10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[ X ]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2005
	OR
[    ]	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: 0-22427

HESKA CORPORATION
(Exact name of registrant as specified in its charter)

Delaware	77-0192527
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
1613 Prospect Parkway
Fort Collins, Colorado	80525
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (970) 493-7272

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

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

         The number of shares of the Registrant’s Common Stock, $.001 par value, outstanding at May 13, 2005 was 49,454,101

HESKA CORPORATION

FORM 10-Q

QUARTERLY REPORT

TABLE OF CONTENTS

		Page
	PART I.   FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets (Unaudited) as of       December 31, 2004 and March 31, 2005	2
	Condensed Consolidated Statements of Operations (Unaudited) for the      three months ended March 31, 2004 and 2005	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the      three months ended March 31, 2004 and 2005	4
	Notes to Condensed Consolidated Financial Statements (Unaudited)	5
Item 2.	Management's Discussion and Analysis of Financial Condition and       Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	321
Item 4.	Controls and Procedures	33
	PART II.   OTHER INFORMATION
Item 1.	Legal Proceedings	34
Item 2.	Changes in Securities and Use of Proceeds	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Submission of Matters to a Vote of Security Holders	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
Signatures		35

           i-STAT is a registered trademark of i-STAT Corporation. SPOTCHEM is a trademark of Arkray, Inc. TRI-HEART is a registered trademark of Schering-Plough Animal Health Corporation in the United States. HESKA, ALLERCEPT, AVERT, E.R.D.-HEALTHSCREEN, E-SCREEN, IMMUCHECK, PERIOCEUTIC, SOLO STEP, VET/E-SIG AND VET/OX are registered trademarks and CBC-DIFF, ERD, FELINE ULTRANASAL, G2 DIGITAL, THYROMED and VET/IV are trademarks of Heska Corporation in the United States and/or other countries. This 10-Q also refers to trademarks and trade names of other organizations.

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands except per share amounts)
(unaudited)

ASSETS
	December 31, 2004		March 31, 2005
Current assets:
Cash and cash equivalents	$	4,982	$	4,690
Accounts receivable, net of allowance for doubtful accounts of           $95 and $106, respectively		10,634		9,846
Inventories, net		11,726		11,524
Other current assets		1,100		917
Total current assets		28,442		26,977
Property and equipment, net		7,925		8,117
Intangible assets, net		1,499		1,519
Goodwill		643		643
Other assets		215		216
Total assets	$	38,724	$	37,472

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	6,697		$	7,384
Accrued liabilities		3,187			3,222
Current portion of deferred revenue		2,708			2,309
Line of credit		10,375			10,582
Current portion of long-term debt		302			1,656
Total current liabilities		23,269			25,153
Long-term debt, net of current portion		1,466			25
Deferred revenue, net of current portion, and other		11,410			10,975
Total liabilities		36,145			36,153
Commitments and contingencies
Stockholders’equity:
Preferred stock, $.001 par value, 25,000,000 shares authorized; none issued          or outstanding		--			--
Common stock, $.001 par value, 75,000,000 shares authorized; 49,338,636 and          49,441,971 shares issued and outstanding, respectively		49			49
Additional paid-in capital		212,533			212,623
Deferred compensation		(67	)		(46	)
Accumulated other comprehensive income		170			107
Accumulated deficit		(210,106	)		(211,414	)
Total stockholders’equity		2,579			1,319
Total liabilities and stockholders’ equity	$	38,724		$	37,472

See accompanying notes to condensed consolidated financial statements.

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)

	Three Months Ended March 31,
	2004			2005
Revenue, net:
Product revenue, net:
Core companion animal health	$	14,114		$	12,856
Other vaccines, pharmaceuticals and products		2,305			3,980
Total product revenue, net		16,419			16,836
Research, development and other		322			318
Total revenue		16,741			17,154
Cost of revenue:
Cost of products sold		10,461			11,057
Cost of research, development and other		135			179
Total cost of revenue		10,596			11,236
Gross profit		6,145			5,918
Operating expenses:
Selling and marketing		4,448			3,799
Research and development		1,713			1,227
General and administrative		2,041			1,995
Total operating expenses		8,202			7,021
Loss from operations		(2,057	)		(1,103	)
Interest and other (income) expense, net		(63	)		205
Net loss	$	(1,994	)	$	(1,308	)
Basic and diluted net loss per share	$	(0.04	)	$	(0.03	)
Shares used to compute basic and diluted net loss per share		48,905			49,375

See accompanying notes to condensed consolidated financial statements.

HESKA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	Three Months Ended March 31,
	2004			2005
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss	$	(1,994	)	$	(1,308	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Depreciation and amortization		375			471
Amortization of intangible assets		32			40
Stock based compensation		25			21
Provision for (recovery of) bad debt		(5	)		12
Changes in operating assets and liabilities:
Accounts receivable		557			790
Inventories		(116	)		216
Other current assets		(189	)		183
Other long-term assets		12			--
Accounts payable		(370	)		696
Accrued liabilities		290			35
Deferred revenue and other long-term liabilities		(311	)		(834	)
Other		(1	)		2
Net cash (used in) provided by operating activities		(1,695	)		324
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from licensing of technology and product rights		400			--
Purchase of property and equipment		(442	)		(666	)
Capitalized patent costs		(135	)		(60	)
Net cash provided by (used in) investing activities		(177	)		(726	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		129			90
Proceeds from line of credit borrowings, net		2,205			207
Repayments of debt and capital lease obligations		(134	)		(87	)
Net cash provided by financing activities		2,200			210
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(47	)		(100	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		281			(292	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		4,877			4,982
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	5,158		$	4,690
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	125		$	212

See accompanying notes to condensed consolidated financial statements.

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
(UNAUDITED)

1.        ORGANIZATION AND BUSINESS

          Heska Corporation (“Heska” or the “Company”) discovers, develops, manufactures, markets, sells, distributes and supports veterinary products. Heska’s core focus is on the canine and feline companion animal health markets. The Company has devoted substantial resources to the research and development of innovative products in these areas, where it strives to provide high value products for unmet needs in veterinary medicine.

          Heska is comprised of two reportable segments, Core Companion Animal Health and Other Vaccines, Pharmaceuticals and Products. The Core Companion Animal Health segment includes diagnostic and monitoring instruments and supplies as well as single use diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use. These products are sold directly by the Company as well as through independent third party distributors and other distribution relationships. The Other Vaccines, Pharmaceuticals and Products segment (“OVP”), previously reported as the Diamond Animal Health segment, includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small mammals, horses and fish. All OVP products are currently sold by third parties under third party labels.

          The Company has incurred annual net losses since its inception and anticipates that it will continue to incur net losses in the near term as it introduces new products, expands its sales and marketing capabilities and continues its research and development activities. Cumulative net losses from inception of the Company in 1988 through March 31, 2005, have totaled $211.4 million. During the three months ended March 31, 2005, the Company incurred a loss of approximately $1.3 million and operations provided cash of approximately $324,000.

          The Company’s primary short-term needs for capital are based on its continuing research and development efforts, its sales, marketing and administrative activities, working capital associated with increased product sales and capital expenditures relating to maintaining and developing its manufacturing operations. The Company’s ability to achieve sustained profitable operations will depend primarily upon its ability to successfully market its products, commercialize products that are currently under development and develop new products. Many of the Company’s products are subject to long development and regulatory approval cycles and there can be no guarantee that the Company will successfully develop, manufacture or market these products. There also can be no guarantee that the Company will attain quarterly, annual, or sustained profitability in the future.

           The Company has a credit facility agreement with Wells Fargo Business Credit, Inc. (“Wells Fargo”) which expires on May 31, 2006. Under this agreement, the Company is required to comply with various financial and non-financial covenants in order to borrow. On May 10, 2005 the Company signed an amended agreement under which Wells Fargo waived certain historical events of non-compliance, including with a covenant on March 31, 2005. If the Company fails to comply with the covenants, Wells Fargo may, at its discretion, make all amounts due to them, immediately due and payable. The Company’s latest projections indicate that it is not probable that it will remain in compliance with all of its debt covenants through the next 12 months. The Company has begun discussions with Wells Fargo, discussed below, including regarding modification of the covenants under this agreement. There can be no guarantee that Wells Fargo will, as it has historically, modify the Company’s covenants. As a result, all debt obligations, including those to Wells Fargo and others that are cross- collateralized with Wells Fargo, totaling approximately $1.7 million have been reflected as current portion on long-term debt in the March 31, 2005 balance sheet. The Company has begun discussions with Wells Fargo and other lenders regarding an amended or new credit facility agreement which would involve increased borrowings against certain of the Company’s assets.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

          The accompanying unaudited condensed consolidated financial statements are the responsibility of the Company’s management and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and rules and regulations of the Securities and Exchange Commission (the “SEC”). The condensed consolidated balance sheet as of December 31, 2004 and March 31, 2005, and the condensed consolidated statements of operations and cash flows for the three months ended March 31, 2004 and 2005 are unaudited, but include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. All material intercompany transactions and balances have been eliminated in consolidation. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in complete financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC.

          Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2004, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2005.

Use of Estimates

          The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates are required when establishing the allowance for doubtful accounts and the provision for excess/obsolete inventory, in determining the period over which the Company’s obligations are fulfilled under agreements to license product rights and/or technology rights and in evaluating long-lived assets for impairment.

Reclassifications

           Certain prior year numbers have been reclassified to be consistent with the current year presentation. These reclassifications include certain amortized fees previously reflected as Research, Development and Other Revenue which are now included in Product Revenue and certain costs previously reflected as Research and Development Expenses which are now included in Cost of Research, Development and Other Revenue.

Basic and Diluted Net Loss Per Share

          Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of shares of common stock outstanding, and, if not anti-dilutive, the effect of outstanding common stock equivalents (such as stock options and warrants) determined using the treasury stock method. Since inception, due to the Company’s annual net losses, all potentially dilutive securities are anti-dilutive and as a result, basic net loss per share is the same as diluted net loss per share for all periods presented. At March 31, 2004 and 2005,

securities that have been excluded from diluted net loss per share because they would be anti-dilutive are outstanding options to purchase 8,796,261 and 11,224,247 shares, respectively, of the Company’s common stock.

Stock Based Compensation

          The Company accounts for its stock-based compensation plans using the intrinsic value method in accordance with Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations, and follows the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“SFAS No. 148”). Statement of Financial Accounting Standards No. 123 “Share-Based Payments” (SFAS No. 123R) was revised in December 2004 and the Company had planned to adopt this standard under the modified prospective of adoption beginning July 1, 2005. On April 14, 2005, the SEC deferred the date of required adoption for SFAS No. 123R for companies in Heska’s position to fiscal years beginning after June 15, 2005. The Company intends to adopt this standard beginning January 1, 2006. At March 31, 2005, the Company had two stock-based compensation plans. The Company recorded compensation expense of $23,000 and $21,000 related to the Company’s restricted stock for the three months ended March 31, 2004 and 2005, respectively.

          Had compensation expense for the Company’s stock-based compensation plans been based on the fair value at the grant dates for awards under those plans, consistent with the methodology of SFAS No. 123, the Company’s net loss and net loss per share for the three months ended March 31, 2004 and 2005 would approximate the pro forma amounts as follows (in thousands, except per share amounts):

	Three Months Ended March 31,
	2004			2005
	(in thousands, except per share amounts)
Net loss as reported	$	(1,994	)	$	(1,308	)
Stock-based employee compensation        expense included in the determination of        net loss, as reported		25			21
Stock-based employee compensation         expense, as if the fair value based method         had been applied to all awards		(468	)		(1,685	)
Net loss, pro forma	$	(2,437	)	$	(2,972	)
Net loss per share:
Basic and diluted - as reported	$	(0.04	)	$	(0.03	)
Basic and diluted - pro forma	$	(0.05	)	$	(0.06	)

           On February 24, 2005, the Company’s Board of Directors considered the significant impact that the use of fair values, rather than intrinsic values, would have on the Company’s future results of operations, as well as factors including that the management team had requested that their salaries be frozen for 2005, many non-management employees’ 2005 raises were to be at below market levels, no management bonus payouts were made for 2004 and the 2005 management incentive plan calls for a performance in excess of the Company’s internal budget before any bonus payments are made, and authorized the Company’s Stock Option Committee, which currently consists solely of the Company’s Chief Executive Officer, to accelerate the vesting of any outstanding but unvested stock options with a strike price that is not “in-the-money” through June 30, 2005 at its discretion. On March 30, 2005, the Company’s Stock Option Committee exercised its discretion and accelerated the vesting of outstanding but unvested stock options with a strike price greater than or equal to $0.82. This action effected approximately 750,000 options, approximately 55,000 of which were held by the Company’s Directors and Executive Officers. These options were not “in-the-money” at that time, and therefore, there was no compensation expense recorded in accordance with APB No. 25 as a result of this modification. However, for pro forma purposes in accordance with SFAS No. 123, the remaining unamortized compensation expense related

to these options, calculated under SFAS No. 123 of approximately $540,000 was recorded in the first quarter of 2005 and included in the table above. In addition, during the first quarter of 2005, options for approximately 2.1 million shares were issued and immediately vested.

          The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for options granted in the three months ended March 31, 2004 and 2005. The estimated total fair value of the options granted during the three months ended March 31, 2004 was approximately $1,498,000. The estimated total fair value of the options granted during the three months ended March 31, 2005 was approximately $1,041,000.

	Three Months Ended                        March 31,
	2004		2005
Risk-free interest rate		3.4%		4.1%
Expected lives		4.6 years		2.9 years
Expected volatility		78%		86%
Expected dividend yield		0%		0%

          A summary of the Company's stock option plans is as follows:

	Year Ended December 31,					Three Months Ended March 31,
	2004					2005
	Options			Weighted Average Exercise Price		Options			Weighted Average Exercise Price
Outstanding at beginning of period		7,954,648		$	1.5163		9,350,959		$	1.4509
Granted at market		2,575,830		$	1.8890		2,105,966		$	0.8887
Granted above market		418		$	2.6300		--		$	--
Cancelled		(792,963	)	$	3.8742		(129,239	)	$	1.8317
Exercised		(386,974	)	$	0.7476		(103,439	)	$	0.7208
Outstanding at end of period		9,350,959		$	1.4509		11,224,247		$	1.3478
Exercisable at end of period		7,939,567		$	1.5532		10,753,477		$	1.3774

          The following table summarizes information about stock options outstanding and exercisable at March 31, 2005:

	Options Outstanding						Options Exercisable
Exercise Prices	Number of Options Outstanding at March 31, 2005		Weighted Average Remaining Contractual Life in Years		Weighted Average Exercise Price		Number of Options Exercisable at March 31, 2005		Weighted Average Exercise Price
$0.34 - $0.70		1,916,445		7.10	$	0.5921		1,445,852	$	0.5654
$0.71 - $0.88		2,144,683		9.87	$	0.8764		2,144,506	$	0.8765
$0.89 - $1.14		2,176,475		7.26	$	1.0329		2,176,475	$	1.0329
$1.15 - $1.59		2,648,979		7.16	$	1.3773		2,648,979	$	1.3773
$1.60 - $15.00		2,337,665		7.30	$	2.6595		2,337,665	$	2.6595
$0.34 - $15.00		11,224,247		7.71	$	1.3478		10,753,477	$	1.3774

3.       RESTRUCTURING AND OTHER OPERATING EXPENSES

           At March 31, 2005, The Company had approximately $6,000 of accrued restructuring expenses included in accrued liabilities on its balance sheet. These remaining expenses will be recognized during the three months ending June 30, 2005.

           Shown below is a reconciliation of restructuring costs for the three months ended March 31, 2004 (in thousands):

	Balance at December 31, 2003		Additions for the Three Months Ended March 31, 2004		Payments for the Three Months Ended March 31, 2004			Balance at March 31, 2004
Leased facility closure costs	$	51	$	--	$	(9	)	$	42
Products and other		70		--		--			70
Total	$	121	$	--	$	(9	)	$	112

4.        SEGMENT REPORTING

          The Company is comprised of two reportable segments, Core Companion Animal Health (“CCA”) and Other Vaccines, Pharmaceuticals and Products (“OVP”). The Core Companion Animal Health segment includes diagnostic and monitoring instruments and supplies, as well as single use diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use. These products are sold directly by the Company as well as through independent third party distributors and other distribution relationships. Core Companion Animal Health segment products manufactured at the Des Moines, Iowa production facility included in OVP’s assets are transferred at cost and are not recorded as revenue for OVP. The Other Vaccines, Pharmaceuticals and Products segment includes private label vaccine and pharmaceutical production, primarily for cattle, but also for other animals including small mammals, horses and fish. All OVP products are currently sold by third parties under third party labels.

