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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

COMMISSION FILE NUMBER 0-19271

IDEXX LABORATORIES, INC.

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $0.10 par value per share
Preferred Stock Purchase Rights
(Title of Class)

     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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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

     Based on the closing sale price on June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the registrant was $1,131,671,822 . For these purposes, the registrant considers its Directors and executive officers to be its only affiliates.

     The number of shares outstanding of the registrant’s Common Stock was 34,703,339 on January 30, 2004.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

     Forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, are made throughout this Annual Report on Form 10-K, including statements relating to management’s expectations regarding new product introductions; the adequacy of the Company’s sources for certain components, raw materials and finished products; and the Company’s ability to utilize certain inventory. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “seeks,” “estimates,” and similar expressions are intended to identify forward-looking statements. There are a number of important factors that could cause IDEXX’s results to differ materially from those indicated by such forward-looking statements, including those detailed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” and “- Future Operating Results.”

     In addition, any forward-looking statements represent the Company’s views only as of the day this Annual Report on Form 10-K was first filed with the Securities and Exchange Commission and should not be relied upon as representing the Company’s views as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if its views change.

PART I.

ITEM 1. BUSINESS

     IDEXX Laboratories, Inc. (“we”, “us”, the “Company” or “IDEXX,” which includes wholly-owned subsidiaries unless the context otherwise requires), develops, manufactures and distributes products and provides services for the veterinary and the food and water testing markets. Our products and services include:

	•		Point-of-care veterinary diagnostic products;
	•		Laboratory and consulting services used by veterinarians;
	•		Veterinary pharmaceutical products;
	•		Information products and services, including software, used in veterinary practice management;
	•		Diagnostic and health-monitoring products and services for production animals;
	•		Products that test water for certain microbiological contaminants; and
	•		Products that test milk for antibiotic residues.

               Most of our sales are derived from the sale of our veterinary diagnostic products and services.

     We are a Delaware corporation and were incorporated in 1983. Our principal executive offices are located at One IDEXX Drive, Westbrook, Maine 04092, our telephone number is 207-856-0300, and our Internet address is idexx.com.

     We make available free of charge on our Website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we file such information with, or furnish it to, the Securities and Exchange Commission.

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PRODUCTS AND SERVICES

     We operate primarily through three business segments: products and services for the veterinary market, which we refer to as our Companion Animal Group (“CAG”), water quality products (“Water”) and products and services for production animal health and dairy quality, which we refer to as the Food Diagnostics Group (“FDG”). See Note 17 to our financial statements included elsewhere in this report for financial information about our business segments, including geographic information.

COMPANION ANIMAL GROUP

     Rapid Assays

     We provide a broad range of single-use, hand held test kits that allow quick (in most cases, less than ten minutes), accurate and convenient test results for a variety of companion animal diseases and health conditions. These products enable veterinarians to provide improved service to animal owners by delivering test results and a diagnosis at the time of the patient visit, allowing the veterinarian to initiate therapy or prevention, if required.

     Our principal single-use tests are sold under the SNAP® name, and include a feline combination test, the SNAP® Combo FIV antibody/FeLV antigen test, which enables veterinarians to test simultaneously for feline immunodeficiency virus (“FIV”) (which is similar to the human AIDS virus) and feline leukemia virus (“FeLV”); a canine combination test, the SNAP® 3Dx®, which tests simultaneously for Lyme disease, Ehrlichia canis and heartworm; and a canine heartworm-only test. Sales of heartworm tests are greater in the first half of our fiscal year due to seasonality of the disease.

     In addition to our single-use tests, we sell a line of microwell-based test kits, under the PetChek® name, which are used by larger clinics and independent laboratories to test multiple samples. PetChek® tests offer accuracy, ease of use and cost advantages to high-volume customers. We currently sell PetChek® tests for FeLV, FIV and canine heartworm disease.

     Instruments and Consumables

     We currently market several instrument systems, as well as associated consumable products, for use in veterinary clinics. These instruments include the following:

     Blood Chemistry. Our VetTest® blood chemistry analyzer is used to measure levels of certain enzymes and other substances in blood in order to assist the veterinarian in diagnosing physiologic conditions. Twenty-one separate blood chemistry tests can be performed on the VetTest® analyzer, with up to 12 tests run in under six minutes after sample application. Commonly run tests include glucose, alkaline phosphatase, ALT (alanine aminotransferase), creatinine, BUN (blood urea nitrogen) and total protein.

     We purchase all of the reagents used in the VetTest® analyzer (“dry chemistry slides ” or “VetTest slides”) from Ortho-Clinical Diagnostics, Inc. (“Ortho”), a subsidiary of Johnson & Johnson. See “Business-Production and Supply.” In October 2003, we entered into a new agreement with Ortho under which we are developing a next-generation chemistry analyzer for the veterinary market based on Ortho’s dry slide technology, and Ortho will supply the slide consumables used in both the VetTest analyzer and the new analyzer through 2018.

     Hematology. In October 2002 we introduced the LaserCyte® system, a hematology system that uses laser-flow cytometry technology to analyze components of blood, including red blood cells, white blood cells, and platelets. We believe that the LaserCyte® system is the only in-clinic hematology system that provides veterinarians with a five-part white blood cell differential and an absolute reticulocyte count, which provides enhanced diagnostic capabilities to veterinarians. We also sell the QBC® VetAutoread™ hematology analyzer, which is based on the Becton Dickinson QBC® Autoread™ hematology system that is sold to physicians for human applications.

     Electrolytes. Our VetLyte® system measures three electrolytes – sodium, potassium and chloride – to aid in evaluating acid-base and electrolyte balances and assessing plasma hydration. Test results are available in less than one minute after sample introduction and are either displayed on the VetLyte® analyzer or downloaded to the VetTest® analyzer.

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     Quantitative Hormone Testing. The VetTest® SNAP® Reader allows the veterinarian to obtain quantitative measurement of hormones, including thyroxine (T4) and cortisol. These measurements assist in diagnosing and monitoring the treatment of certain endocrine diseases, such as hyper- and hypothyroidism, Cushing’s syndrome and Addison’s disease. Samples and reagents are introduced to the analyzer using our SNAP® device platform.

     Computed Radiography. We market and sell two computed radiography systems: the IDEXX-CR System, which is appropriate for use in the veterinary clinic, and the IDEXX-CR Compact System, which is primarily used as a portable unit in ambulatory veterinary practices, such as equine practices. Our computed radiography systems generate digital radiograph images, which replace traditional x-ray film. Use of digital radiographs eliminates the need for the film and processor, hazardous chemicals and darkroom required for the production of film images. We are currently involved in litigation with our supplier of computed radiography instruments. See “Production and Supply” below.

     Veterinary Laboratory and Consulting Services

     We offer commercial veterinary laboratory and consulting services in the U.S. through facilities located in Arizona, California, Colorado, Georgia, Illinois, Kentucky, Maryland, Massachusetts, New Jersey, Ohio, Oregon and Texas. Through subsidiaries located in the United Kingdom, Japan and Australia, we offer commercial veterinary laboratory services to veterinary clinics located in those countries. Veterinarians use our services by submitting samples by courier or overnight delivery to one of our facilities. Our laboratories offer a large selection of tests and diagnostic panels to detect a number of disease states and other conditions in production and companion animals.

     Additionally, we provide specialized veterinary consultation, telemedicine and advisory services, including cardiology, radiology, internal medicine, dermatology and ultrasound consulting. These services permit veterinarians to obtain readings and interpretations of test results transmitted by telephone and over the Internet from the veterinarians’ offices.

     Approximately 74%, 71% and 72% of the Company’s revenues were derived from sales of rapid assays, veterinary instruments and consumables and veterinary laboratory and consulting services within the CAG segment in 2003, 2002 and 2001, respectively.

     Information Products and Services

     We develop, market and sell practice information management software systems that run key functions of veterinary clinics, including scheduling, billing and patient records management. Our systems also provide veterinarians with the ability to download laboratory results electronically from our veterinary reference laboratories directly into the patients’ medical records. We believe we are the leading provider of veterinary practice information management software systems in the U.S., with an installed base of more than 7,500 of the approximately 25,000 veterinary hospitals in North America. We also provide software and hardware support and derive a significant portion of our revenues for this product line from ongoing service contracts.

     Veterinary Pharmaceuticals

     We develop, market and sell novel therapeutics for the veterinary market. In December 2000, we introduced ACAREXX® (.01% ivermectin) otic suspension for the treatment of ear mites in cats, our first drug approved by the U.S. Food and Drug Administration (“FDA”). In 2002, we commenced active marketing of PZI VET®, an insulin product for the treatment of diabetic cats, under the FDA’s regulatory discretion guidelines. In November 2003 we introduced NAVIGATOR® (32% nitazoxanide) Antiprotozoal Oral Paste, a new treatment for equine protozoal myeloencephalitis (EPM). EPM is a progressive, degenerative disease of the central nervous system that can cause serious or even fatal neurological problems in horses. We currently have a number of other products under development, including a topical form of diclofenac, a non-steroidal anti-inflammatory for equine use, and tilmicosin, a long-acting, injectable form of the antibiotic tilmicosin for cats. We have completed the safety and efficacy components of our New Animal Drug Application (“NADA”) for diclofenac, and have submitted

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information relating to manufacturing in response to questions from the FDA. We submitted all components in support of a NADA for tilmicosin to the FDA in the second quarter of 2003.

