UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended December 31, 2009

or

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

For the transition period from                      to                     .

COMMISSION FILE NUMBER: 0-19271

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)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Name of each exchange on which registered
Common Stock, $0.10 par value per share		NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

Based on the closing sale price on June 30, 2009 of the registrant’s Common Stock as reported by the NASDAQ Global Market, the aggregate market value of the voting stock held by non-affiliates of the registrant was $2,690,802,946. For these purposes, the registrant considers its Directors and executive officers to be its only affiliates.

The number of shares outstanding of the registrant’s Common Stock was 58,061,319 on February 12, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Part III—Specifically identified portions of the Company’s definitive proxy statement to be filed in connection with the Company’s 2010 Annual Meeting to be held on May 5, 2010, are incorporated herein by reference.

 

 

IDEXX LABORATORIES, INC.
Annual Report on Form 10-K
Table of Contents

Item No.		Page No.
PART I
Item 1 Business			3
Item 1A Risk Factors			12
Item 1B Unresolved Staff Comments			17
Item 2 Properties			18
Item 3 Legal Proceedings			18
Item 4 Submission of Matters to a Vote of Security Holders			18
PART II
Item 5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			21
Item 6 Selected Financial Data			25
Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 7A Quantitative and Qualitative Disclosure about Market Risk			52
Item 8 Financial Statements and Supplementary Data			53
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			53
Item 9A Controls and Procedures			53
Item 9B Other Information			54
PART III
Item 10 Directors, Executive Officers and Corporate Governance			54
Item 11 Executive Compensation			54
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			55
Item 13 Certain Relationships and Related Transactions and Director Independence			55
Item 14 Principal Accountant Fees and Services			55
PART IV
Item 15 Exhibits, Financial Statement Schedules			55
Signatures			56
Financial Statements and Supplementary Data — Index to Consolidated Financial Statements			F-1
Exhibit Index
Exhibit 10.21
Exhibit 10.24
Exhibit 21
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Form 10-K contains statements which, to the extent they are not statements of historical or present fact, constitute “forward-looking statements.” 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, include statements relating to future revenue growth rates, earnings and other measures of financial performance; the effect of economic downturns on our business performance; demand for our products; realizability of assets; future cash flow and uses of cash; future repurchases of common stock; future levels of indebtedness and capital spending; warranty expense; share-based compensation expense; and competition. Forward-looking statements can be identified by the use of words such as “expects,” “may,” “anticipates,” “intends,” “would,” “will,” “plans,” “believes,” “estimates,” “should,” and similar words and expressions. These forward-looking statements are intended to provide 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 I, Item 1A. Risk Factors” in this Annual Report on Form 10-K. The risks and uncertainties discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. In addition, any forward-looking statements represent our estimates only as of the day this annual 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. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. 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.

PART I

ITEM 1. BUSINESS

We develop, manufacture and distribute products and provide services primarily for the veterinary and the production animal, water testing and dairy markets. We also sell a line of portable electrolytes and blood gas analyzers for the human point-of-care medical diagnostics market. Our primary products and services are:

•

Point-of-care veterinary diagnostic products, comprising rapid assays, and instruments and consumables;

•

Veterinary laboratory diagnostic and consulting services used by veterinarians;

•

Practice information systems and services, and digital radiography systems used by veterinarians;

•

Diagnostic and health-monitoring products for production animals;

•

Products that test water for certain microbiological contaminants;

•

Products that test milk for antibiotic residues and other contaminants; and

•

Point-of-care electrolytes and blood gas analyzers used in the human point-of-care medical diagnostics market.

In the fourth quarter of 2008, we sold our Acarexx^® and SURPASS^® veterinary pharmaceutical products and a product under development. Upon completion of this transaction we restructured the remaining pharmaceutical division and realigned the remaining pharmaceutical product lines to other business units. We retained certain drug delivery technologies that we will seek to commercialize through agreements with third parties such as pharmaceutical companies. See Note 19 to the consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K.

We are a Delaware corporation and were incorporated in 1983. Our principal executive offices are located at One IDEXX Drive, Westbrook, Maine 04092, our telephone number is 207-556-0300, and our Internet address is www.idexx.com. References herein to “we,” “us,” the “Company,” or “IDEXX” include our wholly-owned subsidiaries unless the context otherwise requires. References to our Web site are inactive textual references only and the content of our Web site should not be deemed incorporated by reference into this Form 10-K for any purpose.

We make available free of charge on our Web site our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after we file such information with, or furnish it to, the Securities and Exchange Commission (“SEC”). In addition, copies of our reports filed electronically with the SEC may be accessed on the SEC’s Web site at www.sec.gov. The public may also read and copy any materials filed with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

DESCRIPTION OF BUSINESS BY SEGMENT

During 2009, we operated primarily through three business segments: diagnostic and information technology 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 our Production Animal Segment (“PAS”). We also operate two smaller operating segments that comprise products for dairy quality (“Dairy”) and products for the human point-of-care medical diagnostics market (“OPTI Medical”). In connection with the restructuring of our pharmaceutical division at the end of 2008, we realigned two of our remaining product lines to the Rapid Assay line of business, which is part of our CAG segment, and realigned the remainder of the products, which comprised one product line and two out-licensing arrangements, to the “Other” category. Financial information about the Dairy and OPTI Medical operating segments and other licensing arrangements are combined and presented in an “Other” category because they do not meet the quantitative or qualitative thresholds for reportable segments. Segment information presented for the year ended December 31, 2007 has been restated to conform to our presentation of reportable segments for the years ended December 31, 2009 and 2008. See Note 13 to the consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K for financial information about our segments, including geographic information, and about our product and service categories.

COMPANION ANIMAL GROUP

Instruments and Consumables

We currently market an integrated suite of in-clinic laboratory analyzers for use in providing laboratory diagnostic information in companion animal veterinary practices that we refer to as the IDEXX VetLab^® suite of analyzers. The IDEXX VetLab^® suite includes several instrument systems, as well as associated proprietary consumable products, all of which are described below:

Blood and Urine Chemistry.

We sell two chemistry analyzers, the Catalyst Dx^® Chemistry Analyzer and the VetTest^® Chemistry Analyzer, that are used by veterinarians to measure levels of certain enzymes and other substances in blood or urine for assistance in diagnosing physiologic conditions. Both instruments use consumables manufactured for IDEXX by Ortho-Clinical Diagnostics, Inc. (“Ortho”), a subsidiary of Johnson & Johnson, based on Ortho’s dry slide technology (“dry chemistry slides,” “Catalyst Dx^® slides,” “VetTest^® slides” or “slides”). In addition to dry chemistry slides, the Catalyst Dx^® analyzer also uses electrolyte consumables manufactured by IDEXX at OPTI Medical. Blood tests commonly run on these analyzers include glucose, alkaline phosphatase, ALT (alanine aminotransferase), creatinine, BUN (blood urea nitrogen), and total protein. Tests are sold individually and in prepackaged panels. Both analyzers also run a urine test called urine protein:creatinine ratio, which assists in the detection of early renal disease.

The Catalyst Dx^® analyzer is our latest generation chemistry analyzer, which was launched in the first quarter of 2008. The Catalyst Dx^® analyzer provides significantly improved throughput, ease of use and menu relative to the VetTest^® analyzer, including the ability to run electrolytes. Key ease-of-use features include the ability to run whole blood by way of an on-board centrifuge, the ability to run pre-packaged clips in addition to single chemistry slides, and an automated metering system. The Catalyst Dx^® analyzer also has the ability to run automated dilutions, which is an ease-of-use feature both for certain blood chemistries and the test for urine protein:creatinine ratio. The Catalyst Dx^® analyzer allows a veterinarian to run multiple patient samples simultaneously; to run different sample types including whole blood, plasma, serum and urine; to perform 27 different chemistry and electrolyte parameter tests; and to automatically calculate other parameters and ratios important to blood chemistry analysis.

Our VetLyte^® Electrolyte Analyzer measures three electrolytes—sodium, potassium and chloride—to aid in evaluating acid-base and electrolyte balances and assessing plasma hydration.

Our VetStat^® Electrolyte and Blood Gas Analyzer measures electrolytes, blood gases, glucose and ionized calcium, and calculates other parameters, such as base excess and anion gap. These measurements aid veterinarians in diagnosing various disease states, evaluating fluid therapy choices and measuring respiratory function. The VetStat^® analyzer runs single-use disposable cassettes that contain various configurations of analytes. The VetStat^® analyzer and its cassettes are manufactured by OPTI Medical.

Sales of consumables for use in our installed base of chemistry analyzers provide the majority of consumables volumes and revenues generated from our installed base of IDEXX VetLab^® equipment.

Hematology. We sell three hematology analyzers: the LaserCyte^® Hematology Analyzer, which uses laser-flow cytometry technology to analyze cellular components of blood, including red blood cells, white blood cells and platelets (also called a complete blood count (“CBC”)); the Coag Dx^™ Analyzer, which permits the detection and diagnosis of blood clotting disorders; and the IDEXX VetAutoread^™ Hematology Analyzer, which also provides a CBC.

Quantitative Immunoassay Testing. In the first quarter of 2008, we launched the SNAPshot Dx^® Analyzer, which automates SNAP^® testing for veterinarians by significantly improving ease of use, throughput and test menu, relative to the previous generation IDEXX SNAP^® Reader. The SNAPshot Dx^® analyzer obtains quantitative measurements of total thyroxine (“T₄”), cortisol and bile acids, which assists in the evaluation of thyroid, adrenal and liver function, and offers multiple-patient testing functionality. The SNAPshot Dx^® analyzer also reads, interprets and records the results of certain IDEXX rapid assay SNAP^® tests, including our SNAP^®4Dx^® Test, feline SNAP^® FIV/FeLV Combo Test and canine SNAP^® cPL^™ Test.

Urinalysis. The IDEXX VetLab^® UA^™ Analyzer provides rapid, semi-quantitative urinalysis and is validated specifically for veterinary use.

IDEXX VetLab^® Station. The IDEXX VetLab^® Station (“IVLS”) connects and integrates the diagnostic information from all the IDEXX VetLab^® equipment and thus provides laboratory information management system capability. We sell the IVLS as an integral component of the Catalyst Dx^® and LaserCyte^® systems and also as a standalone hardware platform. The IVLS includes a user interface to input patient information, connect with a practice management information system and send information to run the individual analyzers. IVLS also generates one integrated patient report for the lab work generated by the IDEXX VetLab^® suite; stores, retrieves and analyzes historical patient diagnostics data, including SNAP^® test results; and sends and receives information from practice information management systems, including IDEXX Cornerstone^® and Better Choice^® systems, as well as a wide variety of third-party systems.

Rapid Assays

We provide a broad range of single-use, handheld test kits under the SNAP^® name that allow quick, accurate and convenient diagnostic test results for a variety of companion animal diseases and health conditions. These kits work without the use of instrumentation, although certain kits may also be read automatically by the SNAPshot Dx^® analyzer.

Principal single-use canine tests include:

•

SNAP® 3Dx®, which tests for Lyme disease, Ehrlichia canis and heartworm;

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SNAP® 4Dx®, which adds a test for Anaplasma phagocytophilum to what is tested by SNAP® 3Dx®;

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SNAP® Heartworm RT, which tests only for canine heartworm;

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SNAP® Parvo, which tests for parvovirus;

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SNAP® cPL™, which tests for canine pancreatitis; and

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SNAP® Giardia, which is a fecal test for soluble Giardia antigens

Principal single-use feline tests include:

•

SNAP® FIV/FeLV Combo Test, which tests for feline immunodeficiency virus (“FIV”) (which is similar to the human AIDS virus) and feline leukemia virus (“FeLV”);

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SNAP® Feline Triple®, which tests for FIV, FeLV and feline heartworm;

•

SNAP® FeLV, which tests only for FeLV; and

•

SNAP® Giardia, which is a fecal test for soluble Giardia antigens

Sales of canine parasite tests (including SNAP^® 3Dx^®, SNAP^® 4Dx^®, and SNAP^® Heartworm RT), are greater in the first half of our fiscal year due to seasonality of disease testing in the veterinary practice.

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

Veterinary Laboratory Diagnostic and Consulting Services

We offer commercial veterinary laboratory diagnostic and consulting services to veterinarians in the U.S., Canada, Europe, Australia, Japan, and South Africa. Veterinarians use our services by submitting samples by courier or overnight delivery to one of our facilities. Most test results have same-day or next-day turnaround times. Our laboratories offer a large selection of tests and diagnostic panels to detect a number of disease states and other conditions in companion and production animals, including virtually all tests that can be run in-clinic at the veterinary practice with our instruments or rapid assays. This menu of tests also includes a number of specialized and proprietary tests that we have developed that allow practitioners to diagnose increasingly relevant diseases in dogs and cats, including heart disease, pancreatitis and certain infectious diseases.

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

Practice Information Systems and Digital Radiography

Practice Information Systems and Services. We develop, market and sell practice information systems, including hardware and software, that run key functions of veterinary clinics, including managing patient electronic health records, scheduling (including boarding and grooming), billing and inventory management. Our principal system is the Cornerstone^® system. We also support several legacy systems installed with our customers, including IDEXX Better Choice^®, IDEXX VPM^™ and IDEXX VetLINK^®. Additionally, we provide software and hardware support to our practice information system customers, and related supplies and services to veterinary practice information system users in general, and we derive a significant portion of our revenues for this product line from ongoing service contracts.

Digital Radiography Systems and Services. Our digital radiography systems capture radiograph images in digital form, replacing traditional x-ray film. Use of digital radiography systems eliminates the need for the film and processor, hazardous chemicals, and darkroom required for the production of film images, and provides for image manipulation and enhancement through contrast management. We market and sell three digital radiography systems: the IDEXX-DR^™ 1417 and the IDEXX-CR^™ 1417 systems for use in the small animal (e.g., dog and cat) veterinary hospital, and the IDEXX EquiView^® DR system for use as a portable unit in ambulatory veterinary practices, such as equine practices. Our digital radiography systems use IDEXX-PACS^™ and IDEXX EquiView PACS^™ picture archiving and communication system (“PACS”) software for the viewing, manipulation, management, storage and retrieval of the digital images generated by the digital capture plate. The PACS software also permits images from our digital radiography systems to be integrated into patients’ medical records in the Cornerstone^® system, as well as transferred to other practice information management systems.