          Additionally, the Company generates non-product revenue from sponsored research and development projects for third parties, licensing of technology and royalties. These revenues are allocated as appropriate between CCA and OVP.

          Summarized financial information concerning the Company’s reportable segments is shown in the following table (in thousands):

	Total Core Companion Animal Health			Total Other Vaccines, Pharmaceuticals and Products			Total
Three Months Ended March 31, 2004:
Total revenue	$	14,424		$	2,317		$	16,741
Operating income (loss)		(1,986	)		(71	)		(2,057	)
Total assets		24,006			15,092			39,098
Capital expenditures		421			21			442
Depreciation and amortization		128			247			375

Three Months Ended March 31, 2005:
Total revenue	$	13,132		$	4,022	$	17,154
Operating income (loss)		(1,612	)		509		(1,103	)
Total assets		23,029			14,443		37,472
Capital expenditures		332			334		666
Depreciation and amortization		183			288		471

5.        COMPREHENSIVE INCOME

          Comprehensive income includes net income plus the results of certain stockholders’ equity changes not reflected in the Condensed Consolidated Statements of Operations. Such changes include primarily foreign currency translation items. Total comprehensive loss for the three months ended March 31, 2004 and 2005 was $2,036,000 and $1,370,000, respectively.

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue sources and concentration, gross profit margins, selling and marketing expenses, research and development expenses, general and administrative expenses, capital resources, additional financings or borrowings and additional losses, are subject to risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-Q, particularly in “Factors that May Affect Results,” that could cause actual results to differ materially from those projected. The forward-looking statements set forth in this Form 10-Q are as of May 16, 2005, and we undertake no duty to update this information.

     Overview

          We discover, develop, manufacture, market, sell, distribute and support veterinary products. Our business is comprised of two reportable segments, Core Companion Animal Health, which represented 80% and 76% of fiscal year 2004 and first quarter 2005 product revenue, respectively, and Other Vaccines, Pharmaceuticals and Products, previously reported as Diamond Animal Health, which represented 20% and 24% of fiscal year 2004 and first quarter 2005 product revenue, respectively.

          The Core Companion Animal Health segment includes diagnostic and monitoring instruments and supplies as well as single use diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use.

          Diagnostic and monitoring instruments and supplies represented approximately 45% and 44% of our fiscal year 2004 and first quarter 2005 product revenue, respectively. Many products in this area involve placing an instrument in the field and generating future revenue from consumables, including items such as supplies and service, as that instrument is used. A loss of or disruption in supply of consumables we are selling to an installed base of instruments could substantially harm our business. Historically, most revenue growth from consumables has resulted from an increased number of instruments in the field and not greater revenue per instrument. Major products in this area include our handheld electrolyte instrument, our chemistry instrument and our hematology instrument and their affiliated consumables. All products in this area are supplied by third parties, who typically own the product rights and supply the product to us under marketing and/or distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for veterinary use.

          Single use diagnostic and other tests, vaccines and pharmaceuticals represented approximately 35% and 32% of our fiscal year 2004 and first quarter 2005 product revenue, respectively, with the majority of revenue coming from diagnostic and other tests. Since items in this area are single use by their nature, our aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from existing customers and expand our customer base in the future. Major products in this area include our heartworm diagnostic tests, our heartworm preventive, our allergy diagnostic tests and our allergy immunotherapy. Products in this area are both supplied by third parties and manufactured by us.

          We consider the Core Companion Animal Health segment to be our core business and devote most of our management time and other resources to improving the prospects for this segment. Maintaining a continuing, reliable and economic supply of products we currently obtain from third parties is critical to our success in this area. Virtually all of our sales and marketing expenses are in the Core Companion Animal Health segment. The majority of our research and development spending is dedicated to this segment, as well. We have devoted substantial resources to the research and development of innovative products in Core Companion Animal Health, where we strive to provide high value products for unmet needs and advance the state of veterinary medicine.

          All our Core Companion Animal Health products are ultimately sold to or through veterinarians. In many cases, veterinarians will markup their costs to the end user. The acceptance of our products by veterinarians is critical to our success. Core Companion Animal Health products are sold directly by us as well as through independent third party distributors and other distribution relationships. In 2002, we implemented a new distribution model for our Core Companion Animal Health products which relies on third party distributors for a greater portion of our sales. We believe that one of our largest competitors, IDEXX Laboratories, Inc. (“IDEXX”), effectively prohibits its distributors from selling competitors’ products, including our diagnostic instruments and heartworm diagnostic tests. We believe the IDEXX restrictions limit our ability to engage national distributors to sell our full line of products and significantly restrict our ability to market our products to veterinarians.

          While we have decreased operating expenses over the past several years and intend to continue to exercise disciplined expense control, we expect operating expenses to increase as we grow our business in the intermediate term. We intend to reach sustained profitability through a combination of revenue growth and expense control. Accordingly, we closely monitor product revenue growth trends in our Core Companion Animal Health segment. While we experienced a 9% decline in product revenue in this segment for the first quarter of 2005 as compared to the first quarter of 2004, we expect to return to continued growth in this segment as compared to historical results beginning in the second quarter of 2005. Product revenue in our Core Companion Animal Health segment grew 11% in 2004 as compared to 2003 and has grown at a compounded annual growth rate of over 21% since 1998, our first full year as a public company.

          The Other Vaccines, Pharmaceuticals and Products segment (“OVP”) includes our 168,000 square foot USDA- and FDA-licensed production facility in Des Moines, Iowa. We view this facility as a strategic asset which will allow us to control our cost of goods on any vaccines and pharmaceuticals that we may commercialize in the future. We are increasingly integrating this facility with our operations elsewhere. For example, virtually all our U.S. inventory is now stored at this facility and fulfillment logistics are handled there. Core Companion Animal Health segment products manufactured at this facility are transferred at cost and are not recorded as revenue for OVP. We view OVP reported revenue as revenue primarily to cover the overhead costs of the facility and to generate incremental cash flow to fund our Core Companion Animal Health segment.

          OVP includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small mammals, horses and fish. All OVP products are sold by third parties under third party labels.

          We have developed our own line of bovine vaccines that are licensed by the USDA. We have a long-term agreement with a distributor, Agri Laboratories, Ltd., (“AgriLabs”), for the marketing and sale of certain of these vaccines which are sold primarily under the Titanium® and MasterGuard® brands which are registered trademarks of AgriLabs. This agreement generates a significant portion of OVP’s revenue. Subject to certain purchase minimums, under our long-term agreement, AgriLabs has the exclusive right to sell the aforementioned bovine vaccines in the United States, Africa, China, Mexico and Taiwan until at least December 2009. This exclusivity can be extended by us under certain conditions. OVP also produces vaccines and pharmaceuticals for other third parties.

           Additionally, we generate non-product revenues from sponsored research and development projects for third parties, licensing of technology and royalties. We perform these sponsored research and development projects for both companion animal and livestock product purposes.

     Critical Accounting Policies and Estimates

          Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the

disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expense during the periods. These estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. We have identified those critical accounting policies used in reporting our financial position and results of operations based upon a consideration of those accounting policies that involve the most complex or subjective decisions or assessment. We consider the following to be our critical policies.

                Revenue Recognition

We generate our revenue through sale of products, licensing of technology, royalties and sponsored research and development. Our policy is to recognize revenue when the applicable revenue recognition criteria have been met, which generally include the following:

• Persuasive evidence of an arrangement exists;

• Delivery has occurred or services rendered;

• Price is fixed or determinable; and

• Collectibility is reasonably assured.

Revenue from the sale of products is generally recognized after both the goods are shipped to the customer and acceptance has been received, if required, with an appropriate provision for estimated returns and allowances. Revenue from both direct sales to veterinarians and sales to independent third-party distributors are generally recognized when goods are shipped. Our products are shipped complete and ready to use by the customer. The terms of the customer arrangements generally pass title and risk of ownership to the customer at the time of shipment. Certain customer arrangements provide for acceptance provisions. Revenue for these arrangements is not recognized until the acceptance has been received or the acceptance period has lapsed unless sufficient historical experience exists and reasonable estimates of future returns can be calculated with appropriate allowances for such returns. We reduce our product revenue by the estimated cost of any rebates, allowances or similar programs, which are used as promotional programs.

Recording revenue from the sale of products involves the use of estimates and management judgment. We must make a determination at the time of sale whether the customer has the ability to make payments in accordance with arrangements. While we do utilize past payment history, and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collectibility is reasonably assured is ultimately a judgment decision that must be made by management. We must also make estimates regarding our future obligation relating to returns, rebates, allowances and similar other programs. The estimate of these obligations is partially based on historical experience, but it also requires management to estimate the amount of product that particular customers will purchase in a given period of time.

License revenue under arrangements to sell or license product rights or technology rights is recognized as obligations under the agreement are satisfied, which generally occurs over a period of time. Generally, licensing revenue is deferred and recognized over the estimated life of the related agreements, products, patents or technology. Nonrefundable licensing fees, marketing rights and milestone payments received under contractual arrangements are deferred and recognized over the remaining contractual term using the straight-line method.

Recording revenue from license arrangements involves the use of estimates. The primary estimate made by management is determining the useful life of the related agreement, product, patent or technology. We evaluate all of our licensing arrangements by estimating the useful life of either the product or the technology, the length of the agreement or the legal patent life and defer the revenue for recognition over the appropriate period.

We recognize revenue from sponsored research and development over the life of the contract as research activities are performed. The revenue recognized is the lesser of revenue earned based on total expected revenues or actual non-refundable cash received to date under the agreement.

Recognizing revenue for sponsored research and development requires us to make several estimates. The determination of revenue earned is generally based on actual hours incurred by research and development personnel and actual expenses incurred compared to total estimated hours and costs to be incurred. We believe that this proportional performance model is an appropriate method of determining the amount of service that has been delivered to the customer, and the amount of revenue that has been earned. These estimates must be updated each reporting period based on new information available to management. The estimates are generally based on historical experience and management’s judgment. However, it is possible that there is little to no comparability between projects and we must make estimates based on our understanding of the contractual arrangement and actual experience on the contract to date. We recognize revenue on these sponsored research and development arrangements only to the extent that the revenue has been earned and cash has been received.

Occasionally we enter into arrangements that include multiple elements. Such arrangements may include the licensing of technology and manufacturing of product. In these situations we must determine whether the various elements meet the criteria to be accounted for as separate elements. If the elements cannot be separated, revenue is recognized once revenue recognition criteria for the entire arrangement have been met or over the period that the Company’s obligations to the customer are fulfilled as appropriate. If the elements are determined to be separable, the revenue is allocated to the separate elements based on relative fair value and recognized separately for each element when the applicable revenue recognition criteria have been met. In accounting for these multiple element arrangements, we must make determinations about whether elements can be accounted for separately and make estimates regarding their relative fair values.

                Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts receivable based on client-specific allowances, as well as a general allowance. Specific allowances are maintained for clients which are determined to have a high degree of collectibility risk based on such factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the client’s past payment experience; (iii) a deterioration in the client’s financial condition, evidenced by weak financial condition and/or continued poor operating results, reduced credit ratings, and/or a bankruptcy filing. In addition to the specific allowance, the Company maintains a general allowance for all its accounts receivables which are not covered by a specific allowance. The general allowance is established based on such factors, among others, as: (i) the total balance of the outstanding accounts receivable, including considerations of the aging categories of those accounts receivable; (ii) past history of uncollectible accounts receivable write-offs; and (iii) the overall creditworthiness of the client base. A considerable amount of judgment is required in assessing the realizability of accounts receivable. Should any of the factors considered in determining the adequacy of the overall allowance change, an adjustment to the provision for doubtful accounts receivable may be necessary.

                Inventories

Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. Inventories are written down if the estimated net realizable value of an inventory item is less than its recorded value. We review the carrying cost of our inventories by product each quarter to determine the adequacy of our reserves for obsolescence. In accounting for inventories we must make estimates regarding the estimated net realizable value of our inventory. This estimate is based, in part, on our forecasts of future sales and shelf life of product.

                Capitalized Patent Costs

The Company defers and capitalizes certain costs, including payments to third-party law firms for patent prosecution, related to the technology or patents underlying a variety of long-term licensing arrangements.  No internal costs are capitalized.  The costs are being amortized over the same period as the licensing revenue related to those patents is being recognized.  Costs in excess of the amount of remaining related deferred licensing revenue are not capitalized, but are expensed as incurred. The Company capitalized approximately $135,000 and $60,000 for the three months ended March 31, 2004 and 2005, respectively and amortized approximately $32,000 and $40,000 for the same periods, respectively.

     Results of Operations

     Revenue

          Total revenue, which includes product revenue, sponsored research and development revenue and other revenue, increased 2% to $17.2 million for the three months ended March 31, 2005 as compared to $16.7 million for the corresponding period in 2004. Product revenue increased 3% to $16.8 million for the three months ended March 31, 2005 as compared to $16.4 million for the corresponding period in 2004.

          Product revenue from our Core Companion Animal Health segment decreased 9% to $12.9 million for the three months ended March 31, 2005 compared to $14.1 million for the corresponding period in 2004. This decrease was the result of decreased sales of our canine heartworm preventive; our current hematology instrument due to a systematic offer in the first quarter of 2004 but not in 2005 to customers who had purchased our previous hematology analyzer to upgrade to our new hematology analyzer; and instrument consumables to the installed base of our previous hematology instrument; offset in part by increased sales of our other instrument consumables.

          Product revenue from our Other Vaccines, Pharmaceuticals and Products segment (“OVP”) increased by 73% to $4.0 million for the three months ended March 31, 2005 as compared to $2.3 million for the corresponding period in 2004. This increase was due primarily to higher sales of our own line of bovine vaccines under our contract with Agri Laboratories, Ltd. (“AgriLabs”).

          Revenue from sponsored research and development and other decreased 1% to $318,000 for the three months ended March 31, 2005 from $322,000 for the corresponding period in 2004.

          For 2005, we expect to grow our Core Companion Animal Health segment revenue. We anticipate OVP revenue of approximately $12 million, a slight decline from 2004. We expect research, development and other revenue to decline slightly in 2005.

     Cost of Revenue

          Cost of revenue consists of two components: cost of products sold and cost of research, development and other revenue, both of which correspond to their respective revenue categories. Cost of revenue totaled $11.2 million for the first three months of 2005 compared to $10.6 million for the corresponding period in 2004. Gross profit decreased 4% to $5.9 million for the three months ended March 31, 2005 as compared to $6.1 million in the prior year corresponding period. Gross margin, i.e. gross profit divided by total revenue declined to 34.5% for the three months ended March 31, 2005 as compared to 36.7% in the corresponding period in 2004.

           Gross profit on product revenue decreased 3% to $5.8 million for the quarter ended March 31, 2005 from $6.0 million in the prior year period. Gross margin on product sales, i.e. gross profit on product revenue divided by product revenue, declined to 34.2% in the three months ended March 31, 2005 as compared to 36.2% in the

corresponding period in 2004. The decline was due to a larger percent of revenue from OVP, which tends to carry relatively low margins, as well as certain supplier price increases.

           Gross profit on research, development and other revenue decreased 26% to $139,000 for the quarter ended March 31, 2005 from $187,000 in the prior year period. The primary reason for the decrease is a greater proportion of technology or patent-related costs being expensed as incurred as these costs are in excess of the amount of remaining affiliated deferred licensing revenue in the quarter ended March 31, 2005 as compared to the prior year corresponding period.

           We expect gross margin on product sales to increase in the last nine months of 2005 as compared to the first three months and to be in the same range for the full year 2005 that it was in full year 2004. We expect gross profit on research, development and other revenue to decrease for full year 2005 as compared to full year 2004 as we expect a greater proportion of technology or patent-related costs will be expensed as incurred because the costs are in excess of remaining affiliated deferred licensing revenue. We expect gross profit to increase in 2005 as compared to 2004 as we expect total revenue to increase.

