UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2008

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

For the transition period from                      to                     .

IDEXX LABORATORIES, INC.

DELAWARE		01-0393723
(State or other jurisdiction of incorporation		(IRS Employer Identification No.)
or organization)
ONE IDEXX DRIVE, WESTBROOK, MAINE		04092
(Address of principal executive offices)		(ZIP Code)

207-556-0300
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer		þ				Accelerated filer		o
Non-accelerated filer		o		(Do not check if a smaller reporting company)		Smaller reporting company		o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. The number of shares outstanding of the registrant’s Common Stock, $0.10 par value, was 60,300,554 on April 21, 2008.

 

 

IDEXX LABORATORIES, INC.
Quarterly Report on Form 10-Q
Table of Contents

Item No.		Page
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007			3
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2008 and 2007			4
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2008 and 2007			5
Notes to Condensed Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			25
Item 4. Controls and Procedures			25
PART II—OTHER INFORMATION
Item 1. Legal Proceedings			25
Item 1A. Risk Factors			26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 6. Exhibits			31
Signatures			32
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
		2008				2007
ASSETS
Current Assets:
Cash and cash equivalents		$	60,220			$	60,360
Accounts receivable, less reserves of $2,268 in 2008 and $1,742 in 2007			125,245				108,384
Inventories			99,878				98,804
Deferred income tax assets			24,893				23,606
Other current assets			12,130				14,509
Total current assets			322,366				305,663
Property and equipment, net			151,094				141,852
Goodwill and other intangible assets, net			244,781				236,414
Other long-term assets, net			18,616				18,250
			263,397				254,664
TOTAL ASSETS		$	736,857			$	702,179
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	25,301			$	32,510
Accrued expenses			32,481				29,182
Accrued employee compensation and related expenses			29,951				44,753
Accrued taxes			11,447				18,206
Accrued customer programs			14,421				15,107
Short-term debt			139,951				72,236
Current portion of long-term debt			731				720
Deferred revenue			10,743				10,678
Total current liabilities			265,026				223,392
Long-term Liabilities:
Deferred tax liabilities			12,600				14,697
Long-term debt, net of current portion			5,540				5,727
Deferred revenue			6,071				6,210
Other long-term liabilities			13,984				13,830
Total long-term liabilities			38,195				40,464
Commitments and Contingencies (Note 13)
Stockholders’ Equity:
Common stock, $0.10 par value: Authorized: 120,000 shares; Issued: 94,870 and 94,504 shares in 2008 and 2007, respectively			9,487				9,450
Additional paid-in capital			526,169				514,773
Deferred stock units: Outstanding 99 and 82 units in 2008 and 2007, respectively			2,513				2,201
Retained earnings			613,413				585,862
Accumulated other comprehensive income			31,372				22,705
Treasury stock, at cost: 34,473 and 33,500 shares in 2008 and 2007, respectively			(749,318	)			(696,668	)
Total stockholders’ equity			433,636				438,323
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	736,857			$	702,179

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		For the Three Months Ended
		March 31,
		2008				2007
Revenue:
Product revenue		$	168,990			$	145,464
Service revenue			80,084				65,691
			249,074				211,155
Cost of Revenue:
Cost of product revenue			64,541				58,290
Cost of service revenue			54,697				44,286
			119,238				102,576
Gross profit			129,836				108,579
Expenses:
Sales and marketing			44,001				35,582
General and administrative			29,821				26,149
Research and development			17,295				15,971
Income from operations			38,719				30,877
Interest expense			(1,031	)			(634	)
Interest income			546				662
Income before provision for income taxes			38,234				30,905
Provision for income taxes			10,683				9,878
Net income		$	27,551			$	21,027
Earnings per Share:
Basic		$	0.45			$	0.34
Diluted		$	0.43			$	0.32
Weighted Average Shares Outstanding:
Basic			60,865				62,274
Diluted			63,558				65,083

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		For the Three Months Ended
		March 31,
		2008				2007
Cash Flows from Operating Activities:
Net income		$	27,551			$	21,027
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization			11,395				9,047
Reduction in deferred compensation expense			(131	)			—
Provision for uncollectible accounts			523				116
Benefit of deferred income taxes			(999	)			(1,839	)
Share-based compensation expense			2,878				2,416
Tax benefit from exercises of stock options			(2,384	)			(3,004	)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable			(13,543	)			(16,428	)
Inventories			(477	)			(3,083	)
Other assets			(1,540	)			309
Accounts payable			(7,539	)			935
Accrued liabilities			(18,190	)			(11,453	)
Deferred revenue			(333	)			167
Net cash used by operating activities			(2,789	)			(1,790	)
Cash Flows from Investing Activities:
Sales and maturities of short-term investments			—				35,000
Purchases of property and equipment			(17,049	)			(10,492	)
Acquisitions of equipment leased to customers			(226	)			(238	)
Acquisitions of intangible assets and businesses, net of cash acquired			(7,533	)			(80,311	)
Net cash used by investing activities			(24,808	)			(56,041	)
Cash Flows from Financing Activities:
Borrowings on revolving credit facilities, net			67,942				74,511
Payment of other notes payable			(177	)			(1,323	)
Purchase of treasury stock			(51,355	)			(34,416	)
Proceeds from exercises of stock options			5,974				7,916
Tax benefit from exercises of stock options			2,384				3,004
Net cash provided by financing activities			24,768				49,692
Net effect of exchange rates on cash			2,689				410
Net decrease in cash and cash equivalents			(140	)			(7,729	)
Cash and cash equivalents at beginning of period			60,360				61,666
Cash and cash equivalents at end of period		$	60,220			$	53,937
Supplemental Disclosures of Cash Flow Information:
Interest paid		$	1,182			$	539
Income taxes paid		$	15,343			$	14,814

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

IDEXX LABORATORIES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

The accompanying unaudited, condensed consolidated financial statements of IDEXX Laboratories, Inc. (“IDEXX”, the “Company”, “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 unaudited, condensed consolidated financial statements include the accounts of IDEXX Laboratories, Inc. and our wholly-owned and majority-owned subsidiaries, and all other entities in which we have a variable interest and are determined to be the primary beneficiary. All material intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited, 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 condensed balance sheet data at December 31, 2007 was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. The results of operations for the three months ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year or any future period. These unaudited, condensed financial statements should be read in conjunction with this quarterly report on Form 10-Q for the three months ended March 31, 2008, and our Annual Report on Form 10-K for the year ended December 31, 2007 filed with the Securities and Exchange Commission.

