This Quarterly Report on Form 10-Q includes certain forward-looking statements about the business of IDEXX Laboratories, Inc. and its subsidiaries ("IDEXX" or the "Company"). Such forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to vary materially from those indicated in such forward-looking statements. These risks and uncertainties are discussed in more detail in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report.

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

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

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

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          The accompanying unaudited, consolidated financial statements of IDEXX have been prepared in accordance with generally accepted accounting principles for interim financial information and with the requirements of Form 10-Q.

          The accompanying interim consolidated financial statements reflect, in the opinion of the Company's management, all adjustments necessary for a fair presentation of the financial position and results of operations. The results of operations for the three and six month periods ended June 30, 2002 are not necessarily indicative of the results to be expected for the full year. These financial statements should be read in conjunction with the Company's 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

          The Company has reclassified prior year amounts to conform to current year presentation.

          In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for purchased goodwill from an amortization method to an impairment-only approach. Therefore amortization of all purchased goodwill, including amortization of goodwill recorded in past business combinations ceased upon adoption of SFAS No. 142. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. Early adoption of the SFAS No. 142 was not permitted nor was retroactive application to prior period (interim or annual) financial statements. The Company has assessed the provisions of SFAS No. 142 effective January 1, 2002 and ceased amortizing goodwill. The Company completed testing of goodwill for impairment on adoption and determined that no impairment occurred upon initial adoption of SFAS No. 142.

          The Company tested for impairment by comparing the carrying value of its net assets by reporting unit including goodwill to the estimated fair value of the related reporting unit. The Company estimated the fair value of its reporting units with goodwill using discounted cash flow analysis.

          Net intangible assets and goodwill amounted to $56.0 million as of June 30, 2002, consisting of $23.7 million related to veterinary laboratories (of which $23.3 million represents goodwill), $15.7 million related to water test products (of which $12.8 million represents goodwill), $14.6 million related to veterinary pharmaceutical products (of which $13.7 million represents goodwill) and $2.0 million of other (of which $1.7 million represents goodwill). The Company recorded approximately $2.5 million of goodwill amortization on these amounts during the six months ended June 30, 2001 and would have recorded approximately $2.2 million of goodwill amortization during the same period in 2002, if the existing standards had been continued. The Company recorded $0.8 million and $0.3 million of other intangible amortization during the six months ended June 30, 2001 and June 30, 2002, respectively. The Company recorded $0.3 million and $0.1 million of other intangible amortization during the three months ended June 30, 2001 and June 30, 2002, respectively.

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          Net income and earnings per share for the three months and six months ended June 30, 2001 adjusted to exclude amortization expense of goodwill (net of taxes) is as follows:

Intangible assets consist of the following (in thousands):

Amortization expense of intangible assets will be as follows (in thousands):

          In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets" ("SFAS No. 144"). Adoption of SFAS No. 144 is required for fiscal years beginning after December 15, 2001. The Company adopted the provisions of SFAS No. 144, effective January 2002. The adoption of SFAS No. 144 had no material impact on the consolidated financial statements.

          In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Nos. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). SFAS No. 145 rescinds FASB SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and an amendment of SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. Adoption of certain provi sions of SFAS No. 145 was required after May 15, 2002, while other provisions must be adopted with financial statements issued after May 15, 2002 or the year beginning after May 15, 2002. The Company does not expect adoption of SFAS No. 145 to have a material impact on its operations.

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          In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"). This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Adoption of SFAS No. 146 is required for exit or disposal activities initiated after December 31, 2002. The Company does not expect adoption of SFAS No. 146 to have material impact on its operations.

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

4.       Comprehensive Income (in thousands):

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

          Options to purchase 202,000 shares for the three months ended June 30, 2001, 309,000 shares for the six months ended June 30, 2001, 228,000 shares for the three months ended June 30, 2002 and 214,000 shares for the six months ended June 30, 2002, and warrants to purchase 806,000 shares (at $31.59 per share) have been excluded from the calculation of shares outstanding for diluted earnings per share because they were anti-dilutive. Anti-dilutive options at June 30, 2002 have a weighted average exercise price of $30.03. The weighted average price used to calculate the dilutive effect of options issued to employees was $28.63 and $27.58, respectively, for the three and six months ended June 30, 2002. During the six months ended June 30, 2002, the Company issued options to acquire 1.3 million shares with a weighted average exercise price of $26.27.

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

          The Company conducts business principally in two major operating segments, the Companion Animal Group ("CAG") and the Food and Environmental Group ("FEG"). The separate financial information of each segment is presented consistent with the way results are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in assessing performance.

          CAG develops, designs, and distributes products and performs services for veterinarians. CAG also manufactures certain biology-based test kits for veterinarians. FEG develops, designs, manufactures and distributes products to detect disease and contaminants in food animals, food and water. Both CAG and FEG distribute products and services worldwide. Other is primarily comprised of corporate research and development, CEO succession charge (See Note 9), and interest income.

