HESKA CORP, POS AM, 1997-06-27

HESKA CORP
POS AM, 1997-06-27
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997

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

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

POST-EFFECTIVE

AMENDMENT NO. 1

TO
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. [ ]

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 JUNE 27, 1997

5,000,000 Shares

[HESKA CORPORATION LOGO]

Common Stock
($.001 par value)

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

All of the 5,000,000 shares of Common Stock (the "Shares") offered hereby are
being offered by Heska Corporation ("Heska" or the "Company"). Of the 5,000,000
shares offered hereby, Charter Ventures, an existing stockholder of the Company,
will purchase 500,000 shares of Common Stock at the initial public offering
price. A director of the Company is a general partner of Charter Ventures. See
"Principal Stockholders" and "Underwriting." 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 $8.50 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
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
------------------- ------------------- -------------------
<S> <C> <C> <C>
Per Share........................... $ $ $
Total(3)............................ $ $ $
</TABLE>

(1) No underwriting discount or commission will be paid in connection with the
500,000 shares to be purchased by Charter Ventures. See "Underwriting."

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

(3) The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase a maximum of 750,000
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]

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> 4

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 has a large and sophisticated scientific effort
devoted exclusively 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
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<PAGE> 5

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 $38.4 million. The Company anticipates that it will continue to incur
operating losses for the next several years.

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 11,252,789 shares of Common Stock upon the closing of this offering (after
giving effect to certain anti-dilution adjustments that will occur as a result
of 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> 6

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company.......... 5,000,000 shares
Common Stock to be outstanding after the 17,974,780 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 and deferred
compensation................. -- -- -- -- 1,101 -- 633
------- ------- ------ ------- -------- ------- -------
Total costs and
operating expenses.... 1,678 2,967 4,589 6,895 28,820 3,021 11,291
------- ------- ------ ------- -------- ------- -------
Loss from operations.............. (1,395) (1,150) (731) (4,665) (18,861) (2,865) (8,227)
Other income (expense)............ (58) (37) (153) 99 886 55 120
------- ------- ------ ------- -------- ------- -------
Net loss.......................... $(1,453) $(1,187) $ (884) $(4,566) $(17,975) $(2,810) $(8,107)
======= ======= ====== ======= ======== ======= =======
Pro forma net loss per share(3)... $ (1.35) $ (0.60)
Number of shares used in computing
pro forma net loss per
share(3)........................ 13,307 13,439
</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 $ 54,725
Working capital............................................. 14,992 53,814
Total assets................................................ 38,597 77,419
Long-term obligations....................................... 5,702 5,702
Accumulated deficit......................................... (38,383) (38,383)
Total stockholders' equity.................................. 25,168 63,990
</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 $8.50 per share
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "Capitalization."

5
<PAGE> 7

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 AND CUSTOMER CONCENTRATION

Heska has incurred net losses since its inception. At March 31, 1997, the
Company's accumulated deficit was $38.4 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. Currently, a substantial
portion of the Company's revenues are from Diamond, which manufactures
veterinary biologicals and pharmaceuticals on a contract basis for major
companies in the animal health industry. Revenues from one Diamond customer
comprised approximately 64% of Diamond revenues in 1996 under the terms of a
take-or-pay contract which expires in June 1999. If this customer does not
continue to purchase from Diamond and if the lost revenues are not replaced by
other customers or products, the Company's financial condition and results of
operations could be adversely affected.

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

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<PAGE> 8

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 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

7
<PAGE> 9

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."

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> 10

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 for the next twelve months, 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> 11

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> 12

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 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. Of the 5,000,000 shares offered hereby, 4,500,000 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> 13

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 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 66% of the Company's outstanding Common Stock following the
completion of this offering. The Company's three major stockholders, who
together will own approximately 61% 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 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 $8.50 per share, the immediate
dilution to purchasers of shares of Common Stock in the offering is $5.04 per
share of Common Stock, or 59.3%. Additional dilution is likely to occur upon the
exercise of options and warrants granted by the Company. See "Dilution."

12
<PAGE> 14

THE COMPANY

Heska was incorporated as Paravax, Inc. in California in 1988 as a
biotechnology company devoted to the research and development of products for
the diagnosis, prevention and treatment of companion animal diseases. The
Company was headquartered in California until 1991, when it moved its
headquarters to Fort Collins, Colorado in order to be located in proximity to
the research facilities of the College of Veterinary Medicine and Biomedical
Sciences of Colorado State University. All of the Company's research facilities
and administrative offices and its veterinary diagnostic laboratory are
currently located in Fort Collins. In April 1996, the Company acquired Diamond
Animal Health, Inc., a contract manufacturing facility located in Des Moines,
Iowa. In February 1997, the Company expanded with its acquisition of Bloxham
Laboratories Limited, a veterinary diagnostic laboratory in the United Kingdom.
The Company reincorporated in Delaware in 1997.