WATER

We offer a range of products used in the detection of various microbiological analytes in water.

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

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

Our Filta-Max^® and Filta-Max xpress^® products are used in the detection of Cryptosporidium in water. Cryptosporidium is a parasite that can cause potentially fatal gastrointestinal illness if ingested.

We also distribute certain water testing kits manufactured by Life Technologies Corporation that complement our Cryptosporidium and Giardia testing products.

PRODUCTION ANIMAL SEGMENT

We sell diagnostic tests and related instrumentation that are used to detect a wide range of diseases and to monitor health status in production animals. Our production animal products are purchased primarily by government laboratories and by cattle, swine and poultry producers. Our largest product is a post-mortem test for bovine spongiform encephalopathy (“BSE” or “mad cow disease”). Effective January 1, 2009, the age at which healthy cattle to be slaughtered are required to be tested for BSE in the European Union was increased from 30 months to 48 months, which has been estimated to reduce the population of cattle tested by approximately 30%. We may lose sales of post-mortem tests for BSE in the future as a result of this regulatory change.

OTHER

Dairy

Our principal product for use in testing for antibiotic residue in milk is the SNAP^® Beta-Lactam test. Our primary customers are dairy producers and processors worldwide who use our tests for quality assurance of raw milk. We also sell a SNAP^® test for the detection of the chemical melamine in milk.

OPTI Medical Systems

We sell OPTI^® point-of-care analyzers and related consumables for use in human medical hospitals and clinics to measure electrolytes, blood gases, acid-base balance, glucose and ionized calcium, and to calculate other parameters such as base excess and anion gap. These analyzers are used primarily in emergency rooms, operating rooms, cardiac monitoring areas and any locations where time-critical diagnostic testing is performed within the hospital setting. The OPTI^® CCA and OPTI^® Touch Electrolyte and Blood Gas Analyzers run single-use disposable cassettes that contain various configurations of analytes; the OPTI^® R Analyzer runs reusable cassettes in various analyte configurations; and the OPTI^® LION Stat Electrolyte Analyzer runs single-use electrolyte cassettes. OPTI Medical Systems also supplies our VetStat^® analyzer and additionally, provides the electrolyte module and dry slide reagents that make up the electrolyte testing functionality of the Catalyst Dx^® analyzer.

Other Activities

In connection with the restructuring of our pharmaceutical product line at the end of 2008, we realigned two of our remaining product lines to the Rapid Assay line of business, which is part of our CAG segment, and realigned the remainder of the products, which comprises one product line and two out-licensing arrangements, from the pharmaceutical division to the Other category. The financial impacts of the product line and out-licensing arrangements have been shown in the Other category for 2009 and 2008. The segment information for the year ended December 31, 2007 has been restated to conform to our presentation of reportable segments for the year ended December 31, 2009 and 2008.

When a research and development program materializes into a product or service offering that does not align with one of our existing product or service categories, the related financial impacts are shown in the Other category.

UNALLOCATED AMOUNTS

Items that are not allocated to our operating segments are comprised primarily of corporate research and development expenses that do not align with one of our existing product or service categories, a portion of share-based compensation expense, interest income and expense, and income taxes. We estimate our share-based compensation expense for the year and allocate the estimated 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 resulting in an unallocated amount reported under the caption “Unallocated Amounts.”

We maintain active research and development programs, some of which may materialize into the development and introduction of new technology, products or services. Research and development costs incurred that are not specifically allocated to one of our existing product or service categories are reported under the caption “Unallocated Amounts.”

MARKETING AND DISTRIBUTION

We market, sell and service our products worldwide through our marketing, sales and technical service groups, as well as through independent distributors and other resellers. We maintain sales offices outside the U.S. in Australia, Canada, China, France, Germany, Italy, Japan, the Netherlands, Spain, Switzerland, Taiwan and the United Kingdom. Sales and marketing expense was $167.7 million, $170.0 million and $151.9 million in 2009, 2008 and 2007, respectively, or 16.3% of sales in 2009, 16.6% of sales in 2008, and 16.5% of sales in 2007.

Generally, we select the appropriate distribution channel for our products based on the type of product, technical service requirements, number and concentration of customers, regulatory requirements and other factors. We market our companion animal diagnostic products to veterinarians both directly and through independent veterinary distributors in the U.S., with most instruments sold directly by IDEXX sales personnel, and rapid assay test kits and instrument consumables supplied primarily by the distribution channel. Outside the U.S., we sell our companion animal diagnostic products through our direct sales force and, in certain countries, through distributors and other resellers. We sell our veterinary laboratory diagnostic and consulting services worldwide through our direct sales force. We market our software and digital radiography products through our direct sales force and through distributors primarily in the U.S. We market our water, production animal and dairy products primarily through our direct sales force in the U.S. and Canada. Outside the U.S. and Canada, we market these products through selected independent distributors and, in certain countries, through our direct sales force. We sell our OPTI^® electrolyte and blood gas analyzers both directly and through independent human medical product distributors in the U.S. and we sell most of the related consumables through the distribution channel. Outside the U.S., we sell our OPTI^® products primarily through distributors and other resellers.

Our largest customers are our U.S. distributors of our products in the CAG segment. One of our CAG distributors, Butler Animal Health Supply, LLC (“Butler”), accounted for 7% of our 2009 revenue and 8% of our 2008 and 2007 revenue. Butler accounted for 4% of our net accounts receivable at December 31, 2009 and 5% of our net accounts receivable at December 31, 2008 and 2007. In December 2009, Butler combined with the U.S. animal health business of Henry Schein, Inc. (“Schein”) to form Butler Schein Animal Health. Schein accounted for 3% of our 2009, 2008 and 2007 revenue and 2% of our net accounts receivable at December 31, 2009, 2008 and 2007.

RESEARCH AND DEVELOPMENT

Our business includes the development and introduction of new products and services and may involve entry into new business areas. We maintain active research and development programs in each of our business areas. Our research and development expenses, which consist of salaries, employee benefits, materials and consulting costs, were $65.1 million, $70.7 million and $67.3 million in 2009, 2008 and 2007, respectively, or 6.3% of sales in 2009, 6.9% of sales in 2008, and 7.3% of sales in 2007.

PATENTS AND LICENSES

We actively seek to obtain patent protection in the U.S. and other countries for inventions covering our products and technologies. We also license patents and technologies from third parties.

Important patents and licenses include:

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Exclusive licenses from Tulane University and the University of Texas to patents and patent applications relating to the detection of Lyme disease that expire beginning in 2019;

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A patent concerning the Colilert®-18 product that expires in 2014;

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A patent concerning the Quanti-Tray® product that expires in 2014;

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A patent that relates to certain methods and kits for simultaneously detecting antigens and antibodies, which covers certain of our SNAP® products, including our canine and feline combination tests, that expires in 2014;

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Patents covering various reagents, kits and/or immunoassays for detecting FIV antibodies that expire beginning in 2014;

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An exclusive license from Boehringer Ingelheim to certain patents covering reagents and methods for detecting Porcine Reproductive and Respiratory Syndrome that expire beginning in 2012; and

•

An exclusive license from Cornell University to patents covering methods for detecting Bovine Viral Diarrhea Virus that expire beginning in 2017.

To the extent some of our products may now, or in the future, embody technologies protected by patents, copyrights or trade secrets of others, we may be required to obtain licenses to such technologies in order to continue to sell our products. These licenses may not be available on commercially reasonable terms or at all. Our failure to obtain any such licenses may delay or prevent the sale of certain new or existing products. See “Part I, Item 1A. Risk Factors.”

PRODUCTION AND SUPPLY

Many of the instruments that we sell are manufactured by third parties and we rely on third parties to supply us with certain important components, raw materials and consumables used in or with our products. In some cases these third parties are sole or single source suppliers.

Significant products supplied by third parties include VetTest^® analyzers and consumables, Catalyst Dx^® consumables (other than electrolyte consumables), and VetAutoread^™, VetLyte^® and Coag Dx^™ analyzers and consumables.

VetTest^® slides and Catalyst Dx^® chemistry slides are supplied by Ortho under supply agreements that expire in 2025. We are required to purchase all of our requirements for our current menu of VetTest^® slides and Catalyst Dx^® chemistry slides from Ortho to the extent Ortho is able to supply those requirements.

Other analyzers and consumables are purchased under supply agreements with terms ranging from 1 year to 14 years, which in some cases may be extended at our option. We have minimum purchase obligations under some of these agreements, and our failure to satisfy these obligations may result in loss of some or all of our rights under these agreements or require us to compensate the supplier. See “Part I, Item 1A. Risk Factors.”

We purchase certain other products, raw materials and components from a single supplier. These products include certain digital radiography systems and certain components used in our SNAP^® rapid assay and dairy devices, production animal testing kits, water testing products, and blood analyzers, including our LaserCyte^® analyzers.

We have in the past been successful in ensuring an uninterrupted supply of products purchased from single source suppliers. However, there can be no assurance that uninterrupted supply can be maintained if these agreements terminate for any reason or our suppliers otherwise are unable to satisfy our requirements for products. See “Part I, Item 1A. Risk Factors.”

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

COMPETITION

We face intense competition within the markets in which we sell our products and services. This competition is intensifying, as some of our competitors have expanded the range of products and services offered to the companion animal veterinary market and expanded the geographic scope of their operations. In addition, we expect that we will have to compete with changing technologies, which could affect the marketability of our products and services. Our competitive position also will depend on our ability to develop proprietary or highly differentiated products, integrate our products, develop and maintain effective sales channels, attract and retain qualified scientific and other personnel, develop and implement production and marketing plans, obtain or license patent rights, and obtain adequate capital resources.

We compete with many companies ranging from large human medical diagnostics companies to small businesses focused on animal health. Several large human diagnostic companies are indirect competitors in that they have partnered with veterinary-focused companies to provide their products and technologies to our markets. Our companion animal veterinary diagnostic products and services compete with both laboratory service and in-clinic product providers. Our competitors vary in our different markets. In some markets, academic institutions, governmental agencies and other public and private research organizations conduct research activities and may commercialize products, which could compete with our products, on their own or through joint ventures. Several of our direct and indirect competitors have substantially greater capital, manufacturing, marketing, and research and development resources than we do.

Competitive factors in our different business areas are detailed below:

•

Veterinary diagnostic, water, production animal and dairy testing products. We compete primarily on the basis of the ease of use, speed, accuracy, quality of the information provided, and other performance characteristics of our products and services (including unique tests), the breadth of our product line and services, the effectiveness of our sales and distribution channels, the quality of our technical and customer service, and our pricing relative to the value of our products in comparison with competitive products and services.

•

Veterinary laboratory diagnostic and consulting services. We compete primarily on the basis of quality, consistency of service levels, technology, and our pricing relative to the value of our services in comparison with competitive products and services. We compete in most geographic locations in North America with Antech Diagnostics, a unit of VCA Antech, Inc.

•

Practice information management and digital radiography systems. We compete primarily on the basis of functionality, connectivity to equipment and other systems, performance characteristics, effectiveness of our customer service, information handling capabilities, advances in technologies, and our pricing relative to the value of our products and services.

•

Electrolyte and blood gas analyzers for the human point-of-care medical diagnostics market. We compete primarily with large human medical diagnostics companies such as Radiometer A/S, Siemens Medical Solutions Diagnostics, Instrumentation Laboratory, Abbott Diagnostics, and Roche Diagnostics. We compete primarily on the basis of the ease of use, menu, convenience, international distribution and service, instrument reliability, and our pricing relative to the value of our products.

GOVERNMENT REGULATION

Many of our products are subject to comprehensive regulation by U.S. and foreign regulatory agencies that relate to, among other things, product approvals, manufacturing, marketing and promotion, recordkeeping, testing, quality, storage, and product disposal. The following is a description of the principal regulations affecting our businesses.

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

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

These instrument systems also are subject to the European Medical Device Directives, which create a single set of medical device regulations for all European Union (“EU”) member countries and require companies that wish to manufacture and distribute medical devices in EU member countries to obtain European Conformity (“CE”) marking for their products.

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

Dairy testing products. Dairy products used in National Conference on Interstate Milk Shipments (“NCIMS”) milk-monitoring programs are regulated by the FDA. Before products requiring FDA approval can be sold in the U.S., extensive product performance data must be submitted in accordance with an FDA approved protocol administered by AOAC Research Institute (“AOAC RI”). Following approval of a product by the FDA, the product must also be approved by NCIMS, an oversight body that includes state, federal and industry representatives. Our SNAP^® Beta-Lactam dairy antibiotic residue testing product has been approved by the FDA, NCIMS and AOAC RI. While some foreign countries accept AOAC RI approval as part of their regulatory approval process, many countries have separate regulatory processes.

Human point-of-care electrolyte and blood gas analyzers. Our OPTI^® instrument systems are classified as Class II medical devices, and their design, manufacture and marketing are regulated by the FDA. Accordingly, we must comply with cGMP in the manufacture of our OPTI^® products. The FDA’s Quality System regulations further set forth standards for product design and manufacturing processes, require the maintenance of certain records, and provide for inspections of our facilities by the FDA. New OPTI^® products fall into FDA classifications that require notification of and review by the FDA before marketing, submitted as a 510(k) application.

OPTI^® products are also subject to the European Medical Device Directives and regulations governing the manufacture and marketing of medical devices in other countries in which they are sold.

Any acquisitions of new products and technologies may subject us to additional areas of government regulation. These may involve food, medical device and water-quality regulations of the FDA, the EPA and the USDA, as well as state, local and foreign governments. See “Part I, Item 1A. Risk Factors.”

EMPLOYEES

At December 31, 2009, we had approximately 4,800 full-time and part-time employees.