On October 25, 2007, our board of directors approved a two-for-one split of the outstanding shares of our common stock, to be effected in the form of a 100% stock dividend. Each holder of common stock of record at November 5, 2007 received one additional share of common stock for each share of common stock then held. The additional shares of common stock were distributed on November 26, 2007. As a result of the stock split, the number of outstanding common shares doubled to approximately 61 million shares.

All share and per share data (except par value) have been adjusted to reflect the effect of the stock split for all periods presented. In addition, the exercise of outstanding stock options and the vesting of other stock awards, as well as the number of shares of common stock reserved for issuance under our various employee benefit plans, were proportionately increased in accordance with the terms of those respective agreements and plans.

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

NOTE 2. ACCOUNTING POLICIES

Significant Accounting Policies

The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2008 are consistent with those discussed in Note 2 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2007, except as discussed below.

Share-Based Compensation

To develop the expected term assumption for option awards, we previously elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin No. 107, which is based on vesting and contractual terms. Beginning in January 2008, we derive the expected term assumption for options based on historical experience and other relevant factors concerning expected employee behavior with regard to option exercise. See Note 4.

Recent Accounting Pronouncements

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”) on January 1, 2008. As permitted by FASB Staff Position (“FSP”) No. SFAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. SFAS 157-2”), we elected to defer the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis until January 1, 2009. SFAS No. 157 establishes a framework for measuring fair value and expands financial statement disclosures about fair value measurements. There was no cumulative effect of adoption related to SFAS No. 157 and the adoption did not have an impact on our financial position, results of operations, or cash flows. We are studying SFAS No. 157 with respect to nonfinancial assets and nonfinancial liabilities falling under the scope of FSP No. SFAS 157-2 and have not yet determined the expected impact on our financial position, results of operations, or cash flows. See Note 16 for a discussion of our adoption of SFAS No. 157.

We adopted the provisions of SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115” (“SFAS No. 159”) on January 1, 2008. SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). Under this pronouncement, a business entity must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. We have not elected the fair value option for any items on our balance sheet.

NOTE 3. ACQUISITIONS OF BUSINESSES AND OTHER ASSETS

We paid $6.8 million to acquire a business and certain intangible assets that did not comprise businesses during the three months ended March 31, 2008 and recognized liabilities, including contingent liabilities associated with purchase accounting, of $0.1 million. In addition, we agreed to pay up to $7.5 million in the future upon achievement of revenue and other milestones. These payments will be accrued and recorded as additional intangible assets if and when we determine that it is probable that the milestones will be achieved.

More specifically, in January 2008, we acquired substantially all of the assets and assumed certain liabilities of VetLab Laboratorio Veterinario de Referencia, S.L. (“VetLab S.L.”). With operations in Barcelona, Spain, Vetlab S.L. is a provider of reference laboratory testing services to veterinarians. We also acquired certain intellectual property and distribution rights associated with a diagnostic test product during the three months ended March 31, 2008. In connection with these acquisitions, we recognized goodwill of $0.4 million and amortizable intangible assets of $6.4 million.

During the three months ended March 31, 2008, we made purchase price payments of $0.7 million related to the achievement of milestones achieved by certain businesses acquired in prior years, which were previously accrued.

We believe that the acquired businesses enhance our existing businesses by either expanding the geographic range of our existing businesses or expanding our existing product lines. We determined the purchase price of each acquired business based on our assessment of estimated future cash flows attributable to the business enterprise taken as a whole, the strength of the business in the marketplace, the strategic importance of the acquisition to IDEXX, and the seller’s desire to be acquired by IDEXX versus perceived alternatives. We recognized goodwill based on the excess of the purchase price for each business over the fair values of the individual tangible and separately identified intangible assets acquired, which were valued in accordance with SFAS No. 141, “Business Combinations.”

We have commitments outstanding at March 31, 2008 for additional purchase price payments of up to $8.6 million in connection with acquisitions of businesses and intangible assets during the current and prior periods, of which $8.3 million is contingent on the achievement by certain acquired businesses of specified milestones.

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

NOTE 4. SHARE-BASED COMPENSATION

For the three months ended March 31, 2008, share-based compensation expense included $2.6 million for options, restricted stock units and deferred stock units with vesting conditions and $0.2 million for employee stock purchase rights. Share-based compensation expense was not affected by the two-for-one split of the outstanding shares of our common stock as discussed in Note 1.

Share-based compensation costs for options, restricted stock units, deferred stock units with vesting conditions, and employee stock purchase rights have been included in our condensed consolidated statement of operations for the three months ended March 31, 2008 and 2007 as follows (in thousands):

		For the Three Months Ended
		March 31,
		2008				2007
Cost of revenue		$	186			$	123
Sales and marketing			423				293
General and administrative			1,655				1,504
Research and development			547				450
Total		$	2,811			$	2,370

The fair value of options, restricted stock units, deferred stock units with vesting conditions, and employee stock purchase rights awarded during the three months ended March 31, 2008 and 2007 totaled $17.9 million and $17.8 million, respectively. The total unrecognized compensation cost for unvested share-based compensation awards outstanding at March 31, 2008 and 2007, before consideration of estimated forfeitures, was $38.3 million and $31.3 million, respectively. The weighted average remaining expense recognition period at March 31, 2008 and 2007 is approximately 2.4 years and 2.5 years, respectively.

Options

The weighted average valuation assumptions used to determine the fair value of each option grant on the date of grant were as follows:

		For the Three Months Ended
		March 31,
		2008				2007
Expected stock price volatility			25	%			29	%
Expected term, in years			4.9				5.0
Risk-free interest rate			2.7	%			4.7	%

The total fair value of options vested during the three months ended March 31, 2008 and 2007 was $10.2 million and $11.6 million, respectively.

