine the pro forma impact under SFAS No. 123, as Amended, the fair value of the purchase rights under the employee stock purchase plans is estimated using the Black-Scholes option-pricing model with the following weighted average assumptions:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Dividend yield	None		None		None		None
Expected volatility	33.0	%	40.0	%	33.0	%	40.0	%
Risk-free interest rate	2.0	%	1.0	%	2.0	%	1.0	%
Expected life in years	0.5		0.5		0.5		0.5

The weighted average fair value of options and purchase rights granted were as follows:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Weighted average fair value per underlying share:
Options granted	$	21.23	$	22.70	$	21.59	$	19.07
Purchase rights under employee stock purchase plans		N/A		N/A		11.51		8.79

During 2003, the Company adopted new compensation policies for Directors who are not officers or employees. Under these policies, non-employee Directors are required to defer a portion of their director compensation in the form of unissued shares of the Company’s common stock (“Deferred Stock Units”) pursuant to the Company’s Director Deferred Compensation Plan. The Deferred Stock Units are valued at the closing sale price of the common stock on the date of grant and exchanged for a fixed number of shares of common stock by the Company one year following a Director’s resignation or retirement. The Company also has adopted an Executive Deferred Compensation Plan (the “Executive Plan”) under which certain members of the Company’s management may elect to defer a portion of their earned cash compensation, beginning with 2003 incentive compensation paid in the first quarter of 2004, in Deferred Stock Units. These Deferred Stock Units will be exchanged for a fixed number of shares of common stock on dates determined by the employee, subject to the limitations of the Executive Plan. The Deferred Stock Units are presented in the stockholders’ equity section of the balance sheet as deferred equity-based compensation. During the three months ended September 30, 2004, approximately 900 Deferred Stock Units valued at $0.05 million were issued. During the nine months ended September 30, 2004, approximately 9,500 Deferred Stock Units valued at $0.5 million were issued. During the three and nine months ended September 30, 2003, approximately 2,200 Deferred Stock Units valued at $0.1 million were issued.

Note 2. 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):

	September 30,		December 31,
	2004		2003
Raw materials	$	20,443	$	16,732
Work-in-process		11,064		7,615
Finished goods		54,491		50,986

	$	85,998	$	75,333

Note 3. Warranty and Extended Maintenance Agreement Reserves

The Company provides for the estimated cost of product warranties in cost of product revenue at the time revenue is recognized. The Company’s actual warranty obligation is affected by product service rates and costs incurred in repairing units. Should actual product service rates or costs differ from management’s estimates, which are based on historical data, revisions to the estimated warranty liability would be required. Below is a summary of changes in accrued warranty reserve for products sold to customers (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
Balance, beginning of period	$	4,673		$	1,536		$	3,303		$	343
Provision for warranty expense		754			1,179			3,044			2,634
Provision for (benefit of) change in estimate of prior
warranty expense		(1,345	)		--			(457	)		--
Settlement of warranty liability		(630	)		(242	)		(2,438	)		(504	)

Balance, end of period		3,452			2,473			3,452			2,473
Long-term portion		835			888			835			888

Current portion of warranty reserves	$	2,617		$	1,585		$	2,617		$	1,585

The Company sells extended maintenance agreements covering IDEXX instruments and recognizes associated revenue over the life of the contracts. The Company anticipates that losses will be incurred for certain of these contracts and has recognized provisions for the estimated losses. The anticipated loss reserves were $0.2 million and $0.4 million as of September 30, 2004 and December 31, 2003, respectively. During the three and nine months ended September 30, 2004, net reductions of estimated contractual losses of $0.4 million and $0.2 million, respectively, were recognized as reductions in cost of service revenue.

Note 4. Income Taxes

The effective income tax rates for the three months and nine months ended September 30, 2004 were 32.9% and 29.8%, respectively, compared with 33.5% for the three and nine months ended September 30, 2003. The majority of this rate reduction resulted from the resolution, during the three months ended June 30, 2004, of an IRS income tax audit through the year 2001. As a result of completing this audit, the Company reduced previously accrued taxes. Other rate reductions resulted from the release of a valuation allowance on international deferred tax assets as a result of a foreign subsidiary demonstrating consistent sustained profitability and changes in certain state and international tax estimates.

On October 11, 2004, the United States Congress passed the American Jobs Creation Act of 2004 (the “Act”). The Company is evaluating the impact of the Act and has not yet determined its effect on future financial results.

Note 5. Comprehensive Income (in thousands):

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2004			2003			2004			2003
Net income	$	19,696		$	15,973		$	61,397		$	44,725
Other comprehensive income (loss):
Foreign currency translation adjustments		(126	)		658			(91	)		4,197
Change in fair value of foreign currency
contracts classified as hedges, net of tax		69			262			2,046			(280	)
Change in fair market value of
investments, net of tax		37			(8	)		(43	)		(83	)

Comprehensive income	$	19,676		$	16,885		$	63,309		$	48,559

Note 6. Earnings per Share

The following is a reconciliation of shares outstanding for basic and diluted earnings per share (in thousands):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Shares Outstanding for Basic Earnings per Share:
Weighted average shares outstanding		34,037		34,407		34,456		34,109
Weighted average deferred stock units outstanding		13		1		11		--

		34,050		34,408		34,467		34,109

Shares Outstanding for Diluted Earnings per Share:
Shares outstanding for basic earnings per share		34,050		34,408		34,467		34,109
Dilutive effect of options issued to employees and directors		1,417		1,550		1,653		1,550
Dilutive effect of warrants		--		19		--		47

		35,467		35,977		36,120		35,706

Deferred Stock Units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of the Company’s common stock are issuable for no cash consideration, the number of shares of the Company’s common stock to be issued is fixed and issuance is not contingent. See Note 1.

The warrants outstanding as of January 1, 2003 were exercised or expired as of September 30, 2003. No warrants were outstanding during the nine months ended September 30, 2004.

Certain options to acquire shares have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. The weighted average number of anti-dilutive options, the weighted average exercise price of such anti-dilutive options and the weighted average market value of shares used to calculate the dilutive effect were as follows (in thousands, except per share amounts):

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2004		2003		2004		2003
Weighted average number of shares underlying anti-dilutive
options		39		30		19		11
Weighted average exercise price per underlying share of
anti-dilutive options	$	60.48	$	42.57	$	60.78	$	42.56
Weighted average market value per share	$	51.43	$	40.30	$	54.80	$	36.97

Note 7. Commitments and Contingencies

During the nine months ended September 30, 2004, there was no significant change in the Company’s material commitments and contingencies, described in Notes 8 and 14 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the Securities and Exchange Commission, except as described in Note 9 and as follows:

•

In May 2004, the Company agreed to aggregate minimum purchases of approximately $4.1 million per year of electrolyte instruments, components and consumables in 2004, 2005 and 2006. As of September 30, 2004, the Company had fulfilled its 2004 minimum annual purchase commitment.

•

In October 2004, the Company resolved a contingent liability for a third-party claim related to technology licensing. As a result, the Company recognized reductions of previously accrued expenses during the three and nine months ended September 30, 2004 of $0.9 million and $1.8 million, respectively, in cost of product revenue.

The Company is subject to claims that arise in the ordinary course of business, including with respect to actual and threatened litigation and other matters. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can reasonably be estimated. However, the Company’s actual losses with respect to these contingencies could exceed the Company’s accruals. Contingency matters are summarized below:

In connection with an acquisition in 1998, the Company agreed to issue up to 1,241,000 shares of its common stock to the sellers based on the achievement by the Company’s pharmaceutical business of net sales and operating profit targets through 2004. However, based on the performance of that business, the Company does not anticipate that it will issue any of such shares in connection with this agreement.