ITEM 1A. RISK FACTORS

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

Our Failure to Successfully Execute Certain Strategies Could Have a Negative Impact on Our Growth and Profitability

The companion animal health care industry is highly competitive and we anticipate increased competition from both existing competitors and new market entrants. Our ability to maintain or enhance our historical growth rates and our profitability depends on our successful execution of many elements of our strategy, which include:

•

Developing, manufacturing and marketing innovative new in-clinic laboratory analyzers that drive sales of IDEXX VetLab® instruments, grow our installed base of instruments, and create a recurring revenue stream from consumable products;

•

Developing and introducing new proprietary diagnostic tests and services that provide valuable medical information to our customers and effectively differentiate our products and services from those of our competitors;

•

Achieving the benefits of economies of scale in our worldwide network of laboratories;

•

Increasing the value to our customers of our companion animal products and services by enhancing the integration of these products and managing the diagnostic information derived from our products;

•

Growing our market share by strengthening our sales and marketing activities both within the U.S. and in geographies outside of the U.S.; and

•

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

If we are unsuccessful in implementing some or all of these strategies, our rate of growth or profitability may be negatively impacted.

Our Dependence on a Limited Number of Suppliers Could Limit Our Ability to Sell Certain Products or Reduce Our Profitability

We currently purchase many products and materials from sole or single sources. Some of the products that we purchase from these sources are proprietary, and, therefore, cannot be readily or easily replaced by alternative sources. These products include our VetAutoread^™ hematology, VetLyte^® electrolyte, IDEXX VetLab^® UA^™ urinalysis, VetTest^® chemistry, and Coag Dx^™ blood coagulation analyzers and related consumables and accessories; image capture plates used in our digital radiography systems; and certain components and raw materials used in our SNAP^® rapid assay devices, water testing products, dairy testing products and LaserCyte^® hematology analyzers. To mitigate risks associated with sole and single source suppliers we generally enter into long-term contracts that ensure an uninterrupted supply of products at predictable prices. However, there can be no assurance that suppliers will not experience disruptions in their ability to supply products under our contracts, or that suppliers will always fulfill their obligations

under these contracts. In addition, under some of these agreements we have minimum purchase obligations and our failure to satisfy those obligations may result in loss of some or all of our rights under these agreements or require us to compensate the supplier. Also, in some cases we purchase sole and single source products or components under short-term contracts or purchase orders. In these cases we are more susceptible to unanticipated cost increases or changes in other terms of supply and to the risk that a supplier will not fulfill our requirements for products. If we are unable to obtain adequate quantities of these products in the future, we may be unable to supply the market, which would have a material adverse effect on our results of operations.

Our Biologic Products Are Complex and Difficult to Manufacture, Which Could Negatively Affect Our Ability to Supply the Market

Many of our rapid assay and production animal diagnostic products are biologics, which are products that are comprised of materials from living organisms, such as antibodies, cells and sera. Manufacturing biologic products is highly complex. Unlike products that rely on chemicals for efficacy (such as most pharmaceuticals), biologics are difficult to characterize due to the inherent variability of biological input materials. Difficulty in characterizing biological materials or their interactions creates greater risk in the manufacturing process. There can be no assurance that we will be able to maintain adequate sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy applicable product release criteria. Our inability to produce or obtain necessary biological materials or to successfully manufacture biologic products that incorporate such materials could result in our inability to supply the market with these products, which could have a material adverse effect on our results of operations.

A Weak Economy Could Result in Reduced Demand for Our Products and Services

A substantial percentage of our sales are made worldwide to the companion animal veterinary market. Demand for our companion animal diagnostic products and services is driven in part by the number of pet visits to veterinary hospitals and the practices of veterinarians with respect to diagnostic testing. Economic weakness in our significant markets has caused and could continue to cause pet owners to skip or defer visits to veterinary hospitals or could affect their willingness to treat certain pet health conditions, approve certain diagnostic tests, or continue to own a pet. In addition, concerns about the financial resources of pet owners could cause veterinarians to be less likely to recommend certain diagnostic tests and concerns about the economy may cause veterinarians to defer purchasing capital items such as our instruments. A decline in pet visits to the hospital, in the willingness of pet owners to treat certain health conditions or approve certain tests, in pet ownership, or in the inclination of veterinarians to recommend certain tests or make capital purchases could result in a decrease in sales of diagnostic products and services.

Disruption in Financial and Currency Markets Could Have a Negative Effect on Our Business

Over the past 18 months, financial markets in the U.S., Europe, Australia and Asia have experienced extreme disruption, including, among other things, volatility in exchange rates and security prices, diminished liquidity and credit availability, rating downgrades of certain investments and declining valuations of others. These economic developments affect businesses such as ours in a number of ways. The current tightening of credit in financial markets may adversely affect the ability of customers to obtain financing for significant purchases and operations and could result in a decrease in orders for our products and services. The inability of pet owners to obtain consumer credit could lead to a decline in pet visits to the veterinarian, which could result in a decrease in diagnostic testing. Likewise, a decrease in diagnostic testing could negatively impact the financial condition of the veterinary practices that are our customers, which may inhibit their ability to pay us amounts owed for products delivered or services provided. In addition, although current economic conditions have not impacted our ability to access credit markets and finance our operations, further deterioration in financial markets could adversely affect our access to capital. We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic conditions in the U.S. and other countries.

Strengthening of the Rate of Exchange for the U.S. Dollar Has a Negative Effect on Our Business

Strengthening of the rate of exchange for the U.S. dollar against the Euro, the British Pound, the Canadian Dollar, the Japanese Yen and the Australian Dollar adversely affects our results, as it reduces the dollar value of sales that are made in those currencies and reduces the margins on products manufactured in the U.S. and exported to international markets. For the year ended December 31, 2009, approximately 24% of IDEXX sales were derived from products manufactured in the U.S. and sold internationally in local currencies.

Various Government Regulations Could Limit or Delay Our Ability to Market and Sell Our Products

In the U.S., the manufacture and sale of our products are regulated by agencies such as the USDA, the FDA and the EPA. Most diagnostic tests for animal health applications, including our canine, feline, poultry and livestock tests, must be approved by the USDA prior to sale in the U.S. Our water testing products must be approved by the EPA before they can be used by customers in the U.S. as a part of a water quality monitoring program required by the EPA. Our dairy testing products require approval by the FDA. The manufacture and sale of our OPTI^® line of human point-of-care electrolytes and blood gas analyzers are regulated by the FDA and these products require approval by the FDA before they may be sold commercially in the U.S. The manufacture and sale of our products are subject to similar laws in many foreign countries. Any failure to comply with legal and regulatory requirements relating to the manufacture and sale of our products in the U.S. or in other countries could result in fines and sanctions against us or suspensions or discontinuations of our ability to manufacture or sell our products, which could have a material adverse effect on our results of operations. In addition, delays in obtaining regulatory approvals for new products or product upgrades could have a negative impact on our growth and profitability.

In January 2010, we received a letter from the U.S. Federal Trade Commission (“FTC”), stating that it was conducting an investigation to determine whether IDEXX or others have engaged in, or are engaging in, unfair methods of competition in violation of Section 5 of the Federal Trade Commission Act (“FTC Act”), through pricing or marketing policies for companion animal veterinary products and services, including but not limited to exclusive dealing or tying arrangements with distributors or end-users of those products or services. The letter requests that we preserve all materials potentially relevant to this investigation. The letter states that the FTC has not concluded that IDEXX or anyone else has violated Section 5 of the FTC Act.

We anticipate that we will receive a subpoena from the FTC requesting that we provide the FTC with documents and information relevant to this investigation and we intend to cooperate fully with the FTC in its investigation. We cannot predict how long any investigation might be ongoing.

We believe that our marketing and sales practices for companion animal veterinary products and services do not violate Section 5 of the FTC Act or any other antitrust law. However, it is possible that the FTC could reach a different conclusion at the end of its investigation and elect to commence an enforcement action in an administrative law court within the FTC. If the FTC were to commence an enforcement action we would expect to defend ourselves vigorously. Were the FTC to prevail in the action and through all subsequent appeals, we believe that any remedies likely to be sought by the FTC under Section 5 would not have a material adverse effect on our business.

Our Success Is Heavily Dependent Upon Our Proprietary Technologies

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

We cannot ensure that we will obtain issued patents, that any patents issued or licensed to us will remain valid, or that any patents owned or licensed by us will provide protection against competitors with similar technologies. Even if our patents cover products sold by our competitors, the time and expense of litigating to enforce our patent rights could be substantial, and could have a material adverse effect on our results of operations. In addition, expiration of patent rights could result in substantial new competition in the markets for products previously covered by those patent rights. In June 2009, one of the U.S. patents covering our SNAP^® FIV/FeLV tests expired. We had licensed this broad patent exclusively from the University of California. Expiration of this patent could result in increased competition in the U.S. market for feline immunodeficiency virus tests and if so, we would expect that revenues and profit margins associated SNAP^® FIV/FeLV tests, including Combo and Triple, will likely decline.

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

Distributor Purchasing Patterns Could Negatively Affect Our Operating Results

We sell many of our products, including substantially all of the rapid assays and instrument consumables sold in the U.S., through distributors. Distributor purchasing patterns can be unpredictable and may be influenced by factors unrelated to the end-user demand for our products. In addition, our agreements with distributors may generally be terminated by the distributors for any reason on 60 days notice. Because significant product sales are made to a limited number of distributors, the loss of a distributor or unanticipated changes in the frequency, timing or size of distributor purchases, could have a negative effect on our results of operations.

Distributors of veterinary products have entered into business combinations resulting in fewer distribution companies. Consolidation within distribution channels increases our customer concentration level, which could increase the risks described in the preceding paragraph. See “Part 1. Item 1 Business – Marketing and Distribution.”

Increased Competition and Technological Advances by Our Competitors Could Negatively Affect Our Operating Results

We face intense competition within the markets in which we sell our products and services and we expect that future competition will become even more intense. The introduction by competitors of new and competitive products and services could result in a decline in sales and/or profitability of our products and services. In addition, competitors may develop products or services that are superior to our products and services, which could cause us to lose existing customers and market share. Some of our competitors and potential competitors, including large diagnostic companies, have substantially greater financial resources than us, and greater experience in manufacturing, marketing, research and development and obtaining regulatory approvals than we do.

Changes in Testing Patterns Could Negatively Affect Our Operating Results

The market for our companion and production animal diagnostic tests and our dairy and water testing products could be negatively impacted by a number of factors. The introduction or broad market acceptance of vaccines or preventatives for the diseases and conditions for which we sell diagnostic tests and services could result in a decline in testing. Changes in accepted medical protocols regarding the diagnosis of certain diseases and conditions could have a similar effect. Eradication or substantial declines in the prevalence of certain diseases also could lead to a decline in diagnostic testing for such diseases. Our production animal products business in particular is subject to fluctuations resulting from changes in disease prevalence. In addition, changes in government regulations could negatively affect sales of our products that are driven by compliance testing, such as our production animal, dairy and water products. Declines in testing for any of the reasons described could have a material adverse effect on our results of operations.

Effective January 1, 2009, the age at which healthy cattle to be slaughtered are required to be tested for BSE in the European Union was increased from 30 months to 48 months, which has been estimated to reduce the population of cattle tested by approximately 30%. As a result, we believe that we are likely to lose a portion of our sales of post-mortem tests for BSE.

Consolidation of Veterinary Hospitals Could Negatively Affect Our Business

An increasing percentage of veterinary hospitals in the U.S. is owned by corporations that are in the business of acquiring veterinary hospitals and/or opening new veterinary hospitals nationally or regionally. Major corporate hospital owners in the U.S. include VCA Antech, Inc., National Veterinary Associates, and Banfield, The Pet Hospital, each of which is currently a customer of IDEXX. A similar trend exists in the U.K. and may in the future also develop in other countries. Corporate owners of veterinary hospitals could attempt to improve profitability by leveraging the buying power they derive from their scale to obtain favorable pricing from suppliers, which could have a negative impact on our results. In addition, certain corporate owners, most notably VCA Antech, our primary competitor in the U.S. and Canadian markets for veterinary laboratory diagnostic services, also operate reference laboratories that serve both their hospitals and unaffiliated hospitals. Any hospitals acquired by these companies generally use their laboratory services almost exclusively and shift a large portion of their testing from in-clinic testing to their reference laboratories. In addition, because these companies compete with us in the laboratory services marketplace, hospitals acquired by these companies may cease to be customers or potential customers of our other companion animal products and services, which would cause our sales of these products and services to decline.

Our Inexperience in the Human Point-of-Care Market Could Inhibit Our Success in this Market

Upon acquiring the Critical Care Division of Osmetech plc in January 2007, we entered the human point-of-care medical diagnostics market for the first time with the sale of the OPTI^® line of electrolyte and blood gas analyzers. The human point-of-care medical diagnostics market differs in many respects from the veterinary medical market. Significant differences include the impact of third party reimbursement on diagnostic testing, more extensive regulation, greater product liability risks, larger competitors, a more segmented customer base, and more rapid technological innovation. Our inexperience in the human point-of-care medical diagnostics market could negatively affect our ability to successfully manage the risks and features of this market that differ from the veterinary medical market. There can be no assurance that we will be successful in achieving growth and profitability in the human point-of-care medical diagnostics market comparable to the results we have achieved in the veterinary medical market.

Risks Associated with Doing Business Internationally Could Negatively Affect Our Operating Results

For the year ended December 31, 2009, 40% of our revenue was attributable to sales of products and services to customers outside the U.S. Various risks associated with foreign operations may impact our international sales. Possible risks include fluctuations in the value of foreign currencies relative to the U.S. dollar, inability of our customers to obtain U.S. dollars to pay our invoices, disruptions in transportation of our products, the differing product and service needs of foreign customers, difficulties in building and managing foreign operations, import/export duties and licensing requirements, and unexpected regulatory, economic or political changes in foreign markets. Prices that we charge to foreign customers may be different than the prices we charge for the same products in the U.S. due to competitive, market or other factors. As a result, the mix of domestic and international sales in a particular period could have a material impact on our results for that period. In addition, many of the products for which our selling price may be denominated in foreign currencies are manufactured, sourced, or both, in the U.S. and our costs are incurred in U.S. dollars. We utilize non-speculative forward currency exchange contracts and natural hedges to mitigate foreign currency exposure. However, an appreciation of the U.S. dollar relative to the foreign currencies in which we sell these products would reduce our operating margins. Additionally, a strengthening U.S. dollar could negatively impact the ability of customers outside the U.S. to pay for purchases denominated in U.S. dollars.

