NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Basis of Presentation

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

        The accompanying interim condensed consolidated financial statements reflect, in the opinion of our management, all adjustments necessary for a fair statement of our financial position and results of operations. The results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results to be expected for the full year or any future period. These financial statements should be read in conjunction with this Form 10-Q for the three and six months ended June 30, 2005, and our Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission.

        Reclassifications have been made to the prior year condensed consolidated financial statements to conform to the current year presentation. In connection with the preparation of our report on Form 10-K for the year ended December 31, 2004, we concluded that it was appropriate to classify our auction rate municipal bonds as short-term investments. Previously, such investments had been classified as cash and cash equivalents. Accordingly, we have made adjustments to our Condensed Consolidated Statement of Cash Flows for the period ended June 30, 2004 to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash equivalents. This change in classification does not affect previously reported cash flows from operations or from financing activities in our previously reported Condensed Consolidated Statements of Cash Flows for any period, or our previously reported Condensed Consolidated Statements of Operations for any period. As of June 30, 2004 and for the six months then ended, $91.4 million of these short-term investments were classified as cash and cash equivalents on our Condensed Consolidated Balance Sheet and related Condensed Consolidated Statements of Cash Flows. For the six months ended June 30, 2004, net cash used in investing activities related to these current investments was $1.6 million, which was previously reported as cash and cash equivalents in our Condensed Consolidated Statements of Cash Flows.

         Stock-Based Compensation

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

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

        In order to determine the pro forma impact under SFAS No. 123, as Amended, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

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

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

        During the three months ended June 30, 2005, approximately 1,000 Deferred Stock Units valued at $0.1 million were issued. No Deferred Stock Units were issued during the three months ended June 30, 2004. During the six months ended June 30, 2005 and 2004, approximately 10,000 Deferred Stock Units valued at $0.6 million and 9,000 Deferred Stock Units valued at $0.4 million were issued, respectively.

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         New Accounting Standards

        In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” (SFAS No. 123(R)”), which is a revision of SFAS No. 123 and supersedes APB No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable vesting period. Pro forma disclosure of the income statement effects of share-based payments is no longer an alternative. Implementation of SFAS No. 123(R) was originally required as of the beginning of the first interim or annual period that begins after June 15, 2005, however, the Securities and Exchange Commission amended the compliance date for public companies to the beginning of their next fiscal year that begins after June 15, 2005. Companies must also recognize compensation expense related to any awards that are not fully vested as of the amended effective date. Compensation expense for the unvested awards will be measured based on the fair value of the awards previously calculated in developing the pro forma disclosures in accordance with the provisions of SFAS No. 123, as Amended. We plan to adopt the provisions of SFAS No. 123(R) on January 1, 2006 and do not plan to adjust financial statements for prior periods.

Note 2. Business Acquisitions

        In March 2005, we paid cash of $0.5 million to acquire certain assets of a veterinary reference laboratory located in Switzerland. Goodwill and other intangible assets of $0.2 million and $0.2 million, respectively, were assigned to the Companion Animal Group segment. The results of operations of the acquired business have been included since the acquisition date. Pro forma information has not been presented because such information is not material to the financial statements taken as a whole.

        During the six months ended June 30, 2005, we acquired $0.2 million of goodwill related to an acquisition. See Note 2. The remaining change in goodwill during the six months ended June 30, 2005 resulted primarily from changes in foreign currency exchange rates.

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        Intangible assets other than goodwill consist of the following (in thousands) :

        During the six months ended June 30, 2005, we acquired $0.2 million of amortizable intangible assets related to an acquisition. See Note 2. The remaining change in the cost of intangible assets other than goodwill during the six months ended June 30, 2005 resulted primarily from changes in foreign currency exchange rates.

        Amortization expense of intangible assets was $0.9 million and $0.3 million for the three months ended June 30, 2005 and 2004, respectively. Amortization expense of intangible assets was $1.9 million and $0.6 million for the six months ended June 30, 2005 and 2004, respectively. The increase in amortization expense for the six months ended June 30, 2005 compared to the expense for the six months ended June 30, 2004 results from amortization of intangibles acquired in connection with businesses acquired in 2004. See Note 3 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission for additional information about these business acquisitions.

Note 5. Warranty and Extended Maintenance Agreement Reserves

        We provide for the estimated cost of product warranties in cost of product revenue 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 management’s estimates, which are based on historical data, revisions to the estimated warranty liability would be required. Following is a summary of changes in accrued warranty reserve for products sold to customers for the three and six months ended June 30, 2005 and 2004, respectively (in thousands) :

        The benefits of the change in estimate of prior warranty expense for the three months ended June 30, 2005 and 2004 and for the six months ended June 30, 2005 were due to improved service experience for LaserCyte ^® instruments during the periods. The provision for the change in estimate of prior warranty expense for the six months ended June 30, 2004 was due to deteriorating service experience for LaserCyte ^® instruments during the three months ended March 31, 2004, partly offset by improvements during the three months ended June 30, 2004.