Under the Company’s workers’ compensation insurance policy for the year ending December 31, 2004, the Company retains the first $0.25 million in claim liability per incident and approximately $2.0 million in aggregate claim liability based on payroll. For the year ended December 31, 2003, the Company retained the first $0.25 million in claim liability per incident and $1.4 million in aggregate claim liability. The Company estimates claim liability based on claims incurred and the estimated ultimate cost to settle the claims. Accordingly, the Company has recognized cumulative expenses toward the aggregate limits of $0.4 million for claims incurred during the nine months ended September 30, 2004 and $1.0 million for claims incurred during the year ended December 31, 2003.

Under the Company’s employee health care insurance policy, the Company retains claims liability risk up to $0.1 million per incident and an aggregate claim limit based on monthly participation levels in the employee health care plan. The Company estimates its provision for the uninsured portion of employee health care obligations based on costs of claims incurred. Should actual employee health care claims liability exceed estimates, the Company is liable for up to an additional $0.3 million for potential uninsured obligations as of September 30, 2004. The Company has insurance coverage of $1.0 million for claims above the aggregate limit. Should employee health insurance claims exceed this coverage, the Company would have further obligations for the amount in excess of such coverage.

The Company currently purchases certain products and materials from single sources or a limited number of sources. Some of the products that the Company purchases from these sources are proprietary, and, therefore, may not be available from other sources. If the Company is unable to obtain adequate quantities of these products in the future, then it could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on its results of operations.

From time to time, the Company has received notices alleging that the Company’s products infringe third-party proprietary rights, although the Company is not aware of any pending litigation with respect to such claims.

Note 8. Treasury Stock

The Company’s Board of Directors has approved the repurchase of up to 14,000,000 shares of the Company’s common stock. The Company may make such purchases in the open market or in negotiated transactions. During the three months and nine months ended September 30, 2004, the Company repurchased 720,400 and 1,728,300 shares of common stock for $35.9 million and $93.6 million, respectively. During the nine months ended September 30, 2003, the Company repurchased 657,500 shares of common stock for $23.5 million. No shares were repurchased during the three months ended September 30, 2003. In addition, during the nine months ended September 30, 2004, the Company received approximately 1,200 shares of stock, which were owned by the holder for greater than six months and had a market value of less than $0.1 million, in payment for the exercise price of stock options. During the nine months ended September 30, 2003, the Company received approximately 133,100 shares of stock, which were owned by the holder for greater than six months and had a market value of $4.9 million, in payment for the exercise price of stock options. From the inception of the program in August 1999 to September 30, 2004, the Company repurchased approximately 11,269,700 shares for $307.1 million and received approximately 170,400 shares with a market value of $6.0 million in payment for the exercise price of stock options.

Note 9. Business Acquisitions

In February 2004, the Company acquired certain assets and assumed certain liabilities of a veterinary reference laboratory located in Ohio. The Company paid cash of $5.3 million, issued a note for $1.0 million and assumed liabilities of $0.5 million, for a total purchase price of $6.8 million. Goodwill and other intangible assets of $5.8 million were assigned to the Companion Animal Group segment.

In August 2004, the Company paid cash of $1.5 million to acquire all of the shares of a production animal diagnostics company located in New York. Intangible assets of $2.1 million were assigned to the Food Diagnostics Group segment.

The results of operations of the acquired businesses have been included with those of the Company since the respective acquisition dates. Pro forma information has not been presented because such information is not material to the financial statements of the Company taken as a whole.

In November 2004, the Company paid cash of $30.7 million to acquire all of the shares of the Institut für klinische Prüfung Ludwigsburg GmbH. The business of the acquired company and its subsidiaries comprises commercial veterinary laboratories in Germany and Switzerland and additional customer service locations in the Netherlands, the United Kingdom, Italy, Austria and Denmark. The purchase price paid to the seller is subject to adjustment based on the value of assets acquired and liabilities assumed. Additionally, the total cost to acquire the business will also include associated direct costs of acquisition.

The Company has entered into an agreement to acquire all of the shares of Dr. Bommeli AG, a production animal diagnostics company based in Switzerland, for approximately $16.3 million in cash. The acquisition is expected to be completed this year, upon receiving regulatory approvals. The purchase price paid to the seller is subject to adjustment based on the value of assets acquired and liabilities assumed. Additionally, the total cost to acquire the business will also include associated direct costs of acquisition.

Note 10. Segment Reporting

The Company discloses information regarding its segments in accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”). SFAS No. 131 requires disclosures about operating segments in annual financial statements and requires selected information about operating segments in interim financial statements. It also requires related disclosures about products and services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker is the Chief Executive Officer.

The Company is organized into business units by market and customer group. The Company’s reportable segments are the Companion Animal Group (“CAG”), the Water testing business (“Water”), and the Food Diagnostics Group (“FDG”). CAG develops, designs, manufactures and distributes products, and performs services for veterinarians. Water develops, designs, manufactures and distributes products to detect contaminants in water, primarily microbial contamination in drinking water. FDG develops, designs, manufactures and distributes products to detect disease and contaminants in production animals and food. Other items that are not included in the Company’s reportable segments are comprised primarily of corporate research and development expense and interest income. The Company has conformed the financial information about segments for the three months and nine months ended September 30, 2003 to its presentation of reportable segments for the three months and nine months ended September 30, 2004. Previously the Company had two reportable segments.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 in Notes 2 and 17.

The following is the segment information (in thousands):

	For the Three Months Ended September 30,
	CAG		Water		FDG		Other			Consolidated Total
2004
Revenues	$	108,816	$	14,237	$	11,058	$	--		$	134,111

Income (loss) from operations	$	19,314	$	6,977	$	2,934	$	(821	)	$	28,404
Interest income		--		--		--		830			830

Income (loss) before provisions for (benefit of)
income taxes and partner's interest		19,314		6,977		2,934		9			29,234
Provision for (benefit of) income taxes		6,349		2,294		1,000		4			9,647
Partner's interest in loss of subsidiary		--		--		109		--			109

Net income (loss)	$	12,965	$	4,683	$	2,043	$	5		$	19,696

2003
Revenues	$	97,059	$	12,541	$	10,461	$	--		$	120,061

Income (loss) from operations	$	16,788	$	6,216	$	1,430	$	(1,148	)	$	23,286
Interest income		--		--		--		734			734

Income (loss) before provisions for
(benefit of) income taxes		16,788		6,216		1,430		(414	)		24,020
Provision for (benefit of) income taxes		5,624		2,082		480		(139	)		8,047

Net income (loss)	$	11,164	$	4,134	$	950	$	(275	)	$	15,973

	For the Nine Months Ended September 30,
	CAG		Water		FDG		Other			Consolidated Total
2004
Revenues	$	331,377	$	39,095	$	34,435	$	--		$	404,907

Income (loss) from operations	$	61,022	$	18,004	$	8,254	$	(2,520	)	$	84,760
Interest income		--		--		--		2,315			2,315

Income (loss) before provisions for (benefit of)
income taxes and partner's interest		61,022		18,004		8,254		(205	)		87,075
Provision for (benefit of) income taxes		18,152		5,354		2,548		(61	)		25,993
Partner's interest in loss of subsidiary		--		--		315		--			315

Net income (loss)	$	42,870	$	12,650	$	6,021	$	(144	)	$	61,397

2003
Revenues	$	284,041	$	33,901	$	33,212	$	--		$	351,154

Income (loss) from operations	$	48,000	$	14,977	$	4,779	$	(2,689	)	$	65,067
Interest income		--		--		--		2,188			2,188

Income (loss) before provisions for
(benefit of) income taxes		48,000		14,977		4,779		(501	)		67,255
Provision for (benefit of) income taxes		16,079		5,017		1,602		(168	)		22,530

Net income (loss)	$	31,921	$	9,960	$	3,177	$	(333	)	$	44,725

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q includes or incorporates forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to future revenue growth rates, demand for our products, realizability of assets, warranty expense, and competition. You can generally identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” and similar words and expressions are intended to help you identify forward-looking statements. These statements give our current expectations or forecasts of future events, are based on current

estimates, projections, beliefs, and assumptions of IDEXX and its management, and are not guarantees of future performance. Actual results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties as more fully described under the heading “Future Operating Results” in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2003. The risks and uncertainties discussed herein and in our Annual Report on Form 10-K for the year ended December 31, 2003 do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this Quarterly Report was first filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change.