Our Operations are Vulnerable to Interruption as a Result of Natural Disasters or System Failures

The operation of all of our facilities is vulnerable to interruption as a result of natural and man-made disasters, interruptions in power supply, or other system failures. While we maintain plans to continue business under such circumstances, there can be no assurance that such plans will be successful in fully or partially mitigating the effects of such events.

We manufacture many of our significant products, including our rapid assay devices, certain instruments, and most Water, Dairy, and Production Animal testing products, at a single facility in Westbrook, Maine. Therefore, interruption of operations at this facility would have a material adverse effect on our results of operations.

We maintain property and business interruption insurance to insure against the financial impact of certain events of this nature. However, this insurance may be insufficient to compensate us for the full amount of any losses that we may incur. In addition, such insurance will not compensate us for the long-term competitive effects of being off the market for the period of any interruption in operations.

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

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

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

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

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

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

Future Operating Results Could Be Negatively Affected by the Resolution of Various Uncertain Tax Positions and by Potential Changes to Tax Incentives

In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. Significant judgment is required in determining our worldwide provision for income taxes. We periodically assess our exposures related to our worldwide provision for income taxes and believe that we have appropriately accrued taxes for contingencies. Any reduction of these contingent liabilities or additional assessment would increase or decrease income, respectively, in the period such determination was made. Our income tax filings are regularly under audit by tax authorities and the final determination of tax audits could be materially different than that which is reflected in historical income tax provisions and accruals. Additionally, we benefit from certain tax incentives offered by various jurisdictions. If we are unable to meet the requirements of such incentives, our inability to use these benefits could have a material negative effect on future earnings.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

Our worldwide headquarters is located on a Company owned, 65-acre site in Westbrook, Maine where we occupy a 535,700 square foot building utilized for manufacturing, research and development, marketing, sales and general and administrative support functions.

Additional property ownership and leasing arrangements with approximate square footage, purpose and location are as follows:

Additional Properties Owned:

•

40,000 square feet of office and laboratory space located in the U.S., used for our Veterinary Laboratory Diagnostic and Consulting Services line of business

•

23,000 square feet of office and laboratory space located in the U.K., used for our Veterinary Laboratory Diagnostic and Consulting Services line of business

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3,100 square feet of office and laboratory space located in Canada, used for our Veterinary Laboratory Diagnostic and Consulting Services line of business

Additional Properties Leased:

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317,700 total square feet of office, laboratory and warehousing space located throughout the world, primarily used for our Veterinary Laboratory Diagnostic and Consulting Services line of business

•

108,600 square feet of distribution, warehousing and office space in the Netherlands. This office space serves as our European headquarters.

•

89,400 square feet of industrial space in Tennessee for distribution and warehousing

•

78,800 square feet of office space in Maine for Corporate, Customer Service and IT support services

•

71,100 square feet of office, manufacturing and warehousing space in Georgia related to our OPTI Medical Systems line of business

•

69,300 square feet of office and manufacturing space in Wisconsin related to our Practice Information Systems and Services line of business

•

58,400 total square feet of office and manufacturing space in France, Switzerland and Asia related to our Production Animal business

•

7,600 square feet of office and manufacturing space in the U.K. related to our Water business

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

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any material legal proceedings.

From time to time, we are subject to other legal proceedings and claims, which arise in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our results of operations, financial condition or cash flows.

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

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

EXECUTIVE OFFICERS OF THE COMPANY

Our executive officers at February 12, 2010 were as follows:

Name		Age				Title
Jonathan W. Ayers			53			Chairman of the Board of Directors, President and Chief Executive Officer
William C. Wallen, PhD			66			Senior Vice President and Chief Scientific Officer
William E. Brown III, PhD			55			Corporate Vice President
Conan R. Deady			48			Corporate Vice President, General Counsel and Secretary
Thomas J. Dupree			41			Corporate Vice President
William B. Goodspeed			51			Corporate Vice President
Dan Meyaard			52			Corporate Vice President
Ali Naqui, PhD			56			Corporate Vice President
James F. Polewaczyk			46			Corporate Vice President
Johnny D. Powers, PhD			48			Corporate Vice President
Merilee Raines			54			Corporate Vice President, Chief Financial Officer and Treasurer
Michael J. Williams, PhD			42			Corporate Vice President

Mr. Ayers has been Chairman of the Board, Chief Executive Officer and President of IDEXX since January 2002. Prior to joining IDEXX, from 1999 to 2001, Mr. Ayers was President of Carrier Corporation, the then-largest business unit of United Technologies Corporation, and from 1997 to 1999, he was President of Carrier’s Asia Pacific Operations. From 1995 to 1997, Mr. Ayers was Vice President, Strategic Planning at United Technologies. Before joining United Technologies, from 1986 to 1995, Mr. Ayers held various positions at Morgan Stanley & Co. in mergers and acquisitions and corporate finance. Prior to Morgan Stanley, Mr. Ayers was a strategy consultant for Bain & Company from 1983 to 1986 and was in the field sales organization of IBM’s Data Processing Division from 1978 to 1981. Mr. Ayers holds an undergraduate degree in molecular biophysics and biochemistry from Yale University and graduated from Harvard Business School in 1983.

Dr. Wallen will retire on March 3, 2010 as Senior Vice President and Chief Scientific Officer of the Company, positions he has held since September 2003. He has also led the Company’s infectious disease product manufacturing operations since December 2008, and he led the Company’s pharmaceutical products business from September 2003 until the Company sold certain product lines and restructured that business in 2008. Prior to joining IDEXX, Dr. Wallen held various positions with Bayer Corporation, most recently as Senior Vice President, Research and Development, and Head, Office of Technology for the Diagnostics Division of Bayer Healthcare. From 2001 to 2003, Dr. Wallen served as Senior Vice President and Head of Research, Nucleic Acid Diagnostics Segment; from 1999 to 2001, as Senior Vice President of Research and Development Laboratory Testing Segment; and from 1993 to 1999, as Vice President of Research and Development, Immunodiagnostic and Clinical Chemistry Business Units. Before joining Bayer Corporation, from 1990 to 1993, Dr. Wallen was Vice President, Research and Development at Becton Dickinson Advanced Diagnostics.

Dr. Brown joined IDEXX as Corporate Vice President, Instrument Research and Development and Manufacturing in December 2008. Prior to joining IDEXX, from 1982 to 2007, Dr. Brown held various positions at Abbott Laboratories, Inc., a publicly held, global pharmaceuticals, nutritional and medical products company, most recently as Corporate Officer and Divisional Vice President of R&D, Assays and Instrument Systems for the Diagnostic Division. In March 2010, Dr. Brown will become Chief Scientific Officer and assume responsibility for leading the Company’s research and development activities.

Mr. Deady has been Corporate Vice President and General Counsel of the Company since 1999 and has been leading the Company’s business development activities since April 2005 and its regulatory function since October 2008. Mr. Deady was Deputy General Counsel of the Company from 1997 to 1999. Before joining the Company in 1997, Mr. Deady was Deputy General Counsel of Thermo Electron Corporation (now Thermo Fisher Scientific Inc.), a provider of analytical and laboratory products and services. Previously, Mr. Deady was a partner at Hale and Dorr LLP (now Wilmer Cutler Pickering Hale and Dorr LLP).

Mr. Dupree has been Corporate Vice President of the Company since September 2006 and has been leading the Companion Animal Group Customer Facing Organization in North America since January 2007. Mr. Dupree was General Manager of the Company’s Rapid Assay line of business from April 2005 to January 2007. Prior to that, Mr. Dupree was Vice President, Business Development. Before joining the Company in 2003, Mr. Dupree was employed at the Boston Consulting Group, a business strategy consulting firm, where he spent seven years leading project teams in the firm’s technology and health care practices. Prior to that, Mr. Dupree held various management positions at Bath Iron Works Corporation.

Mr. Goodspeed joined IDEXX as Corporate Vice President in July 2007 and oversees the Company’s Production Animal, Water and Dairy businesses. Prior to joining the Company, from 1994 to 2007, Mr. Goodspeed held various positions at J.M. Huber Corporation, a privately held company in the chemicals, food ingredients, building products, energy and timber industries, most recently as Sector CEO for Natural Resources and Technology-based Services.

Mr. Meyaard joined IDEXX as Corporate Vice President in September 2009 and oversees the Company’s worldwide operations function, including supply chain management, instrument and reagent manufacturing and operational excellence. Prior to joining the Company, from 1980 to 2009, Mr. Meyaard held various positions at multiple divisions of Siemens Healthcare Diagnostics and its predecessors, most recently as Vice President of Global Instrument Manufacturing for Siemens Medical Solutions Diagnostics.

Dr. Naqui has been Corporate Vice President of the Company since January 2006 and has overseen the Company’s international commercial operations since December 2007 and its Asia Pacific and Latin America operations since January 2006. Dr. Naqui led the Company’s Water and Dairy businesses from January 2000 to December 2007. He was General Manager, Water from September 1997 to January 2000, and Director of Research and Development from February 1993 to September 1997. Dr. Naqui joined the Company in 1993 as a result of the acquisition of Environetics, where he was the Director of Research and Development. Prior to joining Environetics, he was a research and development manager with Becton, Dickinson and Company.

Mr. Polewaczyk joined IDEXX as Corporate Vice President in February 2007 and oversees the Company’s Rapid Assay and Digital lines of business. Before joining IDEXX, Mr. Polewaczyk was employed from 2001 at Philips Medical Systems, a subsidiary of Royal Philips Electronics, The Netherlands, as General Manager of their Medical Consumables and Sensors Business. Prior to that, Mr. Polewaczyk spent 15 years at Hewlett-Packard in a variety of senior marketing and product development roles.

Dr. Powers joined IDEXX as Corporate Vice President in February 2009 and oversees the Company’s worldwide reference laboratories business. Prior to joining the Company, Dr. Powers was Vice President responsible for the Cancer Diagnostics business of Becton, Dickinson and Company from 2007 to 2008. Dr. Powers joined Becton Dickinson as a result of its acquisition in 2007 of TriPath Imaging Inc., where he held various positions from 2001 to 2007, most recently serving as President, TriPath Oncology business unit. From 1996 to 2001, Dr. Powers was employed by Ventana Medical Systems, most recently as Vice President and General Manager of Manufacturing Operations. From 1989 to 1996, Dr. Powers was employed by Organon Teknika Corporation in various technical manufacturing roles.

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

Dr. Williams has been Corporate Vice President of the Company since September 2006 and General Manager of the Companion Animal Instrument and Consumables line of business since 2004. Dr. Williams has overseen the OPTI Medical Systems business since its acquisition in January 2007. Dr. Williams was Vice President and General Manager of the Company’s chemistry instruments and consumables business from 2003 to 2004. Prior to joining the Company in 2003, Dr. Williams was a healthcare strategy consultant at McKinsey & Company from 1995 to 2002 and a senior research associate at the Scripps Research Institute from 1992 to 1995.

PART II

ITEM 5.		MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stock Split

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 as of November 5, 2007 received one additional share of common stock. The additional shares of common stock were distributed on November 26, 2007. All share and per share data (except par value) in this Form 10-K have been adjusted to reflect the effect of the stock split for all periods presented.

Market Information

Our common stock is quoted on the NASDAQ Global Market under the symbol IDXX. The following table shows the quarterly range of high and low sale prices per share of our common stock as reported on the NASDAQ Global Market for the years 2009 and 2008.

For the Quarter Ended		High				Low
March 31, 2008		$	61.86			$	47.45
June 30, 2008			55.87				46.71
September 30, 2008			63.58				47.88
December 31, 2008			54.45				24.11
March 31, 2009			36.89				27.68
June 30, 2009			46.90				33.07
September 30, 2009			55.12				43.47
December 31, 2009			55.69				47.52

Holders of Common Stock

At February 12, 2010, there were 824 holders of record of our common stock.

Issuer Purchases of Equity Securities

During the three months ended December 31, 2009, we repurchased our shares as described below:

										Total Number of
										Shares Purchased as				Maximum Number of
										Part of Publicly				Shares that May Yet Be
		Total Number of				Average Price				Announced Plans or				Purchased Under the
		Shares Purchased				Paid per Share				Programs				Plans or Programs
Period		(a)				(b)				(c)				(d)
October 1, 2009 to October 31, 2009			66,242			$	49.31				66,242				2,713,561
November 1, 2009 to November 30, 2009			200,000				52.00				200,000				2,513,561
December 1, 2009 to December 31, 2009			220,890				52.11				220,000				2,293,561
Total			487,132			$	51.69				486,242				2,293,561

Our board of directors has approved the repurchase of up to 44,000,000 shares of our common stock in the open market or in negotiated transactions. The plan was approved and announced on August 13, 1999, and subsequently amended on October 4, 1999, November 16, 1999, July 21, 2000, October 20, 2003, October 12, 2004, October 12, 2005, February 14, 2007, February 13, 2008 and February 10, 2010 and does not have a specified expiration date. There were no other repurchase plans outstanding during the year ended December 31, 2009, and no repurchase plans expired during the period. Repurchases of 486,242 shares were made during the three months ended December 31, 2009 in transactions made pursuant to our repurchase plan.

During the three months ended December 31, 2009, we received 890 shares of our common stock that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. In the above table, these shares are included in columns (a) and (b), but excluded from columns (c) and (d). These shares do not reduce the number of shares that may yet be purchased under the repurchase plan.

During the year ended December 31, 2009, we repurchased 1,919,103 shares of our common stock in transactions made pursuant to our repurchase plan and received 35,241 shares that were surrendered by employees in payment for the minimum required withholding taxes due on the vesting of restricted stock units and settlement of deferred stock units. See Note 16 to the consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K for further information.