WATER

     Our Colilert®, Colilert-18 and Colisure® tests simultaneously detect total coliforms and E. coli in water. These organisms are broadly used as indicators of microbial contamination in water. These products utilize indicator-nutrients that produce a change in color or fluorescence when metabolized by target microbes in the sample. Our water tests are used by government laboratories, water utilities and private certified laboratories to test drinking water in compliance with U.S. Environmental Protection Agency (“EPA”) standards. The tests also are used in evaluating water used in production processes (for example, in beverage and pharmaceutical applications) and in evaluating bottled water, recreational water, waste water and water from private wells.

     Our Enterolert™ product detects enterococci in drinking and recreational waters. Our Quanti-Tray® products, when used in conjunction with our Colilert®, Colilert-18, Colisure® or Enterolert™ products, provide users quantitative measurements of microbial contamination, rather then a presence/absence indication. The Colilert®, Colilert-18, Colisure® and Quanti-Tray® products have been approved by the EPA and by regulatory agencies in certain other countries.

     In August 2000, we acquired Genera Technologies Limited, a U.K.-based company that develops and sells products for detection of cryptosporidia in water. Cryptosporidia are parasites that can cause potentially fatal gastrointestinal illness if ingested. Testing of water supplies for cryptosporidia is mandated by regulation in the United Kingdom, but is not regulated in other countries at this time.

     Approximately 10% of the Company’s revenues were derived from sales of water testing products in each of 2003, 2002 and 2001.

FOOD DIAGNOSTICS GROUP

     Production Animal Services

     We sell diagnostic tests and related instrumentation and software that are used to detect a wide range of diseases and monitor health status in production animals. Our production animal products are purchased primarily by government laboratories and poultry and swine producers. Significant products include diagnostic tests for porcine reproductive and respiratory syndrome and pseudorabies virus in pigs, Newcastle disease in poultry, and Johne’s disease and brucellosis in cattle.

     We have developed a post-mortem test for bovine spongiform encephalopathy, or “mad cow disease.” We have submitted an application to the United States Department of Agriculture (“USDA”) for approval of this test. However, there is no current testing program in the U.S. that requires use of rapid tests of the kind that we manufacture, and we do not know when or if the USDA will implement any such program. We also have submitted an application to the EU Food Safety Commission seeking a license to sell this product in EU member countries.

     Dairy Testing

     Our principal product for use in testing for antibiotic residue in milk is the SNAP® beta-lactam test. Dairy producers and processors use our tests for quality assurance of raw milk, and government and food quality managers use them for ongoing surveillance.

     In March, 2003 we entered into an agreement with the FDA under which we agreed, among other things, to perform specified lot release and stability testing of our SNAP® beta-lactam 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 $16.1 million in 2003.

     Approximately 9%, 11% and 10% of the Company’s revenues were derived from sales of production animal and dairy products and services in 2003, 2002 and 2001, respectively.

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MARKETING AND DISTRIBUTION

     We market, sell and service our products in more than 50 countries through our marketing, sales and technical service groups, as well as through independent distributors and other resellers. We maintain sales offices outside the U.S. in Australia, France, Germany, Italy, Japan, The Netherlands, Spain, Taiwan and the United Kingdom. In 2003, 2002 and 2001 we spent $71.8 million, $57.0 million and $57.1 million or 15%, 14% and 15% of sales, respectively, on sales and marketing.

     Generally, we will select the appropriate distribution channel for our products based on the type of product, technical service requirements, number and concentration of customers, regulatory requirements and other factors. We market our veterinary diagnostic and pharmaceutical products to veterinarians both directly and through independent veterinary distributors in the U.S., with most instruments and laboratory services sold directly by IDEXX sales personnel, and test kits, pharmaceutical products and instrument consumables supplied both via the distribution channel and directly. Outside the U.S., we sell our veterinary diagnostic products through independent distributors and other resellers and, in certain countries, through our direct sales force. We market our software products and veterinary laboratory services through our direct sales force. We market our water, dairy, and production animal products primarily through our direct sales force in the U.S. and Canada. Outside the U.S. and Canada, we market these products through selected independent distributors and, in certain countries, through our direct sales force.

     In 2003, 2002 and 2001, 30%, 29% and 28%, respectively, of our revenue was attributable to sales of products and services to customers outside the U.S. Risks associated with foreign operations include fluctuations in the value of foreign currencies, the need for additional regulatory approvals, possible disruptions in transportation of our products, the differing product 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. We engage in hedging activities to reduce the effect of foreign currency fluctuations on our earnings. See Note 17 to the consolidated financial statements for information by geographic region; Note 2(m) to the consolidated financial statements for a description of our hedging activities; and “Quantitative and Qualitative Disclosure About Market Risk” for a description of foreign currency exchange risk.

     In 2003, 2002 and 2001, no customer accounted for greater than 10% of our sales. Our largest customers are distributors of our products in the CAG segment. The largest consumer of our products accounts for approximately 1% of our sales.

RESEARCH AND DEVELOPMENT

     Our business includes the development and introduction of new products and may involve entry into new business areas. Our research and development activity is focused primarily on development of new animal drugs, new diagnostic instrument platforms, new immunoassay devices, new diagnostic tests and improvements to our diagnostic and testing products. Our research and development expenses, which consists of salaries, employee benefits, materials and consulting costs, were approximately $32.3 million, $29.3 million and $28.4 million, or 7% of sales, in 2003, 2002 and 2001, respectively.

PATENTS AND LICENSES

     We actively seek to obtain patent protection in the U.S. and other countries for inventions covering our products and technologies. We also license patents and technologies from third parties. These licenses include an exclusive royalty-bearing license of certain patents relating to diagnostic products for FIV that expire in 2009, from The Regents of the University of California; an exclusive royalty-bearing license of certain patents utilized in the Colilert®, Colilert-18, Colisure® and Enterolert™ water testing products that expire in 2007; exclusive licenses to certain patents and patent applications relating to detection of Lyme disease that expire beginning in 2019, from Tulane University and the University of Texas; and a non-exclusive royalty-bearing license from Barnes-Jewish Hospital to certain patents relating to canine heartworm tests that expire in 2006. In addition, we hold a U.S. patent, which expires in 2014, covering certain methods and kits for simultaneously detecting antigens and antibodies, that covers our SNAP® Combo FeLV/FIV and Canine SNAP® 3Dx® combination tests.

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     To the extent some of our products may now, or in the future, embody technologies protected by patents, copyrights or trade secrets of others, we may be required to obtain licenses to such technologies in order to continue to sell our products. These licenses may not be available on commercially reasonable terms. Our failure to obtain any such licenses may delay or prevent the sale of certain new or existing products. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Future Operating Results.”

PRODUCTION AND SUPPLY

     VetTest® analyzers are manufactured for us by Tokyo Parts Industrial Company Ltd. under an agreement that renews annually unless either party notifies the other of its decision not to renew. VetTest® slides are supplied exclusively by Ortho under supply agreements with Ortho (the “Ortho Agreements”). We are required to purchase all of our requirements for VetTest® slides from Ortho to the extent Ortho is able to supply those requirements. In addition, we have committed to minimum annual purchase volumes of certain VetTest® slides through 2010. The Ortho Agreements expire on December 31, 2018.

     The QBC®VetAutoread™ system is manufactured for us by Becton Dickinson under a development and distribution agreement that requires Becton Dickinson to supply analyzers to us through 2008 and reagents through 2010. Becton Dickinson is the sole source of these analyzers and reagents.

     We purchase certain other products, raw materials and components from only one source. These include active ingredients for our pharmaceutical products, including NAVIGATOR®, computed radiography systems and certain components used in our SNAP® rapid assay devices, water testing products and LaserCyte® systems. The loss of some of these sources of supply could have a material adverse effect on the Company.

     The supplier of our computed radiography systems has informed us that it believes we are in breach of our supply agreement. We believe we have complied fully with that agreement and we have filed suit against that supplier seeking declaratory judgment from the court that we are not in breach of the agreement, an order from the court compelling the supplier to honor our agreement and damages for certain breaches of the agreement by the supplier. The supplier has asserted counter-claims against us alleging, among other things, breaches of implied covenants in the contract. We believe we have strong defenses to these counter-claims and intend to contest them vigorously. An adverse result in this litigation could result in loss of supply of our computed radiography instruments and/or a requirement that we pay damages to the supplier. Revenue from this product line was $1.3 million in 2003.

     We do not generally maintain significant backlog and believe that our backlog at any particular date historically has not been indicative of future sales.

COMPETITION

     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 technologies, which could affect the marketability of our products and services. Our competitive position also will depend on our ability to develop proprietary products, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans, obtain patent protection and obtain adequate capital resources.

     We compete with many companies ranging from small businesses focused on animal health to large pharmaceutical companies. Our competitors vary in our different markets. Academic institutions, governmental agencies and other public and private research organizations also conduct research activities and may commercialize products, which could compete with our products, on their own or through joint ventures. Some of our competitors have substantially greater capital, manufacturing, marketing and research and development resources than we do.

