HESKA CORP, S-1/A, 1997-05-30

HESKA CORP
S-1/A, 1997-05-30
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 30, 1997

REGISTRATION NO. 333-25767
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------

AMENDMENT NO. 1

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
HESKA CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<C> <C> <C>
DELAWARE 2836 77-0192527
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>

1825 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(970) 493-7272
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

FRED M. SCHWARZER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HESKA CORPORATION
1825 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(970) 493-7272
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

Copies to:

<TABLE>
<C> <C>
KAREN A. DEMPSEY, ESQ. MICHAEL J. SULLIVAN, ESQ.
SALLY A. BRAMMELL, ESQ. REX R. O'NEAL, ESQ.
DANIEL L. CULLUM, ESQ. LISA S. DUMAW, ESQ.
PILLSBURY MADISON & SUTRO LLP COOLEY GODWARD LLP
P.O. BOX 7880 5 PALO ALTO SQUARE, 4TH FLOOR
SAN FRANCISCO, CALIFORNIA 94120 3000 EL CAMINO REAL
PALO ALTO, CALIFORNIA 94306-2155
</TABLE>

---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ------------

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

CALCULATION OF REGISTRATION FEE

<TABLE>
<CAPTION>
=====================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value....... 6,152,500 $16.00 $98,440,000 $29,830(3)
=====================================================================================================================
</TABLE>

(1) Includes 802,500 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.

(2) Estimated solely for the purpose of calculating the registration fee.

(3) $24,394 of this filing fee has been previously paid; $5,436 is being paid in
connection with this amendment.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MAY 30, 1997

5,350,000 Shares

[HESKA CORPORATION LOGO]

Common Stock

($.001 par value)

------------------

Of the 5,350,000 shares of Common Stock (the "Shares") offered hereby, 5,000,000
shares are being offered by Heska Corporation ("Heska" or the "Company") and
350,000 shares are being offered by a stockholder of the Company (the "Selling
Stockholder"). See "Principal and Selling Stockholders." The Company will not
receive any proceeds from the sale of Shares by the Selling Stockholder. Prior
to this offering, there has been no public market for the Shares. It is
currently anticipated that the initial public offering price per share of the
Common Stock will be between $14.00 and $16.00 per share. For a discussion of
the factors to be considered in determining the initial public offering price,
see "Underwriting."

The Common Stock has been approved for quotation on the Nasdaq Stock Market's
National Market under the symbol "HSKA", subject to notice of issuance.

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH
AN INVESTMENT IN THE COMMON STOCK, SEE "RISK FACTORS" ON PAGE 6 HEREIN.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDER
-------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(2)...................... $ $ $ $
</TABLE>

(1) Before deducting expenses payable by the Company estimated at $650,000.

(2) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 802,500
additional shares to cover over-allotments of Shares. If the option is
exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ and Proceeds to
Company will be $ .

The Shares are offered by the several Underwriters when, as and if
delivered to and accepted by the Underwriters and subject to their right to
reject orders in whole or in part. It is expected that the Shares will be ready
for delivery on or about , 1997, against payment in immediately
available funds.

CREDIT SUISSE FIRST BOSTON MERRILL LYNCH & CO.

Prospectus dated , 1997
<PAGE> 3
[INSIDE FRONT COVER OF PROSPECTUS]

[ARTWORK]

DESCRIPTION FOR EDGAR OF ART ON INSIDE FRONT COVER

Photographs of: companion animals with veterinarian, child with dog,
horse, a Heska laboratory, Diamond's facility, Heska's trivalent vaccine and a
kit of Heska's veterinary diagnostic laboratory sample collection supplies.

Caption reads: Heska -- The Science of Caring for Companion Animals
<PAGE> 4

[INSIDE FRONT COVER OF PROSPECTUS]

[ARTWORK]

HESKA, the HESKA logo, DIAMOND, the DIAMOND logo, Bloxham and the Bloxham logo
are trademarks of the Company. This Prospectus also includes trade names and
trademarks of companies other than Heska.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."

2
<PAGE> 5

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the consolidated financial statements
and related notes appearing elsewhere in this Prospectus.

THE COMPANY

Heska discovers, develops, manufactures and markets companion animal health
products, primarily for dogs, cats and horses. The Company's strategy is to
become the companion animal health care company of choice for veterinarians by
enabling them to comprehensively manage diseases using a broad line of
diagnostic, vaccine and therapeutic products and services. Heska has six
products currently on the market and over 25 products in research and
development. The Company also offers diagnostic laboratory services to
veterinarians and operates a full scale USDA and FDA licensed facility which
manufactures products for Heska and other animal health companies. Heska has
corporate partnerships with Novartis AG, Bayer AG and Eisai Co., Ltd. and plans
to expand its products and services through complementary acquisitions, licenses
and collaborations. Heska believes that it has one of the largest and most
sophisticated scientific efforts in the world devoted to applying biotechnology
to the large and growing companion animal health market.

Heska is focused on providing products and services for the comprehensive
management of a broad range of companion animal diseases, such as allergy,
heartworm infection and flea-associated conditions. The Company believes that
several of its products under development may serve to expand the companion
animal health market and advance the practice of veterinary medicine. Heska
recently introduced a canine allergy diagnostic product that it believes is a
substantial advance in the state of the art in allergy diagnosis. The Company
recently introduced a new feline heartworm diagnostic test that is substantially
more sensitive than the other commercially available tests. Heska has a novel
therapeutic product in the final stages of FDA registration for canine
periodontal disease, which is estimated to affect 80 percent of all dogs by
three years of age. Heska expects to receive FDA clearance for this product in
1997. The Company is also working on vaccines to be administered annually to
prevent heartworm infection in dogs and cats, as well as vaccines to help
control fleas on dogs and cats. In addition, Heska is developing a vaccine to
prevent the onset of flea bite allergy in dogs, which afflicts a significant
percentage of all dogs in flea endemic areas. Currently there are no effective
immunologically based preventatives or treatments for this condition.

Heska operates veterinary diagnostic laboratories in Colorado and the
United Kingdom that provide a range of diagnostic and pathology services to
veterinarians, including in vitro allergy testing and the Company's new feline
heartworm diagnostic. The Company believes that these laboratories provide a
valuable marketing point of contact with veterinarians. The Company is also
developing easy to use, point-of-care diagnostic products for the veterinarian's
office.

Heska scientists have developed a large body of knowledge about the
physiology of parasites, such as fleas and heartworms, and the basic immunology
of dogs and cats that the Company believes is unmatched in the industry. Heska
believes this body of knowledge is essential to creating innovative diagnostics,
vaccines and therapeutics. The Company's employees hold more than 20 veterinary
doctoral degrees and over 45 Ph.D.s. Most of these employees have been
affiliated with prestigious academic research institutions or leading
biotechnology or animal health companies.

In April 1996, the Company acquired Diamond Animal Health, Inc., a USDA and
FDA licensed biological and pharmaceutical manufacturing facility. Diamond has
been a licensed manufacturer of veterinary vaccines since the 1950s and operates
a 166,000 square foot manufacturing facility. In addition to manufacturing
Heska's
3
<PAGE> 6

products, Diamond operates as a contract manufacturer of biological and
pharmaceutical products for other major animal health companies.

Heska has entered into agreements with three major pharmaceutical
companies, Novartis AG, Bayer AG and Eisai Co., Ltd., to provide funding for its
research and development programs. In April 1996, Novartis made a $36.0 million
equity investment in the Company. These partners have rights to market certain
resulting Heska products. Heska believes that the size and experience of these
partners will enable the Company to penetrate markets more quickly and
extensively.

To broaden its portfolio of products and technologies, the Company is
aggressively pursuing licenses to promising technologies from leading
biotechnology companies and research institutions. The Company also intends to
build its business through the acquisition of complementary products and
businesses. For example, in March 1996 the Company purchased a canine allergy
product line and in February 1997 acquired Bloxham Laboratories Limited, one of
the largest veterinary diagnostic laboratories in the United Kingdom. The
Company believes that significant acquisition opportunities exist in the
companion animal health market and plans to actively pursue such opportunities.

The Company has a limited operating history and has incurred operating
losses since its inception. At March 31, 1997, the Company's accumulated deficit
was $38.2 million. The Company anticipates that it will continue to incur
operating losses for the next several years.

Heska Corporation was incorporated in California in 1988 and reincorporated
in Delaware in 1997. The Company is located at 1825 Sharp Point Drive, Fort
Collins, Colorado 80525 and its telephone number is (970) 493-7272. Heska and
its subsidiaries currently employ more than 400 persons. As used in this
Prospectus, "Heska" and the "Company" refer to Heska Corporation and its
consolidated subsidiaries, unless the context requires otherwise.

------------------

Except as set forth in the consolidated financial statements and notes
thereto or otherwise as specified herein, all information in this Prospectus (i)
assumes no exercise of the Underwriters' over-allotment option, (ii) reflects
the conversion of all of the Company's outstanding shares of Preferred Stock
into shares of Common Stock upon the closing of this offering, and (iii)
reflects the Company's reincorporation in Delaware to occur prior to the closing
of this offering and associated changes in the Company's charter documents. See
"Underwriting," "Description of Capital Stock" and Notes 2 and 10 of Notes to
Consolidated Financial Statements. This Prospectus contains, in addition to
historical information, forward-looking statements that involve risks and
uncertainties. The Company's actual results and the timing of certain events
could differ materially from those discussed or projected by the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed in the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.
4
<PAGE> 7

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 5,000,000 shares
Common Stock offered by the Selling 350,000 shares
Stockholder................................
Common Stock to be outstanding after the 17,305,990 shares(1)
offering...................................
Use of Proceeds.............................. For research and development, expansion of
sales and marketing activities, expansion and
development of manufacturing operations,
potential acquisitions, working capital and
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol....... HSKA
</TABLE>

SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996(2) 1996 1997
------- ------- ------ ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Products and services, net...... $ -- $ -- $ -- $ -- $ 8,013 $ 39 $ 2,626
Research and development........ 283 1,817 3,858 2,230 1,946 117 438
------- ------- ------ ------- -------- ------- -------
Total revenues.......... 283 1,817 3,858 2,230 9,959 156 3,064
------- ------- ------ ------- -------- ------- -------
Costs and operating expenses:
Cost of sales................... -- -- -- -- 6,648 20 2,148
Research and development........ 1,188 2,427 3,685 6,031 14,038 2,626 4,519
Selling and marketing........... -- -- -- -- 2,493 -- 1,573
General and administrative...... 490 540 904 864 4,540 375 2,418
Amortization of intangible
assets....................... -- -- -- -- 1,101 -- 407
------- ------- ------ ------- -------- ------- -------
Total costs and
operating expenses.... 1,678 2,967 4,589 6,895 28,820 3,021 11,065
------- ------- ------ ------- -------- ------- -------
Loss from operations.............. (1,395) (1,150) (731) (4,665) (18,861) (2,865) (8,001)
Other income (expense)............ (58) (37) (153) 99 886 55 120
------- ------- ------ ------- -------- ------- -------
Net loss.......................... $(1,453) $(1,187) $ (884) $(4,566) $(17,975) $(2,810) $(7,881)
======= ======= ====== ======= ======== ======= =======
Pro forma net loss per share(3)... $ (1.41) $ (0.61)
Number of shares used in computing
pro forma net loss per
share(3)........................ 12,740 12,872
</TABLE>

<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 15,903 $ 85,003
Working capital............................................. 14,992 84,092
Total assets................................................ 38,597 107,697
Long-term obligations....................................... 5,702 5,702
Accumulated deficit......................................... (38,157) (38,157)
Total stockholders' equity.................................. 25,168 94,268
</TABLE>

- ---------------

(1) Based on shares outstanding at May 28, 1997. Does not include 2,415,779
shares issuable upon exercise of stock options outstanding and outstanding
warrants to purchase 31,392 shares of Common Stock. See "Capitalization,"
"Management -- Stock Option Plan," "Description of Capital
Stock -- Warrants" and Note 10 of Notes to Consolidated Financial
Statements.

(2) Includes revenues and related expenses attributable to the Company's
wholly-owned subsidiary, Diamond Animal Health, Inc., which was acquired in
April 1996.

(3) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.

(4) Adjusted to reflect the sale by the Company of 5,000,000 shares of Common
Stock offered hereby at an assumed public offering price of $15.00 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."

5
<PAGE> 8

The discussion in this Prospectus contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
The Company's actual results and the timing of certain events could differ
materially from those discussed or projected by the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed in the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.

RISK FACTORS

In evaluating the Company's business, prospective investors should consider
carefully the following risk factors in addition to the other information
presented in this Prospectus.

DEPENDENCE ON DEVELOPMENT AND INTRODUCTION OF NEW PRODUCTS

Most of the Company's products are still under development and there can be
no assurance such products will be successfully developed or commercialized on a
timely basis, or at all. The Company believes that its revenue growth and
profitability, if any, will substantially depend upon its ability to complete
development of and successfully introduce its new products. The Company will be
required to undertake time-consuming and costly development activities and seek
regulatory approval for these new products. There can be no assurance that the
Company will not experience difficulties that could delay or prevent
successfully developing, obtaining regulatory approvals to market or introducing
these new products, that regulatory clearance or approval of any new products
will be granted by the United States Department of Agriculture ("USDA"), the
United States Food and Drug Administration ("FDA"), the Environmental Protection
Agency ("EPA") or foreign regulatory authorities on a timely basis, or at all,
or that the new products will be successfully commercialized. The Company's
strategy is to develop a broad range of products addressing different disease
indications. The Company has limited resources to devote to the development of
all its products and consequently a delay in the development of one product or
the use of resources for product development efforts that prove unsuccessful may
delay or jeopardize the development of its other products. Further, to a certain
extent, the Company is dependent on collaborative partners to successfully and
timely perform research and development activities on behalf of the Company. In
order to successfully commercialize any new products, the Company will be
required to establish and maintain a reliable, cost-efficient source of
manufacturing for such products. If the Company is unable, for technological or
other reasons, to complete the development, introduction or scale up of
manufacturing of any new product or if any new product is not approved for
marketing or does not achieve a significant level of market acceptance, the
Company could be materially and adversely affected. Following the introduction
of a product, adverse side effects may be discovered that make the product no
longer commercially viable. Publicity regarding such adverse effects could
affect sales of the Company's other products for an indeterminate time period.
The Company is dependent on the acceptance of its products by both veterinarians
and pet owners. The failure of the Company to engender confidence in its
products and services could affect the Company's ability to attain sustained
market acceptance of its products. See "Business -- Manufacturing,"
"-- Government Regulation" and "-- Collaborative Agreements."

LOSS HISTORY AND ACCUMULATED DEFICIT; UNCERTAINTY OF FUTURE PROFITABILITY;
QUARTERLY FLUCTUATIONS

Heska has incurred net losses since its inception. At March 31, 1997, the
Company's accumulated deficit was $38.2 million. The Company anticipates that it
will continue to incur additional operating losses for the next several years.
Such losses have resulted principally from expenses incurred in the Company's
research and development programs and, to a lesser extent, from general and
administrative and sales and marketing expenses. There can be no assurance that
the Company will attain profitability or, if achieved, will remain profitable on
a quarterly or annual basis in the future. The Company believes that future
operating results will be subject to quarterly fluctuations due to a variety of
factors, including whether and when new products are successfully developed and
introduced by the Company or its competitors, market acceptance of current or
new products, regulatory delays, product recalls, competition and pricing
pressures from competitive products, manufacturing delays, shipment problems,
product seasonality, and changes in the mix of products sold. Because the
Company is continuing to increase its operating expenses for personnel and new
product development and marketing, the Company's operating results will be
adversely affected if its sales do not correspondingly increase or if its

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<PAGE> 9

product development efforts are unsuccessful or subject to delays. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON OTHERS

In 1996 Heska began to build a sales force and commenced initial sales of
its products. To be successful, Heska will have to develop and train its direct
sales force or rely on marketing partners or other arrangements with third
parties for the marketing, distribution and sale of its products. The Company is
currently marketing its products to veterinarians through a direct sales force
and certain third parties. There can be no assurance that the Company will be
able to successfully establish and maintain marketing, distribution or sales
capabilities or make arrangements with third parties to perform those activities
on terms satisfactory to the Company. See "Business -- Sales, Marketing and
Customer Service."

In addition, the Company has granted marketing rights to certain products
under development to third parties, including Novartis AG ("Novartis"), Bayer AG
("Bayer") and Eisai Co., Ltd. ("Eisai"). Novartis has the right to manufacture
and market throughout the world (except in countries where Eisai has such
rights) under Novartis trade names any flea control vaccine or feline heartworm
vaccine developed by the Company on or before December 31, 2005. The Company
retained the right to co-exclusively manufacture and market these products
throughout the world under its own trade names. Accordingly, if both elect to
market these products, the Company and Novartis will be direct competitors, with
each party sharing revenues on the other's sales. Heska also granted Novartis a
right of first refusal pursuant to which, prior to granting rights to any third
party for any products or technology developed or acquired by the Company for
either companion animal or food animal applications, Heska must first offer
Novartis such rights. Bayer has exclusive marketing rights to the Company's
canine heartworm vaccine and its recombinant feline toxoplasmosis vaccine
(except in countries where Eisai has such rights). Eisai has exclusive rights in
Japan and most countries in East Asia to market the Company's feline and canine
heartworm vaccines, feline and canine flea control vaccines and feline
toxoplasmosis vaccine. The Company's agreements with its marketing partners
contain no minimum purchase requirements in order for such parties to maintain
their exclusive or co-exclusive marketing rights. There can be no assurance that
Novartis, Bayer or Eisai or any other collaborative party will devote sufficient
resources to marketing the Company's products. Furthermore, there is nothing to
prevent Novartis, Bayer or Eisai or any other collaborative party from pursuing
alternative technologies or products that may compete with the Company's
products. See "Business -- Collaborative Agreements."

HIGHLY COMPETITIVE INDUSTRY

The market in which the Company competes is intensely competitive. Heska's
competitors include companion animal health companies and major pharmaceutical
companies that have animal health divisions. Companies with a significant
presence in the animal health market, such as American Home Products, Bayer,
Merck & Co., Inc., Novartis, Pfizer Inc and IDEXX Laboratories, Inc., have
developed or are developing products that do or would compete with the Company's
products. Novartis and Bayer are marketing partners of the Company, and their
agreements with the Company do not restrict their ability to develop and market
competing products. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. Moreover, such
competitors may offer broader product lines and have greater name recognition
than the Company. Additionally, the market for companion animal health care
products is highly fragmented, with discount stores and specialty pet stores
accounting for a substantial percentage of such sales. As Heska intends to
distribute its products only through veterinarians, a substantial segment of the
potential market may not be reached, and the Company may not be able to offer
its products at prices which are competitive with those of companies that
distribute their products through retail channels. There can be no assurance
that the Company's competitors will not develop or market technologies or
products that are more effective or commercially attractive than the Company's
current or future products or that would render the Company's technologies and
products obsolete. Moreover, there can be no assurance that the Company will
have the financial resources, technical expertise or marketing, distribution or
support capabilities to compete successfully. See "Business -- Competition."

7
<PAGE> 10

UNCERTAINTY OF PATENT AND PROPRIETARY TECHNOLOGY PROTECTION; LICENSE OF
TECHNOLOGY OF THIRD PARTIES

The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology and either
to operate without infringing the proprietary rights of others or to obtain
rights to such technology. Heska has United States and foreign issued patents
and is currently prosecuting patent applications in the United States and with
certain foreign patent offices. There can be no assurance that any of the
Company's pending patent applications will result in the issuance of any patents
or that, if issued, any such patents will offer protection against competitors
with similar technology. There can be no assurance that any patents issued to
the Company will not be challenged, invalidated or circumvented in the future or
that the rights created thereunder will provide a competitive advantage.

The biotechnology and pharmaceutical industries have been characterized by
extensive litigation regarding patents and other intellectual property rights.
There can be no assurance that the Company will not in the future become subject
to patent infringement claims and litigation in the United States or other
countries or interference proceedings conducted in the United States Patent and
Trademark Office ("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 both costly and time
consuming. Litigation may be necessary to enforce any patents issued to the
Company or its collaborative partners, to protect trade secrets or know-how
owned by the Company or its 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 the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties. Further, either as the result of such
litigation or proceedings or otherwise, the Company may be required to seek
licenses from third parties which may not be available on commercially
reasonable terms, if at all.

The Company licenses technology from a number of third parties. The
majority of such license agreements impose due diligence or milestone
obligations and in some cases impose minimum royalty or sales obligations upon
the Company in order for the Company to maintain its rights thereunder. The
Company believes it is in compliance with the terms of each of these agreements.

The Company's products may incorporate technologies that are the subject of
patents issued to, and patent applications filed by, others. As is typical in
its industry, from time to time the Company and its collaborators have received
and may in the future receive notices claiming infringement from third parties
as well as invitations to take licenses under third party patents. It is the
Company's policy when it receives such notices to conduct investigations of the
claims asserted. With respect to notices the Company has received to date, the
Company believes, after due investigation, that it has meritorious defenses to
the infringement claims asserted. Any legal action against the Company or its
collaborators may require the Company or its collaborators to obtain a license
in order to market or manufacture affected products or services. However, there
can be no assurance that the Company or its collaborators will be able to obtain
licenses for technology patented by others on commercially reasonable terms,
that they will be able to develop alternative approaches if unable to obtain
licenses, or that the current and future licenses will be adequate for the
operation of their businesses. The failure to obtain necessary licenses or to
identify and implement alternative approaches could prevent the Company and its
collaborators from commercializing certain of their products under development
and could have a material adverse effect on the Company's business, financial
condition or results of operations.

The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its rights to its trade secrets, or that the Company will
be capable of protecting its rights to its trade secrets. See
"Business -- Intellectual Property."

8
<PAGE> 11

LIMITED MANUFACTURING EXPERIENCE AND CAPACITY; RELIANCE ON CONTRACT
MANUFACTURERS

To be successful, the Company must manufacture, or contract for the
manufacture of, its current and future products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. In order to provide for
manufacturing of biological products, the Company acquired Diamond in April
1996. Significant work will be required for the scaling up of each potential
product prior to commercialization, and there can be no assurance that such work
can be completed successfully or on a timely basis.

In addition to Diamond, the Company intends to rely on contract
manufacturers for certain of its products. The Company currently has supply
agreements with Atrix Laboratories ("Atrix") for its canine periodontal disease
therapeutic and with Iatric Corporation for allergy test kits and allergy
immunotherapy treatment sets and has negotiated a supply agreement with Quidel
Corporation ("Quidel") for certain manufacturing services relating to its
point-of-care canine and feline heartworm diagnostic tests. These agreements all
require the manufacturing partner to supply the Company's requirements, within
certain parameters. Certain of these partners do not have substantial
manufacturing experience on a commercial scale. There can be no assurance that
these partners will be able to manufacture products to regulatory standards, the
Company's specifications or in a cost-effective and timely manner. If any
supplier were to be delayed in scaling up commercial manufacturing, were to be
unable to produce a sufficient quantity of products to meet market demand, or
were to request renegotiation of contract prices, the Company's business would
be materially and adversely affected. While the Company typically retains the
right to manufacture products itself or contract with an alternative supplier in
the event of the manufacturer's breach, any transfer of production would
necessarily involve significant delays in production and additional expense to
the Company to scale up production at a new facility and to apply for regulatory
licensure for the production of products at that new facility. In addition,
there can be no assurance that the Company will be able to locate suitable
manufacturing partners for its products under development or alternative
suppliers if present arrangements are not satisfactory. See
"Business -- Manufacturing."

GOVERNMENT REGULATION; NO ASSURANCE OF OBTAINING REGULATORY APPROVALS

The development, manufacture and marketing of most of the Company's
products are subject to regulation by various governmental authorities,
consisting principally of the USDA and the FDA in the United States and various
regulatory agencies outside the United States. Delays in obtaining, or failure
to obtain any necessary regulatory approvals would have a material adverse
effect on the Company's future product sales and operations. Any acquisitions of
new products and technologies may subject the Company to additional government
regulation.

The Company's manufacturing facilities and those of any contract
manufacturers the Company may use are subject to the requirements of and subject
to periodic regulatory inspections by the FDA, USDA and other federal, state and
foreign regulatory agencies. There can be no assurance that the Company or its
contractors will satisfy such regulatory requirements, and any failure to do so
would have a material adverse effect on the Company's business, financial
condition or results of operations.

There can be no assurance that the Company will not incur significant costs
to comply with laws and regulations in the future or that laws and regulations
will not have a material adverse effect upon the Company's business, financial
condition or results of operation. See "Business -- Government Regulation."

FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING

While the Company believes that its available cash, together with the
proceeds of this offering, will be sufficient to satisfy its funding needs for
current operations at least through the end of 1998, assuming no significant
uses of cash in acquisition activities, the Company has incurred negative cash
flow from operations since inception and does not expect to generate positive
cash flow to fund its operations for the next several years. Thus, the Company
may need to raise additional capital to fund its research and development
programs, to scale up manufacturing activities and to expand its sales and
marketing force. The Company's future liquidity and capital funding requirements
will depend on numerous factors, including the extent to which the Company's
products under development are successfully developed and gain market
acceptance, the timing of regulatory

9
<PAGE> 12

actions regarding the Company's potential products, the costs and timing of
expansion of sales, marketing and manufacturing activities, procurement,
enforcement and defense of patents important to the Company's business, results
of product trials and competition. There can be no assurance that such
additional capital will be available on terms acceptable to the Company, if at
all. Furthermore, any additional equity financing may be dilutive to
stockholders, and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail its operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on unfavorable terms. The failure
by the Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Use of Proceeds" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

DEPENDENCE ON KEY PERSONNEL

The Company is highly dependent on the efforts of its senior management and
scientific team, including its Chief Executive Officer and Chief Scientific
Officer. The loss of the services of any member of its senior management or
scientific staff may significantly delay or prevent the achievement of product
development and other business objectives. Because of the specialized scientific
nature of the Company's business, the Company is highly dependent on its ability
to attract and retain qualified scientific and technical personnel. There is
intense competition among major pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research institutions
for qualified personnel in the areas of the Company's activities. Loss of the
services of, or failure to recruit, key scientific and technical personnel could
adversely affect the Company's business, financial condition or results of
operations. See "Business -- Employees" and "Management -- Directors, Executive
Officers and Key Employees."

POTENTIAL DIFFICULTIES IN MANAGEMENT OF GROWTH; IDENTIFICATION AND INTEGRATION
OF ACQUISITIONS

The Company anticipates additional growth in the number of its employees,
the scope of its operating and financial systems and the geographic area of its
operations as new products are developed and commercialized. This growth will
result in an increase in responsibilities for both existing and new management
personnel. The Company's ability to manage growth effectively will require it to
continue to implement and improve its operational, financial and management
information systems and to train, motivate and manage its employees. There can
be no assurance that the Company will be able to manage its expansion, and a
failure to do so could have a material adverse effect on the Company's business,
financial condition or results of operations.

In 1996, Heska consummated the acquisitions of Diamond and the canine
allergy business of Bioproducts DVM, Inc. In February 1997, Heska acquired
Bloxham Laboratories Limited, a veterinary diagnostic laboratory in the United
Kingdom. Moreover, the Company anticipates using a portion of the proceeds from
this offering to make additional acquisitions. See "Use of Proceeds."
Identifying and pursuing acquisition opportunities, integrating acquired
products and businesses and managing growth requires a significant amount of
management time and skill. There can be no assurance that the Company will be
effective in identifying and effecting attractive acquisitions, integrating
acquisitions or managing future growth. The failure to do so may have a material
adverse effect on the Company's business, financial condition or results of
operations.

POTENTIAL PRODUCT LIABILITY; LIMITED INSURANCE COVERAGE

The testing, manufacturing and marketing of the Company's current products
as well as those currently under development entail an inherent risk of product
liability claims and associated adverse publicity. To date, the Company has not
experienced any material product liability claims, but any such claims arising
in the future could have a material adverse effect on the Company's business,
financial condition or results of operations. Potential product liability claims
may exceed the amount of the Company's insurance coverage or may be excluded
from coverage under the terms of the policy. There can be no assurance that the
Company's existing insurance can be renewed at a cost and level of coverage
comparable to that presently in effect, if at all. In the event that the Company
is held liable for a claim against which it is not indemnified or for damages
exceeding the limits of its insurance coverage or which results in significant
adverse publicity against the Company, such claim could have a material adverse
effect on the Company's business, financial condition or results of operations.

10
<PAGE> 13

RISK OF LIABILITY FROM RELEASE OF HAZARDOUS MATERIALS

The Company's products and development programs involve the controlled use
of hazardous and biohazardous materials, including chemicals, infectious disease
agents and various radioactive compounds. Although the Company believes that its
safety procedures for handling and disposing of such materials comply with the
standards prescribed by applicable local, state and federal regulations, the
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages or fines that result and any such liability could
exceed the resources of the Company. The Company may incur substantial costs to
comply with environmental regulations as the Company expands its manufacturing
capacity.

LACK OF PRIOR PUBLIC MARKET AND DETERMINATION OF OFFERING PRICE

Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or be sustained after this offering. The initial public
offering price will be determined through negotiations among the Company, the
Selling Stockholder and the Underwriters and may bear no relationship to the
price at which the Common Stock will trade upon completion of the offering. See
"Underwriting."

POSSIBLE VOLATILITY OF STOCK PRICE

The securities markets have from time to time experienced significant price
and volume fluctuations that are unrelated to the operating performance of
particular companies. The market prices of the common stock of many
publicly-held biotechnology companies have in the past been, and can in the
future be, especially volatile. Announcements of technological innovations or
new products by the Company or its competitors, release of reports by securities
analysts, developments or disputes concerning patents or proprietary rights,
regulatory developments, changes in regulatory policies, economic and other
external factors, as well as quarterly fluctuations in the Company's financial
results, may have a significant impact on the market price of the Common Stock.

POTENTIAL ADVERSE MARKET IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of Common Stock in the public
market following this offering could have an adverse effect on the price of the
Common Stock. The 5,350,000 shares offered hereby will be eligible for sale in
the public market immediately following this offering. Upon the commencement of
this offering, approximately 283,000 additional shares will be eligible for
immediate resale in the public market. Beginning 90 days after the date of this
Prospectus, approximately 377,000 additional shares will be eligible for sale in
the public market pursuant to Rule 144 and Rule 701 under the Securities Act of
1933, as amended (the "Securities Act"). Additionally, approximately 12,000,000
shares of Common Stock, including 1,177,555 shares issuable upon the exercise of
certain options, will be eligible for sale in the public market 180 days after
the date of this Prospectus, upon expiration of lockup agreements, in reliance
on Rule 144 or Rule 701 under the Securities Act. The Company intends to
register a total of approximately 4,000,000 shares of Common Stock reserved for
issuance under its 1997 Employee Stock Purchase Plan and 1997 Stock Incentive
Plan as soon as practicable following the date of this Prospectus. Certain
existing stockholders have rights to require the Company to register their
shares for future sale. See "Description of Capital Stock -- Registration
Rights" and "Shares Eligible for Future Sale."

BROAD DISCRETION TO ALLOCATE OFFERING PROCEEDS

The Company anticipates that the proceeds of this offering will be used to
fund research and development efforts, to expand sales and marketing
capabilities, to expand and develop manufacturing operations and capabilities,
to fund strategic acquisitions of businesses, technologies or products and to
finance working capital and general corporate requirements. The amounts expended
for each such purpose and the timing of such expenditures may vary depending
upon numerous factors. The Company will have broad discretion in determining the
amount and timing of expenditures and in allocating the new proceeds of this
offering. Such

11
<PAGE> 14

discretion will be particularly broad with respect to that portion of the
proceeds available for use for working capital and general corporate purposes.
See "Use of Proceeds."

PENDING GOVERNMENTAL PROCEEDING

The Company has been notified that the staff of the United States Federal
Trade Commission ("FTC") is conducting an investigation of Novartis, a principal
stockholder of Heska, with respect to Novartis' relationship with Heska. The
Company and Novartis have responded to the FTC requests for information with
respect to competition for feline heartworm prevention products and canine and
feline flea control products. The Company believes that the FTC staff is
investigating Novartis' actions in acquiring an equity interest in Heska and
representation on its board of directors and certain rights to market Heska
products to determine whether these actions violate federal antitrust laws. At
this time it is not known whether the investigation will result in the
initiation of formal proceedings before the FTC, or if such proceedings are
initiated, what relief will be sought or obtained. Such relief may include
limitation of Novartis' voting rights with respect to its Heska stock,
limitation of Novartis' representation on the Company's board of directors, an
orderly divestiture of Novartis' equity investment in Heska or reformation of
Novartis' collaborative agreements with the Company. There can be no assurance
that if the FTC were to initiate a proceeding and be successful, that such
relief would not have a material adverse effect on the Company's business,
operating results and financial condition. See "Business -- Collaborative
Agreements -- Novartis" and "Principal and Selling Stockholders."

CONTROL BY DIRECTORS, EXECUTIVE OFFICERS, PRINCIPAL STOCKHOLDERS AND AFFILIATED
ENTITIES

The Company's directors, executive officers, principal stockholders and
entities affiliated with them will, in the aggregate, beneficially own
approximately 63% of the Company's outstanding Common Stock following the
completion of this offering. The Company's three major stockholders, who
together will own approximately 57% after the offering, have entered into a
voting agreement dated as of April 12, 1996 (the "Voting Agreement") whereby
each agreed to collectively vote its shares in such manner so as to ensure that
each major stockholder was represented by one member on the Company's Board of
Directors. The Voting Agreement terminates on December 31, 2005 unless prior to
such date any of the investors ceases to beneficially hold 2,000,000 shares of
the voting stock of the Company, at which time the Voting Agreement would
terminate. The major stockholders, if acting together, could substantially
control all matters requiring approval by the stockholders of the Company,
including the election of directors and the approval of mergers or other
business combination transactions. See "Principal and Selling Stockholders" and
"Description of Capital Stock -- Voting Agreement."

ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW

Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws may have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that certain investors may be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions allow the Company to issue Preferred Stock without any vote
or further action by the stockholders, provide for a classified board of
directors and eliminate the right of stockholders to call special meetings of
stockholders. These provisions may make it more difficult for stockholders to
take certain corporate actions and could have the effect of delaying or
preventing a change in control of the Company. In addition, certain provisions
of Delaware law applicable to the Company could also delay or make more
difficult a merger, tender offer, or proxy contest involving the Company. See
"Management" and "Description of Capital Stock."

IMMEDIATE AND SUBSTANTIAL DILUTION; ABSENCE OF DIVIDENDS

The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the offering will, therefore, incur immediate and substantial
dilution. At an initial public offering price of $15.00 per share, the immediate
dilution to purchasers of shares of Common Stock in the offering is $9.58 per
share of Common Stock, or 63.9%. Additional dilution is likely to occur upon the
exercise of options and warrants granted by the Company. See "Dilution."

12
<PAGE> 15

USE OF PROCEEDS

The proceeds to the Company from the sale of the 5,000,000 shares of Common
Stock being offered by the Company are estimated to be $69,100,000 ($80,294,875
if the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $15.00 per share and after deducting estimated
underwriting discounts and commissions and offering expenses. The Company
currently estimates that it will use approximately $30.0 million of the net
proceeds of this offering to continue to fund the Company's research and
development efforts, approximately $7.0 million to expand sales and marketing
capabilities and approximately $5.0 million for capital expenditures relating to
the expansion and development of the Company's manufacturing operations and
capabilities. The Company also expects to use a portion of the net proceeds to
acquire businesses, technologies or products complementary to the Company's
business, although no specific commitments have been made which would have a
material effect on the Company's operating results. The Company anticipates
using the remaining net proceeds for working capital and general corporate
purposes. The cost, timing and amount of funds required by the Company cannot be
precisely determined at this time and will be based upon numerous factors,
including the Company's progress in research and development; the timing and
costs of obtaining regulatory approvals; the costs involved in preparing,
filing, prosecuting and enforcing patent claims; competing technological and
market developments; changes in the Company's existing research and
collaborative relationships; evaluation of the commercial viability of potential
products; and the progress of commercialization activities and arrangements. The
Company has broad discretion in determining how the net proceeds of this
offering will be applied. Pending such uses, the Company intends to invest the
net proceeds in short-term, interest-bearing obligations.

The Company will not receive any proceeds from the sale of the shares of
Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholders."

DIVIDEND POLICY

The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable future. The Company
currently intends to retain its earnings, if any, for the development of its
business.

13
<PAGE> 16

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1997, after giving effect to the conversion of all shares of Preferred
Stock into Common Stock upon the closing of this offering, and as adjusted to
give effect to the sale of the 5,000,000 shares of Common Stock being offered by
the Company at an assumed initial public offering price of $15.00 per share and
the application of the estimated net proceeds therefrom as set forth under "Use
of Proceeds."

<TABLE>
<CAPTION>
MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term obligations, less current portion(1).............. $ 5,702 $ 5,702
Stockholders' equity:
Preferred Stock, $.001 par value; 25,000,000 shares
authorized; 10,513,999 outstanding (actual); none
outstanding (as adjusted).............................. 63,236 --
Common Stock, $.001 par value; 40,000,000 shares
authorized; 1,114,904 issued and outstanding (actual);
16,628,903 issued and outstanding (as adjusted)(2)..... 1 17
Additional paid-in capital................................ 238 132,558
Cumulative translation adjustment......................... 1 1
Stock subscription receivable............................. (151) (151)
Accumulated deficit....................................... (38,157) (38,157)
-------- --------
Total stockholders' equity........................ $ 25,168 $ 94,268
======== ========
Total capitalization.............................. $ 30,870 $ 99,970
======== ========
</TABLE>

- ---------------

(1) See Notes 5 and 6 of Notes to Consolidated Financial Statements.

(2) Does not include (i) 3,817,166 shares of Common Stock reserved for issuance
at March 31, 1997 under the Company's stock option plans, under which there
were options outstanding as of that date to purchase an aggregate of
2,490,198 shares of Common Stock, and (ii) 31,392 shares of Common Stock
issuable upon exercise of warrants outstanding as of March 31, 1997. See
"Management -- Stock Option Plan," "Description of Capital
Stock -- Warrants" and Note 10 of Notes to Consolidated Financial
Statements.

14
<PAGE> 17

DILUTION

The net tangible book value of the Company as of March 31, 1997 was $21.0
million, or $1.81 per share. Pre-offering pro forma net tangible book value per
share represents the amount of total tangible assets less total liabilities of
the Company, divided by the number of shares of Common Stock outstanding (which
includes the conversion of all outstanding Preferred Stock at the closing of the
offering). After giving effect to the sale of the 5,000,000 shares of Common
Stock offered by the Company hereby (at an assumed initial public offering price
of $15.00 per share and after deduction of estimated underwriting discounts and
commissions and offering expenses), the post-offering pro forma net tangible
book value of the Company at March 31, 1997 would have been $90.1 million, or
$5.42 per share. This represents an immediate increase in such net tangible book
value of $3.61 per share to existing stockholders and an immediate dilution of
$9.58 per share to new investors purchasing shares in this offering. The
following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $15.00
Net tangible book value per share before offering......... $1.81
Increase per share attributable to new investors.......... 3.61
-----
Pro forma net tangible book value per share after
offering.................................................. 5.42
------
Dilution per share to new investors......................... $ 9.58
======
</TABLE>

The following table summarizes, on a pro forma basis as of March 31, 1997,
the differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company, and the average consideration paid per share
(based upon an assumed initial public offering price of $15.00 per share and
before deduction of estimated underwriting discounts and commissions and
offering expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 11,628,903 69.9% $ 63,324,000 45.8% $ 5.45
New investors................. 5,000,000 30.1 75,000,000 54.2 15.00
---------- ----- ------------ -----
Total............... 16,628,903 100.0% $138,324,000 100.0%
========== ===== ============ =====
</TABLE>

- ---------------

(1) Sales by the Selling Stockholder in this offering will reduce the number of
shares held by existing stockholders to 11,278,903, or approximately 67.8%
(approximately 64.7%, if the Underwriters' over-allotment option is
exercised in full), of the total number of shares of Common Stock
outstanding, and will increase the number of shares held by new investors to
5,350,000, or approximately 32.2% (or approximately 35.3%, if the
Underwriters' over-allotment option is exercised in full), of the total
number of shares of Common Stock outstanding after this offering.

The foregoing table assumes no exercise of the Underwriters' over-allotment
option or of any outstanding stock options or warrants. As of March 31, 1997,
there were outstanding options to purchase an aggregate of 2,490,198 shares of
Common Stock at exercise prices ranging from $0.10 to $3.00 per share and
warrants to purchase 31,392 shares of Common Stock exercisable at a weighted
average exercise price of $3.10 per share. To the extent these options or
warrants are exercised, there will be further dilution to new investors. See
"Management -- Stock Option Plan," "Description of Capital Stock -- Warrants"
and Note 10 of the Notes to Consolidated Financial Statements.

15
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data with respect to the
Company's balance sheet data at December 31, 1995 and 1996 and, with respect to
the Company's consolidated statement of operations data, for each of the three
years in the period ended December 31, 1996 have been derived from the Company's
consolidated financial statements, which have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report included
elsewhere herein. The consolidated balance sheet data as of December 31, 1992,
1993 and 1994 and the consolidated statement of operations data for the years
ended December 31, 1992 and 1993 have been derived from audited consolidated
financial statements not included herein. The selected consolidated financial
data at March 31, 1997 and for each of the three month periods ended March 31,
1996 and 1997 have been derived from unaudited consolidated financial statements
prepared on the same basis as the audited consolidated financial statements and
containing, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
consolidated financial position at such dates and the operating results and cash
flows for such periods. The results of operations for the three months ended
March 31, 1997 are not necessarily indicative of results to be expected for any
future period. The selected financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996(1) 1996 1997
------- ------- ------ ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA:
Revenues:
Products and services, net............. $-- .... $ -- $ -- $ -- $ 8,013 $ 39 $ 2,626
Research and development............... 283 1,817 3,858 2,230 1,946 117 438
------- ------- ------ ------- -------- ------- -------
Total revenues.................. 283 1,817 3,858 2,230 9,959 156 3,064
------- ------- ------ ------- -------- ------- -------
Costs and operating expenses:
Cost of sales.......................... -- -- -- -- 6,648 20 2,148
Research and development............... 1,188 2,427 3,685 6,031 14,038 2,626 4,519
Selling and marketing.................. -- -- -- -- 2,493 -- 1,573
General and administrative............. 490.... 540 904 864 4,540 375 2,418
Amortization of intangible assets...... -- -- -- -- 1,101 -- 407
------- ------- ------ ------- -------- ------- -------
Total costs and operating
expenses...................... 1,678 2,967 4,589 6,895 28,820 3,021 11,065
------- ------- ------ ------- -------- ------- -------
Loss from operations..................... (1,395) (1,150) (731) (4,665) (18,861) (2,865) (8,001)
Other income (expense)................... (58) (37) (153) 99 886 55 120
------- ------- ------ ------- -------- ------- -------
Net loss................................. $(1,453) $(1,187) $ (884) $(4,566) $(17,975) $(2,810) $(7,881)
======= ======= ====== ======= ======== ======= =======
Pro forma net loss per share(2).......... $ (1.41) $ (0.61)
Number of shares used in computing pro
forma net loss per share(2)............ 12,740 12,872
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------- MARCH 31,
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................ $ 149 $ 695 $ 539 $ 6,827 $ 23,700 $ 15,903
Working capital (deficit)............... (331) (241) 300 6,522 23,955 14,992
Total assets............................ 338 1,031 2,670 8,508 42,169 38,597
Long-term obligations................... 19 132 181 302 4,528 5,702
Accumulated deficit..................... (5,663) (6,851) (7,735) (12,301) (30,276) (38,157)
Total stockholders' equity (deficit).... (203) (86) 1,180 7,249 32,383 25,168
</TABLE>

- ---------------

(1) Includes revenues and related expenses attributable to Diamond, which was
acquired in April 1996.

(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.

16
<PAGE> 19

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

This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results and the timing of certain events could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below, as well as those discussed elsewhere in this Prospectus.

OVERVIEW

Heska discovers, develops, manufactures and markets companion animal health
products, primarily for dogs, cats and horses. From the Company's inception in
1988 until early 1996, the Company's operating activities related primarily to
research and development activities, entering into collaborative agreements,
raising capital and recruiting personnel. Prior to 1996, the Company had not
received any revenues from the sale of products, and it has incurred net losses
since inception. As of March 31, 1997, the Company's accumulated deficit was
$38.2 million.

During 1996, Heska grew from being primarily a research and development
concern to a fully-integrated research, development, manufacturing and marketing
company. The Company accomplished this through the acquisitions of Diamond
Animal Health, Inc. ("Diamond"), a licensed pharmaceutical and biological
manufacturing facility in Des Moines, Iowa, and the canine allergy business of
Bioproducts DVM, Inc. (the "Bioproducts Business"), hiring key employees and
support staff, establishing marketing and sales operations to support the
Bioproducts Business and other Heska products introduced in 1996, and the design
and implementation of more sophisticated operating and information systems. The
Company also expanded the scope and level of scientific and business development
activities, increasing the opportunities for new products. In the first quarter
of 1997, the Company launched additional products and expanded internationally
through the acquisition of Bloxham Laboratories Limited ("Bloxham"), a
veterinary diagnostic laboratory in Teignmouth, England. Each of the
acquisitions of Diamond, the Bioproducts Business and Bloxham was accounted for
under the purchase method of accounting and accordingly, the Company's financial
statements reflect the operations of these businesses only for the periods
subsequent to the acquisitions.

The Company anticipates that it will continue to incur additional operating
losses for the next several years as it introduces new products and continues
its research and development activities for products under development. There
can be no assurance that the Company will attain profitability or, if achieved,
will remain profitable on a quarterly or annual basis in the future. See "Risk
Factors -- Loss History and Accumulated Deficit; Uncertainty of Future
Profitability; Quarterly Fluctuations."