In addition to the discussion below under “Critical Accounting Policies and Estimates,” refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2003 entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” for a discussion of significant judgments and estimates used in the preparation of our consolidated financial statements.

BUSINESS OVERVIEW

We operate primarily through three business segments: the Companion Animal Group (“CAG”), Water testing business (“Water”) and the Food Diagnostics Group (“FDG”). CAG comprises our veterinary diagnostic products and services (rapid assays, instruments, instrument consumables, and laboratory and consulting services), veterinary pharmaceuticals, and veterinary information products and services. Water develops, designs, manufactures and distributes products to detect contaminants in water. FDG develops, designs, manufactures and distributes products to detect disease and contaminants in production animals and food. Other items that are not included in our reportable segments are comprised primarily of corporate research and development and interest income.

In the U.S., we sell instrument consumables, rapid assays and pharmaceuticals through distributors, and, therefore, our reported sales of these products are sales made to distributors, rather than sales to veterinarians, the end-users. Because distributor inventory levels and purchasing patterns may fluctuate, sales of a particular product line in a particular period may not always be representative of the underlying customer demand for the product. Therefore, we closely track sales of these products by our distributors to the clinics (“clinic-level sales”), which we think provides a more accurate picture of the real growth rate for these products. In the discussion of results below, we note certain instances where we believe reported sales have been influenced, positively or negatively, by changes in distributor inventories.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The critical accounting policies utilized during the nine months ended September 30, 2004 are consistent with those discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.” Except as described below, the significant judgments and estimates used in the preparation of our consolidated financial statements for the nine months ended September 30, 2004 are also consistent with those used to prepare the consolidated financial statements as of and for the year ended December 31, 2003. We have revised certain significant judgments and estimates associated with our LaserCyte^® hematology instrument and our NAVIGATOR^® pharmaceutical product.

As of September 30, 2004 and December 31, 2003, our net inventories included $13.6 million and $7.2 million, respectively, of component parts and finished goods associated with our LaserCyte^® hematology instrument. In addition, we had firm purchase commitments for an additional $2.1 million of component parts as of September 30, 2004. As of September 30, 2004 and December 31, 2003, $3.7 million and $1.5 million of this inventory, respectively, required rework before it could be used to manufacture finished goods. As of September 30, 2004, the inventory was net of a $0.3 million write-down for inventory estimated to be obsolete. There were no write-downs against this inventory as of December 31, 2003 for obsolete inventory. We expect to fully realize our investment in inventory and purchase commitments. However, if we alter the design of this product, we may be required to write off some or all of the remaining associated inventory.

We provide for the estimated cost of product warranties at the time revenue is recognized. Our actual warranty obligation is affected by product service rates and costs incurred in repairing units. We evaluate our warranty obligation on a quarterly basis based on historical data. Should actual product service rates or costs differ from our estimates, revisions to the estimated warranty liability would be required. As of September 30, 2004 and December 31, 2003, we had accrued $3.5 million and $3.3 million, respectively, for estimated warranty expense including warranty reserves of $3.1 million and $3.0 million, respectively, for LaserCyte^® systems.

The increase in warranty liability during the nine months ended September 30, 2004 compared to the same period of the prior year was due to the impact of the growing installed base of LaserCyte^® systems, partially offset by a reduction of warranty cost resulting from our improved service experience for these instruments. We charge warranty expense to the cost of LaserCyte^® revenue at the time revenue is recognized on the system based on the estimated cost to repair the instrument over its two-year warranty period. Cost of revenue reflects not only estimated warranty expense for the systems sold in the current period, but also any changes in estimated warranty expense for the installed base that results from our quarterly evaluation of service experience. The reduction in estimated warranty costs per instrument resulted in a reduction of $1.3 million in cost of product revenue for the three months ended September 30, 2004.

We sell extended maintenance agreements covering IDEXX instruments. We anticipate that losses will be incurred for certain of these contracts and have recognized provisions for the estimated losses. The anticipated loss reserves were $0.2 million and $0.4 million as of September 30, 2004 and December 31, 2003, respectively. During the three and nine months ended September 30, 2004, net reductions of estimated contractual losses of $0.4 million and $0.2 million, respectively, were recognized as reductions in cost of revenue. The decrease in the contractual loss liability was due to a reduction in estimated losses based on our recent service experience.

NAVIGATOR^® is our pharmaceutical product for the treatment of equine protozoal myeloencephalitis (“EPM”) that we launched during the fourth quarter of 2003. Our inventories as of September 30, 2004 included $8.7 million of inventory associated with NAVIGATOR^®, consisting of $0.4 million of finished goods and $8.3 million of active ingredient and other raw materials. We evaluate this inventory on a quarterly basis for realizability based upon the active ingredient and finished goods expiration dates and assumptions regarding sales volumes that we expect to achieve. During the three and nine months ended September 30, 2004, we incurred finished goods inventory write-downs of less than $0.1 million based upon these evaluations.

As we have gained experience in marketing this product, our evaluation of the market for EPM treatments has evolved, and we now believe that this market is significantly smaller than originally anticipated. We now believe that the annual worldwide market for EPM treatments is approximately 10,000 treatments, which is approximately one-third the market that we previously estimated. We believe that over several years we will be able to capture approximately 20% of this market. Based on these assumptions, annual sales of NAVIGATOR^® would grow to approximately $1.5 million.

The active ingredient included in this inventory will expire at various dates beginning in the second quarter of 2005 through the first quarter of 2007. Active ingredient may be converted to finished goods at any time prior to expiration of the active ingredient, and the resulting finished goods will have a shelf-life of four years. Under the inventory exchange agreement described in Note 2 to the Consolidated Financial Statements of the Company contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, approximately 70% of the active ingredient inventory will be replaced by our supplier with active ingredient that will expire in 2008 or later. In addition, we are currently negotiating an agreement with our supplier under which the supplier would agree to replace any of our active ingredient inventory at risk of expiration with inventory having longer dating.

We believe that we will be able to reach an agreement with our supplier that will substantially eliminate any risk that any of our nitazoxanide inventory will expire prior to sale. However, based on our current estimates of the market for NAVIGATOR^®, if we are unable to reach such an agreement, we would have to write off approximately $4.9 million of nitazoxanide inventory.

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Revenue

Total Company. Revenue for the total company increased $14.1 million, or 12%, to $134.1 million from $120.1 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:

For the Three Months Ended September 30,
Net Revenue (in thousands)	2004		2003		Dollar Change		Percentage Change		Percentage Change from Currency ⁽¹⁾
CAG	$	108,816	$	97,059	$	11,757		12%		2%
Water		14,237		12,541		1,696		14%		3%
FDG		11,058		10,461		597		6%		4%

Total Company	$	134,111	$	120,061	$	14,050		12%		3%

⁽¹⁾ Represents the percentage change in revenue attributed to the effect of changes in currency rates from 2003 to 2004.

Companion Animal Group. Revenue for CAG increased $11.8 million, or 12%, to $108.8 million from $97.1 million in the same period of the prior year. This increase resulted from increased sales of laboratory services, rapid assay products, instrument consumables, pharmaceutical products, and veterinary practice management software and services. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $2.2 million, or 2%, to the increase in CAG revenue.