     Competitive factors in our different business areas are detailed below:

•

Veterinary diagnostic products and food and water test products. We compete primarily on the basis of the ease of use, speed, accuracy and other performance characteristics of our products and services, the breadth of our product line and services, the effectiveness of our sales and distribution channels, the quality of our technical and customer service, and pricing.

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	•		Veterinary laboratory services. In this market, we compete primarily on the basis of quality, service, technology, and price. We compete in certain geographic locations with Antech Diagnostics, a unit of VCA Antech, Inc.
	•		Veterinary pharmaceuticals. We compete primarily on the basis of the performance characteristics of our products.
	•		Veterinary practice information management software systems. We compete primarily on the basis of ease of use, connectivity to equipment and other systems, performance characteristics, effectiveness of our customer service, information handling capabilities, advances in technologies, and price.

GOVERNMENT REGULATION

     Many of our products are subject to regulation by U.S. and foreign regulatory agencies. The following is a description of the principal regulations affecting our businesses.

     Veterinary diagnostic products. Most diagnostic tests for animal health applications are veterinary biological products that are regulated in the U.S. by the Center for Veterinary Biologics within the USDA Animal and Plant Health Inspection Service (“APHIS”). The APHIS regulatory approval process involves the submission of product performance data and manufacturing documentation. Following regulatory approval to market a product, APHIS requires that each lot of product be submitted for review before release to customers. In addition, APHIS requires special approval to market products where test results are used in part for government-mandated disease management programs. A number of foreign governments accept APHIS approval as part of their separate regulatory approvals. However, compliance with an extensive regulatory process is required in connection with marketing diagnostic products in Japan, Germany, The Netherlands and many other countries. We also are required to have a facility license from APHIS to manufacture USDA-licensed products. We have obtained such a license for our manufacturing facility in Westbrook, Maine.

     Our instrument systems are medical devices regulated by the U.S. Food and Drug Administration (“FDA”) under the Food, Drug and Cosmetics Act (the “FDC Act”). While the sale of these products does not require premarket approval by FDA and does not subject us to the FDA’s Good Manufacturing Practices regulations (“GMPs”), these products must not be adulterated or misbranded under the FDC Act.

     Veterinary pharmaceuticals. The manufacture and sale of veterinary pharmaceuticals are regulated by the Center for Veterinary Medicine (“CVM”) of the FDA. A new animal drug may not be commercially marketed in the U.S. unless it has been approved as safe and effective by CVM. Approval may be requested by filing a NADA with CVM containing substantial evidence as to the safety and effectiveness of the drug. Data regarding manufacturing methods and controls also are required to be submitted with the NADA. Manufacturers of animal drugs must also comply with GMPs and Good Laboratory Practices (“GLPs”). Sales of animal drugs in countries outside the U.S. require compliance with the laws of those countries, which may be extensive.

     Water testing products. Our water tests are not subject to formal premarket regulatory approval. However, before a test may be used as part of a water quality monitoring program required by the EPA, the test must first be approved by the EPA. The EPA approval process involves submission of extensive product performance data in accordance with an EPA approved protocol, evaluation of the data by the EPA and publication for public comment of any proposed approval in the Federal Register before final approval. Our Colilert®, Colilert-18, Colisure®, Quanti-Tray®, Filta-Max® and SimPlate® for heterotropic plate counts (HPC) products have been approved by the EPA. The sale of water testing products also is subject to extensive and lengthy regulatory processes in many other countries around the world.

     Dairy testing products. The sale of dairy testing products in the U.S. is regulated by the FDA in conjunction with the Association of Official Analytical Chemists - Research Institute (“AOAC-RI”). Before a product may be sold, extensive product performance data must be submitted in accordance with a protocol that is approved by the FDA and the AOAC-RI. Following approval of a product by FDA, the product must also be approved by the National Conference on Interstate Milk Shipments (“NCIMS”), an oversight body that includes state, federal and industry representatives. Our dairy antibiotic residue testing products have been approved by the FDA and NCIMS. While some foreign countries accept AOAC-RI approval as part of their regulatory approval process, many countries have separate regulatory processes.

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     Any acquisitions of new products and technologies may subject us to additional areas of government regulation. These may involve food, drug and water quality regulations of the FDA, the EPA and the USDA, as well as state, local and foreign governments. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Future Operating Results.”

EMPLOYEES

     As of December 31, 2003, IDEXX had approximately 2,473 full-time and part-time employees. We are not a party to any collective bargaining agreement and we believe that relations with our employees are good.

ITEM 2. PROPERTIES

     We lease approximately 297,000 square feet of office and manufacturing space in Westbrook, Maine under a lease expiring in 2018; approximately 97,500 square feet of industrial space in Memphis, Tennessee for use as a distribution facility, under a lease expiring in 2013; approximately 40,000 square feet of office and manufacturing space in Eau Claire, Wisconsin for our veterinary practice information management software business, under a lease expiring in 2009; and approximately 48,000 square feet of warehouse and office space in The Netherlands for use as our headquarters for European operations, under a lease expiring in 2008.

     We also lease a total of approximately 25,000 square feet of smaller office, manufacturing and warehouse space in the U.S. and elsewhere in the world. In addition, we own or lease approximately 140,000 square feet of space in the U.S., Australia and the United Kingdom for use as veterinary reference laboratories and office space for our veterinary consulting services. Of this space, 46,000 square feet is owned by us and the remaining amount is leased, under leases having expiration dates up to the year 2012.

     We consider that the properties are generally in good condition, are well maintained, and are generally suitable and adequate to carry on our business.

ITEM 3. LEGAL PROCEEDINGS

     We are not a party to any material legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

EXECUTIVE OFFICERS OF THE COMPANY

     Our executive officers as of February 29, 2004 were as follows:

     Mr. Ayers has been Chairman of the Board, Chief Executive Officer and President of IDEXX since January 2002. Prior to joining IDEXX, in 2000 and 2001, Mr. Ayers was President of Carrier Corporation, the largest business unit of United Technologies Corporation, a provider of high-technology products and services to the building systems and aerospace industries, and from 1997 to 1999, he was President of Carrier Asia Pacific Operations. From 1995 to 1997, Mr. Ayers was Vice President, Strategic Planning at United Technologies. Before

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joining United Technologies, from 1991 to 1995, Mr. Ayers was Principal of Corporate Finance and from 1986 to 1991, he was Vice President of Mergers and Acquisitions, at Morgan Stanley & Co. Mr. Ayers holds an undergraduate degree in molecular biophysics and biochemistry from Yale University and an MBA from Harvard University.

     Dr. Wallen has been Senior Vice President and Chief Scientific Officer of IDEXX since September 2003. Prior to joining IDEXX, Dr. Wallen held various positions with Bayer Corporation, most recently as Senior Vice President and Head, Office of Technology for the Diagnostics Division of Bayer Healthcare. From 2001 to 2003, Dr. Wallen served as Senior Vice President and Head of Research, Nucleic Acid Diagnostics Segment; from 1999 to 2001 as Senior Vice President of Research and Development Laboratory Testing Segment; and from 1993 to 1999 as Vice President of Research and Development, Immunodiagnostic and Clinical Chemistry Business Units. Before joining Bayer Corporation, from 1990 to 1993, Dr. Wallen was Vice President Research and Development at Becton Dickinson Advanced Diagnostics.

     Mr. Deady has been Vice President and General Counsel of the Company since 1999 and was Deputy General Counsel of the Company from 1997 to 1999. Before joining the Company in 1997, Mr. Deady was Deputy General Counsel of Thermo Electron Corporation, a manufacturer of technology-based instruments. Mr. Deady was previously affiliated with Hale and Dorr LLP, a Boston-based law firm.

     Dr. Fratoni has been Vice President of the Company since May 1997 and Chief Information Officer since November 2000. He was President of the Company’s Food and Environmental Group from July 1999 to December 2000. From May 1997 to July 1999, Dr. Fratoni was Vice President of Human Resources of the Company, and from October 1996 to May 1997, he was Director of Business Development for the Food and Environmental Group. Before joining the Company in October 1996, Dr. Fratoni held various positions with Hewlett-Packard Company.

     Mr. Hulsy has been Vice President of the Company since February 1999 and President of the Company’s IDEXX Laboratory Services business since August 1998. Before joining the Company in August 1998, Mr. Hulsy was President of American Environmental Network, Inc., a network of environmental laboratories, from 1992 to 1998.

     Ms. LaBauve joined IDEXX as Vice President, Worldwide Operations in February 2004. From 1999 until 2004, Ms. LaBauve held various senior positions with the Ortho-Clincial Diagnostics subsidiary of Johnson & Johnson, including General Manager and Vice President, Clinical Laboratory Franchise, from 2002 to 2004; Vice President, Worldwide Systems R&D, from 2000 to 2002; and Vice President Design Excellence, from 1999 to 2000. Prior to joining Ortho, Ms. LaBauve held various positions with AlliedSignal Corporation, most recently serving as Vice President, Six Sigma Quality.