RESULTS OF OPERATIONS

Three Months Ended March 31, 1997 and 1996

Product and service revenues were $2.6 million for the three months ended
March 31, 1997 as compared to $39,000 for the corresponding period in 1996.
Revenues for the first quarter of 1997 consisted of $2.1 million in revenues
from Diamond, $300,000 in revenues from Heska products introduced in late 1996
or early 1997 and $200,000 in revenues from Bloxham subsequent to its
acquisition in February 1997. Revenues for the first quarter of 1996 included
only minor revenues from the Bioproducts Business which was acquired in March
1996.

Revenues from sponsored research and development increased to $438,000 in
the three months ended March 31, 1997 from $117,000 in the corresponding period
in 1996. Fluctuations in revenues from sponsored research and development are
generally the result of changes in the number of funded research projects as
well as the timing and performance of contract milestones. The Company expects
that revenues from sponsored research and development will decline in future
periods, reflecting the expiration of current funding commitments and the
Company's decision to fund its future research activities primarily from
internal sources.

Cost of goods sold was $2.1 million for the three months ended March 31,
1997 as compared to $20,000 for the comparable period in 1996. Cost of goods
sold for the first quarter of 1997 consisted of $1.8 million in manufacturing
costs for Diamond, $200,000 for Heska and $100,000 for Bloxham. The gross margin
for the three

17
<PAGE> 20

months ended March 31, 1997 was $478,000. The Company expects that its gross
margins will improve as sales volumes increase and manufacturing capacity at
Diamond is more fully utilized.

Research and development expenses increased to $4.5 million for the three
months ended March 31, 1997 from $2.6 million in the comparable period of 1996,
due to a substantial increase in the level and scope of research and development
activities following a $36.0 million equity investment by Novartis in April
1996. Research and development expenses include expenses both for development of
products to be marketed by the Company and development under sponsored research
and development agreements, and consist primarily of salaries and benefits for
scientific, development and regulatory personnel, intellectual property costs,
license fees, contract research, supplies and materials, depreciation and rental
of lab equipment and facility costs. The Company expects that research and
development expenses will continue to increase through 1997, although the rate
of increase is expected to be lower than that experienced between the first
quarter of 1996 and the first quarter of 1997.

Selling and marketing expenses were $1.6 million for the three months ended
March 31, 1997 and consist primarily of salaries and benefits for sales and
marketing personnel, commissions, market research, product promotion, consulting
fees, and trade show costs. The Company added senior sales management and 22
field sales persons in the first quarter of 1997 to support planned product
introductions. The Company expects that these costs will continue to increase
through 1997 as the Company continues to add personnel and launch new products.

General and administrative expenses increased to $2.4 million for the three
months ended March 31, 1997 from $375,000 for the comparable period in 1996 as a
result of significant growth in the Company's accounting and finance, human
resources, legal, administrative, information systems and facilities. The
Company expects that its general and administrative expenses will increase in
future periods.

Amortization of intangible assets totaled $407,000 for the three months
ended March 31, 1997 as a result of these acquisitions. Net intangible assets at
March 31, 1997 totaled $4.2 million as a result of the Diamond, Bioproducts
Business and Bloxham acquisitions.

Interest income increased to $296,000 for the three months ended March 31,
1997 compared to $71,000 for the three months ended March 31, 1996 due to
increased cash balances following the $36.0 million in equity financing received
after the end of the first quarter of 1996. Interest expense increased to
$170,000 for the three months ended March 31, 1997 compared to $16,000 for the
comparable period in 1996 due to the assumption of debt in connection with the
acquisition of Diamond in April 1996 and increases in debt financing for
laboratory and manufacturing equipment acquired during 1996.

The Company reported a net loss of $7.9 million for the three months ended
March 31, 1997 as compared to a net loss of $2.8 million for the three months
ended March 31, 1996. The Company expects to incur additional operating losses
for the next several years.

As part of its review process of this offering, the Securities and Exchange
Commission (the "Commission") has requested information concerning the Board of
Directors' methodology for determining the estimated fair market value of the
Common Stock underlying the Company's option grants in 1996 and 1997, with a
focus on the issuances in 1997, to determine if such grants contained an element
of non-cash compensation pursuant to the Commission's interpretation of
applicable accounting rules. Under these rules, an issuer must record as
deferred compensation for accounting purposes the difference between the
exercise price of stock option grants and the estimated fair market value of the
Common Stock at the time of grant. The issuer would be required to record a
non-cash charge to operations each quarter as the deferred compensation is
amortized over the vesting period of the options, which in the Company's case is
generally four years. From May 30, 1996 through May 30, 1997 the Company granted
options to purchase an aggregate of 1,406,050 shares of Common Stock at exercise
prices ranging from $1.20 to $5.00 per share. Of the options to purchase 855,600
shares which were granted in 1997, 660,250 were granted to new employees and
consultants to the Company, and of the remaining 195,350 shares granted to
existing employees of the Company in 1997, 84,000 were granted to officers and
directors. It has been the Company's policy to grant options at exercise prices
equal to the estimated fair market value on the grant date, and the Company
believes that all of its option grants in 1996 and 1997 conformed to this
policy. If the

18
<PAGE> 21

Commission does not concur with the Company's analysis, the Company may be
required to record a non-cash compensation charge which could be substantial and
may have a material adverse affect on the Company's financial results in future
periods.

Years Ended December 31, 1996, 1995 and 1994

Product and service revenues were $8.0 million in 1996, consisting of $7.3
million in revenues from Diamond subsequent to its acquisition and $700,000 from
sales of allergy diagnostic services and treatment products by Heska subsequent
to the acquisition of the Bioproducts Business. The Company had no such revenues
prior to 1996.

Revenues from sponsored research and development decreased to $1.9 million
in 1996 from $2.2 million in 1995 and $3.9 million in 1994. Fluctuations in
revenues from sponsored research and development are generally the result of
changes in the number of funded research projects as well as the timing and
performance of contract milestones. See Note 8 of Notes to Consolidated
Financial Statements for more detailed information about the amounts received
under sponsored research and development agreements in each of these periods.

Cost of goods sold totaled $6.6 million in 1996 and reflects $6.0 million
from manufacturing activities at Diamond and $600,000 in product costs
associated with Heska's product sales. The Company did not incur cost of goods
sold in 1995 or 1994. The gross margin for 1996 was $1.4 million.

Research and development expenses increased to $14.0 million in 1996 from
$6.0 million in 1995 and $3.7 million in 1994. The increases in 1996 and 1995
are due primarily to substantial increases in the level and scope of research
and development activities for products to be marketed by the Company following
the equity financings in those years and increases in intellectual property
costs. A substantial portion of the expense in 1994 was incurred under sponsored
research and development agreements.

Selling and marketing expenses totaled $2.5 million in 1996, reflecting the
Company's establishment of a sales and marketing organization to support Heska's
launch and sale of products in 1996. Sales and marketing expenses consisted
primarily of salaries and benefits for sales and marketing personnel, market
research, product promotion, consulting and trade show costs. The Company did
not incur selling and marketing expenses in 1995 or 1994.

General and administrative expenses increased to $4.5 million in 1996 from
$864,000 in 1995 and $904,000 in 1994. The increase in 1996 resulted from the
significant growth of accounting and finance, human resources, legal,
administrative, information systems and facilities operations to support the
Company's increased business and financing activities. These expenses declined
slightly in 1995 from 1994 due largely to a severance payment made in 1994 to a
former executive.

Amortization of intangible assets totaled $1.1 million for 1996 and
resulted from the 1996 acquisitions of Diamond and the Bioproducts Business. Net
intangible assets at December 31, 1996 totaled $3.5 million as a result of the
Diamond and Bioproducts Business acquisitions.

Interest income increased to $1.4 million for 1996 from $172,000 in 1995
and $26,000 in 1994, as a result of increased cash available for investment from
the proceeds of equity investments in 1996 and 1995. Interest expense increased
to $325,000 in 1996 from $63,000 in 1995 and $168,000 in 1994, due to the
assumption of debt in connection with the Diamond acquisition and an increase in
debt financing for laboratory and manufacturing equipment. The higher interest
expense in 1994 compared to 1995 reflects interest due on loans to a
stockholder.

The Company reported a net loss in 1996 of $18.0 million as compared to a
1995 net loss of $4.6 million and a 1994 net loss of $884,000. The significant
increase in losses over the period reflects the increases in research and
development in 1996 and 1995 and in sales and marketing activities in 1996.

19
<PAGE> 22

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception primarily with the
net proceeds received from private placements of equity securities and from
revenues from sponsored research and development. As of March 31, 1997, the
Company had received aggregate proceeds of $55.8 million from equity
transactions, including $36.0 million received in April 1996 in connection with
an equity investment by Novartis and $10.0 million received in 1995 from equity
investments by Volendam Investeringen N.V. The Company has also received funds
totaling $11.4 million through March 31, 1997 under collaborative agreements, of
which $10.9 million has been recognized as revenue from sponsored research and
development.

In addition, the Company has received proceeds from equipment financing
totaling $4.7 million through March 31, 1997 and assumed $4.3 million in short
and long-term debt in connection with the 1996 acquisition of Diamond. Capital
lease obligations and term debt owed by the Company totaled $7.8 million as of
March 31, 1997, with installments payable through 2001. The Company anticipates
that it will continue to use capital equipment leasing facilities to fund
equipment acquisitions and, if possible, leasehold improvements. The Company
expects to finance accounts receivable and inventory at Diamond through an asset
based borrowing facility, although no agreement has been entered into. The
Company will also seek similar borrowing facilities to fund increases in Heska's
accounts receivable and inventory if acceptable terms can be negotiated.

Net cash used for operating activities was $1.3 million, $3.7 million and
$14.1 million for 1994, 1995 and 1996, respectively, and $6.9 million for the
three months ended March 31, 1997. Cash was used for operations primarily to
fund research and development activities along with the establishment of sales
and marketing operations and administrative infrastructure. Expenditures for
property and equipment totaled $424,000, $348,000 and $5.2 million for 1994,
1995 and 1996, respectively, and $2.2 million for the three months ended March
31, 1997 and are expected to be approximately $4.0 million for the remainder of
1997. As the Company continues to expand it will require additional expenditures
to improve its leased manufacturing and research facilities.

The Company currently expects to spend approximately $1.5 million per year
for the next several years to improve Diamond's facility, a portion of which may
be funded through debt financing. These improvements include remodeling and
relocation of certain manufacturing operations to improve efficiencies as well
as various enhancements to assure ongoing compliance with certain regulatory
requirements. In addition, Diamond is negotiating to provide manufacturing
services to new customers that would require the construction of specialized
facilities and the purchase of specialized equipment. Diamond will, to the
extent possible, ask such customers to bear or share these costs. Additionally,
the Company may utilize cash generated from operating activities to meet certain
of Diamond's capital requirements.

The Company has financed its acquisition activities primarily through the
issuance of Preferred Stock and in connection therewith issued Preferred Stock
valued at $648,000 in the first three months of 1997 to acquire Bloxham and $7.1
million in 1996 to acquire Diamond. Cash used for acquisition activities,
including funds deposited in a restricted cash account, totaled $418,000 for the
three months ended March 31, 1997 relating to Bloxham, and $500,000 in 1996
relating to the Bioproducts Business.

The Company's primary short-term needs for capital, which are subject to
change, are for the continued advancement of research and development efforts,
expansion of its sales and marketing capabilities and for capital expenditures
relating to the expansion and development activities related to the Company's
manufacturing operations. At March 31, 1997, the Company's principal source of
liquidity was $15.9 million in cash, cash equivalents and short-term
investments. The Company expects its capital requirements to increase over the
next several years as it expands its research and development efforts,
introduces new products, expands its sales and marketing infrastructure,
manufacturing capabilities and facilities and acquires businesses, technologies
or products complementary to the Company's business. The Company's future
liquidity and capital funding requirements will depend on numerous factors,
including the extent to which the Company's products under development are
successfully developed and gain market acceptance, the timing of regulatory
actions regarding the Company's potential products, the costs and the timing of
expansion of sales, marketing and manufacturing activities, the cost and timing
of potential acquisitions, the procurement and enforcement of patents important
to the Company's business, and the results of product trials and competition.

20
<PAGE> 23

The Company believes that its available cash and cash from operations,
together with the proceeds of this offering, will be sufficient to satisfy its
funding needs for current operations at least through the end of 1998, assuming
no significant uses of cash in acquisition activities. Thereafter if cash
generated from operations is insufficient to satisfy the Company's working
capital requirements, the Company may need to raise additional capital to fund
its research and development programs, to scale up manufacturing activities and
to expand its sales and marketing force. There can be no assurance that such
additional capital will be available on terms acceptable to the Company, if at
all. Furthermore, any additional equity financing may be dilutive to
stockholders and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail its operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on unfavorable terms. The failure
by the Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition or
results of operations.

NET OPERATING LOSS CARRYFORWARDS

As of December 31, 1996, the Company had a net operating loss ("NOL")
carryforward of approximately $26.9 million and approximately $731,000 of
research and development ("R&D") tax credits available to offset future federal
income taxes. The NOL and tax credit carryforwards, which are subject to
alternative minimum tax limitations and to examination by the tax authorities,
expire from 2003 to 2010. The Company's acquisition of Diamond resulted in a
"change of ownership" under the provisions of Section 382 of the Internal
Revenue Code of 1986, as amended. As such, the Company will be limited in the
amount of NOLs incurred prior to the merger it may utilize to offset future
taxable income. This limitation will total approximately $4.3 million per year
for periods subsequent to the Diamond acquisition. Similar limitations also
apply to utilization of R&D tax credits to offset taxes payable.

RECENT ACCOUNTING PRONOUNCEMENTS

The Company does not expect the adoption of any standards recently issued
by the Financial Accounting Standards Board to have a material impact on the
Company's financial position or results of operations.

21
<PAGE> 24

BUSINESS

OVERVIEW

Heska discovers, develops, manufactures and markets companion animal health
products, primarily for dogs, cats and horses. The Company's strategy is to
become the companion animal health care company of choice for veterinarians by
enabling them to comprehensively manage diseases using a broad line of
diagnostic, vaccine and therapeutic products and services. Heska has six
products currently on the market and over 25 products in research and
development. The Company also offers diagnostic laboratory services to
veterinarians and operates a full scale USDA and FDA licensed facility which
manufactures products for Heska and other animal health companies. Heska has
corporate partnerships with Novartis, Bayer and Eisai and plans to expand its
products and services through complementary acquisitions, licenses and
collaborations. Heska believes that it has one of the largest and most
sophisticated scientific efforts in the world devoted to applying biotechnology
to the large and growing companion animal health market.

BACKGROUND

Companion animals improve the quality of human life by providing
companionship, affection and acceptance. In addition, numerous studies indicate
that relationships with companion animals have demonstrable therapeutic benefits
for blood pressure, anxiety and loneliness, especially for elderly or depressed
people.

There are approximately 67 million cats, 57 million dogs and seven million
horses in the United States, representing approximately one cat, dog or horse
for every two people. There are also approximately 100 million cats, dogs and
horses in Western Europe, Japan, Canada, Australia and New Zealand. The Company
believes that due to better nutrition and care, the average life expectancy of
dogs and cats in the United States has been increasing. As with humans, as
companion animals age, their medical needs increase.

According to industry estimates, the worldwide market for companion animal
health products and diagnostic services exceeds $3.0 billion, of which
approximately $1.5 billion is in the United States. In the United States, the
market for companion animal health products is growing rapidly in response to
the introduction of novel products. There are over 35,000 veterinarians in the
United States whose practices are devoted principally to companion animal
medicine. The practice of veterinary medicine in the United States is
significantly different in several respects from the practice of human medicine,
and these differences greatly affect the market for companion animal health
products. In addition to providing services and prescribing drugs, veterinarians
act as the pharmacists of companion animal medicine by reselling the vaccines
and other products which they use or prescribe in their practice. Veterinarians
also sell other non-prescription products for use at home. Another distinction
from human medicine is that the vast majority of companion animal veterinarians
practice as "general practice" veterinarians without significant specialization.
Access to veterinarians specializing in diseases common to companion animals can
be difficult and expensive. For example, of the approximately 35,000 companion
animal veterinarians in the United States, fewer than 100 are board certified
veterinary dermatologists.

The development of biotechnology products for the companion animal health
market has lagged behind development of products for the larger human health
market. To date, it appears that there have only been modest, isolated efforts
to use biotechnology to develop products specifically for companion animal
health applications. For example, at this time, the Company believes that there
are only three recombinant vaccines on the market for companion animal health
and only a handful of diagnostic products that use recombinant proteins, two of
which are the Company's feline heartworm and flea bite allergy diagnostic
products. Heska believes that it is the first company to undertake a concerted
effort to use biotechnology to develop a broad range of products for companion
animal health.

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<PAGE> 25

HESKA'S STRATEGY

Heska's goal is to become a leader in companion animal health. The
Company's strategy to achieve this goal includes the following elements:

- Promote strong relationships with veterinarians. Heska plans to become
the companion animal health care company of choice for veterinarians, who
are the primary distribution channel for companion animal diagnostics,
vaccines and therapeutics. Heska intends to accomplish this goal by
providing novel products that advance companion animal medicine, by
selling its products exclusively to veterinarians and by supporting the
general practitioner through high quality diagnostic services and through
access to a staff of medical specialists. The Company believes that
support of veterinarians is critical to enhancing Heska brand loyalty.

- Develop a broad line of innovative products for comprehensive case
management. Heska's strategy is to offer and develop a broad line of
products and services for comprehensive management of companion animal
diseases, such as allergy, heartworm infection and flea-associated
conditions. For several companion animal diseases, Heska is developing
products and services for each step of veterinary care, from diagnosis to
treatment and prevention. The Company currently has six products on the
market and over 25 products in research and development, and it also
provides veterinary diagnostic laboratory services. The Company expects
that its business will not be substantially dependent on one product or
technology.

- Commercialize products from its large, sophisticated research
effort. Heska scientists have developed a large body of knowledge, from
the organism to the molecular genetic level, about the physiology of
parasites, such as fleas and heartworms, and the basic immunology of dogs
and cats. The Company believes that this body of knowledge is unmatched
in the industry. The Company's strategy is to use this knowledge and the
skills of its researchers to create innovative, proprietary products.
Heska's current employees hold more than 20 D.V.M.s and over 45 Ph.D.s.
Most of these employees have been affiliated with prestigious academic
research institutions and/or leading biotechnology or animal health
companies.

- Leverage resources through strong strategic relationships. Heska has
entered into agreements with three major pharmaceutical companies,
Novartis, Bayer and Eisai, to provide funding for its research and
development programs. These partners have rights to market certain
resulting Heska products. Heska believes that the size and experience of
these partners will enable the Company to penetrate markets more quickly
and extensively. Additionally, to broaden its portfolio of products and
technologies, the Company is aggressively pursuing licenses to promising
technologies from leading biotechnology companies and research
institutions.

- Pursue complementary acquisitions. The Company intends to build its
business in part through the acquisition of complementary technologies,
products and businesses. In 1996, the Company acquired its present canine
allergy product line and a licensed manufacturing facility, and in 1997
it purchased one of the largest veterinary diagnostic laboratories in the
United Kingdom. The Company believes that significant acquisition
opportunities exist in the companion animal health industry and plans to
actively pursue such opportunities.

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<PAGE> 26

PRODUCTS AND PROGRAMS

The Company is developing a broad line of diagnostic, vaccine and
therapeutic products targeting a broad range of companion animal diseases. The
following table summarizes Heska's currently available products and its products
in various stages of research and development:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
MARKETING
PRODUCT STAGE OF DEVELOPMENT(1) RIGHTS(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
ALLERGY & DERMATOLOGY
Canine Allergy Diagnostic Currently available; second Heska
generation expected in 1997
Feline Allergy Diagnostic Expected in 1997 Heska
Canine Allergy Currently available Heska
Immunotherapeutic
Feline Allergy Regulatory discussions underway Heska
Immunotherapeutic
Ancillary Dermatology Products Expected in 1997 Heska
- ----------------------------------------------------------------------------------------------
FLEA BITE ALLERGY
Canine Flea Bite Allergy
Diagnostic
Veterinary Diagnostic Currently available Heska
Laboratory
Point-of-Care Diagnostic Research Heska
Feline Flea Bite Allergy
Diagnostic
Veterinary Diagnostic Expected in 1997 Heska
Laboratory
Point-of-Care Diagnostic Research Heska
Flea Bite Allergy Research Heska
Immunotherapeutic
Canine Flea Bite Allergy Research Heska
Vaccine
Feline Flea Bite Allergy Research Heska
Vaccine
- ----------------------------------------------------------------------------------------------
FLEA CONTROL
Flea Control Vaccines
Canine Flea Control Vaccine Research Heska/Novartis/
Eisai
Feline Flea Control Vaccine Research Heska/Novartis/
Eisai
Environmental Flea Control Research Heska
Pharmaceutical Flea Control Research Heska/Novartis
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) See "-- Government Regulation" for a description of the marketing and
approval process for the Company's products.

(2) See "-- Collaborative Agreements" for a description of the marketing
rights for these products.

24
<PAGE> 27

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
MARKETING
PRODUCT STAGE OF DEVELOPMENT(1) RIGHTS(2)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
HEARTWORM INFECTION
Feline Heartworm Diagnostic
Veterinary Diagnostic Currently available Heska
Laboratory
Point-of-Care Diagnostic Expected in 1997 Heska
Canine Heartworm Diagnostic
Veterinary Diagnostic Currently available Heska
Laboratory
Point-of-Care Diagnostic Expected in 1997/1998 Heska
Heartworm Vaccines
Canine Heartworm Vaccine Research Bayer/Eisai
Feline Heartworm Vaccine Research Heska/Novartis/
Eisai
- ----------------------------------------------------------------------------------------------
DENTISTRY
Canine Periodontal Disease Expected in 1997 Heska
Therapeutic
Canine Dental Hygiene Kits Expected in 1997 Heska
- ----------------------------------------------------------------------------------------------
OTHER INFECTIOUS DISEASES
Feline Trivalent Viral Vaccine Currently available; second Heska
generation in research
Feline Immunodeficiency Virus Research Heska
Vaccine
Feline Leukemia Virus Vaccine Research Heska
Bartonellosis (Cat Scratch Product approval trials ongoing Heska
Fever) Vaccine
Feline Toxoplasmosis Vaccine Research Bayer/Eisai
Feline Plague Vaccine Research Heska
Canine Leishmaniosis Diagnostic Expected in Italy in 1997 Heska
Canine Leishmaniosis Vaccine Research Heska
Canine Viral Vaccines Research Heska
Equine Influenza Vaccine Product approval trials ongoing Heska
- ----------------------------------------------------------------------------------------------
ONCOLOGY Research Heska
- ----------------------------------------------------------------------------------------------
</TABLE>

(1) See "-- Government Regulation" for a description of the marketing and
approval process for the Company's products.

(2) See "-- Collaborative Agreements" for a description of the marketing
rights for these products.

25
<PAGE> 28

ALLERGY AND DERMATOLOGY

Overview. Allergy is common in companion animals and affects approximately
10% to 15% of dogs. Clinical symptoms of allergy are variable, but are often
manifested as persistent and serious skin disease in dogs and cats. Clinical
management of allergic disease is problematic as there are a large number of
allergens that may give rise to these conditions. Although skin testing is often
regarded as the most accurate diagnostic procedure, such tests are painful,
subjective and inconvenient for animals and accordingly are used much less often
than in vitro testing. The Company believes that many of the currently available
in vitro diagnostic tests are of questionable accuracy. The effectiveness of the
immunotherapy that is prescribed to treat allergic disease is inherently limited
by inaccuracies in the diagnostic process.

The Company's principal strategy with respect to allergy is to improve the
quality of immunotherapy by improving the quality of diagnosis. Heska has
developed more accurate in vitro technology to detect IgE, the antibody involved
in most allergic reactions. This technology permits the design of tests that
more specifically identify the animal's allergic responses to particular
allergens.

As part of its plan to support the veterinarian, the Company has adopted a
complete disease management approach to allergy. As part of its allergy program,
the Company offers allergy testing services, immunotherapy products, palliative
products and case management services.

Diagnostics. Heska currently markets in vitro canine allergy diagnostic
tests for a wide range of allergens. The allergy testing is conducted in Heska's
veterinary diagnostic laboratories using an enzyme-linked immunoassay ("ELISA")
to screen the serum of dogs against a panel of known allergens. The test format
currently includes 48 different allergens, consisting primarily of various
pollens, grasses, molds and insects.

The binding of IgE antibodies to a cellular receptor is an essential
prerequisite to most allergic reactions. Heska has produced a molecular clone of
the cellular receptor for the IgE antibody. The Company has used this
molecularly cloned receptor in a unique diagnostic assay to detect the presence
and quantity of allergen-specific IgE in an animal's blood. The Company believes
that this test, which is the first of its kind, will enable the more accurate
diagnosis of allergy necessary for improved immunotherapy. Heska introduced a
diagnostic laboratory version of this test for the diagnosis of canine flea bite
allergy in January 1997. The Company is working on an adaptation of this test
for all canine allergy testing, which is expected to be available through
Heska's veterinary diagnostic laboratories in 1997. The Company also intends to
introduce a similar diagnostic product for feline allergy testing in 1997.

Immunotherapeutics. Veterinarians who use Heska's diagnostic laboratories
for in vitro allergy testing services often purchase immunotherapy treatment
sets for those dogs with positive test results. A large percentage of those
canine allergy tests performed by the Company are positive, and veterinarians
order Heska's immunotherapy treatment sets for a majority of these dogs. These
prescription treatment sets are formulated specifically for each allergic animal
and contain only the allergens to which the animal has demonstrated significant
levels of IgE antibodies. The prescription formulations are administered in a
series of injections, with doses increasing over several months, to alter the
allergic status of the animal. Immunotherapy is generally continued for an
extended time. The Company also plans to offer immunotherapy treatment sets for
cats upon receipt of regulatory clearance.

Ancillary Dermatology Products and Services. Heska expects to introduce in
1997 a line of supportive care products such as allergy shampoos and rinses to
be dispensed by veterinarians for use at home, along with client information
brochures explaining allergy and its treatment. The Company has as a full-time
employee a board-certified veterinary dermatologist whose primary job is to
provide free case management consultations to any Heska customer. There are
fewer than 100 board certified veterinary dermatologists in the United States,
and the Company believes that free, on-demand dermatology consultations are of
tremendous assistance to the veterinarian.

FLEA BITE ALLERGY

Overview. Flea bite allergy is the most common skin disease afflicting dogs
and cats throughout the world. It is estimated that flea related problems
account for more than 50% of skin conditions observed by veterinarians

26
<PAGE> 29

in flea endemic areas. Treatments currently available for flea bite allergy are
limited. For example, steroids may provide temporary symptomatic relief, and
control of fleas on the animal and in its environment is also helpful. However,
prolonged use of steroids may have harmful side effects, and sustained complete
control of flea populations is extremely difficult. The Company has developed
technology for the accurate diagnosis of flea bite allergy and is researching
products to prevent the development of flea bite allergy in susceptible animals
and to provide efficacious immunotherapy for animals that have already developed
an allergy to flea bites.

Heska scientists have found that flea salivary proteins are principally
responsible for the allergic reactions to flea bites. The Company has developed
proprietary methods for collecting pure saliva from feeding fleas. From this
pure saliva, flea salivary allergens were discovered and characterized by Heska
biochemists, and the Company's molecular biologists have cloned many of the
genes that encode these unique allergens. Certain of these recombinant molecules
have been shown to give rise to reactions in flea bite allergic dogs and cats.

Diagnostics. At present, diagnosis of flea bite allergy is generally based
on the clinical impression of the veterinarian and a positive response to
effective flea control. Intradermal skin testing, performed by injecting small
amounts of an extract of whole fleas into the skin, is used by some veterinary
dermatologists. A characteristic reaction in the skin, occurring within a few
minutes following injection of the extract, is suggestive of allergy to fleas.
However, testing with an extract of whole fleas is of limited value in
diagnosing flea bite allergy, as such extracts contain only minute amounts of
flea saliva in addition to other allergens known not to be involved in flea bite
allergy that may cause the observed reaction.

Using its proprietary flea salivary allergens and its novel receptor-based
assay for detection of IgE antibodies in the serum of allergic animals, the
Company has developed a reliable in vitro ELISA-based test for flea bite allergy
in dogs. Heska introduced this product in January 1997 in its Colorado
veterinary diagnostic laboratory. The Company expects to introduce a similar
test for cats in 1997. The Company is also developing point-of-care diagnostic
products for both dogs and cats to assist the veterinarian in making a prompt
flea bite allergy diagnosis in the veterinary clinic.

Immunotherapeutics. The Company is using its extensive knowledge of flea
biology, its proprietary flea salivary allergens and its broad understanding of
canine and feline immunology to develop novel flea bite allergy
immunotherapeutics. Such treatments are intended to reduce or eliminate the
symptoms of allergy in dogs and cats that are already allergic to flea bites.
Experimental immunotherapy trials are scheduled to begin in 1997.

Vaccines. Heska is also developing vaccines to prevent flea bite allergy
from occurring in cats and dogs that are not yet allergic to flea bites.
Experimental vaccine studies were initiated in October 1996, and additional
studies are scheduled to commence in 1997.

FLEA CONTROL

Overview. The common flea which infests dogs and cats, Ctenocephalides
felis, is prevalent worldwide wherever warm ambient temperatures and adequate
humidity exist. This highly successful parasite produces uncomfortable allergic
responses, transmits other diseases, causes anemia and is a nuisance to pets and
their owners. The Company estimates that flea control products for dogs and cats
represent a worldwide market of approximately $1 billion, of which the Company
estimates approximately $660 million is in the United States.

A number of proprietary and non-proprietary products are currently marketed
for flea control. Two of the proprietary products introduced in the last few
years have been particularly successful. The systemic flea control products
recently introduced by Novartis and Bayer, "Program" and "Advantage," each sold
$100 million or more in the United States in the year of their introduction. No
single product, however, is considered to be completely safe and effective in
flea control at all life-cycle stages. In addition, certain topical control
chemicals, such as those included in sprays and collars, can be toxic and
present safety concerns for animals and humans. The use of certain flea control
chemicals may also, over time, result in fleas that are resistant to those
products.

Vaccines. Heska's goal is to develop vaccines that will produce an immune
response in the dog or cat that will kill fleas and reduce their reproduction.
For a number of reasons, including the complexity of parasites and their
adaptations for life in or on host animals, the development of vaccines against
parasites is generally more difficult than the development of vaccines against
viral or bacterial infections. Heska has devoted substantial

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resources to basic research in flea physiology in its efforts to design products
that will safely and effectively control fleas. A team of Heska scientists, with
expertise in flea biology, biochemistry, molecular biology and immunology, is
using the results of this research to undertake the development of vaccines for
the control of fleas. To facilitate this work, Heska has created a substantial
flea insectary at its Fort Collins facility producing more than 25 million fleas
every year. The Company has the capacity to microscopically dissect 10,000 fleas
per week. Genomic libraries and numerous tissue-specific cDNA libraries have
been created to discover the relevant product targets. Heska researchers also
study the molecular physiology of fleas, focusing on molecular targets from
virtually every flea life-stage. As candidate molecules are purified and
molecularly cloned, protein and nucleic acid sequence data provide the basis for
composition of matter patent applications. Experimental studies with the first
vaccine candidates were initiated in 1996, but commercial vaccines are not
anticipated for the next several years.

Environmental Control. As an example of Heska's ability to capitalize on
its understanding of flea biology, the Company has also entered into a
collaboration with a third party to develop a safe, biologically-based flea
control product which can be applied around the home or kennel to control fleas.

Pharmaceutical Control. The Company's research of flea molecular physiology
has led to the identification of molecular targets for small molecule
pharmaceuticals. Heska has created and is developing additional in vitro tests
amenable to high throughput chemical screening. These in vitro tests and
additional in vivo screens are expected to facilitate rapid analysis of early
stage product candidates and subsequent product development. The Company expects
that it will seek collaborative arrangements to further develop these
pharmaceutical products.

HEARTWORM INFECTION

Overview. Heartworm infections of dogs and cats are caused by the parasite
Dirofilaria immitis. This parasite is transmitted in larval form to dogs and
cats through the bite of an infected mosquito. Larvae develop into adult worms
which live in the pulmonary arteries and heart of the host, where they can cause
serious cardiovascular, pulmonary, liver and kidney disease. The adult worms
produce offspring called microfilariae, which are ingested by blood-feeding
mosquitoes. In the mosquito, the worms develop into the infective larval stage
and in a subsequent mosquito bite are transmitted to the dog or cat.

Heartworm infection is common throughout the world, particularly in warm
and humid climates. Dogs are especially susceptible to heartworm infection and
treatment is difficult, expensive and requires the use of toxic compounds with
serious adverse effects for the animal. Chemoprophylactic products to prevent
heartworm infections in dogs are generally available and widely prescribed, but
require monthly or daily administration during the heartworm transmission
season. As a result, compliance and convenience issues arise. The Company
estimates that the worldwide market for canine heartworm diagnostic and
chemoprophylactic products is more than $270 million per year, of which
approximately $240 million per year is in the United States.

Heartworm infections of cats represent a growing area of concern for
veterinary practitioners. Although cats are somewhat less susceptible to
heartworm infection than are dogs, infected cats may experience serious disease,
even death, from only a single adult worm. Diagnosis of these infections is very
difficult, as there are generally too few adult worms present to allow for
reliable heartworm antigen detection in the blood, as is done for dogs. A
chemoprophylactic product to prevent heartworm infections of cats, similar to
the products available for dogs, was introduced by Merck & Co., Inc. in January
1997. Because the manufacturer's label of this chemoprophylactic product
recommends that cats be tested for active infection prior to administration of
their product, Heska believes the availability of the feline preventative
treatment will increase demand for its feline diagnostic products.

Diagnostics. Heska's heartworm vaccine research effort has resulted in the
characterization of many unique heartworm antigens, certain of which will be
useful for the development of improved diagnostic tests. In January 1997, Heska
introduced a new test in a diagnostic laboratory format for feline heartworm
infections of cats which allows veterinarians for the first time to accurately
establish the prevalence of heartworm exposure in cats in their practices. This
test is highly accurate and identifies antibodies in cat serum that react with a
recombinant heartworm antigen. Regulatory clearance is expected in 1997 for a
rapid point-of-care test for feline heartworm infection using this same
technology in the clinic. The Company expects to launch this point-of-care
feline heartworm diagnostic product in Italy later this year. Heska has also
developed a diagnostic test for

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heartworm infection in dogs. This test uses monoclonal antibodies reactive with
heartworm antigens to detect the presence of these antigens in the blood of the
infected dog. The test is presently offered through Heska's veterinary
diagnostic laboratory. A point-of-care format is being developed and, assuming
regulatory clearance, is expected to be available in late 1997 or early 1998.

Vaccines. In order to avoid the need for repeated administration of
chemoprophylactic drugs and the resulting compliance and convenience problems,
Heska's goal is to develop vaccines for annual administration that would prevent
cardiopulmonary infection in dogs and cats caused by heartworms. The Company has
identified many candidate vaccine antigens and the genes encoding them have been
cloned. Heska is using these proprietary molecules in vaccination studies of
dogs and cats, including trials which involve delivering vaccine candidates
using nucleic acids and viral vectors. Each vaccination trial requires
approximately one year to complete. Accordingly, commercialization of vaccines
for heartworm infections of dogs and cats is not anticipated for several years.

DENTISTRY

Overview. Dentistry for dogs and cats is one of the fastest growing markets
in companion animal health. Within dentistry, the major problems are general
dental hygiene and periodontal disease. It is estimated that 80% or more of all
dogs exhibit symptoms of periodontal disease by three years of age, which often
manifests as bad breath. Left untreated, periodontal disease can cause loss of
teeth and systemic bacterial infection. The most prevalent treatment is the
cleaning and scaling of the animal's teeth, which requires that the animal be
anesthetized. Although periodic cleaning and scaling is recommended for all
dogs, this procedure alone does not adequately address the underlying infection
in dogs with periodontal disease. Systemic antibiotics to be administered by the
pet owner at home are widely prescribed but present convenience and compliance
issues. Heska's complete disease management approach to these medical issues is
to offer a proprietary periodontal disease therapeutic, a group of dental
hygiene products and case management services from a board-certified veterinary
dental specialist.

Canine Periodontal Disease Therapeutic. The Company has the exclusive,
worldwide rights to market Atrix Laboratories Inc.'s proprietary human
periodontal disease product for the treatment of companion animal periodontal
disease. The product consists of a solution containing the antibiotic
doxycycline that is injected into the tooth pocket. The injected material forms
a biodegradable gel that releases the antibiotic gradually over time,
eliminating the need for repeated antibiotic administration by the pet owner.
Efficacy of this treatment to clear existing infections has been established for
both dogs and humans. Heska's goal is to have this product administered by
veterinarians on a regular basis for dogs with periodontal disease concurrently
with the regular cleaning and scaling of the animal's teeth. Regulatory approval
for marketing of the periodontal disease therapeutic for dogs is expected in
1997. Atrix will manufacture the product for distribution by Heska.

Canine Dental Hygiene Kits. Regular dental hygiene has been proven to be of
value in the prevention of periodontal disease in companion animals. As part of
its comprehensive disease management approach, Heska intends to market canine
dental care kits for both routine dental hygiene and for dental hygiene
following the use of its proprietary periodontal disease therapeutic. The kits
will consist of a toothbrush, toothpaste and rinse and will be manufactured for
the Company by third parties. The Company expects to commence its marketing of
these dental hygiene kits concurrently with the launch of its periodontal
therapeutic.

OTHER INFECTIOUS DISEASES

Feline Trivalent Viral Vaccine. Heska currently markets a three-way
modified live vaccine for the three most common viral diseases of cats, namely
calicivirus, rhinotracheitis virus and panleukopenia virus. This vaccine is
administered without needle injection by dropping the liquid preparation into
the eyes and nostrils of cats. While there is one competitive non-injectable
two-way (no panleukopenia protection) vaccine, all other competitive products
are injectable formulations. The use of injectable vaccines in cats has become
controversial due to the frequency of side effects associated with injection of
certain vaccines. The most serious of these side effects are injection site
sarcomas, tumors which are nearly always fatal. The Company's trivalent vaccine
avoids injection

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site side effects and is believed by the Company to be very efficacious. The
Company is also researching a second generation vaccine using recombinant
technology.

Feline Immunodeficiency Virus Vaccine. Feline Immunodeficiency Virus
("FIV") produces a viral disease characterized by immunodeficiency which
ultimately results in the death of the cat. Treatment options are quite limited,
and at this time there are no vaccines available to prevent the disease,
although several of the animal health companies with a feline vaccine line are
believed to be attempting to develop one. Heska is developing a recombinant FIV
vaccine, and the first experimental trials of Heska vaccine candidates are
expected to be initiated in 1997.

Feline Leukemia Virus Vaccine. Feline Leukemia Virus ("FeLV") is a viral
disease of cats that is characterized by immunodeficiency and ultimately results
in death. As with FIV, treatment options are quite limited. However, there are
several vaccines presently offered for the prevention of FeLV. There is some
controversy as to the relative efficacy of these vaccines. Heska is developing a
recombinant vaccine for FeLV, and the first experimental trials of the Heska
vaccine candidates are expected to be initiated in 1997.

Bartonellosis (Cat Scratch Fever) Vaccine. Cat Scratch Fever, caused by the
bacterium Bartonella henselae, is transmitted from cats to humans by a cat's
scratch and perhaps by other means. The human disease is characterized by
malaise, fever and swollen lymph nodes, sometimes lasting several weeks and
sometimes requiring hospitalization. The Company believes that there are over
22,000 cases of Cat Scratch Fever in humans annually, of which 2,000 require
hospitalization. Immunocompromised humans may develop very severe disease
following infection, and this organism is a cause of a significant number of
opportunistic infections in HIV-positive individuals. Therefore, doctors
treating at-risk human populations may recommend that cats be eliminated from
the household.

The Company is working with scientists at the United States Centers for
Disease Control and Prevention ("CDC") in Atlanta to develop a vaccine for cats.
The vaccine is intended to prevent cats from harboring the bacteria in their
blood with the goal of limiting transmission of the bacteria from cats to
humans. Certain vaccine formulations prepared at Heska have successfully
protected cats from infection and studies are underway to optimize these vaccine
formulations.

Feline Toxoplasmosis Vaccine. Toxoplasmosis is caused by a protozoan
parasite, Toxoplasma gondii, that infects cats and other mammals including
humans, pigs and sheep. This disease is transmitted to humans through the
oocysts (eggs) of the parasite, which are passed exclusively in the feces of
infected cats. In addition, consumption of undercooked lamb and pork is a common
means of transmission to humans. Toxoplasma infections are generally not a
serious concern for cats, as healthy cats generally tolerate the infection
without obvious disease. However, infections of other animals, including humans,
may have serious consequences. This is particularly true for immunocompromised
individuals, such as HIV-infected persons, and for unborn fetuses. Such
infections may be life threatening in the former case and lead to birth defects
or miscarriage in the latter. Because of the risk of transmission of this
disease from cat feces, doctors sometimes advise immunocompromised patients and
women who are or may become pregnant to avoid or give away their cats. For this
reason, Heska believes that an appropriate vaccine may encourage such
individuals to keep their family pets and is developing a recombinant vaccine
intended to protect cats from shedding Toxoplasma oocysts. The Company believes
that such a vaccine, if widely used, could help to reduce the transmission of
disease to humans and other animals. The Company has identified and cloned the
genes encoding over 80 vaccine candidate antigens from internally developed gene
libraries. Testing of these antigens for vaccine efficacy is expected to begin
in 1997.

Feline Plague Vaccine. The disease commonly known as the "Bubonic Plague"
or "Black Death" reached epidemic proportions in medieval Europe. While no
longer epidemic, this disease, caused by the bacterium Yersinia pestis, still
exists and may be transmitted to humans from cats. The plague-causing bacterium
is endemic in many areas of the western United States where infections are
transmitted among rodents by flea bites. Cats may be exposed to the bacterium
either through direct contact or through bites of fleas from infected rodents.
Moreover, veterinarians and cat owners are at risk of infection by contact with
diseased cats. Each year in the western United States several cases of feline
plague are reported, and occasionally, practicing veterinarians are infected.
According to the CDC, from 1980 to 1994, there were 229 reported cases of human
plague in the United States, resulting in 33 fatalities. Heska scientists are
developing a feline vaccine for plague. Studies in mice have

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demonstrated significant immune responses for this vaccine formulation and
efficacy studies in cats are planned for 1997.

Canine Leishmaniosis Diagnostic and Vaccine. Canine visceral leishmaniosis
is a serious disease of dogs and humans caused by the parasite Leishmania. These
protozoan parasites are transmitted to humans and dogs through the bite of
sandflies. The disease causes profound suffering and, if left untreated,
infected dogs often die. While this disease is generally not a problem in the
United States, it is widespread in Mediterranean and Middle Eastern countries
and in South America. Dogs serve as the primary reservoir of the parasites for
transmission to other dogs and to humans. Diagnosis of canine visceral
Leishmania infections is currently based on clinical symptoms, the finding of
parasitized cells in lymph node aspirates and the use of a laboratory-based
microscopy assay to detect antibodies in the serum of dogs reactive with
Leishmania antigens. At present there are no vaccines that will prevent
Leishmania infection of dogs. The Company believes that significant markets
exist for both a convenient and reliable diagnostic and an effective vaccine.
These products would improve quality of life of dogs living in endemic areas and
may reduce the risk of disease transmission to humans.

Using a proprietary molecule developed by Corixa Corporation, the Company
has developed a sensitive diagnostic laboratory immunoassay for diagnosis of
canine Leishmania infection and is developing a point-of-care device for rapid
diagnosis. The laboratory test is expected to be introduced for sale in Italy in
1997, with a point-of-care test and introduction in other European countries to
follow. These tests provide improved accuracy and are much faster and easier to
perform than the currently available laboratory test.

The Company expects that laboratory testing of vaccine candidates will
commence in 1997. Vaccine trials will be conducted in Italy under conditions of
natural exposure in an area where transmission of Leishmania is endemic. Because
little is yet known of the natural progression of disease in Leishmania-infected
dogs, it is anticipated that this research effort, and subsequent vaccine
trials, will not be completed for several years.

Canine Viral Vaccines. Heska scientists are researching a next generation
line of vaccines which are intended to protect dogs from their most common viral
diseases. This vaccine line will focus on four principal canine viral diseases:
parvovirus, distemper virus, parainfluenza virus and adenovirus. The Company
intends to develop a vaccine to protect dogs from all four viruses and another
vaccine aimed at parvovirus alone. The Company does not expect these next
generation vaccines to be commercially available for several years.

Equine Influenza Vaccine. Equine influenza is a common viral disease of
horses and is similar to human influenza. Horses have diminished performance and
quality of life for an extended period following infection. Currently available
vaccines for equine influenza are of limited efficacy and the duration of
immunity for existing vaccines is measured in weeks or months. Heska is
developing a unique vaccine for equine influenza and believes its vaccine
candidates will have improved efficacy and duration of immunity. The vaccine is
currently being tested in horses for safety and efficacy.

ONCOLOGY

With improving medical care, dogs and cats are living longer lives and,
accordingly, developing more age-associated diseases such as cancer. In fact,
cancer is the leading cause of disease-associated death in dogs and cats.
However, most treatments are less than optimal and employ "off label"
therapeutic products developed for use in humans. The Company believes that it
is critical that a cancer therapeutic product not substantially decrease the
quality of life of the treated dog or cat. Accordingly, Heska is pursuing a
number of product opportunities focusing primarily on quality of life during the
course of cancer therapy. Numerous approaches are being taken, including
pursuing licensing opportunities arising from human oncology research and
collaborating with outside scientists on unique immunization techniques for
companion animal cancers. The Company does not expect to have commercial
products in this area for several years.

VETERINARY DIAGNOSTIC LABORATORY SERVICES

Heska believes that there is a substantial market need for high quality
veterinary diagnostic laboratory services combined with high quality case
management advice. This is due in part to the fact that most veterinarians
practice as general practitioners, rather than specialists. In order to support
veterinarians in their

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practices, Heska intends that its veterinary diagnostic laboratory will address
these diagnostic situations as well as provide highly technical,
state-of-the-art case analyses.