Restricted and Other Deferred Stock Units With Vesting Conditions

The weighted average fair value per unit of restricted stock units and deferred stock units with vesting conditions granted during the three months ended March 31, 2008 and 2007 was $56.95 and $41.94, respectively.

NOTE 5. INVENTORIES

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

		March 31,				December 31,
		2008				2007
Raw materials		$	27,080			$	26,182
Work-in-process			15,687				16,425
Finished goods			57,111				56,197
		$	99,878			$	98,804

NOTE 6. PROPERTY AND EQUIPMENT

Property and equipment, net, consisted of the following (in thousands):

		March 31,				December 31,
		2008				2007
Land and improvements		$	7,691			$	7,754
Buildings and improvements			54,226				54,072
Leasehold improvements			17,769				16,737
Machinery and equipment			99,353				92,139
Office furniture and equipment			64,896				61,472
Construction in progress			26,405				23,002
			270,340				255,176
Less accumulated depreciation and amortization			119,246				113,324
Total property and equipment		$	151,094			$	141,852

Depreciation expense was $8.3 million and $6.5 million for the three months ended March 31, 2008 and 2007, respectively.

Instruments placed with customers under certain minimum volume commitment programs are capitalized and depreciated over the shorter of the useful life of the instrument or the minimum volume commitment period.

NOTE 7. GOODWILL AND OTHER INTANGIBLE ASSETS

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

		March 31, 2008								December 31, 2007
						Accumulated								Accumulated
		Cost				Amortization				Cost				Amortization
Patents		$	10,914			$	4,273			$	10,895			$	4,003
Other product rights			34,395				11,951				27,838				10,428
Customer-related intangible assets			59,445				9,524				57,907				8,011
Other, primarily noncompete agreements			6,839				2,620				6,416				2,299
		$	111,593			$	28,368			$	103,056			$	24,741

Amortization expense of intangible assets was $2.6 million and $1.8 million for the three months ended March 31, 2008 and 2007, respectively.

During the three months ended March 31, 2008, we acquired customer-related intangible assets of $1.4 million, other product rights of $4.8 million, and other intangible assets of $0.2 million, all of which were assigned to the Companion Animal Group (“CAG”) segment, with weighted amortization periods of 3 years, 10 years and 15 years, respectively. See Note 3 for additional information. The remaining changes in the cost of intangible assets other than goodwill during the three months ended March 31, 2008 resulted from changes in foreign currency exchange rates.

Goodwill by segment consisted of the following (in thousands):

		March 31,				December 31,
		2008				2007
CAG segment		$	133,135			$	131,004
Water segment			17,645				17,566
Production animal segment			10,776				9,529
		$	161,556			$	158,099

During the three months ended March 31, 2008, we recognized goodwill of $0.4 million (all of which is expected to be tax deductible) related to business acquisitions, which was assigned to the CAG segment. See Note 3 for additional information. The remaining changes in goodwill during the three months ended March 31, 2008 resulted from changes in foreign currency exchange rates.

NOTE 8. WARRANTY RESERVES

We provide for the estimated cost of instrument warranties in cost of product revenue at the time revenue is recognized based on the estimated cost to repair the instrument over its warranty period. Cost of revenue reflects not only estimated warranty expense for the systems sold in the current period, but also any changes in estimated warranty expense for the installed base that results from our quarterly evaluation of service experience. Our actual warranty obligation is affected by instrument performance in the customer’s environment and associated costs incurred in servicing instruments. Should actual service rates or costs differ from our 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 during the three months ended March 31, 2008 and 2007, respectively (in thousands):

		For the Three Months Ended
		March 31,
		2008				2007
Balance, beginning of period		$	1,667			$	1,978
Provision for warranty expense			507				490
Liability assumed in connection with business acquisition			—				86
Change in estimate of prior warranty expense			(66	)			176
Settlement of warranty liability			(547	)			(899	)
Balance, end of period		$	1,561			$	1,831

NOTE 9. DEBT

In February 2008, we increased the aggregate principal amount available under our unsecured short-term revolving credit facility (“Credit Facility”) to $200.0 million from $125.0 million. At March 31, 2008 we had $139.9 million outstanding under the Credit Facility with a weighted average interest rate of 3.3%. Of the total amount outstanding at March 31, 2008 $6.9 million was borrowed by our Canadian subsidiary and denominated in Canadian dollars.

NOTE 10. INCOME TAXES

Our effective income tax rates were 27.9% and 32.0% for the three months ended March 31, 2008 and 2007, respectively. The decrease in the effective tax rate for the three months ended March 31, 2008 as compared with the three months ended March 31, 2007 relates primarily to a reduction in international deferred tax liabilities due to a recent change in the statutory tax rates for a jurisdiction in which we operate. This non-recurring benefit of approximately $1.5 million reduced our effective income tax rate for the quarter by 3.9%. This favorable item was partly offset by federal research and development tax incentives that were not available for the three months ended March 31, 2008 because of an expiration of the law.

NOTE 11. COMPREHENSIVE INCOME

The following is a summary of comprehensive income for the three months ended March 31, 2008 and 2007 (in thousands):

		For the Three Months Ended
		March 31,
		2008				2007
Net income		$	27,551			$	21,027
Other comprehensive income (loss):
Foreign currency translation adjustments			10,021				1,069
Change in fair value of foreign currency contracts classified as hedges, net of tax			(1,281	)			47
Change in fair market value of investments, net of tax			(73	)			7
Comprehensive income		$	36,218			$	22,150

NOTE 12. EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock and vested deferred stock units outstanding during the year. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the denominator is increased for the assumed exercise of dilutive options and other potentially dilutive securities using the treasury stock method unless the security is anti-dilutive.