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 $38,822,500 ($44,751,250
if the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $8.50 per share and after deducting estimated
underwriting discounts and commissions and offering expenses. The Company
currently estimates that it will use approximately $22.0 million of the net
proceeds of this offering to continue to fund the Company's research and
development efforts, approximately $6.0 million to expand and fund its sales and
marketing capabilities and approximately $6.0 million for capital and other
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, products or
facilities complementary to the Company's business. The Company is continuously
evaluating potential acquisition candidates, although no 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.

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> 15

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 (after giving effect
to certain anti-dilution adjustments that will occur as a result of 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 $8.50 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);
17,297,693 issued and outstanding (as adjusted)(2)..... 1 17
Additional paid-in capital................................ 3,884 105,926
Deferred compensation..................................... (3,420) (3,420)
Cumulative translation adjustment......................... 1 1
Stock subscription receivable............................. (151) (151)
Accumulated deficit....................................... (38,383) (38,383)
-------- --------
Total stockholders' equity........................ $ 25,168 $ 63,990
======== ========
Total capitalization.............................. $ 30,870 $ 69,692
======== ========
</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> 16

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 $8.50 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 $59.8 million, or
$3.46 per share. This represents an immediate increase in such net tangible book
value of $1.65 per share to existing stockholders and an immediate dilution of
$5.04 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....................... $8.50
Net tangible book value per share before offering......... $1.81
Increase per share attributable to new investors.......... 1.65
-----
Pro forma net tangible book value per share after
offering.................................................. 3.46
-----
Dilution per share to new investors......................... $5.04
=====
</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 $8.50 per share and
before deduction of estimated underwriting discounts and commissions and
offering expenses payable by the Company):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 12,297,693 71.1% $ 63,324,000 59.8% $5.15
New investors................. 5,000,000 28.9 42,500,000 40.2 8.50
---------- ----- ------------ ----- -----
Total............... 17,297,693 100.0% $105,824,000 100.0% 6.12
========== ===== ============ =====
</TABLE>

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> 17

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 and
deferred compensation................ -- -- -- -- 1,101 -- 633
------- ------- ------ ------- -------- ------- -------
Total costs and operating
expenses...................... 1,678 2,967 4,589 6,895 28,820 3,021 11,291
------- ------- ------ ------- -------- ------- -------
Loss from operations..................... (1,395) (1,150) (731) (4,665) (18,861) (2,865) (8,227)
Other income (expense)................... (58) (37) (153) 99 886 55 120
------- ------- ------ ------- -------- ------- -------
Net loss................................. $(1,453) $(1,187) $ (884) $(4,566) $(17,975) $(2,810) $(8,107)
======= ======= ====== ======= ======== ======= =======
Pro forma net loss per share(2).......... $ (1.35) $ (0.60)
Number of shares used in computing pro
forma net loss per share(2)............ 13,307 13,439
</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) (38,383)
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> 18

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
$38.4 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 and Customer Concentration."

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. Diamond, acquired by the Company in April 1996,
manufactures veterinary biologicals and pharmaceuticals on a contract basis for
major companies in the animal health industry. Revenues from one Diamond
customer comprised 41% of revenues for the three months ended March 31, 1997 but
are expected to continue to represent a majority of Diamond's revenues for the
1997 fiscal year, as they did for the 1996 fiscal year. This customer purchases
from Diamond under the terms of a take-or-pay contract which expires in June
1999. The Company expects that future Heska products will be manufactured by
Diamond and/or by other contract manufacturers. 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

17
<PAGE> 19

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 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 the Diamond, Bioproducts Business and
Bloxham acquisitions. Net intangible assets at March 31, 1997 totaled $4.2
million as a result of these acquisitions.

In connection with the grant of certain stock options in the three months
ended March 31, 1997, the Company recorded aggregate deferred compensation of
$2.8 million, representing the difference between the deemed value of the Common
Stock for accounting purposes and the option exercise price of such options at
the date of grant, which amount is amortized ratably over the vesting period of
the options. The Company's options generally vest over a four year period. The
amortization of deferred compensation resulted in a non-cash charge to
operations in the three months ended March 31, 1997 of $226,000. In connection
with options granted through May 1997, the Company currently expects to incur a
non-cash charge to operations of approximately $271,000 per quarter through the
second quarter of 2001 for amortization of deferred compensation.

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 $8.1 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.