Dividends

We have never paid any cash dividends on our common stock. From time to time our board of directors may consider the declaration of a dividend. However, we have no present intention to pay a dividend.

Securities Authorized for Issuance Under Equity Compensation Plans

December 31, 2009

Number of Securities Remaining

Number of Securities

Weighted Average

Available for

to be Issued Upon Exercise

Exercise Price of

Future Issuance Under Equity

of Outstanding Options,

Outstanding Options,

Compensation Plans (Excluding

Warrants and Rights

Warrants and Rights

Securities Reflected in Column (a))

Plan Category

(a)

(b)

(c)

Equity compensation plans approved by security holders

5,461,147

(1)

$

27.12

4,547,970

(2)

Equity compensation plans not approved by security holders

—

—

—

Total

5,461,147

$

27.12

4,547,970

Stock Performance Graph

This graph compares our total stockholder returns, the Standard & Poor’s (“S&P”) MidCap 400 Health Care Index, the S&P SmallCap 600 Health Care Index and the Total Return Index for the NASDAQ Stock Market (U.S. Companies) prepared by the Center for Research in Security Prices (the “NASDAQ Index”). This graph assumes the investment of $100 on December 31, 2004 in IDEXX’s common stock, the S&P MidCap 400 Health Care Index, the S&P SmallCap 600 Health Care Index and the NASDAQ Index and assumes dividends, if any, are reinvested. Measurement points are the last trading days of the years ended December 2004, 2005, 2006, 2007, 2008 and 2009.

		12/31/2004				12/31/2005				12/30/2006				12/29/2007				12/31/2008				12/31/2009
IDEXX Laboratories, Inc.		$	100.00			$	155.53			$	171.35			$	253.37			$	155.92			$	230.99
S&P MidCap 400 Health Care Index			100.00				135.39				133.83				150.58				100.45				135.26
S&P SmallCap 600 Health Care Index			100.00				135.82				147.40				175.03				125.27				153.09
NASDAQ Index			100.00				102.13				112.19				121.68				58.64				84.28

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected consolidated financial data of the Company for each of the five years ending with December 31, 2009. The selected consolidated financial data presented below has been derived from the Company’s consolidated financial statements. These financial data should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing elsewhere in this Annual Report on Form 10-K.

		For the Years Ended December 31,
		(in thousands, except per share data)
		2009				2008				2007				2006				2005
INCOME STATEMENT DATA:
Revenue		$	1,031,633			$	1,024,030			$	922,555			$	739,117			$	638,095
Cost of revenue			505,352				494,264				459,033				359,588				315,195
Gross profit			526,281				529,766				463,522				379,529				322,900
Expenses:
Sales and marketing			167,748				169,956				151,882				115,882				101,990
General and administrative			117,440				116,681				108,119				82,097				64,631
Research and development			65,124				70,673				67,338				53,617				40,948
Income from operations			175,969				172,456				136,183				127,933				115,331
Interest (expense) income, net			(1,430	)			(2,269	)			(1,340	)			2,817				3,141
Income before provision for income taxes			174,539				170,187				134,843				130,750				118,472
Provision for income taxes			52,304				54,018				40,829				37,224				40,670
Net income			122,235				116,169				94,014				93,526				77,802
Less: Net income attributable to noncontrolling interest			10				—				—				(152	)			(452	)
Net income attributable to IDEXX Laboratories’ stockholders		$	122,225			$	116,169			$	94,014			$	93,678			$	78,254
Earnings per share(1):
Basic		$	2.08			$	1.94			$	1.53			$	1.49			$	1.20
Diluted			2.01				1.87				1.46				1.42				1.15
Weighted average shares outstanding(1):
Basic			58,809				59,953				61,560				62,866				65,043
Diluted			60,682				62,249				64,455				65,907				68,109
Dividends paid		$	—			$	—			$	—			$	—			$	—
BALANCE SHEET DATA:
Cash and investments		$	106,728			$	78,868			$	60,360			$	96,666			$	132,731
Working capital			120,033				60,598				82,271				177,520				192,679
Total assets			808,527				765,437				702,179				559,560				490,676
Total debt			123,884				156,479				78,683				7,125				551
Total stockholders’ equity			514,579				438,194				438,323				409,861				369,010

PART II

ITEM 7.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of Segments. During 2009, we operated primarily through three business segments: diagnostic and information technology products and services for the veterinary market, which we refer to as the 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 (“Dairy”) and products for the human point-of-care medical diagnostic market (“OPTI Medical”). Financial information about the Dairy and OPTI Medical operating segments and other licensing arrangements are combined and presented in an “Other” category because they do not meet the quantitative or qualitative thresholds for reportable segments. See Note 13 to the consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K for financial information about our segments, including geographic information, and about our product and service categories.

Items that are not allocated to our operating segments are comprised primarily of corporate research and development expenses that do not align with one of our existing business or service categories, a portion of share-based compensation expense, interest income and expense, and income taxes. In our segment disclosure of gross profit, operating expenses and operating income, these amounts are shown under the caption “Unallocated Amounts.” We estimate our share-based compensation expense for the year and allocate the estimated 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 resulting in an unallocated amount reported under the Unallocated Category.

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

Companion Animal Group

In the CAG segment, we believe we have developed a strategic advantage over companies with more narrow product or service offerings. The breadth and complementary nature of our products and services give us scale in sales and distribution, permit us to offer integrated disease-management diagnostic solutions that leverage the advantages of both point-of-care and outside laboratory testing, and facilitate the flow of medical and business information in the veterinary practice by connecting practice information software systems with reference laboratory test data, in-clinic test data from our IDEXX VetLab^® suite of analyzers, and radiographic data from the IDEXX-PACS^™ and IDEXX EquiView PACS^™ software generated by our digital radiography systems.

Instruments and Consumables. Our strategy in our IDEXX VetLab^® instrument line of business is to provide veterinarians with an integrated set of instruments that, individually and together, provide superior diagnostic information in the clinic, enabling veterinarians to practice better medicine and, in doing so, achieve their practice economic objectives, including growth and profitability. We derive substantial revenues and margins from the sale of consumables that are used in these instruments. The principal instruments used by veterinarians for in-clinic diagnostic testing are chemistry and hematology analyzers. In addition we sell instruments used for endocrinology, blood gas, electrolytes, urinalysis, and blood coagulation testing. Our IDEXX VetLab^® Station is an in-clinic laboratory information management system that records and integrates patient diagnostic information from our analyzers for better practice management. For customers that utilize our IVLS, we offer IDEXX SmartService^™ Solutions, an electronic customer support and service tool that allows IDEXX technical support to remotely monitor instrument performance, troubleshoot issues and provide system updates. Additionally, we offer extended maintenance agreements in connection with the sale of our instruments.

During the early stage of an instrument’s life cycle, we derive relatively greater revenues from instrument placements, while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placement revenues begin to decline. Instrument sales have significantly lower gross margins than sales of consumables, and therefore the mix of instrument and consumable sales in a particular period will impact our gross margins in this line of business.

Our Catalyst Dx^® analyzer is our latest generation chemistry analyzer, which was launched in the first quarter of 2008. In addition, we sell and have an active installed base of approximately 31,000 VetTest^® analyzers, with substantially all of our revenues from that product line currently derived from consumable sales. We continue to place VetTest^® instruments through sales, lease, rental and other programs. A substantial portion of 2009 Catalyst Dx^® analyzer placements have been made at veterinary clinics that already own our VetTest^® analyzer. As we continue to experience growth in sales of Catalyst Dx^® analyzers and the related consumables, we expect to see a decline in the sales of VetTest^® consumables. Based on projections of future sales volume and the average unit price of consumables used in the Catalyst Dx^® and VetTest^® analyzers, we do not expect a future shift to Catalyst Dx^® consumables to significantly impact gross margin. We do however expect near-term downward pressure on gross margin percentage due to higher relative instrument placement revenues as compared to consumables’ sales with continued penetration of the Catalyst Dx^® analyzer. Our long-term success in this area of our business is dependent upon new customer acquisition, customer retention and customer utilization of existing and new assays introduced for use on our analyzers. To increase utilization, we seek to educate veterinarians about best medical practices that emphasize the importance of blood and urine chemistry testing for a variety of diagnostic purposes.

We purchase the chemistry consumables, other than electrolyte slides, used in our Catalyst Dx^® and VetTest^® analyzers from Ortho-Clinical Diagnostics, Inc. (“Ortho”) under a supply agreement that continues through 2025. This supply agreement provides us with a long-term source of slides at costs that improve over the term of the agreement as a result of increasing purchase volumes.

Our principal hematology analyzer is the LaserCyte^® analyzer. In addition we sell the VetAutoread^™ analyzer. A substantial portion of LaserCyte^® placements have been made at veterinary clinics that already own our VetAutoread^™ analyzer. Although we have experienced growth in sales of hematology consumables, LaserCyte^® consumable sales have been partly offset by declines in sales of VetAutoread^™ consumables.

With all of our instrument lines, we seek to differentiate our products from those of other in-clinic instrument manufacturers and laboratory diagnostic service providers based on breadth of diagnostic menu, flexibility of menu selection, accuracy, reliability, ease-of-use, throughput, ability to handle compromised samples, time-to-result, analytical capability of software, integration with the IDEXX VetLab^® Station, education and training, and superior sales and customer service. Our success depends, in part, on our ability to differentiate our products in a way that justifies premium pricing.

Rapid Assay Products. Our rapid assay line of business consists primarily of single-use kits for point-of-care testing and, to a limited degree, microwell-based kits for laboratory testing for canine and feline diseases and conditions. Our rapid assay strategy is to develop, manufacture, market and sell proprietary tests that address important medical needs for particular diseases prevalent in the companion animal population. We seek to differentiate our tests from those of other in-clinic test providers and laboratory diagnostic service providers through ease-of-use and superior performance, including by providing our customers with combination tests that test a single sample for multiple analytes. Where alternative point-of-care offerings exist, we seek to differentiate our tests with superior performance. As in our other lines of business, we also seek to differentiate our products through superior customer service. We further augment our product development and customer service efforts with sales and marketing programs that enhance medical awareness and understanding regarding our target diseases and the importance of diagnostic testing. We also seek to enhance efficiency and test result capture by providing our customers with the ability to have rapid assay tests read and results recorded into the patient record by our SNAPshot Dx^® analyzer. This functionality is currently available for use with our SNAP^® tests for evaluation of thyroid, adrenal and liver function; diagnosing canine pancreatitis, feline leukemia and feline immunodeficiency virus; and for screening for heartworm and three additional tick-borne diseases, ehrlichiosis, Lyme and anaplasmosis. We are currently developing this functionality across our canine and feline family of rapid assay products.

Veterinary Laboratory Diagnostic and Consulting Services. We believe that more than half of all diagnostic testing by U.S. veterinarians is done at outside reference laboratories such as our IDEXX Reference Laboratories. In markets outside the U.S., in-clinic testing is less prevalent and an even greater percentage of diagnostic testing is done in reference laboratories. We attempt to differentiate our laboratory testing services from those of our competitors and in-clinic offerings primarily on the basis of quality, customer service, technology employed and specialized test menu. Revenue growth in this line of business is achieved both through increased sales at existing laboratories and through the acquisition of new customers, including through laboratory acquisitions, customer list acquisitions and the opening of new laboratories. In 2009, we acquired a telemedicine and consulting services business located in the U.S. In 2008, we acquired a laboratory in Spain and acquired certain intellectual property and distribution rights associated with a diagnostic test product. In 2007, we acquired laboratories in the U.S. and Canada and acquired veterinary laboratory customer lists in the U.S., Switzerland, and the United Kingdom. Profitability of this business is largely the result of our ability to achieve efficiencies from both volume and operational improvements. New laboratories that we open typically will operate at a loss until testing volumes reach a level that permits profitability. Acquired laboratories frequently operate less profitably than our existing laboratories and those laboratories may not achieve profitability comparable to our existing laboratories for several years until we complete the implementation of operating improvements and efficiencies. Therefore, in the short term, new and acquired reference laboratories generally will have a negative effect on the operating margin of the laboratory diagnostic and consulting services line of business.

Practice Information Systems and Digital Radiography. These lines of business consist of veterinary practice information systems including hardware and software and veterinary-specific digital radiography systems. Our strategy in the practice information systems line of business is to provide superior software and hardware integrated information solutions, backed by superior customer support and education, to allow the veterinarian to practice better medicine and achieve the practice’s business objectives. We differentiate our software systems through enhanced functionality and ease of use. Our veterinary-specific digital radiography systems allow veterinarians to capture digital radiographs with ease and without the use of hazardous chemicals. The digital radiography systems also incorporate IDEXX-PACS^™ and IDEXX EquiView PACS^™ picture archiving and communication software developed by IDEXX that allows for image enhancement, manipulation, storage and retrieval, and integration with the practice information software. Our strategy in digital radiography is to offer a system that provides superior image quality and software capability at a competitive price, backed by the same customer support provided for our other products and services in the Companion Animal Group.

Water

Our strategy in the water testing business is to develop, manufacture, market and sell proprietary products with superior performance, supported by exceptional customer service. Our customers are primarily water utilities, government laboratories and private certified laboratories that highly value strong relationships and customer support. International sales of water testing products represented 47% of total water product sales in 2009, and we expect that future growth in this business will be significantly dependent on our ability to increase international sales. Growth also will be dependent on our ability to enhance and broaden our product line. Most water microbiological testing is driven by regulation, and, in many countries, a test may not be used for regulatory testing unless it has been approved by the applicable regulatory body. As a result, we maintain an active regulatory program that involves applying for regulatory approvals in a number of countries, primarily in Europe.

Production Animal Segment

We develop, manufacture, market and sell a broad range of tests for various cattle, swine and poultry diseases and conditions, and have an active research and development, and in-licensing program in this area. Our strategy is to offer proprietary tests with superior performance characteristics. Disease outbreaks are episodic and unpredictable, and certain diseases that are prevalent at one time may be substantially contained or eradicated at a later time. In response to outbreaks, testing initiatives may lead to exceptional demand for certain products in certain periods. Conversely, successful eradication programs may result in significantly decreased demand for certain products. The performance of this business, therefore, can fluctuate. In 2009, approximately 88% of our sales in this business were international. Because of the significant dependence of this business on international sales, the performance of the business is particularly subject to the various risks described above that are associated with doing business internationally. See “Part I, Item 1A. Risk Factors.”