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

		For the Three Months Ended
		March 31,
		2008				2007
Shares Outstanding for Basic Earnings per Share:
Weighted average shares outstanding			60,774				62,203
Weighted average vested deferred stock units outstanding			91				71
			60,865				62,274
Shares Outstanding for Diluted Earnings per Share:
Shares outstanding for basic earnings per share			60,865				62,274
Dilutive effect of options issued to employees and directors			2,590				2,763
Dilutive effect of restricted stock units issued to employees			95				34
Dilutive effect of nonvested deferred stock units issued to directors			8				12
			63,558				65,083

Certain deferred stock units outstanding are included in shares outstanding for basic and diluted earnings per share because the associated shares of our common stock are issuable for no cash consideration, the number of shares of our common stock to be issued is fixed and issuance is not contingent.

Certain options to acquire shares and restricted stock units have been excluded from the calculation of shares outstanding for dilutive earnings per share because they were anti-dilutive. The following table presents information concerning those anti-dilutive options (in thousands, except per share amounts):

		For the Three Months Ended
		March 31,
		2008				2007
Weighted average number of shares underlying anti-dilutive options			451				563
Weighted average exercise price per underlying share of anti-dilutive options		$	52.62			$	41.61
Weighted average number of shares underlying anti-dilutive restricted stock units			92				—

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

		March 31,
		2008				2007
Closing price per share of our common stock		$	49.26			$	43.81
Number of shares underlying options with exercise prices below the closing price			4,999				6,104
Number of shares underlying options with exercise prices equal to or above the closing price			611				200
Total number of shares underlying outstanding options			5,610				6,304

NOTE 13. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Significant commitments, contingencies and guarantees at March 31, 2008 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 in Note 13 to the consolidated financial statements, except as described in Note 3.

NOTE 14. TREASURY STOCK

Our board of directors has authorized the repurchase of up to 40,000,000 shares of our common stock in the open market or in negotiated transactions. We believe that the repurchase of our common stock is a favorable investment and we also repurchase to offset the dilutive effect of our employee share-based compensation programs. Repurchases of our common stock may vary depending upon the level of other investing activities and the share price.

From the inception of the program in August 1999 to March 31, 2008, we repurchased 34,098,000 shares for $741.5 million. From the inception of the program to March 31, 2008, we also received 375,000 shares of stock with a market value of $7.8 million that were surrendered by employees in payment for the minimum required withholding taxes due on the exercise of stock options, vesting of restricted stock units, settlement of deferred stock units, and in payment for the exercise price of stock options.

Information about our treasury stock purchases and other receipts is presented in the table below (in thousands, except per share amounts):

		For the Three Months Ended
		March 31,
		2008				2007
Shares acquired			973				819
Total cost of shares acquired		$	52,650			$	34,819
Average cost per share		$	54.10			$	42.49

NOTE 15. SEGMENT REPORTING

We are organized into business units by market and customer group. Our reportable segments include: products and services for the veterinary market, which we refer to as our Companion Animal Group (“CAG”), water quality products (“Water”), and products for production animal health, which we refer to as the Production Animal Segment (“PAS”). We also operate two smaller segments that comprise products for dairy quality, which we refer to as Dairy, and products for the human medical diagnostic market, which we refer to as OPTI Medical. Financial information about the Dairy and OPTI Medical operating segments are combined and presented in an “Other” category because they do not meet the quantitative or qualitative thresholds for reportable segments. CAG develops, designs, manufactures, and distributes products and performs services for veterinarians. Water develops, designs, manufactures, and distributes products to detect contaminants in water. PAS develops, designs, manufactures, and distributes products to detect disease in production animals. Dairy develops, designs, manufactures, and distributes products to detect contaminants in dairy products. OPTI Medical develops, designs, manufactures, and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.

Items that are not allocated to our operating segments comprise primarily corporate research and development expenses, a portion of share-based compensation expense, interest income and expense, and income taxes. We allocate most of our share-based compensation expense to the operating segments. This allocation differs from the actual expense and consequently yields a difference between the total allocated share-based compensation expense and the actual expense for the total company.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies in our Annual Report on Form 10-K for the year ended December 31, 2007 in Notes 2 and 17.

The following is the segment information (in thousands):

		For the Three Months Ended March 31,
																		Unallocated				Consolidated
		CAG				Water				PAS				Other				Amounts				Total
2008
Revenues		$	203,609			$	16,816			$	21,162			$	7,487			$	—			$	249,074
Income (loss) from operations		$	29,555			$	6,270			$	5,828			$	(189	)		$	(2,745	)		$	38,719
Interest expense, net																							485
Income before provisions for income taxes																							38,234
Provision for income taxes																							10,683
Net income																						$	27,551
2007
Revenues		$	173,433			$	14,405			$	16,811			$	6,506			$	—			$	211,155
Income (loss) from operations		$	23,585			$	5,642			$	3,965			$	(413	)		$	(1,902	)		$	30,877
Interest income, net																							28
Income before provisions for income taxes																							30,905
Provision for income taxes																							9,878
Net income																						$	21,027

Revenue by product and service category was as follows (in thousands):

		For the Three Months Ended
		March 31,
		2008				2007
CAG segment revenue:
Instruments and consumables		$	75,610			$	66,956
Rapid assay products			38,222				31,237
Laboratory and consulting services			70,107				57,888
Practice information systems and digital radiography			15,025				12,525
Pharmaceutical products			4,645				4,827
CAG segment revenue			203,609				173,433
Water segment revenue			16,816				14,405
Production animal segment revenue			21,162				16,811
Other segment revenue			7,487				6,506
Total revenue		$	249,074			$	211,155

NOTE 16. FAIR VALUE MEASUREMENTS

On January 1, 2008, we adopted the provisions of SFAS No. 157 for our financial assets and liabilities. As permitted by FSP No. SFAS 157-2, we elected to defer the adoption of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis until January 1, 2009. SFAS No. 157 provides a framework for measuring fair value under U.S. GAAP and requires expanded disclosures regarding fair value measurements. SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1		Quoted prices in active markets for identical assets or liabilities. Our Level 1 assets and liabilities include investments in marketable securities related to a deferred compensation plan assumed in a business combination. The liabilities associated with this plan relate to deferred compensation, which is indexed to the performance of the underlying investments.
Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Our Level 2 liabilities include unrealized losses on hedge contracts.
Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. At March 31, 2008, we have no Level 3 assets or liabilities.