The increase in sales of laboratory services (an increase of $5.5 million, or 24%) resulted primarily from higher testing volume at established laboratories and the inclusion of sales from laboratories acquired in late 2003 and early 2004, and, to a lesser extent, the favorable impact of currency exchange rates on sales at our laboratories outside the U.S.

The increase in sales of rapid assay products (an increase of $1.8 million, or 9%) was due primarily to domestic price increases that were not effective for the full three months ended September 30, 2003 and to the timing of recognition of certain discounts associated with an annual marketing program, which were concentrated more in the third quarter of 2003 than in the third quarter of 2004. The increase in sales was also attributable, to a lesser extent, to increased domestic clinic-level sales volume of canine products; increased European sales volume of both canine and feline products; and the favorable impact of currency exchange rates on sales outside the U.S. The increases in domestic clinic-level sales and European sales were attributable to demand for both established products sold during the prior year and for our new SNAP^® test to screen dogs and cats for Giardia infection, which was launched during the first quarter of 2004. We expect more competition with certain of our products in the rapid assay market due to the market re-entry of a competitor, which could negatively affect growth in rapid assay sales.

The increase in sales of instrument consumables (an increase of $1.8 million, or 6%) was due mainly to higher unit sales volume, which was attributable primarily to higher volume outside the U.S. and to increased domestic clinic-level sales of LaserCyte^® tubes, and to the favorable impact of currency exchange rates on sales outside the U.S. These increases were partly offset by higher relative sales in geographies where products are sold at lower unit prices.

The increase in sales of pharmaceutical products (an increase of $1.0 million, or 60%) resulted primarily from increased clinic-level demand for established products and from increased sales volume of new products launched in 2003 and 2004.

The increase in sales of veterinary practice management software and services (an increase of $0.6 million, or 11%) resulted primarily from higher volume of complete system sales and of computer hardware upgrades.

Water. Revenue for Water increased $1.7 million, or 14%, to $14.2 million from $12.5 million for the same period of the prior year. The increase resulted primarily from higher sales volume in the U.S. and the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates contributed an aggregate of $0.4 million, or 3%, to the increase in Water revenue.

Food Diagnostics Group. Revenue for FDG increased $0.6 million, or 6%, to $11.1 million from $10.5 million for the same period of the prior year. The increase resulted primarily from higher sales volume of production animal diagnostics and the favorable impact of currency exchange rates on sales outside the U.S. These increases were partly offset by decreased sales volume of dairy testing products and lower average unit prices of both dairy testing and production animal diagnostics products. The increase in production animal diagnostics sales was primarily due to increased sales volume outside the U.S. and the timing of annual sales to a significant U.S. customer that occurred in the second quarter of 2003 but occurred in the third quarter of 2004. The lower average unit prices were attributable to both higher relative sales in geographies where products are sold at lower unit prices and to greater price competition in certain geographies. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $0.4 million, or 4%, to FDG revenue.

Gross Profit

Total Company. Gross profit for the total company increased $12.0 million, or 20%, to $71.1 million from $59.1 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased to 53% from 49% in the same period of the prior year. The following table presents gross profit and gross profit percentage for the Company and its operating segments:

For the Three Months Ended September 30,
Gross Profit (in thousands)	2004		Percent of Sales		2003		Percent of Sales		Dollar Change		Percentage Change
CAG	$	53,757		49%	$	44,905		46%	$	8,852		20%
Water		9,811		69%		8,770		70%		1,041		12%
FDG		7,490		68%		5,415		52%		2,075		38%

Total Company	$	71,058		53%	$	59,090		49%	$	11,968		20%

Companion Animal Group. Gross profit for CAG increased $8.9 million, or 20%, to $53.8 million from $44.9 million in the same period of the prior year due to increased sales volume across the CAG product lines and to an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 49% from 46% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to productivity improvements related to our LaserCyte^® hematology instrument, including both service and manufacturing efficiencies. The service cost improvements during the quarter generated a favorable change in our estimated cost of product warranties and extended maintenance agreements for all placed instruments for which we have such future obligations. Gross profit percentage improvements also resulted from other productivity improvements; the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses; and higher pricing of rapid assay products and laboratory services. These improvements were partially offset by a lower gross margin percentage recognized from higher relative sales of lower margin laboratory services.

Water. Gross profit for Water increased $1.0 million, or 12%, to $9.8 million from $8.8 million for the same period in the prior year, primarily due to increased sales volume, partly offset by a decrease in the gross profit percentage. As a percentage of Water revenue, gross profit decreased to 69% from 70% for the same period in the prior year. The decrease in gross profit percentage was attributable primarily to higher relative sales of lower margin products and also to miscellaneous other factors, partly offset by the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses.

Food Diagnostics Group. Gross profit for FDG increased $2.1 million, or 38%, to $7.5 million from $5.4 million for the same period in the prior year due to an increase in the gross profit percentage and to increased sales volume. As a percentage of FDG revenue, gross profit increased to 68% from 52% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to the revision of a contingent liability estimate resulting from the settlement of a third-party claim and, to a lesser extent, higher relative sales of higher margin products; the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses; and net favorable manufacturing variances. These increases were partially offset by lower average unit sales prices, partly due to higher relative sales in geographies where products are sold at lower prices. The settlement of the third-party claim resulted in a benefit of $0.9 million. Adjusting for this discrete item, the gross profit rate for the three months ended September 30, 2004 would have been 59%. The favorable manufacturing variances resulted primarily from reduced scrap costs and from a favorable comparison to the quarter ended September 30, 2003, which included the negative impact of low production volume for a dairy testing product. The collective impact of the settlement of the third-party claim and favorable currency exchange caused the reported gross margin to be higher than our estimates and future expectations.

Operating Expenses and Operating Income

Total Company. Total company operating expenses increased $6.9 million to $42.7 million from $35.8 million for the same period of the prior year. As a percentage of revenue, operating expenses increased to 32% from 30% for the same period in the prior year. The following tables present operating expenses and operating income for the Company and its operating segments:

For the Three Months Ended September 30,
Operating Expenses (in thousands)	2004		Percent of Sales		2003		Percent of Sales		Dollar Change			Percentage Change
CAG	$	34,443		32%	$	28,117		29%	$	6,326			22%
Water		2,834		20%		2,554		20%		280			11%
FDG		4,556		41%		3,985		38%		571			14%
Other		821		N/A		1,148		N/A		(327	)		(28%	)

Total Company	$	42,654		32%	$	35,804		30%	$	6,850			19%

Operating Income (in thousands)	2004				2003				Dollar Change
CAG	$	19,314		18%	$	16,788		17%	$	2,526	15%
Water		6,977		49%		6,216		50%		761	12%
FDG		2,934		27%		1,430		14%		1,504	105%
Other		(821	)	N/A		(1,148	)	N/A		327	28%

Total Company	$	28,404		21%	$	23,286		19%	$	5,118	22%

Companion Animal Group. Operating expenses for CAG increased $6.3 million, or 22%, to $34.4 million from $28.1 million in the same period of the prior year. The increase was attributable to a 39% ($2.9 million) increase in general and administrative expense, an 18% ($2.7 million) increase in sales and marketing expense, and a 15% ($0.8 million) increase in research and development expense. The increase in general and administrative expense primarily reflects higher spending on information technology and other corporate functions, partly due to expenses associated with Sarbanes-Oxley Act compliance efforts. The increase in sales and marketing expense resulted primarily from increased sales and sales support personnel and marketing program costs. The increase in research and development expense resulted primarily from increased staffing to support diagnostic instrument development programs.