     Ms. Raines has been Chief Financial Officer since October 2003 and Vice President, Finance of the Company since May 1995. Ms. Raines served as Division Vice President, Finance from March 1995 to May 1995, Director of Finance from 1988 to March 1995 and Controller from 1985 to 1988.

     Dr. Tonelli became Vice President of the Company in June 2001 and currently oversees the Company’s Production Animal Services and Rapid Assay lines of business. Previously he has held various positions with the Company, including Division Vice President for Research and Development and Division Vice President, Business Development. Before joining the Company in 1984, he was a Group Leader of Research and Development for the Hepatitis and AIDS Business Unit within the diagnostic division of Abbott Laboratories, Inc.

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PART II.

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     Our Common Stock is quoted on the NASDAQ Stock Market under the symbol IDXX. The table below shows the high and low sale prices per share of our Common Stock as reported on the NASDAQ Stock Market for the years 2003 and 2002.

     As of December 31, 2003, there were 1,068 holders of record of our Common Stock.

     We have never paid any cash dividends on our Common Stock. From time to time our Board of Directors may consider the declaration of a dividend. However, we have no present intention to pay a dividend and we expect to use future earnings to fund the development and growth of the business.

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ITEM 6.  SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated financial data of the Company for each of the five years ended December 31, 2003. The selected consolidated financial data presented below have been derived from the Company’s consolidated financial statements. These financial data should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing elsewhere in this Form 10-K.

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 encompasses activities that are not included in our three business segments and is comprised primarily of corporate research and development, a CEO succession charge and interest income. We have conformed the financial information about segments for the years ended December 31, 2002 and 2001 to our presentation of reportable segments for the year ended December 31, 2003. Previously we reported two operating segments.

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     The following is a discussion of the strategic and operating factors that we believe have the most significant effect on the performance of our business.

     Companion Animal Group

     Our CAG segment accounted for approximately 81% of our sales in 2003 and is, therefore, our most significant business. The largest product lines within our CAG segment by percentage of revenue in 2003 are:

     Other consists primarily of practice information management software and services and pharmaceutical products. To date, revenues from sales of pharmaceutical products have not been substantial. However, we are investing significantly in a pipeline of companion animal pharmaceutical products. If we are successful in developing, obtaining FDA approval for, and marketing these products, we believe that sales of pharmaceutical products will become a more material component of CAG sales in the future.

     By offering to companion animal veterinarians a broad range and an integrated set of proprietary diagnostic products and services, therapeutics and practice management computer systems, we believe we have developed a strong customer franchise, providing us a strategic advantage over companies with more narrow product or service offerings. Our complementary products and services give us scale in sales and distribution in this market, and permit us to offer programs such as Practice Developer™, a loyalty program that allows clinics to earn points with purchases, depending on the number of product categories they purchase from and the volume of those purchases, and to apply earned points toward, among other things, the purchase of a variety of IDEXX products and services. By offering both point-of-care diagnostics for use in the clinic and outside laboratory services, we are able to develop integrated disease management solutions that leverage the advantages of both point-of-care and laboratory testing. In addition, by integrating our practice management software systems with our instruments and with our reference laboratories, we enhance the veterinary practices of our customers by facilitating the flow of medical information in the clinic.

     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.

     Instruments and Instrument Consumables. Our instrument strategy is to provide veterinarians with an integrated set of instruments (called IDEXX VetLab®) that, individually and together, provide superior diagnostic information in the clinic, enabling veterinarians to practice better medicine and build more profitable practices. We derive substantial revenues from the sale of consumables that are used in these instruments. During the early stage of an instrument life cycle, we derive relatively greater revenues from instrument placements, while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placements begin to decline. Our long-term success in this area of our business is dependent on our ability both to develop and sell new instruments with enhanced diagnostic capabilities and to maximize customer utilization of those instruments, which creates more consumables sales.

     We have a large installed base of VetTest® chemistry analyzers, and substantially all of our revenues from that product line are now derived from consumables sales, although we continue to place instruments through sales and through rental and other programs. As a result, the success of this product line is partially dependent on

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increased customer utilization of those instruments. Toward that end, we seek to educate veterinarians about best medical practices that emphasize the importance of blood chemistry testing for a variety of diagnostic purposes.

     We purchase the consumables used in VetTest® chemistry analyzers from Ortho. In October 2003, we entered into a new supply agreement with Ortho, under which we are developing and will introduce a next-generation chemistry analyzer for the veterinary market based on the Ortho dry-slide technology, and Ortho will supply us with the slide consumables used in both the new instrument and the VetTest® chemistry analyzer. The new agreement provides us with a source of dry-slide consumables through 2018 at an expected improved cost over the term of the agreement. The new agreement does not increase, over the prior agreement, the minimum unit volume of slides we are required to purchase from Ortho over the term of the agreement. As a result of this new agreement, we discontinued certain internal development activities relating to an alternative next-generation clinical chemistry instrument. We incurred a non-cash, pre-tax charge in the quarter ended December 31, 2003 of approximately $7.4 million for the impairment of manufacturing equipment purchased for the production of consumables for use in this alternative instrument.

     In the fourth quarter of 2002, we introduced our new hematology analyzer, the LaserCyte® system, which provides more extensive hematological diagnostic information than our original platform, the QBC® VetAutoread™ system. Our success in growing hematology revenues over the next several years will depend upon our ability to sell LaserCyte® instruments, although we intend to continue to sell the QBC® VetAutoread™ system. We do not intend to rent LaserCyte® instruments in the foreseeable future. At earlier stages in the life cycle of this product, a substantial portion of LaserCyte® placements will be made at veterinary clinics that already own our QBC® VetAutoread™ instruments. As a result, net consumables sales are not likely to grow significantly in the near future, as we expect the increase in LaserCyte® consumable sales to be largely offset by declines in sales of QBC® VetAutoread™ consumables. However, we believe that the enhanced diagnostic capabilities of the LaserCyte® system will lead veterinarians to perform more in-clinic hematology testing, which will increase consumables sales as our installed base of LaserCyte® systems increases. In addition, we expect the gross margin percentage of LaserCyte® consumables to exceed the gross margin percentage of the QBC® VetAutoread™ consumables.

     With all of our instrument lines, we seek to differentiate our products based on superior system capability, quality of diagnostic information, reliability and customer service. Our equipment and consumables typically are sold at a premium price to competitive offerings. Our success depends on our ability to maintain a premium price strategy. In addition, our in-clinic instrumentation competes with outside laboratory services for similar diagnostic information, and such services are typically offered at a lower cost. Therefore, our success also depends on our ability to market the relative attractiveness of in-clinic diagnostic testing, versus less convenient and timely, but lower priced, laboratory testing.

     Laboratory Services. We believe that more than half of all diagnostic testing by U.S. veterinarians is done at outside reference laboratories such as our IDEXX Reference Laboratories. We attempt to differentiate our laboratory testing services from those of our competitors primarily on the basis of quality, customer service and technology. Revenue growth in this business is achieved both through increased sales at existing laboratories and through the acquisition of new customers. In the third quarter of 2003 we acquired a laboratory in Kentucky, in the fourth quarter of 2003 we opened a new laboratory in Atlanta and in the first quarter of 2004 we acquired a laboratory in Columbus, Ohio. Profitability of this business is largely the result of our ability to achieve efficiencies from both volume and operational improvements.

     Rapid Assays. Our rapid assay business comprises single-use kits for in-clinic testing and microwell-based kits for large clinic and laboratory testing for canine and feline diseases and conditions. Our two principal product lines are canine heartworm products and the SNAP® FIV antibody/FeLV antigen combination test. Our rapid assay strategy is to develop, manufacture, market and sell proprietary tests with superior performance that address important medical needs. As in our other lines of business, we also seek to differentiate our products through superior customer support. These products carry price premiums over competitive products that we believe do not offer equivalent performance and diagnostic capabilities, and which we believe do not include a similar level of support. We augment our product development and customer service efforts with marketing programs that enhance medical awareness and understanding regarding our target diseases and the importance of diagnostic testing.

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     Water

     Our strategy in the water testing business is to develop, manufacture, market and sell proprietary products with superior performance, supported by exceptional customer service. Our customers are primarily water utilities to whom strong relationships and customer support are very important. Over the past several years the rate of growth of this product line has slowed as a result of increased competition and market penetration. International sales of water testing products represented 37% of total water product sales in 2003, and we expect that future growth in this business will be significantly dependent on our ability to increase international sales. Growth also will be dependent on our ability to enhance and broaden our product line. Most water microbiological testing is driven by regulation, and in many countries a test may not be used for regulatory testing unless it has been approved by the applicable regulatory body. As a result, we maintain an active regulatory program under which we are seeking regulatory approvals in a number of countries, primarily in Europe.

     Food Diagnostics Group

     Production Animal Services. We develop, manufacture, market and sell a broad range of tests for various poultry, cattle and swine diseases and conditions, and have an active research and development and in-licensing program in this area. Our strategy is to offer proprietary tests with superior performance characteristics. Disease outbreaks are episodic and unpredictable, and certain diseases that are prevalent at one time may be substantially contained or eradicated. In response to outbreaks, testing initiatives may lead to exceptional demand for certain products in certain periods. Conversely, successful eradication programs may result in significantly decreased demand for certain products. The performance of this business, therefore, can be subject to fluctuation. In 2003, approximately 70% of our sales in this business was international. Because of the significant dependence of this business on international sales, the performance of the business is particularly subject to the various risks described below that are associated with doing business internationally.