        We sell extended maintenance agreements covering instruments and recognize associated revenue over the life of the contracts. As of December 31, 2004, we anticipated that losses would be incurred for certain of these contracts and recognized provisions for the estimated losses. The anticipated loss reserve was $0.1 million as of December 31, 2004. No loss on extended maintenance agreements is anticipated as of June 30, 2005.

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Note 6. Income Taxes

        The effective income tax rates for the three months and six months ended June 30, 2005 were 33.3% and 33.5%, respectively, compared with 25.0% and 28.2% for the three and six months ended June 30, 2004, respectively. The majority of the increase in the effective tax rate for the three months and six months ended June 30, 2005 compared to the same periods ended June 30, 2004 resulted from a reduction in previously accrued taxes in connection with the resolution in 2004 of an Internal Revenue Service income tax audit through the year 2001. Other rate reductions in 2004 resulted from the release of a valuation allowance on international deferred tax assets as a result of a foreign subsidiary demonstrating consistent sustained profitability and changes in certain state and international tax estimates.

        The recently enacted American Jobs Creation Act of 2004 allows for a reduced rate of United States tax on qualifying repatriations of earnings held outside the United States. We are currently studying the impact of this provision and have not made a final determination as to the amounts, if any, which will be repatriated. As such, the income tax effect of any repatriation cannot be estimated.

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

        The following table presents additional information concerning the exercise prices of options outstanding at the end of the period ( in thousands, except per share amounts ):

Note 9. Commitments and Contingencies

        During the six months ended June 30, 2005, there was no significant change in our material commitments and contingencies, described in Notes 10 and 16 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission, except as described below.

        We purchase the slides sold for use in our VetTest ^® instruments at pre-determined prices under a long-term agreement with a supplier. In June 2005, we amended this agreement to, among other things, extend its term from 2018 to 2020 and we agreed to commit to up to an aggregate of $4.0 million of capital purchase obligations in connection with the design and construction of automated production equipment at our supplier’s facility that will be used to manufacture consumables for use in our next-generation chemistry analyzer. We expect to pay $3.2 million of this commitment in 2006 and 2007, and $0.8 million in approximately 2009. The amendment did not modify our purchase obligations under this agreement.

        On June 18, 2003, we formed a joint venture, Beijing IDEXX-Yuanheng Laboratories Co. Limited (the “Venture”), with Beijing Anheal Laboratories Company Ltd. (“Anheal”), formerly known as Beijing Fortunate Century Animal Health Co., Ltd., to assemble and market veterinary diagnostic products for production animals in China. The Venture is headquartered in Beijing, China. Our initial equity interest in the Venture is 40%, however, we are committed to acquire an additional 20% of the Venture from Anheal within two years of the issuance by the Chinese authority of the business license to the Venture, subject to Chinese government approval of the ownership change. As of June 30, 2005, we are obligated to make future capital contributions of $0.5 million before August 11, 2005. In addition, we are obligated to pay $0.6 million for the additional 20% interest discussed above, and to make an additional $1.5 million capital contribution to the Venture within three months after the approval by the Chinese government of the additional 20% interest. The Venture has not yet submitted an application to the relevant Chinese authority for approval of the change in ownership, thus the effective due date of our obligation for these expenditures may be delayed. We are also obligated to make available to the Venture selected technology, know-how and licenses and to assist with certain logistical, management training and operating matters. In connection with the joint venture agreement, we have not entered into indemnification agreements or assumed liabilities predating the establishment of the Venture. We are evaluating, with Anheal, the joint venture structure and may agree to revise the joint venture agreement. A modification of the agreement may impact our future obligations. However, the commitments described above reflect our significant commitments at this time.

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

        Under our workers’ compensation insurance policy for U.S. employees for the year ending December 31, 2005, we retain the first $0.25 million in claim liability per incident and approximately $2.5 million in aggregate claim liability based on actual payroll expense. For the year ended December 31, 2004, we retained the first $0.25 million in claim liability per incident and $3.0 million in aggregate claim liability. For the year ended December 31, 2003, we retained the first $0.25 million in claim liability per incident and $1.4 million in aggregate claim liability. We estimate claim liability based on claims incurred and the estimated ultimate cost to settle the claims. Based on this analysis, we have recognized cumulative expenses of $0.6 million and $0.7 million for claims incurred during the years ended December 31, 2004 and 2003, respectively, and $0.4 million for claims incurred during the six months ended June 30, 2005. In connection with these policies, we have outstanding letters of credit totaling $1.6 million to the insurance companies as security for these claims as of June 30, 2005.

        Under our employee health care insurance policy, we retain claims liability risk up to $0.1 million per incident and an aggregate claim limit based on monthly participation levels in the employee health care plan. We estimate the provision for the uninsured portion of employee health care obligations based on costs of claims incurred and an estimate for claims incurred but not reported. Should actual employee health care claims liability exceed estimates, we are liable for up to an additional $1.9 million for potential uninsured obligations as of June 30, 2005. We have insurance coverage of $1.0 million for claims above the aggregate limit. Should employee health insurance claims exceed this coverage, we would have further obligations for the amount in excess of such coverage.