In 1996, Heska established a veterinary diagnostic laboratory at its Fort
Collins facility. The diagnostic laboratory currently offers the Company's
allergy diagnostics, canine and feline heartworm diagnostics and flea bite
allergy assays, in addition to other diagnostic and pathology services. The Fort
Collins veterinary diagnostic laboratory is currently staffed by three
diplomates of the American College of Veterinary Pathologists, several medical
technologists experienced in animal disease, and several additional technical
staff. As in all other areas of its business, Heska intends to continue to
provide its customers the highest level of customer support possible.

Heska intends to continue to use the diagnostic laboratory both as a
stand-alone service center and as an adjunct to its product development efforts.
Many of the assays which the Company will develop in a point-of-care format will
initially be validated and made available in the diagnostic laboratory and will
remain available in that format after the introduction of the analogous
point-of-care test. The Company believes that veterinarians will appreciate
being able to have confirmatory testing performed in the laboratory as a back-up
to point-of-care testing, as well as the ability in some circumstances to
conduct quantitative testing. The Company believes that these diagnostic
services also provide opportunities for interaction between its medical and
technical consulting staff and its veterinarian customers.

In addition to the United States veterinary diagnostic laboratory, the
Company recently acquired Bloxham Laboratories Limited, one of the largest
veterinary diagnostic laboratories in the United Kingdom. Bloxham Laboratories
provides a full range of diagnostic and pathology services, including the
proprietary diagnostic laboratory tests marketed by the Company.

NON-COMPANION ANIMAL HEALTH PRODUCTS

Food Animal Products. Diamond is completing the research, development and
testing of a new line of bovine vaccines. Diamond has entered into a strategic
collaboration with a major pharmaceutical company pursuant to which the partner
is providing funding for certain of this bovine vaccine research and development
work in exchange for non-exclusive rights to use the antigens that Diamond
develops.

Heska has also developed a unique diagnostic to detect Trichinella
spiralis, a parasite that is transmitted to humans and other animals in
undercooked meat. Infected pork is implicated in most outbreaks of human
trichinosis. Heska has identified what it believes to be the most important
antigen for the diagnosis of Trichinella infection in pigs and other hosts. This
carbohydrate antigen has been synthesized, can be produced in large quantities
and has been shown to be a superior reagent for the serological diagnosis of
Trichinella infections of swine. The Company is presently in negotiations to
provide this antigen for distribution as a diagnostic product to the swine
product subsidiary of an international pharmaceutical company.

Potential Human Health Applications. Heska's extensive research in the
molecular and cellular biology of parasites has yielded potential human
applications. Various biotechnology companies are pursuing pharmaceutical
compounds derived from various microscopic organisms, higher invertebrates such
as snails and even amphibians. The Company's research with parasites has
similarly yielded molecules that may also have interesting human pharmaceutical
applications.

In addition, the Company's novel work with the cellular receptor for IgE
has been directed toward improving the diagnosis of allergy in companion
animals. The Company intends to further evaluate this technology for the
diagnosis of human allergic disease. It also appears that certain allergic-type
diseases may be caused by an autoimmune reaction to this same cellular receptor
for IgE. The Company is evaluating whether the detection of these
auto-antibodies can be used in diagnostic testing for these diseases. Heska's
work with the cellular receptor for IgE has benefitted from a collaboration with
Professor Jean-Pierre Kinet of Harvard University. Professor Kinet founded a
company focused on allergy that has rights to certain compounds and associated
technologies that have the potential for treating allergic diseases. Heska
acquired this company in May 1997, and Professor Kinet entered into an exclusive
five year consulting agreement with Heska in the areas of allergy, asthma and
animal health.

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After it has completed its initial proof-of-concept work as to these
technologies, Heska intends to explore corporate partnerships with appropriate
human health care companies for the further development of the human
applications while retaining the animal health applications. With these
approaches, Heska hopes to maximize the benefit of the technologies discovered
and developed at Heska, including extending them into the human health care
market where feasible without distracting the Company from its companion animal
health focus.

PRODUCT CREATION

Heska is committed to creating innovative products to address significant
unmet health needs of companion animals. The Company creates products both
through internal research and development and through external collaborations.
Internal research is managed by multidisciplinary product-associated project
teams consisting of veterinarians, biologists, molecular and cellular
biologists, biochemists and immunologists. Heska believes that it has one of the
largest and most sophisticated scientific efforts in the world devoted to
applying biotechnology to the creation of companion animal products. Heska's
employees hold more than 20 D.V.M.s and over 45 Ph.D.s; seven employees hold
both D.V.M. and Ph.D. degrees.

The creation of unique and scientifically advanced vaccine and therapeutic
products often requires an investment in basic research. For example,
fundamental knowledge about the immunology of dogs and cats is not well
developed, and the Company has invested significant resources on basic research
to understand immune responses in dogs and cats. Similarly, the Company has
invested significant resources to develop novel virally vectored and nucleic
acid vaccines. The Company believes the information provided by these research
groups is essential to an informed and predictable program aimed at creating
state of the art safe and effective vaccines and immunotherapeutics. Through
this commitment, Heska has developed new knowledge of T-cell biology, cytokines,
immune responses to adjuvants and the use of virally vectored and nucleic acid
vaccines in companion animals.

For a number of reasons, including the complexity of parasitic organisms
and their adaptations for life in or on host animals, the development of
vaccines against parasites is generally more difficult than the development of
vaccines against viruses or bacteria. The Company has committed substantial
resources to develop a body of knowledge at a molecular genetic level about the
physiology of parasites such as fleas and heartworms and the diseases they cause
that it believes is unmatched in the industry. The Company has created a flea
production laboratory in Fort Collins that produces tens of millions of fleas
each year for internal research. Similarly, in order to maximize the likelihood
of developing a successful heartworm vaccine, the Company has created a mosquito
insectary, also located at the Company's Fort Collins facility, where tens of
thousands of infective heartworm larvae are produced every week.

To support its product research programs, the Company has also developed
core technical support areas which perform commonly-used techniques to a
consistent high standard. These in-house core support areas include a hybridoma
laboratory, a protein and nucleic acid sequencing facility, a recombinant
protein purification laboratory, a diagnostics creation laboratory and a process
development laboratory.

Heska is also committed to identifying external product opportunities and
creating business and technical collaborations that could lead to the creation
of other products. The Company is currently funding research at multiple
academic and governmental institutions. In addition, the Company is also
involved in joint research or product development efforts with a number of
companies. See "-- Collaborative Agreements." The Company believes that its
active participation in scientific networks and its reputation for investing in
research enhances its ability to acquire external product opportunities.

SALES, MARKETING AND CUSTOMER SERVICE

The Company presently markets its products in the United States directly to
veterinarians through the use of its field sales force, inside customer
service/tele-sales force and veterinary distributors acting as contract sales
agents. The Company presently has over 20 field sales representatives and field
sales supervisors and eight customer service/tele-sales representatives and
supervisors. The twelve veterinary distributors with whom the Company has
entered into sales agency relationships employ more than 300 field and customer
service/tele-sales representatives, although some of these distributors may not
distribute all of the Company's products.

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Internationally, the Company will market its products to veterinarians
through distributors, sales agents, strategic collaborators, or directly. The
choice of distribution channels will depend on factors such as the size of the
market in the country, the ease of accessing that market using a direct sales
force and the economic efficiency of alternative distribution methods.

There are over 35,000 veterinarians in the United States whose practices
are devoted principally to companion animal medicine. Those veterinarians
practice in approximately 25,000 clinics in the United States. The Company plans
to market its products to these clinics primarily through the use of its field
and telephone sales force, sales agents, trade shows and print advertising. The
Company has sold products and services to over 3,700 such clinics within the
last 12 months.

In addition to creating novel products that improve companion animal
health, Heska is committed to supporting the veterinarian through a complete
case management strategy. The average companion animal veterinarian practices
general medicine. Although there are an increasing number of veterinary
specialists available, the economics of companion animal practice discourage
extensive use of these specialists. The Company's strategy is to help the
general practice veterinarian practice more sophisticated medicine in several
ways. First, the Company currently provides certain specialized diagnostic
services not available in a point-of-care format or in third party laboratories.
The Company intends to increase the range of these services, both at its
Colorado facility and through the establishment or acquisition of additional
diagnostic laboratories. In addition, the Company has established a medical and
technical consulting group on site at the Colorado facility consisting of six
employee veterinarians with specialized expertise in such areas as dermatology,
internal medicine, pathology, dentistry and feline practice. These personnel are
available to all veterinarian customers for interpretation of test results and
qualified and timely advice for continuing management of any given case. The
Company believes that these services enhance the practicing veterinarians'
ability to provide the best possible medical care.

Although most veterinary diagnostic, vaccine and therapeutic products are
ordinarily sold only by veterinarians where a doctor-patient relationship
exists, these products are sometimes sold directly to the public by catalogue
and retail outlets that employ veterinarians. In order to support veterinary
clinics and to foster loyalty to Heska products, the Company intends to sell its
products exclusively to veterinarians for use where a doctor-patient
relationship exists.

Heska scientists present examples of the scientific advances that are being
made in the Company's laboratories at important veterinary and other scientific
meetings and are encouraged to publish their research in peer reviewed journals.
The Company believes that these presentations and publications have helped
establish the Company as a scientific leader in companion animal health.

MANUFACTURING

The Company expects that its products will be manufactured both by Diamond
and/or by contract manufacturers. Diamond's facility consists of a 166,000
square foot USDA and FDA licensed biological and pharmaceutical manufacturing
facility in Des Moines, Iowa. The Company expects that it will manufacture most
or all of its biological products at this facility, as well as most or all of
its recombinant proteins and other proprietary reagents for its diagnostic
products. The Company will manufacture its point-of-care diagnostic products for
feline and canine heartworm infection with Quidel and Diamond. The Company's
periodontal disease therapeutic will be manufactured by Atrix Laboratories, the
company that is developing this product for human use. The Company's
non-proprietary products, such as the canine dental hygiene kits and the
dermatology line, will be manufactured to its specifications by third parties.
As the Company enters into additional strategic collaborations, it is possible
that some of these strategic partners may manufacture products for sale by the
Company. The Company's reliance upon third party manufacturers poses a
significant risk. See "Risk Factors -- Limited Manufacturing Experience and
Capacity; Reliance on Contract Manufacturers."

In addition to manufacturing products for the Company, Diamond manufactures
veterinary biologicals and pharmaceuticals on a contract basis for other major
companies in the animal health industry. Diamond is one of the few USDA licensed
contract biological manufacturers in this market. Bayer, which is a leader in
the bovine vaccine area, currently purchases a substantial portion of its bovine
products for the United States market from

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<PAGE> 37

Diamond. In 1996, Bayer accounted for 64% of the Company's revenues on a
consolidated basis. In addition to viral vaccines, Diamond also manufactures
vaccines against bacterial infections, such as leptospirosis. Diamond currently
has the capacity to manufacture more than 50,000,000 doses of vaccines each
year. Diamond's customers purchase products in both bulk and finished format and
usually contract with Diamond to perform all phases of manufacturing, including
growth of the active bacterial and viral agents, sterile filling, lyophilization
and packaging. In addition, Diamond ordinarily will support its customers
through research services, regulatory compliance services, validation support
and distribution services. Capacity at this facility is not fully utilized, and
Diamond is in negotiations with several other companies, including a
manufacturer of human vaccines, for the provision of manufacturing services.

COLLABORATIVE AGREEMENTS

NOVARTIS

In April 1996, the Company and Novartis entered into several agreements in
connection with a $36.0 million equity investment by Novartis in the Company
(see "Certain Transactions"). Novartis received, under the marketing agreements,
certain rights to manufacture and market any flea control vaccine or feline
heartworm control vaccine developed by the Company as to which USDA prelicensing
serials are completed on or before December 31, 2005. The Company and Novartis
have co-exclusive rights to market these products under their own trade names
throughout the world (other than in countries in which Eisai has such rights)
and, if both parties elect to market, the parties will share revenues on their
sales. The marketing agreements remain in force through 2010 or longer, if
Novartis is still actively marketing such products. In addition, the parties
entered into a screening and development agreement under which the parties may
undertake joint research and development activities in certain fields. If the
parties fail to agree to perform joint research activities, then Novartis has
the right to use certain materials of the Company on an exclusive basis to
develop food animal pharmaceutical products or on a co-exclusive basis with the
Company to develop pharmaceutical products for parasite control in companion
animals or food animal vaccines. Novartis would pay royalties on any such
products developed by it. Currently, there are no joint research projects being
undertaken, although several are in the proposal stage. The Company and Novartis
also entered into a right of first refusal agreement under which the Company,
prior to granting licenses to any third party to any products or technology
developed or acquired by the Company for either companion animal or food animal
applications, must first offer Novartis such rights. If the parties are unable
to come to an agreement within 150 days of the Company's first notice, Heska may
thereafter license such rights to third parties on terms not materially more
favorable than the terms last offered by the Company to Novartis. The screening
and development agreement and right of first refusal agreement each terminate in
2005.

BAYER

In June 1994, the Company entered into research agreements (the "Research
Agreements") with Bayer providing for funding of research (the "Research
Program") by Bayer on a recombinant feline toxoplasmosis vaccine and a canine
heartworm vaccine (the "Vaccines"). Bayer has the option to obtain an exclusive,
royalty-bearing license to sell the Vaccines in all countries except in those in
which Eisai has rights. If Bayer exercises this option, the parties will
negotiate license and distribution agreements. The Company has the first option
to manufacture any products sold pursuant to any such distribution agreement.
The Research Agreements will terminate upon completion of the Research Program.
Bayer may terminate the Research Agreements prior to completion, but would not
have any rights to market the Vaccines (unless it terminated due to Heska's
breach), although it would have non-exclusive access to technology developed in
the Research Program for use other than in Vaccines. In the event Bayer elects
to terminate the Research Agreements (other than due to Heska's breach), the
Company would recover the right to market the Vaccines, subject to certain
royalties to Bayer intended to repay certain amounts Bayer paid under the
Research Agreements.

EISAI

In January 1993, the Company entered into an agreement with Eisai, a
leading Japanese pharmaceutical company, pursuant to which the Company granted
Eisai the exclusive right to market the Company's feline and canine heartworm
vaccines, flea control vaccine and feline toxoplasmosis vaccine in Japan and
most other

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<PAGE> 38

countries in East Asia. In exchange, the Company received an up-front license
fee and research funding for the development of these products. Heska will have
the right to manufacture any such products pursuant to a supply agreement to be
negotiated between the parties. The agreement will terminate in January 2008,
unless extended or earlier terminated by either party for material breach of the
agreement or by Eisai pursuant to certain early termination rights.

QUIDEL

The Company has entered into a development agreement with Quidel under
which the parties are jointly developing its feline and canine heartworm
point-of-care diagnostic tests using Quidel's rapid in-clinic test technology.
The Company has paid development fees to Quidel. The parties also have
negotiated a supply agreement under which Quidel will perform manufacturing
services with respect to these tests for the Company.

INTELLECTUAL PROPERTY

Heska believes that patents, trademarks, copyrights and other proprietary
rights are important to its business. Heska also relies upon trade secrets,
know-how, continuing technological innovations and licensing opportunities to
develop and maintain its competitive position.

Heska actively seeks patent protection both in the United States and
abroad. As of May 27, 1997, Heska owned or co-owned seven issued United States
patents and 56 pending United States patent applications, including six with
allowed claims. Heska's issued United States patents primarily relate to the
Company's proprietary heartworm, flea control, trichinosis diagnostic and
vaccine delivery technologies. The Company's pending United States patent
applications primarily relate to proprietary heartworm, flea control, flea
allergy dermatitis, trichinosis diagnostic, plague, vaccine delivery, and IgE
receptor-based allergy diagnosis technologies. Applications corresponding to
most of the United States applications have been or will be filed in other
countries. As of May 27, 1997, Heska had three issued foreign patents and 61
pending foreign filings, including nine pending Patent Cooperation Treaty
("PCT") filings.

The Company also has obtained exclusive and non-exclusive licenses for
numerous other patents held by academic institutions and human biotechnology
companies. The proprietary technology of Diamond is primarily protected through
trade secret protection of, for example, its manufacturing processes. In
general, the intellectual property of Diamond's customers belongs to such
customers.

As patent applications in the United States are maintained in secrecy until
patents issue and as publication of discoveries in the scientific or patent
literature often lags behind the actual discoveries, the Company cannot be
certain that it was the first to make the inventions covered by each of its
pending patent applications or that it was the first to file patent applications
for such inventions. Furthermore, the patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions, and, therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be
predicted. There can be no assurance that patents will issue from any of the
Company's patent applications or, should patents issue, that the Company will be
provided with adequate protection against potentially competitive products.
Furthermore, there can be no assurance that should patents issue, they will be
of commercial value to the Company, or that the USPTO or private parties,
including competitors, will not successfully challenge the Company's patents or
circumvent the Company's patent position. In the absence of adequate patent
protection, the Company's business may be adversely affected by competitors who
develop comparable technology or products.

Pursuant to the terms of the Uruguay Round Agreements Act, patents issuing
from applications filed on or after June 8, 1995 have a term of 20 years from
the date of such filing, irrespective of the period of time it may take for such
patent to ultimately issue. This method of patent term calculation can result in
a shorter period of patent protection afforded to the Company's products
compared to the prior method of term calculation (17 years from the date of
issue) as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 and the Generic Animal Drug and Patent Term Restoration
Act, a patent which claims a product, use or method of manufacture covering
drugs and certain other products may be extended for up to five years to
compensate the patent holder for a portion of

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<PAGE> 39

the time required for FDA review of the product. There can be no assurance that
the Company will be able to take advantage of the patent term extension
provisions of this law.

The Company also relies on trade secrets and continuing technological
innovation which it seeks to protect with reasonable business procedures for
maintaining trade secrets, including confidentiality agreements with its
collaborators, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach or that the Company's trade secrets and proprietary know-how will
not otherwise become known or be independently discovered by competitors. Under
certain of the Company's research and development agreements, inventions
discovered in certain cases become jointly owned by the Company and the
corporate sponsor or partner and in other cases become the property of the
Company or the corporate sponsor or partner. Disputes may arise with respect to
ownership of any such inventions.

The commercial success of the Company also depends in part on the Company
and its collaborators neither infringing patents or proprietary rights of third
parties nor breaching any licenses that may relate to the Company's technologies
and products. The Company is aware of several third party patents and patent
applications that may relate to the practice of the Company's technologies.
There can be no assurance that the Company or its collaborators do not or will
not infringe any valid patents or proprietary rights of third parties.
Furthermore, to the extent that Heska or its consultants or research
collaborators use intellectual property owned by others in work performed for
the Company, disputes may arise as to the rights in such intellectual property
or in related or resulting know-how and inventions. Any legal action against the
Company or its collaborative partners claiming damages and seeking to enjoin
commercial activities relating to the Company's products and processes affected
by third party rights, in addition to subjecting the Company to potential
liability for damages, may require the Company or its collaborative partner to
obtain a license in order to continue to manufacture or market the affected
products and processes or to stop the manufacture and marketing of the affected
products and processes. There can be no assurance that the Company or its
collaborative partners would prevail in any such action or that any license
(including licenses proposed by third parties) required under any such patent
would be made available on commercially acceptable terms, if at all. There are a
significant number of United States and foreign patents and patent applications
in the practice of the Company's areas of interest and the Company believes that
there may be significant litigation in the industry regarding patent and other
intellectual property rights. If the Company becomes involved in such
litigation, it could consume a substantial portion of the Company's managerial
and financial resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Risk
Factors -- Uncertainty of Patent and Proprietary Technology Protection; License
of Technology of Third Parties."

GOVERNMENT REGULATION

Most of the products being developed by Heska will require licensing by a
governmental agency before marketing. In the United States, governmental
oversight of animal health products is primarily split between two agencies the
United States Department of Agriculture ("USDA") and the Food and Drug
Administration ("FDA"). Vaccines and point-of-care diagnostics for animals are
considered veterinary biologics and are regulated by the Center for Veterinary
Biologics ("CVB") of the USDA under the auspices of the Virus-Serum-Toxin Act.
Alternatively, animal drugs, which generally include all synthetic compounds,
are approved and monitored by the Center for Veterinary Medicine ("CVM") of the
FDA under the auspices of the Federal Food, Drug and Cosmetic Act. A third
agency, the Environmental Protection Agency ("EPA"), has jurisdiction over
certain products applied topically to animals or to premises to control external
parasites.

Most of the regulated products presently under development by Heska will be
regulated by the USDA. The purpose of the Virus-Serum-Toxin Act is to ensure
that veterinary biologics sold in the United States are safe and efficacious.
Pre-market testing is performed by the manufacturer and the CVB prior to
approval of the product for sale as well as on each new lot. Although the
procedures for licensing products by the USDA are formalized, the acceptable
standards of performance for any product are agreed upon between the
manufacturer and the CVB. For novel products that are unlike others already
licensed, the agreement on expected performance standards is typically reached
through a dialogue between the CVB and the manufacturer. The formal
demonstration of acceptable efficacy of the product is done in carefully
controlled laboratory trials. This is normally a much quicker process than
demonstration of efficacy in clinical trials using client-owned animals.

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<PAGE> 40

The drug development process for human therapeutics is much more involved
than that for animal drugs. The company sponsor of a human drug must obtain FDA
marketing approval in a multi-phase process which generally is lengthy,
expensive and subject to unanticipated delays. First, extensive preclinical
studies in animal models to assess safety and efficacy as well as laboratory
toxicology and pharmacokinetic studies of the drug must be conducted. The
company must then submit to the FDA an application for an Investigational New
Drug which must become effective before human clinical trials can commence.
Human clinical trials are then conducted in three sequential phases. Phase I,
which is safety testing, generally involves a small group of patients or healthy
volunteers and typically takes approximately one year to complete. Phase II, in
which the drug is tested for efficacy, optimal dosage and safety risks, is
conducted in a larger, but still limited, patient population and typically takes
18 to 36 months to complete. If the drug proves efficacious in Phase II trials,
expanded Phase III trials are conducted to evaluate the overall risks and
benefits of the drug in relation to available therapies for the disease. This
phase typically takes two and one-half to five years to complete. Only after
these clinical trials are complete may the company submit a New Drug Application
("NDA") to the FDA for marketing approval of the drug; and the NDA review
process takes more than one year on average to complete. The entire process from
research to market introduction on average exceeds 15 years and costs hundreds
of millions of dollars.

By contrast, recent industry data indicate that it takes about 11 years and
$5.5 million to develop a new drug for animals, from commencement of research to
market introduction. Of this time, approximately three years is spent in the
clinical trial and review process. This time requirement for animal drugs is
significantly shorter than the analogous time requirement for human drugs in
part because neither preclinical studies in model systems nor a sequential phase
system of clinical trials is required. Rather, for animal drugs clinical trials
for safety and efficacy may be conducted immediately in the species for which
the drug is intended. Thus, there is no required phased evaluation of drug
performance, and CVM will review data at the most appropriate and productive
times in the drug development process. In addition, the time and cost for
developing companion animal drugs may be significantly less than for drugs for
food producing animals, as food safety issues relating to tissue residue levels
are not present. Also, for animal drugs, unlike human drugs, advantages over
existing therapies do not have to be demonstrated. In addition, with the
enactment of the Animal Drug Availability Act ("ADA") in October 1996,
substantial reductions in the time and cost to license some new animal drugs by
the FDA are anticipated. The ADA was designed to streamline the animal drug
approval process in order to provide more registered drugs for animal use. The
ADA creates a binding pre-submission conference at which the CVM and a company
agree on the types of data the FDA will require. The ADA also removes the
requirement that field investigations be done in every instance and allows the
CVM to accept different types of proof of a drug's safety and efficacy. For
example, as permitted by the ADA, the FDA has agreed that data collected by
Atrix in human preclinical trials using dogs with naturally occurring
periodontal disease constituted adequate evidence of product efficacy for
purposes of regulatory clearance for Heska's canine periodontal disease
therapeutic. This is expected to reduce, by approximately two years, the
approval process time for the Heska periodontal disease therapeutic by
eliminating the need to conduct clinical trials in client-owned dogs. Heska
currently expects that this product will be licensed for use in dogs before the
equivalent product is licensed by the FDA for use in humans, although the human
clinical trials were initiated significantly before Heska's efforts.

Recent industry data indicates that it takes approximately four years and
$1.0 million to license a conventional vaccine for animals from basic research
through licensing. In contrast to vaccines, point-of-care diagnostics can
typically be licensed by the USDA in about a year with considerably less cost.
However, vaccines or diagnostics that use innovative materials such as those
resulting from recombinant DNA technology usually require additional time to
license. The USDA licensing process involves the submission of several data
packages. These packages include information on how the product will be
prepared, information on the performance and safety of the product in laboratory
studies, and information on performance of the product in field conditions.
However, the submission and review of these data packages is not staged so that
one must be completed before beginning the next.

A number of animal health products are not regulated. For example, assays
for use in a veterinary diagnostic laboratory do not have to be licensed by
either the USDA or the FDA. Additionally, grooming and supportive care products
such as those being developed for the dermatology and dental health care product
lines are exempt from significant regulation as long as they do not bear a
therapeutic claim that represents the product as a drug.

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<PAGE> 41

Recently, regulations governing the export of drugs and biologics have also
been relaxed by the passage of the Export Reform Enhancement Act of 1996. Under
this act, drugs and biologics produced in the United States do not have to be
licensed for sale in the United States before export if they are approved for
sale in the importing country. Accordingly, Heska is moving quickly to introduce
diagnostic products in certain countries, such as Italy and Australia, where the
products would address significant market opportunities or needs.

The European Union ("EU") is centralizing the regulatory process for
companion animal drugs and biologics for member states. In addition, both the
USDA and the FDA are working with the EU and Japan via the Veterinary
International Cooperation on Harmonization initiative to harmonize the
regulatory requirements for companion animal health products. Thus, in the
future, it is hoped that a single set of requirements will be in place to
streamline the licensing of veterinary products in the major companion animal
markets.

COMPETITION

The market in which the Company competes is intensely competitive. Heska's
competitors include companion animal health companies and major pharmaceutical
companies that have animal health divisions. Companies with a significant
presence in the animal health market, such as American Home Products, Bayer,
Merck & Co., Inc., Novartis, Pfizer Inc and IDEXX Laboratories, Inc., have
developed or are developing products that do or would compete with the Company's
products. Novartis and Bayer are marketing partners of the Company and their
agreements with the Company do not restrict their ability to develop and market
competing products. These competitors have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, distribution and service organizations than the Company. Moreover, such
competitors may offer broader product lines and have greater name recognition
than the Company. Additionally, the market for companion animal health care
products is highly fragmented, with discount stores and specialty pet stores
accounting for a substantial percentage of such sales. As Heska intends to
distribute its products only through veterinarians, a substantial segment of the
potential market may not be reached and the Company may not be able to offer its
products at prices which are competitive with those of companies that distribute
their products through retail channels. There can be no assurance that the
Company's competitors will not develop or market technologies or products that
are more effective or commercially attractive than the Company's current or
future products or that would render the Company's technologies and products
obsolete. Moreover, there can be no assurance that the Company will have the
financial resources, technical expertise or marketing, distribution or support
capabilities to compete successfully.

EMPLOYEES

As of April 1, 1997, Heska and its subsidiaries employed 402 full-time
persons, of whom 108 are in manufacturing and quality control, 137 are in
research, development and regulatory, 65 are in finance and administration, 54
are in sales and marketing, 38 are in the diagnostic laboratories. Of this
total, Diamond employed a total of 144 persons and Bloxham employed a total of
27 persons. Heska's employees hold more than 20 D.V.M.s and over 45 Ph.D.s.
There can be no assurance that the Company will continue to be able to attract
and retain qualified technical and management personnel. See "Risk
Factors -- Dependence on Key Personnel." None of the Company's employees is
covered by a collective bargaining agreement, and the Company believes its
employee relations are good.

FACILITIES

Heska leases an aggregate of approximately 75,000 square feet of
administrative and laboratory space in six buildings located mostly in one
business park in Fort Collins, Colorado under leases expiring from 1999 through
2004, with options to extend through 2010 for the larger facilities. Heska
believes that its present Fort Collins facilities are adequate for its current
and planned activities and that suitable additional or replacement facilities in
the Fort Collins area are readily available on commercially reasonable terms.
Diamond's principal manufacturing facility in Des Moines, Iowa, consisting of
166,000 square feet of buildings on 34 acres of land, is leased from Bayer under
a lease expiring 1998, with options to extend through 2009. Diamond also owns a
160-acre farm used principally for research purposes located in Carlisle, Iowa.
Management believes that any new construction

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<PAGE> 42

required for Diamond's activities can be accommodated at its present site. The
Company's European subsidiary leases its facilities.

LEGAL PROCEEDINGS

The Company is not a party to any material legal proceedings.

GOVERNMENTAL PROCEEDINGS

The Company has been notified that the staff of the United States Federal
Trade Commission ("FTC") is conducting an investigation of Novartis, a principal
stockholder of Heska, with respect to Novartis' relationship with Heska. The
Company and Novartis have responded to the FTC requests for information with
respect to competition for feline heartworm prevention products and canine and
feline flea control products. The Company believes that the FTC staff is
investigating Novartis' actions in acquiring an equity interest in Heska and
representation on its board of directors and certain rights to market Heska
products to determine whether these actions violate federal antitrust laws. At
this time it is not known whether the investigation will result in the
initiation of formal proceedings before the FTC, or if such proceedings are
initiated, what relief will be sought or obtained. Such relief may include
limitation of Novartis' voting rights with respect to its Heska stock,
limitation of Novartis' representation on the Company's board of directors, an
orderly divestiture of Novartis' equity investment in Heska or reformation of
Novartis' collaborative agreements with the Company. There can be no assurance
that if the FTC were to initiate a proceeding and be successful, that such
relief would not have a material adverse effect on the Company's business,
operating results and financial condition. See "-- Collaborative
Agreements -- Novartis" and "Principal and Selling Stockholders."

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MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The directors, executive officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Fred M. Schwarzer............... 45 President, Chief Executive Officer and Director
Robert B. Grieve, Ph.D.......... 45 Chief Scientific Officer and Vice Chairman
Giuseppe Miozzari, Ph.D......... 50 Managing Director, Heska Europe
R. Lee Seward, D.V.M............ 51 Executive Vice President
John A. Shadduck, D.V.M., 57 Executive Vice President, Operations
Ph.D..........................
William G. Skolout.............. 46 Chief Financial Officer
Louis G. Van Daele.............. 53 President, Diamond Animal Health, Inc.
A. Barr Dolan(1)(2)............. 47 Chairman of the Board
Lyle A. Hohnke, Ph.D.(1)........ 54 Director
Denis H. Pomroy(2).............. 47 Director
Lynnor B. Stevenson, Ph.D.(1)... 54 Director
Guy Tebbit, Ph.D.(2)............ 47 Director
KEY EMPLOYEES
David L. Hines, Ph.D............ 50 Vice President, Product Development and Regulatory
Affairs
Elizabeth Hodgkins, D.V.M....... 47 Vice President, Marketing
Paul Hudnut, J.D................ 38 Vice President, Business Development
Deborah E. Robbins, J.D......... 40 Vice President, General Counsel and Secretary
Keith E. Rushlow, Ph.D.......... 43 Vice President, Science and Technology
Dan T. Stinchcomb, Ph.D......... 43 Vice President, Biochemistry and Molecular Biology
Carol Talkington Verser, 44 Vice President, Intellectual Property
Ph.D..........................
Donald L. Wassom, Ph.D.......... 48 Vice President, Allergy and Immunology
Glade Weiser, D.V.M............. 48 Vice President, Diagnostics
Kenneth Williams................ 50 Vice President, Sales
</TABLE>

- ---------------

(1) Member of Compensation Committee of the Board of Directors.

(2) Member of Audit Committee of the Board of Directors.

Fred M. Schwarzer is President, Chief Executive Officer and a director of
the Company. Mr. Schwarzer served as the Executive Vice President responsible
for the Company's strategic planning and corporate partnerships from June 1994
until he was elected to serve as President and Chief Executive Officer of the
Company effective November 1994. He has been a member of the Company's Board of
Directors since June 1994. From June through October 1994, Mr. Schwarzer was an
employee of Charter Venture Capital and continues to hold a small limited
partnership interest in Charter Ventures II, L.P. Mr. Schwarzer was the founder
and a partner in the Mountain View, California law firm of General Counsel
Associates from 1988 to June 1994 and, prior to founding General Counsel
Associates, was a partner in the San Francisco law firm of Pillsbury Madison &
Sutro LLP. He holds a J.D. degree from the University of California, Berkeley
and a B.A. degree from the University of Michigan.

Robert B. Grieve, Ph.D. is Chief Scientific Officer and Vice Chairman of
the Company and is a founder of the Company. Dr. Grieve was named to his current
position in December 1994. He has been a member of the Company's Board of
Directors since 1990. Dr. Grieve was a Professor of Parasitology at Colorado
State University from 1987 until joining the Company in January 1994 as Vice
President, Research and Development. In addition to his duties with the Company,
Dr. Grieve serves as President of the American Society of Parasitologists. In
the past, he has served in a formal editorial capacity for the Journal of
Immunology, the

41
<PAGE> 44

Journal of Parasitology and the American Journal of Veterinary Research. His
professional awards and honors include the 1991 Ralston Purina Small Animal
Research Award and the 1990 Henry Baldwin Ward medal for outstanding research in
Parasitology, awarded by the American Society of Parasitologists. He holds a
Ph.D. degree from the University of Florida and M.S. and B.S. degrees from the
University of Wyoming.

Giuseppe Miozzari, Ph.D. joined the Company as Managing Director, Heska
Europe in March 1997. From 1980 to March 1997, Dr. Miozzari served in senior
research positions with Novartis, most recently as the Head of Research of the
Animal Health Sector and prior to that, from 1980 to 1983, as Head of the
Molecular Biology Research Unit in the Pharmaceuticals Division. Dr. Miozzari
also served as Novartis' designate on the Board of Directors of the Company from
April 1996 to March 1997. Dr. Miozzari holds Ph.D. and Dipl. Sc. Nat. degrees
from the Federal Institute of Technology (ETH) in Zurich, Switzerland.

R. Lee Seward, D.V.M. is Executive Vice President of the Company. He joined
the Company in October 1994. Before joining the Company, Dr. Seward held
successive positions with Merck & Co., Inc. from May 1981 until September 1994.
His most recent position with Merck was Executive Director, Animal Science
Research, a position in which he headed worldwide animal health product
development. Dr. Seward was in private veterinary practice from March 1980 until
he joined Merck & Co., Inc. He holds D.V.M. and B.S. degrees from Colorado State
University.

John A. Shadduck, D.V.M., Ph.D. is Executive Vice President, Operations of
the Company. He was named to this position in January 1997. Dr. Shadduck also
served as a director of the Company from January 1990 to January 1997. Before
joining the Company, he held the position of Dean, College of Veterinary
Medicine, Texas A&M University from July 1988 until January 1997. He holds
D.V.M. and M.Sc. and Ph.D degrees from The Ohio State University.

William G. Skolout was appointed Chief Financial Officer of the Company in
March 1997. Before joining Heska, Mr. Skolout was Chief Financial Officer of
Cardinal Technologies, Inc. from March 1996 to February 1997 and was Chief
Financial Officer and Vice President of Cray Computer Corporation from September
1992 to December 1995. He holds an M.B.A., Finance degree from the University of
Massachusetts, Amherst and a B.S., Business Finance degree from University of
Colorado, Boulder.

Louis G. Van Daele has served as President of Diamond since February 1994.
From February 1989 until January 1994, he served as Director of Quality Control
and Quality Assurance at Diamond. He holds an M.B.A. degree from Wayne State
University and a B.S. degree from Michigan State University.

A. Barr Dolan has been a director of the Company since March 1988. Mr.
Dolan has been the President of Charter Venture Capital, a venture capital
management firm, since 1982, a general partner of Charter Ventures since 1982
and a general partner of Charter Ventures II, L.P. since 1994. Mr. Dolan is also
a director of several private companies. He holds M.S. and B.A. degrees from
Cornell University, an M.A. degree from Harvard University and an M.B.A. from
Stanford University.

Lyle A. Hohnke, Ph.D. has been a director of the Company since April 1996.
Dr. Hohnke is a general partner of Javelin Capital Fund, L.P., a venture capital
firm, a position he has held since 1994. Dr. Hohnke was a co-founder of Diamond
and served as Chairman and CEO from 1994 until its acquisition by the Company in
April 1996. From January 1991 to October 1993 he was a general partner of Heart
Land Seed Capital Fund. Dr. Hohnke is also a director of Zynaxis, Inc. and
several private companies. He holds Ph.D. and M.A. degrees from the University
of Oregon, an M.B.A. from the Hartford Graduate Institute and a B.A. degree from
Western Michigan University.

Denis H. Pomroy has been a director of the Company since March 1995. He is
the president of Volendam Capital Advisors, Palo Alto, California, a venture
capital management company, which advises on and manages investments for member
companies of the Volendam investment group, including Volendam Investeringen
N.V. Prior to joining Volendam Capital Advisors, Mr. Pomroy served as chief
financial officer from 1989 through 1996 of Madge Networks N.V., a computer
networking company. Mr. Pomroy serves as a director of several other private
companies, mainly in the emerging growth technology area. He holds a bachelors
degree from The University of Birmingham, England and is a fellow of The
Chartered Institute of Management Accountants, England.

42
<PAGE> 45

Lynnor B. Stevenson, Ph.D. was a founder of Heska and has been a director
of the Company since March 1988 and served as President of the Company from
March 1988 to March 1992. Dr. Stevenson is currently the President and Chief
Executive Officer of Cascade Oncogenics, Inc. From July 1992 to April 1997, she
was Director, Technology Transfer at the University of Oregon. She holds a Ph.D.
degree in biochemistry from Monash University, Australia and B.Sc. and M.Ed.
degrees from the University of Melbourne, Australia.

Guy Tebbit, Ph.D. has been a director of the Company since March 1997 when
he became Novartis' designate on the Board of Directors of the Company. Since
January 1997, Dr. Tebbit has served as Vice President, Research and Development,
Regulatory Affairs and Professional Services at Novartis. From January 1995 to
January 1997, he held the position of Director, Manufacturing and Regulatory
Affairs at Novartis and from January 1992 to January 1995 he served as Senior
Product Development Manager at Novartis. Dr. Tebbit holds a Ph.D. from Oregon
State University and a B.S. degree from Northern Illinois University.

David L. Hines, Ph.D. has served as Vice President, Product Development
and Regulatory Affairs since February 1997. Prior to joining the Company, Dr.
Hines was the manager of Virus Vaccine Research and Development for Solvay
Animal Health, Inc., where he was employed from February 1989 to December 1995.
He holds Ph.D. and B.Sc. degrees from The Ohio State University.

Elizabeth Hodgkins, D.V.M. has served as Vice President, Marketing of the
Company since October 1996. From June 1985 until August 1993, Dr. Hodgkins held
a variety of positions in customer relations and marketing with Hill's Pet
Nutrition Inc. Prior to 1985, Dr. Hodgkins was an Instructor in Residence in
Veterinary Microbiology at the University of California at Davis and an
Oncological Specialist and Associate Clinician at Silverado Veterinary Hospital
in Napa, CA. She holds D.V.M. and B.S. degrees from the University of
California, Davis and a J.D. degree from the University of Kansas.

Paul Hudnut, J.D. has served as Vice President of Business Development of
the Company since June 1996. Prior to joining the Company, Mr. Hudnut was a
General Manager at US WEST Media Group. He held positions in management and
business development at subsidiaries of US WEST Inc. from February 1988 until
joining the Company. Prior to joining US WEST Inc., Mr. Hudnut was associated
with the Denver, Colorado law firm of Davis, Graham & Stubbs. He holds a J.D.
degree from the University of Virginia and a B.A. degree from The Colorado
College.

Deborah E. Robbins, J.D. is Vice President, General Counsel and Secretary
of the Company. She has served in that position since April 1996. From February
1990 until joining the Company, Ms. Robbins was a partner with the Mountain
View, California law firm of General Counsel Associates, and prior to that time
was an associate and partner in the Palo Alto, California law firm of Wilson,
Sonsini, Goodrich & Rosati. She holds a J.D. degree from the University of
Chicago and a B.A. degree from Wellesley College.

Keith E. Rushlow, Ph.D. has served as Vice President of Science and
Technology of the Company since December 1995. From April 1993 until December
1993, he was Senior Director, Molecular Biology. From December 1993 to December
1994, he was Director of Research. From December 1994 to December 1995, he was
Vice President, Research. From September 1990 until joining the Company, Dr.
Rushlow was a Research Associate Professor at the University of Pittsburgh
School of Medicine and Associate Faculty at the Pittsburgh Cancer Institute. Dr.
Rushlow has also held various scientific and research management positions with
the National Cancer Institute, Battelle Memorial Institute and
Syngene/TechAmerica. He holds a Ph.D. degree from the University of Colorado and
a B.S. degree from the University of Michigan.

Dan T. Stinchcomb, Ph.D. has served as Vice President of Biochemistry and
Molecular Biology for the Company since May 1996. Prior to joining the Company,
from July 1993 until May 1996 Dr. Stinchcomb was employed at Ribozyme
Pharmaceuticals, Inc., most recently as Director of Biology Research. From 1988
until April 1993, Dr. Stinchcomb held various positions with Synergen, Inc.
Prior to joining Synergen, Dr. Stinchcomb was an Associate Professor in Cellular
and Developmental Biology at Harvard University. He holds a Ph.D. degree from
Stanford University and a B.A. degree from Harvard University.

Carol Talkington Verser, Ph.D. has served as Vice President of Intellectual
Property of the Company since June 1996. From July 1995 until June 1996, Dr.
Verser was the Director of Intellectual Property for the Company. She was a
patent agent for the law firm of Sheridan, Ross & McIntosh in Denver, Colorado
from 1991 until 1995

43
<PAGE> 46

and from 1990 through 1992 was a writer and contributing editor for Bioworld
Today. From 1986 until 1989, she was a director at BioGrowth Inc. She holds a
Ph.D. degree from Harvard University and a B.S. degree from the University of
Southern California.

Donald L. Wassom, Ph.D. has served as Vice President of Allergy and
Immunology of the Company since January 1996. From May 1992 until January 1996,
Dr. Wassom was Professor of Parasitology at Colorado State University. Dr.
Wassom has also held faculty positions at the University of Wisconsin and
Cornell University. He holds Ph.D. and B.S. degrees from the University of Utah.

Glade Weiser, D.V.M. has served as Vice President of Diagnostics of the
Company since April 1996. From October 1989 until January 1996, Dr. Weiser was
Professor and Chairperson for the Department of Pathology in the College of
Veterinary Medicine and Biomedical Sciences at Colorado State University. He was
a member of the faculty at the College of Veterinary Medicine of The Ohio State
University from July 1975 until December 1982. Dr. Weiser is a Diplomate of the
American College of Veterinary Pathologists. He holds D.V.M. and B.S. degrees
from the University of California, Davis.

Kenneth Williams has served as Vice President of Sales of the Company since
February 1997. From 1988 until joining the Company, he was Director of Field
Sales for Ciba-Geigy Animal Health. He holds a B.S. degree from Virginia
Polytechnic Institute.

Mr. Schwarzer and Ms. Robbins are husband and wife. There are no other
family relationships among any of the directors or executive officers of the
Company.

BOARD COMPOSITION AND COMMITTEES

Effective upon the closing of this offering, the Company's Board of
Directors will be divided into three classes, with one class of directors
elected each year at the annual meeting of stockholders for a three-year term of
office. All directors of one class hold their positions until the annual meeting
of stockholders at which their respective successors are elected and qualified.
Mr. Schwarzer and Dr. Tebbit serve in the class whose term expires in 1998; Dr.
Grieve and Mr. Dolan serve in the class whose term expires in 1999; and Mr.
Pomroy, Dr. Stevenson and Dr. Hohnke serve in the class whose term expires in
2000. Officers are elected at the first board of directors meeting following the
stockholders' meeting at which the directors are elected and serve at the
discretion of the Board of Directors.

Mr. Dolan was appointed to the Company's Board of Directors in connection
with initial and subsequent equity investments in the Company by Charter
Ventures and Charter Ventures II, L.P. (collectively, "Charter"). Dr. Tebbit was
appointed to the Board of Directors in connection with an equity investment in
the Company by Novartis. Mr. Pomroy was appointed to the Board of Directors of
the Company in connection with an investment in the Company by Volendam
Investeringen N.V. ("Volendam"). Volendam, Charter and Novartis are parties to a
voting agreement with the Company pursuant to which each entity is entitled to
elect one director to the Company's Board of Directors for as long as each
entity owns a specified amount of the Company's voting stock. See "Description
of Capital Stock -- Voting Agreement." Dr. Hohnke was appointed to the Board of
Directors of the Company in connection with the Company's April 1996 acquisition
of Diamond.

The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Messrs. Dolan and
Pomroy and Dr. Tebbit, reviews the results and scope of the annual audit and the
services provided by the Company's independent accountants. The Compensation
Committee, which consists of Mr. Dolan, Dr. Hohnke and Dr. Stevenson, makes
recommendations to the Board of Directors with respect to general and specific
compensation policies and practices of the Company and administers its 1997
Stock Incentive Plan and 1997 Employee Stock Purchase Plan. Mr. Schwarzer also
attends meetings of the Compensation Committee, other than discussions relating
to his own compensation, but does not vote on any matters.

44
<PAGE> 47

COMPENSATION OF OUTSIDE DIRECTORS

Directors do not receive any fees for service on the Board of Directors,
but are reimbursed for their expenses for each meeting attended. Directors are
eligible to participate in the Company's 1997 Stock Incentive Plan described
below. As of the date of this Prospectus, one outside director purchased an
aggregate of 25,000 shares of Common Stock at a price of $1.20 per share
pursuant to an award made under a prior stock plan. In March 1997, each outside
director was granted an option to purchase 2,000 shares of Common Stock at an
exercise price of $3.00 per share under the 1997 Stock Incentive Plan. Dr.
Tebbit has declined this option in accordance with Novartis policies. Mr. Dolan
assigned his option in equal portions to Charter Ventures and Charter Ventures
II, L.P. as required by their partnership agreements. The Company expects that
there will be no further discretionary grants of options to outside directors
after the date of this offering, although outside directors will be entitled to
certain automatic grants under the 1997 Stock Incentive Plan. See "-- Stock
Option Plan."