     Operating Expenses

          Selling and marketing expenses consist primarily of salaries, commissions and benefits for sales and marketing personnel and expenses related to product advertising and promotion. Selling and marketing expenses decreased 15% to $3.8 million in the three months ended March 31, 2005 as compared to $4.4 million in the corresponding period in 2004. Factors in the decrease include the heavier marketing spending related to the launch of our new hematology instrument in the first quarter of 2004 as well as lower amortization of demonstration instruments used by our sales force in the first quarter of 2005.

           Research and development expenses declined 28% to $1.2 million for the three months ended March 31, 2005 from $1.7 million during the corresponding period in 2004. This decline was primarily due to lower compensation and benefits costs, lower cost of clinical trials and lower expenses related to our new hematology instrument launch in January 2004.

          General and administrative expenses were $2.0 million in the three months ended March 31, 2005, down slightly from the prior year period.

           In 2005, we expect total operating expenses to decrease as compared to 2004.

     Interest and Other (Income) Expense, Net

          Other expense increased to $205,000 for the three months ended March 31, 2005 as compared to other income of $63,000 during the corresponding period in 2004. The increase in net other expense were due to higher interest expense in 2005 as we utilized more of our revolving line of credit, incurred higher interest rates on our borrowings and the receipt of certain prior years’ tax credits in 2004 which did not occur in 2005. We expect this line item to be a net expense for 2005 and to primarily consist of net interest expense. We expect net interest expense to increase in 2005 as compared to 2004 as we use our revolving credit facility more extensively and have higher interest rates on our outstanding loans due to the increase in interest rates resulting from our most recent modification to our credit facility agreement.

     Net Loss

          Our net loss decreased to $1.3 million in the three months ended March 31, 2005 compared to $2.0 million during the corresponding period in 2004. The improvement in 2005 from 2004 was the result of lower operating expenses, somewhat offset by lower gross margin. In 2005, we expect increased revenue and lower expenses to contribute to a lower net loss as compared to 2004.

     Liquidity and Capital Resources

          We have incurred negative cash flow from operations since our inception in 1988. For the three months ended March 31, 2005, we had a net loss of $1.3 million. During the three months ended March 31, 2005, our operations provided cash of $324,000. At March 31, 2005, we had $4.7 million of cash and cash equivalents, $1.8 million of working capital, $10.6 million of outstanding borrowings under our revolving line of credit agreement and we had fully utilized the available borrowing capacity based upon eligible accounts receivable and eligible inventory under the credit facility agreement. Our working capital has decreased from $5.2 million at December 31, 2004, to $1.8 million at March 31, 2005, primarily due to the classification of all our long-term debt obligations as current at March 31, 2005 because our projections indicate it is not probable we will meet our current Wells Fargo financial covenants through the next 12 months and decreases in accounts receivable and inventories and increased accounts payable and borrowings under our revolving line of credit.

          At March 31, 2005, we had outstanding obligations for long-term debt and capital leases totaling $1.7 million primarily related to a term loan with Wells Fargo Business Credit, Inc. (“Wells Fargo”) and a subordinated promissory note with a significant customer with the proceeds used for facilities enhancements. The term loan is secured by real estate and had an outstanding balance at March 31, 2005 of $1.1 million due in monthly installments of $17,658 plus interest, with a balloon payment of approximately $834,000 due on May 31, 2006. On March 31, 2005, the term loan had a stated interest rate of prime plus 2.75%. The subordinated promissory note is secured by our production facility, has a stated interest rate of prime plus 1.0% and a remaining balance of $500,000 payable in 2006. In addition, we have a promissory note to the City of Des Moines with an outstanding balance at March 31, 2005 of $86,000, due in monthly installments through June 2006. The promissory note has a stated interest rate of 3.0%. The note is secured by first security interests in essentially all of OVP’s assets and the lender has subordinated its first security interest to Wells Fargo. Our capital lease obligations totaled $32,000 at March 31, 2005. At March 31, 2005, all of our obligations for long-term debt are classified as current. The terms of our debt agreement includes provisions where non-compliance with certain covenants could, in specified circumstances, result in acceleration of the repayment of these borrowings. Our latest projections for the next 12 months indicate that it is not probable we will be able to achieve all of our existing covenants. We have begun negotiations with Wells Fargo regarding an amendment to our existing agreement, which would include a modification of the covenants, although there can be no guarantee that we will be successful in obtaining such an amendment. As a result, approximately $1.7 million has been reflected as current portion of long-term debt in the March 31, 2005 balance sheet.

          At March 31, 2005, we also had a $12.0 million asset-based revolving line of credit with Wells Fargo which expires on May 31, 2006. At March 31, 2005, $10.6 million was outstanding under this line of credit. On May 10, 2005 we signed an amended agreement under which Wells Fargo waived certain historical events of non-compliance, including with a covenant as of March 31, 2005. Our ability to borrow under this facility varies based upon available cash, eligible accounts receivable and eligible inventory. On March 31, 2005, interest was charged at a stated rate of prime plus 2.75% and payable monthly. We are required to comply with various financial and non-financial covenants, and we have made various representations and warranties. Among the financial covenants is a requirement to maintain a minimum liquidity (cash plus excess borrowing base) of $1.5 million. Additional requirements include covenants for minimum capital monthly and minimum net income quarterly. We have begun discussions with Wells Fargo and other financial institutions regarding an amended or a new credit facility agreement, which would involve increased borrowings against certain of the Company’s fixed assets. We anticipate that any future covenants negotiated in an amended or a new credit facility agreement will result in our expectation of compliance, as has been the case with Wells Fargo in the past, although there can be no assurance thereof. Failure to comply with any existing or future covenants, representations or warranties could result in our being in default on the loan and could cause all outstanding amounts payable to Wells Fargo as well as others, including those discussed above, to become immediately due and payable or impact our ability to borrow under the agreement. Any default under the Wells Fargo agreement could also accelerate the repayment of our other borrowings. At March 31, 2005, we had fully utilized the available borrowing capacity based upon eligible accounts receivable and eligible inventory under the credit facility agreement.

          Net cash provided by operating activities was $324,000 for the three months ended March 31, 2005 as compared to using cash of $1.7 million during the corresponding period in 2004. The decrease in cash used by operations for the three months ended March 31, 2005 as compared to the same period of 2004 is due to an increase of $696,000 in accounts payable in 2005 compared to a decrease of $370,000 in 2004, an increase in depreciation and amortization of approximately $96,000, a larger decrease in accounts receivable of approximately $233,000 year over year and a decrease in inventories in 2005 as compared to an increase in 2004. Offsetting these increases in cash from operations, deferred revenue and other long-term liabilities decreased by $523,000 more in 2005 than 2004 due primarily to fewer fees being received in the first quarter of 2005. Our cash from operations fluctuates from period to period primarily due to our periodic net income (loss) and changes in working capital.

          Net cash flows from investing activities used cash of $726,000 in the three months ended March 31, 2005, compared to using $177,000 during the corresponding period in 2004, with the change due primarily to increased capital expenditures in 2005 compared to 2004 and proceeds from the licensing of technology and product rights totaling $400,000 in 2004 with no corresponding proceeds in 2005.

          Net cash flows from financing activities provided cash of $210,000 during the three months ended March 31, 2005 as compared to providing $2.2 million during the corresponding period in 2004. In both 2005 and 2004, the cash was provided primarily from net borrowings under our revolving credit facility.

          At March 31, 2005, we had total deferred revenue and other long-term liabilities, net of current portion, of approximately $11.0 million. Included in this total is approximately $10.9 million of deferred revenue related to up-front licensing fees that have been received for certain product rights and technology rights out-licensed during the three months ended March 31, 2005 and prior. These deferred amounts are being recognized on a straight-line basis over the remaining lives of the agreements, products, patents or technology. The remaining approximately $148,000 is related to pension liabilities for a defined benefit pension plan which was frozen in October 1992.

          Our primary short-term need for capital, which is subject to change, is to fund our operations, which consist of continued research and development efforts, our sales, marketing and administrative activities, working capital associated with increased product sales and capital expenditures relating to developing and expanding our manufacturing operations. Our future liquidity and capital requirements will depend on numerous factors, including the extent to which our marketing, selling and distribution efforts, as well as third parties who market, sell and distribute our products, are successful, the outcome of our discussion with Wells Fargo and other financial institutions regarding an amended or new credit facility agreement, the extent to which currently planned products and/or technologies under research or development are successfully developed and the extent of the market acceptance of new products, the timing of regulatory actions regarding our products, the costs and timing of expansion of sales, marketing and manufacturing activities, if any, the cost, timing and business management of current and potential acquisitions, if any, and contingent liabilities associated with such acquisitions, the procurement and enforcement of patents important to our business and the results of competition.

           If Wells Fargo were to reset all our covenants based on our current financial plan for 2005 and future forecasts we believe our available cash and cash equivalents, together with cash from operations and borrowings expected to be available under our revolving line of credit would be sufficient to fund our operations through 2005 and into 2006, although the margin for variation from our current financial plan is significantly less than management is comfortable with. Accordingly, we have decided to raise additional capital. We have begun discussions with Wells Fargo and other financial institutions regarding an amended or new credit facility including an increase in term loans on assets with historical appraised values significantly in excess of current affiliated debt, which would provide us with additional liquidity if successful. However, these discussions may not be successful and/or our actual results may differ from our current financial plan and future forecasts, which may require us to consider alternative strategies. We may be required to raise additional capital in the future. If necessary, we expect to raise these additional funds through one or more of the following: (1) sale of equity or debt securities; (2) sale of assets, products or marketing rights; and (3) licensing of technology. There is no

guarantee that additional capital will be available from these sources on acceptable terms, if at all, and certain of these sources may require approval by existing lenders. If we cannot raise the additional funds through these options on acceptable terms or with the necessary timing, management could also reduce discretionary spending to decrease our cash burn rate through actions such as delaying or canceling research projects or marketing plans. These actions would likely extend the then available cash and cash equivalents, and the then available borrowings for a limited time. See “Factors that May Affect Results.”

     Net Operating Loss Carryforwards

          As of December 31, 2004, we had a net domestic operating loss carryforward, or NOL, of approximately $169.5 million, a domestic alternative minimum tax credit of approximately $23,000 and a domestic research and development tax credit carryforward of approximately $584,000. The NOL and tax credit carryforwards are subject to alternative minimum tax limitations and to examination by the tax authorities. In addition, we had a “change of ownership” as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (an “Ownership Change”). We believe the latest, and most restrictive, Ownership Change occurred at the time of our initial public offering in July 1997. We do not believe this Ownership Change will place a significant restriction on our ability to utilize our NOLs in the future. We also have net operating loss carryforwards in Switzerland of approximately $3.7 million related to losses previously recorded by Heska AG.

     Recent Accounting Pronouncements

          Recent accounting pronouncements that are relevant to us include Statement of Financial Accounting Standards (“SFAS”) No. 123R and SFAS No. 151.

SFAS No. 123R, “Share-Based Payment” (Revised 2004)

          Statement of Financial Accounting Standards No. 123 “Share-Based Payments” (“SFAS No. 123R”) was revised and promulgated in December 2004. On April 14, 2005, the SEC issued a release amending the compliance dates for SFAS No. 123R. Under the SEC’s new rule, companies in our position may implement SFAS No. 123R at the beginning of their next fiscal year, instead of the next reporting period as originally required under SFAS No. 123R, that begins after June 15, 2005. We originally intended to adopt SFAS No. 123R beginning on July 1, 2005 but based on the SEC’s action on April 14, 2005, we currently intend to adopt this standard on January 1, 2006 - the first day of our next fiscal year. We intend to adopt SFAS No. 123R under the modified prospective method of adoption at that time. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), which became effective in 1996, allows for the continued measurement of compensation cost for stock-based compensation using the intrinsic value based method under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB No. 25”), provided that pro forma disclosures are made of net income or loss, assuming the fair value based method of SFAS No. 123 had been applied. We have elected to account for our stock-based compensation plans under APB No. 25 and will continue to do so through the completion of our current fiscal year ending December 31, 2005. When we adopt SFAS No. 123R effective January 1, 2006, we will be required to recognize compensation expense using the fair value-based model for options that vest after December 31, 2005, including those that were granted prior to the effective date of SFAS No. 123R. This will result in recording compensation expense for periods after December 31, 2005. Historically, under APB No. 25, we recorded minimal amounts of stock-based compensation, and none related to grants of options. On February 24, 2005, our Board of Directors considered the significant impact that the use of fair values, rather than intrinsic values, would have on our future results of operations, as well as factors including that the management team had requested that their salaries be frozen for 2005, many non-management employees’ 2005 raises were to be at below market levels, no management bonus payouts were made for 2004 and the 2005 management incentive plan calls for a performance in excess of our internal budget before any bonus payments are made, and authorized our Stock Option Committee, which currently consists solely of our Chief Executive Officer, to immediately vest all options granted from that date through June 30, 2005 and to accelerate the vesting of any outstanding but unvested stock options with a strike price that is not “in-the-money” at its discretion (the aggregate authorization to the Stock

Option Committee to be known as the “Vesting Authorization”) through June 30, 2005; for similar reasons and understanding the SEC had issued a release amending the compliance date for SFAS No. 123R, on May 9, 2005 our Board of Directors approved the extension of the Vesting Authorization to our Stock Option Committee from June 30, 2005 to December 31, 2005. On March 30, 2005 our Stock Option Committee exercised its discretion and accelerated the vesting of outstanding but unvested stock options with a strike price greater than or equal to $0.82. These options were not “in-the-money” at that time, and therefore, there was no compensation expense recorded in accordance with APB No. 25 as a result of this modification. However, for pro forma purposes, in accordance with SFAS No. 123, the remaining unamortized compensation related to these options will be reported in the footnotes to our first quarter 2005 financial statements. This action effected approximately 750,000 options, approximately 55,000 of which were held by our Directors and Executive Officers. Had this action not been taken, and had all approximately 750,000 options continued to vest according to the vesting schedules in place prior to the acceleration, we would have recorded incremental compensation related to these options of approximately $275,000 on a pro forma basis for the nine months ending December 31, 2005. This follows a similar action for similar reasons in December 2004 under which approximately 2.2 million outstanding but unvested stock options were immediately vested. Had the December action not been taken, and had all approximately 2.2 million options continued to vest according to the vesting schedules in place prior to the acceleration, we would have recorded incremental compensation related to these options of approximately $870,000 on a pro forma basis for the year ending December 31, 2005. We also have an employee stock purchase plan under which we will recognize compensation expense under SFAS No. 123R beginning on January 1, 2006.

           There are four key inputs to the Black-Scholes model which we use to value our options: expected term, expected volatility, risk-free interest rate and expected dividends, all of which require us to make estimates. Our estimates for these inputs may not be indicative of actual future performance and changes to any of these inputs can have a material impact on the resulting fair value calculated for the option. Our expected term input was estimated based on our historical time from grant to exercise experience for all employees in 2005 and a software program to which an input was our current employee exercise experience in 2004; we treated all employees in one grouping in both years. Our expected volatility input was estimated based on our historical stock price volatility in 2005 and a combination of our historical price volatility and a peer group volatility in 2004. Our risk-free interest rate input was determined based on the U.S. Treasury yield curve at the time of option issuance in both 2005 and 2004. Our expected dividends input was zero in both 2005 and 2004. Different assumptions could materially impact the resulting option value calculated. In the first quarter of 2005, we reported pro forma employee stock option compensation of approximately $1.685 million on approximately 3.0 million stock options. The underlying assumptions of these stock options, weighted by number of options and stock fair value at the time of grant, were as follows: expected term of 3.3 years, expected volatility of 95%, risk-free interest rate of 3.8% and expected dividends of zero. A tranche of “at-the-money” options granted under these assumptions in the same number as above would require a fair value price of approximately $0.90 per share (the “Benchmark Tranche”) to yield the same value as above (the “Benchmark Value”). The following table represents the approximate change, in dollars, of the value of the Benchmark Tranche under different expected term and expected volatility assumptions assuming all other inputs are the same. For example, the Benchmark Tranche is approximately 3.0 million “at-the-money” options with a fair market stock value of $0.90 per share, and if the Benchmark Tranche is valued using an expected term of 3.3 years, expected volatility of 95%, a risk-free interest rate of 3.8% and expected dividends of zero, we obtain a fair value of approximately $1.685 million - the Benchmark Value. If we value the Benchmark Tranche under the same assumptions, except we assume an expected term of 5.0 years instead of 3.3 years and an expected volatility of 60% instead of 95.0%, we obtain a value of approximately $1.443 million, or a decrease of approximately $242,000 as compared to the Benchmark Value. All amounts in the table below are in thousands of dollars.