18
<PAGE> 20

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. Sales to one Diamond customer, Bayer, represented 64% of total
revenues in 1996. This customer purchases vaccines from Diamond under the terms
of a take-or-pay contract which expires in June 1999.

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 these
acquisitions. In connection with the grant of certain stock options in the year
ended December 31, 1996, the Company recorded aggregate deferred compensation of
$879,000, representing the difference between the deemed value of the Common
Stock for accounting purposes and the option exercise price of such options at
the date of grant.

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> 21

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> 22

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 for the next twelve months, 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> 23

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 has a large and sophisticated scientific effort devoted
exclusively 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.

22
<PAGE> 24

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> 25

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> 26

<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> 27

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> 28

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> 36

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 entered into several agreements with Ciba-Geigy
Limited and Ciba-Geigy Corporation ("Ciba"), which agreements were succeeded to
by Novartis, the entity formed upon Ciba's merger with Sandoz Limited. Such
agreements were entered into 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.

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<PAGE> 37

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 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 June 26, 1997, Heska owned or co-owned eight issued United States
patents and 55 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 June 26, 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

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<PAGE> 38

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 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

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<PAGE> 39

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.

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.

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<PAGE> 40

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.

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. Notwithstanding the EU's efforts to streamline the regulatory process
for companion animal health products, certain countries in Europe, including
Italy, where the Company is currently conducting clinical trials of its
Leishmania diagnostic product, have chosen not to stringently regulate
veterinary diagnostic products at this time. Although Italy will provide
marketing authorization upon request from the Ministry of Health, no substantive
review or analysis of such products is undertaken.

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.

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<PAGE> 41

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 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 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

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<PAGE> 43

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> 44

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> 45

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> 46

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. The figure shown represents
Mr. Van Daele's compensation for the full fiscal year, $89,570 of which was
actually paid to Mr. Van Daele from April 1996 through December 1996
following the Company's acquisition of Diamond.

45
<PAGE> 47

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> 48

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> 49

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> 50

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> 51

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 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 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 PRIOR TO AFTER
TO OFFERING(1) OFFERING OFFERING
------------------- --------- ---------
<S> <C> <C> <C>
Entities associated with
Charter Ventures(2).................................... 3,716,924 30.2% 23.5%
525 University Avenue
Suite 1500
Palo Alto, CA 94301
Novartis Produkte AG(3).................................. 3,000,000 24.4 20.4
Klybeckstrasse A4A
4002 Basel
Switzerland
Volendam Investeringen, N.V.............................. 3,076,923 25.0 17.1
14 John B. Gorsiraweg
P.O. Box 3889
Curacao, Netherlands Antilles
A. Barr Dolan(4)......................................... 3,716,924 30.2 23.5
Robert B. Grieve, Ph.D.(5)(10)........................... 320,261 2.6 1.8
Lyle A. Hohnke, Ph.D.(10)................................ 94,217 * *
Denis H. Pomroy(6)(10)................................... 3,103,923 25.2 17.3
Fred M. Schwarzer(7)(10)................................. 298,166 2.4 1.6
Lynnor B. Stevenson, Ph.D.(10)........................... 227,000 1.8 1.3
Guy Tebbit, Ph.D.(8)..................................... 3,000,000 24.4 20.4
R. Lee Seward, D.V.M.(9)(10)............................. 163,334 1.3 *
Louis G. Van Daele(10)................................... 111,245 * *
All directors and executive officers as a group (12
persons)(10)(11)....................................... 11,063,456 87.1 66.5
</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> 52

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.
Post-offering percentage of shares owned includes 500,000 shares to be
purchased by Charter Ventures in this offering.

(3) Post-offering percentage of shares owned includes 668,790 shares to be
issued to Novartis pursuant to certain anti-dilution provisions of the
Company's Restated Certificate of Incorporation.

(4) 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.

(5) 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.

(6) 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.

(7) 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.

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

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

(10) 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.

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

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<PAGE> 53

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 12,974,780 shares of Common Stock outstanding
held by approximately 113 stockholders of record. Such figures assume the
conversion of all of the Company's outstanding shares of Preferred Stock into
11,252,789 shares of Common Stock upon the closing of this offering (after
giving effect to certain anti-dilution adjustments that will occur as a result
of the closing of this offering).

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 approximately 11,250,000 shares of
Common Stock issued upon conversion of the Company's Preferred Stock (including
shares issuable upon exercise of Warrants (collectively,

52
<PAGE> 54

the "Registrable Shares")), or their permitted transferees, are entitled to
certain rights with respect to the registration of such 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> 55

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
17,974,780 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 5,000,000 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 12,000,000 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
179,000 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> 56

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 11,250,000
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> 57

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 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............................................. 5,000,000
=========
</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 750,000 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 has 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 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 that they do not expect
discretionary sales by the Underwriters to exceed 5% of the Shares being offered
hereby.