EXECUTIVE COMPENSATION

The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's other most highly compensated
executive officers whose total annual salary and bonus exceeded $100,000, for
services rendered in all capacities to the Company during the fiscal year ended
December 31, 1996.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION OTHER SECURITIES
NAME AND FISCAL --------------------- ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY($)(1) BONUS COMPENSATION OPTIONS(#)
------------------ ------ ------------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Fred M. Schwarzer................... 1996 $200,000 -- -- 150,000
President and Chief Executive
Officer
Robert B. Grieve.................... 1996 190,000 -- -- 150,000
Chief Scientific Officer and Vice
Chairman
R. Lee Seward....................... 1996 180,000 -- -- --
Executive Vice President
Louis G. Van Daele.................. 1996.. 115,098(2) -- -- 14,685
President, Diamond
</TABLE>

- ---------------

(1) Salary includes amounts, if any, deferred pursuant to 401(k) arrangements.

(2) Mr. Van Daele's employment with the Company commenced in April 1996
following the Company's acquisition of Diamond.

45
<PAGE> 48

The following tables set forth certain information as of December 31, 1996
and for the fiscal year then ended with respect to stock options granted to and
exercised by the individuals named in the Summary Compensation Table above who
received option grants in 1996.

OPTION GRANTS IN FISCAL YEAR 1996

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENTAGE OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OR OPTION TERM(4)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(1) FISCAL YEAR ($/SHARE)(2) DATE(3) 5%($) 10%($)
---- ---------- --------------- ------------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Fred M. Schwarzer...... 150,000 18.87% $1.20 6/21/06 $113,201 $286,874
Robert B. Grieve....... 150,000 18.87 1.20 6/21/06 113,201 286,874
Louis G. Van Daele..... 13,975 1.75 1.20 5/21/06 10,430 26,365
710(5) .09 1.20 4/19/06 536 1,358
</TABLE>

- ---------------

(1) The right to exercise these stock options vests ratably on a monthly basis
over a four year period. Under the terms of the Company's stock plans, the
committee designated by the Board of Directors to administer such plans
retains the discretion, subject to certain limitations, to modify, extend or
renew outstanding options and to reprice outstanding options. Options may be
repriced by canceling outstanding options and reissuing new options with an
exercise price equal to the fair market value on the date of reissue, which
may be lower than the original exercise price of such canceled options.

(2) The exercise price is equal to 100% of the fair market value on the date of
grant.

(3) The options have a term of 10 years, subject to earlier termination in
certain events related to termination of employment.

(4) The 5% and 10% assumed rates of appreciation are suggested by the rules of
the Securities and Exchange Commission and do not represent the Company's
estimate or projection of the future Common Stock price. There can be no
assurance that any of the values reflected in the table will be achieved.

(5) These incentive stock options were fully vested as of the date of grant.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL 1996 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fred M. Schwarzer......... -- -- 76,979 196,021 $ 51,984 $55,066
Robert B. Grieve.......... -- -- 180,416 179,584 156,270 41,230
R. Lee Seward............. 30,000 $25,500 -- 50,000 -- 42,500
Louis G. Van Daele........ -- -- 3,039 11,646 -- --
</TABLE>

- ---------------

(1) These values were calculated on the basis of the fair market value of the
underlying securities at the exercise date minus the applicable per share
exercise price.

(2) There was no public trading market for the Common Stock as of December 31,
1996. These values were calculated on the basis of the fair market value of
the Common Stock at December 31, 1996 ($1.20), as determined by the
Company's Board of Directors, minus the applicable per share exercise price.

46
<PAGE> 49

EMPLOYMENT AGREEMENTS

The Company has entered into employment agreements with each of Fred M.
Schwarzer, its Chief Executive Officer, Robert B. Grieve Ph.D., its Chief
Scientific Officer and Vice Chairman, and R. Lee Seward D.V.M., an Executive
Vice President. These agreements provide for severance payments if the
employment of the individual is terminated without cause, including terminations
in connection with a change in control of the Company. In the case of Mr.
Schwarzer and Dr. Grieve, the payments would be one year's salary plus an
additional one year of vesting under any stock arrangements if the termination
takes place at any time on or before December 31, 1999, or six months' salary
and an additional six months' vesting under any stock arrangements if the
termination takes place after that date. In the case of Dr. Seward, the
severance payment would be one year's salary if the termination takes place at
any time on or before October 17, 1997 and six months' salary if the termination
takes place after that date. Additionally, Louis G. Van Daele, President of
Diamond, has an employment agreement with Diamond, pursuant to which Mr. Van
Daele is entitled to severance payments equal to one year of salary payable in
twelve monthly installments if he is terminated without cause prior to April
2000.

STOCK OPTION PLAN

In March 1997, the Company's Board of Directors adopted the Company's 1997
Stock Incentive Plan (the "Stock Plan"). The Stock Plan replaces the Company's
1988 Stock Plan and its 1994 Key Executive Plan (the "Prior Plans"). The Prior
Plans were terminated effective upon the adoption of the Stock Plan. No further
grants will be made under the Prior Plans, although they will continue to govern
all outstanding awards made thereunder. All future awards will be made under the
Stock Plan. The number of shares of Common Stock that are reserved for issuance
under the Stock Plan pursuant to the direct award or sale of shares or the
exercise of options is equal to 1,350,000 shares plus the number of shares
remaining available under the Prior Plans on the date of their termination. If
any options granted under the Stock Plan or under the Prior Plans are forfeited
or terminate for any other reason without having been exercised in full, then
the unpurchased shares subject to those options will become available for
additional grants under the Stock Plan. If shares granted or purchased under the
Stock Plan are forfeited, then those shares will also become available for
additional grants under the Stock Plan. The number of shares reserved for
issuance under the Stock Plan will be increased automatically on January 1 of
each year by a number equal to the lesser of (a) 1,500,000 shares or (b) 5% of
the shares of Common Stock outstanding on the immediately preceding December 31.

Under the Stock Plan, all employees (including officers) and directors of
the Company or any subsidiary and any independent contractor or advisor who
performs services for the Company or a subsidiary are eligible to purchase
shares of Common Stock and to receive awards of shares or grants of nonstatutory
options. Employees are also eligible to receive grants of incentive stock
options ("ISOs") intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"). The Stock Plan is administered by the
Compensation Committee of the Board of Directors, which selects the persons to
whom shares will be sold or awarded or options will be granted, determines the
number of shares to be made subject to each sale, award or grant, and prescribes
the other terms and conditions of each sale, award or grant, including the type
of consideration to be paid to the Company upon sale or exercise and the vesting
schedule.

The exercise price under any nonstatutory options generally must be at
least 85% of the fair market value of the Common Stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value of
the Common Stock on the date of grant and, in the case of ISOs granted to
holders of more than 10% of the voting power of the Company, not less than 110%
of such fair market value. The term of an ISO cannot exceed 10 years, and the
term of an ISO granted to a holder of more than 10% of the voting power of the
Company cannot exceed five years.

Beginning after this offering, each new non-employee director who is
elected to the Company's Board of Directors will automatically be granted as of
the date of election an option to purchase 10,000 shares of Common Stock at an
exercise price equal to the fair market value of the Common Stock on the date of
grant. The shares subject to these options will vest in four equal installments
at annual intervals over the four-year period commencing on the date of grant.
In addition, each non-employee director who will continue to serve following any
annual meeting of stockholders will automatically be granted an option as of the
date of such meeting to

47
<PAGE> 50

purchase 2,000 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on the date of grant. The shares subject to
these options will vest on the first anniversary of grant. No director will
receive the 10,000-share grant and a 2,000-share grant in the same year.

EMPLOYEE STOCK PURCHASE PLAN

In April 1997, the Board of Directors of the Company adopted the 1997
Employee Stock Purchase Plan (the "ESPP") to provide employees of the Company
with an opportunity to purchase Common Stock through payroll deductions. The
ESPP will be submitted to the stockholders of the Company for approval. Under
the ESPP, 250,000 shares of Common Stock have been reserved for issuance. The
ESPP is expected to become effective at the time of this Offering. All full-time
regular employees who are employed by the Company or Diamond on the date of this
Prospectus, will be eligible to participate in the ESPP.

Eligible employees may participate in the ESPP by authorizing payroll
deductions of a specified percentage of their total cash compensation. Amounts
withheld are applied at the end of every six-month accumulation period to
purchase shares of Common Stock. The value of the Common Stock (determined as of
the beginning of the offering period) that may be purchased by any participant
in a calendar year is limited to $25,000. Participants may withdraw their
contributions at any time before stock is purchased.

The purchase price is equal to 85% of the lower of (a) the market price of
Common Stock immediately before the beginning of the applicable offering period
or (b) the market price of Common Stock at the time of the purchase. In general,
each offering period is 24 months long, but a new offering period begins every
six months. Thus, up to four overlapping offering periods may be in effect at
the same time. An offering period continues to apply to a participant for the
full 24 months, unless the market price of Common Stock is lower when a
subsequent offering period begins. In that event, the subsequent offering period
automatically becomes the applicable period for purposes of determining the
purchase price. The first accumulation and offering periods are expected to
commence on the date of this Prospectus and will end on December 31, 1997 and
June 30, 1999, respectively.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company has adopted provisions in its Restated Certificate of
Incorporation that limit the liability of its directors for monetary damages for
breach of their fiduciary duty as directors, except for liability that cannot be
eliminated under the Delaware General Corporation Law ("Delaware Law"). Delaware
Law provides that directors of a company will not be personally liable for
monetary damages for breach of their fiduciary duty as directors, except for
liability (i) for any breach of their duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment
of dividends or unlawful stock repurchases or redemptions, as provided Section
174 of the Delaware Law, or (iv) for any transaction from which the director
derived an improper personal benefit. Any amendment or repeal of these
provisions requires the approval of the holders of shares representing at least
66 2/3% of the shares of the Company entitled to vote in the election of
directors, voting as one class.

The Company's Restated Certificate of Incorporation and Bylaws also provide
that the Company may indemnify its directors and officers to the fullest extent
permitted by Delaware Law. The Company has entered into separate indemnification
agreements with its directors and executive officers that could require the
Company, among other things, to indemnify them against certain liabilities that
may arise by reason of their status or service as directors or executive
officers and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. The Company believes that
the limitation of liability provision in its Restated Certificate of
Incorporation and the indemnification agreements will facilitate the Company's
ability to continue to attract and retain qualified individuals to serve as
directors and officers of the Company.

48
<PAGE> 51

CERTAIN TRANSACTIONS

The Company has historically sold its Preferred Stock in private placements
to venture capital firms. Since January 1994, the Company has sold an aggregate
of 3,928,085 shares of Series E Preferred Stock in a series of private
financings for $3.25 per share and 3,000,000 shares of Series F Preferred Stock
for $12.00 per share (all shares of Preferred Stock will convert into Common
Stock upon the closing of this offering). The purchasers of the Preferred Stock
include the following directors, holders of more than 5% of the Company's
securities, and entities associated with the Company's directors:

<TABLE>
<CAPTION>
SHARES OF PREFERRED STOCK
PURCHASED
--------------------------
SERIES E SERIES F
----------- -----------
<S> <C> <C>
Entities associated with Charter Ventures................... 851,162 --
Volendam Investeringen, N.V. ............................... 3,076,923 --
Denis H. Pomroy(1).......................................... 3,076,923 --
A. Barr Dolan(2)............................................ 851,162 --
Novartis.................................................... -- 3,000,000
Guy Tebbit Ph.D.(3)......................................... 3,000,000
</TABLE>

- ---------------

(1) Represents shares held by Volendam Investeringen N.V. with respect to which
Mr. Pomroy disclaims beneficial ownership except to the extent of his
proportionate share therein. Mr. Pomroy, a director of the Company, is the
president of Volendam Capital Advisors, which advises and manages
investments for Volendam Investeringen, N.V. and may be deemed to be a
beneficial owner of the shares held by Volendam Investeringen N.V. because
of shared voting power with respect to such shares.

(2) Represents shares held by Charter Ventures and Charter Ventures II, L.P.
with respect to which Mr. Dolan disclaims beneficial ownership except to the
extent of his proportionate share therein. Mr. Dolan, a director of the
Company, is a general partner of each of Charter Ventures and Charter
Ventures II, L.P. and may be deemed to be a beneficial owner of the shares
held by such entities because of shared voting power with respect to such
shares.

(3) Represents shares held by Novartis, by whom Dr. Tebbit is employed. Dr.
Tebbit does not share voting or investment power with respect to such shares
and disclaims beneficial ownership thereof.

The purchasers of the above shares of Preferred Stock are entitled to
registration rights. See "Description of Capital Stock -- Preferred Stock."

In connection with its purchase of Series F Preferred Stock, Novartis was
granted marketing rights to certain of the Company's products under development.
In addition, the Company entered into a Screening and Development Agreement and
Right of First Refusal Agreement with Novartis. See "Business -- Collaborative
Agreements" for a description of these agreements. Novartis did not make any
separate payments for these rights.

See "Management -- Employment Agreements" for a description of employment
agreements between the Company and certain executive officers. For information
concerning indemnification of directors and officers, see
"Management -- Limitation of Liability and Indemnification Matters."

In March 1995, the Company converted $638,567 of indebtedness to entities
associated with Charter Ventures, a principal stockholder of the Company, to
shares of Series E Preferred Stock at $3.25 per share. In December 1994, the
Company converted $2,127,708 of indebtedness to Charter Ventures to shares of
Series E Preferred Stock at $4.00 per share. In connection with the sale of
Series E Preferred Stock in March 1995 at $3.25 per share, the Company effected
a 1.23 to one split of the Series E Preferred Stock to bring the effective
purchase price of the shares purchased at $4.00 to $3.25. A total of 122,753
shares was issued to Charter Ventures as a result of this stock split.

Mr. Schwarzer purchased an aggregate of 177,000 shares of Common Stock from
the Company in February 1995 at a purchase price of $.35 per share, paid by a
full recourse promissory note in the initial principal amount of $61,950. The
note bears interest at 7 1/2% per annum, compounded annually, and is due in full
in February 2001. Mr. Schwarzer is a special limited partner of Charter Ventures
II, L.P.

49
<PAGE> 52

In May 1997, the Company acquired all of the outstanding capital stock of
Astarix Institute, Inc. in exchange for 70,000 shares of the Company's Series E
Preferred Stock and 376,000 shares of the Company's Common Stock. Charter
Ventures II, L.P., a principal stockholder of the Company, was the only
preferred stockholder of Astarix Institute, Inc. and received 70,000 shares of
the Company's Series E Preferred Stock in this transaction.

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of May 28, 1997 and as adjusted to
reflect the sale by the Company and the Selling Stockholder of the shares
offered hereby (assuming no exercise of the Underwriters' over-allotment
option), by: (i) each person who is known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) each of the Company's
directors, (iii) each of the Company's officers named under "Management --
Summary Compensation Table," and (iv) all directors and executive officers of
the Company as a group.

<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES
BENEFICIALLY
OWNED(1)
SHARES BENEFICIALLY -------------------
OWNED PRIOR NUMBER OF PRIOR TO AFTER
TO OFFERING(1) SHARES OFFERED OFFERING OFFERING
------------------- -------------- -------- --------
<S> <C> <C> <C> <C>
Entities associated with
Charter Ventures(2)........................... 3,716,924 -- 30.2% 21.5%
525 University Avenue
Suite 1500
Palo Alto, CA 94301
Novartis Produkte AG............................ 3,000,000 -- 24.4 17.3
Klybeckstrasse A4A
4002 Basel
Switzerland
Volendam Investeringen, N.V..................... 3,076,923 350,000 25.0 17.8
14 John B. Gorsiraweg
P.O. Box 3889
Curacao, Netherlands Antilles
A. Barr Dolan(3)................................ 3,716,924 -- 30.2 21.5
Robert B. Grieve, Ph.D.(4)(9)................... 320,261 -- 2.6 1.8
Lyle A. Hohnke, Ph.D.(9)........................ 94,217 -- * *
Denis H. Pomroy(5)(9)........................... 3,103,923 -- 25.2 17.9
Fred M. Schwarzer(6)(9)......................... 298,166 -- 2.4 1.7
Lynnor B. Stevenson, Ph.D.(9)................... 227,000 -- 1.8 1.3
Guy Tebbit, Ph.D.(7)............................ 3,000,000 -- 24.4 17.3
R. Lee Seward, D.V.M.(8)(9)..................... 163,334 -- 1.3 *
Louis G. Van Daele(9)........................... 111,245 -- * *
All directors and executive officers as a group
(12 persons)(9)(10)........................... 11,063,456 -- 87.1 62.5
</TABLE>

- ---------------

* Less than 1%.

(1) To the Company's knowledge, the persons named in the table have sole voting
and investment power with respect to all shares of Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power
with respect to securities. Shares of Common Stock issuable upon exercise
of stock options exercisable within 60 days of May 30, 1997 are deemed
outstanding and to be beneficially owned by the person holding such option
for purposes of computing such person's percentage

50
<PAGE> 53

ownership, but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.

(2) Includes 3,385,510 shares and options to purchase 1,000 shares of Common
Stock held by Charter Ventures and 329,414 shares and options to purchase
1,000 shares of Common Stock held by Charter Ventures II, L.P.

(3) Represents shares and options held by Charter Ventures and Charter Ventures
II, L.P., with respect to which Mr. Dolan disclaims beneficial ownership
except to the extent of his proportionate share therein. Mr. Dolan, a
director of the Company, is a general partner of each of Charter Ventures
and Charter Ventures II, L.P., and may be deemed a beneficial owner of the
shares held by such entities because of shared voting power with respect to
such shares.

(4) Includes options to purchase 14,844 shares of Common Stock held by Dr.
Grieve's wife, with respect to which Dr. Grieve disclaims beneficial
ownership.

(5) Includes 3,076,923 shares held by Volendam Investeringen, N.V., with
respect to which Mr. Pomroy disclaims beneficial ownership except to the
extent of his proportionate interest therein, and 20,320 shares of Common
Stock subject to repurchase by the Company.

(6) Includes 4,125 shares of Common Stock and options to purchase 2,333 shares
of Common Stock held by Mr. Schwarzer's wife, with respect to which Mr.
Schwarzer disclaims beneficial ownership, and 90,054 shares of Common Stock
subject to repurchase by the Company.

(7) Represents shares held by Novartis, with respect to which Dr. Tebbit
disclaims beneficial ownership.

(8) Includes 37,500 shares of Common Stock subject to repurchase by the
Company.

(9) Includes an aggregate of 392,542 shares of Common Stock issuable upon
exercise of stock options currently exercisable within 60 days of May 30,
1997 as follows: Dr. Grieve, 215,417; Dr. Hohnke, 7,826; Mr. Pomroy, 2,000;
Mr. Schwarzer, 114,708; Dr. Stevenson, 2,000; Dr. Seward, 13,334; Mr. Van
Daele, 5,077; and Dr. Shadduck, 32,180.

(10) Includes shares held by entities referenced in footnotes 2, 5 and 7 which
are affiliated with certain directors.

51
<PAGE> 54

DESCRIPTION OF CAPITAL STOCK

Upon the closing of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $.001 par value, and
25,000,000 shares of Preferred Stock, $.001 par value.

COMMON STOCK

As of May 28, 1997 there were 12,305,990 shares of Common Stock outstanding
held by approximately 113 stockholders of record. Such figures assume the
conversion of each outstanding share of Preferred Stock upon the closing of this
offering into one share of Common Stock.

The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of Common Stock entitled to vote in any
election of directors can elect all of the directors standing for election, if
they so choose (subject to the Voting Agreement described below). Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors out of funds legally available
therefor. See "Dividend Policy." Upon a liquidation, dissolution or winding up
of the Company, the holders of Common Stock will be entitled to share ratably in
the net assets legally available for distribution to stockholders after the
payment of all debts and other liabilities of the Company, subject to the prior
rights of any Preferred Stock then outstanding. Holders of Common Stock have no
preemptive or conversion rights or other subscription rights and there are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of this offering will be, fully paid and nonassessable.

PREFERRED STOCK

Upon the closing of this offering, all outstanding shares of Preferred
Stock will be converted into Common Stock. See Note 10 of Notes to Consolidated
Financial Statements for a description of the currently outstanding Preferred
Stock. Following the conversion, the Company's Certificate of Incorporation will
be restated to delete all references to the prior series of Preferred Stock and
25,000,000 shares of undesignated Preferred Stock will be authorized. The Board
of Directors has the authority, without further action by the stockholders, to
issue from time to time the Preferred Stock in one or more series and to fix the
number of shares, designations, preferences, powers, and relative,
participating, optional or other special rights and the qualifications or
restrictions thereof. The preferences, powers, rights and restrictions of
different series of Preferred Stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to holders of Common Stock or affect adversely the
rights and powers, including voting rights, of the holders of Common Stock and
may have the effect of delaying, deferring or preventing a change in control of
the Company. The Company has no present plans to issue any shares of Preferred
Stock.

WARRANTS

In connection with certain equipment financing transactions, the Company
issued to the equipment lessor warrants (collectively, the "Warrants") to
purchase 6,400 shares of Series C Preferred Stock with an exercise price of
$2.50 and warrants to purchase 24,992 shares of Series D Preferred Stock with an
exercise price of $3.25. All of such Warrants remain outstanding as of May 28,
1997. Upon the closing of this offering, such Warrants will become exercisable
for Common Stock at the rate of one share of Common Stock for each share of
Preferred Stock underlying such Warrants.

REGISTRATION RIGHTS

After this offering, the holders of 10,500,000 shares of Common Stock
issued upon conversion of the Company's Preferred Stock (including shares
issuable upon exercise of Warrants (collectively, the "Registrable Shares")), or
their permitted transferees, are entitled to certain rights with respect to the
registration of such

52
<PAGE> 55

shares under the Securities Act. If the Company proposes to register any of its
securities under the Securities Act for its own account or the account of any of
its stockholders other than the holders of the Registrable Shares, holders of
such Registrable Shares are entitled, subject to certain limitations and
conditions, to notice of such registration and are, subject to certain
conditions and limitations, entitled to include Registrable Shares therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in such registration. In
addition, commencing 180 days after the effective date of the Registration
Statement of which this Prospectus is a part, the Company may be required to
prepare and file a registration statement under the Securities Act at its
expense if requested to do so by the holders of at least 35% of the Registrable
Shares, provided the reasonably expected aggregate offering price will equal or
exceed $5,000,000 including underwriting discounts and commissions. The Company
is required to use its best efforts to effect such registration, subject to
certain conditions and limitations. The Company is not obligated to effect more
than two of such stockholder-initiated registrations. Further, holders of
Registrable Shares may require the Company to file additional registration
statements on Form S-3, subject to certain conditions and limitations.

VOTING AGREEMENT

In connection with certain investments in the Company by each of Novartis,
Volendam and Charter (collectively, the "Investors"), the Investors entered into
a Voting Agreement dated as of April 12, 1996 (the "Voting Agreement"), whereby
each Investor agreed to vote or act with respect to all shares of the Company's
voting securities now owned or subsequently acquired by such Investor such that
one designee of each of Novartis, Volendam and Charter shall be elected to the
Board of Directors of the Company. The Investors further agreed to vote their
shares in such manner to elect as the remaining directors of the Company
individuals unaffiliated with any of the Investors but who are reasonably
acceptable to all of the Investors. By executing the Voting Agreement, the
Company agreed to use its best efforts to cause the nominee of each of Novartis,
Volendam and Charter to be elected to the Company's Board of Directors. The
Voting Agreement terminates on December 31, 2005 unless prior to such date any
of the Investors ceases to beneficially hold 2,000,000 shares (as adjusted for
stock splits, recapitalizations and similar events) of the voting stock of the
Company.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

The Company is subject to the provisions of Section 203 of the Delaware
Law, an anti-takeover law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a business combination with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes a merger, asset sale or other transaction resulting in financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.

Upon the closing of this offering, the Company's Restated Certificate of
Incorporation will provide for a classified board of directors and will
eliminate the right of stockholders to call special meetings of stockholders.
The provisions described above, together with the ability of the Board of
Directors to issue Preferred Stock as described under "--Preferred Stock," may
have the effect of deterring a hostile takeover or delaying a change in control
or management of the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American
Securities Transfer and Trust, Inc.

53
<PAGE> 56

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering there has been no public market for the Common Stock
of the Company and no predictions can be made regarding the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. As described below, only a limited
number of shares will be available for sale shortly after this offering due to
certain contractual and legal restrictions on resale. Nevertheless, sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price.

Upon completion of this offering, the Company will have outstanding
17,305,990 shares of Common Stock assuming: (i) no exercise of the Underwriter's
over-allotment option; and (ii) no exercise of outstanding options and warrants.
The 5,350,000 shares of Common Stock being sold hereby will be freely tradable
(other than by an "affiliate" of the Company as such term is defined in the
Securities Act) without restriction or registration under the Securities Act.
All remaining shares were issued and sold by the Company in private transactions
("Restricted Shares") and are eligible for public sale if registered under the
Securities Act or sold in accordance with Rule 144 or Rule 701 thereunder. The
Company's directors, executive officers and certain stockholders, who
collectively hold an aggregate of approximately 11,000,000 shares of Common
Stock, have agreed pursuant to certain agreements that they will not sell any
Common Stock owned by them without the prior written consent of Credit Suisse
First Boston Corporation for a period of 180 days from the effective date of the
Registration Statement of which this Prospectus is a part (the "Lockup Period").
Approximately 283,000 Restricted Shares will be eligible for immediate sale in
the public market pursuant to Rule 144(k) under the Securities Act as of the
date of this Prospectus. Beginning 90 days after the date of this Prospectus,
approximately 377,000 additional Restricted Shares will be eligible for sale in
the public market pursuant to Rule 144 and Rule 701 under the Securities Act.
Following the expiration of the Lockup Period, approximately 12,000,000 shares
of Common Stock, including 1,177,555 shares issuable upon the exercise of
certain options, will be available for sale in the public market subject to
compliance with Rule 144 or Rule 701. See "Underwriting."

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an affiliate of the Company, or a holder of
Restricted Shares who owns beneficially shares that were not acquired from the
Company or an affiliate of the Company within the prior year, would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of 1% of the then outstanding shares of Common Stock (approximately
173,000 shares immediately after this offering, assuming no exercise of the
Underwriters' over-allotment option) or the average weekly trading volume of the
Common Stock during the four calendar weeks preceding the date on which notice
of the sale is filed with the Securities and Exchange Commission (the
"Commission"). Sales under Rule 144 are subject to certain requirements relating
to manner of sale, notice and availability of current public information about
the Company. However, a person (or persons whose shares are aggregated) who is
not deemed to have been an affiliate of the Company at any time during the 90
days immediately preceding the sale and who owns beneficially Restricted Shares
is entitled to sell such shares under Rule 144(k) without regard to the
limitations described above; provided that at least two years have elapsed since
the later of the date the shares were acquired from the Company or from an
affiliate of the Company. The foregoing is a summary of Rule 144 and is not
intended to be a complete description.

Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this offering, along with the shares acquired upon exercise of such
options. Securities issued in reliance on Rule 701 are deemed to be Restricted
Shares and, beginning 90 days after the date of this Prospectus (unless subject
to the contractual restrictions described above), may be sold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year minimum holding
period requirements.

The Company intends to file a registration statement under the Securities
Act covering approximately 4,000,000 shares of Common Stock reserved for
issuance under the Stock Plan and ESPP. Such registration statement is expected
to be filed soon after the date of this Prospectus and will automatically become
effective

54
<PAGE> 57

upon filing. Accordingly, shares registered under such registration statement
will be available for sale in the open market, unless such shares are subject to
vesting restrictions with the Company or the contractual restrictions described
above.

In addition, after this offering, the holders of approximately 10,500,000
shares of Common Stock will be entitled to certain rights to cause the Company
to register the sale of such shares under the Securities Act. Registration of
such shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock -- Registration Rights."

55
<PAGE> 58

UNDERWRITING

Under the terms and subject to the conditions contained in an Underwriting
Agreement dated , 1997 (the "Underwriting Agreement"), the
Underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated are
acting as representatives (the "Representatives"), have severally but not
jointly agreed to purchase from the Company and the Selling Stockholder the
following respective numbers of shares of Common Stock:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated....................................

---------
Total............................................. 5,350,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below), if any are purchased. The Underwriting Agreement provides
that, in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of the non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.

The Company has granted to the Underwriters an option, expiring on the
close of business on the 30th day after the date of this Prospectus, to purchase
up to 802,500 additional shares from the Company at the initial public offering
price less the underwriting discounts and commissions, all as set forth on the
cover page of this Prospectus. Such option may be exercised only to cover
over-allotments in the sale of the shares of Common Stock. To the extent such
option is exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares of Common Stock as it was obligated to purchase pursuant to the
Underwriting Agreement.

The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares offered hereby
to the public initially at the public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession of
$ per share, and the Underwriters and such dealers may allow a discount
of $ per share on sales to certain other dealers. After the initial
public offering, the public offering price and concession and discount to
dealers may be changed by the Representatives.

Prior to this Offering, there has been no public market for the Common
Stock. The initial price to the public for the shares of Common Stock will be
determined by negotiation among the Company, the Selling Stockholder and the
Representatives and will be based on, among other things, the Company's
financial and operating history and condition, its prospects and the prospects
for its industry in general, the management of the Company and the market prices
for the securities of companies in businesses similar to that of the Company.

The Representatives have informed the Company and the Selling Stockholder
that they do not expect discretionary sales by the Underwriters to exceed 5% of
the Shares being offered hereby.

The Company, its officers and directors and certain other stockholders of
the Company, including the Selling Stockholder, have agreed that they will not
offer, sell, contract to sell, announce their intention to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to any additional
shares of Common Stock or securities convertible into or exchangeable

56
<PAGE> 59

or exercisable for any shares of Common Stock without the prior written consent
of Credit Suisse First Boston Corporation for a period of 180 days from the date
of this Prospectus, except (i) sales of Common Stock offered in this offering or
(ii) issuances of Common Stock by the Company pursuant to the exercise of
employee stock options outstanding on the date of this Prospectus or (iii)
issuances in specified acquisitions.

The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or contribute to payments which the Underwriters may be required
to make in respect thereof.

The Common Stock has been approved for listing on The Nasdaq Stock Market's
National Market under the symbol "HSKA", subject to notice of issuance.

The Representatives, on behalf of the Underwriters, may engage in
overallotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the Common Stock originally sold by such syndicate member
is purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the Common Stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

NOTICE TO CANADIAN RESIDENTS

RESALE RESTRICTIONS

The distribution of the Common Stock in Canada will be made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholder prepare and file a prospectus with the securities regulatory
authorities in each province where trades of the Common Stock are effected.
Accordingly, any resale of the Common Stock in Canada must be made in accordance
with applicable securities laws which will vary depending on the relevant
jurisdiction, and which may require resales to be made in accordance with
available statutory exemptions or pursuant to a discretionary exemption granted
by the applicable Canadian securities regulatory authority. Purchasers are
advised to seek legal advice prior to any resale of the Common Stock.

REPRESENTATIONS OF PURCHASERS

Each purchaser of the Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling Stockholder
and the dealer from whom such purchase confirmation is received that (i) such
purchaser is entitled under applicable provincial securities laws to purchase
such Common Stock without the benefit of a prospectus qualified under such
securities laws, (ii) where required by law, that such purchaser is purchasing
as principal and not as agent, and (iii) such purchaser has reviewed the text
above under "Resale Restrictions."

RIGHTS OF ACTION (ONTARIO PURCHASERS)

The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.

57
<PAGE> 60

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein and the Selling Stockholder may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.

NOTICE TO BRITISH COLUMBIA RESIDENTS

A purchaser of the Common Stock to whom the Securities Act (British
Columbia) applies is advised that such purchaser is required to file with the
British Columbia Securities Commission a report within ten days of the sale of
any Common Stock acquired by such purchaser pursuant to this offering. Such
report must be in the form attached to British Columbia Securities Commission
Blanket Order BOR #95/17, a copy of which may be obtained from the Company. Only
one such report must be filed in respect of the Common Stock acquired on the
same date and under the same prospectus exemption.

TAXATION AND ELIGIBILITY FOR INVESTMENT

Canadian purchasers of the Common Stock should consult their own legal and
tax advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.

LEGAL MATTERS

Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Pillsbury Madison & Sutro
LLP, San Francisco, California and for the Underwriters by Cooley Godward LLP,
Palo Alto, California and Boulder, Colorado.

EXPERTS

The consolidated financial statements of Heska Corporation included in this
Prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants as indicated in their report
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.

The statements of income and cash flows of Diamond Animal Health, Inc. for
the year ended March 31, 1996 included in this Prospectus and elsewhere in the
Registration Statement have been audited by McGladrey & Pullen, LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.

The statements of income and cash flows of Diamond Animal Health, Inc. for
the year ended March 31, 1995 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.

58
<PAGE> 61

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock offered hereby, reference is hereby made to such Registration
Statement, exhibits and schedules. Statements contained in this Prospectus
regarding the contents of any contract or other document are not necessarily
complete; with respect to each such contract or document filed as an exhibit to
the Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. A copy of the Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of such material may be obtained from
such office upon payment of the fees prescribed by the Commission.

In addition, the Commission maintains a World Wide Web site on the Internet
at http://www.sec.gov that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.

59
<PAGE> 62

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HESKA CORPORATION
Report of Independent Public Accountants.................. F-2
Consolidated Balance Sheets as of December 31, 1995 and
1996 and March 31, 1997 (unaudited) and on a pro forma
basis as of March 31, 1997 (unaudited)................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997 (unaudited)....... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1994, 1995 and 1996 and the
three months ended March 31, 1997 (unaudited).......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and for the three
months ended March 31, 1996 and 1997 (unaudited)....... F-6
Notes to Consolidated Financial Statements................ F-7

DIAMOND ANIMAL HEALTH, INC.
Report of Independent Accountants (McGladrey & Pullen
LLP)................................................... F-24
Report of Independent Auditors (Ernst & Young LLP)........ F-25
Statements of Income for the years ended March 31, 1995
and 1996............................................... F-26
Statements of Cash Flows for the years ended March 31,
1995 and 1996.......................................... F-27
Notes to Financial Statements............................. F-28
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION...... F-31
</TABLE>

F-1
<PAGE> 63

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of Heska Corporation:

We have audited the accompanying consolidated balance sheets of Heska
Corporation and subsidiary as of December 31, 1995 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the three years ended December 31, 1994, 1995 and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heska Corporation and
subsidiary as of December 31, 1995 and 1996, and the results of their operations
and their cash flows for the three years ended December 31, 1994, 1995 and 1996,
in conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP

ARTHUR ANDERSEN LLP

Denver, Colorado,
February 28, 1997

F-2
<PAGE> 64

HESKA CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

ASSETS

<TABLE>
<CAPTION>
PRO
DECEMBER 31, FORMA
------------------- MARCH 31, MARCH 31,
1995 1996 1997 1997
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 6,827 $ 6,609 $ 4,476 $ 4,476
Marketable securities............................. -- 17,091 11,427 11,427
Accounts receivable, net.......................... -- 749 1,047 1,047
Inventories, net.................................. -- 4,430 5,287 5,287
Other current assets.............................. 152 334 482 482
Contract receivable............................... 500 -- -- --
-------- -------- -------- --------
Total current assets...................... 7,479 29,213 22,719 22,719
Property and equipment, net......................... 1,029 8,209 10,548 10,548
Intangible assets, net.............................. -- 3,480 4,158 4,158
Restricted marketable securities and other assets... -- 1,267 1,172 1,172
-------- -------- -------- --------
Total assets.............................. $ 8,508 $ 42,169 $ 38,597 $ 38,597
======== ======== ======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.................................. $ 537 $ 1,634 $ 2,446 $ 2,446
Accrued liabilities............................... 169 940 1,182 1,182
Deferred revenue.................................. 20 1,413 1,842 1,842
Current portion of capital lease obligations...... 231 464 549 549
Current portion of long-term debt................. -- 807 1,708 1,708
-------- -------- -------- --------
Total current liabilities................. 957 5,258 7,727 7,727
Capital lease obligations, less current portion..... 302 1,459 1,648 1,648
Long-term debt, less current portion................ -- 2,942 3,912 3,912
Accrued pension liability........................... -- 127 142 142
-------- -------- -------- --------
Total liabilities......................... 1,259 9,786 13,429 13,429
-------- -------- -------- --------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value,
10,000,000, 25,000,000, 25,000,000 and
25,000,000 shares authorized; 6,618,085,
10,459,999, 10,513,999 and no shares issued and
outstanding, with an aggregate liquidation
preference of $19,516, $62,588, $63,236 and
none, respectively............................. 19,516 62,588 63,236 --
Common stock, $.001 par value, 40,000,000 shares
authorized; 919,363, 1,021,645, 1,114,904 and
11,628,903 shares issued and outstanding,
respectively................................... 1 1 1 12
Additional paid-in capital........................ 143 188 238 63,463
Cumulative translation adjustment................. -- -- 1 1
Stock subscription receivable from officers....... (110) (118) (151) (151)
Accumulated deficit............................... (12,301) (30,276) (38,157) (38,157)
-------- -------- -------- --------
Total stockholders' equity................ 7,249 32,383 25,168 25,168
-------- -------- -------- --------
Total liabilities and stockholders'
equity.................................. $ 8,508 $ 42,169 $ 38,597 $ 38,597
======== ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE> 65

HESKA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
----------------------------- ------------------
1994 1995 1996 1996 1997
------ ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Products and services, net.............. $ -- $ -- $ 8,013 $ 39 $ 2,626
Research and development................ 3,858 2,230 1,946 117 438
------ ------- -------- ------- -------
3,858 2,230 9,959 156 3,064
Costs and operating expenses:
Cost of sales........................... -- -- 6,648 20 2,148
Research and development................ 3,685 6,031 14,038 2,626 4,519
Selling and marketing................... -- -- 2,493 -- 1,573
General and administrative.............. 904 864 4,540 375 2,418
Amortization of intangible assets....... -- -- 1,101 -- 407
------ ------- -------- ------- -------
4,589 6,895 28,820 3,021 11,065
------ ------- -------- ------- -------
Loss from operations...................... (731) (4,665) (18,861) (2,865) (8,001)
Other income (expense):
Interest income......................... 26 172 1,356 71 296
Interest expense........................ (168) (63) (325) (16) (170)
Other, net.............................. (11) (10) (145) -- (6)
------ ------- -------- ------- -------
Net loss.................................. $ (884) $(4,566) $(17,975) $(2,810) $(7,881)
====== ======= ======== ======= =======
Pro forma net loss per share
(unaudited)............................. $ (1.41) $ (0.61)
======== =======
Shares used to compute pro forma net loss
per share (unaudited)................... 12,740 12,872
======== =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE> 66

HESKA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)

<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK CUMULATIVE
---------------- --------------- PAID-IN SUBSCRIPTION TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE ADJUSTMENT DEFICIT
------ ------- ------ ------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993........ 2,690 $6,750 496 $ 1 $ 14 $ -- $ -- $ (6,851)
Exercise of options to purchase
Common Stock for cash at
$0.15-$0.35 per share.......... -- -- 113 -- 19 -- -- --
Issuance of Series E Preferred
Stock for cancellation of
indebtedness, valued at $3.25
per share...................... 655 2,128 -- -- -- -- -- --
Issuance of Common Stock for
services, valued at $0.35 per
share.......................... -- -- 4 -- 1 -- -- --
Compensation expense related to
options........................ -- -- -- -- 2 -- -- --
Net loss......................... -- -- -- -- -- -- -- (884)
------ ------- ----- ------ ---- ----- ---- --------
Balances, December 31, 1994........ 3,345 8,878 613 1 36 -- -- (7,735)
Exercise of options to purchase
Common Stock for cash at
$0.25-$0.35 per share.......... -- -- 9 -- 3 -- -- --
Issuance of Series E Preferred
Stock for cancellation of
indebtedness, valued at $3.25
per share...................... 196 638 -- -- -- -- -- --
Issuance of Series E Preferred
Stock at $3.25 per share....... 3,077 10,000 -- -- -- -- -- --
Issuance of Common Stock at $0.35
per share for stock
subscription receivable from
officers....................... -- -- 297 -- 104 (104) -- --
Interest on stock subscription
receivable from officers....... -- -- -- -- -- (6) -- --
Net loss......................... -- -- -- -- -- -- -- (4,566)
------ ------- ----- ------ ---- ----- ---- --------
Balances, December 31, 1995........ 6,618 19,516 919 1 143 (110) -- (12,301)
Issuance of Series E Preferred
Stock in exchange for the
common stock of Diamond Animal
Health, Inc., valued at $8.40
per share...................... 842 7,072 -- -- -- -- -- --
Grant of options to purchase
Common Stock................... -- -- -- -- 8 -- -- --
Exercise of options to purchase
Common Stock for cash at
$0.25-$0.35 per share.......... -- -- 103 -- 37 -- -- --
Issuance of Series F Preferred
Stock at $12.00 per share...... 3,000 36,000 -- -- -- -- --
Interest on stock subscription
receivable from officers....... -- -- -- -- -- (8) -- --
Net loss......................... -- -- -- -- -- -- -- (17,975)
------ ------- ----- ------ ---- ----- ---- --------
Balances, December 31, 1996........ 10,460 62,588 1,022 1 188 (118) -- (30,276)
Unaudited:
Issuance of Series E Preferred
Stock in exchange for the
capital stock of Bloxham
Laboratories Limited, valued at
$12.00 per share............... 54 648 -- -- -- -- -- --
Exercise of options to purchase
Common Stock for cash at
$0.15-$1.20 per share.......... -- -- 68 -- 20 -- -- --
Issuance of Common Stock at $1.20
per share for stock
subscription receivable from a
director....................... -- -- 25 -- 30 (30) -- --
Interest on stock subscription
receivable from officers and a
director....................... -- -- -- -- -- (3) -- --
Foreign currency translation
adjustments.................... -- -- -- -- -- -- 1 --
Net loss......................... -- -- -- -- -- -- -- (7,881)
------ ------- ----- ------ ---- ----- ---- --------
Balances, March 31, 1997
(unaudited)...................... 10,514 $63,236 1,115 $ 1 $238 $(151) $ 1 $(38,157)
====== ======= ===== ====== ==== ===== ==== ========

<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balances, December 31, 1993........ $ (86)
Exercise of options to purchase
Common Stock for cash at
$0.15-$0.35 per share.......... 19
Issuance of Series E Preferred
Stock for cancellation of
indebtedness, valued at $3.25
per share...................... 2,128
Issuance of Common Stock for
services, valued at $0.35 per
share.......................... 1
Compensation expense related to
options........................ 2
Net loss......................... (884)
--------
Balances, December 31, 1994........ 1,180
Exercise of options to purchase
Common Stock for cash at
$0.25-$0.35 per share.......... 3
Issuance of Series E Preferred
Stock for cancellation of
indebtedness, valued at $3.25
per share...................... 638
Issuance of Series E Preferred
Stock at $3.25 per share....... 10,000
Issuance of Common Stock at $0.35
per share for stock
subscription receivable from
officers....................... --
Interest on stock subscription
receivable from officers....... (6)
Net loss......................... (4,566)
--------
Balances, December 31, 1995........ 7,249
Issuance of Series E Preferred
Stock in exchange for the
common stock of Diamond Animal
Health, Inc., valued at $8.40
per share...................... 7,072
Grant of options to purchase
Common Stock................... 8
Exercise of options to purchase
Common Stock for cash at
$0.25-$0.35 per share.......... 37
Issuance of Series F Preferred
Stock at $12.00 per share...... 36,000
Interest on stock subscription
receivable from officers....... (8)
Net loss......................... (17,975)
--------
Balances, December 31, 1996........ 32,383
Unaudited:
Issuance of Series E Preferred
Stock in exchange for the
capital stock of Bloxham
Laboratories Limited, valued at
$12.00 per share............... 648
Exercise of options to purchase
Common Stock for cash at
$0.15-$1.20 per share.......... 20
Issuance of Common Stock at $1.20
per share for stock
subscription receivable from a
director....................... --
Interest on stock subscription
receivable from officers and a
director....................... (3)
Foreign currency translation
adjustments.................... 1
Net loss......................... (7,881)
--------
Balances, March 31, 1997
(unaudited)...................... $ 25,168
========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE> 67

HESKA CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
---------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss................................... $ (884) $(4,566) $(17,975) $(2,810) $(7,881)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization........... 148 253 1,072 123 430
Amortization of intangible assets....... -- -- 1,101 -- 407
Amortization of debt discount........... -- -- 121 -- 21
Issuance of common stock for services... 1 -- -- -- --
Compensation expense related to
options............................... 2 -- -- -- --
Loss on disposition of assets........... 13 16 60 -- 48
Interest receivable on stock
subscription.......................... -- -- (8) (2) (3)
Increase in accrued pension liability... -- -- 62 -- 15
Changes in operating assets and
liabilities:..........................
Accounts receivable, net.............. -- -- (508) (75) (10)
Inventories, net...................... -- -- (408) -- (751)
Prepaids and other assets............. (20) (83) (66) (116) (203)
Contract receivable................... (1,500) 1,000 500 -- --
Accounts payable...................... 454 41 744 (101) 519
Accrued liabilities................... 144 -- 265 238 57
Deferred revenue...................... 325 (386) 987 (20) 429
------- ------- -------- ------- -------
Net cash used in operating
activities....................... (1,317) (3,725) (14,053) (2,763) (6,922)
------- ------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash
acquired................................ -- -- (478) (500) (180)
Cash deposited in restricted cash account
related to Bloxham acquisition.......... -- -- -- -- (238)
Purchase of marketable securities.......... -- -- (31,243) -- --
Purchase of restricted marketable
securities.............................. -- -- (1,219) -- --
Proceeds from sale of marketable
securities.............................. -- -- 14,152 -- 6,140
Purchases of property and equipment........ (424) (348) (5,232) (630) (2,229)
------- ------- -------- ------- -------
Net cash provided by (used in)
investing activities............. (424) (348) (24,020) (1,130) 3,493
------- ------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock..... 19 3 37 1 20
Proceeds from borrowings................... 1,644 527 3,318 -- 1,614
Repayments of debt and capital lease
obligations............................. (78) (169) (1,500) (55) (345)
Proceeds from issuance of preferred
stock................................... -- 10,000 36,000 -- --
------- ------- -------- ------- -------
Net cash provided by (used in)
financing activities............. 1,585 10,361 37,855 (54) 1,289
------- ------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH...... -- -- -- -- 7
------- ------- -------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ (156) 6,288 (218) (3,947) (2,133)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD..................................... 695 539 6,827 6,827 6,609
------- ------- -------- ------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD..... $ 539 $ 6,827 $ 6,609 $ 2,880 $ 4,476
======= ======= ======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE> 68

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BUSINESS

Heska Corporation (the "Company") discovers, develops, manufactures and
markets companion animal health products and services. The Company also
manufactures and sells animal health products and services in the United States,
Canada and Europe through Diamond Animal Health, Inc. ("Diamond") and Bloxham
Laboratories Limited ("Bloxham"), its wholly-owned subsidiaries (see Note 3). In
May 1997, the Company reincorporated in Delaware.