								Volatility
		15%		30%		45%		60%			75%			90%			105%			120%			135%			150%
	1		1,475		1,324		1,171		1,023			875			733			594			464			337			216
	2		1,360		1,153		946		748			556			375			204			47			(95	)		(225)
Time to	3		1,259		1,017		774		544			328			127			(53	)		(216	)		(355	)		(476)
Expiration	4		1,168		902		633		381			148			(59	)		(242	)		(396	)		(526	)		(633)
(in years)	5		1,085		798		511		242			3			(207	)		(384	)		(529	)		(644	)		(736)
	6		1,005		704		402		124			(118	)		(325	)		(494	)		(627	)		(730	)		(804)
	7		931		618		304		24			(222	)		(420	)		(579	)		(701	)		(789	)		(851)
	8		860		538		219		(68	)		(307	)		(503	)		(650	)		(757	)		(834	)		(884)
	9		792		464		139		(148	)		(384	)		(568	)		(704	)		(801	)		(866	)		(908)
	10		727		396		68		(219	)		(449	)		(624	)		(751	)		(834	)		(890	)		(922)

          The current period pro forma compensation expense of approximately $1.685 million may not be indicative of the future impact of SFAS No. 123R. We currently have approximately $85,000 of compensation cost underlying employee stock options granted that has not yet been recognized, approximately $80,000 of which is to be recognized in 2006 assuming all options vest according to the vesting schedules currently in place. The Compensation Committee of our Board of Directors is currently considering alternatives regarding different forms of long-term compensation for future use, including the continued use of stock options. The decisions of the Compensation Committee of our Board of Directors regarding stock options is likely to be a key factor in the future impact of SFAS No. 123R on our financial statements.

     Factors That May Affect Results

          Our future operating results may vary substantially from period to period due to a number of factors, many of which are beyond our control. The following discussion highlights these factors and the possible impact of these factors on future results of operations. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline and you could experience losses on your investment.

           We have historically not generated positive cash flow from operations and may need additional capital and any required capital may not be available on acceptable terms or at all.

           If Wells Fargo were to reset all our covenants based on our current financial projections for 2005 and future forecasts we believe our available cash and cash equivalents, together with cash from operations and borrowings expected to be available under our revolving line of credit should be sufficient to fund our operations through 2005 and into 2006, although the margin for variation from our current plan is significantly less than management is comfortable with. Accordingly, we have decided to raise additional capital. We have begun discussions with Wells Fargo and other financial institutions regarding an amended or new credit facility including an increase in term loans on assets with historical appraised values significantly in excess of current affiliated debt, which would provide us with additional liquidity if successful. However, these discussions may not be successful and our actual results may differ from our current financial plan for 2005, and we may be required to consider alternative strategies. We may be required to raise additional capital in the future. If necessary, we expect to raise these additional funds through one or more of the following: (1)  sale of equity or debt securities; (2)  sale of assets, products or marketing rights; and (3)  licensing of technology. There is no guarantee that additional capital will be available from these sources on acceptable terms, if at all, and certain of these sources may require approval by existing lenders. If we cannot raise the additional funds through these options on acceptable terms or

with the necessary timing, management could also reduce discretionary spending to decrease our cash burn rate through actions such as delaying or canceling research projects or marketing plans. These actions would likely extend the then available cash and cash equivalents, and then available borrowings for a limited time.

          Additional capital may not be available on acceptable terms, if at all. The public markets may be unreceptive to equity financings and we may not be able to obtain additional private equity or debt financing. Furthermore, amounts we expect to be available under our existing revolving line of credit may not be available and other lenders could refuse to provide us with additional debt financing. Furthermore, any additional equity financing would likely be dilutive to stockholders and additional debt financing, if available, may include restrictive covenants and increased interest rates that would limit our currently planned operations and strategies. Alternatively, we may have to relinquish rights to certain of our intellectual property, products or marketing rights if we are required to obtain funds through collaborative agreements or otherwise. If adequate funds are not available, we may be required to curtail our operations significantly and reduce discretionary spending to extend the currently available cash resources, which would likely have a material adverse effect on our business, financial condition and our ability to continue as a going concern.

           We must maintain various financial and other covenants under our credit facility agreement in order to borrow and fund our operations.

          Under our credit facility agreement with Wells Fargo, we are required to comply with various financial and non-financial covenants in order to borrow under that agreement. The borrowings under this credit facility are essential to continue to fund our operations. Among the financial covenants is a requirement to maintain minimum liquidity (cash plus excess borrowing base) of $1.5 million in 2005. Additional requirements include covenants for minimum capital monthly and minimum net income quarterly. We do not believe we will be able to meet all of the current Wells Fargo covenants in the future. We have begun discussions with Wells Fargo regarding an amended credit facility agreement, which would include renegotiated covenants. Wells Fargo has granted us several historical waivers of non-compliance to these covenants, the most recent of which was on May 10, 2005. However, there can be no assurance we will be able to obtain similar waivers or other modifications if needed in the future.

          Failure to comply with any of the covenants, representations or warranties, or failure to modify them to allow future compliance, could result in our being in default under the loan and could cause all outstanding amounts, including amounts currently classified as long-term and loans with our other lenders, to become immediately due and payable or impact our ability to borrow under the agreement. We intend to rely on available borrowings under the credit agreement to fund our operations through May 2006. We have begun discussions with other financial institutions regarding a new credit facility to replace our agreement with Wells Fargo, if necessary, although there can be no assurance these discussions will be successful. If we are unable to borrow funds under our agreement with Wells Fargo or a new financial institution, we will need to raise additional capital from other sources to fund our cash needs and continue our operations, which capital may not be available on acceptable terms, or at all.

           Many of our expenses are fixed and if factors beyond our control cause our revenue to fluctuate, this fluctuation could cause greater than expected losses, cash flow and liquidity shortfalls as well as our stock price to decline.

          We believe that our future operating results will fluctuate on a quarterly basis due to a variety of factors which are generally beyond our control, including:

• supply of products from third party suppliers or termination of such relationships;

• the introduction of new products by our competitors or by us;

• competition and pricing pressures from competitive products;

• our distribution strategy and our ability to maintain relationships with distributors;

• large customers failing to purchase at historical levels;

• fundamental shifts in market demand;

• manufacturing delays;

• shipment problems;

• regulatory and other delays in product development;

• product recalls or other issues which may raise our costs;

• changes in our reputation and/or market acceptance of our current or new products; and

• changes in the mix of products sold.

          We have high operating expenses for personnel, new product development and marketing. Many of these expenses are fixed in the short term. If any of the factors listed above cause our revenues to decline, our operating results could be substantially harmed and our current financial plan for 2005 contains very little margin for error versus our current capital position.

           Our common stock is listed on the Nasdaq SmallCap Market and we may not be able to maintain that listing, which may make it more difficult for you to sell your shares.

          Our common stock is listed on the Nasdaq SmallCap Market. We have received a communication from Nasdaq advising us that we have been afforded a “grace period” ending on November 1, 2005 to regain compliance with the $1.00 minimum bid requirement which would require us to have a minimum bid price of $1.00 or more for 10 consecutive business days. We cannot assure you that we will be able to obtain the aforementioned minimum bid price requirement or maintain our listing on the Nasdaq stock market, which includes additional quantitative and qualitative requirements in addition to a $1.00 minimum bid price such as market value of listed securities. In addition, the Nasdaq staff retains significant discretion in matters related to listing. If we are delisted from the Nasdaq SmallCap Market, our common stock will be considered a penny stock under the regulations of the Securities and Exchange Commission and would therefore be subject to rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers discourage broker-dealers from effecting transactions in our common stock, which could severely limit market liquidity of the common stock and your ability to sell our securities in the secondary market. This lack of liquidity would also make it more difficult for us to raise capital in the future.

           We may be unable to successfully market, sell and distribute our products.

          The market for companion animal healthcare products is highly fragmented. Because our Core Companion Animal Health proprietary products are generally available only by prescription and our medical instruments require technical training, we sell our Core Companion Animal Health products only ultimately to or through veterinarians. The acceptance of our products by veterinarians is critical to our success. Therefore, we may fail to reach a substantial segment of the potential market.

          We currently market our Core Companion Animal Health products in the United States to veterinarians through approximately 13 independent third-party distributors who carry our full line of companion animal products, approximately 11 independent third-party distributors who carry portions of our companion animal product line and through a direct sales force of approximately 43 individuals. To be successful, we will have to effectively market our products and continue to develop and train our direct sales force as well as sales personnel of our distributors and rely on other arrangements with third parties to market, distribute and sell our products. In addition, most of our distributor agreements can be terminated on 60 days notice and we believe that IDEXX Laboratories, Inc. (“IDEXX”), one of our largest competitors, effectively prohibits its distributors from selling competitive products, including our diagnostic instruments and heartworm diagnostic tests. We believe this restriction significantly limits our ability to engage national distributors to sell our full line of products and significantly restricts our ability to market our products to veterinarians. In 2002, one of our largest distributors informed us that they were going to carry IDEXX products and that they no longer would carry our diagnostic instruments and heartworm diagnostic tests. In late 2004, this distributor acquired another of our distributors. We believe IDEXX effectively prohibits this distributor from carrying our diagnostic instruments and heartworm diagnostic tests as a condition for having access to buy the IDEXX product line.

          We may not successfully develop and maintain marketing, distribution or sales capabilities, and we may not be able to make arrangements with third parties to perform these activities on satisfactory terms. If our marketing, sales and distribution strategy is unsuccessful, our ability to sell our products will be negatively impacted and our revenues will decrease.

           We anticipate future losses and may not be able to achieve sustained profitability.

          We have incurred net losses on an annual basis since our inception in 1988 and, as of March 31, 2005, we had an accumulated deficit of $211.4 million. Notwithstanding a profitable quarter in 2002 and 2003, we have never achieved profitability on an annual basis. Our ability to be profitable in future periods will depend, in part, on our ability to increase sales in our Core Companion Animal Health segment, including maintaining and growing our installed base of instruments and related consumables, to maintain or increase gross margins and to limit the increase in our operating expenses to a reasonable level. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we cannot achieve or sustain profitability for an extended period, we may not be able to fund our expected cash needs or continue our operations.

          We operate in a highly competitive industry, which could render our products obsolete or substantially limit the volume of products that we sell. This would limit our ability to compete and achieve profitability.

          The market in which we compete is intensely competitive. Our competitors include independent animal health companies and major pharmaceutical companies that have animal health divisions. We also compete with independent, third party distributors, including distributors who sell products under their own private labels. In the point-of-care diagnostic testing market, our major competitors include IDEXX, Abaxis, Inc., AGEN Biomedical, Ltd. and Synbiotics Corporation. Other companies with a significant presence in the companion animal health market, such as Bayer AG, Intervet International B.V., Merial Ltd., Novartis AG, Pfizer Inc., Schering-Plough Corporation, Virbac S.A. and Wyeth (formerly American Home Products), may be marketing or developing products that compete with our products or would compete with them if developed. These and other competitors may have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service organizations than we do. Our competitors may offer broader product lines and have greater name recognition than we do. Our competitors may develop or market technologies or products that are more effective or commercially attractive than our current or future products or that would render our technologies and products obsolete. Further, additional competition could come from new entrants to the animal health care market. Moreover, we may not have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully. Novartis has a marketing agreement with us, but the agreement does not restrict its ability to develop and market competing products. We believe that one of our largest competitors, IDEXX, effectively prohibits its distributors from selling competitive products, including our diagnostic instruments and heartworm diagnostic tests. The products manufactured by OVP for sale by third parties compete with similar products offered by a number of other companies, some of which have substantially greater financial, technical, research and other resources than us and may have more established marketing, sales, distribution and service organization’s than OVP’s customers. Competitors may have facilities with similar capabilities to OVP, which they may operate at a lower unit price to their customers, which could cause us to lose customers. If we fail to compete successfully, our ability to achieve sustained profitability will be limited and sustained profitability, or profitability at all, may not be possible.

           We may face costly intellectual property or other legal disputes, or our technology or that of our suppliers or collaborators may become the subject of legal action.

          Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology and either to operate without infringing the proprietary rights of others or to obtain rights to technology owned by third parties. We have United States and foreign-issued patents and are currently prosecuting patent applications in the United States and various foreign countries. Our pending patent

applications may not result in the issuance of any patents or any issued patents that will offer protection against competitors with similar technology. Patents we receive may be challenged, invalidated or circumvented in the future or the rights created by those patents may not provide a competitive advantage. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

          We may become subject to additional patent infringement claims and litigation in the United States or other countries or interference proceedings conducted in the United States Patent and Trademark Office, or USPTO, to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings, and related legal and administrative proceedings are costly, time-consuming and distracting. We may also need to pursue litigation to enforce any patents issued to us or our collaborative partners, to protect trade secrets or know-how owned by us or our collaborative partners, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceeding will result in substantial expense to us and significant diversion of the efforts of our technical and management personnel. Any adverse determination in litigation or interference proceedings could subject us to significant liabilities to third parties. Further, as a result of litigation or other proceedings, we may be required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all.

          We license technology from a number of third parties, including Synbiotics Corporation, Corixa Corporation, Roche Molecular Systems, Inc., New England Biolabs, Inc. and Hybritech Inc., as well as a number of research institutions and universities. The majority of these license agreements impose due diligence or milestone obligations on us, and in some cases impose minimum royalty and/or sales obligations on us, in order for us to maintain our rights under these agreements. Our products may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. As is typical in our industry, from time to time we and our collaborators have received, and may in the future receive, notices from third parties claiming infringement and invitations to take licenses under third party patents. We currently do not have any unresolved notices of infringement. Any legal action against us or our collaborators may require us or our collaborators to obtain one or more licenses in order to market or manufacture affected products or services. However, we or our collaborators may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all, we may not be able to develop alternative approaches if unable to obtain licenses, or current and future licenses may not be adequate for the operation of our businesses. Failure to obtain necessary licenses or to identify and implement alternative approaches could prevent us and our collaborators from commercializing our products under development and could substantially harm our business.

          We may also face legal disputes relating to other areas of our business. These disputes may require significant expenditures on our part and could have material adverse consequences on our business in the case of an unfavorable ruling or settlement.

          We have granted third parties substantial marketing rights to certain of our existing products as well as products under development. If the third parties are not successful in marketing our products our sales may not increase.

          Our agreements with our corporate marketing partners generally contain no or very small minimum purchase requirements in order for them to maintain their exclusive or co-exclusive marketing rights. We are party to an agreement with SPAH which grants distribution and marketing rights in the U.S. for our canine heartworm preventive product, TRI-HEART Chewable Tablets. Novartis Agro K.K. markets and distributes our SOLO STEP CH heartworm test in Japan. Leo Animal Health A/S currently exclusively distributes both E.R.D.-HEALTHSCREEN Urine Tests and SOLO STEP CH in Europe. In addition, Nestle Purina Petcare has exclusive rights to license our technology for nutritional applications for dogs and cats. In addition, we have entered into agreements granting Novartis certain rights to market or co-market certain of the products that we are currently developing. One or more of these marketing partners may not devote sufficient resources to marketing our products. Furthermore, there is generally nothing to prevent these partners from pursuing alternative

technologies or products that may compete with our products. In the future, third-party marketing assistance may not be available on reasonable terms, if at all. If any of these events occur, we may not be able to commercialize our products and our sales will decline. In addition, our agreement with SPAH requires us to potentially pay termination penalties if we are unable to supply product over an extended period of time.

          We rely substantially on third-party suppliers. The loss of products or delays in product availability from one or more third-party supplier could substantially harm our business.

          To be successful, we must contract for the supply of, or manufacture ourselves, current and future products of appropriate quantity, quality and cost. Such products must be available on a timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm our business.