Water. Operating expenses for Water increased $0.3 million, or 11%, to $2.8 million from $2.6 million in the same period of the prior year. The increase was primarily attributable to a 29% ($0.2 million) increase in general and administrative expense. The increase in general and administrative expense primarily reflects higher spending on information technology and other corporate functions, partly due to expenses associated with Sarbanes-Oxley Act compliance efforts. There were no significant fluctuations in the nature and amounts of sales and marketing expense and research and development expense.

Food Diagnostics Group. Operating expenses for FDG increased $0.6 million, or 14%, to $4.6 million from $4.0 million in the same period of the prior year. The net increase resulted from a 47% ($0.5 million) increase in general and administrative expense and a 13% ($0.2 million) increase in sales and marketing expense, partly offset by an 11% ($0.1 million) decrease in research and development expense. The increase in general and administrative expense primarily reflects higher spending on information technology and other corporate functions, partly due to expenses associated with Sarbanes-Oxley Act compliance efforts. The increase in sales and marketing expense resulted from increased marketing activities, partly driven by increased spending in support of our HerdChek^® BSE Antigen Test Kit, a rapid test for detection of bovine spongiform encephalopathy (“BSE”). The decrease in research and development expense was due primarily to decreased spending to support product development of products launched since the same period of the prior year.

Other. Operating expenses, consisting primarily of corporate research and development, decreased $0.3 million, or 28%, to $0.8 million from $1.1 million in the same period of the prior year.

Interest Income

Net interest income was $0.8 million for the three months ended September 30, 2004 compared to $0.7 million for the three months ended September 30, 2003. The slight increase in interest income was due to higher effective interest rates partially offset by lower invested cash balances.

Provision for Income Taxes

The effective income tax rate for the three months ended September 30, 2004 was 32.9% compared with 33.5% for the same period of the prior year. The reduction in this rate resulted primarily from changes in certain state and international tax estimates.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Revenue

Total Company. Revenue for the total company increased $53.8 million, or 15%, to $404.9 million from $351.2 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:

For the Nine Months Ended September 30,
Net Revenue (in thousands)	2004		2003		Dollar Change		Percentage Change		Percentage Change from Currency ⁽¹⁾
CAG	$	331,377	$	284,041	$	47,336		17%		3%
Water		39,095		33,901		5,194		15%		4%
FDG		34,435		33,212		1,223		4%		5%

Total Company	$	404,907	$	351,154	$	53,753		15%		3%

⁽¹⁾ Represents the percentage change in revenue attributed to the effect of changes in currency rates from 2003 to 2004.

Companion Animal Group. Revenue for CAG increased $47.3 million, or 17%, to $331.4 million from $284.0 million in the same period of the prior year. This increase resulted from increased sales of laboratory services, instrument consumables, rapid assay products, instruments, pharmaceutical products, and veterinary practice management software and services. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $8.3 million, or 3%, to the increase in CAG revenue.

The increase in sales of laboratory services (an increase of $14.9 million, or 22%) resulted primarily from higher testing volume at established laboratories and the inclusion of sales from laboratories acquired in late 2003 and early 2004, and, to a lesser extent, the favorable impact of currency exchange rates on sales at our laboratories outside the U.S. and higher pricing.

The increase in sales of instrument consumables (an increase of $10.3 million, or 11%) was due mainly to increased sales volume including higher domestic clinic-level sales of VetTest^® slides and, to a lesser extent, tubes used with our hematology instruments, as well as higher volume outside the U.S.; the favorable impact of currency exchange rates on sales outside the U.S.; and the impact of changes in distributors’ inventory levels. Shipments to distributors during the nine months ended September 30, 2003 were reduced as a result of the Company’s continuing efforts to improve efficiency in the distribution channel. The reduced shipments during the nine months ended September 30, 2003 had a positive impact on sales growth in the 2004 period. The collective impact of favorable currency exchange and favorable comparisons resulting from lower distributor purchases in 2003 caused reported growth for the nine months ended September 30, 2004 to be higher than our estimates of the underlying clinic-level growth of instrument consumable products.

The increase in sales of rapid assay products (an increase of $9.9 million, or 15%) was due primarily to increased domestic clinic-level sales volume of canine and, to a lesser extent, feline products as well as demand for our new SNAP^® test to screen dogs and cats for Giardia infection, which was launched during the first quarter of 2004; the impact of changes in distributors’ inventory levels; and, to a lesser extent, the favorable impact of currency exchange rates on sales outside the U.S. Shipments to distributors during the nine months ended September 30, 2004 increased as distributors built up inventory levels in response to higher clinic-level demand, while shipments to distributors decreased during the same period of the prior year as a result of the Company’s efforts to improve efficiency in the distribution channel. The comparative impact of these changes in distributors’ inventories resulted in reported sales growth in the 2004 period. The collective impact of changes in distributor inventory levels and favorable currency exchange caused reported growth for the nine months ended September 30, 2004 to be higher than our estimates of the underlying clinic-level growth of rapid assay products. We expect more competition with certain of our products in the rapid assay market, which could negatively affect growth in rapid assay sales.

The increase in sales of instruments (an increase of $5.9 million, or 25%) was due primarily to increased sales of the LaserCyte^® hematology system and of digital radiography systems.

The increase in sales of pharmaceutical products (an increase of $2.9 million, or 57%) resulted primarily from sales of new products launched in 2003 and 2004 and from increased clinic-level demand for established products.

The increase in sales of veterinary practice management software and services (an increase of $2.1 million, or 13%) resulted primarily from higher volume of complete system sales.

Water. Revenue for Water increased $5.2 million, or 15%, to $39.1 million from $33.9 million for the same period of the prior year. The increase resulted primarily from higher sales volume and the favorable impact of currency exchange rates on sales outside the U.S., partly offset by lower average unit prices due to higher relative sales in geographies where products are sold at lower unit prices. The favorable impact of currency exchange rates contributed an aggregate of $1.5 million, or 4%, to the increase in Water revenue.

Food Diagnostics Group. Revenue for FDG increased $1.2 million, or 4%, to $34.4 million from $33.2 million for the same period of the prior year. The increase was due primarily to the favorable impact of currency exchange rates on sales outside the U.S. and higher sales volume of production animal diagnostics. These increases were partly offset by lower average unit prices of production animal diagnostics and, to a lesser extent, of dairy testing products, and by decreased sales volume of dairy testing products. The increase in production animal diagnostics sales was due to increased sales volume outside the U.S. The lower average unit prices were attributable to both greater price competition in certain geographies and to higher relative sales in geographies where products are sold at lower unit prices. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $1.8 million, or 5%, to FDG revenue.

Gross Profit

Total Company. Gross profit for the total company increased $39.9 million, or 23%, to $210.1 million from $170.2 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased to 52% from 48% in the same period of the prior year. The following table presents gross profit and gross profit percentage for the Company and its operating segments:

For the Nine Months Ended September 30,
Gross Profit (in thousands)	2004		Percent of Sales		2003		Percent of Sales		Dollar Change		Percentage Change
CAG	$	161,942		49%	$	130,554		46%	$	31,388		24%
Water		26,552		68%		22,797		67%		3,755		16%
FDG		21,612		63%		16,872		51%		4,740		28%

Total Company	$	210,106		52%	$	170,223		48%	$	39,883		23%

Companion Animal Group. Gross profit for CAG increased $31.4 million, or 24%, to $161.9 million from $130.6 million in the same period of the prior year due primarily to increased sales volume across the CAG product lines and to an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 49% from 46% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to productivity improvements across CAG product lines and services; the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses; and favorable pricing from our supplier of slide consumables compared to the same period of the prior year. The productivity improvements were partly due to fixed costs spread over a higher revenue base and to service and manufacturing efficiencies related to our LaserCyte^® hematology instrument. The LaserCyte^® service cost improvements generated a favorable change in our estimated cost of product warranties and extended maintenance agreements for all placed instruments for which we have such future obligations. These increases in gross profit percentage were partially offset by a lower gross margin percentage recognized from a laboratory acquired in early 2004 and, to a lesser extent, by start-up costs of a laboratory opened in the fourth quarter of 2003.