     Dairy Testing. Our strategy in the dairy testing business is to develop, manufacture and sell antibiotic residue testing products that satisfy applicable regulatory requirements for testing of bulk milk by producers and provide reliable field performance. Sales of dairy testing products have declined over the last several years largely as a result of increased competition in the domestic market. To increase sales of dairy testing products, we will need to increase penetration in geographies outside the United States and in the farm segment of the dairy market.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, restructuring and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

     We believe the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

     Inventory

     Our inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. We write down inventory for estimated obsolescence when warranted by our estimates of future demand and market conditions. If actual market conditions are less favorable than those estimated by management, additional inventory write-downs may be required, which would have a negative effect on our results of operations.

     As of December 31, 2003, our inventories included $7.2 million of component parts and finished goods associated with our LaserCyte® hematology instrument, which we began shipping to customers in fourth quarter of

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2002. In addition, we have firm purchase commitments for an additional $3.5 million. We expect to fully realize our investment and purchase commitments. However, if we alter the design of this product, we may be required to write off some or all of the associated inventory.

     Valuation of Long-lived and Intangible Assets and Goodwill

     We assess the impairment of identifiable intangibles, long-lived assets and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important that could trigger an impairment review include but are not limited to the following:

	•		Significant under-performance relative to historical or projected future operating results;
	•		Failure to obtain regulatory approval of certain products;
	•		Significant changes in the manner of our use of the acquired assets or the strategy for our overall business;
	•		Significant increase in the discount rate assumed to present value future cash flow,
	•		Significant negative industry or economic trends; and
	•		Significant advancements or changes in technology.

     When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based on a change in events and circumstances discussed above, we measure any impairment based on factors such as projected cash flows. Net intangible assets and goodwill amounted to $61.8 million as of December 31, 2003, consisting of $25.2 million related to veterinary laboratories (of which $24.6 million represents goodwill), $17.3 million related to water test products (of which $14.9 million represents goodwill), $16.0 million related to veterinary pharmaceutical products (of which $13.7 million represents goodwill) and $3.3 million of other (of which $1.8 million represents goodwill).

     In 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142 and as a result, we ceased to amortize goodwill, but continued to amortize all other intangibles. We had recorded approximately $5.0 million of goodwill amortization on these amounts during the year ended December 31, 2001, and would have recorded approximately $4.5 million of goodwill amortization during the same periods in 2003 and 2002, if the existing standards had been continued. In addition, we recorded $0.5 million, $0.6 million and $1.5 million of other intangible amortization during the years ended December 31, 2003, 2002 and 2001, respectively. In lieu of goodwill amortization, we were required to perform annual impairment reviews of our goodwill. No impairment was found as a result of either our initial impairment review or our 2003 and 2002 year-end reviews.

     Revenue Recognition

     We recognize revenue when four criteria are met. These include (i) persuasive evidence that an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price is fixed and determinable, and (iv) collectibility is reasonably assured.

	•		We recognize revenue at the time of shipment to distributors for substantially all products, as title and risk of loss pass to these customers on delivery to the common carrier. We recognize revenue for the remainder of our customers when the product is delivered, except as noted below. Our distributors do not have the right to return products.
	•		We recognize revenue on sales of instruments after the instrument is installed because installation is considered essential to the usability of the instrument, and the customer has accepted the instrument.
	•		We recognize service revenue at the time the service is performed.
	•		We recognize revenue associated with extended maintenance agreements ratably over the life of the contracts. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

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	•		We recognize revenue from noncancelable software licenses and hardware systems upon installation of the software (and completion of training if applicable) or hardware and customer acceptance because collection is probable and we have no significant further obligations.
	•		We recognize revenue on certain instrument systems under rental programs over the life of the rental agreement. Amounts collected in advance of revenue recognition are recorded as a current or long-term liability based on the time from the balance sheet date to the future date of revenue recognition.

     When instruments are sold together with extended maintenance agreements, we allocate revenue to the extended maintenance agreement under EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Accordingly the total consideration received is allocated to the elements based on their relative fair values, which is determined by amounts charged separately for the delivered and undelivered elements to other customers. The deferred revenue related to the extended maintenance agreements is recognized ratably over the maintenance period. The delivered elements are recognized as revenue when appropriate under the policies described above. Shipping costs reimbursed by the customer are included in revenue.

     We record estimated reductions to revenue in connection with customer programs and incentive offerings, which may give customers future rights such as free or discounted goods or services or trade-in rights. We estimate these reductions based on our experience with similar customer programs in prior years. Revenue reductions are finalized on a quarterly basis for most programs upon issuance of credits or free or discounted products. For the SNAP-Up-the-Savings™ program, estimates of future customer credits are revised quarterly and finalized annually in the third quarter of each year upon the issuance of credits to customers. For our Practice Developer™ volume discount program, we have reduced revenue assuming all points granted will result in future credits because we do not have sufficient experience with this program to estimate customer point forfeitures.

     We recognize revenue only in those situations where collection from the customer is reasonably assured. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimates on detailed analysis of specific client situations and percentage of our accounts receivable by aging category. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payment, additional allowances might be required.

     Income Taxes

     We account for income taxes under SFAS No. 109, “Accounting for Income Taxes.” This statement requires that we recognize a current tax liability or asset for current taxes payable or refundable, respectively; and a deferred tax liability or asset, as the case may be, for the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We have recorded a valuation allowance on certain deferred tax assets that relate to state and international net operating loss carryforwards and certain other unrealizable international deferred tax assets. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

     We do not provide for U.S. income taxes on earnings of our subsidiaries outside of the U.S. As of December 31, 2003, we had unremitted earnings in subsidiaries outside the U.S. of $60.4 million, on which no U.S. taxes have been provided. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when tax-effective to do so. It is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.

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     Warranty Reserves

     We provide for the estimated cost of product warranties at the time revenue is recognized. Our actual warranty obligation is affected by product failure rates and service costs incurred in correcting a product failure. Should actual product failure rates or service costs differ from our estimates, which are based on historical data and engineering estimates, where applicable, revisions to the estimated warranty liability would be required. As of December 31, 2003 and 2002, we had accrued $3.7 million and $0.3 million for estimated warranty expense, respectively. Warranty expense was $4.0 million, $0.4 million and $0.3 million for the years ended December 31, 2003, 2002 and 2001, respectively.

     The increase in warranty accrual and expense is due to our launch of the LaserCyte® system in the fourth quarter of 2002. We expect sales of LaserCyte® will continue to increase in 2004 and beyond. We will charge warranty expense to the cost of LaserCyte® sales based upon our experience with instrument sales and engineering information about the system. Should actual warranty expense exceed our estimates, our cost of sales of LaserCyte® systems would increase.

     Estimates for Certain Claims

     We purchase insurance policies annually for individual and aggregate amounts of employee health insurance claims. We are self-insured for up to $0.1 million per claim and up to an aggregate limit based on the number of employees enrolled in the plan per month, which is estimated to be $10 million annually. We estimate our liability for employee health claims based on individual and aggregate coverage, our monthly claims experience, the number of employees enrolled in the program, and the average time from when a claim is incurred to the time it is reported.

     We purchase workers’ compensation insurance policies annually. Prior to January 1, 2003, we were fully insured for workers’ compensation claims. Beginning January 1, 2003, we purchased an insurance policy where we are liable for the first $0.25 million in claims per occurrence and up to an aggregate limit based on payroll, which is estimated to be $1.4 million for 2003. We renewed this policy effective January 1, 2004. We estimate our liability for workers’ compensation claims based on the insurance policy limits, claims incurred and the estimated ultimate cost to litigate and/or settle the claims.

     Periodically we are notified that a claim is being made against us. We evaluate each claim based on the facts and circumstances of each claim. If warranted, we provide for our best estimate of the cost to settle or litigate the claim and evaluate the liability recorded quarterly.

RESULTS OF OPERATIONS

Twelve Months Ended December 31, 2003 Compared to Twelve Months Ended December 31, 2002

Revenue

     Total Company. Revenue for the total company increased $63.3 million, or 15%, to $476.0 million from $412.7 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:

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     Companion Animal Group. Revenue for CAG increased $57.5 million, or 18%, to $384.4 million from $326.9 million in the same period of the prior year. This increase resulted primarily from sales of instruments, rapid assay products, instrument consumables, laboratory services, 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 $11.8 million, or 4%, to the increase in CAG revenue.

     The increase in sales of instruments (an increase of approximately $18.5 million, or 127%) was due primarily to increased sales of the LaserCyte® hematology system, which was launched in the fourth quarter of 2002, partially offset by lower sales of QBC® VetAutoread ™ systems.

     The increase in sales of rapid assay products (an increase of approximately $13.2 million, or 18%) was due to increased domestic clinic-level sales of canine products and to a lesser degree, feline products, higher average unit prices, the impact of reductions in distributors’ inventory levels in 2002 and the favorable impact of currency exchange rates on sales outside the U.S. The increased sales volume was due in part to the apparent temporary difficulty of one of our competitors in supplying certain competitive products to the market. In January 2004 this competitor announced that it had reentered the heartworm market. In addition, another competitor announced that it has entered the heartworm market. As a result, we believe that competition in the heartworm market will increase in 2004.