The Company continues to incur substantial operating losses due principally
to its research and development and sales and marketing activities. Cumulative
operating losses from inception of the Company in 1988 through December 31, 1996
and March 31, 1997 have totaled $30,276,000 and $38,157,000 (unaudited),
respectively.

During 1996, the Company progressed from being primarily a research and
development company to a fully-integrated research, development, manufacturing
and marketing company. The Company's products are subject to long development
and regulatory approval cycles and there can be no assurance that the Company
will successfully develop, manufacture or market these products. In the first
quarter of 1997, the Company began to launch products which had been developed
internally. Prior to that time, the Company had not received any revenues from
the sale of internally developed products.

The Company's ability to achieve profitable operations will depend
primarily upon its ability to commercialize products that are currently under
development. There can be no assurance that the Company will successfully
develop, manufacture, or market these products. During the period required to
develop its products, the Company intends to finance operations with additional
equity and debt financing. There can be no assurance that such financing will be
available when required or will be obtained under favorable terms.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries since the dates of their
respective acquisitions. All material intercompany transactions and balances
have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents are stated at cost, which approximates market,
and include short-term highly liquid investments with original maturities of
less than three months. Cash equivalents consist of United States government
obligations.

Marketable Securities and Restricted Investments

The Company has adopted Statement of Financial Accounting Standards No.
115, Accounting for Certain Investments in Debt and Equity Securities. Pursuant
to this Statement, the Company has classified its marketable securities as
"available-for-sale" and, accordingly, carries such securities at aggregate fair
value. Unrealized gains or losses, if material, are included as a separate
component of stockholders' equity.

At December 31, 1996 and March 31, 1997, these securities had an aggregate
amortized cost of $18,310,000 and $12,170,000 (unaudited), respectively, which
approximated fair market value, a maximum maturity of

F-7
<PAGE> 69

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

approximately nine and six months, respectively, and consisted entirely of U.S.
government obligations. This included $1,219,000 and $743,000 (unaudited) of
restricted investments held as collateral for capital leases (see Note 4) and
$17,091,000 and $11,427,000 (unaudited) of short-term marketable securities,
respectively.

Inventories, net

Inventories are stated at the lower of cost or market using the first-in,
first-out method. If the cost of inventories exceeds fair market value,
provisions are made for the difference between cost and fair market value.

Inventories, net of provisions, consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------- MARCH 31,
1995 1996 1997
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials............................................ $-- $ 885 $ 868
Work in process.......................................... -- 3,103 4,121
Finished goods........................................... -- 442 298
--- ------ ------
$-- $4,430 $5,287
=== ====== ======
</TABLE>

Property, Equipment and Intangible Assets

Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets.
Amortization of assets acquired under capital leases is included with
depreciation expense on owned assets.

Leasehold improvements are amortized over the applicable lease period or
their estimated useful lives, whichever is shorter. Maintenance and repairs are
charged to expense when incurred, and major renewals and improvements are
capitalized.

Intangible assets consist of various assets arising from business
combinations and are amortized using the straight-line method over the period of
expected benefit.

In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, the Company periodically reviews the appropriateness of the
remaining life of its property, equipment and intangible assets considering
whether any events have occurred or conditions have developed which may indicate
that the remaining life requires adjustment. After reviewing the appropriateness
of the remaining life and the pattern of usage of these assets, the Company then
assesses their overall recoverability by determining if the net book value can
be recovered through undiscounted future operating cash flows. Absent any
unfavorable findings, the Company continues to amortize and depreciate its
property, equipment and intangible assets based on the existing estimated life.

F-8
<PAGE> 70

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------- MARCH 31,
USEFUL LIFE 1995 1996 1997
------------- ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Land...................................... N/A $ -- $ 233 $ 233
Buildings................................. 10 years -- 453 453
Machinery and equipment................... 3 to 15 years 1,382 7,924 10,562
Leasehold improvements.................... 3 to 5 years 222 1,103 1,234
------ ------- -------
1,604 9,713 12,482
Less accumulated depreciation and amortization........... (575) (1,504) (1,934)
------ ------- -------
$1,029 $ 8,209 $10,548
====== ======= =======
</TABLE>

Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
ESTIMATED ---------------- MARCH 31,
USEFUL LIFE 1995 1996 1997
------------- ------ ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Take-or-pay contract...................... 37 Months $ -- $ 3,873 $ 3,873
Other intangible assets................... 2 to 7 years -- 707 1,792
------ ------- -------
-- 4,580 5,665
Less accumulated amortization............................ -- (1,100) (1,507)
------ ------- -------
$ -- $ 3,480 $ 4,158
====== ======= =======
</TABLE>

The take-or-pay contract resulted from the acquisition of Diamond in April
1996 (see Note 3). The remaining intangible assets resulted from the
acquisitions of Bloxham in February 1997 (see Note 3) and the canine allergy
business from Bioproducts DVM, Inc. in March 1996 (see Note 3).

Revenue Recognition

Revenues from products and services are recognized at the time goods are
shipped or services are provided to the customer, with an appropriate provision
for returns and allowances.

The Company recognizes revenue from sponsored research and development as
research activities are performed or as development milestones are completed
under the terms of the research and development agreements. Costs incurred in
connection with the performance of sponsored research and development are
expensed as incurred. The Company defers revenue recognition related to payments
received during the current year for research activities to be performed in the
following year.

Cost of Sales

Royalties payable in connection with certain research and development
agreements (see Note 8) are reflected in cost of sales as incurred.

Unaudited Pro Forma Net Loss Per Share

The Company's historical capital structure is not indicative of its
prospective structure due to the automatic conversion of all shares of
convertible preferred stock into common stock concurrent with the closing of the
Company's anticipated initial public offering ("IPO"). Accordingly, historical
net loss per common share is not considered meaningful as it would differ
materially from the pro forma net loss per common share and common stock
equivalent shares given the contemplated changes in the capital structure of the
Company.

F-9
<PAGE> 71

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Pro forma net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Common equivalent shares
from stock options and warrants are excluded from the computation as their
effect is anti-dilutive, except as required by the SEC. Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, common stock and
common stock equivalent shares issued by the Company during the 12 months
immediately preceding the filing of the IPO, plus shares which became issuable
during the same period as a result of the granting of options to purchase common
stock, have been included in the calculation of weighted average number of
shares of common stock as if they were outstanding for all periods presented
(using the treasury stock method). Accordingly, only those common stock and
common stock equivalent shares issued during the 12 months immediately preceding
the filing of the IPO have been included in the computation of pro forma net
loss per common share. In addition, the Company has assumed the conversion of
convertible preferred stock issued into common stock for all periods presented.

Unaudited Pro Forma Information

Upon closing of the Company's IPO, all of the outstanding shares of Series
A, B, C, D, E and F Preferred Stock will be automatically converted into shares
of Common Stock on a share for share basis. The unaudited pro forma consolidated
balance sheet as of March 31, 1997 reflects the conversion of 10,513,999 shares
of Preferred Stock into 10,513,999 shares of Common Stock.

Foreign Currency Translation

The functional currency of Bloxham is the Pound Sterling ("L"). Assets and
liabilities of the Company's foreign subsidiary are translated using the
exchange rate in effect at the balance sheet date. Revenue and expense accounts
are translated using an average of exchange rates in effect during the period.
Cumulative translation gains and losses are shown in the consolidated balance
sheets as a separate component of stockholders' equity. Exchange gains and
losses arising from transactions denominated in foreign currencies (i.e.
transaction gains and losses) are recognized in current operations. To date, the
Company has not entered into any forward contracts or hedging transactions.

Interim Financial Statements

The financial statements as of March 31, 1997 and for the three months
ended March 31, 1996 and 1997 are unaudited and include all adjustments
(consisting of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the results for such interim
periods. The results of operations for the three months ended March 31, 1997 are
not necessarily indicative of the results to be expected for the entire year.

Reclassifications

Certain reclassifications have been made to the prior period financial
statements to conform to the current period presentation.

3. BUSINESS MERGERS AND ACQUISITIONS

The following acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the operating results of these
acquisitions are included in the Company's consolidated results of operations
from the date of acquisition.

Diamond Animal Health, Inc. ("Diamond") -- In April 1996, the Company
acquired Diamond in a merger transaction valued at $7,080,000. The merger was
consummated by exchanging 1,593,432 shares of Diamond common stock for 841,914
shares of the Company's Series E Preferred Stock and options to purchase

F-10
<PAGE> 72

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

68,553 shares of the Company's Common Stock, granted to Diamond employees at an
exercise price of $1.20 per share. As a result of the merger, Diamond became a
wholly-owned subsidiary of the Company.

The total purchase price of the acquisition was allocated as follows (in
thousands):

<TABLE>
<CAPTION>
<S> <C>
Cash........................................................ $ 22
Other current assets........................................ 4,623
Property and equipment...................................... 3,101
Take-or-pay contract........................................ 3,873
License rights.............................................. 1,250
-------
12,869
Less liabilities assumed:
Current liabilities....................................... (2,726)
Long-term liabilities..................................... (3,063)
-------
(5,789)
-------
Value of shares issued and options granted.................. $ 7,080
=======
</TABLE>

Under the take-or-pay contract, a Diamond customer (see Note 11) is
obligated to make minimum annual purchases from Diamond through June 1999. This
contract is terminable by either party for material breach which remains uncured
by the other party, or after June 30, 1999 on 18 months' written notice. The
take-or-pay contract was valued using the discounted estimated net cash flows
expected to be realized over the remaining life of the contract.

License rights reflect the value of certain rights granted to a Diamond
customer in return for a reduction of $1,250,000 in payments on a note payable
to the customer (see Note 5). These license rights were classified as intangible
assets held for sale at the time of the Diamond merger, and no gain or loss was
recognized as a result of this transaction.

Bioproducts DVM, Inc. ("Bioproducts") -- In March 1996, the Company
acquired the canine allergy testing and immunotherapy businesses of Bioproducts
(the "Bioproducts Business") in exchange for $500,000 in cash and a $250,000
promissory note. The promissory note is noninterest bearing and is due in four
equal annual installments of $62,500 on each anniversary date of the acquisition
closing date (see Note 5). In connection with this acquisition, the Company
recorded an intangible asset in the amount of $707,000, primarily related to
customer lists and covenants not to compete.

Pro Forma Results of Operations

The following unaudited pro forma summary presents the consolidated results
of operations as if the Bioproducts Business and Diamond acquisitions had been
consummated as of January 1, 1995, based on unaudited financial statements
provided by the respective sellers (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1995 1996
------- --------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $12,027 $ 12,928
Net loss.................................................... $(7,354) $(18,589)
Pro forma net loss per share................................ N/A $ (1.46)
Shares used to compute pro forma net loss per share......... N/A 12,740
</TABLE>

The pro forma results give effect to certain adjustments, including
amortization of intangibles, reduced interest costs associated with conversion
of debt, and additional depreciation and amortization expenses due to

F-11
<PAGE> 73

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

increased book basis of the property and equipment. The pro forma results have
been prepared for comparative purposes only and are not necessarily indicative
of the results that would have been attained had the acquisitions occurred at
the beginning of 1995 or of the results which may occur in the future.

Bloxham Laboratories Limited ("Bloxham") -- In February 1997, the Company
acquired the capital stock of Bloxham, a clinical reference laboratory located
in the United Kingdom, in a transaction valued at approximately $1,150,000. The
acquisition was consummated by exchanging 54,000 shares of the Company's Series
E Preferred Stock, a note payable for L200,000 and $180,000 in cash. The Company
also agreed to grant to Bloxham employees options to purchase the Company's
common stock on a basis consistent with stock options granted to employees of
other Heska subsidiaries. Under the terms of the acquisition agreement, the
Company deposited approximately $238,000 in a restricted cash account as
collateral for the note payable. In connection with this acquisition, the
Company recorded an intangible asset in the amount of $1,085,000.

4. CAPITAL LEASE OBLIGATIONS

The Company has entered into certain capital lease agreements for
laboratory equipment, office equipment, machinery and equipment, and computer
equipment and software. For the years ended December 31, 1995 and 1996 and the
three months ended March 31, 1997, the Company had capitalized machinery and
equipment under capital leases of $741,000, $2,004,000 and $2,259,000
(unaudited), respectively. The capitalized cost of the equipment under capital
leases is included in the accompanying balance sheets under the respective asset
classes. Under the terms of the Company's lease agreements, the Company is
required to make monthly payments of principal and interest through the year
2001, at interest rates ranging from 9.25% to 11.85% per annum. The equipment
under the capital leases serves as security for the leases.

The Company has a capital lease with its commercial bank which requires the
Company to pledge cash or investments as additional collateral for the lease.
The lease agreement, which has a borrowing limit of $2,000,000, calls for a
collateral balance equal to 75% of the outstanding lease balance, dropping to
50% and 25% when the Company's annual revenues reach $18,000,000 and
$28,000,000, respectively. In March 1997, the bank reduced the collateral
requirement to 50% (unaudited). As of December 31, 1996 and March 31, 1997, the
Company was in compliance with all covenants of the master lease and had pledged
U.S. Treasury Bonds of $1,219,000 and $743,000 (unaudited) as additional
collateral under the lease, respectively.

The future annual minimum required payments under capital lease obligations
as of December 31, 1996 were as follows (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
- ------------
<S> <C>
1997........................................................ $ 1,304
1998........................................................ 1,143
1999........................................................ 1,086
2000........................................................ 1,184
2001........................................................ 713
-------
Total minimum lease payments.............................. 5,430
Less amount representing interest......................... (3,507)
-------
Present value of net minimum lease payments............... 1,923
Less current portion...................................... (464)
-------
Total long-term capital lease obligations......... $ 1,459
=======
</TABLE>

F-12
<PAGE> 74

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. LONG-TERM DEBT AND NOTES PAYABLE

Long term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Diamond obligations
9.5% real estate mortgage to Hartford-Carlisle Bank
due in monthly installments of $3 and a final
payment of the unpaid principal balance and accrued
interest of $59 in
October 2004....................................... $ -- $ 214 $ 211
Term note to Iowa Business Growth guaranteed by the
Small Business Administration (SBA), due in monthly
installments of approximately $3 through July 2004,
including interest at prime plus 0.7%.............. -- 169 165
Promissory note to the Iowa Department of Economic
Development (IDED), due in annual installments of
$15 through June 2004, with the remaining $125
forgivable in March 1999 based upon levels of
employment at Diamond, with a stated interest rate
of 3.0% and a 9.5% imputed interest rate, net of an
unamortized discount of $39 and $38 (unaudited),
respectively....................................... -- 189 189
Promissory note to the City of Des Moines, due in
monthly installments of $2 through May 2004, with a
stated interest rate of 3.0% and a 9.5% imputed
interest rate, net of an unamortized discount of
$26 and $25 (unaudited),
respectively....................................... -- 128 126
10.0% promissory notes, due in monthly interest
payments until June 1997, then quarterly
installments totaling $50 from June 1997 to March
1999, with the unpaid balance due March 1999....... -- 498 498
Unsecured promissory note to customer, due in monthly
installments of $25 through June 1999, with no
stated interest rate and a 9.5% imputed interest
rate, net of an unamortized discount of $82 and $67
(unaudited), respectively (monthly installments
change to 1/36th of the principal balance and
stated interest becomes prime plus 2.0% if
Diamond's sales increase to $12,000 in any annual
period)............................................ -- 655 597
Heska obligations
Promissory note to Bioproducts (see Note 3) due in
annual installments of $62 through March 2000, with
no stated interest rate and a 9.5% imputed interest
rate, net of an unamortized discount of $43 and $38
(unaudited), respectively.......................... -- 207 149
</TABLE>

F-13
<PAGE> 75

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- MARCH 31,
1995 1996 1997
----- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Promissory note to former Bloxham shareholders (see
Note 3) due in semi-annual interest payments
through February 2007, redeemable on demand in
whole or in part at any time after February 18,
1998 in increments of L1 together with accrued
interest, with stated interest rate of 4.5%,
denominated in pounds sterling..................... -- -- 327
Bloxham obligation
Real estate mortgage due in monthly principal payments
of L1 and quarterly interest payments through June
2006, with stated interest rate of a bank's base
rate (6.0% at March 31, 1997) plus 2.75%,
denominated in Pounds Sterling..................... -- -- 132
Diamond and Heska obligations
Equipment financing due in monthly installments of $49
through June 2000, and final payments totaling $342
due May through July 2000, with stated interest
rates of 18.1%, secured by certain equipment,
furniture and fixtures............................. -- 1,689 1,616
Equipment financing due in monthly installments of $48
through March 2000, with stated interest rate of
14.0%, secured by certain equipment and fixtures... -- -- 1,610
----- ------ -------
-- 3,749 5,620
Less installments due within one year................... -- (807) (1,708)
----- ------ -------
$ -- $2,942 $ 3,912
===== ====== =======
</TABLE>

The Diamond SBA, IDED, City of Des Moines and 10.0% promissory notes are
secured by a first security interest in substantially all of the assets of
Diamond except assets acquired through capital leases, and are included as
cross-collateralized obligations by the respective lenders. These notes, along
with the unsecured note to the customer, were assumed as a result of the Diamond
acquisition.

Maturities of long-term debt and notes payable as of December 31, 1996 were
as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997......................................................... $ 808
1998......................................................... 988
1999......................................................... 849
2000......................................................... 679
2001......................................................... 79
Thereafter................................................... 346
------
$3,749
======
</TABLE>

Notes Payable to a Stockholder

The Company had demand notes payable to a holder of Preferred Stock in the
amount of $129,000 at December 31, 1994. The notes were unsecured and bore
interest at 10% per annum. A representative of the stockholder is a director of
the Company. In December 1994, the Company converted $2,128,000 of notes payable
and accrued interest owing to this stockholder to 654,680 shares of Series E
Preferred Stock. In

F-14
<PAGE> 76

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

March 1995, the Company converted $639,000 of demand notes payable and accrued
interest owing to this stockholder to 196,482 shares of Series E Preferred
Stock.

6. ACCRUED PENSION LIABILITY

Diamond has an inactive noncontributory defined benefit pension plan
covering a limited number of current and former Diamond employees. Effective
October 1992, Diamond froze the plan, restricting new participants and benefits
for future service. The plan provides monthly benefits on years of service which
are subject to certain reductions if the employee retires before reaching age
65. Diamond's funding policy is to make the minimum annual contribution that is
required by applicable regulations.

Net pension cost for Diamond's defined benefit pension plan consisted of
the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Interest cost on projected benefit obligation............... $ 55
Actual return on plan assets................................ 14
Net amortization and deferral............................... (70)
-----
Net periodic pension cost......................... $ (1)
=====
</TABLE>

The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheets (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation................................... $1,089
Accumulated benefit obligation.............................. 1,089
-------
Projected benefit obligation................................ 1,089
Plan assets, consisting primarily of bonds and commercial
mortgage notes............................................ 962
-------
Projected benefit obligation in excess of plan assets....... $ (127)
=======
</TABLE>

Assumptions used by Diamond in the determination of the pension plan
information consisted of the following:

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------
<S> <C>
Discount rate............................................... 7.00%
Expected long-term rate of return on plan assets............ 7.75%
</TABLE>

7. INCOME TAXES

The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. As
of December 31, 1996 the Company had approximately $26,900,000 of net operating
loss ("NOL") carryforwards for income tax purposes and approximately $731,000 of
research and development tax credits available to offset future federal income
taxes, subject to limitations for alternative minimum tax. The NOL and credit
carryforwards are subject to examination by the tax authorities and expire in
various years from 2003 through 2010. The Tax Reform Act of 1986 contains
provisions that may limit the NOL and credit carryforwards available for use in
any given year upon the occurrence of certain events, including significant
changes in ownership interest. A change in ownership of a company of greater
than 50% within a three-year period results in an annual limitation on a
company's ability to utilize its NOL carryforwards from tax periods prior to the
ownership change. The acquisition of Diamond

F-15
<PAGE> 77

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

resulted in such a change of ownership and the Company estimates that the
resulting NOL carryforward limitation will be approximately $4,300,000 per year
for periods subsequent to April 1996. The Company does not believe that this
limitation will have a material impact on the utilization of its NOL
carryforwards.

The acquisition of Diamond was completed on a tax free basis. Accordingly,
the difference between the basis of the assets for financial reporting purposes
exceeds the basis of the assets for income tax purposes. The Company has
recorded a deferred tax liability related to this basis difference. As the
Company had previously recorded a valuation allowance against its deferred tax
assets, the Company reduced its valuation allowance in an amount equal to the
deferred tax liability at the date of the acquisition.

The Company's NOLs represent a previously unrecognized tax benefit.
Recognition of these benefits requires future taxable income, the attainment of
which is uncertain, and therefore, a valuation allowance has been established
for the entire tax benefit and no benefit for income taxes has been recognized
in the accompanying consolidated statements of operations.

Deferred tax assets and liabilities consist of the following (in
thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- --------
<S> <C> <C>
Deferred tax assets:
Research and development credits.......................... $ 414 $ 731
Inventory valuation and reserves.......................... -- 71
Deferred revenue.......................................... -- 90
Pension liability......................................... -- 49
Accrued compensation...................................... 39 122
Amortization of intangible assets......................... -- 86
Other..................................................... 7 11
Net operating loss carryforwards.......................... 4,491 10,317
------- --------
4,951 11,477
Less valuation allowance.................................. (4,951) (10,818)
------- --------
-- 659
Deferred tax liability:
Property and equipment.................................... -- (659)
------- --------
-- (659)
------- --------
Net deferred taxes................................ $ -- $ --
======= ========
</TABLE>

8. RESEARCH AND DEVELOPMENT AGREEMENTS

In June 1994, the Company entered into agreements with Bayer AG ("Bayer"),
a pharmaceutical company, pursuant to which Bayer is funding and assisting in
the development of certain technologies. In return, the Company granted Bayer
the option to license the technologies to manufacture certain products for sale,
as well as the right to distribute for all parts of the world, except Japan and
East Asia. To the extent the Company is determined to have manufacturing
capability, under the terms of the agreement Bayer will be required to purchase
its requirements of such products from the Company.

In exchange for the above, Bayer agreed to provide research funding to the
Company, of which $1,500,000 was received in 1995 and $500,000 in June 1996. The
Company expects to receive periodic research payments until June 1999 as the
related expenses are incurred and specified milestones are reached. In
connection with this contract, the Company recognized research revenue of
$569,000, $1,456,000 and $1,300,000 for the years ended

F-16
<PAGE> 78

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1994, 1995 and 1996, respectively, and none (unaudited) for the
three months ended March 31, 1996 and 1997.

Additionally, the Company will receive royalties based on a percentage of
any net sales of products developed under the agreements not manufactured by the
Company.

Bayer may terminate the agreement for convenience at any anniversary,
beginning in June 1996, with 90 days notice, in which case the product rights
revert to the Company. In the event of such a termination, the Company would be
required to pay Bayer a royalty at a modest rate on net sales of these products
exceeding a specified threshold. The total amount of this royalty would not
exceed the amount of research funding provided by Bayer.

In January 1993, the Company entered into an agreement with Eisai Co., Ltd.
("Eisai") pursuant to which Eisai obtained the exclusive right to market certain
products in Japan and East Asia. Under the terms of the agreement, the Company
is to receive periodic payments for support of research, one half of which is
only to be received upon completion of certain milestones. The Company
recognized $600,000 and $337,000 as research and development revenue for the
years ended December 31, 1994 and 1995, respectively, related to this agreement.
No revenue was recognized for the year ended December 31, 1996, or the three
months ended March 31, 1997 (unaudited). Although the agreement does not expire
until 2008, Eisai may terminate its research support for any licensed product
with 90 days written notice. Three of the specified projects covered by the
agreement have been mutually abandoned.

In February 1993, the Company entered into an agreement with another
pharmaceutical company pursuant to which the Company granted the pharmaceutical
company an exclusive license for the sale and use of certain technology. The
Company received $187,000 in the year ended December 31, 1994, related to this
agreement, which was terminated in December 1994.

In October 1996, the Company and Diamond entered into three related
agreements with a pharmaceutical company concerning the research, development,
licensing, manufacturing and marketing of certain products. Under the research
and development agreement, Diamond granted a non-exclusive, royalty-free,
paid-up right and license to develop, manufacture and market certain of its
bovine products. In return, the pharmaceutical company agreed to fund certain
research costs associated with the development of these products, subject to the
achievement of certain milestones. In connection with this research funding, the
Company recognized research and development revenue of $210,000 during the
fourth quarter of 1996 and $320,000 (unaudited) for the three months ended March
31, 1997. As additional consideration, the Company received an exclusive,
royalty-free, worldwide license for certain feline biological vaccines. The
Company also has a three-year agreement with the pharmaceutical company for the
manufacture of these feline vaccines.

The Company estimates its future cash flows from its existing research and
development contracts, subject to scheduled completion of specified milestones,
are as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997.................................................................. $1,505
1998.................................................................. 1,360
1999.................................................................. 750
2000.................................................................. 600
------
$4,215
======
</TABLE>

9. COMMITMENTS AND CONTINGENCIES

The Company holds certain rights to market and manufacture products using
technology developed under certain research and development agreements with
various entities. In connection with such agreements, the

F-17
<PAGE> 79

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company has agreed to pay the entities royalties on net product sales. No
royalties have become payable to date under these agreements.

In connection with the acquisition of the Bioproducts Business (see Note
3), the Company entered into a four year product supply agreement in March 1996
with a company affiliated with Bioproducts (the "Seller"). The Company is
obligated to purchase a minimum of $168,000 in products and services from the
Seller on a quarterly basis. If purchases are less than $168,000 in any quarter
the Company may make an advance payment to be credited against future purchases,
or pay 65% of the shortfall. In 1996 the Company incurred shortfalls under this
agreement totaling approximately $72,000, which are expected to be applied
against 1997 purchases. The agreement also contains provisions whereby the
Company may make payments to terminate the contract after March 1997.

In connection with an equity investment by Novartis AG ("Novartis") in
April 1996 (see Note 10), the Company granted Novartis the rights, co-exclusive
with the Company's rights, to market two products under development by the
Company, the flea control vaccine and feline heartworm vaccine. The Company and
Novartis have a revenue sharing arrangement for net sales of these products
through the year 2005.

In addition to the marketing agreements described above, the Company
entered into a pharmaceutical screening cooperation agreement with Novartis,
pursuant to which the two parties may enter into joint development arrangements
to develop pharmaceutical and vaccine products. In addition, to the extent that
the Company decides to grant a license to any third party to any products or
technology for companion or food animal applications, Novartis must be offered
first right to negotiate to acquire such license.

The Company contracts with various parties that conduct research and
development on the Company's behalf. In return, the Company generally receives
the right to commercialize any products resulting from these contracts. The
contracts are generally for one year periods and may be extended or terminated
at the end of the contract period upon mutual agreement. In the event the
Company licenses any technology developed under these contracts, the Company
will generally be obligated to pay royalties at specified percentages of future
sales of products utilizing the licensed technology.

The Company has entered into operating leases for its office and research
facilities and certain equipment with future minimum payments as of December 31,
1996 as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C> <C>
1997.................................................................. $ 622
1998.................................................................. 621
1999.................................................................. 440
2000.................................................................. 370
2001.................................................................. 303
Thereafter............................................................ 837
------
$3,193
======
</TABLE>

The Company had rent expense of $145,000, $208,000 and $564,000 in 1994,
1995 and 1996, respectively.

F-18
<PAGE> 80

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. CAPITAL STOCK

Preferred Stock

Preferred Stock consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1995 1996 1997
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Series A, no par value, 300,000 shares authorized and
outstanding, entitled to a preference in liquidation
of $300,000......................................... $ 300 $ 300 $ 300
Series B, no par value, 250,000 shares authorized and
outstanding, entitled to a preference in liquidation
of $500,000......................................... 500 500 500
Series C, no par value, 1,346,400 shares authorized;
1,340,000 issued and outstanding, entitled to a
preference in liquidation of $3,350................. 3,350 3,350 3,350
Series D, no par value, 824,992 shares authorized;
800,000 issued and outstanding, entitled to a
preference in liquidation of $2,600,000............. 2,600 2,600 2,600
Series E, no par value, 4,100,000 and 5,100,000 and
5,100,000 shares authorized, respectively;
3,928,085, 4,769,999 and 4,823,999 shares issued and
outstanding, respectively, entitled to a preference
in liquidation of $12,766,000, $19,838,000 and
$20,486,000, respectively........................... 12,766 19,838 20,486
Series F, no par value, no shares, 3,000,000 and
3,000,000 authorized and outstanding,
respectively, entitled to a preference in
liquidation of $36,000,000....................... -- 36,000 36,000
------- ------- -------
$19,516 $62,588 $63,236
======= ======= =======
</TABLE>

In 1996, the Company increased the total authorized number of shares of
Preferred Stock to 25,000,000. Preferred Stock may be issued in one or more
series with rights and dividend preferences determined by the board of
directors. Each share of Preferred Stock entitles the holder to one vote and to
receive dividends when and if declared by the board of directors. No
distributions may be paid to the holders of Common Stock unless the holders of
preferred stock have received stated minimum preferential dividends and
participate in such distributions to holders of Common Stock. All accrued
dividends on the Preferred Stock must be paid prior to such distributions. No
dividends have been paid or declared as of March 31, 1997.

In April 1996, the Company issued 3,000,000 shares of its Series F
Preferred Stock to Novartis at $12.00 per share. In connection with this equity
investment, the Company and the Investor signed certain joint marketing,
screening and right of first refusal agreements. See Note 9.

In the event of liquidation, the holders of Series A, B, C, D, E and F
Preferred Stock are entitled to receive, prior to any distribution to the
holders of Common Stock, the liquidation preference of the respective series of
Preferred Stock indicated above, plus all declared and unpaid dividends. After
these distributions have been made, the remaining assets of the Company, if any,
will be distributed to the holders of Common Stock in an amount equal to $1.20
per share. After the above distributions have been made, the remaining assets of
the Company, if any, will be shared by the holders of Preferred and Common Stock
in the same proportion as the number of shares of Common Stock and Preferred
Stock then held by each stockholder. In the event of a

F-19
<PAGE> 81

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

consolidation, merger, sale, conveyance or other disposition of all or
substantially all of the Company's property or business, the holders of
Preferred Stock are to receive the amount they would have received in
liquidation.

Each share of Preferred Stock is convertible, at the option of the holder,
on a share for share basis into Common Stock, subject to certain anti-dilutive
provisions. Conversion into Common Stock is automatic in the event of a
qualifying IPO.

Stockholders owning at least 35% of the outstanding Preferred Stock
(including Common Stock issued upon conversion of Preferred Stock) may require
the Company to register their shares with the Securities and Exchange Commission
under certain circumstances. Registration expenses are to be paid by the
Company.

Common Stock

The Company has granted stock purchase rights to acquire 322,000 shares of
Common Stock to key executives pursuant to the 1994 Key Executive Stock Plan.
The executives exercised these rights by executing promissory notes payable to
the Company. The notes mature in six years, bear interest at 7.5% and are
secured by a pledge of the shares of Common Stock purchased. Under the terms of
the Key Executive Stock Plan, if the purchaser's relationship with the Company
ceases for any reason within 48 months of the date of grant the Company may,
within 90 days following termination, repurchase at the original exercise price
all of the stock which has not vested. The stock vests ratably over the 48 month
period.

The following table summarizes information about the stock purchase rights
exercised during the years ended, and the amounts outstanding and vested, at
December 31, 1995 and 1996:

<TABLE>
<CAPTION>
NUMBER DECEMBER 31, 1995 DECEMBER 31, 1996
OF EXERCISE ------------------ -------------------
SHARES PRICE EXERCISED VESTED EXERCISED VESTED
------- -------- --------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Stock purchase rights granted
during 1994..................... 297,000 $0.35 297,000 95,066 -- 169,310
Stock purchase rights granted
during 1996..................... 25,000 $1.20 -- -- -- 1,040
</TABLE>

In January 1997, the stock purchase rights granted in 1996 were exercised
by the grantee through a promissory note which is due January 2003.

Stock Option Plans

The Company has a stock option plan (the "1988 Stock Plan") which
authorizes the grant of stock options and stock purchase rights to employees,
officers, directors and consultants of the Company to purchase shares of Common
Stock. In 1996, the board of directors increased the total number of shares of
Common Stock reserved for issuance under the 1988 Stock Plan to 2,683,060. The
stock options granted by the board of directors may be either incentive stock
options ("ISO") or nonstatutory stock options ("NSO") and expire as determined
by the board of directors. The exercise price for options may be no less than
100% of fair market value for ISOs or 85% of fair market value for NSOs. Options
granted will expire no later than the tenth anniversary subsequent to the date
of grant or 90 days following termination of employment, except in cases of
death or disability, in which case the options will remain exercisable for up to
twelve months. Under the terms of the 1988 Stock Plan, in the event the Company
is sold or merged, options granted will either be assumed by the surviving
corporation or vest immediately.

During 1994, the Company approved a Key Executive Stock Plan which
authorizes the grant of options and stock purchase rights to key executives,
including directors, of the Company to purchase up to 500,000 shares of Common
Stock. The board of directors may grant stock purchase rights or stock options,
which may be either ISOs or NSOs and expire as determined by the board of
directors. The exercise price may be no less than 100%

F-20
<PAGE> 82

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of fair market value for ISOs or 85% of fair market value for NSOs or purchase
rights. Options granted will expire no later than the tenth anniversary
subsequent to the date of grant or 90 days following termination of employment,
except in cases of death or disability, in which case the options will remain
exercisable for up to twelve months. Under the terms of the Key Executive Stock
Plan, in the event the Company is sold or merged, options granted will either be
assumed by the surviving corporation or vest immediately.

In March 1997, the Company's board of directors adopted the Company's 1997
Stock Incentive Plan (the "Stock Plan"). The Stock Plan replaces the Company's
1988 Stock Plan and its 1994 Key Executive Plan (the "Prior Plans"). The Prior
Plans were terminated effective upon the adoption of the Stock Plan. No further
grants will be made under the Prior Plans, although the terms of the Prior Plans
will continue to govern all outstanding awards made thereunder. All future
awards will be made under the Stock Plan. The number of shares of Common Stock
that are reserved for issuance under the Stock Plan pursuant to the direct award
or sale of shares or the exercise of options is equal to 1,350,000 shares plus
the number of shares remaining available under the Prior Plans on the date of
their termination. The number of shares reserved for issuance under the Stock
Plan will be increased automatically on January 1 of each year by a number equal
to the lesser of (a) 1,500,000 shares or (b) 5% of the shares of Common Stock
outstanding on the immediately preceding December 31.

Statement Of Financial Accounting Standards No. 123 ("SFAS 123")

SFAS 123, Accounting for Stock-Based Compensation, defines a fair value
based method of accounting for employee stock options or similar equity
instruments. However, SFAS 123 allows the continued measurement of compensation
cost for such plans using the intrinsic value based method prescribed by APB
Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), provided
that pro forma disclosures are made of net income or loss, assuming the fair
value based method of SFAS 123 had been applied. The Company has elected to
account for its stock-based compensation plans under APB 25; accordingly, for
purposes of the pro forma disclosures presented below, the Company has computed
the fair values of all options granted during 1995 and 1996, using the
Black-Scholes pricing model and the following weighted average assumptions:

<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Risk-free interest rate.............................. 5.93% 6.12%
Expected lives....................................... 3.30 years 3.11 years
Expected volatility.................................. 80% 80%
Expected dividend yield.............................. 0% 0%
</TABLE>

To estimate expected lives of options for this valuation, it was assumed
options will be exercised at varying schedules after becoming fully vested
dependent upon the income level of the option holder. For measurement purposes,
options have been segregated into three income groups, and estimated exercise
behavior of option recipients varies from zero to one year from the date of
vesting, dependent on income group (less highly compensated employees are
expected to have shorter holding periods). All options are initially assumed to
vest. Cumulative compensation cost recognized in pro forma net income or loss
with respect to options that are forfeited prior to vesting is adjusted as a
reduction of pro forma compensation expense in the period of forfeiture. Because
the Company's Common Stock is not yet publicly traded, the expected market
volatility was estimated using the estimated average volatility of four publicly
held companies which the Company believes to be similar with respect to the
markets in which they compete. Actual volatility of the Company's stock may
vary. Fair value computations are highly sensitive to the volatility factor
assumed; the greater the volatility, the higher the computed fair value of the
options granted.

The total fair value of options granted was computed to be approximately
$120,000 and $468,000 for the years ended December 31, 1995 and 1996,
respectively. The amounts are amortized ratably over the vesting periods of the
options. Pro forma stock-based compensation, net of the effect of forfeitures,
was $38,000 and $176,000 for 1995 and 1996, respectively.

F-21
<PAGE> 83

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net loss would have been reported as
follows (in thousands except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1995 1996
------- --------
<S> <C> <C>
Net loss:
As reported............................................... $(4,566) $(17,975)
======= ========
Pro forma (unaudited)..................................... $(4,604) $(18,151)
======= ========
Pro forma net loss per share:
As reported (unaudited)................................... $ (1.41)
========
Pro forma (unaudited)..................................... $ (1.42)
========
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------- THREE MONTHS ENDED
1995 1996 MARCH 31, 1997
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period......................... 688,361 $0.2503 1,279,592 $0.2973 1,898,992 $0.6250
Granted........................ 612,850 $0.3500 794,624 $1.1031 682,335 $1.8586
Cancelled...................... (12,496) $0.3117 (72,942) $0.4634 (22,793) $1.1274
Exercised...................... (9,123) $0.2778 (102,282) $0.3559 (68,336) $0.2831
--------- --------- ---------
Outstanding at end of period..... 1,279,592 $0.2973 1,898,992 $0.6250 2,490,198 $0.9678
========= ========= =========
Exercisable at end of period..... 533,814 $0.2433 850,662 $0.4049 890,594 $0.4540
========= ======= ========= ========= =======
</TABLE>

The weighted average exercise prices approximated weighted average
estimated fair values of options granted during the years ended December 31,
1995 and 1996, and the three months ended March 31, 1997.

The following table summarizes information about stock options outstanding
and exercisable at December 31, 1996:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED OPTIONS EXERCISABLE
NUMBER OF AVERAGE -------------------------
OPTIONS REMAINING WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
DECEMBER 31, LIFE IN EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1996 YEARS PRICE 1996 PRICE
------------------------ -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$0.1000-$0.2500................ 448,692 5.69 $0.2104 433,574 $0.2090
$0.3500-$0.3500................ 762,323 8.39 $0.3500 290,222 $0.3500
$1.2000-$1.2000................ 687,977 9.49 $1.2000 126,866 $1.2000
--------- -------
$0.1000-$1.2000................ 1,898,992 8.11 $0.5877 850,662 $0.4049
========= ==== ======= ======= =======
</TABLE>

As of March 31, 1997, the Company had options to purchase 2,490,198
(unaudited) shares of Common Stock outstanding with exercise prices ranging from
$0.10 -- $3.00 per share.

F-22
<PAGE> 84

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock Warrants

The Company has issued warrants to purchase 6,400 shares of Series C
Preferred Stock at an exercise price of $2.50 per share and 6,225 shares, 267
shares and 18,500 shares of Series D Preferred Stock at an exercise price of
$3.25 per share in connection with the leases discussed in Note 4. These
warrants expire on November 7, 1998, June 7, 2002, December 30, 2002 and October
20, 2003, respectively. No warrants have been exercised as of December 31, 1996.

11. MAJOR CUSTOMERS

The Company had sales of greater than 10% of total revenue to only one
customer during the year ended December 31, 1996. This customer, which
represented 64% of total revenues, purchases vaccines from Diamond under the
terms of a take-or-pay contract which expires in June 1999.

12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, MARCH 31,
------------------------ ------------
1994 1995 1996 1996 1997
------ ---- ------ ---- ----
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash paid for interest............................. $ 21 $ 55 $ 331 $157 $146
Noncash investing and financing activities:
Purchase of intangible assets through the
issuance of debt.............................. -- -- 207 207 320
Issuance of Preferred Stock and options to
purchase Common Stock in exchange for the
common stock of Diamond, net of cash
received...................................... -- -- 7,058 -- --
Reduction in future payments on debt to customer
in exchange for the granting of certain
rights........................................ -- -- 1,250 -- --
Issuance of Preferred Stock in exchange for
cancellation of indebtedness, including
accrued interest.............................. 2,385 639 -- -- --
Purchase of assets under direct capital lease
financing..................................... 155 416 -- -- 255
Issuance of Preferred Stock in exchange for the
capital stock of Bloxham, net of cash
received...................................... -- -- -- -- 648
</TABLE>

F-23
<PAGE> 85

INDEPENDENT AUDITOR'S REPORT

The Board of Directors
Diamond Animal Health, Inc.
Des Moines, Iowa

We have audited the accompanying statements of income and cash flows of
Diamond Animal Health, Inc. for the year ended March 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Diamond
Animal Health, Inc. for the year ended March 31, 1996 in conformity with
generally accepted accounting principles.

/s/ MCGLADREY & PULLEN, LLP

MCGLADREY & PULLEN, LLP

Des Moines, Iowa
May 14, 1996

F-24
<PAGE> 86

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Diamond Animal Health, Inc.

We have audited the accompanying statements of income and cash flows of
Diamond Animal Health, Inc. for the year ended March 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Diamond
Animal Health, Inc. for the year ended March 31, 1995 in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

Des Moines, Iowa
May 30, 1995

F-25
<PAGE> 87

DIAMOND ANIMAL HEALTH, INC.

STATEMENTS OF INCOME
YEARS ENDED MARCH 31, 1995 AND 1996
(in thousands)

<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net sales (Note 6).......................................... $10,944 $ 8,124
Cost of goods sold.......................................... 7,713 6,467
------- -------
Gross profit.............................................. 3,231 1,657
Selling, general and administrative expenses (Note 5)....... 2,531 2,829
------- -------
Operating income (loss)................................... 700 (1,172)
------- -------
Financial income (expense):
Interest income........................................... 40 12
Interest (expense)........................................ (355) (426)
------- -------
(315) (414)
------- -------
Income (loss) before income tax expense (benefit)......... 385 (1,586)
Income tax expense (benefit) (Note 4)....................... 80 (130)
------- -------
Net income (loss)................................. $ 305 $(1,456)
======= =======
</TABLE>

See Notes to Financial Statements.

F-26
<PAGE> 88

DIAMOND ANIMAL HEALTH, INC.

STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995 AND 1996
(in thousands)

<TABLE>
<CAPTION>
1995 1996
--------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)......................................... $ 305 $ (1,456)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation........................................... 105 159
Amortization........................................... 25 23
Noncash pension expense................................ -- 7
Noncash interest expense............................... 202 195
Change in operating assets and liabilities:
(Increase) in trade receivables...................... (370) (37)
(Increase) in income tax refund claim receivable..... -- (160)
(Increase) in inventories............................ (64) (667)
(Increase) decrease in prepaid expenses.............. 14 (70)
(Increase) decrease in other assets.................. (19) 16
Increase in accounts payable......................... 32 421
Increase (decrease) in accrued expenses.............. (34) 152
Increase in customer deposits........................ -- 623
(Decrease) in deferred revenue....................... (373) --
--------- -----------
Net cash (used in) operating activities........... (177) (794)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment........................ (428) (218)
Payments of organization costs............................ (37) --
--------- -----------
Net cash (used in) investing activities........... (465) (218)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt........................................ 645 1,505
Principal payments on debt, including capital lease
obligations............................................ (503) (482)
--------- -----------
Net cash provided by financing activities......... 142 1,023
--------- -----------
Net increase (decrease) in cash................... (500) 11
CASH
Beginning................................................. 583 83
--------- -----------
Ending.................................................... $ 83 $ 94
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest............................................... $ 146 $ 221
Income taxes........................................... 159 5
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Accretion (valuation) of redeemable common stock purchase
warrants (Note 3)...................................... $ 116 $ (116)
Capital lease obligations incurred for the purchase of
equipment.............................................. -- 136
347,028 shares of common stock issued in exchange for
redeemable common stock purchase warrants, net of $100
cash secured (Note 3).................................. -- 135
(Decrease) in minimum pension liability as stockholder's
equity................................................. -- (24)
</TABLE>

See Notes to Financial Statements.

F-27
<PAGE> 89

DIAMOND ANIMAL HEALTH, INC.

NOTES TO FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business: Diamond Animal Health, Inc. (the "Company")
manufactures and sells animal health products to the agricultural and veterinary
markets in the United States, Canada and Europe. The Company, which was
incorporated in 1993 and began operations in its current legal form in 1994, is
a successor corporation to an original manufacturing company which was founded
in 1952.

Significant accounting policies:

Cost of goods sold: Inventories are stated at the lower of cost, determined
by using the first-in, first-out (FIFO) method, or market.