Water. Gross profit for Water increased $3.8 million, or 16%, to $26.6 million from $22.8 million for the same period in the prior year, primarily due to increased sales volume and, to a lesser extent, an increase in the gross profit percentage. As a percentage of Water revenue, gross profit increased to 68% from 67% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses, partially offset by lower average unit prices due to higher relative sales in geographies where products are sold at lower unit prices.

Food Diagnostics Group. Gross profit for FDG increased $4.7 million, or 28%, to $21.6 million from $16.9 million for the same period in the prior year, primarily due to an increase in the gross profit percentage. As a percentage of FDG revenue, gross profit increased to 63% from 51% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to revisions in the second and third quarters of a contingent liability estimate and, to a lesser extent, the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses, and increased manufacturing efficiencies, partially offset by lower average unit sales prices. The revisions of a contingent liability estimate related to a third-party claim that was settled in the third quarter resulted in an aggregate benefit of $1.8 million. Adjusting for this discrete item, the gross profit rate for the nine months ended September 30, 2004 would have been 58%. The collective impact of the settlement of the third-party claim and favorable currency exchange caused the reported gross margin to be higher than our estimates and future expectations.

Operating Expenses and Operating Income

Total Company. Total company operating expenses increased $20.2 million to $125.3 million from $105.2 million for the same period of the prior year. As a percentage of revenue, operating expenses increased slightly to 31% from 30% in the same period of the prior year. The following tables present operating expenses and operating income for the Company and its operating segments:

For the Nine Months Ended September 30,
Operating Expenses (in thousands)	2004		Percent of Sales		2003		Percent of Sales		Dollar Change			Percentage Change
CAG	$	100,920		30%	$	82,554		29%	$	18,366			22%
Water		8,548		22%		7,820		23%		728			9%
FDG		13,358		39%		12,093		36%		1,265			10%
Other		2,520		N/A		2,689		N/A		(169	)		(6%	)

Total Company	$	125,346		31%	$	105,156		30%	$	20,190			19%

Operating Income (in thousands)	2004				2003				Dollar Change
CAG	$	61,022		18%	$	48,000		17%	$	13,022	27%
Water		18,004		46%		14,977		44%		3,027	20%
FDG		8,254		24%		4,779		14%		3,475	73%
Other		(2,520	)	N/A		(2,689	)	N/A		169	6%

Total Company	$	84,760		21%	$	65,067		19%	$	19,693	30%

Companion Animal Group. Operating expenses for CAG increased $18.4 million, or 22%, to $100.9 million from $82.6 million in the same period of the prior year. The increase was attributable to a 26% ($10.9 million) increase in sales and marketing expense, a 25% ($5.8 million) increase in general and administrative expense, and a 10% ($1.7 million) increase in research and development expense. The increase in sales and marketing expense resulted primarily from increased sales and sales support personnel and marketing program costs and the unfavorable impact of foreign currency denominated expenses. The increase in general and administrative expense reflects higher spending on information technology and other corporate functions, partly due to expenses associated with Sarbanes-Oxley Act compliance efforts; higher personnel costs; and the unfavorable impact of foreign currency denominated expenses, partially offset by the effect of a payment received during the second quarter to settle certain litigation. The increase in research and development expense results primarily from increased staffing and higher spending to support instrument and pharmaceutical product development.

Water. Operating expenses for Water increased $0.7 million, or 9%, to $8.5 million from $7.8 million in the same period of the prior year. The increase was primarily attributable to a 23% ($0.6 million) increase in general and administrative expense and an 11% ($0.1 million) increase in research and development expense. The increase in general and administrative expense reflects higher spending on information technology and other corporate functions, partly due to expenses associated with Sarbanes-Oxley Act compliance efforts; the impact of a gain from a legal settlement in 2003 recorded as a reduction to general and administrative expense; and the unfavorable impact of foreign currency denominated expenses. The increase in research and development expense was due primarily to increased compensation costs. There were no significant fluctuations in the nature and amounts of sales and marketing expense.

Food Diagnostics Group. Operating expenses for FDG increased $1.3 million, or 10%, to $13.4 million from $12.1 million in the same period of the prior year. The net increase resulted primarily from a 30% ($1.0 million) increase in general and administrative expense, a 3% ($0.2 million) increase in sales and marketing expense, and a 4% ($0.1 million) increase in research and development expense. The increase in general and administrative expense resulted primarily from higher spending on information technology and other corporate functions, partly due to expenses associated with Sarbanes-Oxley Act compliance efforts; ongoing expenses associated with the China joint venture formed in 2003; and the unfavorable impact of foreign currency denominated expenses. The increase in sales and marketing expense resulted primarily from increased sales compensation costs outside the U.S.; increased spending in support of our HerdChek^® BSE Antigen Test Kit; and the unfavorable impact of foreign currency denominated expenses, partly offset by the nonrecurrence in 2004 of expenses incurred in 2003 in connection with the formation of the China joint venture. The increase in research and development expense was due primarily to higher compensation costs for additional personnel.

Other. Operating expenses for 2004, consisting primarily of corporate research and development, decreased $0.2 million, or 6%, to $2.5 million from $2.7 million for the same period of the prior year.

Interest Income

Net interest income was $2.3 million for the nine months ended September 30, 2004 compared to $2.2 million for the nine months ended September 30, 2003. The increase in interest income was due to higher invested cash balances partially offset by lower effective interest rates.

Provision for Income Taxes

Our effective income tax rate for the nine months ended September 30, 2004 was 29.8% compared with 33.5% for the same period of the prior year. The majority of this rate reduction resulted from the resolution, during the three months ended June 30, 2004, of an IRS income tax audit through the year 2001. As a result of completing this audit, the Company reduced previously accrued taxes. Other rate reductions resulted from the release of a valuation allowance on international deferred tax assets as a result of a foreign subsidiary demonstrating consistent sustained profitability and changes in certain state and international tax estimates.

On October 11, 2004, the United States Congress passed the American Jobs Creation Act of 2004. The Company is evaluating the impact of the Act and has not yet determined its effect on future financial results.

LIQUIDITY AND CAPITAL RESOURCES

We fund the capital needs of our business through cash generated from operations. We had $196.6 million and $220.7 million of cash, cash equivalents and short-term investments as of September 30, 2004 and December 31, 2003, respectively, and working capital of $266.4 million and $270.2 million, respectively. As of September 30, 2004 and December 31, 2003, we also had long-term investments, primarily in municipal bonds, of $18.4 million and $35.1 million, respectively. As of September 30, 2004 and December 31, 2003, we had total cash, short-term investments and long-term investments of $215.0 million and $255.8 million, respectively.

Cash provided by operating activities was $68.2 million for the nine months ended September 30, 2004. Cash of $7.7 million was generated from the income tax benefit obtained from the exercise of nonqualified stock options and disqualifying dispositions of incentive stock options by employees. Cash of $10.5 million was used by an increase in inventories. Cash of $3.4 million was used by an increase in accounts receivable due primarily to increased sales volume. Cash of $2.0 million was used by a decrease in accrued liabilities (defined as accrued expenses, accrued employee compensation and related expenses, accrued taxes, accrued marketing and customer programs, and accrued warranty and extended maintenance reserves) attributable primarily to tax and compensation payments.