     The increase in sales of instrument consumables (an increase of approximately $13.1 million, or 12%) was due primarily to increased sales of VetTest® slides and, to a lesser extent, LaserCyte® tubes, partially offset by reduced sales of QBC® VetAutoread ™ tubes resulting from the replacement of QBC® VetAutoread ™ systems by LaserCyte® systems. The overall increase in sales of instrument consumables was due to the favorable impact of currency exchange rates on sales outside the U.S., the impact of reductions in distributors’ inventory levels in 2002, higher volume outside the U.S. and increased domestic clinic-level sales.

     Shipments to distributors of our consumables and rapid assay products during 2002 were significantly reduced by the Company as part of a plan to reduce product inventories held by distributors. The reduced shipments during 2002 create a favorable year-to-year comparison that causes reported growth in 2003 to exceed the Company’s estimates of the underlying clinic-level growth for these products.

     The increase in sales of laboratory services (an increase of approximately $11.9 million, or 15%) resulted primarily from higher volume primarily in the US and to a lesser extent in the UK and Australia, the favorable impact of currency exchange rates on sales at our laboratories outside the U.S. and favorable pricing.

     The increase in sales of pharmaceutical products (an increase of approximately $1.8 million, or 35%), resulted from sales of a product licensed to a third party and to a lesser extent growth of existing products.

     The increase in sales of veterinary practice management software and services (an increase of approximately $0.6 million, or 3%), resulted primarily from higher volume of complete system sales, and increased hardware sales.

     Water. Revenue for Water increased $5.0 million, or 12%, to $46.9 million from $42.0 million for the same period of the prior year. The increase resulted primarily from higher sales volume of water testing products and the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $1.8 million, or 4%, to the increase in Water revenue.

     Food Diagnostics Group. Revenue for FDG increased $0.8 million, or 2%, to $44.6 million from $43.8 million for the same period of the prior year. The increase was due to the favorable impact of currency exchange rates on sales outside the U.S. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $3.5 million, or 8%, to the increase in FDG revenue.

     The increase in sales of production animal diagnostics (an increase of approximately $1.1 million, or 4%) resulted from the favorable impact of currency exchange rates on sales outside the U.S. These increases were partially offset by lower average unit prices and sales volume.

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     The decrease in sales of dairy testing products (a decrease of approximately $0.3 million, or 2%) was attributable to lower unit sales volume, offset partially by the favorable impact of currency exchange rates on sales outside the U.S.

Gross Profit

     Total Company. Gross profit for the total company increased $37.6 million, or 20%, to $230.3 million from $192.7 million for the same period in the prior year. As a percentage of total company revenue, gross profit increased to 48% in 2003 from 47% in 2002. The following table presents gross profit and gross profit percentage for the Company and its operating segments:

     Companion Animal Group. Gross profit for CAG increased $32.9 million, or 23%, to $175.6 million from $142.7 million in the same period of the prior year due to increased sales volume across the CAG product lines and, to a lesser extent, to an increase in the gross profit percentage. As a percentage of CAG revenue, gross profit increased to 46% from 44% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to greater relative sales of rapid assay products and the 2003 termination of a low margin veterinary referral business, productivity improvements across CAG product lines in service and distribution operations, the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses, reduced amortization of VetTest® instruments in our rental and trade-up programs as units become fully amortized and increased average unit prices of rapid assay products and laboratory services. These increases were partially offset by higher sales of our lower gross margin LaserCyte® hematology instrument and by the higher cost of VetTest® slides purchased in 2002 and sold in 2003 as a result of the 2002 renegotiation of our VetTest® slide supply agreement with Ortho. VetTest® slides purchased in 2002 were sold as of the end of the third quarter of 2003. Therefore, beginning in the fourth quarter of 2003, the associated cost of sales was reduced to a level more comparable with the first nine months of 2002.

     Water. Gross profit for Water increased $2.9 million, or 10%, to $31.5 million from $28.6 million for the same period in the prior year, primarily due to increased revenue partially offset by a decrease in the gross profit percentage. As a percentage of Water revenue, gross profit decreased to 67% from 68% for the same period in the prior year. The decrease in gross profit percentage was attributable primarily to higher royalty expenses, the net impact of currency exchange and exchange contract losses, unfavorable manufacturing variances, and an unfavorable product mix of higher sales of lower margin accessories.

     Food Diagnostics Group. Gross profit for FDG increased $1.8 million, or 9%, to $23.2 million from $21.4 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 52% from 49% for the same period in the prior year. The increase in gross profit percentage was attributable primarily to reduced inventory writedowns in 2003 compared to those recognized in the same period in 2002, primarily on an instrument and related components sold by the dairy business.

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Operating Expenses

     Total Company. Total company operating expenses increased $23.0 million to $149.9 from $126.9 million for the same period of the prior year. As a percentage of revenues, operating expenses remained flat at 31%. The following tables present operating expenses and operating income for the Company and its operating segments:

     Companion Animal Group. Operating expenses for CAG increased $23.7 million, or 25%, to $120.4 million from $96.7 million in the same period of the prior year. The increase was attributable to a 28% (approximately $12.7 million) increase in sales and marketing expense, a $7.5 million increase in other expense, a 9% (approximately $1.9 million) increase in research and development expense, and a 6% (approximately $1.7 million) increase in general and administrative expense. The increase in sales and marketing expenses resulted primarily from increased personnel and marketing program costs, increased costs to support the ramp up in LaserCyte® sales and the unfavorable impact of foreign currency denominated expenses.

     The increase in other expense is primarily due to a $7.4 million charge for the write-down of production equipment purchased for the manufacture of consumables for use in an alternative clinical chemistry system. In October 2003 we extended our relationship with Ortho, which supplies the VetTest slides. We committed to develop a next generation clinical chemistry system based on Ortho’s dry slide technology and discontinued efforts to develop the alternative system.

     The increase in research and development expense results from increased staffing. The increase in administrative expenses reflects higher spending on information technology and other corporate functions and an increase in bad debt provisions, offset partially by the elimination of certain expenses related to legal matters that concluded in 2002.

     Water. Operating expenses for Water increased $0.3 million, or 3%, to $10.5 million from $10.2 million in the same period of the prior year. The increase was attributable to a 21% (approximately $0.9 million) increase in sales and marketing expenses and an 11% (approximately $0.2 million) increase in research and development expenses, partly offset by a $0.8 million reduction in other expenses. The increase in sales and marketing expenses resulted primarily from increased marketing activities and headcount. The increase in research and development expenses was due to new product development efforts. The decrease in other expenses reflects the absence of certain non-recurring expenses that were recognized in 2002 associated with a write-off of intangible assets and litigation that concluded in 2002.

     Food Diagnostics Group. Operating expenses for FDG increased $1.9 million, or 14%, to $15.6 million from $13.7 million in the same period of the prior year. The increase was attributable to a 23% (approximately $1.4 million) increase in sales and marketing expenses, a 17% ($0.7 million) increase in administrative expenses, and a 16% ($0.6 million) increase in research and development expenses, partly offset by a $0.8 million increase in other income. The increase in sales and marketing expenses resulted primarily from increased marketing activities and headcount, and from expenses incurred in connection with the formation of the China joint venture (see Note 14 to

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the consolidated financial statements). The increase in administrative expenses reflects an increase in administrative support expenses outside of the U.S., including support of the China joint venture and higher spending on information technology and other corporate functions. The increase in research and development expenses was due to new product development efforts, primarily related to products for diagnosis of transmissible spongiform encephalopathies. The increase in other income was primarily due to a favorable revision of an estimate of royalty obligations under a technology license.

     Other. Operating expenses for 2003 decreased $2.9 million or 46% to $3.4 million from $6.3 million for the same period in period in the year. The decrease resulted primarily from $3.4 million in non-recurring benefits provided in 2002 in connection with the retirement of our former Chairman and Chief Executive Officer in January 2002, partly offset by corporate research and development hiring costs incurred in 2003.

Interest Income

     Net interest income was $2.9 million for 2003 compared with $3.0 million during 2002. The decrease was due to lower effective interest rates and the receipt in 2002 of $0.3 million in interest on a domestic tax refund. The decrease was partially offset by interest earned on higher invested cash balances.

Provision for Income Taxes

     Our effective tax rate was 31.5% for 2003 compared with 34.0% for 2002. The decrease in the effective rate is due to ongoing domestic and international tax planning initiatives, revisions to prior year international tax estimates and the charge to write-down fixed assets discussed above occurring in a high-tax jurisdiction. The write-down reduced the effective tax rate by 0.5%.