          We currently rely on third party suppliers to manufacture those products we do not manufacture ourselves. We currently rely on third party suppliers for our veterinary diagnostic and patient monitoring instruments and consumable supplies for these instruments, for certain of our point-of-care diagnostic and other tests, for the manufacture of our allergy immunotherapy treatment products as well as other manufacturers for other products. Major suppliers who sell us products they manufacture which are responsible for more than 5% or more of our revenue are i-STAT Corporation (acquired in 2004 by Abbott Laboratories), Arkray, Inc., Boule Diagnostics International AB and Quidel. We often purchase products from our suppliers under agreements that are of limited duration or can be terminated on an annual basis. We believe we have agreements in place to ensure supply of our major product offerings through at least the end of 2005 and we believe we are in full compliance with such agreements. There can be no assurance, however, that our suppliers will be able to meet their obligations under these agreements or that we will be able to compel them to do so. Risks of relying on suppliers include:

• The loss of product rights upon expiration or termination of an existing agreement. Unless we are able to find an alternate supply of a similar product, we would not be able to continue to offer our customers the same breadth of products and our sales and operating results would likely suffer. In the case of an instrument supplier, we could also potentially suffer the loss of sales of consumable supplies, which could be significant if we have built a significant installed base, further harming our sales prospects and opportunities. Even if we were able to find an alternate supply, we would likely face increased competition from the product whose rights we lost being marketed by a third party or the former supplier and it may take us additional time and expense to gain the necessary approvals and launch an alternative product.

• High switching costs. If we need to change to other commercial manufacturing contractors for certain of our products, additional regulatory licenses or approvals must be obtained for these contractors prior to our use. This would require new testing and compliance inspections prior to sale thus resulting in potential delays. Any new manufacturer would have to be educated in, or develop substantially equivalent processes necessary for the production of our products. In addition, in certain lines of instruments, we would lose the consumable revenues from the installed base of those instruments if we were to switch to a competitive instrument.

• The involuntary or voluntary discontinuation of a product line.   Unless we are able to find an alternate supply of a similar product in this or similar circumstances with any product, we would not be able to continue to offer our customers the same breadth of products and our sales would likely suffer. Even if we are able to identify an alternate supply, it may take us additional time and expense to gain the necessary approvals and launch an alternative product, especially if the product is discontinued unexpectedly.

• Inability to meet minimum obligations. Current agreements, or agreements we may negotiate in the future, may commit us to certain minimum purchase or other spending obligations. It is possible we

will not be able to create the market demand to meet such obligations, which could create an increased drain on our financial resources and liquidity.

• Loss of exclusivity. Our agreements, or agreements we may negotiate in the future, with suppliers may require us to meet minimum annual sales levels to maintain our position as the exclusive distributor of these products. We may not meet these minimum sales levels in the future and maintain exclusivity over the distribution and sale of these products. If we are not the exclusive distributor of these products, competition may increase.

• Limited capacity or ability to scale capacity. If market demand for our products increases suddenly, our current suppliers might not be able to fulfill our commercial needs, which would require us to seek new manufacturing arrangements and may result in substantial delays in meeting market demand. If we consistently generate more demand for a product than a given supplier is capable of handling, it could lead to large backorders and potentially lost sales to competitive products that are readily available. This could require us to seek or fund new sources of supply.

• Inconsistent or inadequate quality control. We may not be able to control or adequately monitor the quality of products we receive from our suppliers. Poor quality items could damage our reputation with our customers.

• Regulatory risk. Our manufacturing facility and those of some of our third party suppliers are subject to ongoing periodic unannounced inspection by regulatory authorities, including the FDA, USDA and other federal and state agencies for compliance with strictly enforced Good Manufacturing Practices, regulations and similar foreign standards, and we do not have control over our suppliers’ compliance with these regulations and standards. Violations could potentially lead to interruptions in supply that could cause us to lose sales to readily available competitive products.

• Developmental delays. We may experience delays in the scale-up quantities needed for product development that could delay regulatory submissions and commercialization of our products in development, causing us to miss key windows of opportunity.

• Limited intellectual property rights. We may not have intellectual property rights, or may have to share intellectual property rights, to the products themselves and any improvements to the manufacturing processes or new manufacturing processes for our products.

          Potential problems with suppliers such as those discussed above could substantially decrease sales, lead to higher costs, damage our reputation with our customers due to factors such as poor quality goods or delays in order fulfillment, resulting in our being unable to effectively sell our products and substantially harm our business.

          We often depend on third parties for products we intend to introduce in the future. If our current relationships and collaborations are not successful, we may not be able to introduce the products we intend to in the future.

          We are often dependent on third parties and collaborative partners to successfully and timely perform research and development activities to successfully develop new products. For example, we jointly developed point-of-care diagnostic products with Quidel, and Quidel manufactures these products. In other cases, we have discussed Heska marketing in the veterinary market an instrument being developed by a third party for use in the human health care market. In the future, one or more of these third parties or collaborative partners may not complete research and development activities in a timely fashion, or at all. If these third parties or collaborative partners fail to complete research and development activities, or fail to complete them in a timely fashion, our ability to introduce new products will be impacted negatively and our revenues may decline.

           Interpretation of existing legislation, regulations and rules or implementation of future legislation, regulations and rules could cause our costs to increase or could harm us in other ways.

          Sarbanes-Oxley has increased our required administrative actions as a public company. The increase in general and administrative costs of complying with Sarbanes-Oxley will depend on how it is interpreted over time. Of particular concern are the level and timing of standards for internal control evaluation and reporting adopted under Section 404 of Sarbanes-Oxley. If our regulators and/or auditors adopt or interpret more stringent standards than we are anticipating, we and/or our auditors may be unable to conclude that our internal controls over financial reporting are designed and operating effectively, which could adversely affect investor confidence in our financial statements. Even if we and our auditors are able to conclude that our internal controls over financial reporting are designed and operating effectively in such a circumstance, our general and administrative costs are likely to increase. We may be required to obtain an audit of our internal controls for the year ending December 31, 2005 and, if so, our general and administrative costs are likely to increase. Actions by other entities, such as enhanced rules to maintain our listing on the Nasdaq SmallCap Market could also increase our general and administrative costs, as could further legislative action.

           The loss of significant customers could harm our operating results.

          Revenue from one contract with AgriLabs comprised approximately 17% and 15% of consolidated revenue in 2002 and 2003, respectively. Revenue from this customer represented less than 10% of our consolidated revenue for the year ended December 31, 2004 and for the three months ended March 31, 2004 and 2005, respectively. While we do not have any other customers who have represented more than 10% of revenues over the last three years, the loss of significant customers who, for example, are historically large purchasers or who are considered leaders in their field could damage our business and financial results. As an example, in late 2004 one of our largest distributors who has historically carried our full product line informed us they were being acquired by a distributor who does not carry our full product line. We believe purchases from the acquired distributor will be significantly lower in 2005 than in 2004, which we are unlikely to completely recover through direct sales and sales through other distributors.

          We depend on key personnel for our future success. If we lose our key personnel or are unable to attract and retain additional personnel, we may be unable to achieve our goals.

          Our future success is substantially dependent on the efforts of our senior management and other key personnel, particularly Dr. Robert B. Grieve, our Chairman and Chief Executive Officer. The loss of the services of members of our senior management or other key personnel may significantly delay or prevent the achievement of product development and other business objectives. Although we have an employment agreement with Dr. Grieve, he is an at-will employee, which means that either party may terminate his employment at any time without prior notice. If we lose the services of, or fail to recruit, key scientific and other personnel, the growth of our business could be substantially impaired. We do not maintain key person life insurance for any of our key personnel.

           Our stock price has historically experienced high volatility, which may increase in the future, and which could affect our ability to raise capital in the future or make it difficult for investors to sell their shares.

          The securities markets have experienced significant price and volume fluctuations and the market prices of securities of many microcap and smallcap companies have in the past been, and can in the future be expected to be, especially volatile. During the past 12 months, our closing stock price has ranged from a low of $0.56 to a high of $1.86. Fluctuations in the trading price or liquidity of our common stock may adversely affect our ability to raise capital through future equity financings. Factors that may have a significant impact on the market price and marketability of our common stock include:

• stock sales by large stockholders or by insiders;

• our quarterly operating results, including as compared to our revenue, earnings or other guidance and in comparison to historical results;

• termination of our third party supplier relationships;

• announcements of technological innovations or new products by our competitors or by us;

• litigation;

• regulatory developments, including delays in product introductions;

• developments in our relationships with collaborative partners;

• developments or disputes concerning patents or proprietary rights;

• releases of reports by securities analysts;

• changes in regulatory policies;

• economic and other external factors; and

• general market conditions.

          In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. If a securities class action suit is filed against us, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

           We must obtain and maintain costly regulatory approvals in order to market certain of our products.

          Many of the products we develop, market or manufacture are subject to extensive regulation by one or more of the USDA, the FDA, the EPA and foreign regulatory authorities. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, advertising, promotion, sale and distribution of our products. Satisfaction of these requirements can take several years and time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the product.

          The effect of government regulation may be to delay or to prevent marketing of our products for a considerable period of time and to impose costly procedures upon our activities. We have experienced in the past, and may experience in the future, difficulties that could delay or prevent us from obtaining the regulatory approval or license necessary to introduce or market our products. Such delays in approval may cause us to forego a significant portion of a new product’s sales in its first year due to seasonality and advanced booking periods associated with certain products. Regulatory approval of our products may also impose limitations on the indicated or intended uses for which our products may be marketed.

          Among the conditions for certain regulatory approvals is the requirement that our facilities and/or the facilities of our third party manufacturers conform to current Good Manufacturing Practices. Our manufacturing facilities and those of our third party manufacturers must also conform to certain other manufacturing regulations, which include requirements relating to quality control and quality assurance as well as maintenance of records and documentation. The USDA, FDA and foreign regulatory authorities strictly enforce manufacturing regulatory requirements through periodic inspections. If any regulatory authority determines that our manufacturing facilities or those of our third party manufacturers do not conform to appropriate manufacturing requirements, we or the manufacturers of our products may be subject to sanctions, including warning letters, manufacturing suspensions, product recalls or seizures, injunctions, refusal to permit products to be imported into or exported out of the United States, refusals of regulatory authorities to grant approval or to allow us to enter into government supply contracts, withdrawals of previously approved marketing applications, civil fines and criminal prosecutions. Any of these events, alone or in unison, could damage our business.

           Our future revenues depend on successful research, development, commercialization and market acceptance, any of which can be slower than we expect or may not occur.

          The research, development and regulatory approval process for many of our products is extensive and may take substantially longer than we anticipate. Research projects may fail. New products that we are developing for the veterinary marketplace may not perform up to our expectations. Because we have limited resources to devote to product development and commercialization, any delay in the research or development of one product or reallocation of resources to product development efforts that prove unsuccessful may delay or jeopardize the development of other product candidates. If we fail to successfully develop new products and bring them to market in a timely manner, our ability to generate additional revenue will decrease.

          Even if we are successful in the research and development of a product, we may experience delays in commercialization and/or market acceptance. For example, there may be delays in producing large volumes of a product or veterinarians may be slow to adopt a product. The latter is particularly likely where there is no comparable product available or historical use of such a product. For example, while we believe our E.R.D.-HEALTHSCREEN urine tests for dogs and cats represent a significant scientific breakthrough in companion animal annual health examinations, market acceptance of the product has been significantly slower than we anticipated. The ultimate adoption of a new product by veterinarians, the rate of such adoption and the extent veterinarians choose to integrate such a product into their practice are all important factors in the economic success of one of our new products and are factors that we do not control to a large extent. If our products do not achieve a significant level of market acceptance, demand for our products will not develop as expected and our revenues will be lower than we anticipate.

           Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.

          We prepare our financial statements in conformance with United States generally accepted accounting principles, or GAAP. These accounting principles are established by and are subject to interpretation by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is made effective. Changes to those rules may adversely affect our reported financial results or the way we conduct our business.

          We may face product returns and product liability litigation and the extent of our insurance coverage is limited. If we become subject to product liability claims resulting from defects in our products, we may fail to achieve market acceptance of our products and our sales could decline.

          The testing, manufacturing and marketing of our current products as well as those currently under development entail an inherent risk of product liability claims and associated adverse publicity. Following the introduction of a product, adverse side effects may be discovered. Adverse publicity regarding such effects could affect sales of our other products for an indeterminate time period. To date, we have not experienced any material product liability claims, but any claim arising in the future could substantially harm our business. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. We may not be able to continue to obtain adequate insurance at a reasonable cost, if at all. In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the $10 million limit of our insurance coverage or which results in significant adverse publicity against us, we may lose revenue, be required to make substantial payments which could exceed our financial capacity and/or lose or fail to achieve market acceptance. Furthermore, our agreements with some suppliers of our instruments contain limited warranty provisions, which may subject us to liability if a supplier fails to meet its warranty obligations if a defect is traced to our instrument or if we cannot correct errors reported during the warranty period. If our contractual limitations are unenforceable in a particular jurisdiction, a successful claim could require us to pay substantial damages.

           We may be held liable for the release of hazardous materials, which could result in extensive clean up costs or otherwise harm our business.

          Our products and development programs involve the controlled use of hazardous and biohazardous materials, including chemicals, infectious disease agents and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by applicable local, state and federal regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any fines, penalties, remediation costs or other damages that result. Our liability for the release of hazardous materials could exceed our resources, which could lead to a shutdown of our operations. In addition, we may incur substantial costs to comply with environmental regulations if we choose to expand our manufacturing capacity.

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

          Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and foreign interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These exposures are directly related to our normal operating and funding activities.

     Interest Rate Risk

          The interest payable on certain of our lines of credit and other borrowings is variable based on the United States prime rate and, therefore, is affected by changes in market interest rates. At March 31, 2005, approximately $12.0 million was outstanding on these lines of credit and other borrowings with a weighted average interest rate of 8.19%. We also had approximately $4.7 million of cash and cash equivalents at March 31, 2005, the majority of which was invested in liquid interest bearing accounts. We completed an interest rate risk sensitivity analysis based on the above and an assumed one-percentage point increase/decrease in interest rates. If market rates increase/decrease by one percentage point, we would experience an increase/decrease in annual interest expense of approximately $73,000 based on our outstanding balances as of March 31, 2005.

     Foreign Currency Risk

          Our investment in foreign assets consists primarily of our investment in our European subsidiary. Foreign currency risk may impact our results of operations. In cases where we purchase inventory in one currency and sell corresponding products in another, our gross margin percentage is typically at risk based on foreign currency exchange rates. In addition, in cases where we may be generating operating income in foreign currencies, the magnitude of such operating income when translated into U.S. dollars will be at risk based on foreign currency exchange rates. Our agreements with suppliers and customers vary significantly in regard to the existence and extent of currency adjustment and other currency risk sharing provisions. We had no foreign currency hedge transactions in place on March 31, 2005.

          We have a wholly-owned subsidiary in Switzerland which uses the Swiss Franc as its functional currency. We purchase inventory in foreign currencies, primarily Japanese Yen and Euros, and sell corresponding products in U.S. dollars. We also sell products in foreign currencies, primarily Japanese Yen and Euros, where our inventory costs are in U.S. dollars. Based on our results of operations for the most recent 12 months, if foreign currency exchange rates were to strengthen/weaken by 25% against the dollar, we would expect a resulting pre-tax loss/gain of approximately $1.2 million.

Item 4.

CONTROLS AND PROCEDURES

     (a)   Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined by Rule 13a-15 of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and procedures are adequate to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  

     (b)   Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

          If, as of June 30, 2005, we meet the definition of “accelerated filer,” as defined by Rule 12b-2 of the Exchange Act, we will be required by the Sarbanes-Oxley Act of 2002 to include an assessment of our internal control over financial reporting and attestation from our independent registered public accounting firm in our Annual Report on Form 10-K for our fiscal year ending December 31, 2005. If, however, we are not deemed an “accelerated filer” at that time, we will not have to include such assessment and attestation until our Annual Report on Form 10-K for our fiscal year ended December 31, 2006.

PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

                 From time to time, we may be involved in litigation relating to claims arising out of our operations. As of March 31, 2005, we were not party to any legal proceedings that are expected, individually or in the aggregate, to have a material effect on our business, financial condition or operating results.