Depreciation: Depreciation is provided on the straight-line method over the
estimated useful lives of the assets, including 10 to 15 years for buildings and
5 to 10 years for machinery and equipment. It is the Company's policy to include
amortization of assets acquired under capital leases with depreciation expense
on owned assets.

Amortization: Costs incurred in connection with the organization of the
Company are amortized on the straight-line basis over five years.

Deferred taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.

Stock options and awards: Employee stock options and awards are accounted
for in accordance with Accounting Principles Board Opinion No. 25 using the
intrinsic value method. Under that method, the excess of the fair value of the
underlying stock over the exercise price is determined at the measurement date
and recognized as compensation expense over the related service period.

Research and development: Expenditures for research and development are
charged to expense as incurred. Expense for the years ended March 31, 1995 and
1996 was approximately $772,000 and $1,455,000, respectively.

Revenue recognition: Revenue is recognized upon shipment of orders.

Estimates and assumptions: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

NOTE 2. RENT EXPENSE

The Company leases its primary production and office facility under a
noncancelable operating lease expiring on December 31, 1998. The lease contains
a five-year renewal option exercisable at the option of the Company. In
addition, the Company leases certain office equipment and autos under operating
leases expiring from February 1997 to May 2000. Total rent expense was
approximately $178,000 and $182,000 for the years ended March 31, 1995 and 1996,
respectively.

NOTE 3. REDEEMABLE COMMON STOCK PURCHASE WARRANTS

In connection with the initial capitalization of the Company, warrants were
issued to subordinated lenders to purchase a total of 337,028 shares of common
stock at an exercise price of $.005 per share. Total proceeds received from the
lenders were allocated to long-term debt and warrants based on fair value,
resulting in an initial

F-28
<PAGE> 90

DIAMOND ANIMAL HEALTH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

carrying value of the warrants of $133,000. The carrying value of the warrants
was being accreted to the estimated redemption price on a pro-rata basis over
the period until the initial redemption date, with a corresponding charge
(credit) to retained earnings of $116,000 and $(116,000) for the years ended
March 31, 1995 and 1996, respectively. All warrants were exercised during the
year ended March 31, 1996. Under a similar agreement, warrants to purchase
20,000 shares of common stock were issued in March 1996, with 10,000 warrants
exercised at $.01 per share and the remaining 10,000 exercised subsequent to
year-end at $.01 per share.

NOTE 4. INCOME TAXES

Components of income tax expense (benefit) for the years ended March 31,
1995 and 1996 were as follows:

<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Current expense (benefit)............... $ 196,000 $(130,000)
Research and development tax credits.... (116,000) --
--------- ---------
$ 80,000 $(130,000)
========= =========
</TABLE>

The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income (loss) from
continuing operations for the years ended March 31, 1995 and 1996 due to the
following:

<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Computed "expected" (benefit) expense... $131,000 $(544,000)
Increase (decrease) in valuation
allowance............................. (51,000) 414,000
-------- ---------
$ 80,000 $(130,000)
======== =========
</TABLE>

At March 31, 1996, the Company had research and development tax credit
carryforwards of approximately $370,000 which expire in 2000 through 2003. The
Company also had net operating loss carryforwards of $567,000 which expire in
the year 2010.

NOTE 5. EMPLOYEE BENEFIT PLANS

The Company has a noncontributory defined benefit pension plan covering all
employees who have met the eligibility requirements. The plan provides monthly
benefits on years of service which are subject to certain reductions if the
employee retires before reaching age 65. Substantially all employees were
eligible for the plan prior to the plan being frozen. The Company's funding
policy is to make the minimum annual contribution that is required by applicable
regulations. Effective October 1992, the Company froze the plan restricting new
participants and benefits for future service.

Net pension cost for the Company's defined benefit pension plan consisted
of the following components for the year ended March 31, 1996. Pension cost for
1995 was not material and the components for that period have not been
determined.

<TABLE>
<CAPTION>
1996
--------
<S> <C>
Interest cost on projected benefit obligation............... $ 72,000
Actual return on plan assets................................ (171,000)
Net amortization and deferral............................... 106,000
--------
$ 7,000
========
</TABLE>

F-29
<PAGE> 91

DIAMOND ANIMAL HEALTH, INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Assumptions used by the Company in the determination of the pension plan
information consisted of the following as of March 31, 1996:

<TABLE>
<S> <C>
Discount rate............................................... 7.00%
Expected long-term rate of return on plan assets............ 7.75%
</TABLE>

The Company has a 401(k) plan covering substantially all full-time
employees. Under the terms of the plan, participants may contribute up to 15% of
their salary to the plan. The Company matches certain employee contributions,
depending on length of service with the Company. Expense related to this plan
was approximately $93,000 and $82,000 for the years ended March 31, 1995 and
1996, respectively. The Company also has a defined contribution plan covering
substantially all full-time employees. The Company contributed 4% and 3% of all
eligible employee earnings for the years ended March 31, 1995 and 1996,
respectively. Expense related to this plan was approximately $130,000 and
$108,000 for the years ended March 31, 1995 and 1996, respectively.

The Company has an employee stock option plan providing for the issuance of
up to 337,028 shares of the Company's common stock. The plan provides for
options to be issued to key employees at an exercise price of not less than fair
market value with a term of ten years and a month to exercise from date of
grant. At March 31, 1996 the Company had options outstanding for a total of
129,737 shares at an exercise price of $3.18 per share, all of which were fully
vested and exercisable and expire in the years ending March 31, 2005 and 2006.

NOTE 6. MAJOR CUSTOMER

Approximately 88% and 71% of the Company's revenues were derived from the
Company's major customer representing sales of approximately $9,578,000 and
$5,766,000 for the years ended March 31, 1995 and 1996, respectively. The
Company has a supply agreement with the customer which obligates the customer to
purchase a minimum quantity of vaccines from the Company annually on a calendar
year basis starting January 1, 1996. The agreement is effective through June
1999, renewable annually thereafter. This agreement is terminable by either
party for material breach which remains uncured by the other party or after June
30, 1999 on 18 months' written notice.

NOTE 7. INTEREST EXPENSE

The Company had long-term debt, bank and other notes payable totaling
$3,995,000 and $5,347,000 at March 31, 1995 and 1996, respectively, at interest
rates ranging primarily from 8% to 10%.

F-30
<PAGE> 92

PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma consolidated condensed statement of
operations for the year ended December 31, 1996 gives effect to the acquisition
of Diamond in April 1996 and the canine allergy business from Bioproducts DVM,
Inc. in March 1996 as if each had occurred on January 1, 1996. The pro forma
adjustments are based upon currently available information and upon certain
assumptions that management believes are reasonable under current circumstances.
The unaudited pro forma consolidated statement of operations and notes thereto
do not purport to represent what the Company's consolidated results of
operations would actually have been if such transactions had in fact occurred on
such date. The unaudited pro forma consolidated statement of operations and
accompanying notes should be read in conjunction with the audited consolidated
financial statements and notes thereto and other financial information
pertaining to the Company included elsewhere in the prospectus.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------
HISTORICAL RESULTS UNAUDITED
HESKA ------------------------------- PRO
HISTORICAL BIOPRODUCTS DIAMOND PRO FORMA FORMA
RESULTS (UNAUDITED)(1) (UNAUDITED)(1) ADJUSTMENTS RESULTS
---------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 9,959 $ 149 $ 2,820 $ -- $ 12,928
Costs and operating expenses..... (26,648) (115) (3,086) -- (29,849)
Depreciation and amortization.... (1,072) -- (64) (97)(2) (1,233)
Amortization of intangible
assets......................... (1,100) -- -- (114)(3) (1,214)
-------- ----- ------- ----- --------
Loss from operations............. (18,861) 34 (330) (211) (19,368)
Interest and other expense....... 886 -- (137) 30(4) 779
-------- ----- ------- ----- --------
Net loss......................... $(17,975) $ 34 $ (467) $(181) $(18,589)
======== ===== ======= ===== ========
Unaudited pro forma net loss per
share(5)....................... $ (1.41) $ (1.46)
Weighted average common shares
outstanding(5)................. 12,740 12,740
</TABLE>

- ---------------

(1) Represents the sales and costs of sales of products sold related to the
period from January through March and April, respectively, of the
Bioproducts Business and Diamond. The results of both operations were
included in the Company's historical operations from their respective
acquisition dates.

(2) Represents additional depreciation and amortization of the tangible assets
acquired.

(3) Represents additional depreciation and amortization of certain intangible
assets acquired from the respective entities. For purposes of this pro forma
statement of operations, the Company has recorded amortization of the
intangible asset related to the take-or-pay contract over the period from
January 1996 through June 1999. The Company's historical statement of
operations includes amortization of such asset over the period from April
1996 through June 1999.

(4) Represents a reduction in interest expense relative to certain notes payable
which were converted into equity immediately prior to the acquisition of
Diamond in April 1996.

(5) Assumes conversion of Preferred Stock into Common Stock of the Company. See
Note 2 of the Notes to Consolidated Financial Statements.

F-31
<PAGE> 93
DESCRIPTION OF ART ON INSIDE BACK COVER

Photographs of dogs, cats and horses and drawings of the logos of
Heska's subsidiaries, Bloxham Laboratories, Ltd. and Diamond Animal Health,
Inc.

Caption reads -- Heska -- The Science of Caring for Companion Animals

<PAGE> 94

------------------------------------------------------

NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.

------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 13
Dividend Policy........................ 13
Capitalization......................... 14
Dilution............................... 15
Selected Consolidated Financial Data... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 22
Management............................. 41
Certain Transactions................... 49
Principal and Selling Stockholders..... 50
Description of Capital Stock........... 52
Shares Eligible for Future Sale........ 54
Underwriting........................... 56
Notice to Canadian Residents........... 57
Legal Matters.......................... 58
Experts................................ 58
Additional Information................. 59
Index to Consolidated Financial
Statements........................... F-1
</TABLE>

------------------

UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

======================================================

[HESKA CORPORATION LOGO]

5,350,000 Shares

Common Stock

($.001 par value)

PROSPECTUS

CREDIT SUISSE FIRST BOSTON

MERRILL LYNCH & CO.

------------------------------------------------------
<PAGE> 95

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the National Association of Securities Dealers, Inc. filing fee.

<TABLE>
<S> <C>
SEC registration fee........................................ $ 29,830
National Association of Securities Dealers, Inc. filing
fee....................................................... 10,344
Blue Sky fees and expenses.................................. 7,500
Accounting fees and expenses................................ 100,000
Legal fees and expenses..................................... 300,000
The Nasdaq Stock Market listing fee......................... 35,000
Printing and engraving expenses............................. 140,000
Registrar and Transfer Agent's fees......................... 10,000
Miscellaneous fees and expenses............................. 17,326
--------
Total............................................. $650,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act. Article VIII of the Registrant's Restated Certificate of
Incorporation (Exhibit 3.1 hereto) authorizes the Board of Directors of the
Registrant to indemnify the Registrant's directors, officers, employees and
other agents to the fullest extent permitted by the Delaware General Corporation
Law. The Registrant has also entered into agreements with its directors and
officers that will require the Registrant, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or service
as directors or officers to the fullest extent not prohibited by law.

The Underwriting Agreement (Exhibit 1.1) provides for indemnification by
the Underwriters of the Registrant, its directors and officers, and by the
Registrant of the Underwriters, for certain liabilities, including liabilities
arising under the Act, and affords certain rights of contribution with respect
thereto.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

(a) On various dates between January 1994 and May 1997, the Registrant
issued an aggregate of 524,242 shares of its Common Stock to 63 employees
pursuant to the exercise of options granted under its stock option plans. The
exercise prices per share ranged from $.35 to $3.00, for an aggregate
consideration of $151,689. The Registrant relied on the exemption provided by
Rule 701 under the Act.

(b) In February 1995 and January 1997, the Registrant issued an aggregate
of 322,000 shares of its Common Stock to two senior executives and a director of
the Company pursuant to restricted stock purchase agreements under a stock
option plan. The purchase prices ranged from $0.35 to $1.20 per share for an
aggregate consideration of $133,950. The Registrant relied on the exemption
provided by Section 4(2) and Rule 701 under the Act.

(c) In 1994 and 1995, the Registrant issued an aggregate of 3,928,085
shares of Series E Preferred Stock to a total of three accredited investors at
an effective price per share of $3.25, for an aggregate cash consideration of
$12,766,276. In April 1996, the Company issued 3,000,000 shares of its Series F
Preferred Stock to a single accredited investor at a purchase price of $12.00
per share for an aggregate cash consideration of $36,000,000. The Registrant
relied on the exemptions provided by Sections 4(2) and 4(6) of the Act.

II-1
<PAGE> 96

(d) On various dates between March 1994 and February 1995, the Registrant
issued an aggregate of 3,525 shares of Common Stock to two consultants of the
Registrant in consideration of consulting services. The Registrant relied upon
the exemptions provided by Section 4(2) and Rule 701 of the Act.

(e) In April 1996, the Registrant issued an aggregate of 841,914 shares of
Series E Preferred Stock to the eight shareholders of Diamond Animal Health,
Inc. in exchange for all of the outstanding shares of Diamond. The Registrant
relied upon the exemption provided by Section 4(2) of the Act.

(f) In February 1997, the Registrant issued an aggregate of 54,000 shares
of Series E Preferred Stock to the three shareholders of Bloxham Laboratories
Limited in exchange for all of the outstanding shares of Bloxham. The Registrant
relied upon the exemption provided by Section 4(2) of the Act.

(g) In May 1997, the Registrant issued an aggregate of 376,000 shares of
Common Stock and 70,000 shares of Series E Preferred Stock to the three
shareholders of Astarix Institute, Inc. in exchange for all of the outstanding
shares of Astarix. The Registrant relied upon the exemption provided by Section
4(2) of the Act.

The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock certificates
issued in such transactions. All recipients had adequate access, through
employment or other relationships, to information about the Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

II-2
<PAGE> 97

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.5+* Screening and Development Agreement between Ciba-Geigy
Limited and Registrant, dated as of April 12, 1996.
10.6* Right of First Refusal Agreement between Ciba-Geigy Limited
and Registrant, dated as of April 12, 1996.
10.7+* Marketing Agreement between Registrant and Ciba-Geigy
Limited dated as of April 12, 1996.
10.8+* Marketing Agreement between Registrant and Ciba-Geigy
Corporation dated as of April 12, 1996.
10.9+* Manufacturing and Supply Agreement between and among Diamond
Animal Health, Inc., Agrion Corporation, Diamond Scientific
Co. and Miles Inc. dated December 31, 1993 and Amendment and
Extension thereto dated September 1, 1995.
10.10* Employment Agreement between Registrant and Robert B. Grieve
dated January 1, 1994, as amended March 4, 1997.
10.11* Employment Agreement between Registrant and Fred M.
Schwarzer dated November 1, 1994, as amended March 4, 1997.
10.12* Employment Agreement between Registrant and R. Lee Seward
dated October 17, 1994.
10.13* Employment Agreement between Registrant and Louis G. Van
Daele dated April 14, 1996.
10.14 [RESERVED]
10.15* Restricted Stock Purchase Agreement dated February 28, 1995
by and between Registrant and Fred M. Schwarzer.
10.16* Restricted Stock Purchase Agreement dated February 28, 1995
by and between Registrant and R. Lee Seward.
10.17* Restricted Stock Purchase Agreement dated January 11, 1997
by and between Registrant and Denis H. Pomroy.
10.18* Form of Indemnification Agreement to be entered into between
Registrant and its directors and certain officers.
10.19 1997 Incentive Stock Plan of Registrant.
10.20* Forms of Option Agreement.
10.21* 1997 Employee Stock Purchase Plan of Registrant.
10.22* Lease Agreement dated March 8, 1994 between Sharp Point
Properties, LLC and Registrant.
10.23* Lease Agreement dated as of June 27, 1996 between GB
Ventures and Registrant.
10.24* Lease Agreement dated as of July 11, 1996 between GB
Ventures and Registrant.
10.25* Lease Agreement dated as of December 31, 1993 between Miles,
Inc. and Diamond Animal Health, Inc., as amended September
1, 1995.
11.1 Statement of computation of earnings per share.
21.1* Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McGladrey & Pullen, LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration
Statement).
24.1* Power of Attorney.
27.* Financial Data Schedule.
</TABLE>

- ---------------

* Previously filed.

+ Confidential treatment has been requested with respect to certain portions of
these agreements.

II-3
<PAGE> 98

(B) FINANCIAL STATEMENT SCHEDULES

None.

Schedules have been omitted because they are not applicable or not required
or because the information is included elsewhere in the Financial Statements or
the notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

(3) It will provide to the underwriters at the closing(s) specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriters to permit prompt delivery to each
purchaser.

II-4
<PAGE> 99

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Fort
Collins, State of Colorado, on the 29th day of May, 1997.

HESKA CORPORATION

By /s/ FRED M. SCHWARZER
-----------------------------------
Fred M. Schwarzer
President and Chief Executive
Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>

/s/ FRED M. SCHWARZER President and Chief Executive Officer
- ------------------------------------------------ (Principal Executive Officer) and
Fred M. Schwarzer Director May 29, 1997

/s/ WILLIAM G. SKOLOUT Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting Officer)
William G. Skolout May 29, 1997

* Chairman of the Board
- ------------------------------------------------
A. Barr Dolan May 29, 1997

/s/ ROBERT B. GRIEVE, PH.D. Chief Scientific Officer and Vice
- ------------------------------------------------ Chairman
Robert B. Grieve, Ph.D. May 29, 1997

* Director
- ------------------------------------------------
Lyle A. Hohnke, Ph.D. May 29, 1997

* Director
- ------------------------------------------------
Denis H. Pomroy May 29, 1997

* Director
- ------------------------------------------------
Lynnor B. Stevenson, Ph.D. May 29, 1997

* Director
- ------------------------------------------------
Guy Tebbit, Ph.D. May 29, 1997

*/s/ FRED M. SCHWARZER
---------------------------------------------
Fred M. Schwarzer,
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 100

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1(a)* Restated Articles of Incorporation of Heska Corporation, a
California corporation, as filed with the Secretary of State
of California on April 4, 1996.
3.1(b)* Form of Restated Certificate of Incorporation of Heska
Merger Corporation, a Delaware corporation (to be filed
prior to the effective date of the Registration Statement).
3.1(c) Form of Restated Certificate of Incorporation of Heska
Corporation, a Delaware corporation (to be filed after the
closing of the offering).
3.2(a)* Bylaws of Heska Corporation, a California corporation, as
amended.
3.2(b)* Bylaws of Heska Merger Corporation, a Delaware corporation,
as amended.
3.2(c) Bylaws of Heska Corporation, a Delaware corporation, as
amended (to be adopted after the closing of the offering).
4.1 Specimen Common Stock Certificate.
4.2* First Amended Investors' Rights Agreement by and among
Registrant and certain stockholders of Registrant dated as
of April 12, 1996.
4.3* Form of warrant to purchase Series C Preferred Stock.
4.4* Form of warrant to purchase Series D Preferred Stock.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
9.1* Voting Agreement by and among Registrant and certain
stockholders of Registrant, dated as of April 12, 1996.
10.1+* Collaborative Agreement between Registrant and Eisai Co.,
Ltd. dated January 25, 1993.
10.2+* Canine Heartworm Cooperation Agreement between Registrant
and Bayer AG dated as of June 10, 1994.
10.3+* Feline Toxoplasmosis Cooperation Agreement between
Registrant and Bayer AG dated as of June 10, 1994.
10.4+* Product Supply and License Agreement between Registrant and
Atrix Laboratories, Inc. dated May 1, 1995, as amended June
23, 1995.
10.5+* Screening and Development Agreement between Ciba-Geigy
Limited and Registrant, dated as of April 12, 1996.
10.6* Right of First Refusal Agreement between Ciba-Geigy Limited
and Registrant, dated as of April 12, 1996.
10.7+* Marketing Agreement between Registrant and Ciba-Geigy
Limited dated as of April 12, 1996.
10.8+* Marketing Agreement between Registrant and Ciba-Geigy
Corporation dated as of April 12, 1996.
10.9+* Manufacturing and Supply Agreement between and among Diamond
Animal Health, Inc., Agrion Corporation, Diamond Scientific
Co. and Miles Inc. dated December 31, 1993 and Amendment and
Extension thereto dated September 1, 1995.
10.10* Employment Agreement between Registrant and Robert B. Grieve
dated January 1, 1994, as amended March 4, 1997.
10.11* Employment Agreement between Registrant and Fred M.
Schwarzer dated November 1, 1994, as amended March 4, 1997.
10.12* Employment Agreement between Registrant and R. Lee Seward
dated October 17, 1994.
10.13* Employment Agreement between Registrant and Louis G. Van
Daele dated April 14, 1996.
10.14 [RESERVED]
</TABLE>

<PAGE> 101

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.15* Restricted Stock Purchase Agreement dated February 28, 1995
by and between Registrant and Fred M. Schwarzer.
10.16* Restricted Stock Purchase Agreement dated February 28, 1995
by and between Registrant and R. Lee Seward.
10.17* Restricted Stock Purchase Agreement dated January 11, 1997
by and between Registrant and Denis H. Pomroy.
10.18* Form of Indemnification Agreement to be entered into between
Registrant and its directors and certain officers.
10.19 1997 Incentive Stock Plan of Registrant.
10.20* Forms of Option Agreement.
10.21* 1997 Employee Stock Purchase Plan of Registrant.
10.22* Lease Agreement dated March 8, 1994 between Sharp Point
Properties, LLC and Registrant.
10.23* Lease Agreement dated as of June 27, 1996 between GB
Ventures and Registrant.
10.24* Lease Agreement dated as of July 11, 1996 between GB
Ventures and Registrant.
10.25* Lease Agreement dated as of December 31, 1993 between Miles,
Inc. and Diamond Animal Health, Inc., as amended September
1, 1995.
11.1 Statement of computation of earnings per share.
21.1* Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of McGladrey & Pullen, LLP.
23.3 Consent of Ernst & Young LLP.
23.4 Consent of Pillsbury Madison & Sutro LLP (included in its
opinion filed as Exhibit 5.1 to this Registration
Statement).
24.1* Power of Attorney (see page II-5).
27.* Financial Data Schedule.
</TABLE>

- ---------------

* Previously filed.

+ Confidential treatment has been requested with respect to certain portions of
these agreements.

<PAGE> 1
EXHIBIT 1.1

5,350,000 SHARES

HESKA CORPORATION

COMMON STOCK, $.001 PAR VALUE

UNDERWRITING AGREEMENT

June ___, 1997

CREDIT SUISSE FIRST BOSTON CORPORATION
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629

Dear Sirs:

1.Introductory. Heska Corporation, a Delaware corporation ("Company")
proposes to issue and sell 5,000,000 shares of its Common Stock, $.001 par
value per share ("Securities") and the stockholder listed on Schedule A hereto
(the "Selling Stockholder") proposes to sell an aggregate of 350,000
outstanding shares of the Securities (such 5,350,000 shares of Securities being
hereinafter referred to as the "Firm Securities"). The Company also proposes
to sell to the Underwriters, at the option of the Underwriters, an aggregate of
not more than 802,500 additional shares of its Securities (the "Optional
Securities"). The Firm Securities and the Optional Securities are herein
collectively called the "Offered Securities." The Company and the Selling
Stockholder hereby agree with the several Underwriters named in Schedule B
hereto ("Underwriters") as follows:

2.Representations and Warranties of the Company and the Selling
Stockholder. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:

(i) A registration statement (No. 333-25767) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (A) has
been declared effective under the Securities Act of 1933 ("Act") and is
not proposed to be amended or (B) is proposed to be amended by amendment
or post-effective amendment. If such registration statement (the
"initial registration statement") has been declared effective, either
(A) an additional registration statement (the "additional registration
statement") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such Rule
and the Offered Securities all have been duly registered under the Act
pursuant to the initial registration statement and, if applicable, the
additional registration statement or (B) such an additional registration
statement is proposed to be filed with the Commission pursuant to Rule
462(b) and will become effective upon filing pursuant to such Rule and
upon such filing the Offered Securities will all have been duly
registered under the Act pursuant to the initial registration statement
and such additional registration statement. If the Company does not
propose to amend the initial registration statement or if an additional
registration statement has been filed and the Company does not propose
to amend it, and if any post-effective amendment to either such
registration statement has been filed with the Commission prior to the
execution and delivery of this Agreement, the most recent amendment (if
any) to each such registration statement has been declared effective by
the

1.
<PAGE> 2
Commission or has become effective upon filing pursuant to Rule 462(c)
("Rule 462(c)") under the Act or, in the case of the additional
registration statement, Rule 462(b). For purposes of this Agreement,
"Effective Time" with respect to the initial registration statement or,
if filed prior to the execution and delivery of this Agreement, the
additional registration statement means (A) if the Company has advised
the Representatives that it does not propose to amend such registration
statement, the date and time as of which such registration statement, or
the most recent post-effective amendment thereto (if any) filed prior to
the execution and delivery of this Agreement, was declared effective by
the Commission or has become effective upon filing pursuant to Rule
462(c), or (B) if the Company has advised the Representatives that it
proposes to file an amendment or post-effective amendment to such
registration statement, the date and time as of which such registration
statement, as amended by such amendment or post-effective amendment, as
the case may be, is declared effective by the Commission. If an
additional registration statement has not been filed prior to the
execution and delivery of this Agreement but the Company has advised the
Representatives that it proposes to file one, "Effective Time" with
respect to such additional registration statement means the date and
time as of which such registration statement is filed and becomes
effective pursuant to Rule 462(b). "Effective Date" with respect to the
initial registration statement or the additional registration statement
(if any) means the date of the Effective Time thereof. The initial
registration statement, as amended at its Effective Time, including all
information contained in the additional registration statement (if any)
and deemed to be a part of the initial registration statement as of the
Effective Time of the additional registration statement pursuant to the
General Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.

(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the rules and regulations of the Commission ("Rules and
Regulations") and did not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, (B) on the
Effective Date of the Additional Registration Statement (if any), each
Registration Statement conformed or will conform, in all respects to the
requirements of the Act and the Rules and Regulations and did not
include, or will not include, any untrue statement of a material fact
and did not omit, or will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all respects
to the requirements of the Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all respects to the requirements of the Act and the Rules and
Regulations, neither of such documents will include any untrue statement
of a material fact or will omit to state any material fact required to
be stated therein or necessary to make the statements

2.
<PAGE> 3

therein, in light of the circumstances under which they were made, not
misleading, and no Additional Registration Statement has been or will be
filed. The two preceding sentences do not apply to statements in or
omissions from a Registration Statement or the Prospectus based upon
written information furnished to the Company by any Underwriter through
the Representatives specifically for use therein, it being understood
and agreed that the only such information is that described as such in
Section 7(c) hereof.

(iii) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties and
conduct its business as described in the Prospectus; and the Company is
duly qualified to do business as a foreign corporation in good standing
in all other jurisdictions in which its ownership or lease of property
or the conduct of its business requires such qualification.

(iv) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct
of its business requires such qualification; all of the issued and
outstanding capital stock of each subsidiary of the Company has been
duly authorized and validly issued and is fully paid and nonassessable;
and the capital stock of each subsidiary owned by the Company, directly
or through subsidiaries, is owned free from liens, encumbrances and
defects.

(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized and validly
issued, fully paid and nonassessable and conform to the description
thereof contained in the Prospectus; and the stockholders of the Company
have no preemptive rights with respect to the Securities.

(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.

(vii) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned by such
person or to require the Company to include such securities in the
securities registered pursuant to a Registration Statement or in any
securities being registered pursuant to any other registration statement
filed by the Company under the Act other than such rights which have
been satisfied or waived.

(viii) The Securities have been approved for listing subject to
notice of issuance on The Nasdaq Stock Market's National Market.

(ix) No consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required to be
obtained or made by the Company for the consummation of the transactions
contemplated by this Agreement in connection with the sale of the
Offered Securities, except such as have been obtained and made under the
Act and such as may be required under state securities laws.

(x) The execution, delivery and performance of this Agreement,
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the

3.
<PAGE> 4

properties of the Company or any such subsidiary is subject, or the
charter or by-laws of the Company or any such subsidiary.

(xi) This Agreement has been duly authorized, executed and
delivered by the Company.

(xii) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them and except for liens securing equipment to equipment lessors;
and except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them.

(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them and have not received any notice of proceedings relating to the
revocation or modification of any such certificate, authority or permit
that, if determined adversely to the Company or any of its subsidiaries,
would individually or in the aggregate have a material adverse effect on
the Company and its subsidiaries taken as a whole.

(xiv) The Company and its subsidiaries have complied with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (15 U.S.C. Section
18a) and the regulations promulgated pursuant thereto.

(xv) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a material adverse effect on the Company and its subsidiaries
taken as a whole.

(xvi) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively, "intellectual
property rights") necessary to conduct the business now operated by
them, or presently employed by them, and except as disclosed in the
Prospectus have not received any notice of infringement of or conflict
with asserted rights of others with respect to any intellectual property
rights that, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material
adverse effect on the Company and its subsidiaries taken as a whole.

(xvii) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or contamination
pursuant to any environmental laws, or is subject to any claim relating
to any environmental laws, which violation, contamination, liability or
claim would individually or in the aggregate have a material adverse
effect on the Company and its subsidiaries taken as a whole; and the
Company is not aware of any pending investigation that might lead to
such a claim.

(xviii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company,
any of its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a material adverse effect on the
condition (financial or other), business, properties or results of
operations of the Company and its subsidiaries taken as a whole, or
would materially and adversely affect the ability of the Company to
perform its obligations under this Agreement, or that are otherwise
material

4.
<PAGE> 5

in the context of the sale of the Offered Securities; and no such
actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.

(xix) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied on
a consistent basis and the schedules included in each Registration
Statement present fairly the information required to be stated therein.

(xx) Except as disclosed in the Prospectus, since the date of the
latest audited financial statements included in the Prospectus there has
been no material adverse change, nor any development or event involving
a prospective material adverse change, in the condition (financial or
other), business, properties or results of operations of the Company and
its subsidiaries taken as a whole, and, except as disclosed in or
contemplated by the Prospectus, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.

(xxi) The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.

(xxii) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida Statutes
and the Company agrees to comply with such Section if prior to the
completion of the distribution of the Offered Securities it commences
doing such business.

(a)The Selling Stockholder represents and warrants to, and agrees with,
the several Underwriters that:

(i) Such Selling Stockholder has and on each Closing Date
hereinafter mentioned will have good and marketable title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date and full right, power and authority to enter into this Agreement,
subject to the rights of American Securities Transfer and Trust, Inc. as
Custodian, ("Custodian") and to sell, assign, transfer and deliver the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date hereunder; and upon the delivery of and payment for the
Offered Securities on each Closing Date hereunder the several
Underwriters will acquire good and marketable title to the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date.

(ii) If the Effective Time of the Initial Registration Statement
is prior to the execution and delivery of this Agreement: (A) on the
Effective Date of the Initial Registration Statement, the Initial
Registration Statement conformed in all respects to the requirements of
the Act and the Rules and Regulations and did not include any untrue
statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading, (B) on the Effective Date of the Additional Registration
Statement (if any), each Registration Statement conformed, or will
conform, in all respects to the requirements of the Act and the Rules
and Regulations did not include, or will not include, any untrue
statement of a material fact and did not omit, or will not omit, to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, and (C) on the date of this
Agreement, the Initial Registration Statement and, if the Effective Time
of the Additional Registration Statement is prior to the execution and
delivery of this Agreement, the Additional Registration Statement each
conforms, and at the time of filing of the Prospectus pursuant to Rule
424(b) or (if no such filing is required) at the Effective Date of the
Additional Registration Statement in which the Prospectus is included,
each Registration Statement and the Prospectus will conform, in all
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the

5.
<PAGE> 6

Effective Time of the Initial Registration Statement is subsequent to
the execution and delivery of this Agreement: on the Effective Date of
the Initial Registration Statement, the Initial Registration Statement
and the Prospectus will conform in all respects to the requirements of
the Act and the Rules and Regulations, neither of such documents will
include any untrue statement of a material fact or will omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading. The two preceding sentences do not
apply to statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).

(iii) Except as disclosed in the Prospectus or contemplated by
this Agreement, there are no contracts, agreements or understandings
between such Selling Stockholder and any person that would give rise to
a valid claim against such Selling Stockholder or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection
with this offering.

3.Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the
Company and each Selling Stockholder, at a purchase price of $ per
share, that number of Firm Securities (rounded up or down, as determined by
Credit Suisse First Boston Corporation ("CSFBC") in its discretion, in order to
avoid fractions) obtained by multiplying Firm Securities in the
case of the Company and the number of Firm Securities set forth opposite the
name of such Selling Stockholder in Schedule A hereto, in the case of a Selling
Stockholder, in each case by a fraction the numerator of which is the number of
Firm Securities set forth opposite the name of such Underwriter in Schedule B
hereto and the denominator of which is the total number of Firm Securities.

Certificates in negotiable form for the Offered Securities to be sold by the
Selling Stockholder hereunder have been placed in custody, for delivery under
this Agreement, under Custody Agreements made with , as
custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholder
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholder for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated by operation of law, whether by
the death of any individual Selling Stockholder or the occurrence of any other
event, or in the case of a trust, by the death of any trustee or trustees or
the termination of such trust. If any individual Selling Stockholder or any
such trustee or trustees should die, or if any other such event should occur,
or if any of such trusts should terminate, before the delivery of the Offered
Securities hereunder, certificates for such Offered Securities shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such death or other event or termination had not occurred,
regardless of whether or not the Custodian shall have received notice of such
death or other event or termination.

The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price in Federal (same day) funds at a bank acceptable to CSFBC drawn
to the order of the Company in the case 350,000 shares of Firm Securities to
the account of the Custodian payable to the Custodian and in the case of
5,000,000 shares of Firm Securities, at the office of at
A.M., New York time, on , or at such other time
not later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "First Closing Date". The
certificates for the Firm Securities so to be delivered will be in definitive
form, in such denominations and registered in such names as CSFBC requests and
will be made available for checking and packaging at the office of
at least 24 hours prior to the First Closing Date.

In addition, upon written notice from CSFBC given to the Company from time
to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at
the purchase price per Security to be paid for the Firm Securities. The
Company agrees to sell to the Underwriters the number of Optional Securities
specified in such notice and the Underwriters agree, severally and

6.
<PAGE> 7

not jointly, to purchase such Optional Securities. Such Optional Securities
shall be purchased for the account of each Underwriter in the same proportion
as the number of Firm Securities set forth opposite such Underwriter's name
bears to the total number of Firm Securities (subject to adjustment by CSFBC to
eliminate fractions) and may be purchased by the Underwriters only for the
purpose of covering over-allotments made in connection with the sale of the
Firm Securities. No Optional Securities shall be sold or delivered unless the
Firm Securities previously have been, or simultaneously are, sold and
delivered. The right to purchase the Optional Securities or any portion thereof
may be exercised from time to time and to the extent not previously exercised
may be surrendered and terminated at any time upon notice by CSFBC to the
Company.

Each time for the delivery of and payment for the Optional Securities, being
herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment
of the purchase price therefor in Federal (same day) funds by official bank
check or checks or wire transfer to an account at a bank acceptable to CSFBC
payable to the Company. The certificates for the Optional Securities being
purchased on each Optional Closing Date will be in definitive form, in such
denominations and registered in such names as CSFBC requests upon reasonable
notice prior to such Optional Closing Date and will be made available for
checking and packaging at the above office of at a reasonable
time in advance of such Optional Closing Date.

4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.

5. Certain Agreements of the Company and the Selling Stockholder. The
Company agrees with the several Underwriters and the Selling Stockholder that:

(a) If the Effective Time of the Initial Registration Statement is prior
to the execution and delivery of this Agreement, the Company will file the
Prospectus with the Commission pursuant to and in accordance with subparagraph
(1) (or, if applicable and if consented to by CSFBC, subparagraph (4)) of Rule
424(b) not later than the earlier of (A) the second business day following the
execution and delivery of this Agreement or (B) the fifteenth business day
after the Effective Date of the Initial Registration Statement.

(b) The Company will advise CSFBC promptly of any such filing pursuant to
Rule 424(b). If the Effective Time of the Initial Registration Statement is
prior to the execution and delivery of this Agreement and an additional
registration statement is necessary to register a portion of the Offered
Securities under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional registration
statement or, if filed, will file a post-effective amendment thereto with the
Commission pursuant to and in accordance with Rule 462(b) on or prior to 10:00
P.M., New York time, on the date of this Agreement or, if earlier, on or prior
to the time the Prospectus is printed and distributed to any Underwriter, or
will make such filing at such later date as shall have been consented to by
CSFBC.

(c) The Company will advise CSFBC promptly of any proposal to amend or
supplement the initial or any additional registration statement as filed or the
related prospectus or the Initial Registration Statement, the Additional
Registration Statement (if any) or the Prospectus and will not effect such
amendment or supplementation without CSFBC's consent; and the Company will also
advise CSFBC promptly of the effectiveness of each Registration Statement (if
its Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration Statement
or the Prospectus and of the institution by the Commission of any stop order
proceedings in respect of a Registration Statement and will use its best
efforts to prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.

(d) If, at any time when a prospectus relating to the Offered Securities
is required to be delivered under the Act in connection with sales by any
Underwriter or dealer, any event occurs as a result of which the Prospectus as
then amended or supplemented would include an untrue statement of a material
fact or omit to state any material

7.
<PAGE> 8

fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
promptly notify CSFBC of such event and will promptly prepare and file with the
Commission, at its own expense, an amendment or supplement that will correct
such statement or omission or an amendment that will effect such compliance.
Neither CSFBC's consent to, nor the Underwriters' delivery of, any such
amendment or supplement shall constitute a waiver of any of the conditions set
forth in Section 6.

(e) As soon as practicable, but not later than the Availability Date (as
defined below), the Company will make generally available to its security
holders an earnings statement covering a period of at least 12 months beginning
after the Effective Date of the Initial Registration Statement (or, if later,
the Effective Date of the Additional Registration Statement) that will satisfy
the provisions of Section 11(a) of the Act. For the purpose of the preceding
sentence, "Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such Effective Date,
except that, if such fourth fiscal quarter is the last quarter of the Company's
fiscal year, "Availability Date" means the 90th day after the end of such
fourth fiscal quarter.

(f) The Company will furnish to the Representatives copies of each
Registration Statement (three of which will be signed and will include all
exhibits), each related preliminary prospectus, and, so long as a prospectus
relating to the Offered Securities is required to be delivered under the Act in
connection with sales by any Underwriter or dealer, the Prospectus and all
amendments and supplements to such documents, in each case in such quantities
as CSFBC requests. The Prospectus shall be so furnished on or prior to 3:00
P.M., New York time, on the business day following the later of the execution
and delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other such documents shall be so furnished as soon
as available. The Company will pay the expenses of printing and distributing to
the Underwriters all such documents.

(g) The Company will arrange for the qualification of the Offered
Securities for sale under the laws of such jurisdictions as CSFBC designates
and will continue such qualifications in effect so long as required for the
distribution.

(h) During the period of five years hereafter, the Company will furnish
to the Representatives and, upon request, to each of the other Underwriters, as
soon as practicable after the end of each fiscal year, a copy of its annual
report to stockholders for such year; and the Company will furnish to the
Representatives (i) as soon as available, a copy of each report and any
definitive proxy statement of the Company filed with the Commission under the
Securities Exchange Act of 1934 or mailed to stockholders, and (ii) from time
to time, such other information concerning the Company as CSFBC may reasonably
request in writing.

(i) For a period of 180 days after the date of the initial public
offering of the Offered Securities, the Company will not offer, sell, contract
to sell, pledge or otherwise dispose of, directly or indirectly, or file with
the Commission a registration statement under the Act relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or publicly
disclose the intention to make any such offer, sale, pledge, disposition or
filing, without the prior written consent of CSFBC, except (i) the sale of
Offered Securities hereunder, (ii) the grant of options or the issuance of
Securities under the Company's stock option plans or stock purchase plan, as
the case my be, (iii) the issuance of Securities upon exercise of currently
outstanding options or warrants described in the Registration Statement, and
(iv) the issuance of Securities upon conversion of any of the Company's
outstanding shares of Preferred Stock pursuant to the terms of the Company's
Restated Certificate of Incorporation.

(j) The Company agrees with the several Underwriters that the Company
will pay all expenses incident to the performance of the obligations of the
Company and such Selling Stockholder, under this Agreement, for any filing fees
and other expenses (including fees and disbursements of counsel) in connection
with qualification of the Offered Securities for sale under the laws of such
jurisdictions as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the National Association of Securities Dealers, Inc. of the Offered Securities,
for any travel expenses of the Company's officers and employees and any other
expenses of the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities,

8.
<PAGE> 9

for any transfer taxes on the sale by the Selling Stockholder of the Offered
Securities to the Underwriters and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments and
supplements thereto) to the Underwriters.

(k) Each Selling Stockholder agrees to deliver to CSFBC, attention:
Transactions Advisory Group on or prior to the First Closing Date a properly
completed and executed United States Treasury Department Form W 8 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).

(l) Each Selling Stockholder agrees, for a period of 180 days after the
date of the initial public offering of the Offered Securities, not to offer,
sell, contract to sell, pledge or otherwise dispose of, directly or indirectly,
any additional shares of the Securities of the Company or securities
convertible into or exchangeable or exercisable for any shares of Securities,
or publicly disclose the intention to make any such offer, sale, pledge or
disposal, without the prior written consent of CSFBC.

6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholder herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance by the Company and the Selling
Stockholder of their obligations hereunder and to the following additional
conditions precedent:

(a) The Representatives shall have received a letter, dated the date of
delivery thereof (which, if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, shall be on
or prior to the date of this Agreement or, if the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of this
Agreement, shall be prior to the filing of the amendment or post-effective
amendment to the registration statement to be filed shortly prior to such
Effective Time), of Arthur Andersen LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable published
Rules and Regulations thereunder and stating to the effect that:

(i) in their opinion the financial statements and schedules
examined by them and included in the Registration Statements comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published Rules and Regulations;

(ii) they have performed the procedures specified by the American
Institute of Certified Public Accountants for a review of interim
financial information as described in Statement of Auditing Standards
No. 71, Interim Financial Information, on the unaudited financial
statements included in the Registration Statements;

(iii) on the basis of the review referred to in clause (ii) above,
a reading of the latest available interim financial statements of the
Company, inquiries of officials of the Company who have responsibility
for financial and accounting matters and other specified procedures,
nothing came to their attention that caused them to believe that:

(A) the unaudited financial statements included in the
Registration Statements do not comply as to form in all material
respects with the applicable accounting requirements of the Act
and the related published Rules and Regulations or any material
modifications should be made to such unaudited financial
statements for them to be in conformity with generally accepted
accounting principles;

(B) at the date of the latest available balance sheet read
by such accountants, or at a subsequent specified date not more
than three business days prior to the date of this Agreement,
there was any change in the capital stock or any increase in
short-term indebtedness or long-term debt of the Company and its
consolidated subsidiaries or, at the date of the latest available
balance

9.
<PAGE> 10

sheet read by such accountants, there was any decrease in
consolidated net assets, as compared with amounts shown on the
latest balance sheet included in the Prospectus; or

(C) for the period from the closing date of the latest
income statement included in the Prospectus to the closing date
of the latest available income statement read by such accountants
there were any decreases, as compared with the corresponding
period of the previous year and with the period of corresponding
length ended the date of the latest income statement included in
the Prospectus, in consolidated net sales or net operating income
in the total or per share amounts of consolidated net income;
except in all cases set forth in clauses (A) and (B) above for
changes, increases or decreases that the Prospectus discloses
have occurred or may occur or that are described in such letter;
and

(iv) they have compared specified dollar amounts (or percentages
derived from such dollar amounts) and other financial information
contained in the Registration Statements (in each case to the extent
that such dollar amounts, percentages and other financial information
are derived from the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by analysis
or computation) with the results obtained from inquiries, a reading of
such general accounting records and other procedures specified in such
letter and have found such dollar amounts, percentages and other
financial information to be in agreement with such results, except as
otherwise specified in such letter.

For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to its
Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements.

(b) If the Effective Time of the Initial Registration Statement is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or such later date as shall have been consented to by CSFBC. If
the Effective Time of the Additional Registration Statement (if any) is not
prior to the execution and delivery of this Agreement, such Effective Time
shall have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later date as
shall have been consented to by CSFBC. If the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, the Prospectus shall have been filed with the Commission in
accordance with the Rules and Regulations and Section 5(a) of this Agreement.
Prior to such Closing Date, no stop order suspending the effectiveness of a
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of any Selling
Stockholder, the Company or the Representatives, shall be contemplated by the
Commission.

(c) Subsequent to the execution and delivery of this Agreement, there
shall not have occurred (i) any change, or any development or event involving a
prospective change, in the condition (financial or other), business, properties
or results of operations of the Company or its subsidiaries that, in the
judgment of a majority in interest of the Underwriters including the
Representatives, is material and adverse and makes it impractical or
inadvisable to proceed with completion of the public offering or the sale of
and payment for the Offered Securities; (ii) any downgrading in the rating of
any debt securities of the Company by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the Act), or
any public announcement that any such organization has under surveillance or
review its rating of any debt securities of the Company (other than an
announcement with positive implications of a possible upgrading, and no
implication of a possible downgrading, of such rating); (iii) any suspension or
limitation of trading in securities generally on the New York Stock Exchange or

10.
<PAGE> 11

any setting of minimum prices for trading on such exchange, or any suspension
of trading of any securities of the Company on any exchange or in the over-the-
counter market; (iv) any banking moratorium declared by U.S. Federal or New
York authorities; or (v) any outbreak or escalation of major hostilities in
which the United States is involved, any declaration of war by Congress or any
other substantial national or international calamity or emergency if, in the
judgment of a majority in interest of the Underwriters including the
Representatives, the effect of any such outbreak, escalation, declaration,
calamity or emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the Offered
Securities.