Cash used for investing activities was $31.6 million for the nine months ended September 30, 2004. We purchased approximately $23.4 million of fixed assets and $2.0 million of equipment for lease to customers during the nine months ended September 30, 2004. We used $6.8 million to acquire certain assets of a veterinary reference laboratory located in Ohio, a production animal diagnostics company, and other intangibles. The net increase in cash from purchases and sales of investments was $0.6 million. We expect our total spending for capital expenditures in 2004 to be approximately $35.0 million.

Cash used for financing activities was $76.8 million for the nine months ended September 30, 2004. We used cash of $94.0 million to repurchase 1,728,300 shares of our common stock and to pay for shares purchased at the end of 2003. As of September 30, 2004, approximately 11,269,700 shares of our common stock had been repurchased under the stock repurchase plan. The repurchase plan was originally authorized by the Board of Directors in 1999 and subsequently amended to encompass total purchases of up to 14,000,000 shares of our common stock in the open market or in negotiated transactions. Employees’ exercises of options yielded cash proceeds of $17.6 million during the nine months ended September 30, 2004. We used cash of $0.4 million for payment on notes.

The slides sold for use in our VetTest^® instruments are purchased under an agreement with a supplier at fixed prices. Under this agreement, we are required to make additional slide purchases in 2004 of approximately $11.9 million.

We purchase electrolyte instruments, components and consumables at fixed prices under an agreement with a supplier. Under this agreement, we are required to make aggregate minimum purchases of approximately $4.1 million per year of electrolyte instruments, components and consumables in 2004, 2005 and 2006. As of September 30, 2004, we had fulfilled our 2004 minimum annual purchase commitment.

In November 2004, we paid cash of $30.7 million to acquire all of the shares of the Institut für klinische Prüfung Ludwigsburg GmbH, which is engaged in the commercial veterinary laboratory business. The purchase price is subject to adjustment based on the value of assets acquired and liabilities assumed. Additionally, the total cost to acquire the business will also include associated direct costs of acquisition.

We have entered into an agreement to acquire all of the shares of Dr. Bommeli AG, a production animal diagnostics company based in Switzerland, for approximately $16.3 million in cash. The acquisition is expected to be completed this year, upon receiving regulatory approvals. The purchase price is subject to adjustment based on the value of assets acquired and liabilities assumed. Additionally, the total cost to acquire the business will also include associated direct costs of acquisition.

In evaluating liquidity, we consider cash and investments collectively. We believe that current cash, short-term investments, long-term investments and funds generated from operations will be sufficient to fund our operations and capital purchase requirements.

FUTURE OPERATING RESULTS

The future operating results of IDEXX involve a number of risks and uncertainties. Actual events or results may differ materially from those discussed in this report. Factors that could cause or contribute to such differences include, but are not limited to, the factors discussed below, as well as those discussed elsewhere in this report.

IDEXX’s Future Growth and Profitability Depends on Several Factors

The future success of our business depends upon our ability to successfully implement various strategies, including:

•

Developing, manufacturing and marketing new products with new features and capabilities, including pharmaceutical products and a new clinical chemistry instrument, and improving and enhancing existing products, including the LaserCyte^® system;

•

Expanding our market by increasing use of our products by our customers;

•

Strengthening our sales and marketing activities both within the U.S. and in geographies outside of the U.S.;

•

Developing and implementing new technology development and licensing strategies; and identifying, completing and integrating acquisitions that enhance our existing businesses or create new business areas for us; and

•

Reducing the costs of manufacturing our products through operating efficiencies.

However, we may not be able to successfully implement some or all of these strategies and increase or sustain our rate of growth or profitability.

IDEXX's Markets are Competitive and Subject to Rapid and Substantial Technological Change

We face intense competition within the markets in which we sell our products and services. We expect that future competition will become even more intense, and that we will have to compete with changing and improving technologies. Some of our competitors and potential competitors, including large pharmaceutical companies, have substantially greater capital, manufacturing, marketing and research and development resources than we do.

IDEXX’s Products and Services are Subject to Various Government Regulations

In the U.S., the manufacture and sale of our products are regulated by agencies such as the U.S. Department of Agriculture (“USDA”), U.S. Food and Drug Administration (“FDA”) and the U.S. Environmental Protection Agency (“EPA”). Most diagnostic tests for animal health applications, including our canine, feline, poultry and livestock tests, must be approved by the USDA prior to sale. Our water testing products must be approved by the EPA before they may be used by customers in the U.S. as a part of a water quality monitoring program required by the EPA. Our pharmaceutical and dairy testing products require approval by the FDA. The manufacture and sale of our products are subject to similar laws in many foreign countries. Any failure to comply with legal and regulatory requirements relating to the manufacture and sale of our products in the U.S. or in other countries could result in fines and sanctions against us or removals of our products from the market, which could have a material adverse effect on our results of operations.

We have entered into an agreement with the FDA under which we have agreed, among other things, to perform specified lot release and stability testing of our SNAP^® beta-lactam dairy testing products and to provide related data to the FDA. If the FDA were to determine that one or more lots of product failed to meet applicable criteria for product performance or stability, the FDA could take various actions, including requiring us to recall products or restricting our ability to sell these products. Sales of dairy antibiotic residue testing products were $11.6 million for the nine months ended September 30, 2004.

Commercialization of animal health pharmaceuticals in the U.S. requires prior approval by the FDA. To obtain such approvals, we are required to submit substantial clinical, manufacturing and other data to the FDA. Regulatory approval for products submitted to the FDA may take several years and following approval, the FDA continues to regulate all aspects of the manufacture, labeling, storage, record keeping and promotion of pharmaceutical products. Failure to obtain, or delays in obtaining, FDA approval for new pharmaceutical products would have a negative impact on our future growth.

Changes in Veterinary Medical Practices Could Negatively Affect Operating Results

We believe that more than half of all veterinary diagnostic testing occurs in laboratories. Although we have a significant laboratory business, our in-clinic testing business is more material to our results of operations. If testing by companion animal veterinarians generally were to shift toward increased laboratory testing and away from in-clinic testing, this shift could have a material adverse effect on our results of operations.

The market for diagnostic tests could be negatively impacted by the introduction or broad market acceptance of vaccines or preventatives for the diseases and conditions for which we sell diagnostic tests and services. Eradication or substantial declines in the prevalence of certain diseases also could lead to a decline in diagnostic testing for such diseases. Such a decline could have a material adverse effect on our results of operations.

IDEXX’s Success is Heavily Dependent Upon its Proprietary Technologies

We rely on a combination of patent, trade secret, trademark and copyright law to protect our proprietary rights. If we do not have adequate protection of our proprietary rights, our business may be affected by competitors who develop substantially equivalent technologies that compete with us.

We cannot assure that we will obtain issued patents, that any patents issued or licensed to us will remain valid, or that any patents owned or licensed by us will provide protection against competitors with similar technologies. Even if our patents cover products sold by our competitors, the time and expense of litigating to enforce our patent rights could be substantial, and could have a material adverse effect on our results of operations. In addition, expiration of patent rights could result in substantial new competition in the markets for products previously covered by those patent rights.

In the past, we have received notices claiming that our products infringe third-party patents and we may receive such notices in the future. Patent litigation is complex and expensive and the outcome of patent litigation can be difficult to predict. We cannot assure that we will win a patent litigation case or negotiate an acceptable resolution of such a case. If we lose, we may be stopped from selling certain products and/or we may be required to pay damages and/or ongoing royalties as a result of the lawsuit. Any such adverse result could have a material adverse effect on our results of operations.