Charter Ventures, an existing stockholder of the Company, has agreed to
purchase 500,000 shares of the Common Stock offered hereby. The Underwriters
will not receive any underwriting discounts or commissions in connection with
the sale of such shares. Charter is purchasing such shares for investment
purposes and not with a view to resale or distribution.

56
<PAGE> 58

The Company, its officers and directors and certain other stockholders of
the Company 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 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 has 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 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 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

57
<PAGE> 59

action for damages or rescission or rights of action under the civil liability
provisions of the U.S. federal securities laws.

ENFORCEMENT OF LEGAL RIGHTS

All of the issuer's directors and officers as well as the experts named
herein 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> 60

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> 61

(This page intentionally left blank)
<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.

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 1,067 3,884 67,109
Deferred compensation............................. -- (879) (3,420) (3,420)
Cumulative translation adjustment................. -- -- 1 1
Stock subscription receivable from officers....... (110) (118) (151) (151)
Accumulated deficit............................... (12,301) (30,276) (38,383) (38,383)
-------- -------- -------- --------
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 and
deferred compensation................ -- -- 1,101 -- 633
------ ------- -------- ------- -------
4,589 6,895 28,820 3,021 11,291
------ ------- -------- ------- -------
Loss from operations...................... (731) (4,665) (18,861) (2,865) (8,227)
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) $(8,107)
====== ======= ======== ======= =======
Pro forma net loss per share
(unaudited)............................. $ (1.35) $ (0.60)
======== =======
Shares used to compute pro forma net loss
per share (unaudited)................... 13,307 13,439
======== =======
</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
---------------- --------------- PAID-IN DEFERRED SUBSCRIPTION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------ ------- ------ ------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1993..................... 2,690 $6,750 496 $ 1 $ 14 $ -- $ --
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...................................... -- -- -- -- -- -- --
------ ------- ----- ------ ------- ------- -----
Balances, December 31, 1994..................... 3,345 8,878 613 1 36 -- --
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...................................... -- -- -- -- -- -- --
------ ------- ----- ------ ------- ------- -----
Balances, December 31, 1995..................... 6,618 19,516 919 1 143 -- (110)
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)
Deferred compensation related to options...... -- -- -- -- 879 (879) --
Net loss...................................... -- -- -- -- -- -- --
------ ------- ----- ------ ------- ------- -----
Balances, December 31, 1996..................... 10,460 62,588 1,022 1 1,067 (879) (118)
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...... -- -- -- -- -- -- --
Deferred compensation related to options...... -- -- -- -- 2,767 (2,767) --
Amortization of deferred compensation......... -- -- -- -- -- 226 --
Net loss...................................... -- -- -- -- -- -- --
------ ------- ----- ------ ------- ------- -----
Balances, March 31, 1997 (unaudited)............ 10,514 $63,236 1,115 $ 1 $ 3,884 $(3,420) $(151)
====== ======= ===== ====== ======= ======= =====

<CAPTION>
CUMULATIVE TOTAL
TRANSLATION ACCUMULATED STOCKHOLDERS'
ADJUSTMENT DEFICIT EQUITY
----------- ----------- -------------
<S> <C> <C> <C>
Balances, December 31, 1993..................... $ -- $ (6,851) $ (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) (884)
---- -------- --------
Balances, December 31, 1994..................... -- (7,735) 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) (4,566)
---- -------- --------
Balances, December 31, 1995..................... -- (12,301) 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)
Deferred compensation related to options...... -- -- --
Net loss...................................... -- (17,975) (17,975)
---- -------- --------
Balances, December 31, 1996..................... -- (30,276) 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 -- 1
Deferred compensation related to options...... -- -- --
Amortization of deferred compensation......... -- -- 226
Net loss...................................... -- (8,107) (8,107)
---- -------- --------
Balances, March 31, 1997 (unaudited)............ $ 1 $(38,383) $ 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) $(8,107)
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization........... 148 253 1,072 123 430
Amortization of intangible assets and
deferred compensation................. -- -- 1,101 -- 633
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 11,182,789 shares of Common Stock (after giving effect
to certain anti-dilution adjustments that will occur as a result of the closing
of this Offering).