The following table sets forth our financial assets and liabilities that were measured at fair value on a recurring basis at March 31, 2008 by level within the fair value hierarchy. We did not have any nonfinancial assets or liabilities that were measured or disclosed at fair value on a recurring basis at March 31, 2008. As required by SFAS No. 157, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability (in thousands):

		Quoted Prices				Significant
		In Active				Other				Significant
		Markets for				Observable				Unobservable
		Identical Assets				Inputs				Inputs				Balance at
		(Level 1)				(Level 2)				(Level 3)				March 31, 2008
Assets
Marketable securities (1)		$	2,016			$	—			$	—			$	2,016
Liabilities
Deferred compensation (2)			2,016				—				—				2,016
Derivatives (3)			—				3,769				—				3,769

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

This quarterly report on Form 10-Q includes or incorporates forward-looking statements about our business and expectations within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements relating to future revenue growth rates, demand for our products, realizability of assets, warranty expense, share-based compensation expense, and competition. You can generally identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” and similar words and expressions are intended to help you identify forward-looking statements. These statements give our current expectations or forecasts of future events; are based on current estimates, projections, beliefs, and assumptions; and are not guarantees of future performance. Actual events or results may differ materially from those described in the forward-looking statements. These forward-looking statements involve a number of risks and uncertainties as more fully described under the heading “Part II, Item 1A. Risk Factors” in this quarterly report on Form 10-Q. The risks and uncertainties discussed herein do not reflect the potential impact of future mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this quarterly report was first filed with the Securities and Exchange Commission and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or expectations change.

• Business Overview

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 for production animal health, which we refer to as the Production Animal Segment (“PAS”). We also operate two smaller segments that comprise products for dairy quality, which we refer to as Dairy, and products for the human medical diagnostic market, which we refer to as OPTI Medical. Financial information about the Dairy and OPTI Medical operating segments are combined and presented in an “Other” category because they do not meet the quantitative or qualitative thresholds for reportable segments.

CAG develops, designs, manufactures, and distributes products and performs services for veterinarians. Water develops, designs, manufactures, and distributes products to detect contaminants in water. PAS develops, designs, manufactures, and distributes products to detect diseases in production animals. Dairy develops, designs, manufacture, and distributes products to detect contaminants in dairy products. OPTI Medical develops, designs, manufactures, and distributes point-of-care electrolyte and blood gas analyzers and related consumable products for the human medical diagnostics market.

Items that are not allocated to our operating segments comprise primarily corporate research and development expenses, a portion of share-based compensation expense, interest income and expense, and income taxes. We allocate most of our share-based compensation expense to the operating segments. This allocation differs from the actual expense and consequently yields a difference between the total allocated share-based compensation expense and the actual expense for the total company.

• Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our condensed 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. We base our estimates on historical experience and on various other assumptions that we believe 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. The significant accounting policies used in preparation of these condensed consolidated financial statements for the three months ended March 31, 2008 are consistent with those discussed in Note 2 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 and in Note 2 to the condensed consolidated financial statements included in this quarterly report on Form 10-Q. The critical accounting policies and the significant judgments and estimates used in the preparation of our condensed consolidated financial statements for the three months ended March 31, 2008 are consistent with those discussed in our Annual Report on Form 10-K for the year ended December 31, 2007 in the section captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates”, except as discussed below.

Share-Based Compensation

We grant share-based compensation to certain employees annually in the first quarter of each year, including stock options. The valuation of stock options includes the use of subjective assumptions that we believe are reasonable, particularly for the expected stock price volatility and the expected term of options assumptions.

To develop the expected term assumption for option awards, we previously elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin No. 107, which is based on vesting and contractual terms. Beginning in January 2008, we derive the expected term assumption for options based on historical experience and other relevant factors concerning expected employee behavior with regard to option exercise. Longer expected term assumptions increase the fair value of option awards, and therefore increase the expense recognized per award.

Share-based compensation expense is based on the number of awards ultimately expected to vest and is, therefore, reduced for an estimate of the number of awards that are expected to be forfeited. The forfeiture estimates are based on historical data and other factors, and compensation expense is adjusted for actual results. Net share-based compensation costs for the three months ended March 31, 2008 were $2.8 million, which is net of a reduction of $0.2 million for estimated forfeitures. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in unanticipated increases or decreases in share-based compensation expense from period to period.

• Results of Operations

Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007

Revenue

Total Company. Revenue increased $37.9 million, or 18%, to $249.1 million for the three months ended March 31, 2008 from $211.2 million for the same period of the prior year. Incremental sales from businesses and from customer-related and other intangible assets acquired subsequent to January 1, 2007 contributed 4% to revenue growth. These acquisitions consisted primarily of veterinary reference laboratories and customer lists in Canada, the United States and Europe; intellectual property and distribution rights of a veterinary diagnostics business; a production animal diagnostic products business in France; and the Critical Care Division of Osmetech plc, which we refer to as OPTI Medical. The favorable impact of currency exchange rates contributed 5% to revenue growth. The following table presents revenue by operating segment:

For the Three Months Ended March 31,
																										Percentage
																										Change Net of
																		Percentage				Percentage				Acquisitions
Net Revenue										Dollar				Percentage				Change from				Change from				and Currency
(dollars in thousands)		2008				2007				Change				Change				Currency (1)				Acquisitions (2)				Effect
CAG		$	203,609			$	173,433			$	30,176				17.4	%			4.2	%			2.7	%			10.5	%
Water			16,816				14,405				2,411				16.7	%			4.5	%			—				12.2	%
PAS			21,162				16,811				4,351				25.9	%			11.8	%			12.2	%			1.9	%
Other			7,487				6,506				981				15.1	%			4.8	%			13.7	%			(3.4	%)
Total		$	249,074			$	211,155			$	37,919				18.0	%			4.9	%			3.6	%			9.5	%