          The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K except that most interest income and expense are not allocated to individual operating segments and income taxes are provided on each segment using the overall effective tax rate.

          The following is the segment information (in thousands):

          The Company's Board of Directors has approved the repurchase of up to ten million shares of the Company's Common Stock. The Company may make such purchases in the open market or in negotiated transactions. During the six months ended June 30, 2002, the Company repurchased approximately 1.0 million shares for $29.8 million. From the inception of the program to June 30, 2002, the Company had purchased 8.6 million shares for $177.3 million. In addition, during the quarter ended June 30, 2002 the Company received 36,054 shares of stock with a fair market value of $1.1 million in payment of the exercise price of outstanding stock options. The holder had previously owned the 36,054 shares for greater than six months.

          In January 2002, the Company's Founder, Chairman and Chief Executive Officer was succeeded by its current Chairman and Chief Executive Officer. Under an employment agreement, the Company is required to make certain payments to its former Chief Executive Officer and provide certain benefits to him following this succession. During the three-month periods ending March 31, 2002 and June 30, 2002, the Company incurred pre-tax charges related to this agreement of $2.9 million and $0.5 million, respectively, of which $1.8 million was non-cash.

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          We operate primarily through two business segments: the Companion Animal Group ("CAG") and the Food and Environmental Group ("FEG"). CAG comprises our veterinary diagnostic products and services, veterinary pharmaceuticals business, and veterinary information products and services. FEG comprises our services and products for water and dairy testing and our production animal services business.

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

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

          Our inventories include material, labor and overhead, and are stated at the lower of cost (first-in, first-out) or market. We write-down inventory for estimated obsolescence based upon assumptions about future demand and market conditions, which may negatively affect our ability to dispose of inventory. If actual market conditions are less favorable than those assumed by management, additional inventory write-downs may be required, which would have a negative effect on our results of operations. Certain major components of our inventory are discussed in more detail below.

          Nitazoxanide. Our nitazoxanide product for the treatment of equine protozoal myeloencephalitis ("EPM") is in registration with the U.S. Food and Drug Administration ("FDA"). We have completed the manufacturing and efficacy components of our submission, and in April 2002 we submitted the results of additional safety studies requested by the FDA. Our inventories as of June 30, 2002 included $8.5 million of inventory associated with the nitazoxanide product, consisting of $8.3 million of active ingredient and $0.2 million of other raw materials. The $8.3 million of active ingredient included in inventory at June 30, 2002 will expire in 2004. Expiration dates are based on a shelf life of 48 months from the date of manufacture for the active ingredient. Upon use of unexpired active ingredient in the manufacture of finished goods, the active ingredient shelf life is no longer relevant. The shelf life of the finished goods is measured from the date of manufacture, regardless of the age of the active ingredient used to manufacture the finished goods. The shelf life of the finished goods is currently 24 months from date of manufacture, although we anticipate, based on stability data that we have submitted to the FDA, that the shelf life of the finished goods will be extended to 36 months if and when the product is approved by the FDA.

          We evaluate our nitazoxanide inventory on a quarterly basis for realizability. In the quarter ended June 30, 2002, we incurred no further write-downs for this inventory. Our quarterly evaluation is based upon the expiration dates described, assumptions regarding the timing of FDA approval and our launch of the product and assumptions regarding sales volumes that we expect to achieve following approval and launch of the product. We believe that the product will be approved in late 2002 and launched in early 2003, that the worldwide market for EPM treatments is approximately $50 million annually, and that our nitazoxanide product will capture approximately 25-40% of that market over four years following launch. Should FDA approval be delayed beyond 2003 or should sales volumes be lower than those assumed, additional active ingredient and finished goods would expire and would need to be written off. For example, if FDA approval was obtained in late 2002, but sales volumes over the next four years were fifty percent lower than anticipated, and assuming a shelf life of 36 months for finished goods inventory, approximately $1.6 million of additional inventory would expire and require a charge to operations.

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          If we do not receive FDA approval of the nitazoxanide product, and if we then elect to terminate our license to use the active ingredient, we have the right to require our supplier to repurchase the active ingredient at a price equal to our cost. We have no assurances that our supplier has the financial ability to repurchase all of this inventory. To the extent we were unable to sell the active ingredient to our supplier, we would incur a loss in the amount of any unrecovered costs of the active ingredient. This could result in a loss of up to the full value of our net inventory, or $8.5 million as of June 30, 2002.