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 $ (1.37)
Shares used to compute pro forma net loss per share......... N/A 13,558
</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 $1,242,000 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 $367,000 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) $(18,342)
======= ========
Pro forma net loss per share:
As reported (unaudited)................................... $ (1.35)
========
Pro forma (unaudited)..................................... $ (1.38)
========
</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 and weighted average estimated fair
values (as calculated under SFAS 123) of options granted during the years ended
December 31, 1995 and 1996, and the three months ended March 31, 1997 were as
follows.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------------------------------------------------- MARCH 31, 1997
1995 1996 -------------------------------
------------------------------- ------------------------------- (UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE AVERAGE NUMBER AVERAGE AVERAGE
OF ESTIMATED EXERCISE OF ESTIMATED EXERCISE OF ESTIMATED EXERCISE
OPTIONS FAIR VALUE PRICE OPTIONS FAIR VALUE PRICE OPTIONS FAIR VALUE PRICE
------- ---------- -------- ------- ---------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Exercise Price less than
estimated fair value..... -- $ -- $ -- 661,101 $1.8223 $1.2000 682,335 $5.9140 $1.8592
Exercise price equal to
estimated fair value..... 618,850 $0.3500 0.3500 133,523 0.2400 0.7147 -- -- $ --
------- ------- ------- ------- ------- ------- ------- ------- -------
612,850 $0.3500 $0.3500 794,624 $1.5157 $1.1031 682,335 $5.9140 $1.8592
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>

The Company recorded deferred compensation (as calculated under APB 25) of
$879,000 as of 1996 and $2,767,000 during the first quarter of 1997 based on the
difference between the estimated fair value of the underlying common stock of
$2.53 per share and $5.91 per share, respectively, and the related weighted
average exercise prices of options of $1.20 per share and $1.86 per share,
respectively, for options to purchase 661,101 and 682,335 shares of Common
Stock, respectively. Deferred compensation is being amortized over the
applicable vesting periods, or 48 months. Amortization of deferred compensation
totaled $226,000 in the first quarter of 1997. Amortization of deferred
compensation during the year ended December 31, 1996 was not material.

F-22
<PAGE> 84

HESKA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

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)
(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.

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.

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)....................... $ (1.35) $ (1.37)
Weighted average common shares
outstanding(5)................. 13,307 13,558
</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

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<PAGE> 94

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<PAGE> 95

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<PAGE> 96

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

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 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
The Company............................ 13
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 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]

5,000,000 Shares

Common Stock
($.001 par value)

PROSPECTUS

CREDIT SUISSE FIRST BOSTON

MERRILL LYNCH & CO.

------------------------------------------------------
<PAGE> 97

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................................ 150,000
Legal fees and expenses..................................... 400,000
The Nasdaq Stock Market listing fee......................... 35,000
Printing and engraving expenses............................. 200,000
Registrar and Transfer Agent's fees......................... 25,000
Miscellaneous fees and expenses............................. 142,326
----------
Total............................................. $1,000,000
==========
</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> 98

(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> 99

<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> 100

(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> 101

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 27th day of June, 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 June 27, 1997

/s/ WILLIAM G. SKOLOUT Chief Financial Officer (Principal
- ------------------------------------------------ Financial and Accounting Officer)
William G. Skolout June 27, 1997

* Chairman of the Board
- ------------------------------------------------
A. Barr Dolan June 27, 1997

* Chief Scientific Officer and Vice
- ------------------------------------------------ Chairman
Robert B. Grieve, Ph.D. June 27, 1997

* Director
- ------------------------------------------------
Lyle A. Hohnke, Ph.D. June 27, 1997

* Director
- ------------------------------------------------
Denis H. Pomroy June 27, 1997

* Director
- ------------------------------------------------
Lynnor B. Stevenson, Ph.D. June 27, 1997

* Director
- ------------------------------------------------
Guy Tebbit, Ph.D. June 27, 1997

*/s/ DEBORAH E. ROBBINS
---------------------------------------------
Deborah E. Robbins,
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 102

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> 103

EXHIBIT INDEX

<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.
27.* Financial Data Schedule.
</TABLE>

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

* Previously filed.

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

<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") ............ 11,183 11,183

Effect of common stock and common stock
equivalents issued within one year prior to the filing of
initial public offering (SAB 83)(1) ....................... 1,186 1,186
-------- --------

Total ................................................ 13,307 13,439
======== ========

Net loss ...................................................... $(17,975) $ (8,107)
======== ========

Pro forma net loss per share .................................. $ (1.35) $ (0.60)
======== ========
</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 this registration statement.

Arthur Andersen LLP

Denver, Colorado

June 24, 1997

<PAGE> 1

EXHIBIT 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use in this
Post Effective 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.

McGladrey & Pullen, LLP

Des Moines, Iowa

June 24, 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.

ERNST & YOUNG LLP

Des Moines, Iowa

June 24, 1997