Twelve Months Ended December 31, 2002 Compared to Twelve Months Ended December 31, 2001

Revenue

     Total Company. Revenue for the total company increased $26.6 million, or 7%, to $412.7 million from $386.1 million in the same period of the prior year. The following table presents revenue for the Company and its operating segments:

     Companion Animal Group. Revenue for CAG increased $18.8 million, or 6%, to $326.9 million from $308.0 million in the same period of the prior year. The increase resulted primarily from sales of laboratory services and instrument consumables and, to a lesser extent, rapid assay products, veterinary practice management software and services and instruments. These increases were partially offset by reduced sales of pharmaceutical products. The favorable impact of currency exchange rates on sales outside the U.S. contributed an aggregate of $2.3 million or 1% to the increase CAG revenue.

     The increase in sales of laboratory services (an increase of approximately $7.3 million, or 10%) resulted primarily from higher volume worldwide and, to a lesser extent, price increases in the U.S. and the impact of currency exchange rates on sales at our laboratories outside the U.S.

     The increase in sales of instrument consumables (an increase of approximately $6.2 million, or 6%) resulted primarily from increased unit sales of VetTest® slides worldwide and, to a lesser extent, the impact of currency exchange rates on sales outside of the U.S. The increase in revenues was positively impacted by depressed 2001 sales that resulted from a late 2000 marketing program that pulled sales into 2000. Revenues were negatively impacted due to a decrease in distributor inventories of instrument consumables in 2002.

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     The increase in sales of rapid assay products (an increase of approximately $3.1 million, or 5%) resulted primarily from increased clinic-level sales of canine heartworm and feline test kits, offset primarily by the negative impact of changes in distributor inventory levels, and increased accruals on sales of canine heartworm test kits due to higher customer participation in a volume rebate program.

     The increase in sales of veterinary practice management software and services (an increase of approximately $1.4 million, or 7%), resulted primarily from higher volume of complete system sales, and increased hardware upgrade sales.

     The increase in sales of instruments (an increase of approximately $1.1 million, or 8%) was due to sales of LaserCyte® systems and, to a lesser extent, VetTest® systems, partially offset by reduced sales of our QBC® VetAutoread™ hematology instrument, primarily due to a shift in marketing and customer focus to the LaserCyte® system.

     The decrease in sales of pharmaceutical products (a decrease of $0.3 million or 6%) was due to a decline in sales of the Company’s ACAREXX® feline ear mite treatment, offset partially by increased sales of PZI VET® insulin, which was launched on a commercial basis in the fourth quarter of 2002.

     Water. Revenue for Water increased $3.7 million, or 10%, to $42.0 million from $38.3 million for the same period of the prior year. The increase resulted primarily from increased sales volume in Europe and the Americas, and to a lesser extent, price increases in the U.S.

     Food Diagnostics Group. Revenue for FDG increased $4.1 million, or 10%, to $43.8 million from $39.7 million for the same period of the prior year. The increase was primarily due to increased sales of production animal diagnostics offset partially by a decrease in sales of dairy testing products.

     The increase in sales of production animal diagnostics (an increase of approximately $4.9 million, or 22%) resulted primarily from higher unit sales of livestock products and, to a lesser extent, price increases on livestock products and the impact of currency exchange rates on sales outside of the U.S. Approximately half of the increased sales of livestock products were the result of government sponsored testing initiatives in Germany.

     The decrease in sales of dairy testing products (a decrease of approximately $0.8 million, or 5%) was primarily attributable to lower unit sales volume as a result of increased competition.

Gross Profit

     Total Company. Gross profit for the total company increased $9.4 million, or 5%, to $192.7 million from $183.3 million for the same period in the prior year.As a percentage of total company revenue, gross profit remained flat at 47%.The following table presents gross profit and gross profit percentage for the Company and its operating segments:

     Companion Animal Group. Gross profit for CAG increased $4.9 million, or 4%, to $142.7 million from $137.8 million in the same period of the prior year, primarily due to increased sales volume across the CAG product lines, partially offset by a reduction in the gross profit percentage. As a percentage of CAG revenue, gross profit declined from 45% for the same period in the prior year to 44%. The decrease in gross profit percentage was attributable primarily to foreign exchange hedge contract losses in 2002 compared to gains in 2001; increased amortization due to additional placements of VetTest® instruments in our rental and trade-up programs; and a net unfavorable change in manufacturing variances. These factors were offset partially by productivity improvements across CAG product lines, partly due to increased revenue spread against the fixed cost portion of our expense base;

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the positive impact of the strengthening of the Euro and British Pound on sales denominated in those currencies; reversal of an accrual for potential loss on our VetTest® slide supply agreement with Ortho as a result of an amendment to our supply agreement in October 2002 that reduced our minimum purchase obligations under the agreement; and higher prices, primarily on laboratory services and feline test kits.

     Water. Gross profit for Water increased $2.5 million, or 9%, to $28.6 million from $26.1 million for the same period in the prior year, primarily due to increased sales volume. As a percentage of Water revenue, gross profit was unchanged at 68%. Gross profit percentage benefited from favorable manufacturing variances and reduced inventory writedowns, higher prices, and the positive impact of the strengthening of the Euro and British Pound on revenue. These increases were offset by higher distribution costs.

     Food Diagnostics Group. Gross profit for FDG increased $2.0 million, or 10%, to $21.4 million from $19.4 million for the same period in the prior year, primarily due to increased sales volume in production animal diagnostics. As a percentage of FDG revenue, gross profit was unchanged at 49%. Gross profit percentage benefited from a favorable mix of higher margin poultry and livestock products, reduced distribution and freight costs, higher prices for livestock products, and the positive impact of the strengthening of the Euro and British Pound on revenue. These increases were offset by higher inventory writedowns of certain dairy and production animal diagnostic products and royalty accruals on certain livestock products.

Operating Expenses

     Total Company. Total company operating expenses increased $0.1 million to $126.9 from $126.8 million for the same period of the prior year. As a percentage of revenues, operating expenses declined to 31% from 33%. The following tables present operating expenses and operating income for the Company and its operating segments:

     Companion Animal Group. Operating expenses for CAG decreased $4.5 million, or 4%, to $96.7 million from $101.2 million in the same period of the prior year. This decrease resulted primarily from the impact of adoption of SFAS No. 142 (under which the Company ceased amortizing goodwill); a reduction in severance and related costs; a reduction in marketing expense associated with feline diagnostic products (due to a direct-to-consumer marketing campaign in 2001); a reduction in bad debt expense; and savings from the consolidation of our pharmaceuticals and companion animal diagnostics sales forces. These decreases were offset partially by increased spending on sales and marketing (including the unfavorable impact of foreign exchange) to support higher sales volumes; litigation spending, net of a settlement received, related to the Company’s patent infringement lawsuit against Abaxis, Inc. and S.A. Scientific, Inc.; and increased research and development expenses.

     Water. Operating expenses for Water increased $0.4 million, or 4%, to $10.2 million from $9.8 million in the same period of the prior year. The increase was attributable to the write-off of non-performing intangible assets (associated with the 2000 acquisition of Genera Technologies Limited), litigation that concluded in 2002, and new product development efforts, offset partially by the impact of adoption of SFAS No. 142 and a reduction in bad debt expense.

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     Food Diagnostics Group. Operating expenses for FDG increased $0.7 million, or 5%, to $13.7 million from $13.1 million in the same period of the prior year. The increase was primarily due to new product development efforts, primarily related to products for diagnosis of transmissible spongiform encephalopathies; increased marketing activities and headcount; and an increase in administrative support expenses outside of the U.S. These increases were partially offset by a decrease in bad debt experience.

     Other. Operating expenses for other, which consist of $2.9 million in corporate research and development and $3.4 million in charges related to our Chief Executive Officer succession, increased $3.6 million to $6.3 million from $2.7 million in the same period of the prior year. The increase resulted primarily from benefits provided in connection with the retirement of our former Chairman and Chief Executive Officer in January 2002. Under an employment agreement, we were required to make certain payments to our former Chief Executive Officer and provide certain benefits to him following his retirement and the succession to our new Chief Executive Officer. During 2002 we incurred charges under this agreement of $3.4 million, of which $1.8 million was non-cash.

Interest Income

     Net interest income was $3.0 million for 2002 compared with $2.2 million during 2001. The increase was due to higher invested cash balances and the receipt of $0.3 million in interest on a domestic tax refund. These increases were partially offset by lower effective interest rates.

Provision for Income Taxes

     Our effective tax rate was 34% for 2002 compared with 36% for 2001. The reduction in the effective tax rate was primarily due to the elimination of nondeductible goodwill associated with the adoption of SFAS No. 142.

RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2002, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF No. 00-21”). EITF No. 00-21 addresses the accounting treatment for arrangements that provide for the delivery or performance of multiple products or services where the delivery of a product, system or performance of services may occur at different points in time or over different periods of time. EITF No. 00-21 requires the separation of the multiple deliverables that meet certain requirements into individual units of accounting that are accounted for separately under the appropriate authoritative accounting literature. EITF No. 00-21 is applicable to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company adopted the provisions of EITF No. 00-21 effective January 2003. The adoption of EITF No. 00-21 had no material impact on the consolidated financial statements.

     In November 2002, the FASB issued FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by issuing the guarantee. FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements about its obligation under certain guarantees it has issued. The accounting requirements for the initial recognition of guarantees are applicable on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for all guarantees outstanding, regardless of when they were issued or modified, for financial statements for interim or annual periods ending after December 15, 2002. We have adopted the additional disclosure provisions of this statement required for the year ended December 31, 2002 and the recognition provisions for the quarter ended March 31, 2003. There were no impacts of the adoption of this statement.