          VetTest® Slides. Our inventories as of June 30, 2002 included $25.7 million of slides used in our VetTest chemistry instruments, which represents approximately 1.5 turns based on recent historical usage. Most of the slides have a shelf life of 24 months at the date of manufacture. The average remaining shelf life at June 30, 2002 was 16.5 months. In addition, we are required to purchase a minimum of $268.5 million of slides over the remaining life of our contract with Ortho-Clinical Diagnostics, Inc. ("Ortho"), which expires on December 31, 2010.

          We evaluate potential losses over the life of the Ortho contract on a quarterly basis. During the quarter ended June 30, 2002, we recorded a loss on the contract of approximately $0.4 million. Our quarterly evaluation is based on an estimate of the value of slides that we are required to purchase under the contract but that will expire before sale. The estimated loss is calculated based on the expiration dating described, and an evaluation of our minimum contractual purchase obligations relative to assumptions regarding (i) the per-customer growth in demand for slides over the life of the contract, and (ii) changes over the life of the contract in the size of our installed base of VetTest customers resulting from (a) new VetTest instrument placements by us and (b) loss of customers who switch to other chemistry analyzers supplied by IDEXX or its competitors. We have assumed that unit sales of VetTest slides will grow 9% and 7% in 2002 and 200 3, respectively, over the prior years. This assumption is consistent with our data regarding growth in demand from veterinary clinics for slides during 2001 and the first six months of 2002. We also have assumed that growth rates will decline from 2004 through the end of the Ortho contract. If our assumptions regarding the per-customer demand for slides or the changes in the installed base of VetTest instruments are incorrect, we could incur additional losses beyond the amounts reserved to date, which could be material.

           LaserCyte™ hematology instrument. As of June 30, 2002, our inventories included $6.8 million of component parts associated with our LaserCyte hematology instrument, which is in the final stages of development. In addition, we have placed $0.9 million in deposits with vendors to secure additional critical components and we have firm purchase commitments of an additional $3.0 million. We expect to launch this product in the second half of 2002 and to fully realize our investment and purchase commitments. However, if we are unable to introduce this product, or if we alter the final design, we may be required to write off some or all of the associated inventory.

          The nitazoxanide, chemistry slides and LaserCyte products are included in our CAG segment.

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

          When we determine that the carrying value of intangibles, long-lived assets and goodwill may not be recoverable based on a change in events and circumstances discussed above, we measure any impairment based on factors such as projected cash flows. Net intangible assets and goodwill amounted to $56.0 million as of June 30, 2002, consisting of $23.7 million related to veterinary laboratories (of which $23.3 million represents goodwill), $15.7 million related to water test products (of which $12.8 million represents goodwill), $14.6 million related to veterinary pharmaceutical products (of which $13.7 million represents goodwill) and $2.0 million of other (of which $1.7 million represents goodwill).

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          In 2002, SFAS No. 142 became effective and as a result, we ceased to amortize goodwill, but continued to amortize all other intangibles. We had recorded approximately $2.5 million of goodwill amortization on these amounts during the six months ended June 30, 2001 and would have recorded approximately $2.2 million of goodwill amortization during the same period in 2002, if the existing standards had been continued. In addition, we recorded $0.8 million of other intangible amortization during the six months ended June 30, 2001 and $0.3 million during the six months ended June 30, 2002. In lieu of amortization, we are required to perform an initial impairment review of our goodwill in 2002 and an annual impairment review thereafter. We completed the initial impairment review and determined that no impairment occurred.

          Net income and earnings per share for the three months and six months ended June 30, 2001 adjusted to exclude amortization expense of goodwill (net of taxes) is as follows:

          We recognize product revenue at the time of shipment (including to distributors) for substantially all products except software licenses and hardware systems. We recognize revenue from non-cancelable software licenses and hardware systems upon installation of the software or hardware because at this time collection is probable and we have no significant further obligations after installation. Our distributors do not have the right to return products. Service revenue is recognized at the time the service is performed. Maintenance revenue is billed in advance and recognized over the life of the contracts, usually one year or less. Certain instrument systems are sold to a third-party finance company that leases these systems to its customers with a right-of-return privilege. We allow the third-party finance company to return these instruments to us for a partial refund based on the time from product return to end of lease term. Therefore we r ecognize revenue under these contracts over the term of the underlying customer lease contract. We record estimated reductions to revenue in connection with customer programs and incentive offerings, which may give customers future rights such as free or discounted goods or services or trade-in rights.

          We account for income taxes under SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires that we recognize a current tax liability or asset for current taxes payable or refundable and a deferred tax liability or asset for the estimated future tax effects of temporary differences and carryforwards to the extent they are realizable. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize al l or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

          We do not provide for U.S. income taxes on earnings of our subsidiaries outside of the U.S. Our intention is to reinvest these earnings permanently or to repatriate the earnings only when tax-effective to do so. It is not practical to estimate the amount of additional taxes that might be payable upon repatriation of foreign earnings.