IDEXX Purchases Materials for its Products from a Limited Number of Sources

We currently purchase certain products and materials from single sources or a limited number of sources. Some of the products that we purchase from these sources are proprietary, and, therefore, may not be available from other sources. These products include our VetTest^® chemistry and QBC^® VetAutoread™ hematology analyzers and related consumables, digital radiography systems, active ingredients for pharmaceutical products, including NAVIGATOR^® paste, and certain components of our SNAP^® rapid assay devices, water testing products and LaserCyte^® systems. If we are unable to obtain adequate quantities of these products in the future, we could face cost increases or reductions or delays in product shipments, which could have a material adverse effect on our results of operations.

The slides sold for use in our VetTest^® instruments are purchased under an agreement with Ortho-Clinical Diagnostics, Inc. at fixed prices. Under this agreement we are required to purchase a minimum of $136 million of slides through 2010. To the extent that slides purchased under the contract exceed demand for the slides, we may incur losses in the future under this agreement. To the extent that we are unable to maintain current pricing levels on sales of slides to our customers, our profits on slide sales could decline because we purchase slides at fixed prices.

IDEXX’s Biologic Products are Complex and Difficult to Manufacture

Many of our products are biologics, which are products that are comprised of materials from living organisms, such as antibodies, cells and sera. Manufacturing biologic products is highly complex. Unlike products that rely on chemicals for efficacy (such as most pharmaceuticals), biologics are difficult to characterize due to the inherent variability of biological materials. Difficulty in characterizing biological materials limits the precision of specifications for these materials, which creates greater risk in the manufacturing process. We attempt to mitigate risk associated with the manufacture of biologics by utilizing multiple vendors, manufacturing some of these materials ourselves and maintaining substantial inventories of materials that have demonstrated the appropriate characteristics. However, there can be no assurance that we will be able to maintain adequate sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy applicable product release criteria. Our inability to obtain necessary biological materials or to successfully manufacture biologic products that incorporate such materials could have a material adverse effect on our results of operations.

IDEXX’s Sales are Dependent on Distributor Purchasing Patterns

We sell many of our products, including substantially all of the rapid assays and instrument consumables sold in the U.S., through distributors. Because significant product sales are made to a limited number of customers, unanticipated changes in the timing and size of distributor purchases can have a negative effect on quarterly results. Our financial performance, therefore, is subject to an unexpected downturn in product demand and may be unpredictable.

International Revenue Accounts for a Significant Portion of IDEXX’s Total Revenue

Various risks associated with foreign operations may impact our international sales. Possible risks include fluctuations in the value of foreign currencies, disruptions in transportation of our products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. Prices that we charge to foreign customers may be different than the prices we charge for the same products in the U.S. due to competitive, market or other factors. As a result, the mix of domestic and international sales in a particular period could have a material impact on our results for that period. In addition, many of the products for which our selling price may be denominated in foreign currencies are manufactured, sourced, or both, in the U.S. and our costs are incurred in U.S. dollars. We utilize non-speculative forward currency exchange contracts to mitigate foreign currency exposure, however, an appreciation of the U.S. dollar relative to the foreign currencies in which we sell these products would reduce our gross margins.

The Loss of our President, Chief Executive Officer and Chairman Could Adversely Affect our Business

We rely on the management and leadership of Jonathan W. Ayers, our President, Chief Executive Officer and Chairman. We do not maintain key man life insurance coverage for Mr. Ayers. The loss of Mr. Ayers could have a material impact on our business.

We Could be Subject to Class Action Litigation Due to Stock Price Volatility, Which, if it Occurs, Could Result in Substantial Costs or Large Judgments Against Us

The market for our common stock may experience extreme price and volume fluctuations, which may be unrelated or disproportionate to our operating performance or prospects. In the past, securities class action litigation has often been brought against companies following periods of volatility in the market prices of their securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert our management’s attention and resources, which could have a negative effect on our business, operating results and financial condition.

If our Quarterly Results of Operations Fluctuate, This Fluctuation May Cause our Stock Price to Decline, Resulting in Losses to You

Our prior operating results have fluctuated due to a number of factors, including seasonality of certain product lines; changes in our accounting estimates; the impact of acquisitions; timing of distributor purchases, product launches, research and development expenditures, litigation and claim-related expenditures; changes in competitors’ product offerings; and other matters. Similarly, our future operating results may vary significantly from quarter to quarter due to these and other factors, many of which are beyond our control. If our operating results do not meet the expectations of market analysts or investors in future periods, our stock price may fall.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our financial market risk consists primarily of foreign currency exchange rate risk. We operate subsidiaries in 13 foreign countries and transact business in local currencies. We attempt to hedge the majority of our cash flow on intercompany sales to minimize foreign currency exposure.

The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions. Corporate policy prescribes the range of allowable hedging activity. We primarily utilize forward exchange contracts with a duration of less than 18 months. Gains and losses related to qualifying hedges of foreign currency from commitments or anticipated transactions are deferred in prepaid expenses or accruals and are included in the basis of the underlying transaction. Our hedging strategy is consistent with prior periods. Our hedging strategy provides that we employ the full amount of our hedges for the succeeding year at the conclusion of our budgeting process for that year, which is complete by the end of the preceding year. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the following twelve months. Accordingly, our risk with respect to foreign currency exchange rate fluctuations may vary throughout each annual cycle. As of September 30, 2004, the Company had $1.0 million in unrealized losses on foreign exchange contracts designated as hedges recorded in other comprehensive income, which is net of $0.5 million in taxes.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2004. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2004, the Company’s disclosure controls and procedures were (1) designed to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the Company’s Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

(b) Changes in Internal Controls. No change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Period		Average Price Paid per Share (b)
July 1, 2004 to July 31, 2004	158,900	$	53.81	158,900	1,291,830
August 1, 2004 to August 31, 2004	477,500		48.61	477,500	814,330
September 1, 2004 to September 30, 2004	84,000		49.66	84,000	730,330	⁽¹⁾

Total	720,400	$	49.88	720,400	730,330	⁽¹⁾

⁽¹⁾ On October 12, 2004, the Company’s Board of Directors increased the Company’s share repurchase authorization by 2,000,000 shares.

The Company’s Board of Directors has approved the repurchase of up to 14,000,000 shares of the Company’s common stock in the open market or in negotiated transactions. The plan was approved and announced on August 13, 1999 and subsequently amended on October 4, 1999, July 21, 2000, October 20, 2003, and October 12, 2004 and does not have a specified expiration date. The repurchases made during the nine months ended September 30, 2004 were made in open market transactions. There were no other repurchase plans outstanding during the nine months ended September 30, 2004 and no repurchase plans expired during the period.

Item 6. Exhibits

Exhibits

31.1

Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

Certification by Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification by Vice President, Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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



	IDEXX LABORATORIES, INC.

	/s/Merilee Raines
Date: November 8, 2004	Merilee Raines Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)

Exhibit Index

Exhibit No. Description

31.1

Certification by Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

Certification by Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certification by Vice President, Chief Financial Officer and Treasurer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

OR

207-856-0300

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

INDEX

PART I FINANCIAL INFORMATION Item 1. Financial Statements

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

Note 1. Basis of Presentation

Note 2. Inventories

Note 3. Warranty and Extended Maintenance Agreement Reserves

Note 4. Income Taxes

Note 6. Earnings per Share

Note 7. Commitments and Contingencies

Note 8. Treasury Stock

Note 9. Business Acquisitions

Note 10. Segment Reporting

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS OVERVIEW

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

RESULTS OF OPERATIONS

Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Revenue

Gross Profit

Operating Expenses and Operating Income

Interest Income

Provision for Income Taxes

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Revenue

Gross Profit

Operating Expenses and Operating Income

Interest Income

Provision for Income Taxes

LIQUIDITY AND CAPITAL RESOURCES

FUTURE OPERATING RESULTS

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Item 6. Exhibits

SIGNATURES

Exhibit Index

PART I FINANCIAL INFORMATION
Item 1. Financial Statements