Other

Dairy. Our strategy in the dairy testing business is to develop, manufacture and sell antibiotic residue testing products that satisfy applicable regulatory requirements for testing of milk by processors and producers and provide reliable field performance. The manufacture of these testing products leverage, almost exclusively, the SNAP^® platform as well as the production equipment of our rapid assay business, incorporating customized reagents for antibiotic detection. The majority of our sales in this business are international. To successfully increase sales of dairy testing products, we believe that we need to increase penetration in the processor and producer segments of the dairy market, and to develop product line enhancements and extensions. Because of the significant dependence of this business on international sales, the performance of the business is particularly subject to the various risks described above that are associated with doing business internationally. See “Part I, Item 1A. Risk Factors.”

OPTI Medical Systems. Our strategy in the OPTI Medical Systems business for the human market is to develop, manufacture, and sell electrolyte and blood gas analyzers and related consumable products for the medical point-of-care diagnostics market worldwide, with a focus on small- to mid-sized hospitals. We seek to differentiate our products based on ease of use, menu, convenience, international distribution and service, and instrument reliability. Similar to our veterinary instruments and consumables strategy, a substantial portion of the revenues from this product line is derived from the sale of consumables for use on the installed base of electrolyte and blood gas analyzers. During the early stage of an instrument’s life cycle, relatively greater revenues are derived from instrument placements, while consumable sales become relatively more significant in later stages as the installed base of instruments increases and instrument placement revenues begin to decline. Our long-term success in this area of our business is dependent upon new customer acquisition, customer retention and increased customer utilization of existing and new assays introduced on these instruments.

OPTI Medical Systems also supplies our VetStat^® analyzer, an instrument and consumable system that is a member of the IDEXX VetLab^® suite for the veterinary market. In addition, OPTI Medical Systems provides the electrolyte module and dry slide reagents that make up the electrolyte testing functionality of the Catalyst Dx^® analyzer. Our strategy in the OPTI Medical Systems business for the veterinary market is to utilize this unit’s know-how, intellectual property and manufacturing capability to continue to expand the menu and instrument capability of the VetStat^® and Catalyst Dx^® platforms for veterinary applications.

Other Activities. We have developed certain proprietary technology that we believe may have application in areas that do not align with one of our existing business or service categories. Our strategy is to out-license these technologies to partners that are best positioned to complete the development and commercialization of products utilizing these technologies. To the extent we are successful in doing so, we may receive one-time or recurring payments based on the achievement of development or sales milestones. Our ability to succeed in this area of our business depends on our ability to attract and retain qualified scientific personnel to develop proprietary products or technology and our ability to identify suitable third parties to complete the commercialization of these technologies.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 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. Note 3 to the consolidated financial statements included in this Annual Report on Form 10-K for the year ended December 31, 2009 describes the significant accounting policies used in preparation of these consolidated financial statements.

We believe the following critical accounting estimates and assumptions may have a material impact on reported financial condition and operating performance and involve significant levels of judgment to account for highly uncertain matters or are susceptible to significant change.

Revenue Recognition

We recognize revenue when four criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectibility is reasonably assured. See Note 3(h) to the consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K for additional information about our revenue recognition policy and criteria for recognizing revenue.

Multiple element arrangements (MEA’s). Arrangements to sell products to customers frequently include multiple deliverables. Our most significant MEA’s include the sale of one or more of the instruments from the IDEXX VetLab^® suite of analyzers or digital radiography systems, combined with one or more of the following products: extended maintenance agreements; consumables; laboratory services; and practice management software. Practice management software is frequently sold with postcontract customer support and implementation services. Delivery of the various products or performance of services within the arrangement may or may not coincide. Interpretation of customer sales agreements is sometimes required to determine the appropriate accounting, including whether the deliverables specified in a MEA should be treated as separate units of accounting for revenue recognition purposes, and, if so, how the price should be allocated among the elements and when to recognize revenue for each element.

When arrangements include multiple elements, we use verifiable objective evidence (“VOE”) of fair value or vendor-specific objective evidence (“VSOE”) of fair value for software to allocate revenue to the elements and recognize revenue when the elements have standalone value and the four criteria for revenue recognition have been met for each element. The timing of product and service revenue recognized is affected by our judgments as to whether an arrangement includes multiple elements and, if so, whether fair value exists for those elements. Changes to the elements in an arrangement and the ability to establish fair value for those elements could affect the timing of the revenue recognition.

We determine VOE and VSOE of fair value by amounts charged separately for the delivered and undelivered elements to similar customers in standalone sales of the specific elements. We have determined that the software components of our digital radiography systems and IVLS are more than incidental to the products as a whole, therefore we account for sales of these products in MEA’s under software accounting guidance and defer revenue equal to the fair value of the support provided to the customer during the one-year warranty period. Judgment is required to determine whether the software within our digital systems and IVLS is essential to the functionality of the products and judgment and estimation is required to establish the fair value of the updates and support provided. We have also applied judgment to determine that software used in, or with our IDEXX VetLab^® instruments, except for the IVLS, is not more than incidental to the functionality of those instruments.

Certain arrangements with customers include discounts on future products and services. We apply judgment in determining whether discounts are significant and incremental and when the future discount offered is not considered significant and incremental, we do not account for the discount as an element of the arrangement. If the future discount is significant and incremental, we recognize that discount as an element of the arrangement and allocate the discount to the other elements of the arrangement based on relative fair value. To determine whether a discount is significant and incremental, we look to the discount provided in standalone sales of the same product to similar customers, the level of discount provided on other elements in the arrangement, and the significance of the discount to the overall arrangement. If the discount in the MEA approximates the discount typically provided in standalone sales, that discount is not considered significant and incremental.

We separately price extended maintenance agreements (“EMA”) sold to customers. When an EMA is sold as a component of a multi-product sale, we recognize revenue related to the EMA at the stated contractual price on a straight-line basis over the life of the agreement.

Customer programs. We record estimated reductions to revenue in connection with customer marketing programs and incentive offerings that may give customers credits, award points, or provide other incentives. Future market conditions and changes in product offerings may require us to change marketing strategies to increase customer incentive offerings, possibly resulting in incremental reductions of revenue in future periods as compared to reductions in the current or prior periods. Additionally, certain incentive programs require us to estimate, based on historical experience, and apply judgment to approximate the number of customers who will actually redeem the incentive. Differences between estimated and actual customer participation in programs may impact the amount and timing of revenue recognition.

Revenue reductions are recorded quarterly based on issuance of credits, points earned but not yet issued, and estimates of credits and points to be earned in the future based on current revenue. In our analysis, we utilize data supplied from distributors and collected in-house that details the volume of qualifying products purchased as well as price paid per clinic (“practice-level sales data”).

Customers can earn IDEXX Points based on their participation in certain customer programs and making qualifying purchases related to those programs. IDEXX Points may then be applied against the purchase price for IDEXX products and services purchased in the future or applied to trade receivables due to us. As points are redeemed we recognize the benefit of points expected to expire, or breakage, using historical forfeiture rates. On November 30 of each year, unused points earned before January 1 of the prior year expire and any variance from the breakage estimate is accounted for as a change in estimate. Our two most significant customer programs are Practice Developer^® and SNAP^® up the Savings^™ (“SUTS”), both of which are offered only to North American customers. In 2009, the SUTS program was redesigned to allow for payout of points earned quarterly. The most significant estimate related to SUTS, and other point programs, is estimating the amount of breakage. Following is a summary of revenue reductions recorded under these programs and in total for the years ended December 31, 2009, 2008 and 2007 (in thousands):

		For the Years Ended December 31,
		2009				2008				2007
Revenue Reductions Recorded
Practice Developer® program (1)		$	6,892			$	7,521			$	6,747
SNAP® up the Savings™ program(1)			4,582				4,011				4,429
Other programs(1)			9,201				3,808				5,946
Total revenue reductions		$	20,675			$	15,340			$	17,122

At December 31, 2009, 2008 and 2007, the total accrued revenue reductions were $17.4 million, $15.2 million and $15.1 million, respectively. Following is a summary of changes in the accrual for estimated revenue reductions attributable to IDEXX Points customer programs and incentive offerings and the ending accrued revenue reductions balance for the years ended December 31, 2009, 2008 and 2007 (in thousands):

		For the Years Ended December 31,
		2009				2008				2007
Accrued Customer Programs:
Balance, beginning of the year		$	15,183			$	15,107			$	14,012
Current provision related to Practice Developer® program(1)			6,892				7,521				6,747
Current provision related to SNAP® up the Savings™ program(1)			4,582				4,011				4,429
Current provision related to other programs(1)			9,201				3,808				5,946
Breakage			(367	)			(694	)			(352	)
Actual points redeemed and credits issued			(18,256	)			(14,338	)			(15,755	)
Exchange impact on balances denominated in foreign currency			153				(232	)			80
Balance, end of year		$	17,388			$	15,183			$	15,107

Inventory Valuation

We write down inventory for estimated obsolescence when warranted by estimates of future demand, market conditions, remaining shelf life, or product functionality. If actual market conditions or results of estimated functionality are less favorable than those we estimated, additional inventory write-downs may be required, which would have a negative effect on results of operations. Certain major components of inventory for which we have made critical valuation judgments are discussed in more detail below.

LaserCyte^® Hematology Analyzer. At December 31, 2009, 2008 and 2007, $1.3 million, $2.9 million and $2.7 million, respectively, of inventory associated with our LaserCyte^® analyzer required rework before it could be used to manufacture finished goods, which was net of $2.4 million, $2.2 million and $1.7 million, respectively, of write-downs for inventory estimated to be obsolete and disposed. We determined write-downs based on our estimate of the costs to rework inventory compared to replacement cost and the probability of success, primarily based on historical experience. We expect to fully realize our net investment in this inventory. However, if we are unsuccessful in reworking this inventory, if we revise our judgment of our ability to successfully rework inventory due to new experience in reworking this inventory, if we determine that it is more cost effective to purchase new inventory rather than rework this inventory, or if we alter the design of this product, we may be required to write off some or all of the remaining associated inventory.

Valuation of Goodwill and Other Intangible Assets

A significant portion of the purchase price for acquired businesses is assigned to intangible assets. Intangible assets other than goodwill are initially valued at fair value. If a market value is not readily available, the fair value of the intangible asset is estimated based on discounted cash flows using market participant assumptions, which are assumptions that are not specific to IDEXX. The selection of appropriate valuation methodologies and the estimation of discounted cash flows require significant assumptions about the timing and amounts of future cash flows, risks, appropriate discount rates, and the useful lives of intangible assets. When material, we utilize independent valuation experts to advise and assist us in allocating the purchase prices for acquired businesses to the fair values of the identified intangible assets and in determining appropriate amortization methods and periods for those intangible assets. Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair values of acquired net assets, including intangible assets.

We assess goodwill for impairment annually in the fourth quarter and whenever events or circumstances indicate an impairment may exist. For impairment testing, the fair values of the reporting units that include goodwill are estimated using an income approach by developing discounted cash flow models. Model assumptions are based on our projections and best estimates, using appropriate and customary market participant assumptions. Changes in forecasted cash flows or the discount rate would affect the estimated fair values of reporting units and could result in a goodwill impairment charge in a future period. However, at December 31, 2009 a 25% decrease in the current estimated fair value of any of our reporting units would not result in a goodwill impairment charge for any of our reporting units that include goodwill. As a measure to assess the fair values of the reporting units, we aggregate the fair value of each of the reporting units and compare that aggregate total to the overall market capitalization of the Company. As of November 30, 2009, the date that we performed our assessment of goodwill for impairment, the total aggregate fair values of the reporting units was approximately $3.2 billion, which approximates the Company’s market capitalization as of that date. No goodwill impairments were identified as a result of the annual or event-driven reviews during the years ended December 31, 2009, 2008 or 2007.

During 2008, we sold certain pharmaceutical product lines and pharmaceutical assets that qualified as a business. The pharmaceutical business had $13.7 million of related goodwill, of which we wrote off approximately $7.2 million that was allocated to the product lines sold based on their respective fair values. Fair values were estimated using a discounted cash flow approach. A substantial portion of the remaining goodwill is associated with products that have been licensed to third parties and is included in our “Other” segment. Realization of this goodwill is dependant upon the success of those third parties in developing and commercializing products, which will result in our receipt of royalties and other payments.

We assess the realizability of intangible assets other than goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If an impairment review is triggered, we evaluate the carrying value of intangible assets based on estimated undiscounted future cash flows over the remaining useful life of the assets and compare that value to the carrying value of the assets. The cash flows that are used contain our best estimates, using appropriate and customary assumptions and projections at the time.

During 2009, we recognized an impairment charge of $1.5 million to write off an acquired intangible asset associated with our equine digital radiography business, which is part of our CAG segment. Based on changes in estimated future demand and market conditions, we determined that we would not fully realize our investment and, therefore, fully expensed this asset. No other impairments were identified during the year ended December 31, 2009. No impairments were identified during the year ended December 31, 2008.

During 2007, we recognized an impairment charge to write off a prepaid royalty license of $1.0 million associated with Navigator^® paste. We also recognized a related inventory write-down, the circumstances of which are described in Note 6 to the consolidated financial statements included in this Annual Report on Form 10-K. Based on our changed estimates of product availability and estimated future demand and market conditions, we determined that we would not realize our investment in prepaid royalties and, therefore, fully expensed this asset. No other impairments were identified during the year ended December 31, 2007.

Share-Based Compensation

Beginning in 2006, we modified our employee share-based compensation programs to shift from the grant of stock options and employee stock purchase rights only to the grant of a mix of restricted stock units and stock options, along with employee stock purchase rights. There were no modifications to the terms of outstanding options, restricted stock units or deferred stock units during 2009, 2008 or 2007.