(d) The Representatives shall have received an opinion, dated such
Closing Date, of Pillsbury Madison & Sutro LLP, counsel for the Company, to
the effect that:

(i) The Company and each subsidiary have been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of it's incorporation, with corporate power and authority
to own its properties and conduct its business as described in the
Prospectus; and the Company and each subsidiary are duly qualified to do
business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the conduct
of their business requires such qualification;

(ii) The Offered Securities delivered on such Closing Date and all
other outstanding shares of the Common Stock of the Company have been
duly authorized and validly issued, are fully paid and nonassessable and
conform to the description thereof contained in the Prospectus; and the
stockholders of the Company have no preemptive rights with respect to
the Securities;

(iii)Except as disclosed in or specifically contemplated by the
Prospectus, to the best of such counsel's knowledge, there are no
outstanding options, warrants or other rights calling for the issuance
of, and no commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any security convertible into or
exchangeable for capital stock of the Company;

(iv) The Company is not in violation of its certificate of
incorporation or bylaws or, to the best of such counsel's knowledge, in
breach of or default with respect to any provision of any agreement,
mortgage, deed of trust, lease, franchise, license, indenture, permit or
other instrument known to such counsel to which the Company is a party
or by which it or its properties may be bound or affected, except where
such default would not materially and adversely affect the Company; and,
to the best of such counsel's knowledge, the Company is in compliance
with all laws, rules, regulations, judgments, decrees, orders and
statutes of any court or jurisdiction to which it is subject, except
where noncompliance would not materially adversely affect the Company.

(v) To the best of such counsel's knowledge, no holders of
securities of the Company have rights that have not been waived or
otherwise satisfied with respect to the registration of shares of Common
Stock or other securities, because of the filing of the Registration
Statement by the Company or the offering contemplated hereby.

(vi) There are no contracts, agreements or understandings known to
such counsel between the Company and any person granting such person the
right to require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such securities in
the securities registered pursuant to the Registration Statement or in
any securities being registered pursuant to any other registration
statement filed by the Company under the Act;

(vii)The Company is not and, after giving effect to the offering
and sale of the Offered Securities and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as defined in the Investment Company Act of 1940.

11.
<PAGE> 12

(viii) To such counsel's knowledge, no consent, approval,
authorization or order of, or filing with, any governmental agency or
body or any court is required to be obtained or made by the Company or
any Selling Stockholder for the consummation of the transactions
contemplated by this Agreement or the Custody Agreement in connection
with the sale of the Offered Securities, except such as have been
obtained and made under the Act and such as may be required under state
securities laws as to which such counsel renders no opinion;

(ix) To such counsel's knowledge, the execution, delivery and
performance of this Agreement or the Custody Agreement and the
consummation of the transactions herein or therein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court having
jurisdiction over the Company or any subsidiary of the Company or any of
their properties, or any agreement or instrument to which the Company or
any such subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the Company or
any such subsidiary is subject, or the charter or by-laws of the Company
or any such subsidiary;

(x) To the best knowledge of such counsel, there are no pending
actions, suits or proceedings against or affecting the Company or its
subsidiaries or any of its properties that, if determined adversely to
the Company, would individually or in the aggregate have a material
adverse effect on the condition (financial or otherwise), business,
properties or results of operations of the Company, or would materially
and adversely affect the ability of the Company to perform its
obligations under this Agreement, or that are otherwise material in the
context of the sale of the Offered Securities; and no such actions,
suits or proceedings are threatened or, to the Company's knowledge,
contemplated.

(xi) The Initial Registration Statement was declared effective
under the Act as of the date and time specified in such opinion, the
Additional Registration Statement (if any) was filed and became
effective under the Act as of the date and time (if determinable)
specified in such opinion, the Prospectus either was filed with the
Commission pursuant to the subparagraph of Rule 424(b) specified in such
opinion on the date specified therein or was included in the Initial
Registration Statement or the Additional Registration Statement (as the
case may be), and, to the best of the knowledge of such counsel, no stop
order suspending the effectiveness of a Registration Statement or any
part thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Act, and each
Registration Statement and the Prospectus, and each amendment or
supplement thereto, as of their respective effective or issue dates,
complied as to form in all material respects with the requirements of
the Act and the Rules and Regulations; such counsel have no reason to
believe that any part of a Registration Statement or any amendment
thereto, as of its effective date or as of such Closing Date, contained
any untrue statement of a material fact or omitted to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing Date,
contained any untrue statement of a material fact or omitted to state
any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements and
Prospectus of statutes, legal and governmental proceedings and contracts
and other documents are accurate and fairly present the information
required to be shown; and such counsel do not know of any legal or
governmental proceedings required to be described in a Registration
Statement or the Prospectus that are not described as required or of any
contracts or documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as exhibits to a
Registration Statement that are not described and filed as required; it
being understood that such counsel need express no opinion as to the
financial statements or other financial data contained in the
Registration Statements or the Prospectus; and

(xii) The Company has full right, corporate power and authority
to enter into this Agreement and to sell and deliver the Common Shares to
be sold by it to the several Underwriters; this Agreement has been duly
and validly authorized by all necessary corporate action by the Company,
has been duly and validly executed and delivered by and on behalf of the
Company, and is a valid and binding agreement of

12.
<PAGE> 13

the Company enforceable in accordance with its terms, except as
enforceability may be limited by general equitable principles,
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting creditors; rights generally and except as to those provisions
relating to indemnity or contribution for liabilities arising under the
Act as to which no opinion need to be expressed; and are in full force
and effect under the Act and such as may be required under applicable
Blue Sky laws in connection with the purchase and distribution of the
Common Shares by the Underwriters and the clearance of such offering
with the NASD;

In addition, such counsel shall include a statement to the effect that
such counsel has participated in conferences with officials and other
representatives of the Company, the Representatives, Underwriters' Counsel and
the independent public accountants of the Company, at which conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and although they have not verified the accuracy or
completeness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel which caused them
to believe that, at the time the Registration Statement became effective the
Registration Statement (except as to financial statements, financial and
statistical data and supporting schedules contained therein and intellectual
property matters, as to which such counsel need express no opinion) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or at the Closing Date or any later Option Closing Date, as the
case may be, the Registration Statement or the Prospectus (except as a
aforesaid) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under, which they were made,
not misleading.

(e) The Representatives shall have received an opinion, dated such
Closing Date, of Sheridan Ross, patent counsel for the Company, to the effect
that:

(i) Such Counsel have no reason to believe that the Registration
Statement, as of the Effective Date, and the Prospectus as of its date
and as of the applicable Closing Date: (A) contained or contain any
untrue statements of material fact with respect to patents, trade
secrets or other proprietary information of the Company, or with respect
to any allegation that the Company is infringing any patents, trade
secrets or proprietary information of any other person' or (B) omitted
or omit to state any material fact that relates to patents, trade
secrets or other proprietary information of the Company and, in the
opinion of such counsel, is required to be stated in the Registration
Statement or the Prospectus in order to make the statements therein, in
the light of the circumstances under which they were made, not
misleading:

(ii) The statements in the Prospectus under the caption "Risk
Factors--Uncertainty of Patent and Proprietary Technology Protection"
and under the caption "Business--Intellectual Property" contain accurate
descriptions of the Company's patents and patent applications and,
insofar as such statements constitute matters of United States patent
law or legal conclusions thereunder, are accurate and fairly present
such matters of law and legal conclusion:

(iii) Such counsel have reviewed the Company's patent applications
filed in the U.S., Europe, Japan and other jurisdictions in which
Company has filed patent applications ("Applications"), which
Applications are listed on Schedule I to such opinion, and nothing has
come to the attention of such counsel that has caused them to believe
that the Applications were not properly prepared and filed, not being
diligently pursued by the Company, or are not held by or licensed to the
Company, and such counsel are not aware of others who have asserted any
ownership rights in such Applications other than as described in the
Registration Statement and Prospectus;

(iv) Such counsel are not aware that any issued patent held or
licensed by the Company ("Patents"), all of which are listed on Schedule
I, are invalid or that any patent issued in respect of an Application
would be invalid, and are not aware of others who have asserted
ownership rights in such Patents other than as described in the
Registration Statement and Prospectus;

(v) To the best of such counsel's knowledge and except as set
forth in the Prospectus under the caption "Risk Factors--Uncertainty of
Patent and Proprietary Technology Protection" and under the

13.
<PAGE> 14

caption "Business--Intellectual Property," there are no legal or
governmental proceedings (other than the patent rights, trade secrets or
other proprietary information owned or licensed by the Company; and

(vi) Except as set forth in the Prospectus, such counsel are not
aware that the Company has received any notice of infringement with
respect to any Patent or any notice challenging the validity, scope or
enforceability of any of the patents licensed to the Company, and to the
best of such counsel's knowledge, the Company is not infringing or
otherwise violating any patents, trade secrets or other proprietary
information; and to the best of such counsel's knowledge, counsel is
unaware of any infringements by others of the Company's patents, trade
secrets or other proprietary information that, in the judgment of such
counsel, could materially and adversely affect the Company's rights to
use such patents, trade secrets or other proprietary information.

(f) The Representatives shall have received an opinion, dated such
Closing Date, of Pillsbury Madison & Sutro LLP, counsel for the Selling
Stockholder, to the effect that:

(i) The Selling Stockholder had valid and unencumbered title to
the Offered Securities delivered by such Selling Stockholder on such
Closing Date and had full right, power and authority to sell, assign,
transfer and deliver the Offered Securities delivered by such Selling
Stockholder on such Closing Date hereunder. Upon delivery of the
Offered Securities to be sold by the Selling Stockholder in accordance
with the terms of this Agreement, the Underwriters will have acquired
good and marketable title to the Offered Securities free and clear of
any adverse claim, assuming the Underwriters acquire the shares in good
faith and without notice of any defect in title to the shares.

(ii) To our knowledge and based solely on the representation and
warranties of the Selling Stockholder in the Power of Attorney and
Custody Agreement, no consent, approval, authorization or order of, or
filing with, any governmental agency or body or any court is required to
be obtained or made by Selling Stockholder for the consummation of the
transactions contemplated by the Custody Agreement or this Agreement in
connection with the sale of the Offered Securities sold by the Selling
Stockholder, except such consent, approval, authorization or orders as
have been obtained and made under the Act and such as may be required
under state securities laws as to which we express no opinion;

(iii) The execution, delivery and performance of this Agreement
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule, regulation or
order of any governmental agency or body or any court having
jurisdiction over any Selling Stockholder or any of their properties or
any agreement or instrument to which any Selling Stockholder is a party
or by which any Selling Stockholder is bound or to which any of the
properties of any Selling Stockholder is subject, or the charter or by-
laws of any Selling Stockholder that is a corporation; and

(iv) The Power of Attorney and related Custody Agreement with
respect to the Selling Stockholder has been duly authorized by all
necessary corporate action, executed and delivered by the Selling
Stockholder and constitute valid and legally binding obligations of each
such Selling Stockholder enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles; and

(v) This Agreement has been duly authorized, executed and
delivered by each Selling Stockholder.

(g) The Representatives shall have received from Cooley Godward LLP,
counsel for the Underwriters, such opinion or opinions, dated such Closing
Date, with respect to the incorporation of the Company, the validity of the
Offered Securities delivered on such Closing Date, the Registration Statements,
the Prospectus and other related matters as the Representatives may require,
and the Selling Stockholder and the Company shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.

14.
<PAGE> 15

(h) The Representatives shall have received a certificate, dated such
Closing Date, of the President and a principal financial or accounting officer
of the Company in which such officers, to the best of their knowledge after
reasonable investigation, shall state that: the representations and warranties
of the Company in this Agreement are true and correct; the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order suspending
the effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated by the
Commission; the Additional Registration Statement (if any) satisfying the
requirements of subparagraphs (1) and (3) of Rule 462(b) was filed pursuant to
Rule 462(b), including payment of the applicable filing fee in accordance with
Rule 111(a) or (b) under the Act, prior to the time the Prospectus was printed
and distributed to any Underwriter; and, subsequent to the respective dates of
the most recent financial statements in the Prospectus, there has been no
material adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries taken
as a whole except as set forth in or contemplated by the Prospectus or as
described in such certificate.

(i) The Representatives shall have received a letter, dated such Closing
Date, of Arthur Andersen LLP which meets the requirements of subsection (a) of
this Section, except that the specified date referred to in such subsection
will be a date not more than three business days prior to such Closing Date for
the purposes of this subsection.

The Selling Stockholder and the Company will furnish the Representatives
with such conformed copies of such opinions, certificates, letters and
documents as the Representatives reasonably request. CSFBC may in its sole
discretion waive on behalf of the Underwriters compliance with any conditions
to the obligations of the Underwriters hereunder, whether in respect of an
Optional Closing Date or otherwise.

7. Indemnification and Contribution. (a) The Company will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by such Underwriter in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses
are incurred; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon an untrue statement or alleged untrue statement in or
omission or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (d) below.

(b) The Selling Stockholder will indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in any Registration
Statement, the Prospectus, or any amendment or supplement thereto, or any
related preliminary prospectus, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and will
reimburse each Underwriter for any legal or other expenses reasonably incurred
by such Underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Selling Stockholder will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in or omission
or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by an Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only

15.
<PAGE> 16

such information furnished by any Underwriter consists of the information
described as such in subsection (c). Notwithstanding the foregoing, (i) in no
event shall the Selling Stockholder be liable for any amount in excess of the
net proceeds received by the Selling Stockholder form the sale of the Offered
Securities, and (ii) each Underwriter agrees that any claim for indemnity
pursuant to this Section 7 shall first be sought to be satisfied by the Company
and shall only then be sought to be satisfied by the Selling Stockholder if,
and to the extent that, such claim for indemnity has not been satisfied in full
by the Company.

(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and each Selling Stockholder against any losses, claims,
damages or liabilities to which the Company or such Selling Stockholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement, the Prospectus, or any amendment
or supplement thereto, or any related preliminary prospectus, or arise out of
or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the Representatives
specifically for use therein, and will reimburse any legal or other expenses
reasonably incurred by the Company and each Selling Stockholder in connection
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred, it being understood and agreed that the
only such information furnished by any Underwriter consists of the following
information in the Prospectus furnished on behalf of each Underwriter: the last
paragraph at the bottom of the cover page concerning the terms of the offering
by the Underwriters, the legend concerning over-allotments and stabilizing and
passive market making on the inside front cover page, the information contained
in the sections of the Prospectus entitled "Underwriting" and "Notice" to
Canadian Residents."

(d) Promptly after receipt by an indemnified party under this Section of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability that it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any
claims that are the subject matter of such action.

(e) If the indemnification provided for in this Section is unavailable or
insufficient to hold harmless an indemnified party under subsection (a), (b) or
(c) above, then each indemnifying party shall contribute to the amount paid or
payable to such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholder on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholder on
the one hand and the Underwriters on the other in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholder on the
one hand and the Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling Stockholder bear

16.
<PAGE> 17

to the total underwriting discounts and commissions received by the
Underwriters. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholder or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such untrue statement or omission. The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities referred to in the first sentence of this subsection (e) shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in connection with investigating or defending any action or
claim that is the subject of this subsection (e). Notwithstanding the
provisions of this subsection (e), no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Securities underwritten by it and distributed to the public were offered to
the public exceeds the amount of any damages that such Underwriter has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (e) to
contribute are several in proportion to their respective underwriting
obligations and not joint.

(f) The obligations of the Company and the Selling Stockholder under
this Section shall be in addition to any liability that the Company and the
Selling Stockholder may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability that the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.

8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of
Offered Securities that such defaulting Underwriter or Underwriters agreed but
failed to purchase does not exceed 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing
Date, CSFBC may make arrangements satisfactory to the Company and the Selling
Stockholder for the purchase of such Offered Securities by other persons,
including any of the Underwriters, but if no such arrangements are made by such
Closing Date, the non-defaulting Underwriters shall be obligated severally, in
proportion to their respective commitments hereunder, to purchase the Offered
Securities that such defaulting Underwriters agreed but failed to purchase on
such Closing Date. If any Underwriter or Underwriters so default and the
aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC, the Company and the Selling Stockholder
for the purchase of such Offered Securities by other persons are not made
within 36 hours after such default, this Agreement will terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholder, except as provided in Section 9 (provided that if such
default occurs with respect to Optional Securities after the First Closing
Date, this Agreement will not terminate as to the Firm Securities or any
Optional Securities purchased prior to such termination). As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.

9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of
the Selling Stockholder, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers
or directors or any controlling person, and will survive delivery of and
payment for the Offered Securities. If this Agreement is terminated pursuant to
Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholder shall
remain responsible for the expenses to be paid or reimbursed by them pursuant
to Section 5 and the respective obligations of the Company, the Selling
Stockholder, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the

17.
<PAGE> 18

purchase of the Offered Securities by the Underwriters is not consummated for
any reason other than solely because of the termination of this Agreement
pursuant to Section 8 or the occurrence of any event specified in clause (iii),
(iv) or (v) of Section 6(c), the Company and the Selling Stockholder will,
jointly and severally, reimburse the Underwriters for all out-of-pocket
expenses (including fees and disbursements of counsel) reasonably incurred by
them in connection with the offering of the Offered Securities.

10. Notices. All communications hereunder will be in writing and, if sent
to the Underwriters, will be mailed, delivered or telegraphed and confirmed to
the Representatives, c/o Credit Suisse First Boston Corporation, Eleven Madison
Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking Department -
Transactions Advisory Group, or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at Heska Corporation, 1825 Sharp
Point Drive, Fort Collins, CO 80525, Attention: General Counsel, or, if sent
to the Selling Stockholder or any of them, will be mailed, delivered or
telegraphed and confirmed to Volendam Investeringen, N.V. at 14 John B.
Gorsiraweg, P.O. Box 3889, Curagao, Netherlands Antilles; provided, however,
that any notice to an Underwriter pursuant to Section 7 will be mailed,
delivered or telegraphed and confirmed to such Underwriter.

11. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective personal representatives and
successors and the officers and directors and controlling persons referred to
in Section 7, and no other person will have any right or obligation hereunder.

12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this
Agreement, and any action under this Agreement taken by the Representatives
jointly or by CSFBC will be binding upon all the Underwriters. The Attorneys-
in-Fact will act for the Selling Stockholder in connection with such
transactions, and any action under or in respect of this Agreement taken by the
Attorney's-in-Fact will be binding upon all the Selling Stockholder.

13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.

14. Applicable Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.

The Company hereby submits to the non-exclusive jurisdiction of the Federal
and state courts in the Borough of Manhattan in The City of New York in any
suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.

18.
<PAGE> 19

If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of
the counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholder, the Company and the several Underwriters in accordance
with its terms.

Very truly yours,

HESKA CORPORATION

By
---------------------------------

Title:
-----------------------------

VOLENDAM INVESTERINGEN, N.V.

By
---------------------------------

Its Attorney-in-Fact
------------------------------

The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above
written.

CREDIT SUISSE FIRST BOSTON CORPORATION

MERRILL, LYNCH, PIERCE, FENNER & SMITH INCORPORATED

Acting on behalf of themselves and as
the Representatives of the several Underwriters.

By CREDIT SUISSE FIRST BOSTON CORPORATION

By
------------------------------------------

19.
<PAGE> 20

SCHEDULE A

NUMBER OF
FIRM SECURITIES
SELLING STOCKHOLDER TO BE SOLD
------------------------------------------------ -----------------
<S> <C>
Volendam Investeringen, N.V. 350,000

------------
Total ............................................ 350,000
============
</TABLE>

20.
<PAGE> 21

SCHEDULE B

<TABLE>
<CAPTION>
NUMBER OF
FIRM SECURITIES
UNDERWRITER TO BE PURCHASED
- -------------------------------------------------------- ------------------
<S> <C>
Credit Suisse First Boston Corporation ................
Merrill, Lynch, Pierce, Fenner & Smith Incorporated....

------------
Total ............................................
============
</TABLE>

21.

<PAGE> 1
EXHIBIT 3.1(c)

RESTATED CERTIFICATE OF INCORPORATION

HESKA CORPORATION

HESKA CORPORATION, a corporation organized and existing under the laws
of the State of Delaware, hereby certifies as follows:

FIRST: The name of this corporation is Heska Corporation.

SECOND: The original Certificate of Incorporation of the
corporation was filed with the Secretary of State of the State of
Delaware on March 27, 1997 and the original name of the corporation
was Heska Merger Corporation. A Restated Certificate of Incorporation
of the corporation was filed with the Secretary of State of the State
of Delaware on May 28, 1997. A Certificate of Merger whereby Heska
Corporation, a California corporation, was merged with and into this
corporation and this corporation's name was changed to Heska
Corporation was filed with the Secretary of State of the State of
Delaware on May 29, 1997.

THIRD: The Restated Certificate of Incorporation of said
corporation shall be amended and restated to read in full as follows:

ARTICLE I

The name of this corporation is HESKA CORPORATION.

ARTICLE II

The registered office of the corporation within the State of Delaware
is located at 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.

ARTICLE III

The purpose of this corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of Delaware.

-1-
<PAGE> 2
ARTICLE IV

A. Authorized Stock. This corporation is authorized to issue two
classes of shares, to be designated Common Stock and Preferred Stock,
respectively. This corporation is authorized to issue forty million
(40,000,000) shares of Common Stock, $.001 par value per share, and twenty-five
million (25,000,000) shares of Preferred Stock, $.001 par value per share.

B. Preferred Stock. The Preferred Stock may be issued in any
number of series, as determined by the Board of Directors. The Board of
Directors may by resolution fix the designation and number of shares of any
such series, and may determine, alter, or revoke the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
series. The Board of Directors may thereafter in the same manner, within the
limits and restrictions stated in any resolution or resolutions of the Board of
Directors originally fixing the number of shares constituting any series,
increase or decrease the number of shares of any such series (but not below the
number of shares of that series then outstanding). In case the number of
shares of any series shall be decreased, the shares constituting such decrease
shall resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.

C. Common Stock.

1. Relative Rights of Preferred Stock and Common Stock.
All preferences, voting powers, relative, participating, optional or
other special rights and privileges, and qualifications, limitations
or restrictions of the Common Stock are expressly made subject and
subordinate to those that may be fixed with respect to any shares of
the Preferred Stock.

2. Voting Rights. Except as otherwise required by law
or this Restated Certificate of Incorporation, each holder of Common
Stock shall have one vote in respect of each share of stock held by
such holder of record on the books of the corporation for the election
of directors and on all matters submitted to a vote of stockholders of
the corporation.

3. Dividends. Subject to the preferential rights of the
Preferred Stock, if any, the holders of shares of Common Stock shall
be entitled to receive, when and if declared by the Board of
Directors, out of the assets of the corporation which are by law
available therefor, dividends payable either in cash, in property or
in shares of capital stock.

4. Liquidation, Dissolution or Winding Up. In the event
of any dissolution, liquidation or winding up of the affairs of the
corporation, after distribution in full of the preferential amounts,
if any, to be distributed to the holders of shares of the Preferred
Stock, holders of Common Stock shall be entitled, unless otherwise
provided by law or this Restated Certificate of Incorporation, to
receive all of the remaining assets of the corporation of whatever

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<PAGE> 3
kind available for distribution to stockholders ratably in proportion
to the number of shares of Common Stock held by them respectively.

ARTICLE V

The corporation is to have perpetual existence.

ARTICLE VI

A. Classified Board. The Board of Directors shall be divided
into three classes, designated Class I, Class II and Class III, as nearly equal
in number as possible, and the term of office of directors of one class shall
expire at each annual meeting of stockholders, and in all cases as to each
director when such director's successor shall be elected and shall qualify or
upon such director's earlier resignation, removal from office, death or
incapacity. Additional directorships resulting from an increase in number of
directors shall be apportioned among the classes as equally as possible. The
initial term of office of directors of Class I shall expire at the annual
meeting of stockholders in 1998; that of Class II shall expire at the annual
meeting in 1999; and that of Class III shall expire at the annual meeting in
2000; and in all cases as to each director when such director's successor shall
be elected and shall qualify or upon such director's earlier resignation,
removal from office, death or incapacity. At each annual meeting of
stockholders, beginning with the annual meeting of stockholders in 1998, the
number of directors equal to the number of directors of the class whose term
expires at the time of such meeting (or, if less, the number of directors
properly nominated and qualified for election) shall be elected to hold office
until the third succeeding annual meeting of stockholders after their election.

B. Changes. The Board of Directors of this corporation, by
amendment to the corporation's bylaws, is expressly authorized to change the
number of directors in any or all of the classes of directors without the
consent of the stockholders.

C. Elections. Elections of directors need not be by written
ballot unless the Bylaws of the corporation shall so provide.

D. Vote Required to Amend or Repeal. The affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the stock of the corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend in any respect or repeal this Article
VI.

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<PAGE> 4
ARTICLE VII

A. Special Meetings of Stockholders. Special meetings of the
stockholders of the corporation may be called for any purpose or purposes,
unless otherwise prescribed by statute or by this Restated Certificate of
Incorporation, only at the request of the Chairman, the Chief Executive Officer
of the corporation or by a resolution duly adopted by the affirmative vote of a
majority of the Board of Directors.

B. Vote Required to Amend or Repeal. The affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the stock of the corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend in any respect or repeal this Article
VII.

ARTICLE VIII

A. Amend or Repeal Bylaws. The Board of Directors is expressly
empowered to adopt, amend or repeal the Bylaws of the corporation; provided,
however, that any adoption, amendment or repeal of the Bylaws of the
corporation by the Board of Directors shall require the approval of at least
sixty-six and two-thirds percent (66 2/3%) of the total number of authorized
directors (whether or not there exist any vacancies in previously authorized
directorships at the time any resolution providing for adoption, amendment or
repeal is presented to the Board of Directors). The stockholders shall also
have the power to adopt, amend or repeal the Bylaws of the corporation,
provided, however, that in addition to any vote of the holders of any class or
series of stock of the corporation required by law or by this Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the
then outstanding shares of the stock of the corporation entitled to vote
generally in the election of directors, voting together as a single class,
shall be required for such adoption, amendment or repeal by the stockholders of
any provisions of the Bylaws of the corporation.

ARTICLE IX

The books of the corporation may be kept at such place within or
without the State of Delaware as the bylaws of the corporation may provide or
as may be designated from time to time by the board of directors of the
corporation.

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<PAGE> 5
ARTICLE X

Whenever a compromise or arrangement is proposed between the
corporation and its creditors or any class of them and/or between the
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the corporation or of any creditor or stockholder thereof or on the
application of any receivers appointed for the corporation under the provisions
of section 291 of Title 8 of the Delaware Code or on the application of
trustees in dissolution or of any receiver or receivers appointed for the
corporation under the provisions of section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or the stockholders
or class of stockholders of the corporation, as the case may be, to be summoned
in such manner as the said court directs. If a majority, in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization
of this corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the corporation, as the case may be, and also on the
corporation.

ARTICLE XI

A. Limitation on Liability. A director of the corporation shall
not be personally liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability (1)
for any breach of the director's duty of loyalty to the corporation and its
stockholders; (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (3) under Section 174 of
the Delaware General Corporation Law; or (4) for any transaction from which the
director derived an improper personal benefit.

If the Delaware General Corporation Law hereafter is amended to
further eliminate or limit the liability of directors, then the liability of a
director of the corporation, in addition to the limitation on personal
liability provided herein, shall be limited to the fullest extent permitted by
the amended Delaware General Corporation Law.

B. Indemnification. The corporation is authorized to indemnify
the directors and officers of this corporation to the fullest extent
permissible under Delaware law.

C. Insurance. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.

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<PAGE> 6
D. Repeal and Modification. Any repeal or modification of the
foregoing provisions of this Article XI shall not adversely affect any right or
protection of any director, officer, employee or agent of the corporation
existing at the time of such repeal or modification.

E. Vote Required to Amend or Repeal. The affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then outstanding shares of the stock of the corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend in any respect or repeal this Article
XI.

ARTICLE XII

The corporation reserves the right to amend or repeal any provision
contained in this Restated Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon a stockholder
herein are granted subject to this reservation.

* * * * *

Four: This Restated Certificate of Incorporation was duly
adopted by the Board of Directors of this corporation.

Five: This Restated Certificate of Incorporation was duly
adopted by written consent of the stockholders of the corporation in
accordance with Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware and written notice of such action has
been given as provided in Section 228.

IN WITNESS WHEREOF, Heska Corporation has caused this certificate to
be signed by the undersigned officer, thereunto duly authorized, this __th day
of June, 1997.

By:
-----------------------------------
Name:
Title:

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<PAGE> 1

EXHIBIT 3.2(c)

B Y L A W S

HESKA CORPORATION

(A DELAWARE CORPORATION)
<PAGE> 2
TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE 1: Offices . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Principal Office. . . . . . . . . . . . . . . . . . . . . . 1
1.2 Additional Offices. . . . . . . . . . . . . . . . . . . . . 1

ARTICLE 2: Meeting of Stockholders . . . . . . . . . . . . . . . . . . . 1
2.1 Place of Meeting. . . . . . . . . . . . . . . . . . . . . . 1
2.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . . 1
2.3 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 2
2.4 Action Without a Meeting. . . . . . . . . . . . . . . . . . 2
2.5 Notice of Meetings. . . . . . . . . . . . . . . . . . . . . 3
2.6 Business Matter of a Special Meeting. . . . . . . . . . . . 3
2.7 List of Stockholders. . . . . . . . . . . . . . . . . . . . 3
2.8 Organization and Conduct of Business. . . . . . . . . . . . 3
2.9 Quorum and Adjournments . . . . . . . . . . . . . . . . . . 4
2.10 Voting Rights . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 Majority Vote . . . . . . . . . . . . . . . . . . . . . . . 4
2.12 Record Date for Stockholder Notice and Voting . . . . . . . 4
2.13 Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.14 Inspectors of Election . . . . . . . . . . . . . . . . . . 5

ARTICLE 3: Directors . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.1 Number, Election, Tenure and Qualifications . . . . . . . . 6
3.2 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 Resignation and Removal . . . . . . . . . . . . . . . . . . 7
3.4 Powers. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.5 Place of Meetings . . . . . . . . . . . . . . . . . . . . . 7
3.6 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . 7
3.7 Regular Meetings. . . . . . . . . . . . . . . . . . . . . . 8
3.8 Special Meetings. . . . . . . . . . . . . . . . . . . . . . 8
3.9 Quorum and Adjournments . . . . . . . . . . . . . . . . . . 8
3.10 Action Without Meeting . . . . . . . . . . . . . . . . . . 8
3.11 Telephone Meetings . . . . . . . . . . . . . . . . . . . . 8
3.12 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . 8
3.13 Fees and Compensation of Directors . . . . . . . . . . . . 8
3.14 Rights of Inspection . . . . . . . . . . . . . . . . . . . 9

ARTICLE 4: Committees of Directors . . . . . . . . . . . . . . . . . . . 9
4.1 Selection . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.2 Power . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.3 Committee Minutes . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>

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<PAGE> 3
<TABLE>
<S> <C>
ARTICLE 5: Officers . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.1 Officers Designated . . . . . . . . . . . . . . . . . . . . 10
5.2 Appointment of Officers . . . . . . . . . . . . . . . . . . 10
5.3 Subordinate Officers. . . . . . . . . . . . . . . . . . . . 10
5.4 Removal and Resignation of Officers. . . . . . . . . . . . 10
5.5 Vacancies in Offices. . . . . . . . . . . . . . . . . . . . 10
5.6 Compensation. . . . . . . . . . . . . . . . . . . . . . . . 10
5.7 The Chairman of the Board . . . . . . . . . . . . . . . . . 10
5.8 The Chief Executive Officer and President . . . . . . . . . 11
5.9 The Vice President. . . . . . . . . . . . . . . . . . . . . 11
5.10 The Secretary . . . . . . . . . . . . . . . . . . . . . . . 11
5.11 The Assistant Secretary . . . . . . . . . . . . . . . . . . 11
5.12 The Chief Financial Officer . . . . . . . . . . . . . . . . 12

ARTICLE 6: Stock Certificates . . . . . . . . . . . . . . . . . . . . . 12
6.1 Certificates for Shares . . . . . . . . . . . . . . . . . . 12
6.2 Signatures on Certificates. . . . . . . . . . . . . . . . . 12
6.3 Transfer of Stock . . . . . . . . . . . . . . . . . . . . . 12
6.4 Registered Stockholders . . . . . . . . . . . . . . . . . . 13
6.5 Lost, Stolen or Destroyed Certificates. . . . . . . . . . . 13

ARTICLE 7: General Provisions . . . . . . . . . . . . . . . . . . . . . 13
7.1 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.2 Dividend Reserve. . . . . . . . . . . . . . . . . . . . . . 13
7.3 Checks. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.4 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . . 14
7.5 Execution of Corporate Contracts and Instruments. . . . . . 14
7.6 Representation of Shares of Other Corporations. . . . . . . 14

ARTICLE 8: Amendments . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>

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<PAGE> 4

B Y L A W S

HESKA CORPORATION

(A DELAWARE CORPORATION)

ARTICLE 1

Offices

1.1 Principal Office. The initial registered office of the
corporation shall be 1209 Orange Street, Wilmington, DE, and the name of the
initial registered agent in charge thereof is The Corporation Trust Company.

1.2 Additional Offices. The corporation may also have offices at
such other places, either within or without the State of Delaware, as the Board
of Directors (the "Board") may from time to time designate or the business of
the corporation may require.

ARTICLE 2

Meeting of Stockholders

2.1 Place of Meeting. Meetings of stockholders may be held at such
place, either within or without of the State of Delaware, as may be designated
by or in the manner provided in these Bylaws, or, if not so designated, at the
registered office of the corporation or the principal executive offices of the
corporation.

2.2 Annual Meeting. Annual meetings of stockholders shall be held
each year at such date and time as shall be designated from time to time by the
Board and stated in the notice of the meeting. At such annual meetings, the
stockholders shall elect by a plurality vote the number of directors equal to
the number of directors of the class whose term expires at such meetings (or,
if fewer, the number of directors properly nominated and qualified for
election) to hold office until the third succeeding annual meeting of
stockholders after their election. The stockholders shall also transact such
other business as may properly be brought before the meetings.

To be properly brought before the annual meeting, business must be
either (a) specified in the notice of meeting (or any supplement thereto) given
by or at the direction of the Board of Directors or the Chief Executive Officer
and President, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or the Chief Executive Officer and
President, or (c) otherwise properly brought before the meeting by a
stockholder of record. In

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<PAGE> 5
addition to any other applicable requirements, for business to be properly
brought before the annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the corporation. To
be timely, a stockholder's notice must be delivered personally or deposited in
the United States mail, or delivered to a common carrier for transmission to
the recipient or actually transmitted by the person giving the notice by
electronic means to the recipient or sent by other means of written
communication, postage or delivery charges prepaid in all such cases, and
received at the principal executive offices of the corporation, addressed to
the attention of the Secretary of the corporation, not less than 60 days nor
more than 90 days prior to the scheduled date of the meeting (regardless of any
postponements, deferrals or adjournments of that meeting to a later date);
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the scheduled meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the earlier of (a) the close of business on the 10th day following
the day on which such notice of the date of the scheduled annual meeting was
mailed or such public disclosure was made, whichever first occurs, and (b) two
days prior to the date of the scheduled meeting. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of the stockholder
proposing such business, (iii) the class, series and number of shares of the
corporation that are owned beneficially by the stockholder, and (iv) any
material interest of the stockholder in such business. Notwithstanding
anything in these Bylaws to the contrary, no business shall be conducted at the
annual meeting except in accordance with the procedures set forth in this
Section; provided, however, that nothing in this Section shall be deemed to
preclude discussion by any stockholder of any business properly brought before
the annual meeting.

The Chairman of the Board of the corporation (or such other person
presiding at the meeting in accordance with these Bylaws) shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with the provisions of this Section,
and if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.

2.3 Special Meetings. Special meetings of the stockholders may be
called for any purpose or purposes, unless otherwise prescribed by the statute
or by the Restated Certificate of Incorporation, only at the request of the
Chairman or the Chief Executive Officer and President of the corporation or by
a resolution duly adopted by the affirmative vote of a majority of the Board of
Directors. Such request shall state the purpose or purposes of the proposed
meeting. Business transacted at any special meeting shall be limited to matters
relating to the purpose or purposes stated in the notice of meeting.

2.4 Action Without a Meeting. Any action which may be taken at any
annual or special meeting of the stockholders of this corporation may be taken
without a meeting, without prior notice, and without a vote, if a consent or
consents in writing, setting forth the action or actions so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Such consent or consents

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<PAGE> 6
shall be delivered to the corporation by hand or certified mail, return receipt
requested, to its principal executive office, or to an officer or agent of the
corporation having custody of the book in which proceedings of meetings of
stockholders are recorded.

2.5 Notice of Meetings. Written notice of stockholders' meetings,
stating the place, date and time of the meeting and, in the case of a special
meeting, the purpose or purposes for which such special meeting is called,
shall be given to each stockholder entitled to vote at such meeting not less
than ten (10) nor more than sixty (60) days prior to the meeting.

When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than
thirty (30) days after the date for which the meeting was originally noticed,
or if a new record date is fixed for the adjourned meeting, written notice of
the place, date and time of the adjourned meeting shall be given in conformity
herewith. At any adjourned meeting, any business may be transacted which might
have been transacted at the original meeting.

Whenever, under the provisions of Delaware law or of the Restated
Certificate of Incorporation or of these Bylaws, notice is required to be given
to any stockholder it shall not be construed to mean personal notice, but such
notice may be given in writing, by mail, addressed to such director or
stockholder, at his or her address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to
be given at the time when the same shall be deposited in the United States
mail.

Whenever any notice is required to be given under the provisions of
Delaware law or of the Restated Certificate of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.

2.6 Business Matter of a Special Meeting. Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice, except to the extent such notice is waived or is not required.

2.7 List of Stockholders. The officer in charge of the stock ledger
of the corporation or the transfer agent shall prepare and make, at least ten
(10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at the meeting arranged in alphabetical order,
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the meeting, at
a place within the city where the meeting is to be held, which place, if other
than the place of the meeting, shall be specified in the notice of the meeting.
The list shall also be produced and kept at the place of the meeting during the
whole time thereof, and may be inspected by any stockholder who is present in
person thereat.

2.8 Organization and Conduct of Business. The Chairman of the Board
or, in his or her absence, the Chief Executive Officer and President of the
corporation or, in their absence,

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<PAGE> 7
such person as the Board may have designated or, in the absence of such a
person, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order
any meeting of the stockholders and act as Chairman of the meeting. In the
absence of the Secretary of the corporation, the Secretary of the meeting shall
be such person as the Chairman appoints.

The Chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seems to him or her in order.

2.9 Quorum and Adjournments. Except where otherwise provided by law
or the Restated Certificate of Incorporation or these Bylaws, the holders of a
majority of the stock issued and outstanding and entitled to vote, present in
person or represented in proxy, shall constitute a quorum at all meetings of
the stockholders. The stockholders present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough stockholders to have less than a
quorum if any action taken (other than adjournment) is approved by at least a
majority of the shares required to constitute a quorum. At such adjourned
meeting at which a quorum is present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If, however, a quorum shall not be present or represented at any
meeting of the stockholders, the stockholders entitled to vote thereat who are
present in person or represented by proxy shall have the power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented.

2.10 Voting Rights. Unless otherwise provided in the Restated
Certificate of Incorporation, each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of
the capital stock having voting power held by such stockholder.

2.11 Majority Vote. When a quorum is present at any meeting, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of the
statutes or of the Restated Certificate of Incorporation or of these Bylaws, a
different vote is required in which case such express provision shall govern
and control the decision of such question.

2.12 Record Date for Stockholder Notice and Voting.

(i) For purposes of determining the stockholders entitled to
notice of any meeting or to vote, or entitled to receive payment of
any dividend or other distribution, or entitled to exercise any right
in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board may fix, in advance, a
record date, which shall not be more than sixty (60) days nor less
than ten (10) days before the date of any such meeting nor more than
sixty (60) days before any other action. If the Board does not so fix
a record date, the record date for determining stockholders entitled
to notice of or to vote at a meeting of stockholders shall be at the
close of business on the business day

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<PAGE> 8
next preceding the day on which notice is given or, if notice is
waived, at the close of business on the business day next preceding
the day on which the meeting is held.

(ii) For purposes of determining the stockholders entitled to
consent to corporate action in writing without a meeting, the board of
directors may fix a record date, which record date shall not precede
the date upon which the resolution fixing the record date is adopted
by the board of directors, and which date shall not be more than ten
(10) days after the date upon which the resolution fixing such record
date is adopted by the board of directors. If no record date has been
fixed by the board of directors, the record date for determining
stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the board of directors is
required under Delaware law, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken
is delivered to the corporation by hand or certified mail, return
receipt requested, to its principal executive office, or to an officer
or agent of the corporation having custody of the book in which
proceedings of meetings of stockholders are recorded. If no record
date has been fixed by the board of directors and prior action by the
board of directors is required under Delaware law, the record date for
determining stockholders entitled to consent to corporate action in
writing without a meeting shall be the close of business on the day on
which the board of directors adopts the resolution taking such prior
action.

2.13 Proxies. Every person entitled to vote for directors or on any
other matter shall have the right to do so either in person or by one or more
agents authorized by a written proxy signed by the person and filed with the
Secretary of the corporation. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. A validly executed proxy which does not state
that it is irrevocable shall continue in full force and effect unless (i)
revoked by the person executing it, before the vote pursuant to that proxy, by
a writing delivered to the corporation stating that the proxy is revoked or by
a subsequent proxy executed by, or attendance at the meeting and voting in
person by, the person executing the proxy; or (ii) written notice of the death
or incapacity of the maker of that proxy is received by the corporation before
the vote pursuant to that proxy is counted; provided, however, that no proxy
shall be valid after the expiration of three years from the date of the proxy,
unless otherwise provided in the proxy.

2.14 Inspectors of Election. The corporation shall, in advance of
any meeting of stockholders, appoint one or more inspectors of election to act
at the meeting and make a written report thereof. The corporation may
designate one or more persons to act as alternate inspectors to replace any
inspector who fails to act. If no inspector or alternate is able to act at a
meeting of stockholders, the person presiding at the meeting shall appoint one
or more inspectors to act at the meeting. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability.

-5-
<PAGE> 9
ARTICLE 3

Directors

3.1 Number, Election, Tenure and Qualifications. The Board of
Directors of the corporation shall consist of not less than five (5) members
nor more than nine (9) members and shall be divided into three classes,
designated as Class I, Class II and Class III, as nearly equal in number as
possible. The initial Board of Directors shall consist of seven (7) members,
with Class I consisting of two (2) directors, Class II consisting of two (2)
directors and Class III consisting of three (3) directors, and the exact number
of members of any future Board of Directors, and the exact number of directors
in each Class, shall be determined from time to time by resolution of the Board
of Directors. Notwithstanding the foregoing, additional directorships
resulting from an increase in the number of directors shall be apportioned
among the classes as equally as possible.

Only persons who are nominated in accordance with the following
procedures shall be eligible for election as directors. Nominations of persons
for election to the Board of Directors at the annual meeting, by or at the
direction of the Board of Directors, may be made by any nominating committee or
person appointed by the Board of Directors; nominations may also be made by any
stockholder of record of the corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section. Such nominations, other than those made by or at the direction
of the Board of Directors, shall be made pursuant to timely notice in writing
to the Secretary of the corporation. To be timely, a stockholder's notice
shall be delivered personally or deposited in the United States mail, or
delivered to a common carrier for transmission to the recipient or actually
transmitted by the person giving the notice by electronic means to the
recipient or sent by other means of written communication, postage or delivery
charges prepaid in all such cases, and received at the principal executive
offices of the corporation addressed to the attention of the Secretary of the
corporation not less than 60 days nor more than 90 days prior to the scheduled
date of the meeting (regardless of any postponements, deferrals or adjournments
of that meeting to a later date); provided, however, that, in the case of an
annual meeting and in the event that less than 70 days' notice or prior public
disclosure of the date of the scheduled meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the earlier of (a) the close of business on the 10th day following
the day on which such notice of the date of the scheduled meeting was mailed or
such public disclosure was made, whichever first occurs, or (b) two days prior
to the date of the scheduled meeting. Such stockholder's notice to the
Secretary shall set forth (a) as to each person whom the stockholder proposes
to nominate for election or reelection as a director, (i) the name, age,
business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class, series and number of
shares of capital stock of the corporation that are owned beneficially by the
person, (iv) a statement as to the person's citizenship, and (v) any other
information relating to the person that is required to be disclosed in
solicitations for proxies for election of directors pursuant to Section 14 of
the Securities Exchange Act of 1934, as amended, and the rules and regulations
promulgated thereunder; and (b) as to the stockholder giving the notice, (i)
the name and record address of the stockholder and (ii) the class, series and
number of shares of capital stock of the corporation that are owned
beneficially by the

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<PAGE> 10
stockholder. The corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the corporation to determine
the eligibility of such proposed nominee to serve as director of the
corporation. No person shall be eligible for election as a director of the
corporation unless nominated in accordance with the procedures set forth
herein.

In connection with any annual meeting, the Chairman of the Board of
Directors (or such other person presiding at such meeting in accordance with
these Bylaws) shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the foregoing procedure, and
if he should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.

Directors shall serve as provided in the Restated Certificate of
Incorporation of the corporation. Directors need not be stockholders.

3.2 Vacancies. Vacancies and newly created directorships resulting
from any increase in the authorized number of directors may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and the directors so chosen shall hold office until
the next annual election at which the term of the class to which they have been
elected expires and until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, then an election
of directors may be held in the manner provided by statute. In the event of a
vacancy in the Board of Directors, the remaining directors, except as otherwise
provided by law or these bylaws, may exercise the powers of the full board
until the vacancy is filled.

3.3 Resignation and Removal. Any director may resign at any time
upon written notice to the corporation at its principal place of business or to
the chief executive officer or the secretary. Such resignation shall be
effective upon receipt of such notice unless the notice specifies such
resignation to be effective at some other time or upon the happening of some
other event. Any director or the entire Board of Directors may be removed, but
only for cause, by the holders of a majority of the shares then entitled to
vote at an election of directors, unless otherwise specified by law or the
certificate of incorporation.