        We have entered into employment agreements with two of our officers whereby payments may be required if we terminate their employment without cause. The amounts payable are based upon the executives’ salaries at the time of termination and the cost of continuing to provide certain benefits. Had both of such officers been terminated as of June 30, 2005, we would have had aggregate obligations of approximately $1.9 million under such agreements. We have entered into employment agreements with each officer of IDEXX that require us to make certain payments in the event the officer’s employment is terminated under certain circumstances within a certain period following a change in control of the Company. The amounts payable under these agreements are based on the officer’s salary and bonus history at the time of termination and the cost of continuing to provide certain benefits. Had all of the Company’s officers been terminated following a change in control as of June 30, 2005, we would have had aggregate obligations of approximately $11.1 million under these agreements. These agreements also provide for the acceleration of the vesting of all stock options held by two of the officers immediately upon a change in control, and of all stock options held by the other executive officers upon any qualifying termination following a change in control. We also have employment agreements with other employees through 2009 that provide for total payments of $1.5 million.

        From time to time, we have received notices alleging that our products infringe third-party proprietary rights, although we are not aware of any pending litigation with respect to such claims. Patent litigation frequently is complex and expensive, and the outcome of patent litigation can be difficult to predict. There can be no assurance that we will prevail in any infringement proceedings that may be commenced against the Company. If we lose any such litigation, we may be stopped from selling certain products and/or we may be required to pay damages as a result of the litigation.

Note 10. Treasury Stock

        The Board of Directors has authorized the repurchase of up to 14,000,000 shares of the Company’s common stock in the open market or in negotiated transactions. During the three and six months ended June 30, 2005, we repurchased 366,900 and 897,700 shares of common stock for $20.9 million and $50.4 million, respectively. During the three and six months ended June 30, 2004, we repurchased 573,400 and 1,007,900 shares of common stock for $35.7 million and $57.7 million, respectively. In addition, during the three and six months ended June 30, 2004, we received approximately 100 and 1,100 shares of stock, respectively, that had been owned by the holder for greater than six months, in payment for the exercise price of stock options. The 1,100 shares had a market value of less than $0.1 million. From the inception of the program in August 1999 to June 30, 2005, we repurchased 12,852,500 shares for $392.7 million and received 170,400 shares of stock with a market value of $6.0 million in payment for the exercise price of stock options.

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Note 11. Preferred Stock Purchase Rights

        Under our Shareholder Rights Plan (the “Plan”), each preferred stock purchase right may be exercised to purchase one one-thousandth of a share of Series A Junior Participating Preferred Stock at a purchase price of $200.00. The rights will be exercisable only if a person or group has acquired beneficial ownership of 25% or more of our common stock (“Common Stock”) or commenced a tender or exchange offer that would result in such a person or group owning 30% or more of the Common Stock. We generally will be entitled to redeem the rights, in whole, but not in part, at a price of $.01 per right at any time until the tenth business day following a public announcement that a 25% stock position has been acquired and in certain other circumstances. Prior to an amendment to the Plan in March 2005, the rights were exercisable if a person or group had acquired beneficial ownership of 20% or more of the Common Stock or commenced a tender or exchange offer that would result in such a person or group owning 30% or more of the Common Stock.

        If any person or group becomes a beneficial owner of 25% or more of the Common Stock (except pursuant to a tender or exchange offer for all shares at a fair price as determined by the outside members of our Board of Directors), each right not owned by a 25% stockholder will enable its holder to purchase such number of shares of Common Stock as is equal to the exercise price of the right divided by one-half of the current market price of the Common Stock on the date of the occurrence of the event. Prior to the March 2005 amendment, these rights were exercisable if any person or group had acquired beneficial ownership of 20% or more of the Common Stock, subject to the exception. In addition, if we are thereafter acquired in a merger or other business combination with another person or group in which we are not the surviving corporation or in connection with which our Common Stock is changed or converted, or if we sell or transfer 50% or more of its assets or earning power to another person, each right that has not previously been exercised will entitle its holder to purchase such number of shares of common stock of such other person as is equal to the exercise price of the right divided by one-half of the current market price of such common stock on the date of the occurrence of the event.

        See Note 12 of the Notes to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission for additional information about the Plan.

Note 12. Segment Reporting

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

        We are organized into business units by market and customer group. Our reportable operating segments include the Companion Animal Group (“CAG”), the Water testing business (“Water”) and the Food Diagnostics Group (“FDG”) and other. CAG develops, designs, manufactures, and distributes products and performs services for veterinarians. 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 food animals and food. Other encompasses activities that are not included in the reportable segments and is comprised primarily of corporate research and development and interest income.

        The accounting policies of the segments are the same as those described in the summary of significant accounting policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 in Notes 2 and 18.

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        The following is the segment information (in thousands) :