On January 1, 2006 we adopted amendments to the accounting provisions governing share-based payments and adopted the straight-line method to prospectively expense share-based awards granted subsequent to December 31, 2005. The graded-vesting, or accelerated, method has been used to calculate the expense for stock options granted prior to January 1, 2006. If the total fair value of share-based compensation awards, as well as other features that impact expense, including forfeitures and capitalization of costs, was consistent from year-to-year in each of the last five years and through 2010, this change in expense method to straight-line expensing would yield less than the pro forma graded-vesting expense through 2010 until awards granted prior to January 1, 2006 were fully expensed. However, the total fair value of future awards may vary significantly from past awards based on a number of factors, including our share-based award practices. Therefore, share-based compensation expense is likely to fluctuate, possibly significantly, from year to year.

We determine the assumptions to be used in the valuation of option grants as of the date of grant. As such, we may use different assumptions during the year if we grant options at different dates. However, substantially all of our options granted during the years ended December 31, 2009, 2008 and 2007 were granted in the first quarter of each year. The weighted average of each of the valuation assumptions used to determine the fair value of each option grant during each of the previous three years is as follows:

		For the Years Ended December 31,
		2009				2008				2007
Expected stock price volatility			31	%			25	%			29	%
Expected term, in years (1)			4.8				4.9				5.0
Risk-free interest rate			1.6	%			2.6	%			4.7	%

We use the Black-Scholes-Merton option-pricing model to determine the fair value of options granted. Option-pricing models require the input of highly subjective assumptions, particularly for the expected stock price volatility and the expected term of options. Changes in the subjective input assumptions can materially affect the fair value estimate. Our expected stock price volatility assumptions are based on the historical volatility of our stock over periods that are similar to the expected terms of grants and other relevant factors. Lower estimated volatility reduces the fair value of an option. The total fair value of options awarded during the year ended December 31, 2009 ($5.4 million) would have increased by 9% or decreased by 7% if the weighted average of the stock price volatility assumptions were increased or decreased by 10% to 33.6% or 27.5%, respectively. The total expense recognized for options awarded during the year ended December 31, 2009 would have increased or decreased by $0.1 million if the weighted average of the stock price volatility assumption used to value options granted during 2009 were increased or decreased by 10% to 33.6% or 27.5%, respectively.

To develop the expected term assumption for option awards, we previously elected to use the simplified method 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. The expected term for future awards will be determined using a consistent method. Longer expected term assumptions increase the fair value of option awards, and therefore increase the expense recognized per award. The total fair value of options awarded during the year ended December 31, 2009 ($5.4 million) would have increased by 10% or decreased by 11% if the weighted average of the expected term assumptions were increased or decreased by one year, respectively. The total cost recognized for options awarded during the year ended December 31, 2009 would have increased or decreased by $0.1 million if the weighted average of the expected term assumptions were increased or decreased by one year, respectively.

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. Share-based compensation costs for the year ended December 31, 2009 were $11.4 million, which is net of a reduction of $2.5 million for actual and estimated forfeitures. Changes in estimated forfeiture rates and differences between estimated forfeiture rates and actual experience may result in significant, unanticipated increases or decreases in share-based compensation expense from period to period. The termination of employment by certain employees who hold large numbers of share-based compensation instruments may also have a significant, unanticipated impact on forfeiture experience and, therefore, on share-based compensation expense.

The fair value of options, restricted stock units, deferred stock units with vesting conditions, and employee stock purchase rights awarded during the years ended December 31, 2009, 2008 and 2007 totaled $16.0 million, $18.7 million and $18.2 million, respectively. The total unrecognized compensation cost for unvested share-based compensation awards outstanding at December 31, 2009, before consideration of estimated forfeitures, was $33.0 million. We estimate that this cost will be reduced by approximately $3.4 million related to forfeitures. The weighted average remaining expense recognition period is approximately 1.6 years.

Income Taxes

We recognize a current tax liability or asset for current taxes payable or refundable, respectively, and a deferred tax liability or asset, as the case may be, for the estimated future tax effects of temporary differences between book and tax treatment of assets and liabilities and carryforwards to the extent they are realizable.

The future tax benefit arising from net deductible temporary differences and tax carryforwards, net of valuation allowances, was $8.0 million and $7.5 million at December 31, 2009 and 2008, respectively. On a quarterly basis we assess our current earnings by jurisdiction to determine whether or not our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future tax benefits. Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. A reduction of net income before taxes in each subsidiary equal to 5% of revenue, compared to the corresponding reported amounts for the year ended December 31, 2009, would not result in the recognition of incremental valuation allowances except in two subsidiaries where a 5% reduction could result in our recording a valuation allowance of $1.2 million for those subsidiaries.

For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is recorded to offset the deferred tax asset within that jurisdiction. In assessing the need for a valuation allowance, we consider future taxable income and ongoing prudent and feasible tax planning strategies. Alternatively, in the event that 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.

Our net deductible temporary differences and tax carryforwards are recorded using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax liability or asset is expected to be settled or realized. Should the expected applicable tax rates change in the future, an adjustment to the net deferred tax asset would be credited or charged, as appropriate, to income in the period such determination was made. For example, an increase of one percentage point in our anticipated U.S. state income tax rate would cause us to increase our net deferred tax asset balance by $0.3 million. This increase in the net deferred asset would increase net income in the period that our rate was adjusted. Likewise, a decrease of one percentage point to our anticipated U.S. state income tax rate would have the opposite effect.

We periodically assess our exposures related to our worldwide provision for income taxes and believe that we have appropriately accrued taxes for contingencies. Any reduction of these contingent liabilities or additional assessment would increase or decrease income, respectively, in the period such determination was made.

We consider the majority of the operating earnings of non-United States subsidiaries to be indefinitely invested outside the U.S. The cumulative earnings of these subsidiaries were $194.0 million at December 31, 2009. No provision has been made for U.S. federal and state, or international taxes that may result from future remittances of these undistributed earnings of non-United States subsidiaries. Should we repatriate these earnings in the future, we would have to adjust the income tax provision in the period in which the decision to repatriate earnings is made. For the operating earnings not considered to be indefinitely invested outside the United States we have accrued taxes on a current basis.

We record a liability for uncertain tax provisions in accordance with a comprehensive model for the recognition, measurement, and financial statement disclosure. This comprehensive model requires us to assess all tax positions against a more likely than not standard. We record tax benefits for only those positions that we believe will more likely than not be sustained. For positions that we believe that it is more likely than not that we will prevail, we record a benefit considering the amounts and probabilities that could be realized upon ultimate settlement. If our judgment as to the likely resolution of the uncertainty changes, if the uncertainty is ultimately settled or if the statute of limitation related to the uncertainty expires, the effects of the change would be recognized in the period in which the change, resolution or expiration occurs. As of December 31, 2009 our net liability for uncertain tax positions was $6.0 million, which includes estimated interest expense and penalties.

RESULTS OF OPERATIONS

Impact of Distribution Channel on Results of Operations. Because the instrument consumables and rapid assay products in our CAG segment 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.

Impact of Economic Factors, Including Foreign Currency Exchange Rates. Approximately 24% of our revenue is derived from products manufactured in the U.S. and sold internationally in local currencies. Strengthening of the rate of exchange for the U.S. dollar relative to other currencies has a negative impact on our international revenues and on margins of products manufactured in the U.S. and sold internationally. In addition, to the extent that the U.S. dollar is stronger in future periods relative to the exchange rates in effect in the corresponding prior periods, our growth rate will be negatively affected. The impact of foreign currency denominated operating expenses, foreign currency denominated supply contracts and the impact of foreign currency hedge contracts in place partly offset this exposure.

We believe that our financial results in 2009 continued to be negatively impacted by economic conditions that weakened over the course of 2008 due, in large part, to fewer patient visits to U.S. and European veterinary clinics for routine screening, preventive care and elective procedures. We believe reduced patient visits negatively impacted the growth rate of sales of rapid assay tests, instrument consumables, and laboratory diagnostic and consulting services in our CAG segment. In addition, we believe that the rate of growth of sales of our instruments, which are larger capital purchases for veterinarians, was negatively affected by increased caution among veterinarians regarding economic prospects. Weaker economic conditions also increased the sensitivity of our customers to the pricing of our products and services, resulting in lower price realization for certain products over the course of 2009 relative to prior periods.

Beyond our companion animal business, we are also seeing the weaker economy impact certain customer groups in our Water and PAS businesses. Lower Water testing volumes in the non-regulatory segments of the business have been driven by a decline in new home construction and reduced consumer willingness to spend on certain luxury items, such as vacation cruises. Lower PAS testing volumes have been driven by a reduction in non-regulatory producer and laboratory testing, as a measure to reduce operating costs, and by a reduction in testing associated with government mandated eradication programs, due to lower government funding.

While we expect these trends to continue in the near term, we believe the fundamental drivers of demand in the markets we serve to remain intact and that growth rates will improve as major world economies stabilize.

Twelve Months Ended December 31, 2009 Compared to Twelve Months Ended December 31, 2008

Revenue

Total Company. The following table presents revenue by operating segment:

For the Years Ended December 31,
																										Percentage
																										Change Net of
																						Percentage				Acquisitions/
																		Percentage				Change from				Divestitures
Net Revenue										Dollar				Percentage				Change from				Acquisitions/				and Currency
(dollars in thousands)		2009				2008				Change				Change				Currency(1)				Divestitures(2)				Effect
CAG		$	843,303			$	834,056			$	9,247				1.1	%			(2.3	%)			(2.0	%)			5.4	%
Water			73,214				74,469				(1,255	)			(1.7	%)			(3.4	%)			—				1.7	%
PAS			77,208				80,762				(3,554	)			(4.4	%)			(3.4	%)			—				(1.0	%)
Other			37,908				34,743				3,165				9.1	%			(0.4	%)			—				9.5	%
Total		$	1,031,633			$	1,024,030			$	7,603				0.7	%			(2.4	%)			(1.6	%)			4.7	%

The following revenue analysis and discussion 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 acquired or revenues lost from divisions divested subsequent to December 31, 2007.

Companion Animal Group. The following table presents revenue by product and service category for CAG:

For the Years Ended December 31,
																										Percentage
																										Change Net of
																						Percentage				Acquisitions/
																		Percentage				Change from				Divestitures
Net Revenue										Dollar				Percentage				Change from				Acquisitions/				and Currency
(dollars in thousands)		2009				2008				Change				Change				Currency(1)				Divestitures(2)				Effect
Instruments and consumables		$	332,706			$	318,533			$	14,173				4.4	%			(2.7	%)			—				7.1	%
Rapid assay products			147,078				146,867				211				0.1	%			(0.7	%)			—				0.8	%
Laboratory diagnostic and consulting services			298,410				288,244				10,166				3.5	%			(3.0	%)			0.7	%			5.8	%
Practice information management systems and digital radiography			65,055				61,291				3,764				6.1	%			(0.8	%)			0.2	%			6.7	%
Pharmaceutical products			54				19,121				(19,067	)			(99.7	%)			—				(99.6	%)			(0.1	%)
Net CAG revenue		$	843,303			$	834,056			$	9,247				1.1	%			(2.3	%)			(2.0	%)			5.4	%

The increase in instruments and consumables revenue was due to higher sales volumes, partly offset by lower average unit sales prices on instruments. Higher sales volumes were driven primarily by sales of our Catalyst Dx^® analyzer, which was launched at the end of the first quarter of 2008. This impact was partly offset by a decrease in sales of our other IDEXX VetLab^® instruments, most notably of LaserCyte^® analyzers, due primarily to market penetration and a shift in focus of our sales efforts to our newer instruments. Higher sales volume was also attributable to sales of consumables used with the Catalyst Dx^® instrument, partly offset by lower sales of consumables used with our VetTest^® instrument as Catalyst Dx^® instruments have replaced VetTest^® instruments at certain customers. Instrument service revenue also contributed to revenue growth as our active installed base of instruments covered under service contracts continued to increase. Lower average unit sales prices for instruments were primarily related to sales of our LaserCyte^® analyzers, resulting from discounts associated with customer purchase programs. Changes in distributors’ inventory levels did not have a meaningful impact on reported instruments and consumables revenue growth.

The slight increase in rapid assay revenue was due to higher practice-level sales resulting from increased sales volumes of canine combination test products and SNAP^® cPL^™, our test for pancreatitis in dogs, partly offset by lower sales volumes of feline combination test products. To a lesser extent, higher average unit sales prices also contributed to the increase in rapid assay revenue. Changes in distributors’ inventory levels did not have a meaningful impact on reported rapid assay revenue growth.

The increase in laboratory diagnostic and consulting services revenue resulted primarily from the impact of higher testing volume and price increases. Higher testing volume was the result of growth in our customer base and the impact of new test offerings. To a lesser extent, revenue was also favorably impacted by incremental sales from businesses acquired in 2009.

The increase in practice information management systems and digital radiography revenue resulted primarily from higher sales volumes of companion animal radiography systems and peripheral equipment and support services related to our practice information management systems. These favorable items were partly offset by lower sales of equine radiography systems, lower average unit prices for companion animal radiography systems, and lower sales of Cornerstone^® practice information management systems.

In the fourth quarter of 2008, we sold a substantial portion of our pharmaceutical assets and product lines, and therefore did not have significant pharmaceutical product revenue in 2009. We have retained certain intellectual property and licenses for developed products as well as certain less significant product lines, which have been reassigned to other lines of business. Prior year amounts have been reclassified to conform to current year presentation. See Note 19 to the consolidated financial statements for the year ended December 31, 2009 included in this Annual Report on Form 10-K.

Water. The increase in Water revenue resulted primarily from higher average unit sales prices, partly offset by lower sales volume of certain Water products. Higher average unit sales prices were attributable to a favorable mix of product sales within certain markets; the impact of price increases for certain products sold in the U.S.; and higher relative sales in geographies where products are sold at higher average unit sales prices.

Production Animal Segment. The decrease in PAS revenue resulted primarily from the impact of the timing of revenue recognition on shipments to a customer, where revenue for shipments to that customer is recognized on the cash basis of accounting due to uncertain collectability and lower average unit sales prices. These unfavorable items were partly offset by higher overall sales volumes.