Companion Animal Group. Revenue for CAG increased $30.2 million, or 17%, to $203.6 million for the three months ended March 31, 2008 from $173.4 million for the same period of the prior year. Incremental sales from veterinary reference laboratory businesses and customer-related assets acquired subsequent to January 1, 2007 contributed 3% to CAG revenue growth. The favorable impact of currency exchange rates contributed 4% to the increase in CAG revenue. The following table presents revenue by product and service category for CAG:

For the Three Months Ended March 31,
																										Percentage
																										Change Net of
																		Percentage				Percentage				Acquisitions
Net Revenue										Dollar				Percentage				Change from				Change from				and Currency
(dollars in thousands)		2008				2007				Change				Change				Currency (1)				Acquisitions (2)				Effect
Instruments and consumables		$	75,610			$	66,956			$	8,654				12.9	%			4.8	%			—				8.1	%
Rapid assay products			38,222				31,237				6,985				22.4	%			2.4	%			—				20.0	%
Laboratory and consulting services			70,107				57,888				12,219				21.1	%			5.2	%			8.1	%			7.8	%
Practice information management systems and digital radiography			15,025				12,525				2,500				20.0	%			2.0	%			—				18.0	%
Pharmaceutical products			4,645				4,827				(182	)			(3.8	%)			—				—				(3.8	%)
Net CAG revenue		$	203,609			$	173,433			$	30,176				17.4	%			4.2	%			2.7	%			10.5	%

The following revenue analysis reflects the results of operations net of the impact of currency exchange rates on sales outside the U.S. and net of incremental sales from businesses and from customer-related and other intangible assets acquired subsequent to January 1, 2007.

Because our instrument consumables, rapid assay products, and pharmaceutical products are sold in the U.S. and certain other geographies by distributors, distributor purchasing dynamics have an impact on our reported sales of these products. Distributors purchase products from us and sell them to veterinary practices, who are the end users. Distributor purchasing dynamics may be affected by many factors and may be unrelated to underlying end-user demand for our products. As a result, fluctuations in distributors’ inventories may cause reported results in a period not to be representative of underlying end-user demand. Therefore, we believe it is important to track distributor sales to end users and to distinguish between the impact of end-user demand and the impact of distributor purchasing dynamics on reported revenue growth.

Where growth rates are affected by changes in end-user demand, we refer to the impact of practice-level sales on growth. Where growth rates are affected by distributor purchasing dynamics, we refer to the impact of changes in distributors’ inventories. If during the comparable period of the prior year, distributors’ inventories grew by more than those inventories grew in the current year, then changes in distributors’ inventories have a negative impact on our reported sales growth in the current period. Conversely, if during the comparable period of the prior year, distributors’ inventories grew by less than those inventories grew in the current year, then changes in distributors’ inventories have a positive impact on our reported sales growth in the current period.

The increase in sales of instruments and consumables was due to higher sales across all instrument and consumables product categories. Higher consumables sales were due primarily to increased volume of consumables used with the Coag Dx™ Analyzer, our blood coagulation analyzer that we began to sell in December 2007, to increased U.S. and Canada practice-level sales of cassettes used with our VetStat^® Analyzer, to increased worldwide practice-level sales of tubes used with our hematology analyzers, and to higher average unit sales prices on sales of slides for use in our VetTest^® chemistry analyzers. Higher instrument service revenue was due to higher volume of service contracts sold, due to increased number of units placed. Higher instrument sales were due primarily to higher volume of sales of our IDEXX VetLab^® Station, an in-clinic laboratory information management system, and of sales of our Coag Dx™ Analyzer, partly offset by lower average unit prices on sales of our LaserCyte^® Hematology Analyzer and IDEXX VetLab^® Station, due primarily to increased promotional discounting. Sales volumes of consumables in the U.S. and Canada in the first quarter of 2007 benefited from temporary additional diagnostic testing volume related to the recall of certain pet foods in mid-March 2007. We believe that the recall resulted in a higher than usual number of pet visits to veterinary clinics in North America in the first and second quarters of 2007. We estimate that this event negatively impacted year-over-year first quarter growth in sales of consumables used in our IDEXX VetLab^® Suite of analyzers by approximately 3%, and negatively impacted growth in sales of total instruments and consumables by approximately 2%. Changes in distributors’ inventory levels negatively impacted reported consumables revenue growth by 1%.

The increase in sales of rapid assay products was due to both higher sales volumes and higher average unit sales prices. Increased volume was due to incremental sales of Canine SNAP^® tests in Japan and increased U.S. practice-level sales of canine combination test products, such as the SNAP^® 4Dx^® and, to a lesser extent, the July 2007 launch of SNAP^® cPL™, our test for pancreatitis in dogs. Higher volume in Japan resulted primarily from the timing of orders placed by our distributor which we anticipate will unfavorably impact the year-over-year comparison of second quarter 2008 revenue. Higher average unit sales prices were due, in part, to higher relative sales of canine combination test products and less promotional discounting in connection with our SNAP^® up the Savings™ and other customer programs. We expect that the rate of end users’ conversion from canine heartworm-only tests to combination test products will slow in future periods, which will decelerate the rate of increase in average unit sales prices. The impact from changes in U.S. distributors’ inventory levels increased reported rapid assay revenue growth by 3%.

The increase in sales of laboratory and consulting services resulted primarily from acquisitions, higher testing volume and, to a lesser extent, the impact of price increases. Acquisitions of veterinary reference laboratories in Canada, the United States and Europe contributed 8% to reported laboratory and consulting services revenue growth. Higher testing volume was attributable to incremental sales to new customers, increased testing volume from existing customers and the impact of new test offerings. As discussed above, the first quarter of 2007 benefited from temporary additional diagnostic testing volume resulting from the March 2007 pet food recall. We estimate that this event negatively impacted year-over-year first quarter laboratory and consulting services revenue growth by approximately 1%.