Item 2.   Changes in Securities and Use of Proceeds

                 None.

Item 3.   Defaults upon Senior Securities

                 None.

Item 4.   Submission of Matters to a Vote of Security Holders

                 None.

Item 5.   Other Information

                 None.

Item 6.    Exhibits

                (a)   Exhibits

Number	Notes	Description
10.1	H	Eighth Amendment to Second Amended and Restated Credit and Security Agreement between Registrant, Diamond Animal Health, Inc. and Wells Fargo Business Credit, Inc., dated March 22, 2005.
10.2	H	Distribution Agreement between Registrant and Arkray Global Business, Inc., dated November 1, 2004.
31.1		Certification Under Section 302 of Sarbanes-Oxley Act.
31.2		Certification Under Section 302 of Sarbanes-Oxley Act.
32.1		Certification Under Section 906 of Sarbanes-Oxley Act.

                Notes
                H  Confidential treatment has been requested with respect to certain portions of this agreement.  

HESKA CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

                             HESKA CORPORATION

Date:                           May 16, 2005 By    /s/  Robert B. Grieve     
         ROBERT B. GRIEVE
         Chairman of the Board and Chief Executive Officer
         (on behalf of the Registrant and as the Registrant’s
         Principal Executive Officer)

Date:                           May 16, 2005 By    /s/  Jason A. Napolitano     
        JASON A. NAPOLITANO
        Executive Vice President and Chief Financial Officer
        (on behalf of the Registrant and as the Registrant’s
        Principal Financial Officer)

EX-10

Exhibit 10.1

[***]     – Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

EIGHTH AMENDMENT TO SECOND AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT

                This Amendment, dated as of March 22, 2005, is made by and between Heska Corporation, a Delaware corporation (“Heska”), Diamond Animal Health, Inc., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be referred to herein individually as a “Borrower” and collectively as the “Borrowers”), and Wells Fargo Business Credit, Inc., a Minnesota corporation (the “Lender”).

Recitals

                The Borrowers and the Lender are parties to a Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (as amended to date and as the same may be hereafter amended from time to time, the “Credit Agreement”). Capitalized terms used in these recitals have the meanings given to them in the Credit Agreement unless otherwise specified.

                The Borrowers have requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to the terms and conditions set forth herein.

                NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as follows:

               1.        Defined Terms.  Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein.

               2.         Spread.  Section 2.7 of the Credit Agreement is amended to read in its entirety as follows:

       “Section 2.7 Spread.  The spread (the “Spread”) means two and three-quarters percent (2.75%), effective retroactive to January 1, 2005; provided, however, that (a) if on the last day of any month, Permanent Capital exceeds the Minimum Capital covenant for such month set forth in Section 6.12 by [***] or more, “Spread” shall be set to one and three-quarters percent (1.75%), effective as of the first day of the month following such achievement; and provided further that if on the last day of any month, Permanent Capital does not exceed the Minimum Capital covenant for such month by [***] or more, “Spread” shall be set to two and three-quarters percent (2.75%), effective as of the first day of the month following such a situation; and (b) if [***] in respect of the Borrower’s current dispute with that company relating to invoices totaling approximately $329,000, then “Spread” shall mean 2.5% or 1.5% for all periods instead of 2.75% or 1.75%, respectively, effective as of the first day of the month following the month in

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

which the Borrower delivers to the Lender evidence of such collection, if such evidence is acceptable to the Lender in its sole discretion.”

               3.        Minimum Net Income.  Section 6.13 of the Credit Agreement is hereby amended to read in its entirety as follows:

      “Section 6.13 Minimum Net Income.  Heska will achieve, on a consolidated basis, during each period described below, Net Income in an amount not less than the amount set forth opposite such period (amounts in parentheses denote negative numbers):

Period
Twelve months ended December 31, 2004
Three months ending March 31, 2005
Six months ending June 30, 2005
Nine months ending September 30, 2005
Twelve months ending December 31, 2005
Fifteen months ending March 31, 2006 Minimum Net Income
[***]
[***]
[***]
[***]
[***]
[***]"

               4.        Compliance Certificate.  Exhibit G to the Credit Agreement is replaced in its entirety by Exhibit A to this Amendment.

               5.        No Other Changes.  Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any advance or letter of credit thereunder.

               6.        Waiver of Default.  The Borrowers are in default of Section 6.13 of the Credit Agreement as of December 31, 2004 (the “Existing Default”). Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby waives the Existing Default. This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle the Borrowers to any other or further waiver in any similar or other circumstances.

               7.        Amendment Fee.  The Borrowers shall pay the Lender a fully earned, non-refundable fee in the amount of $8,000 in consideration of the Lender’s execution and delivery of this Amendment, which fee shall be due and payable on April 1, 2005.

               8.        Conditions Precedent.  This Amendment, including the waiver set forth in paragraph 6, shall be effective when the Lender shall have received an executed original hereof.

               9.        Representations and Warranties.   The Borrowers hereby represent and warrant to the Lender as follows:

        (a)        The Borrowers have all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and this Amendment has been duly executed and delivered by the Borrowers and constitute the legal, valid and binding obligation of the Borrowers, enforceable in accordance with their terms.

        (b)        The execution, delivery and performance by the Borrowers of this Amendment have been duly authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it or its properties may be bound or affected.

        (c)        All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date.

               10.        No Other Waiver.  Except as set forth in paragraph 6, the execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment.

               11.        Release.  The Borrowers hereby absolutely and unconditionally release and forever discharge the Lender, and any and all participants, parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which any Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown.

               12.        Costs and Expenses.  The Borrowers hereby reaffirm their agreement under the Credit Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the Lender in connection with the Loan Documents, including without limitation all reasonable fees and disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental hereto. The Borrowers hereby agree that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the Borrowers, make a loan to the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses and the fee required under paragraph 7 hereof.

               13.        Miscellaneous.  This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.

               IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

HESKA CORPORATION


By    /s/ JASON NAPOLITANO                           
              Jason Napolitano
     Its    Chief Financial Officer                           



WELLS FARGO BUSINESS CREDIT, INC.


By    /s/ TIM ULRICH                                          
          Tim Ulrich, Vice President DIAMOND ANIMAL HEALTH, INC.


By    /s/ JASON NAPOLITANO                        
              Jason Napolitano
     Its     Chief Financial Officer                        

[***]     – Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Exhibit A to Eighth Amendment

Compliance Certificate

To:                                                                        
                  Wells Fargo Business Credit, Inc.

Date:                                                       , 20      

Subject:     Heska Corporation
                  Financial Statements

In accordance with our Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (the “Credit Agreement”), attached are the financial statements of Heska Corporation (“Heska”) as of and for ________________, 20___ (the “Reporting Date”) and the year-to-date period then ended (the “Current Financials”). All terms used in this certificate have the meanings given in the Credit Agreement.

I certify that, to the best of my knowledge, the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrowers’ financial condition and the results of its operations as of the date thereof.

                    Events of Default. (Check one):

[   ]    The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit
    Agreement.

[   ]    The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement
    and attached hereto is a statement of the facts with respect to thereto.

                    I hereby certify to the Lender as follows:

[   ]    The Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters, hence I am completing all
    paragraphs below except paragraph 4.

[   ]    The Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs
    below.

                    Financial Covenants. I further hereby certify as follows:

         1.        Accounts Payable.  Pursuant to Section 6.5 of the Credit Agreement, as of the Reporting Date, the Borrowers [   ] are [   ] are not in compliance with the requirement that they have no accounts payable more than 60 days past due.

         2.        Spread.  Pursuant to Section 2.7 of the Credit Agreement, as of the Reporting Date, Heska’s Permanent Capital was, on a consolidated basis,

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

$_________________, which [   ] exceeds [   ] does not exceed the corresponding Minimum Capital covenant (set forth in paragraph 3 below) by at least [***].

         3.        Minimum Capital.  Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska’s Capital was, on a consolidated basis, $_________________, which [   ] satisfies [   ] does not satisfy the requirement that such amount be not less than $_____________ on the Reporting Date, as set forth in the table below:

Date
December 31, 2004
January 31, 2005
February 28, 2005
March 31, 2005
April 30, 2005
May 31, 2005
June 30, 2005
July 31, 2005
August 31, 2005
September 30, 2005
October 31, 2005
November 30, 2005
December 31, 2005
January 31, 2006
February 28, 2006
March 31, 2006
April 30, 2006
May 31, 2006 Minimum Capital
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]

The covenant amounts set forth above for dates after December 31, 2004, shall be adjusted upward or downward, respectively, on a dollar-for-dollar basis by the amount by which Heska’s Capital, on a consolidated basis as of December 31, 2004, as reflected in Heska’s audited financial statements, exceeds or is less than [***].

         4.        Minimum Net Income.  Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heska’s Net Income was, on a consolidated basis, $_________________, which [   ] satisfies [   ] does not satisfy the requirement that such amount be no less than $______________ on the Reporting Date, as set forth in the table below:

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Period
Twelve months ended December 31, 2004
Three months ending March 31, 2005
Six months ending June 30, 2005
Nine months ending September 30, 2005
Twelve months ending December 31, 2005
Fifteen months ending March 31, 2006 Minimum Net Income
[***]
[***]
[***]
[***]
[***]
[***]

         5.        Minimum Liquidity.  Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, Heska’s Liquidity was, on a consolidated basis, $_________________, which [   ] satisfies [   ] does not satisfy the requirement that such amount be no less than $1,500,000 on the Reporting Date.

         6.        Minimum Individual Book Net Worth.  Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heska’s Book Net Worth was $_________________ and Diamond’s Book Net Worth was $_________________, which [   ] satisfies [   ] does not satisfy the requirement that such amounts be no less than zero on the Reporting Date.

         7.        Capital Expenditures.  Pursuant to Section 7.10 of the Credit Agreement, as of the Reporting Date, Heska’s Capital Expenditures were, in the aggregate and on a consolidated basis, $_______________ which [   ] satisfies [   ] does not satisfy the requirement that such amount be not more than $_______________ during the period ending on the Reporting Date, as set forth in the table below:

Period
Twelve months ended December 31, 2004
Three months ending March 31, 2005
Twelve months ending December 31, 2005
Four months ending April 30, 2006
Five months ending May 31, 2006 Maximum Capital Expenditures
[***]
[***]
[***]
[***]
[***]

Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP.

HESKA CORPORATION


By                                                     
       Its                                              

EX-10

Exhibit 10.2

[***]     – Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

DISTRIBUTION AGREEMENT

THIS AGREEMENT made and entered into effective as of November 1, 2004 (the “Effective Date”), by and between ARKRAY Global Business, Inc., a Japanese corporation with its principal office at 57 Nishi Aketa-cho, Higashikujo, Minami-ku, Kyoto 601-8045, Japan (hereinafter referred to as “AGB”) and HESKA Corporation, a Delaware corporation with its principal office at 1613 Prospect Parkway, Fort Collins, Colorado 80525, U.S.A. (hereinafter referred to as “HESKA”),

WITNESSETH

WHEREAS, HESKA and ARKRAY, Inc., a parent company of AGB, are the parties to the distribution agreement made and entered into effective as of February 16, 2001;

WHEREAS, effective November 1, 2001, ARKRAY, Inc. has assigned and transferred to AGB, and AGB has accepted from ARKRAY, Inc. all of ARKRAY, Inc.’s rights and obligations under the said distribution agreement with prior written consent of HESKA (the distribution agreement so assigned and transferred is hereinafter referred to as the ^“Current Agreement”); and

WHEREAS, in the absence of 180 day prior written notice not to renew the Current Agreement, (1) the Current Agreement has been automatically renewed for an additional period of one year from February 16, 2004, and (2) the Current Agreement so renewed is to be further renewed for an additional period of one year from February 16, 2005 but AGB and HESKA desire to terminate the Current Agreement on October 31, 2004 and enter into a new distribution agreement effective as of November 1, 2004.

NOW, THEREFORE, in consideration of the foregoing premises and of the mutual covenants herein contained, the parties hereby agree as follows:

ARTICLE I

AGB hereby appoints HESKA as its exclusive distributor to promote, market, service and sell the Products (hereinafter defined) in the Field of the Territory (hereinafter respectively defined) from the Effective Date of this Agreement, and HESKA accepts such appointment,

subject to and in accordance with the following terms and conditions. AGB and HESKA acknowledge and agree that the Current Agreement shall terminate and cease to be valid any further upon this Agreement becoming effective.

1.1   Products

The Products means those products manufactured by or for the ARKRAY group of companies, and listed on Attachment 1 (hereinafter referred to as the “Products”), along with all related spare parts necessary to support those products. The Attachment 1 can be amended as needed in the future by mutual written agreement of both parties.

1.2    Branding

AGB and HESKA agree that the brand name of the Products and its logotype shall be a combination of “ARKRAY” and “HESKA” in a format to be mutually agreed upon by the parties hereto.

1.3    Distribution Right

HESKA shall have an exclusive right to promote, market, sell and distribute the Products, with the right to appoint sub-distributors, only in the veterinary market (hereinafter referred to as the “Field”) of North America, i.e. USA and Canada (hereinafter referred to as the “Territory”). The exclusivity referred to in this Agreement applies between HESKA and AGB, AGB’s affiliates and AGB-appointed distributors. Except as expressly provided in this Article 1, no right, title or interest is granted, whether express or implied, by AGB to HESKA, and nothing in this Agreement shall be deemed to grant to HESKA any right to any products other than the Products.

HESKA agrees that, during the term of this Agreement, (a) HESKA shall not make commercially available a product(s) with features identical to the Products, (b) HESKA shall not handle or otherwise provide any “off-brand” and/or “generic” form of consumables, test strips or reagents for use with any instrument Product, PROVIDED, HOWEVER, this paragraph shall not apply to common laboratory transfer pipettes, common QC serum materials and primary blood collection tubes that fit commercially available external centrifuges.

1.4    Sales Responsibility

HESKA assumes all sales responsibilities for the Products to be sold under this Agreement. “Sales Responsibilities” as used herein includes all sales force training, maintenance and support activities, warranty repair service as contemplated at Section 2.1 below as well as advertising, promotion, and demonstration. AGB will provide HESKA with all drawings,

specifications, test procedures, manuals, information and demonstration materials, but only to the extent that they are reasonably necessary for HESKA to fulfill its Sales Responsibilities. AGB will also provide HESKA with test data and results, performance studies, and other materials as needed to obtain regulatory clearance to market all Products in the Field of the Territory.

1.5    Relationship of Parties

Each party shall be considered an independent contractor of the other party. Nothing in this Agreement shall be construed as establishing a joint venture or partnership or principal/agent or employer/employee relationship. No party is authorized to make any statement, claim, representation or warranty or to act on behalf of the other party with respect to any of the provisions of this Agreement, except as provided for herein or as specifically authorized in writing by the other party.

1.6   Term

Unless terminated earlier as set forth in Section 1.7, this Agreement shall continue to be in full force and effect for a period of three (3) years from the Effective Date first hereinabove written.

1.7   Termination

1.7.1  Either party may terminate this Agreement by a written notice to the other party at any time in the event that the other party shall have been in breach of any of the provisions of this Agreement and such breach shall have continued for sixty (60) days (ten (10) days in the case of breach of payment terms) after receipt of written notice of the breach from the non-breaching party.

1.7.2  Either party may terminate this Agreement without any notice to the other party if the other party (1) is declared insolvent or bankrupt, or proceedings for commencement of civil rehabilitation, company reorganization or other similar procedure are made against it in a court of competent jurisdiction or (2) enters into liquidation whether compulsorily or voluntarily; or compounds or makes any arrangements with its creditor or has a receiver, manager or administrator appointed in respect of all or any part of its assets.

1.7.3   Either party may terminate this Agreement by a written notice to the other party at any time in the event of any sale to a competitor of the other party’s veterinary blood chemistry business pertaining to this Agreement occurs, whether by sale of assets or divisions, merger or otherwise.

1.8   Effect of Termination

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

1.8.1   Upon termination of this Agreement, the terminating party may (but has no obligation to) cancel any and all outstanding orders pending hereunder.

1.8.2  In the event of termination by HESKA, HESKA will have the right to return any instrument Products in-transit from AGB to HESKA as well as in its possession in unused or unpacked condition to AGB, at AGB’s expense for return freight, for a full refund of the purchase price paid for such Products by HESKA to AGB.