Other. The increase in Other revenue was due primarily to higher sales volumes of Dairy and OPTI Medical products. Higher Dairy volume was primarily attributable to Dairy SNAP^® antibiotic residue tests, a recently released Dairy SNAP^® residue test for detection of melamine and a recently launched instrument. These favorable items were partly offset by lower average unit sales prices for OPTI Medical products.

Gross Profit

Total Company. The following table presents gross profit and gross profit percentages by operating segment:

For the Years Ended December 31,
Gross Profit						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2009				Revenue				2008				Revenue				Change				Change
CAG		$	410,356				48.7	%		$	412,199				49.4	%		$	(1,843	)			(0.4	%)
Water			47,233				64.5	%			47,052				63.2	%			181				0.4	%
PAS			51,256				66.4	%			55,005				68.1	%			(3,749	)			(6.8	%)
Other			17,067				45.0	%			15,131				43.6	%			1,936				12.8	%
Unallocated amounts			369				N/A				379				N/A				(10	)			(2.6	%)
Total Company		$	526,281				51.0	%		$	529,766				51.7	%		$	(3,485	)			(0.7	%)

Companion Animal Group. Gross profit for CAG decreased due to a decrease in the gross profit percentage of less than one percentage point to 49%. The decrease in the gross profit percentage was due primarily to the absence of higher margin pharmaceutical product sales in 2009; higher relative sales of lower margin products and services, primarily IDEXX VetLab^® instruments and laboratory diagnostic and consulting services; higher product overhead spending due, in part, to investment in facilities and production equipment to meet anticipated future demand; and the impact of lower volumes of most of our instruments, except for Catalyst Dx^® and SNAPshot Dx^® analyzers. These unfavorable impacts were partly offset by gross profit improvement in our laboratory diagnostic and consulting services line of business due, in part, to higher selling prices and operational efficiencies. Lower depreciation expense associated with IDEXX VetLab^® instruments previously placed under rental agreements also favorably impacted gross profit percentage.

Water. Gross profit for Water increased due to an increase in the gross profit percentage to 64.5% from 63%. The increase in the gross profit percentage was due primarily to the impact of lower royalty costs and, to a lesser extent, higher average unit sales prices. These favorable items were partly offset by higher overall manufacturing costs and higher costs related to product distribution.

Production Animal Segment. Gross profit for PAS decreased due to lower sales volume and a decrease in the gross profit percentage to 66% from 68%. The decrease in gross profit percentage was due primarily to higher costs of product manufacturing and the impact of lower revenue recognized related to a customer where revenue is recognized on the cash basis of accounting due to uncertain collectability. These items were partly offset by the favorable impact of foreign currency hedge contracts and the favorable currency impact on foreign currency denominated expenses, net of the unfavorable impact the strengthening of the U.S. dollar had on sales denominated in foreign currencies and lower royalty costs.

Other. Gross profit for Other increased due to higher sales volume and an increase in the gross profit percentage to 45% from 44%. The increase in gross profit percentage was due to lower overall costs of product manufacturing in our OPTI Medical and Dairy businesses and, to a lesser extent, greater relative sales of higher margin Dairy SNAP^® tests and OPTI Medical instrument consumables. These favorable items were partly offset by lower average unit sales prices of OPTI Medical products.

Operating Expenses and Operating Income

Total Company. The following tables present operating expenses and operating income by operating segment:

For the Years Ended December 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2009				Revenue				2008				Revenue				Change				Change
CAG		$	274,235				32.5	%		$	282,579				33.9	%		$	(8,344	)			(3.0	%)
Water			15,618				21.3	%			15,722				21.1	%			(104	)			(0.7	%)
PAS			33,985				44.0	%			33,245				41.2	%			740				2.2	%
Other			13,642				36.0	%			13,576				39.1	%			66				0.5	%
Unallocated amounts			12,832				N/A				12,188				N/A				644				5.3	%
Total Company		$	350,312				34.0	%		$	357,310				34.9	%		$	(6,998	)			(2.0	%)

Operating Income						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2009				Revenue				2008				Revenue				Change				Change
CAG		$	136,121				16.1	%		$	129,620				15.5	%		$	6,501				5.0	%
Water			31,615				43.2	%			31,330				42.1	%			285				0.9	%
PAS			17,271				22.4	%			21,760				26.9	%			(4,489	)			(20.6	%)
Other			3,425				9.0	%			1,555				4.5	%			1,870				120.3	%
Unallocated amounts			(12,463	)			N/A				(11,809	)			N/A				(654	)			(5.5	%)
Total Company		$	175,969				17.1	%		$	172,456				16.8	%		$	3,513				2.0	%

Companion Animal Group. The following table presents CAG operating expenses by functional area:

For the Years Ended December 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2009				Revenue				2008				Revenue				Change				Change
Sales and marketing		$	141,681				16.8	%		$	143,644				17.2	%		$	(1,963	)			(1.4	%)
General and administrative			92,122				10.9	%			93,008				11.2	%			(886	)			(1.0	%)
Research and development			40,432				4.8	%			45,927				5.5	%			(5,495	)			(12.0	%)
Total operating expenses		$	274,235				32.5	%		$	282,579				33.9	%		$	(8,344	)			(3.0	%)

As previously described, we sold a substantial portion of our pharmaceutical assets and product lines and restructured the remainder of this business in the fourth quarter of 2008. As a result, we did not incur meaningful expenses related to this business in 2009 and will not incur meaningful expenses in the future. This impact on sales and marketing expense, general and administrative expense and research and development expense is referred to in the following operating expense analysis as the impact of the “pharmaceutical transaction.” In relation to restructuring the remainder of the pharmaceutical business, certain research and development personnel were realigned to our corporate research and development team, for which expenses are not allocated to our operating segments. A portion of the decrease in spending explained within the CAG section is due to this restructuring.

The decrease in sales and marketing expense resulted primarily from the effects of the pharmaceutical transaction and from the favorable impact of exchange rates on foreign currency denominated expenses. These decreases were partly offset by higher personnel and personnel-related costs due, in part, to the addition of customer support, sales and marketing personnel, and an increase in facility expenses related to completion of significant phases of our headquarters expansion project in 2009. The decrease in general and administrative expense resulted primarily from the favorable impact of exchange rates on foreign currency denominated expenses, the effects of the pharmaceutical transaction and lower bad debt expense. These decreases were partly offset by an impairment charge of $1.5 million to write off an acquired intangible asset associated with our equine digital radiography business. To a lesser extent, the decreases noted were also offset by an increase in spending related to general support functions in the U.S. and Europe and incremental expenses associated with businesses acquired subsequent to January 1, 2009, comprised mainly of administrative expenses of a recurring nature to support the acquired businesses and transaction related expenses. The decrease in research and development expense resulted primarily from a decrease in spending related to the pharmaceutical business.

Water. The following table presents Water expenses by functional area:

For the Years Ended December 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2009				Revenue				2008				Revenue				Change				Change
Sales and marketing		$	7,115				9.7	%		$	7,504				10.1	%		$	(389	)			(5.2	%)
General and administrative			5,851				8.0	%			5,674				7.6	%			177				3.1	%
Research and development			2,652				3.6	%			2,544				3.4	%			108				4.2	%
Total operating expenses		$	15,618				21.3	%		$	15,722				21.1	%		$	(104	)			(0.7	%)

The decrease in sales and marketing expense resulted primarily from the favorable impact of exchange rates on foreign currency denominated expenses, lower spending on consulting services and a decrease in spending on travel. The increase in general and administrative expense resulted from higher bad debt expense and higher spending on corporate support function expenses, partly offset by lower legal expenses and the favorable impact of exchange rates on foreign currency denominated expenses. The increase in research and development expense was due primarily to an increase in spending associated with enhancing the functionality of an existing product, qualifying second source suppliers of certain raw materials and new product development. These increases were partly offset by lower spending related to product registration related fees and the favorable impact of exchange rates on foreign currency denominated expenses.

Production Animal Segment. The following table presents PAS operating expenses by functional area:

For the Years Ended December 31,
Operating Expenses						Percent of								Percent of				Dollar				Percentage
(dollars in thousands)		2009				Revenue				2008				Revenue				Change				Change
Sales and marketing		$	12,650				16.4	%		$	12,982				16.1	%		$	(332	)			(2.6	%)
General and administrative			12,845				16.6	%			12,416				15.4	%			429				3.5	%
Research and development			8,490				11.0	%			7,847				9.7	%			643				8.2	%
Total operating expenses		$	33,985				44.0	%		$	33,245				41.2	%		$	740				2.2	%

The decrease in sales and marketing expense resulted primarily from the favorable impact of exchange rates on foreign currency denominated expenses and lower spending on marketing activities. The increase in general and administrative expense resulted primarily from increased personnel costs and higher legal spending, partly offset by the favorable impact of exchange rates on foreign currency denominated expenses and lower intangible asset amortization expense. The increase in research and development expense resulted primarily from an increase in spending on product development, increased personnel-related expenses and increased spending on supplies, partly offset by the favorable impact of exchange rates on foreign currency denominated expenses.

Other. Operating expenses for Other operating units increased $0.1 million to $13.6 million for the year ended December 31, 2009. The unfavorable impact of an increase in deferred compensation expense associated with an employee plan assumed in the acquisition of OPTI Medical, higher personnel-related costs and higher bad debt expense were almost entirely offset by the receipt of a milestone payment and, to a lesser extent, by lower spending on marketing materials and advertising in our OPTI Medical and Dairy businesses. In the fourth quarter of 2009, we received a milestone payment of $2 million related to the sale of product rights in connection with the disposition of our pharmaceutical division in the fourth quarter of 2008. The receipt of this payment was due to the achievement of certain development milestones by the third party that purchased the product rights. Because we have no obligation to deliver product or services, or otherwise provide support to the third party under this agreement, receipt of milestone payments are included in results of operations, but are not classified as revenue as the transaction was accounted for as the sale of a product line. We may receive up to $9.5 million of future payments based on the achievement of future sales milestones by this third party. Additional milestone payments will be included in our results of operations upon achievement of the milestone.

Unallocated Amounts. Operating expenses that are not allocated to our operating segments increased $0.6 million to $12.8 million for the year ended December 31, 2009 due to the write-off of capitalized costs related to an information technology project and higher expense related to share-based compensation. These increases were partly offset by the impact of the fourth quarter 2008 sale of our Acarexx^® and SURPASS^® pharmaceutical products and a product that was under development, and the subsequent restructuring of the remaining pharmaceutical division. In 2008, we recognized a loss on the transaction and restructuring of approximately $1.5 million, of which $1.1 million was recorded in general and administrative expense, $0.3 million was recorded in sales and marketing expense and $0.1 million was recorded in research and development expense.

Interest Income and Interest Expense

Interest income was $0.5 million for the year ended December 31, 2009 compared to $2.3 million for the same period of the prior year. The decrease in interest income was due to lower effective interest rates, partly offset by higher average invested cash balances.

Interest expense was $1.9 million for the year ended December 31, 2009 compared to $4.6 million for the same period of the prior year. The decrease in interest expense was due to lower effective interest rates on outstanding debt balances, partly offset by lower capitalized interest and higher average borrowings under our revolving credit facility.

Provision for Income Taxes

Our effective income tax rate was 30.0% for the year ended December 31, 2009 and 31.7% for the year ended December 31, 2008. The decrease in tax rate was due primarily to the recognition of tax benefits resulting from the expiration of certain statutes of limitations, settlement of an audit in an international tax jurisdiction and the write-off of non-deductible goodwill related to the pharmaceutical product lines sold in the fourth quarter of 2008. These benefits were partly offset by a reduction in international deferred tax liabilities in 2008 due to a 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 year ended December 31, 2008 by 0.9 percentage points.

In the next year, it is reasonably possible that we could recognize up to $1.5 million of income tax benefits that have not been recognized at December 31, 2009. The income tax benefits are primarily due to the lapse in the statutes of limitations for various U.S. and international tax jurisdictions.

Twelve Months Ended December 31, 2008 Compared to Twelve Months Ended December 31, 2007

Revenue

Total Company. The following table presents revenue by operating segment:

For the Years Ended December 31,
																										Percentage
																										Change Net of
																						Percentage				Acquisitions/
																		Percentage				Change from				Divestitures
Net Revenue										Dollar				Percentage				Change from				Acquisitions/				and Currency
(dollars in thousands)		2008				2007				Change				Change				Currency(1)				Divestitures(2)				Effect
CAG		$	834,056			$	750,449			$	83,607				11.1	%			1.0	%			0.8	%			9.3	%
Water			74,469				66,235				8,234				12.4	%			0.3	%			—				12.1	%
PAS			80,762				75,085				5,677				7.6	%			4.8	%			2.7	%			0.1	%
Other			34,743				30,786				3,957				12.9	%			2.8	%			2.9	%			7.2	%
Total		$	1,024,030			$	922,555			$	101,475				11.0	%			1.3	%			0.9	%			8.8	%

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 acquired or revenues lost from divisions divested subsequent to December 31, 2006.

Companion Animal Group. The following table presents revenue by product and service category for CAG:

For the Years Ended December 31,
																										Percentage
																										Change Net of
																						Percentage				Acquisitions/
																		Percentage				Change from				Divestitures
Net Revenue										Dollar				Percentage				Change from				Acquisitions/				and Currency
(dollars in thousands)		2008				2007				Change				Change				Currency(1)				Divestitures(2)				Effect
Instruments and consumables		$	318,533			$	289,271			$	29,262				10.1	%			1.0	%			—				9.1	%
Rapid assay products			146,867				133,508				13,359				10.0	%			0.9	%			—				9.1	%
Laboratory diagnostic and consulting services			288,244				255,193				33,051				13.0	%			1.5	%			2.5	%			9.0	%
Practice information management systems and digital radiography			61,291				53,385				7,906				14.8	%			(0.2	%)			—				15.0	%
Pharmaceutical products			19,121				19,092				29				0.2	%			—				(2.5	%)			2.7	%
Net CAG revenue		$	834,056			$	750,449			$	83,607				11.1	%			1.0	%			0.8	%			9.3	%