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          We provide for the estimated cost of product warranties at the time revenue is recognized. Although we engage in extensive product quality programs and processes, our warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Should actual product failure rates or service delivery costs differ from our estimates, which are based on historical data and engineering estimates, where applicable, revisions to the estimated warranty liability would be required.

          In the second half of 2002, we expect to introduce the LaserCyte hematology instrument. We expect that sales of this system will cause warranty expense to increase significantly. We will charge warranty expense to the cost of LaserCyte sales based upon our experience with instrument sales and engineering information about the system. Should actual warranty expense exceed our estimates, our cost of sales of LaserCyte systems would increase.

          As of June 30, 2002 our U.S. veterinary diagnostic product distributors were holding $13.4 million of inventory, compared to $22.3 million of inventory as of June 30, 2001 and $22.5 million of inventory as of December 31, 2001. We have decreased the inventory levels at distributors as part of a plan to create a more efficient supply chain.

          Gross profit as a percent of CAG's revenue decreased to 45% from 46% in 2001. The decrease was attributable to a loss on currency hedge contracts versus a gain in 2001; inventory write-downs related primarily to VetTest slides; unfavorable product mix due primarily to incremental instruments cumulatively placed under rental agreements, which have lower gross margins, and to additional sales of lower margin veterinary laboratory services; and elimination of favorable purchase price variance that occurred in 2001. These decreases were partially offset by productivity improvements in cost of service in our veterinary reference laboratories and our practice management information systems businesses and by price increases in certain canine test kits and in our veterinary reference laboratory business. The provision for slide obsolescence was a result of our estimates of future loss under our supply agreement with Ortho, as discussed above.

          Operating expenses relating to CAG decreased $3.7 million, or 13% to $24.2 million from $27.9 million in 2001. The decrease was attributable to a 24% decrease in general and administrative expenses and a 12% decrease in sales and marketing expenses. The reduction in general and administrative expense was attributable to the elimination of goodwill amortization in accordance with SFAS No. 142; currency exchange gains, which are recorded as a reduction to general and administrative expense, on balances denominated in a currency other than our subsidiaries' functional currency; and recovery of bad debt provisions due to favorable receivable collection results. The reduction in sales and marketing expenses was a result of higher expenses in 2001 associated primarily with a marketing program related to our feline test kits, and of the elimination of a dedicated pharmaceutical sales force, partially offset by higher sales commissions in 2002.

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          Gross profit as a percent of CAG revenue decreased to 43% from 46% in 2001. The decrease was attributable to inventory write-downs related primarily to VetTest and QBC®VetAutoread ™ instruments and related parts and VetTest slides as discussed above; a loss on foreign currency hedge contracts versus a gain in 2001; unfavorable product mix due to incremental instruments in our rental program as discussed above and additional sales of our lower margin laboratory services; and elimination of favorable purchase price variance that occurred in 2001. The decreases were partially offset by productivity improvements in cost of service in the veterinary reference laboratories and practice management information systems businesses.

            Operating expenses relating to CAG decreased $6.7 million, or 12% to $47.9 million from $54.6 million in 2001. The decrease was due to a 20% decrease in general and administrative expense, a 10% decrease in sales and marketing expense and a 5% decrease in research and development expense. The reduction in general and administrative expense was attributable to the elimination of goodwill amortization in accordance with SFAS No. 142; currency exchange gains, which are recorded as a reduction to general and administrative expense, on balances denominated in a currency other than our subsidiaries' functional currency; and the recovery of bad debt provisions due to favorable receivable collection results. The decrease in sales and marketing expense was attributable to higher 2001 expenses associated with the feline test kit marketing program discussed above and the launch of our ACAREXX™ treatment for ear mites in 2001, and to el imination of a dedicated pharmaceutical sales force in the third quarter of 2001. The decrease in research and development expenses was due to reduced expenses in each major product line within CAG.

          Gross profit as a percent of FEG's revenue decreased to 55% from 58% in 2001. The decrease was attributable primarily to a write-down of excess Parallux® dairy testing instruments and related parts and to unfavorable manufacturing variances related to the poultry and livestock and the dairy product lines due to product obsolescence and scrap. These decreases were partially offset by price increases in water testing products and poultry and livestock product lines and favorable product mix that resulted from higher sales of poultry and livestock products.

          Operating expenses relating to FEG decreased $0.2 million, or 3% to $5.7 million from $5.9 million in 2001. The decrease was due to a 10% decrease in general and administrative expense and a 2% decrease in research and development expense. The decrease in general and administrative expense was attributable to the elimination of goodwill amortization in accordance with SFAS No. 142 and the recovery of bad debt provisions due to favorable receivable collection results. The decrease in research and development expense was attributable to a decrease in expenses associated with the dairy t