1.8.3  In the event of termination by AGB, at the option of AGB, either AGB will have the right to repurchase any instrument Products in HESKA’s possession in unused or unpacked condition, at HESKA’s expense for return freight, for a full refund of the purchase price paid for such Products by HESKA to AGB or HESKA shall pay for any and all Products in process, in inventory, and/or in-transit to HESKA and, when applicable, the deficient number of the instrument Products provided for at Section 3.2 and shall take delivery of those Products as soon as demanded by AGB; provided, that HESKA is allowed to distribute such purchased Products in the Field in the Territory for six (6) month after such termination. Unless otherwise provided herein, each party waives any claims for compensation or damages in connection with such cancellation of outstanding orders from the other party.

ARTICLE II

2.1   Warranty and Quality

AGB warrants that the Products sold hereunder shall be free and clear of any and all liens, encumbrances or defects in title and shall be conveyed to HESKA with lawful and marketable title. AGB further warrants that the Products shall satisfy the performance specifications set forth in Attachments 1 and 2. AGB will not make any changes to the Products without first (i) notifying HESKA in writing at least ninety (90) days in advance of such changes, (ii) providing HESKA with satisfactory evidence that such changes do not alter the performance specifications of any Product or necessitate further regulatory filings for any Product, and (iii) obtaining HESKA’S consent in writing. AGB shall input normal reference ranges for animals supplied by HESKA in writing into the instrument Products without modification by AGB.

The instrument Products are warranted by AGB to be free from defects in materials and workmanship for a period of [***] from the date of shipment from AGB to HESKA, and the test strip Products are warranted for a period of their remaining shelf lives, provided, however, AGB shall not ship test strip Products whose remaining shelf lives are less [***] at the time of shipment. AGB will use good faith efforts to provide the longest possible shelf life in excess of the minimum requirement of [***]. During the warranty period, AGB will promptly provide HESKA with all necessary warranty repair parts to have the non-conforming Products repaired by HESKA, or replacement of the non-conforming Products at no cost. AGB’s

warranty obligation under this Section 2.1 is limited to the timely supply of free repair parts or free replacement of the non-conforming Products.

In the event that HESKA determines that any shipment of the Products fails to conform to their performance specifications set forth in Attachments 1 and 2, HESKA shall promptly notify AGB and reasonably specify the manner in which the Products fail to conform. AGB shall have the right to make its own inspection and evaluation of the allegedly non-conforming Products and shall notify HESKA, within twenty one (21) days after receipt of such information, including samples of the allegedly non-conforming Products from HESKA, whether it has confirmed and accepted HESKA’S claim that the Products are non-conforming.

If AGB determines and confirms that the Products are non-conforming, AGB shall replace, at no cost to HESKA, the non-conforming Products at the earliest date after confirmation of the Products non-conformance. AGB shall also bear the freight charges for return of all non-conforming Products to AGB from HESKA.

If, after evaluating the allegedly non-conforming Products, AGB believes that the Products in question are conforming, AGB shall supply HESKA with its written findings and request HESKA to submit additional samples of the Products to an independent third party, acceptable to both parties, for testing in accordance with and against the performance specifications set forth in Attachments 1 and 2. The decision of such third party shall be final with respect to the alleged non-conforming Products and binding on both parties to this Agreement.

If the decision of the third party is that the Products are non-conforming, AGB shall pay the return freight with respect to the Products shipped to HESKA as well as all costs and expenses relating to the testing of the Products by the independent third party. In addition, AGB shall supply HESKA with a Certificate of Destruction certifying that the non-conforming Products returned by HESKA have been destroyed in an environmentally safe manner.

If the decision of the third party is that the Products conform to the performance specifications set forth in Attachments 1 and 2, HESKA shall accept the Products and shall be responsible for the return freight and all costs and expenses relating to the testing of the Products by the independent third party.

AGB shall, at its cost, comply and provide HESKA with certifications that the Products are in compliance with any applicable government regulations relating to the sale of the Products in

the Territory, and manufacture in Japan or in China, as the case may be, including compliance with ISO 9001 or ISO 13485 requirements. HESKA agrees to take responsibility for timely providing AGB with such regulations in writing. AGB and HESKA shall cooperate in meeting all regulations or requirements of, and the guidelines published by, the U.S. Food and Drug Administration and any other applicable U.S. governmental regulatory agencies. AGB and HESKA, in consultation, shall use their best efforts to answer specific questions relating to quality assurance as soon as possible upon receipt of such questions.

AGB warrants that shipping of Products is in compliance with all applicable laws and government regulations of Japan and/or China regarding exports.

2.2   Trademark

AGB grants HESKA a limited non-exclusive and non-transferable license to use ARKRAY, Inc.‘s and/or AGB’S trademarks and brand names set forth in Attachment 3 for the specific purpose of performing its obligations hereunder. Except as specified in this Section 2.2 and Section 1.2, no party hereto will derive any legal rights to the other party’s trademarks and brand names by use thereof. No party hereto shall adopt, use or register in any country, without the prior written consent of the other party, any trademarks and brand names which are likely to be confused with a trademark(s) and brand names of the other party.

2.3   Recall

If any governmental or regulatory authority having jurisdiction over the Products requires AGB or HESKA to recall any Products, such party shall immediately give a notice to the other party of such requirement and all particulars thereof and review with the other party the proposed manner in which the recall is to be carried out, it being the intention of the parties that the cost, expenses and liabilities associated with any such recall shall be borne by the party that caused the recall. The party responsible for carrying out the recall shall do so in as expeditious a manner as possible and in such a way as to cause the least disruption to the sale of the Products and to preserve the goodwill attached to the Products and each party.

2.4   Spare Parts, Consumables and Test Strips

Notwithstanding any provision of this Agreement to the contrary, AGB will continue to furnish for five (5) years after the termination or expiration of this Agreement the spare parts, consumables and test strip Products for exclusive use with the instrument Products at their prices as of the termination date; provided, that such prices can be adjusted once a year equal to the percentage increase in the U.S. Consumer Price Index. For purposes of this Agreement, U.S. Consumer Price Index means the U.S. Consumer Price Index, All Urban Consumers

(CPI-U). U.S. City Average for all Items, 1982-84=100.

2.5   Patents

AGB warrants and represents to HESKA that to the best of its actual knowledge, and as of the Effective Date of this Agreement, neither the Products covered by this Agreement nor their manufacture, use, rental, importation or sale will infringe upon any issued patent or other proprietary rights held by a third party.

AGB shall, in consultation with HESKA, defend, indemnify and hold HESKA and its subsidiary or affiliated companies, and customers thereof, harmless from any costs, damages, loss, expense, claims, judgments or settlements including without limitation reasonable attorney’s fees and investigation costs, with respect to any and all claims that the manufacture, use, rental, importation or sale of any Products covered by this Agreement infringes upon any patent or other proprietary rights of a third party.

ARTICLE III

3.1   Orders and Forecast

HESKA agrees and acknowledges that each order for the instrument Products shall be in multiples of five (5) units, and each order for the test strip Products shall be in multiples of one hundred (100) boxes. On or around the Effective Date of this Agreement, HESKA shall submit a firm purchase order for the Products covering its requirement for the first five (5) months. Thereafter, HESKA shall submit periodically purchase orders by the end of each calendar quarter as needed in the form agreed to by both parties, the terms and conditions of which shall be applicable hereto to the extent they are not inconsistent with the provisions of this Agreement. AGB will immediately confirm the receipt of each purchase order from HESKA so that HESKA has assurance that each purchase order is duly received by AGB. Such purchase orders shall not bind AGB unless or until accepted by AGB. AGB shall notify HESKA of its decision on acceptance within ten (10) days after receipt of a purchase order.

HESKA shall provide AGB, on a quarterly basis by the end of each calendar quarter, with a non-binding rolling one (1) year forecast of its anticipated purchases of the Products. AGB shall keep HESKA notified immediately of any events that may significantly impact AGB^’S ability to deliver the Products, such as interruptions by suppliers, labor troubles, discovered defects, and the like.

3.2   Minimum Purchase Requirement for Instrument Product

During the effective term of this Agreement, HESKA guarantees to purchase from AGB and

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

to take delivery of the instrument Products in the following annual minimum purchase quantity:

(l)  The 1^st Contract Year:  [***] units

(2)   The annual minimum purchase quantity for the 2^nd and 3^rd Contract Year shall be [***] units each unless AGB and HESKA mutually agree to a different minimum purchase quantity at least ninety (90) days prior to the beginning of the 2^nd and 3^rd Contract Year. If, during any Contract Year, HESKA failed to purchase and to take delivery of the instrument Products in the annual minimum purchase quantity applicable to that Contract Year, it is the intent of the parties hereto that HESKA shall pay for and take delivery of the deficient number of the instrument Products upon demand from AGB.

For the purpose of this Section 3.2,

(a)  “Contract Year” shall mean any one (1) year period commencing on the Effective Date or any anniversary thereof, and

(b)  “The instrument Product is considered purchased when the payment therefore has actually been received by AGB in full; and

(c)  “HESKA shall be deemed to have satisfied its obligation to purchase and take delivery of the annual minimum purchase quantity of the Products that are accepted by AGB and paid by HESKA during any applicable Contract Year for which AGB fails to make timely production or delivery.

3.3   Pricing

AGB will sell the Products to HESKA in accordance with the prices set forth on Attachment 1. The Product pricing is fixed until the first anniversary of the Effective Date of this Agreement. Thereafter, upon thirty (30) day’s prior written notice from one party to the other, the parties agree to discuss in good faith any adjustment to the prices of the Products in an attempt to reach a mutually satisfactory agreement. If a mutually satisfactory agreement cannot be reached, the prices of the Products then in effect shall remain applicable.

3.4   Shipping of Products

AGB agrees to ship to HESKA the instrument Products and the test strip Products within ninety (90) days of its acceptance of HESKA’S purchase orders. In the event of its inability to make a complete shipment as accepted by AGB, AGB shall notify HESKA immediately of the possible shipping date. Both parties shall discuss and amicably agree to adjust the shipping date if AGB’S shipping date causes HESKA any inconvenience.

3.5   Payment Terms

HESKA shall pay for all the Products ordered with AGB by telegraphic transfer (“T/T”) in

advance of the contracted shipment date. Such T/T shall be made at least two (2) weeks before the contracted shipment date, PROVIDED, THAT, HESKA receives a timely firm shipment date in writing from AGB. AGB shall periodically review HESKA’S financial condition and consider in good faith whether any revision of payment terms is possible or not.

3.6   Labeling and Packaging

The test strip Products shall be labeled as illustrated on Attachment 4 attached hereto. The Products shall be packaged and shipped to HESKA in accordance with AGB’S quality standards. If changes need to be made to labels or packaging in order to comply with legal or regulatory requirements, HESKA shall cooperate fully with AGB to comply with those requirements as quickly as possible.

3.7   Freight/Insurance

AGB, at its option, will ship the Products ordered by HESKA under the terms of FCA Osaka, Kobe and/or Shanghai, China as defined in Incoterms 2000. HESKA shall be responsible for payment of all air and/or sea freight, insurance, duties and tariffs for shipments of the Products to HESKA.

ARTICLE IV

4.1   Report

HESKA shall make periodic reports on a quarterly basis to AGB on its inventory, sales activities and sales promotion plans for the Products, and the market conditions including information on the competitive products.

4.2   Approvals

HESKA and AGB shall exercise reasonable efforts to obtain all government licenses or approvals required for the marketing, sales or use of the Products in the Field of the Territory. All Products registrations, if required, are in the name of AGB unless otherwise agreed by both parties. If registrations in HESKA’s name are required by law, all registrations are to be assigned or transferred to AGB, to the extent permitted by law, at AGB’s expense, upon termination of this Agreement.

AGB will pay personnel, consulting, data collection costs and other expenses incurred in connection with the preparation and filing of all applications hereunder. AGB shall also have financial responsibility for government licenses and approvals, which shall apply to both the initial list of the Products on Attachment 1,as well as to any changes to such Products. Similarly, whenever because of changes in regulatory agencies or regulations or in the

Products, any additional or different requirements are imposed regarding the marketing, sales or use of any Products, AGB and HESKA shall exercise their reasonable best efforts to comply, at AGB’s expense, with all new requirements regarding the marketing, sales or use of Products.

4.3    Confidentiality

                (a)   “Confidential Information” means any technical, manufacturing, business and marketing information, including, without limitation, patent applications, patent disclosure, data, inventions, concepts, ideas, structures, formulas, techniques, processes, apparatus, know-how and customer information, disclosed after the Effective Date of this Agreement orally or in tangible form such as documents, memoranda, reports, correspondence, machine readable tapes or disks drawings, notes or other media.

                (b)   The party receiving information (“Receiving Party”) agrees that the party disclosing (“Disclosing Party”) is the owner of the Confidential Information and that the Receiving Party will not use any Confidential Information for any purpose except for the performance of this Agreement. Each Receiving Party agrees not to disclose any Confidential Information to any third party or to employees of the Receiving Party, except to those employees who are required to have the Confidential Information in order to be engaged in the execution of this Agreement. Receiving Party’s obligations with regard to the confidentiality and nonuse of such Confidential Information shall not extend to any information that:

(1)   was in the public domain at the time it was disclosed or becomes part of public domain after disclosure, including, without limitation, disclosure in a U.S. or foreign patent or disclosure in a printed publication which is generally available to the public, or through the sale of the Product embodying the same to the extent that such confidentiality is ascertainable from such Product; or

(2)   was known to the Receiving Party at the time of its disclosure or becomes known to the party without breach of this Agreement, provided that the Receiving Party shall have the burden of proving such knowledge: or

(3)   is independently developed by the persons of the Receiving Party without use of the Confidential Information; or

(4)  is disclosed by a Disclosing Party to a third party without restrictions on such third party’s rights to disclose or use the same; or

(5)   is disclosed by the Disclosing Party pursuant to statute, regulation, judicial order, a requirement of an agency or by operation of law, provided that, in the case of a judicial order or the order of an agency, the Receiving Party shall (i) give the Disclosing party prompt notice of any such possible disclosure of Confidential Information and (ii) permit the Disclosing

Party, at its expense, to take all reasonable measures to prevent or limit the scope of such disclosure and/or to obtain protective orders relating to the confidentiality of such Confidential Information; or

(6)   is approved for release upon the Disclosing Party’s prior written consent; or

(7)   is disclosed by the Disclosing Party to the Receiving Party after written notification is given by the Receiving Party to the Disclosing Party that it will not accept any further Confidential Information.

                (c)   Each Receiving Party agrees that it shall take all reasonable measures to protect the secrecy and avoid unauthorized use of the Confidential Information and that any disclosure of the information within the Receiving Party will only be such as is reasonably necessary for the purposes contemplated by this Agreement. Each Receiving Party shall immediately notify the Disclosing Party in the event of any unauthorized use or disclosure of the Confidential Information.

                (d)   Any disclosures made after the Effective Date of this Agreement shall be governed exclusively by the provisions of this Section 4.3 and not by the parties’ existing Confidential Disclosure Agreement—Bilateral signed by ARKRAY on November 17, 2000. This Section 4.3 shall survive for five (5) years following termination of this Agreement.

4.4   Product Liability Insurance

Each party shall maintain product liability insurance in the amount of One Million Dollars ($1,000,000). Each party agrees that it shall provide the other party with at least thirty (30) days’ prior written notice of any cancellation or change of limits or terms of such policy and similarly the certificate and policy shall contain an endorsement that such insurance may not be cancelled or modified except upon thirty (30) days’ prior written notice to the other party.

4.5   Product and General Liability Indemnification

Each party agrees that it will defend, indemnify and hold harmless the other party from and against all costs, damages, loss, expense (including reasonable attorney’s fees and investigation costs), claims by or judgments or settlements in favor of third parties for bodily injury, property damage, or any other damage or injury caused or alleged to have been caused by defects of products it supplies. Furthermore, each party agrees that it shall defend, indemnify and hold the other party harmless from all costs, damages, loss, expense (including reasonable attorney’s fees and investigation costs), or any other damage caused by, arising out of, or resulting from (i) such party’s failure of performance of any of the terms of this Agreement; (ii) such party’s failure to comply with any and all laws (statutory and common) and regulations applicable to such performance; or (iii) any governmental or regulatory investigation of it or its products.