3.4 Powers. The business of the corporation shall be managed by or
under the direction of the Board which may exercise all such powers of the
corporation and do all such lawful acts and things which are not by statute or
by the Restated Certificate of Incorporation or by these Bylaws directed or
required to be exercised or done by the stockholders.

3.5 Place of Meetings. The Board may hold meetings, both regular and
special, either within or without the State of Delaware.

3.6 Annual Meetings. The annual meetings of the Board shall be held
immediately following the annual meeting of stockholders, and no notice of such
meeting shall be necessary to the Board, provided a quorum shall be present.
The annual meetings shall be for the purposes of organization, and an election
of officers and the transaction of other business.

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<PAGE> 11
3.7 Regular Meetings. Regular meetings of the Board may be held
without notice at such time and place as may be determined from time to time by
the Board.

3.8 Special Meetings. Special meetings of the Board may be called by
the Chairman of the Board, the Chief Executive Officer and President or a
majority of the Board upon one (1) day's notice to each director and can be
delivered either personally, or by telephone, express delivery service (so
that the scheduled delivery date of the notice is at least one (1) day in
advance of the meeting), telegram or facsimile transmission, and on five
(5) day's notice, by mail. The notice need not describe the purpose of the
special meeting.

3.9 Quorum and Adjournments. At all meetings of the Board, a
majority of the directors then in office shall constitute a quorum for the
transaction of business, and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board, except as
may otherwise be specifically provided by law or the Restated Certificate of
Incorporation. If a quorum is not present at any meeting of the Board, the
directors present may adjourn the meeting from time to time, without notice
other than announcement at the meeting at which the adjournment is taken, until
a quorum shall be present. A meeting at which a quorum is initially present
may continue to transact business notwithstanding the withdrawal of directors,
if any action taken is approved of by at least a majority of the required
quorum for that meeting.

3.10 Action Without Meeting. Unless otherwise restricted by the
Restated Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board or of any committee thereof
may be taken without a meeting, if all members of the Board or committee, as
the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board or committee.

3.11 Telephone Meetings. Unless otherwise restricted by the
Restated Certificate of Incorporation or these Bylaws, any member of the Board
or any committee may participate in a meeting by means of conference
telephone or of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.

3.12 Waiver of Notice. Notice of a meeting need not be given to any
director who signs a waiver of notice or a consent to holding the meeting or an
approval of the minutes thereof, whether before or after the meeting, or who
attends the meeting without protesting, prior thereto or at its commencement,
the lack of notice to such director. All such waivers, consents and approvals
shall be filed with the corporate records or made a part of the minutes of the
meeting.

3.13 Fees and Compensation of Directors. Unless otherwise restricted
by the Restated Certificate of Incorporation or these Bylaws, the Board shall
have the authority to fix the compensation of directors. The directors may be
paid their expenses, if any, of attendance at each meeting of the Board and
may be paid a fixed sum for attendance at each meeting of the Board or a
stated salary as director. No such payment shall preclude any director from
serving the

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<PAGE> 12
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for
attending committee meetings.

3.14 Rights of Inspection. Any director shall have the right to
examine the corporation's stock ledger, a list of its stockholders and its
other books and records for a purpose reasonably related to his or her position
as a director.

ARTICLE 4

Committees of Directors

4.1 Selection. The Board may, by resolution passed by a majority of
the entire Board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The Board may designate
one or more directors as alternate members of any committee, who may replace
any absent or disqualified member at any meeting of the committee.

In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or she or they constitute a quorum, may unanimously
appoint another member of the Board to act at the meeting in the place of any
such absent or disqualified member.

4.2 Power. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the Restated Certificate of Incorporation
(except that a committee may, to the extent authorized in the resolution or
resolutions providing for the issuance of shares of stock adopted by the Board
as provided in Section 151(a) of the General Corporation Law of Delaware, fix
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the corporation or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the corporation), adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the corporation's property and assets, recommending to the
stockholders a dissolution of the corporation or a revocation of dissolution,
removing or indemnifying directors or amending the Bylaws of the corporation;
and, unless the resolution or the Restated Certificate of Incorporation
expressly so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock or to adopt a
certificate of ownership and merger. Such committee or committees shall have
such name or names as may be determined from time to time by resolution
adopted by the Board.

4.3 Committee Minutes. Each committee shall keep regular minutes of
its meetings and report the same to the Board when required.

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<PAGE> 13
ARTICLE 5

Officers

5.1 Officers Designated. The officers of the corporation shall be
chosen by the Board and shall be a Chief Executive Officer and President, a
Secretary and a Chief Financial Officer. The Board may also choose a Chairman
of the Board, one or more Vice Presidents, and one or more assistant
Secretaries. Any number of offices may be held by the same person, unless the
Restated Certificate of Incorporation or these Bylaws otherwise provide.

5.2 Appointment of Officers. The officers of the corporation, except
such officers as may be appointed in accordance with the provisions of Section
5.3 or 5.5 of this Article 5, shall be chosen in such manner and shall hold
their offices for such terms as are prescribed by these Bylaws or determined by
the board of directors. Each officer shall hold his or her office until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. This section does not create any rights of employment or continued
employment. The corporation may secure the fidelity of any or all of its
officers or agents by bond or otherwise.

5.3 Subordinate Officers. The Board may appoint, and may empower the
Chief Executive Officer and President to appoint, such other officers and
agents as the business of the corporation may require, each of whom shall hold
office for such period, have such authority and perform such duties as are
provided in the Bylaws or as the Board may from time to time determine.

5.4 Removal and Resignation of Officers. Subject to the rights, if
any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by an affirmative vote of the majority
of the Board, at any regular or special meeting of the Board, or, except in
case of an officer chosen by the Board, by any officer upon whom such power of
removal may be conferred by the Board.

Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless
otherwise specified in that notice, the acceptance of the resignation shall not
be necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.

5.5 Vacancies in Offices. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in
the manner prescribed in these Bylaws for regular appointment to that office.

5.6 Compensation. The salaries of all officers of the corporation
shall be fixed from time to time by the Board and no officer shall be prevented
from receiving a salary because he is also a director of the corporation.

5.7 The Chairman of the Board. The Chairman of the Board, if such an
officer be elected, shall, if present, perform such other powers and duties as
may be assigned to him from

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<PAGE> 14

time to time by the Board. If there is no Chief Executive Officer and
President, the Chairman of the Board shall also be the Chief Executive Officer
and President of the corporation and shall have the powers and duties
prescribed in Section 5.8 of this Article 5.

5.8 The Chief Executive Officer and President. Subject to such
supervisory powers, if any, as may be given by the Board to the Chairman of the
Board, if there be such an officer, the Chief Executive Officer and President
shall be the Chief Executive Officer of the corporation, shall preside at all
meetings of the stockholders and in the absence of the Chairman of the Board,
or if there be none, at all meetings of the Board, shall have general and
active management of the business of the corporation and shall see that all
orders and resolutions of the Board are carried into effect. He or she shall
execute bonds, mortgages and other contracts requiring a seal, under the seal
of the corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and execution thereof shall be
expressly delegated by the Board to some other officer or agent of the
corporation.

5.9 The Vice President. The Vice President (or in the event there be
more than one, the Vice Presidents in the order designated by the directors, or
in the absence of any designation, in the order of their election), shall, in
the absence of the Chief Executive Officer and President or in the event of his
or her disability or refusal to act, perform the duties of the Chief Executive
Officer and President, and when so acting, shall have the powers of and subject
to all the restrictions upon the Chief Executive Officer and President. The
Vice President(s) shall perform such other duties and have such other powers as
may from time to time be prescribed for them by the Board, the Chief Executive
Officer and President, the Chairman of the Board or these Bylaws.

5.10 The Secretary. The Secretary shall attend all meetings of the
Board and the stockholders and record all votes and the proceedings of the
meetings in a book to be kept for that purpose and shall perform like duties
for the standing committees, when required. The Secretary shall give, or cause
to be given, notice of all meetings of stockholders and special meetings of the
Board, and shall perform such other duties as may from time to time be
prescribed by the Board, the Chairman of the Board or the Chief Executive
Officer and President, under whose supervision he or she shall act. The
Secretary shall have custody of the seal of the corporation, and the Secretary,
or an Assistant Secretary, shall have authority to affix the same to any
instrument requiring it, and, when so affixed, the seal may be attested by his
or her signature or by the signature of such Assistant Secretary. The Board
may give general authority to any other officer to affix the seal of the
corporation and to attest the affixing thereof by his or her signature. The
Secretary shall keep, or cause to be kept, at the principal executive office or
at the office of the corporation's transfer agent or registrar, as determined
by resolution of the Board, a share register, or a duplicate share register,
showing the names of all stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same and the number and date of cancellation of every certificate
surrendered for cancellation.

5.11 The Assistant Secretary. The Assistant Secretary, or if there
be more than one, the Assistant Secretaries in the order designated by the
Board (or in the absence of any designation, in the order of their election)
shall, in the absence of the Secretary or in the event

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<PAGE> 15
of his or her inability or refusal to act, perform the duties and exercise the
powers of the Secretary and shall perform such other duties and have such other
powers as may from time to time be prescribed by the Board.

5.12 The Chief Financial Officer. The Chief Financial Officer shall
have the custody of the Corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
corporation and shall deposit all moneys and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board. The Chief Financial Officer shall disburse the funds of the
corporation as may be ordered by the Board, taking proper vouchers for such
disbursements, and shall render to the Chief Executive Officer and President
and the Board, at its regular meetings, or when the Board so requires, an
account of all his or her transactions as Chief Financial Officer and of the
financial condition of the corporation.

ARTICLE 6

Stock Certificates

6.1 Certificates for Shares. The shares of the corporation shall be
represented by certificates or shall be uncertificated. Certificates shall be
signed by, or in the name of the corporation by, the Chairman of the Board, or
the Chief Executive Officer and President or a Vice President and by the Chief
Financial Officer, or the Secretary or an Assistant Secretary of the
corporation.

Within a reasonable time after the issuance or transfer of
uncertificated stock, the corporation shall send to the registered owner
thereof a written notice containing the information required by the General
Corporation Law of the State of Delaware or a statement that the corporation
will furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.

6.2 Signatures on Certificates. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.

6.3 Transfer of Stock. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate of shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated share, such uncertificated shares shall
be canceled and issuance of new

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<PAGE> 16
equivalent uncertificated shares or certificated shares shall be made to the
person entitled thereto and the transaction shall be recorded upon the books of
the corporation.

6.4 Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a percent registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.

6.5 Lost, Stolen or Destroyed Certificates. The Board may direct
that a new certificate or certificates be issued to replace any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing the issue of a new certificate or certificates, the Board may, in
its discretion and as a condition precedent to the issuance thereof, require
the owner of the lost, stolen or destroyed certificate or certificates, or his
or her legal representative, to advertise the same in such manner as it shall
require, and/or to give the corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.

ARTICLE 7

General Provisions

7.1 Dividends. Dividends upon the capital stock of the corporation,
subject to any restrictions contained in the General Corporation Law of the
State of Delaware or the provisions of the Restated Certificate of
Incorporation, if any, may be declared by the Board at any regular or special
meeting. Dividends may be paid in cash, in property or in shares of the
capital stock, subject to the provisions of the Restated Certificate of
Incorporation.

7.2 Dividend Reserve. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest
of the corporation, and the directors may modify or abolish any such reserve in
the manner in which it was created.

7.3 Checks. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board may from time to time designate.

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<PAGE> 17
7.4 Corporate Seal. The Board may provide a suitable seal,
containing the name of the corporation, which seal shall be in charge of the
Secretary. If and when so directed by the Board or a committee thereof,
duplicates of the seal may be kept and used by the Chief Financial Officer or
by any Assistant Secretary.

7.5 Execution of Corporate Contracts and Instruments. The Board,
except as otherwise provided in these Bylaws, may authorize any officer or
officers, or agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the corporation; such authority may
be general or confined to specific instances. Unless so authorized or ratified
by the Board or within the agency power of an officer, no officer, agent or
employee shall have any power or authority to bind the corporation by any
contract or engagement or to pledge its credit or to render it liable for any
purpose or for any amount.

7.6 Representation of Shares of Other Corporations. The Chief
Executive Officer and President or any Vice President or the Secretary or any
Assistant Secretary of this corporation is authorized to vote, represent and
exercise on behalf of this corporation all rights incident to any and all
shares of any corporation or corporations standing in the name of this
corporation. The authority herein granted to said officers to vote or
represent on behalf of this corporation any and all shares held by this
corporation in any other corporation or corporations may be exercised either by
such officers in person or by any other person authorized so to do by proxy or
power of attorney duly executed by said officers.

ARTICLE 8

Amendments

The Board of Directors is expressly empowered to adopt, amend or
repeal these Bylaws, provided, however, that any adoption, amendment or repeal
of these Bylaws by the Board of Directors shall require the approval of at
least sixty-six and two-thirds percent (66-2/3%) of the total number of
authorized directors (whether or not there exist any vacancies in previously
authorized directorships at the time any resolution providing for adoption,
amendment or repeal is presented to the board). The stockholders shall also
have power to adopt, amend or repeal these Bylaws, provided, however, that in
addition to any vote of the holders of any class or series of stock of this
corporation required by law or by the Restated Certificate of Incorporation of
this corporation, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the voting power of all of the then outstanding
shares of the stock of the corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required for
such adoption, amendment or repeal by the stockholders of any provisions of
these Bylaws.

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<PAGE> 1
EXHIBIT 4.1

COMMON STOCK

INCORPORATED UNDER THE LAWS OF DELAWARE

NUMBER SHARES [LOGO]

SEE REVERSE SIDE FOR CERTAIN DEFINITIONS

CUSIP 428058 10 4

THIS CERTIFIES THAT

IS THE OWNER OF

L FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
O PAR VALUE OF $.001 PER SHARE OF HESKA CORPORATION (THE
G "CORPORATION"),
O
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE
RECORD HOLDER HEREOF IN PERSON OR BY DULY AUTHORIZED
ATTORNEY UPON SURRENDER OF THIS CERTIFICATE PROPERLY
ENDORSED.

THIS CERTIFICATE IS NOT VALID UNTIL COUNTERSIGNED BY
THE TRANSFER AGENT AND REGISTRAR.

IN WITNESS WHEREOF THE CORPORATION HAS CAUSED THIS
CERTIFICATE TO BE SIGNED BY THE FACSIMILE SIGNATURES
OF ITS DULY AUTHORIZED OFFICERS.

DATED:

[CHIEF FINANCIAL OFFICER] [PRESIDENT]

COUNTERSIGNED AND REGISTERED
AMERICAN SECURITIES TRANSFER & TRUST, INCORPORATED L
(P.O. BOX 1596, DENVER, CO 80201) TRANSFER AGENT O
AND REGISTRAR G
O

AUTHORIZED SIGNATURE

<PAGE> 2
[REVERSE SIDE OF STOCK CERTIFICATE]

HESKA CORPORATION

The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.

The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

<TABLE>
<S> <C> <C>
TEN COM: as tenants in common UNIF GIFT MIN ACT Custodian
TEN ENT: as tenants by the entirety (Cust) (Minor)
JT TEN: as joint tenants with rights Under Uniform Gifts to Minors
of survivorship and not as Act
tenants in common (State)
UNIF TRF MIN ACT Custodian (until age )
(Cust)
under Uniform Transfers
to Minors Act
(State)
</TABLE>

Additional abbreviations may also be used though not on the above list.

FOR VALUE RECEIVED, hereby sell, assign and transfer unto

Please insert social security or other
identifying number of assignee

(Please print or typewrite name and address, including zip code, of assignee)

of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint Attorney
to transfer the said shares of Common Stock on the books of the within named
Corporation with full power of substitution.

Dated: X
X
NOTICE: The signature(s) to this assignment must
correspond with the name(s) as written upon the face
of the certificate in every particular, without
alteration or enlargement or any change whatever.

SIGNATURE(S) GUARANTEED:

The signature(s) should be guaranteed by an eligible guarantor institution
(banks, stockbrokers, savings and loan associations and credit unions with
membership in an approved signature guarantee medallion program), pursuant to
S.E.C. Rule 17Ad-15.

<PAGE> 1
EXHIBIT 5.1

PILLSBURY MADISON & SUTRO LLP
P.O. BOX 7880
SAN FRANCISCO, CA 94120
Tel: (415) 983-1000
Fax: (415) 983-1200

May 29, 1997

Heska Corporation
1825 Sharp Point Drive
Fort Collins, CO 80525

Re: Registration Statement on Form S-1

Ladies and Gentlemen:

We are acting as counsel for Heska Corporation, a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended (the "Securities Act"), of 6,152,500 shares
of Common Stock, par value $.001 per share (the "Common Stock"), of the
Company, of which 5,802,500 authorized but heretofore unissued shares
(including 802,500 shares subject to the underwriters' over-allotment option)
are to be offered and sold by the Company and 350,000 shares are to be offered
and sold by a certain stockholder of the Company (the "Selling Stockholder").
In this regard we have participated in the preparation of a Registration
Statement on Form S-1 (Registration No. 333-25767) relating to such 6,152,500
shares of Common Stock. (Such Registration Statement, as amended, and
including any registration statement related thereto and filed pursuant to Rule
462(b) under the Securities Act (a "Rule 462(b) registration statement") is
herein referred to as the "Registration Statement.")

We are of the opinion that (i) the shares of Common Stock to be
offered and sold by the Company (including any shares of Common Stock
registered pursuant to a Rule 462(b) registration statement) have been duly
authorized and, when issued and sold by the Company in the manner described in
the Registration Statement and in accordance with the resolutions adopted by
the Board of Directors of the Company, will be legally issued, fully paid and
nonassessable, and (ii) the shares of Common Stock to be offered and sold by
the Selling Stockholder have been duly authorized and legally issued and are
fully paid and nonassessable.

We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.

Very truly yours,

/s/ Pillsbury Madison & Sutro LLP

[01976]

<PAGE> 1
EXHIBIT 10.19

HESKA CORPORATION

1997 STOCK INCENTIVE PLAN

(AS ADOPTED EFFECTIVE MARCH 15, 1997)

<PAGE> 2

TABLE OF CONTENTS

PAGE
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ARTICLE 1. INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE 2. ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 Committee Composition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.2 Committee Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE 3. SHARES AVAILABLE FOR GRANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.1 Basic Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.2 Annual Increase in Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
3.3 Additional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE 4. ELIGIBILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.1 Nonstatutory Stock Options and Restricted Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4.2 Incentive Stock Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

ARTICLE 5. OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.1 Stock Option Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.2 Number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.3 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.4 Exercisability and Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.5 Effect of Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
5.6 Modification or Assumption of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
5.7 Buyout Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

ARTICLE 6. PAYMENT FOR OPTION SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.1 General Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.2 Surrender of Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6.3 Exercise/Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.4 Exercise/Pledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.5 Promissory Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
6.6 Other Forms of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.1 Initial Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.2 Annual Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.3 Accelerated Exercisability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
7.4 Exercise Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.5 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7.6 Affiliate of Outside Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE 8. RESTRICTED SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8.1 Time, Amount and Form of Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
</TABLE>

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<TABLE>
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8.2 Payment for Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
8.3 Vesting Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8.4 Voting and Dividend Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARTICLE 9. PROTECTION AGAINST DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.1 Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.2 Dissolution or Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
9.3 Reorganizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

ARTICLE 10. AWARDS UNDER OTHER PLANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE 11. LIMITATION ON RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.1 Retention Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.2 Stockholders' Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
11.3 Regulatory Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

ARTICLE 12. WITHHOLDING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
12.1 General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
12.2 Share Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE 13. FUTURE OF THE PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
13.1 Term of the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
13.2 Amendment or Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE 14. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE 15. EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
</TABLE>

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<PAGE> 4

HESKA CORPORATION

1997 STOCK INCENTIVE PLAN

ARTICLE 1. INTRODUCTION.

The Plan was adopted by the Board effective March 15, 1997. The
purpose of the Plan is to promote the long-term success of the Company and the
creation of stockholder value by (a) encouraging Employees, Outside Directors
and Consultants to focus on critical long-range objectives, (b) encouraging the
attraction and retention of Employees, Outside Directors and Consultants with
exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock
ownership. The Plan seeks to achieve this purpose by providing for Awards in
the form of Restricted Shares or Options (which may constitute incentive stock
options or nonstatutory stock options).

The Plan shall be governed by, and construed in accordance with, the
laws of the State of Colorado (except their choice-of-law provisions).

ARTICLE 2. ADMINISTRATION.

2.1 COMMITTEE COMPOSITION. The Plan shall be administered by the
Committee. The Committee shall consist exclusively of two or more
directors of the Company, who shall be appointed by the Board. In
addition, the composition of the Committee shall satisfy:

(a) Such requirements as the Securities and Exchange
Commission may establish for administrators acting under
plans intended to qualify for exemption under Rule 16b-3 (or
its successor) under the Exchange Act; and

(b) Such requirements as the Internal Revenue Service may
establish for outside directors acting under plans intended
to qualify for exemption under section 162(m)(4)(C) of the
Code.

The Board may also appoint one or more separate committees of the Board, each
composed of one or more directors of the Company who need not satisfy the
foregoing requirements, who may administer the Plan with respect to Employees
and Consultants who are not considered officers or directors of the Company
under section 16 of the Exchange Act, may grant Awards under the Plan to such
Employees and Consultants and may determine all terms of such Awards.

2.2 COMMITTEE RESPONSIBILITIES. The Committee shall (a) select the
Employees, Outside Directors and Consultants who are to receive Awards
under the Plan, (b) determine the type, number, vesting requirements and
other features and conditions of such Awards, (c) interpret the Plan and
(d) make all other decisions relating to the

<PAGE> 5

operation of the Plan. The Committee may adopt such rules or guidelines
as it deems appropriate to implement the Plan. The Committee's
determinations under the Plan shall be final and binding on all persons.

ARTICLE 3. SHARES AVAILABLE FOR GRANTS.

3.1 BASIC LIMITATION. Common Shares issued pursuant to the Plan may be
authorized but unissued shares or treasury shares. The aggregate number
of Options and Restricted Shares awarded under the Plan shall not exceed
(a) 1,350,000 plus (b) the aggregate number of Common Shares remaining
available for grants under the Predecessor Plans on March 15, 1997, plus
(c) the additional Common Shares described in Sections 3.2 and 3.3. No
additional grants shall be made under the Predecessor Plans after March
15, 1997. The limitation of this Section 3.1 shall be subject to
adjustment pursuant to Article 9.

3.2 ANNUAL INCREASE IN SHARES. As of January 1 of each year, commencing
with the year 1998, the aggregate number of Options and Restricted Shares
that may be awarded under the Plan shall be increased by a number of
Common Shares equal to the lesser of (a) 5% of the total number of Common
Shares outstanding as of the next preceding December 31 or (b) 1,500,000.

3.3 ADDITIONAL SHARES. If Options granted under this Plan or under the
Predecessor Plans are forfeited or terminate for any other reason before
being exercised, then the corresponding Common Shares shall become
available for the grant of Options and Restricted Shares under this Plan.
If Restricted Shares are forfeited, then the corresponding Common Shares
shall again become available for the grant of NQOs and Restricted Shares
under the Plan. The aggregate number of Common Shares that may be issued
under the Plan upon the exercise of ISOs shall not be increased when
Restricted Shares are forfeited.

ARTICLE 4. ELIGIBILITY.

4.1 NONSTATUTORY STOCK OPTIONS AND RESTRICTED SHARES. Only Employees,
Outside Directors and Consultants shall be eligible for the grant of NQOs
and Restricted Shares.

4.2 INCENTIVE STOCK OPTIONS. Only Employees who are common-law employees
of the Company, a Parent or a Subsidiary shall be eligible for the grant
of ISOs. In addition, an Employee who owns more than 10% of the total
combined voting power of all classes of outstanding stock of the Company
or any of its Parents or Subsidiaries shall not be eligible for the grant
of an ISO unless the requirements set forth in section 422(c)(6) of the
Code are satisfied.

ARTICLE 5. OPTIONS.

5.1 STOCK OPTION AGREEMENT. Each grant of an Option under the Plan shall
be evidenced by a Stock Option Agreement between the Optionee and the
Company. Such

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Option shall be subject to all applicable terms of the Plan and may be
subject to any other terms that are not inconsistent with the Plan. The
Stock Option Agreement shall specify whether the Option is an ISO or an
NQO. The provisions of the various Stock Option Agreements entered into
under the Plan need not be identical. Options may be granted in
consideration of a cash payment or in consideration of a reduction in the
Optionee's other compensation. A Stock Option Agreement may provide that
a new Option will be granted automatically to the Optionee when he or she
exercises a prior Option and pays the Exercise Price in the form
described in Section 6.2.

5.2 NUMBER OF SHARES. Each Stock Option Agreement shall specify the
number of Common Shares subject to the Option and shall provide for the
adjustment of such number in accordance with Article 9. Options granted
to any Optionee in a single fiscal year of the Company shall not cover
more than 500,000 Common Shares, except that Options granted to a new
Employee in the fiscal year of the Company in which his or her service as
an Employee first commences shall not cover more than one million Common
Shares. The limitations set forth in the preceding sentence shall be
subject to adjustment in accordance with Article 9.

5.3 EXERCISE PRICE. Each Stock Option Agreement shall specify the
Exercise Price; provided that the Exercise Price under an ISO shall in no
event be less than 100% of the Fair Market Value of a Common Share on the
date of grant and the Exercise Price under an NQO shall in no event be
less than 85% of the Fair Market Value of a Common Share on the date of
grant. In the case of an NQO, a Stock Option Agreement may specify an
Exercise Price that varies in accordance with a predetermined formula
while the NQO is outstanding.

5.4 EXERCISABILITY AND TERM. Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of
the Option; provided that the term of an ISO shall in no event exceed 10
years from the date of grant. A Stock Option Agreement may provide for
accelerated exercisability in the event of the Optionee's death,
disability or retirement or other events and may provide for expiration
prior to the end of its term in the event of the termination of the
Optionee's service. NQOs may also be awarded in combination with
Restricted Shares, and such an Award may provide that the NQOs will not
be exercisable unless the related Restricted Shares are forfeited.

5.5 EFFECT OF CHANGE IN CONTROL. The Committee may determine, at the
time of granting an Option or thereafter, that such Option shall become
exercisable as to all or part of the Common Shares subject to such Option
in the event that a Change in Control occurs with respect to the Company,
subject to the following limitations:

(a) In the case of an ISO, the acceleration of exercisability shall
not occur without the Optionee's written consent.

(b) If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be
treated as a "pooling

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of interests" for financial reporting purposes, and if such transaction
in fact is so treated, then the acceleration of exercisability shall not
occur to the extent that the surviving entity's independent public
accountants determine in good faith that such acceleration would preclude
the use of "pooling of interests" accounting.

5.6 MODIFICATION OR ASSUMPTION OF OPTIONS. Within the limitations of the
Plan, the Committee may modify, extend or assume outstanding options or
may accept the cancellation of outstanding options (whether granted by
the Company or by another issuer) in return for the grant of new options
for the same or a different number of shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification
of an Option shall, without the consent of the Optionee, alter or impair
his or her rights or obligations under such Option.

5.7 BUYOUT PROVISIONS. The Committee may at any time (a) offer to buy
out for a payment in cash or cash equivalents an Option previously
granted or (b) authorize an Optionee to elect to cash out an Option
previously granted, in either case at such time and based upon such terms
and conditions as the Committee shall establish.

ARTICLE 6. PAYMENT FOR OPTION SHARES.

6.1 GENERAL RULE. The entire Exercise Price of Common Shares issued upon
exercise of Options shall be payable in cash or cash equivalents at the
time when such Common Shares are purchased, except as follows:

(a) In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the
applicable Stock Option Agreement. The Stock Option
Agreement may specify that payment may be made in any
form(s) described in this Article 6.

(b) In the case of an NQO, the Committee may at any time
accept payment in any form(s) described in this Article 6.

6.2 SURRENDER OF STOCK. To the extent that this Section 6.2 is
applicable, all or any part of the Exercise Price may be paid by
surrendering, or attesting to the ownership of, Common Shares that are
already owned by the Optionee. Such Common Shares shall be valued at
their Fair Market Value on the date when the new Common Shares are
purchased under the Plan. The Optionee shall not surrender, or attest
to the ownership of, Common Shares in payment of the Exercise Price if
such action would cause the Company to recognize compensation expense (or
additional compensation expense) with respect to the Option for financial
reporting purposes.

6.3 EXERCISE/SALE. To the extent that this Section 6.3 is applicable,
all or any part of the Exercise Price and any withholding taxes may be
paid by delivering (on a form prescribed by the Company) an irrevocable
direction to a securities broker approved by

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<PAGE> 8

the Company to sell all or part of the Common Shares being purchased
under the Plan and to deliver all or part of the sales proceeds to the
Company.

6.4 EXERCISE/PLEDGE. To the extent that this Section 6.4 is applicable,
all or any part of the Exercise Price and any withholding taxes may be
paid by delivering (on a form prescribed by the Company) an irrevocable
direction to pledge all or part of the Common Shares being purchased
under the Plan to a securities broker or lender approved by the Company,
as security for a loan, and to deliver all or part of the loan proceeds
to the Company.

6.5 PROMISSORY NOTE. To the extent that this Section 6.5 is applicable,
all or any part of the Exercise Price and any withholding taxes may be
paid by delivering (on a form prescribed by the Company) a full-recourse
promissory note; provided that the par value of the Common Shares being
purchased under the Plan shall be paid in cash or cash equivalents.

6.6 OTHER FORMS OF PAYMENT. To the extent that this Section 6.6 is
applicable, all or any part of the Exercise Price and any withholding
taxes may be paid in any other form that is consistent with applicable
laws, regulations and rules.

ARTICLE 7. AUTOMATIC OPTION GRANTS TO OUTSIDE DIRECTORS

7.1 INITIAL GRANTS. Each Outside Director who first becomes a member of
the Board after the date of the Company's initial public offering shall
receive a one-time grant of an NQO covering 10,000 Common Shares (subject
to adjustment under Article 9). Such NQO shall be granted on the date
when such Outside Director first joins the Board and shall be exercisable
immediately. Common Shares issued upon exercise of such NQO shall be
subject to repurchase by the Company at the Exercise Price in the event
of the termination of such Outside Director's service for any reason.
The Company's right to repurchase such Common Shares shall lapse in four
equal installments at annual intervals over the 48-month period
commencing on the date of grant.

7.2 ANNUAL GRANTS. Upon the conclusion of each regular annual meeting of
the Company's stockholders held in the year 1998 or thereafter, each
Outside Director who will continue serving as a member of the Board
thereafter shall receive an NQO covering 2,000 Common Shares (subject to
adjustment under Article 9), except that such NQO shall not be granted
in the calendar year in which the same Outside Director received the NQO
described in Section 7.1. Each NQO granted under this Section 7.2 shall
be exercisable immediately. Common Shares issued upon exercise of such
NQO shall be subject to repurchase by the Company at the Exercise Price
in the event of the termination of such Outside Director's service for
any reason. The Company's right to repurchase such Common Shares shall
lapse in full on the first anniversary of the date of grant.

7.3 ACCELERATED EXERCISABILITY. The Company's right to repurchase Common
Shares issued to an Outside Director under this Article 7 shall also
lapse in full in the event of:

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<PAGE> 9

(a) The termination of such Outside Director's service
because of death, total and permanent disability or
retirement at or after age 65; or

(b) A Change in Control with respect to the Company, except
as provided in the next following sentence.

If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a
"pooling of interests" for financial reporting purposes, and if such
transaction in fact is so treated, then the acceleration of vesting shall
not occur to the extent that the surviving entity's independent public
accountants determine in good faith that such acceleration would preclude
the use of "pooling of interests" accounting.

7.4 EXERCISE PRICE. The Exercise Price under all NQOs granted to an
Outside Director under this Article 7 shall be equal to 100% of the Fair
Market Value of a Common Share on the date of grant, payable in one of
the forms described in Sections 6.1, 6.2, 6.3 and 6.4.

7.5 TERM. All NQOs granted to an Outside Director under this Article 7
shall terminate on the earliest of (a) the 10th anniversary of the date
of grant, (b) the date three months after the termination of such Outside
Director's service for any reason other than death or total and permanent
disability or (c) the date 12 months after the termination of such
Outside Director's service because of death or total and permanent
disability.

7.6 AFFILIATES OF OUTSIDE DIRECTORS. The Committee may provide that the
NQOs that otherwise would be granted to an Outside Director under this
Article 7 shall instead be granted to an affiliate of such Outside
Director. Such affiliate shall then be deemed to be an Outside Director
for purposes of the Plan, provided that the service-related vesting and
termination provisions pertaining to the NQOs shall be applied with
regard to the service of the Outside Director.

ARTICLE 8. RESTRICTED SHARES.

8.1 TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
granted in the form of Restricted Shares. Restricted Shares may also be
awarded in combination with NQOs, and such an Award may provide that the
Restricted Shares will be forfeited in the event that the related NQOs
are exercised.

8.2 PAYMENT FOR AWARDS. To the extent that an Award is granted in the
form of newly issued Restricted Shares, the Award recipient, as a
condition to the grant of such Award, shall be required to pay the
Company in cash or cash equivalents an amount equal to the par value of
such Restricted Shares. To the extent that an Award is granted in the
form of Restricted Shares from the Company's treasury, no cash
consideration shall be required of the Award recipients. Any amount not
paid in cash may be paid with a full-recourse promissory note.

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<PAGE> 10

8.3 VESTING CONDITIONS. Each Award of Restricted Shares may or may not
be subject to vesting. Vesting shall occur, in full or in installments,
upon satisfaction of the conditions specified in the Stock Award
Agreement. A Stock Award Agreement may provide for accelerated vesting
in the event of the Participant's death, disability or retirement or
other events. The Committee may determine, at the time of granting
Restricted Shares or thereafter, that all or part of such Restricted
Shares shall become vested in the event that a Change in Control occurs
with respect to the Company, except as provided in the next following
sentence. If the Company and the other party to the transaction
constituting a Change in Control agree that such transaction is to be
treated as a "pooling of interests" for financial reporting purposes, and
if such transaction in fact is so treated, then the acceleration of
vesting shall not occur to the extent that the surviving entity's
independent public accountants determine in good faith that such
acceleration would preclude the use of "pooling of interests" accounting.

8.4 VOTING AND DIVIDEND RIGHTS. The holders of Restricted Shares awarded
under the Plan shall have the same voting, dividend and other rights as
the Company's other stockholders. A Stock Award Agreement, however, may
require that the holders of Restricted Shares invest any cash dividends
received in additional Restricted Shares. Such additional Restricted
Shares shall be subject to the same conditions and restrictions as the
Award with respect to which the dividends were paid.

ARTICLE 9. PROTECTION AGAINST DILUTION.

9.1 ADJUSTMENTS. In the event of a subdivision of the outstanding Common
Shares, a declaration of a dividend payable in Common Shares, a
declaration of a dividend payable in a form other than Common Shares in
an amount that has a material effect on the price of Common Shares, a
combination or consolidation of the outstanding Common Shares (by
reclassification or otherwise) into a lesser number of Common Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall
make such adjustments as it, in its sole discretion, deems appropriate in
one or more of (a) the number of Options and Restricted Shares available
for future Awards under Article 3, (b) the limitations set forth in
Section , (c) the number of NQOs to be granted to Outside Directors under
Article 7; (d) the number of Common Shares covered by each outstanding
Option or (e) the Exercise Price under each outstanding Option. Except
as provided in this Article 9, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of
shares of stock of any class, the payment of any stock dividend or any
other increase or decrease in the number of shares of stock of any class.

9.2 DISSOLUTION OR LIQUIDATION. To the extent not previously exercised,
Options shall terminate immediately prior to the dissolution or
liquidation of the Company.

9.3 REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options and Restricted Shares
shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation,

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<PAGE> 11

for the continuation of outstanding Awards by the Company (if the
Company is a surviving corporation), for their assumption by the
surviving corporation or its parent or subsidiary, for the substitution
by the surviving corporation or its parent or subsidiary of its own
awards for such Awards, for accelerated vesting and accelerated
expiration, or for settlement in cash or cash equivalents.

ARTICLE 10. AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Common Shares issued under this Plan. Such
Common Shares shall be treated for all purposes under the Plan like Restricted
Shares and shall, when issued, reduce the number of Common Shares available
under Article 3.

ARTICLE 11. LIMITATION ON RIGHTS.

11.1 RETENTION RIGHTS. Neither the Plan nor any Award granted under the
Plan shall be deemed to give any individual a right to remain an
Employee, Outside Director or Consultant. The Company and its Parents,
Subsidiaries and Affiliates reserve the right to terminate the service of
any Employee, Outside Director or Consultant at any time, with or without
cause, subject to applicable laws, the Company's certificate of
incorporation and by-laws and a written employment agreement (if any).

11.2 STOCKHOLDERS' RIGHTS. A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Common
Shares covered by his or her Award prior to the time when a stock
certificate for such Common Shares is issued or, in the case of an
Option, the time when he or she becomes entitled to receive such Common
Shares by filing a notice of exercise and paying the Exercise Price. No
adjustment shall be made for cash dividends or other rights for which the
record date is prior to such time, except as expressly provided in the
Plan.

11.3 REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Common Shares
under the Plan shall be subject to all applicable laws, rules and
regulations and such approval by any regulatory body as may be required.
The Company reserves the right to restrict, in whole or in part, the
delivery of Common Shares pursuant to any Award prior to the satisfaction
of all legal requirements relating to the issuance of such Common Shares,
to their registration, qualification or listing or to an exemption from
registration, qualification or listing.

ARTICLE 12. WITHHOLDING TAXES.

12.1 GENERAL. To the extent required by applicable federal, state, local
or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any
withholding tax obligations that arise in connection with the Plan. The
Company shall not be required to issue any Common Shares or make any cash
payment under the Plan until such obligations are satisfied.

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<PAGE> 12

12.2 SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations
by having the Company withhold all or a portion of any Common Shares that
otherwise would be issued to him or her or by surrendering all or a
portion of any Common Shares that he or she previously acquired. Such
Common Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash.

ARTICLE 13. FUTURE OF THE PLAN.

13.1 TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on March 14, 1997. The Plan shall remain in effect until it is
terminated under Section 13.2, except that no ISOs shall be granted after
March 14, 2007.

13.2 AMENDMENT OR TERMINATION. The Board may, at any time and for any
reason, amend or terminate the Plan. An amendment of the Plan shall be
subject to the approval of the Company's stockholders only to the extent
required by applicable laws, regulations or rules. No Awards shall be
granted under the Plan after the termination thereof. The termination of
the Plan, or any amendment thereof, shall not affect any Award previously
granted under the Plan.

ARTICLE 14. DEFINITIONS.

14.1 "AFFILIATE" means any entity other than a Subsidiary, if the Company
and/or one or more Subsidiaries own not less than 50% of such entity.

14.2 "AWARD" means any award of an Option or a Restricted Share under the
Plan.

14.3 "BOARD" means the Company's Board of Directors, as constituted from
time to time.

14.4 "CHANGE IN CONTROL" shall mean:

(a) The consummation of a merger or consolidation of the
Company with or into another entity or any other corporate
reorganization, if more than 50% of the combined voting
power of the continuing or surviving entity's securities
outstanding immediately after such merger, consolidation or
other reorganization is owned by persons who were not
stockholders of the Company immediately prior to such
merger, consolidation or other reorganization;

(b) The sale, transfer or other disposition of all or
substantially all of the Company's assets;

(c) A change in the composition of the Board, as a result of
which fewer than 50% of the incumbent directors are
directors who either (i) had been directors of the Company
on the date 24 months prior to the date of

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<PAGE> 13

the event that may constitute a Change in Control (the
"original directors") or (ii) were elected, or nominated for
election, to the Board with the affirmative votes of at
least a majority of the aggregate of the original directors
who were still in office at the time of the election or
nomination and the directors whose election or nomination
was previously so approved; or

(d) Any transaction as a result of which any person is the
"beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of the
Company representing at least 30% of the total voting power
represented by the Company's then outstanding voting
securities. For purposes of this Paragraph (d), the term
"person" shall have the same meaning as when used in
sections 13(d) and 14(d) of the Exchange Act but shall
exclude (i) any person, or person affiliated with said
person, who, on March 15, 1997, is the beneficial owner of
securities of the Company representing at least 20% of the
total voting power represented by the Company's then
outstanding voting securities (11,607,764), (ii) a trustee
or other fiduciary holding securities under an employee
benefit plan of the Company or of a Parent or Subsidiary and
(iii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same
proportions as their ownership of the common stock of the
Company.

A transaction shall not constitute a Change in Control if its sole purpose is
to change the state of the Company's incorporation or to create a holding
company that will be owned in substantially the same proportions by the persons
who held the Company's securities immediately before such transaction.

14.5 "CODE" means the Internal Revenue Code of 1986, as amended.

14.6 "COMMITTEE" means a committee of the Board, as described in
Article 2.

14.7 "COMMON SHARE" means one share of the common stock of the Company.

14.8 "COMPANY" means either (a) Heska Corporation, a California
corporation (prior to the formation of Heska Corporation, a Delaware
corporation), or (b) Heska Corporation, a Delaware corporation (following
its formation).

14.9 "CONSULTANT" means a consultant or adviser who provides bona fide
services to the Company, a Parent, a Subsidiary or an Affiliate as an
independent contractor. Service as a Consultant shall be considered
employment for all purposes of the Plan, except as provided in Section
4.2.

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<PAGE> 14
14.10 "EMPLOYEE" means a common-law employee of the Company, a Parent, a
Subsidiary or an Affiliate.

14.11 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

14.12 "EXERCISE PRICE" means the amount for which one Common Share may be
purchased upon exercise of such Option, as specified in the applicable
Stock Option Agreement.

14.13 "FAIR MARKET VALUE" means the market price of Common Shares,
determined by the Committee in good faith on such basis as it deems
appropriate. Whenever possible, the determination of Fair Market Value
by the Committee shall be based on the prices reported in The Wall Street
Journal. Such determination shall be conclusive and binding on all
persons.

14.14 "ISO" means an incentive stock option described in section 422(b)
of the Code.

14.15 "NQO" means a stock option not described in sections 422 or 423 of
the Code.

14.16 "OPTION" means an ISO or NQO granted under the Plan and entitling
the holder to purchase Common Shares.

14.17 "OPTIONEE" means an individual or estate who holds an Option.

14.18 "OUTSIDE DIRECTOR" shall mean a member of the Board who is not an
Employee. Service as an Outside Director shall be considered employment
for all purposes of the Plan, except as provided in Section 4.2.

14.19 "PARENT" means any corporation (other than the Company) in an
unbroken chain of corporations ending with the Company, if each of the
corporations other than the Company owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the
other corporations in such chain. A corporation that attains the status
of a Parent on a date after the adoption of the Plan shall be considered
a Parent commencing as of such date.

14.20 "PARTICIPANT" means an individual or estate who holds an Award.

14.21 "PLAN" means this Heska Corporation 1997 Stock Incentive Plan, as
amended from time to time.

14.22 "PREDECESSOR PLANS" means (a) the 1988 Heska Corporation Stock Plan
and (b) the Heska Corporation 1994 Key Executive Stock Plan.

14.23 "RESTRICTED SHARE" means a Common Share awarded under the Plan.

14.24 "STOCK AWARD AGREEMENT" means the agreement between the Company and
the recipient of a Restricted Share that contains the terms, conditions
and restrictions pertaining to such Restricted Share.

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<PAGE> 15

14.25 "STOCK OPTION AGREEMENT" means the agreement between the Company
and an Optionee that contains the terms, conditions and restrictions
pertaining to his or her Option.

14.26 "SUBSIDIARY" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company, if each of the
corporations other than the last corporation in the unbroken chain owns
stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain. A
corporation that attains the status of a Subsidiary on a date after the
adoption of the Plan shall be considered a Subsidiary commencing as of
such date.

ARTICLE 15. EXECUTION.

To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to execute this document in the name of the
Company.

HESKA CORPORATION

By /s/ Fred M. Schwarzer
--------------------------------------
President and Chief Financial Officer

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<PAGE> 1
EXHIBIT 11.1

HESKA CORPORATION
Statement Re: Computation of Pro Forma Net Loss Per Share
(In Thousands, Except per Share Amounts)

<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1996 1997
------------ ------------
<S> <C> <C>
Weighted average common shares outstanding..................... 938 1,070

Assumed conversion of preferred stock from
original date of issuance (weighted average
effect from the date of issuance pursuant
to Staff Accounting Bulletin No. 83 ("SAB 83") ............ 10,514 10,514

Effect of common stock and common stock
equivalents issued within one year prior to the filing of
initial public offering (SAB 83)(1) ....................... 1,288 1,288
-------- --------

Total ................................................ 12,740 12,872
======== ========

Net loss ...................................................... $(17,975) $ (7,881)
======== ========

Pro forma net loss per share .................................. $ (1.41) $ (0.61)
======== ========
</TABLE>

(1) Common Stock and Common Stock Equivalents issued after April 22, 1996, at
prices substantially less than the assumed initial public offering price,
have been considered outstanding during the entire period using the
treasury stock method.

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
report (and all references to our Firm) included in or made part of this
amendment to registration statement.

/s/ ARTHUR ANDERSEN LLP

Arthur Andersen LLP

Denver, Colorado

May 29, 1997

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use in this
Amendment No. 1 to Registration Statement of our report, dated May 14, 1996
relating to the financial statements of Diamond Animal Health, Inc., and to the
reference to our Firm under the caption "Experts" in the Prospectus.

/s/ MCGLADREY & PULLEN, LLP

McGladrey & Pullen, LLP

Des Moines, Iowa

May 28, 1997

<PAGE> 1

EXHIBIT 23.3

CONSENT OF INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated May 30, 1995, with respect to the statements of
income and cash flows of Diamond Animal Health, Inc. for the year ended March
31, 1995 included in the Amendment to Registration Statement (Form S-1) and
related Prospectus of Heska Corporation for the registration of its common
stock.

/s/ ERNST & YOUNG LLP

ERNST & YOUNG LLP

Des Moines, Iowa

May 29, 1997