The increase in sales of practice information management systems and digital radiography resulted primarily from higher sales volumes of companion animal radiography systems and the favorable impact of changes to the customer support pricing structure for our Cornerstone^® practice information management systems, partly offset by lower sales of practice information management systems and lower average unit prices for digital radiography systems due to increased competition.

The decrease in sales of pharmaceutical products resulted primarily from lower sales volume, largely related to decreased sales of PZI VET^®, our insulin product for the treatment of diabetic cats, as a result of the timing of significant orders placed by large distributors in the fourth quarter of 2007. In the second quarter of 2008, we informed customers that we will be discontinuing the PZI VET^® product. At the time we had a limited inventory of product since the raw material used in the product is no longer commercially available. Substantially all of this inventory was sold in the second quarter. Consequently, sales of PZI VET^® will be unusually high in the second quarter, and we will have limited or no sales of PZI VET^® beyond the second quarter.

Water. Revenue for Water increased $2.4 million, or 17%, to $16.8 million for the three months ended March 31, 2008 from $14.4 million for the same period of the prior year. The increase resulted primarily from higher sales volume, partly offset by lower average unit sales prices due to both higher relative sales in geographies where products are sold at lower average unit sales prices and greater price competition in certain geographies. Higher sales volumes were attributable to the commencement in September 2007 of distribution of certain water testing kits manufactured by Invitrogen Corporation (“Invitrogen”), which increased reported Water revenue growth by 6%, as well as higher sales of our Colilert^® products, used to detect total coliforms and E. coli in water. The favorable impact of currency exchange rates contributed 5% to the increase in Water revenue.

Production Animal Segment. Revenue for PAS increased $4.4 million, or 26%, to $21.2 million for the three months ended March 31, 2008 from $16.8 million for the same period of the prior year. The increase resulted primarily from higher livestock diagnostics sales volume, including sales attributable to Institut Pourquier (“Pourquier”), a manufacturer of production animal diagnostic products in France that we acquired in March 2007. Sales of Pourquier products contributed 12% to PAS revenue growth. The favorable impact of higher sales volume was partly offset by lower average unit sales prices for our post-mortem test for bovine spongiform encephalopathy (“BSE”) due to greater price competition. The favorable impact of currency exchange rates contributed 12% to the increase in PAS revenue.

Other. Revenue for Other operating units increased $1.0 million, or 15%, to $7.5 million for the three months ended March 31, 2008 from $6.5 million for the same period of the prior year due primarily to incremental revenue from OPTI Medical, which was acquired in January 2007.

Gross Profit

Total Company. Gross profit increased $21.3 million, or 20%, to $129.8 million for the three months ended March 31, 2008 from $108.6 million for the same period of the prior year. As a percentage of total revenue, gross profit increased to 52% from 51%. The following table presents gross profit and gross profit percentage by operating segment:

For the Three Months Ended March 31,
Gross Profit						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2008				Revenue				2007				Revenue				Change				Change
CAG		$	101,985				50.1	%		$	86,330				49.8	%		$	15,655				18.1	%
Water			10,315				61.3	%			9,232				64.1	%			1,083				11.7	%
PAS			14,233				67.3	%			10,963				65.2	%			3,270				29.8	%
Other			3,127				41.8	%			1,914				29.4	%			1,213				63.4	%
Unallocated amounts			176				N/A				140				N/A				36				25.7	%
Total Company		$	129,836				52.1	%		$	108,579				51.4	%		$	21,257				19.6	%

Companion Animal Group. Gross profit for CAG increased $15.7 million, or 18%, to $102.0 million for the three months ended March 31, 2008 from $86.3 million for the same period of the prior year due primarily to increased revenue across the CAG product and service lines except in the pharmaceuticals business. As a percentage of revenue, gross profit remained constant at 50%. Gross profit percentage was favorably impacted by lower cost of slides that are sold for use in our VetTest^® chemistry analyzers; higher average unit sales prices on sales of our canine combination test products, including SNAP^®4Dx^®, and laboratory and consulting services; improved efficiency in our process relating to IDEXX VetLab^® instrument service; and the favorable impact of foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses and foreign currency denominated expenses. These favorable items were primarily offset by greater costs of service in the laboratory and consulting services business; greater costs of manufacturing related to IDEXX VetLab^® instruments; and higher relative sales of relatively lower margin laboratory and consulting services.

Water. Gross profit for Water increased $1.1 million, or 12%, to $10.3 million for the three months ended March 31, 2008 from $9.2 million for the same period of the prior year due to higher revenue, partly offset by a decrease in the gross profit percentage to 61% from 64%. The decrease in the gross profit percentage was due primarily to discrete costs incurred as a result of discontinuing a project to qualify a second source supplier for certain products and greater relative sales of lower margin products, consisting primarily of water testing kits manufactured by Invitrogen that we began distributing in September 2007. These unfavorable impacts were partly offset by foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses and foreign currency denominated expense.

Production Animal Segment. Gross profit for PAS increased $3.3 million, or 30%, to $14.2 million for the three months ended March 31, 2008 from $11.0 million for the same period of the prior year due to increased sales volume and to an increase in the gross profit percentage to 67% from 65% for the prior year. The gross profit percentage was favorably impacted by foreign currency rates on sales denominated in those currencies, net of foreign exchange hedge contract losses and foreign currency denominated expenses; net lower production costs; and greater relative sales of higher margin products, partly offset by the impact of lower gross profit on sales of Pourquier products and lower average unit sales prices. Comparatively lower production costs resulted partly from the unfavorable impact in the first quarter of 2007 of purchase accounting for inventory acquired in connection with the acquisition of Pourquier. Finished goods inventory acquired in connection with a business acquisition is assigned a fair value that exceeds replacement cost, which results in a low gross margin on the sale of those finished goods by the acquirer.

Other. Gross profit for Other operating units increased $1.2 million, or 63%, to $3.1 million for the three months ended March 31, 2008 from $1.9 million for the same period of the prior year due primarily to the unfavorable impact in the first quarter of 2007 of purchase accounting for inventory in connection with the acquisition of OPTI Medical. Excluding OPTI Medical, the gross profit percentage for Other operating units remained constant for the three months ended March 31, 2008 compared to the same period of the prior year.