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Each party agrees to give the other party prompt notice in writing of the institution of any suit or investigation, or any claims made by a third party, including any claims asserted or made by any governmental authority having jurisdiction over the parties or any Product. AGB and HESKA agree to cooperate with each other in the defense of such suits or claims and to provide all necessary information to enable the defending party to carry on the defense of such suit or any appeal from a judgment or decree rendered therein.

4.6   Force Majeure

Except with respect to the indemnification obligations provided for in Section 4.5, no party shall be liable to the other party in any manner for failure or delay to fulfill all or part of this Agreement, directly or indirectly, owing to acts of God, governmental orders or restrictions, war, threat of war, warlike conditions, hostilities, sanctions, mobilization, blockade, embargo, detention, revolution, riot, looting, strike, lockout, shortage of power or raw material, other labor troubles, fire, typhoon, earthquake, or lightning, epidemic or accident of any other causes or circumstances beyond its control.

4.7   Notices

Any notice required or permitted to be given hereunder shall be given in writing and be properly given if served personally by the party giving notice or if sent by such party by prepaid registered or recorded delivery letter, by fax (simultaneously confirmed by prepaid registered or recorded delivery letter) to the address of the other party specified hereunder. Any notice personally delivered to the appropriate address shall be deemed to have been given on the date of its delivery and any notice sent by prepaid registered or recorded delivery post shall be deemed to have been given on the seventh day following the posting of the same and any notice given by fax shall be deemed to have been given on the day which it is transmitted.

If to AGB:
57 Nishi Aketa-cho
Higashi-kujo, Minami-ku
Kyoto 601-8045, Japan
[***]
Attention:   Shigeru Doi
President & CEO If to HESKA:
1613 Prospect Parkway
Fort Collins, Colorado 80525
USA
[***]
Attention: Robert Grieve
Chief Executive Officer

4.8   Publicity

Neither party shall announce or disclose the existence of this Agreement or its terms and conditions, or advertise or release any publicity regarding this Agreement without the prior

written consent of the other party, except as required by law, rule, or regulation. AGB understands and agrees that HESKA may be required to disclose and file this Agreement with the U.S. Securities and Exchange Commission and that such filings are publicly available. HESKA will be obligated to disclose the information within the limits of the range required by law, rule or regulation.

4.9   Assignability

This Agreement and the rights and obligations hereunder shall not be assigned or transferred to any third party by either party except (i) with the prior written approval of the other party or (ii) subject to Section 1.7, in connection with a sale of its business pertaining to this Agreement, whether by sale of assets or divisions, merger or otherwise.

4.10   Waivers

No delay or omission in the exercise of any right or remedy of any party or any default by another shall impair any right or remedy otherwise available nor shall it be construed as a waiver of any right or remedy. Any waiver by any party of any default must be in writing and shall not be a waiver of any other default concerning the same or any other provision.

4.11   Entire Agreement

This Agreement contains the entire understanding of the parties with respect to the subject matter hereof. All express or implied agreements and understandings, either oral or written, heretofore made including the Current Agreement recited herein above are expressly superseded by this Agreement. This Agreement may be modified only by written agreement duly executed by the parties.

4.12    Law of Contract Jurisdiction

This Agreement shall be governed by and construed under the laws of Japan. AGB represents and warrants that the provisions of this Agreement are enforceable under such laws. The English language employed herein shall be controlling and this Agreement shall be deemed to have been executed at Osaka, Japan.

4.13   Arbitration

All disputes, controversies or differences which may arise between the parties, out of or in relation to or in connection with the present contract shall be finally settled by arbitration. The arbitration shall be held in Denver in English under the Rules of Arbitration of the

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules if initiated by AGB, and shall be held in Kyoto or Osaka in English in accordance with the Commercial Arbitration Rules of The Japan Commercial Arbitration Association by one or more arbitrators appointed in accordance with these rules if initiated by HESKA. The award rendered by the arbitrator(s) shall be final and binding upon the parties hereto.

4.14   Survival

The termination or expiration of this Agreement for any reason whatsoever shall not release either party from any liability, obligation or agreement which is provided to be performed after the termination or expiration of this Agreement, and the provisions of Sections 1.8, 2.1, 2.3, 2.4, 2.5, 4.3, 4.5, 4.7, 4.13 and 4.14 shall survive termination of this Agreement.

4.15   Effect of Headings

The headings in this Agreement are included for purposes of convenience only and shall not affect the construction or interpretation of its provisions.

4.16   Execution in Counterparts

This Agreement may be executed in two (2) counterparts, each of which shall be deemed an original but all of which together shall be deemed for all purposes one and the same instrument.

IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their authorized representatives as of the Effective Date first herein above written.

ARKRAY Global Business, Inc.


By    /s/ [***]                                             
              [***]

Title      [***]


Date:  April 19, 2005                                HESKA Corporation


By    /s/ JASON NAPOLITANO                   
              Jason Napolitano

Title:   Chief Financial Officer


Date:    May 5, 2005                                       

Attachment 1

Products &

Price List

PL2004-11

ARKRAY    (Logo)

Date:  November 01, 2004

Distributor:

                Heska Corporation
                1613 Prospect Parkway, Fort Collins, Colorado 80525 U.S.A.
                Phone  970-493-7272

Territory:

                North America
                 (i.e. United States of America and Canada)

Payment Terms:

                100% advanced payment by telegraphic transfer (T/T)

Delivery Terms:

                FCA Osaka/Kobe, Japan and/or Shanghai, China

Prices may be adjusted as stated in Section 3.3.

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Code No.  18303 / 18361

SPOTCHEM EZ    Model: “SP-4430”
(sometimes referred to as “the instrument Products”)

Specification:

Sample
Reagent
Measurement Items



Warm-Up
Display
Operation Panel
Calibration
Data Storage
Dimension & Weight
: Serum, Plasma, Whole Blood (only Hb)
: SPOTCHEM II Reagent Strip
: Glu, UA, T-Cho, TG, BUN, T-Bil, Ca, TP, Alb, GOT, GPT,
LDH, CPK, Hb, Amy, GGT, ALP, Cre, HDL-C, FRA, IP, Mg,
**Total Test Items = 22
**Max. 9 items can be measured simultaneously
: 10 minutes
: 20 digits x 2 lines LCD (Character)
: Sheet Key
: Calibration by Magnetic Card or by Calibration Kit
: 100 Measurements
: 338 x 203 x 167 (WDH), Approx. 5.4 kg

Including:

Thermal Printer Paper (1), Power Cord (1), AC Adapter (1), Accessory case (1), Operating Manual (1), Warranty Card (1), Tip (10), Cleaning Wire (1), Cleaning Set (1), Nozzle Set (1), Wrench Set (1), Centrifuge Tube (10), Tip Waste Case (2) and Protective Cover (2)

minimum ordering unit : in multiples of five (5) units per order
                                                                                                                                                                                                     

JP¥[***].- / unit
(FCA Kobe/Osaka, Japan and/or Shanghai, China)

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

SPOTCHEM II Reagent Strips (Single Type):
(sometimes referred to as “the test strip Products”)

CODE NO.

77341
77342
77343
77344
77345
77346
77347
77348
77349
77350
77351
77352
77353
77354
77355
77356
77357
77358
77359
77360
77361
77362

* 25 Strips / Box      DESCRIPTION

Glu
UA
T-Cho
TG
BUN
T-Bil
Ca
T-Pro
Alb
GOT
GPT
LDH
CPK
Hb
Amy
GGT
ALP
Cre
HDL-C Kit
FRA
IP
Mg       @PRICE
FCA Japan / China
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]

SPOTCHEM II Reagent Strips (Multi Type):
(sometimes referred to as “the test strip Products”)

CODE NO.

77363

* 25 Strips / Box      DESCRIPTION

Panel-V       @PRICE
FCA Japan / China
¥[***]

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Optional Consumable Accessories:

CODE NO.

10067
10204
10191
10202
10192
10200
10206
10207
77041
77042
77043
10711
10712
10743
10692
10698
10208
10193
10194
10199
10699
10700
10701
10702
18204
10703
10704      DESCRIPTION

Thermal Printer Paper (For Built in Printer, 58 mm width)
Serum Sample Tube (100 pieces, blue cap)
Serum Sample Tube (500 pieces, blue cap)
Whole Blood Sample Tube (100 pieces, orange cap)
Whole Blood Sample Tube (500 pieces, orange cap)
Diluent for Hb measurement (20 mL, 50 pieces)
Pipette Tip for Hb Meas. (100L, 960 pieces)
Pipette Tip for Hb Meas. (1,000L, 960 pieces)
Calibrator Kit (Low and High, 2 vials each, 2 vials of dilution)
Calibrator Hb Kit (Calibrator and dilution for Hb meas)
Calibration Check (4 pieces of lyophilized serum 3 mL)
Tip Set (EZ) (100 pieces)
Centrifuge Cup (100 pieces)
Tip Set (EZ) (500 pieces)
AC Adaptor
Cleaning wire
Cleaner Set (Brush, 5 cotton swabs)
Pipette for Solution (For 3 mL)
Pipette for Hb Meas (For 40mL, 200L 1 each)
Sample Rack (For 30 sample tubes)
Nozzle Set (EZ) (Replacement Nozzle, 0-ring)
Tool Set for Nozzle Replacement
Waste Case (2 pieces)
Protective Cover (2 pieces)
Portable Centrifuge (CF-9520)
RS-232C, Connection Cable
Carrying Case       @PRICE
FCA Japan / China
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]
¥[***]

Attachment 2

No.                

FINAL INSPECTION CRITERIA

PRODUCT: SPOTCHEM II REAGENT STRIPS

    Established Date             01 November, 2004

Applicable Date                  01 March, 2005

Prepared by


Checked by


Approved by





 :  /s/  [***]            
      [***]


 :  /s/  [***]     
      [***]


 :  /s/  [***]            
      [***]

ARKRAY Factory, Inc.
Reagent Quality Control Dept.

Sheet 1 of 4

REVISION RECORD

Code Date Item Contents

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Sheet 2 of 4

FINAL INSPECTION CRITERIA

I.       Purpose

This Final Inspection Criteria is intended to assure the product quality of SPOTCHEM II Reagent Strips manufactured by ARKRAY Factory, Inc. and supplied by ARKRAY, Inc.

II.      Scope

This Final Inspection Criteria should be applied to the quality control of SPOTCHEM II Reagent Strips.

III.     Types of Inspection

1.   Performance test
      1)   Sensitivity
      2)   Accuracy   

2.   Visual Inspection
      1)   Labeling
      2)   Quantity   

IV.     Environmental Conditions

The inspections should be carried out under the following environmental conditions:

1)     Ambient temperature     :   [***]
2)     Relative Humidity          :   [***]
3)     Others                              :  No fluctuation in power supply.
                                                  :  No noise confounded with measurements.

V.     Procedures

1.   Performance test

      1-1.   Sensitivity
                [Procedures]
              1)   Perform calibration by inserting Single (or Multi) Card provided in the reagent strip box to the SP-4430.
              2)   Measure the SPOTCHEM Calibrator Kit (Low and High).
              3)   Calculate an average of the following items.

Number of measurement:

Item
Single
Multi Low
18
10 High
18
10

Note)  CPK and ALP should be measured within two hours after dissolution of calibrators, while the other items
should be within four hours after the dissolution.

[Standard]
The average should fall in the range indicated in Appendix.

Sheet 3 of 4

      1-2.   Accuracy
                [Procedures]
               Calculate coefficient of variation (C.V.) using the observed values in the previous section (1-1. Sensitivity):

               Coefficient of variation (C.V.) =  standard deviation divided by average of x times 100

               An outlier should be treated in accordance with JIS Z 8402 (ISO 5725-2).

               [Standard]
               C.V. should fall in the range indicated in Appendix.

2.   Visual Inspection

       2-1.   Labeling
                [Procedures]
                Confirm labels, package and aluminum pack in terms of position, contents and colors.
                [Standard]
                No defect which should impair the product quality is found.

       2-2.   Quantity
                [Procedures]
                Confirm composition of each package.
                [Standard]
                A package should consist of the following items:

                    Reagent strips                           :   5 strips / sheet x 5 sheets
                    Molecular sieve                        :   1 tablet / strip 
                    Single Card (or Multi Card)     :   1 card / package
                    Package insert                           :   1 sheet / package

VI.     Judgement

1.   If a product fails to meet a standard, confirm the environmental conditions and the inspection methods, and perform inspection again.

2.   When the results of the inspection meet the standards, the lot is considered to pass the inspection.

VII.    Remarks

This Final Inspection Criteria shall become applicable to those shipments which are made on and after March 1, 2005. To those shipments which are made from November 1, 2004 till February 28, 2005, the former Final Inspection Criteria shall apply.

[***]     – Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

Sheet 4 of 4

Appendix

[***]

Attachment 3

ARKRAY brand specifications 1                                                                                                                                                          Basic design system

1-4-1

Prototype

            ARKRAY (logo)





Sub-design

            ARKRAY (logo)





Isolation

  -  Prototype


           ARKRAY (logo measurements)


  -  Sub-design



          ARKRAY (logo measurements) ARKRAY brand consists of ARKRAY mark and logo.

Basically the prototype should be used.







If the prototype cannot be used due to the size of space, use the sub-design instead.







The Isolation is the minimum sized space surrounding the ARKRAY brand to set it apart from other factors in order to make the design prominent. Do NOT allow other factors to enter the space.

Color specifications                                                                                                                                                                                      Basic design system

1-7-1

ARKRAY blue (DIC641)

     If DIC641 is not available
      -  C100 + M60
      -  PANTONE293


ARKRAY orange (DIC205)

     If DIC205 is not available
     -   M50 + Y90
     -  PANTONE 136




Coloring Instruction ARKRAY mark is expressed in the two colors, ARKRAY blue and ARKRAY orange.
ARKRAY blue is the corporate color, representing fair, good faith and “truthful” stated in our corporate philosophy.
ARKRAY orange indicates vitality, meaning “active” in the corporate philosophy.
ARKRAY logo should be painted in black. In case the number of color is limited, follow the coloring specifications below.

                                                                                       Color type

ARKRAY (logo - DIC205 and DIC641)

Prototype (basically used) ARKRAY (DIC641) (logo - DIC205 and DIC641)

If the prototype cannot be used due to the limitation of the number of colors, use ARKRAY blue and ARKRAY orange as shown above.

                                                                                  Monochrome types

ARKRAY (logo)

Monochrome type 1
Use black and meshed black 40% as shown above.
If the black is not available to use, use ARKRAY blue
(or the most similar color) instead of black. ARKRAY (logo)

If the meshed black is not clearly shown in monochrome print, use black only.

                                                                                  Reversed color type

ARKRAY (logo) If the ARKRAY colors don't look attractive due to the color of foundation the ARKRAY brand is on, use white only shown at the left.

Attachment 4



[Photo of Heska/Arkray label]



[Photo of Heska/Arkray label]



[Photo of Heska/Arkray label]



[Photo of Heska/Arkray label]

EX-31

Exhibit 31.1

CERTIFICATION

I, Robert B. Grieve, Chief Executive Officer of Heska Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Heska Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:           May 16, 2005 /s/   Robert B. Grieve     
ROBERT B. GRIEVE
Chairman of the Board and Chief Executive Officer

EX-31

Exhibit 31.2

CERTIFICATION

I, Jason A. Napolitano, Chief Financial Officer of Heska Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Heska Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15e)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:           May 16, 2005 /s/   Jason A. Napolitano     
JASON A. NAPOLITANO
Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Robert B. Grieve, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heska Corporation on Form 10-Q for the quarterly period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation.

By:             /s/  Robert B. Grieve     
Name:       ROBERT B. GRIEVE
Title:         Chairman of the Board and
                  Chief Executive Officer

I, Jason A. Napolitano, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Heska Corporation on Form 10-Q for the quarterly period ended March 31, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Form 10-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation.

By:             /s/  Jason A. Napolitano     
Name:        JASON A. NAPOLITANO
Title:          Executive Vice President and
                   Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Heska Corporation and will be retained by Heska Corporation and furnished to the Securities and Exchange Commission or its staff upon request.