     In December 2003, the FASB issued FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities, an interpretation of ARB 51” (“FIN 46R”). FIN 46R provides guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and on the determination of when such entities are required to be included in the consolidated financial statements of the business enterprise that holds an interest in the variable interest entity. This new model for consolidation applies to

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an entity in which either (1) the equity investors do not have a controlling financial interest or (2) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46R requires additional related disclosures. Certain disclosure provisions of FIN 46R apply to all financial statements issued after January 31, 2003, the consolidation provisions apply to variable interest entities created after January 31, 2003 and to variable interest entities in which an enterprise obtains an interest after that date, and the remaining provisions, with the exception of interest in special purpose entities, apply at the end of the first fiscal year or interim period ending after March 15, 2004 to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Application for interest in special purpose entities is required for periods after December 15, 2003. The adoption of FIN 46R had no material impact on the consolidated financial statements.

     In December 2003, the SEC issued Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” (“SAB No.104”) which replaces SAB No. 101. This staff accounting bulletin revises or rescinds portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The principal revisions relate to the rescission of material no longer necessary because of private sector developments in U.S. generally accepted accounting principles. This staff accounting bulletin also rescinds the Revenue Recognition in Financial Statements Frequently Asked Questions and Answers document issued in conjunction with Topic 13. Selected portions of that document have been incorporated into Topic 13. SAB No. 104 also rescinds the accounting guidance in SAB No. 101 related to multiple-element arrangements as this guidance has been superseded as a result of the issuance of EITF 00-21. The adoption of this standard did not have a material impact on the consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

     We fund the capital needs of our business through cash generated from operations. At December 31, 2003 and 2002, we had $220.7 million and $147.2 million of cash, cash equivalents and short-term investments, respectively, and working capital of $269.9 million and $217.7 million, respectively. As of December 31, 2003 and 2002, we also had long-term investments primarily in municipal bonds of $35.1 million and $15.6 million, respectively. As of December 31, 2003 and 2002 we had total cash, short-term investments and long-term investments of $255.8 million and $162.8 million, respectively.

     Effective January 1, 2003, we entered into a workers’ compensation insurance policy where we retain the first $0.25 million in claim liability per incident and up to specific limits, based on payroll, in claim liability in the aggregate. We renewed this workers’ compensation policy effective January 1, 2004. We are liable for up to $1.4 million in aggregate claim liability for 2003 and estimate that we will be liable for up to $2.0 million for 2004. We have recorded our estimated claim liability as of December 31, 2003 based on claims incurred and the estimated ultimate cost to settle the claims. The insurance company administers and pays these claims and we reimburse the insurance company for our portion of these claims. The insurance company also provides insurance for claims above the individual occurrence and aggregate limits. We issued a $0.5 million letter of credit to the insurance company as security for these claims as of December 31, 2003 and agreed to issue an additional $0.6 million letter of credit for 2004.

     We purchased approximately $16.9 million in fixed assets and $2.7 million in other long-term assets during the year ended December 31, 2003, principally related to the CAG segment. Our total capital budget for 2004 is approximately $23.0 million. Research and development expense as a percentage of revenue for 2004 is expected to be consistent with 2003 levels. Under certain supply agreements with suppliers of veterinary instruments, slides for our VetTest® instruments and certain raw materials, at December 31, 2003 we had aggregate commitments to purchase approximately $68.3 million of products in 2004.

     Cash provided by operating activities was $117.2 million during 2003. Cash of $16.6 million was provided by an increase in accruals, defined as accrued expenses, accrued employee compensation and related expenses, accrued taxes and accrued marketing and customer programs, attributable primarily to increased liabilities for taxes, compensation and related liabilities and warranty expense. Cash of $13.0 million was generated from the income tax benefit obtained due to the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options. Cash of $9.6 million was generated by an increase to accounts payable due primarily to the timing of quarterly shipments of VetTest slides from Ortho. The non-cash write down of manufacturing equipment

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reduced our net income by $7.4 million and therefore is added back to cash generated from operations. Cash of $5.6 million was used by an increase in accounts receivable due to high sales volume.

     During 1999 and 2000, the Board of Directors authorized the purchase of up to 10,000,000 shares of our common stock in the open market or in negotiated transactions. In October 2003, the Board authorized the purchase of an additional 2,000,000 shares of common stock. During 2003, we repurchased approximately 927,000 shares of our common stock for $36.2 million. As of December 31, 2003, 2002 and 2001, approximately 9,541,000, 8,614,000 and 7,614,000 cumulative shares, respectively, had been repurchased under these programs. During 2003, the Company received approximately 133,000 shares of stock, which were owned by the holder for greater than six months, in payment for the exercise price of stock options. The shares of stock had a fair market value of $4.9 million. See Note 11 to the consolidated financial statements.

     We are required to make the following payments in the years below:

     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 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 LaserCyte®;
	•		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 and completing acquisitions that enhance our existing businesses or create new business areas for us.
			However, we may not be able to successfully implement some or all of these strategies and increase or sustain our rate of growth.

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     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 $16.1 million in 2003.

     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. We have two animal pharmaceutical products in registration with the FDA, including a nonsteroidal anti-inflammatory for the treatment of lameness in horses and an injectible antibiotic for cats. Failure to obtain, or delays in obtaining, FDA approval for these 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 towards 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 the 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.

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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, computed radiography systems, active ingredients for pharmaceutical products, including NAVIGATOR®, 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, then 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 supplier of our computed radiography systems has informed us that it believes we are in breach of our supply agreement. We believe we have complied fully with that agreement and we have filed suit against that supplier seeking declaratory judgment from the court that we are not in breach of the agreement, an order from the court compelling the supplier to honor our agreement and damages for certain breaches of the agreement by the supplier. The supplier has asserted counter-claims against us alleging, among other things, breaches of implied covenants in the contract. We believe we have strong defenses to these counter-claims and intend to contest them vigorously. An adverse result in this litigation could result in loss of supply of our computed radiography instruments and/or a requirement that we pay damages to the supplier. Revenue from this product line was $1.3 million in 2003.

     The slides sold for use in our VetTest® instruments are purchased under an agreement with Ortho at fixed prices. Under this agreement we are required to purchase a minimum of $170.4 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 would 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 manufacture successfully biologic products that incorporate such materials would 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.

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Our financial performance, therefore, is subject to an unexpected downturn in product demand and may be unpredictable.

     Inventories of Pharmaceutical Products Under Development May Not Be Usable

     While our pharmaceutical products are under development, we may carry related active ingredients, other raw materials and finished goods as assets on our balance sheet when recovery of the asset value from future sales is deemed probable. To the extent that these inventories become unusable due to unanticipated delays in obtaining FDA approval for these products, or to our failure to obtain such approvals, we may be required to write down those inventories, which could have a material adverse effect on our results of operations.

     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.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURE 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. See Note 2(m) to our consolidated financial statements.

     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 12 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 December 31, 2003, the Company had $3.0 million in unrealized losses on foreign exchange contracts designated as hedges recorded in other comprehensive income, which is net of $1.4 million in taxes.

     Our currency rate exposure at December 31, 2003 consisted of local currency revenues and expenses, the impact of hedge contracts and balances denominated in a currency other than the Company’s or its subsidiaries’ functional currency. Based on our overall currency rate exposure excluding unrealized losses of $4.4 million at December 31, 2003 and $2.6 million at December 31, 2002, a 10% strengthening of the U.S. dollar relative to foreign currencies would reduce operating income by approximately $2.2 million for 2004. A 10% strengthening of the U.S. dollar from December 31, 2002 would have reduced operating income for 2003 by approximately $2.4 million. A 10% weakening of the U.S. dollar relative to foreign currencies at December 31, 2003 would increase operating income by approximately $2.2 million in 2004. A 10% weakening of the U.S. dollar from December 31, 2002 would have increased operating income by approximately $2.4 million in 2003. As of December 31, 2003 a 10% strengthening of the U.S. dollar relative to foreign currencies, excluding the impact of hedge contracts currently in place, would reduce operating income by approximately $8.1 million in 2004 , compared to $7.4 million in 2003 and the effects of a 10% weakening of U.S. dollar relative to foreign currencies, excluding the impact of hedge contracts currently in place, would increase operating income by approximately $8.1 million in 2004 compared to $7.4 million in 2003.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The response to this item is submitted as a separate section of this report commencing on page F-1.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     Not applicable.

ITEM 9A.  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 December 31, 2003. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2003, 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 year ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the sections entitled “Board of Directors” and “Election of Directors” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Executive Compensation and Related Information” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Ownership of Common Stock by Directors and Officers” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.

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ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Executive Compensation and Related Information — Employment Agreements” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The information required by this Item is omitted from this Annual Report on Form 10-K and, pursuant to Regulation 14A of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference from the section entitled “Ratification of Independent Auditors — Independent Auditors’ Fees” in the Company’s definitive proxy statement with respect to its 2004 Annual Meeting of Stockholders, which proxy statement will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report.

PART IV.

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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:

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

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EXHIBIT INDEX