Operating Expenses and Operating Income

Total Company. Total operating expenses increased $13.4 million, or 17%, to $91.1 million for the three months ended March 31, 2008 from $77.7 million for the same period of the prior year. As a percentage of revenue, operating expenses were constant at 37%.

Operating income increased $7.8 million, or 25%, to $38.7 million for the three months ended March 31, 2008 from $30.9 million for the same period of the prior year. As a percentage of revenue, operating income increased to 16% from 15%.

The following tables present operating expenses and operating income by operating segment:

For the Three Months Ended March 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2008				Revenue				2007				Revenue				Change				Change
CAG		$	72,430				35.6	%		$	62,745				36.2	%		$	9,685				15.4	%
Water			4,045				24.1	%			3,590				24.9	%			455				12.7	%
PAS			8,405				39.7	%			6,998				41.6	%			1,407				20.1	%
Other			3,316				44.3	%			2,327				35.8	%			989				42.5	%
Unallocated amounts			2,921				N/A				2,042				N/A				879				43.0	%
Total Company		$	91,117				36.6	%		$	77,702				36.8	%		$	13,415				17.3	%

Operating Income						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2008				Revenue				2007				Revenue				Change				Change
CAG		$	29,555				14.5	%		$	23,585				13.6	%		$	5,970				25.3	%
Water			6,270				37.3	%			5,642				39.2	%			628				11.1	%
PAS			5,828				27.5	%			3,965				23.6	%			1,863				47.0	%
Other			(189	)			(2.5	%)			(413	)			(6.4	%)			224				54.2	%
Unallocated amounts			(2,745	)			N/A				(1,902	)			N/A				(843	)			(44.3	%)
Total Company		$	38,719				15.5	%		$	30,877				14.6	%		$	7,842				25.4	%

Companion Animal Group. Operating expenses for CAG increased $9.7 million, or 15%, to $72.4 million for the three months ended March 31, 2008 from $62.7 million for the same period of the prior year and, as a percentage of revenue, were constant at 36%. The following table presents CAG operating expenses by functional area:

For the Three Months Ended March 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2008				Revenue				2007				Revenue				Change				Change
Sales and marketing		$	37,299				18.3	%		$	30,833				17.8	%		$	6,466				21.0	%
General and administrative			23,888				11.7	%			20,786				12.0	%			3,102				14.9	%
Research and development			11,243				5.5	%			11,126				6.4	%			117				1.1	%
Total operating expenses		$	72,430				35.6	%		$	62,745				36.2	%		$	9,685				15.4	%

The increase in sales and marketing expense resulted primarily from higher personnel and personnel-related costs due, in part, to expanded worldwide sales and marketing and the addition of customer service support resources. To a lesser extent, the impact of exchange rates on foreign currency denominated expenses and incremental spending on customer support related information technology initiatives also contributed to the increase in sales and marketing expense.

The increase in general and administrative expense resulted primarily from higher personnel costs due, in part, to expanded resources and spending on information technology and other general support functions and, to a lesser extent, the unfavorable impact of exchange rates on foreign currency denominated expenses and incremental expenses associated with businesses acquired subsequent to January 1, 2007, comprised mainly of administrative expenses of a recurring nature to support the acquired businesses and amortization expense for intangible assets acquired. These increases were partly offset by transaction gains realized upon settlement of foreign currency denominated liabilities and, to a lesser extent, by decreased related spending for facilities support.

The increase in research and development expense resulted primarily from higher personnel costs due, in part, to incremental new product and technology development initiatives and product enhancement efforts related primarily to IDEXX VetLab^® instrumentation, rapid assay, and digital radiography products. These increases were largely offset by a net decrease in new product development spending as we completed development of our next-generation chemistry analyzer, Catalyst Dx™, and our new quantitative immunoassay platform, SNAPshot Dx™, both of which began customer shipments at the end of the quarter, as well as lower external consulting costs incurred in our pharmaceuticals business.

Water. Operating expenses for Water increased $0.5 million, or 13%, to $4.0 million for the three months ended March 31, 2008 from $3.6 million for the same period of the prior year and, as a percentage of revenue, decreased to 24% from 25%. The following table presents Water expenses by functional area:

For the Three Months Ended March 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2008				Revenue				2007				Revenue				Change				Change
Sales and marketing		$	1,999				11.9	%		$	1,560				10.8	%		$	439				28.1	%
General and administrative			1,493				8.9	%			1,391				9.7	%			102				7.3	%
Research and development			553				3.3	%			639				4.4	%			(86	)			(13.5	%)
Total operating expenses		$	4,045				24.1	%		$	3,590				24.9	%		$	455				12.7	%

The increase in sales and marketing expense resulted primarily from higher personnel and personnel-related costs due, in part, to expanded headcount, incremental costs incurred for commissions and travel and, to a lesser extent, the impact of exchange rates on foreign currency denominated expenses. The increase in general and administrative expense resulted primarily from increased professional fees. The decrease in research and development expense is due primarily to the absence in 2008 of higher costs incurred during the first quarter of 2007 associated with support of new product development initiatives and costs incurred in 2007 related to identification of alternative raw material suppliers.

Production Animal Segment. Operating expenses for PAS increased $1.4 million, or 20%, to $8.4 million for the three months ended March 31, 2008 from $7.0 million for the same period of the prior year and, as a percentage of revenue, decreased to 40% from 42%. The following table presents PAS operating expenses by functional area:

For the Three Months Ended March 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2008				Revenue				2007				Revenue				Change				Change
Sales and marketing		$	3,398				16.1	%		$	2,384				14.2	%		$	1,014				42.5	%
General and administrative			3,126				14.8	%			2,834				16.9	%			292				10.3	%
Research and development			1,881				8.9	%			1,780				10.6	%			101				5.7	%
Total operating expenses		$	8,405				39.7	%		$	6,998				41.6	%		$	1,407				20.1	%