VETERINARY CENTERS OF AMERICA INC, 10-K, 1998-03-31

VETERINARY CENTERS OF AMERICA INC
10-K, 1998-03-31
AGRICULTURAL SERVICES

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 1997

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

Commission file number 1-10787

VETERINARY CENTERS OF AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 95-4097995
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

3420 OCEAN PARK BOULEVARD, SUITE 1000
SANTA MONICA, CALIFORNIA 90405
(Address of principal executive offices and zip code)

(310) 392-9599
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

Common stock, $.001 par value

Preferred Stock Purchase Rights

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
Amendment to this Form 10-K. [ ]

At March 23, 1998, there were outstanding 19,225,853 shares of the Common
Stock of Registrant and the aggregate market value of the shares held on
that date by non-affiliates of Registrant, based on the closing price
($15.875 per share) of the Registrant's Common Stock on the NASDAQ National
Market, was $305,210,416. For purposes of this computation, it has been
assumed that the shares beneficially held by directors and officers of
Registrant were "held by affiliates;" this assumption is not to be deemed
to be an admission by such persons that they are affiliates of Registrant.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Registrant's Proxy Statement relating to its 1998 Annual
Meeting of Stockholders are incorporated by reference in Part III of this
Annual Report.

<PAGE>

PART I

ITEM 1. BUSINESS

GENERAL

Veterinary Centers of America, Inc. ("VCA" or the "Company") was
founded in 1986 and is a leading animal health care company. The Company
has established a premier position in two core businesses, animal hospitals
and veterinary diagnostic laboratories. In addition, the Company owns a
partnership interest in a joint venture with Heinz Pet Products ("HPP"),
which markets and distributes premium pet foods. The Company also has an
investment in Veterinary Pet Insurance, Inc., the nation's largest pet
health insurance company. The Company operates the largest network of free-
standing, full-service animal hospitals in the country and one of the
largest networks of veterinary-exclusive laboratories in the nation.

The Company's animal hospitals offer a full range of general medical
and surgical services and also perform specialty surgeries such as
orthopedics for small animals, including dogs, cats, birds and other
household pets. In addition to treating disease and injury, the Company's
animal hospitals emphasize pet wellness and offer programs to encourage
routine vaccinations, health examinations, spaying and neutering and dental
care. The Company's veterinary laboratories offer a full range of diagnostic
and reference tests. Laboratory tests are used by veterinarians to diagnose,
monitor and treat diseases through the detection of substances in blood,
urine or tissue samples and other specimens. The Company does not conduct
experiments on animals and is not engaged in animal research.

THE ANIMAL HEALTH CARE INDUSTRY

The animal hospital and veterinary diagnostic laboratory markets in
which the Company operates had total domestic revenues in 1996 of
approximately $11.0 billion. Animal hospitals and veterinary diagnostic
laboratories represented approximately 73% and 27%, respectively, of the
Company's revenues for the year ended December 31, 1997. The Company
classifies its markets into two segments, Animal Hospitals and Veterinary
Diagnostic Laboratories.

ANIMAL HOSPITALS

Veterinarians diagnose and treat animal illnesses and injuries,
perform surgeries, provide routine medical exams and prescribe medication.
Some veterinarians specialize by type of medicine, such as orthopedics,
dentistry, ophthalmology or dermatology and by type of animal. The United
States market for veterinary services is highly fragmented with approximately
124 million dogs, cats and birds cared for by an estimated 55,000
veterinarians practicing at 16,000 animal hospitals. These animal hospitals
are primarily single site, sole practitioner facilities. The Company
believes that the principal factors in a pet owner's decision as to which
veterinarian to use include convenient location, recommendation of friends,
reasonable fees and convenient hours.

The animal hospital industry is consolidating. Factors contributing
to this trend include (i) the desire of some owners of animal hospitals to
diversify their investment portfolio by selling all or a portion of their
investment in the animal hospital, (ii) the buying, marketing and
administrative cost advantages which can be realized by a large, multiple
location, multi-practitioner veterinary provider, (iii) the desire of
veterinarians to practice veterinary medicine rather than spend a large
portion of their working time performing the administrative tasks necessary
to operate an animal hospital, (iv) the cost of financing equipment
purchases and upgrading technology necessary for a successful practice,
and (v) the desire of many veterinarians for more flexible work hours and
benefits than are typically available to a sole practitioner or single
site provider.

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VETERINARY DIAGNOSTIC LABORATORIES

Given the inability of the patient to communicate verbally with the
doctor, laboratory testing is an important part of the diagnostic process
in veterinary medicine. Clinical laboratory tests are used by veterinarians
to diagnose, monitor and treat diseases through the detection of substances
in blood or tissue samples and other specimens.

Veterinary laboratory tests are performed primarily at the animal
hospital, using on-site diagnostic equipment, or at outside veterinary
diagnostic laboratories. On-site diagnostic equipment is sold by a number
of manufacturers. For many types of tests, on-site diagnostic equipment can
provide more timely results than outside laboratories but requires the
animal hospital or veterinarian to purchase the equipment and provide trained
personnel to operate it. Veterinary diagnostic laboratories, such as those
operated by the Company, can provide a wider range of tests than are
generally available on-site at most animal hospitals and do not require any
up-front investment on the part of the animal hospital or veterinarian.
Veterinary laboratory services are also available through universities and
several national laboratory companies.

The veterinary laboratory industry is highly fragmented and is
primarily characterized by local and regional competitors. The Company
believes that veterinarians usually prefer to use laboratories that
specialize in the veterinary market and that offer individual attention,
rapid test reporting and response to inquiries by veterinary professionals,
a broad spectrum of tests, convenient sample pick-up times, and customized
testing services.

Achieving rapid sample pick-up, diagnostics and reporting, at
competitive prices, is benefited by high throughput volumes. The Company
believes that the industry will continue to consolidate as participants
seek to gain a cost advantage.

BUSINESS STRATEGY

The Company's goal is to become the leading animal health care
company serving the animal hospital and veterinary diagnostic laboratory
markets. The Company intends to achieve this goal by continuing to
(i) expand its animal hospital and laboratory businesses through
acquisitions and internal growth, (ii) achieve cost savings by
consolidating operations and realizing economies of scale in marketing,
purchasing and administrative support functions and by implementing the
Company's standard management programs, (iii) establish brand
identification with the VCA name through signage, marketing and association
with its pet healthcare publication, VCA FAMILY PET, (iv) take advantage of
its unique opportunity to deliver its products and services through multiple
channels to its customers, primarily veterinarians and pet owners, and
(v) capitalize on its leadership position within the animal health care
industry to expand into other products and services for veterinarians and
pet owners.

EXPAND THROUGH ACQUISITIONS IN NEW AND EXISTING MARKETS. Since 1988
the Company has expanded rapidly from a single animal hospital in Los
Angeles to a nationwide network of 158 animal hospitals in 26 states at
March 23, 1998. As a result of these acquisitions and their successful
integration into the Company's operations, the Company has gained a
leadership position in the animal hospital industry, allowing it to expand
into the veterinary diagnostic laboratory business. Since March 1994, the
Company has acquired 15 veterinary diagnostic laboratories, making it the
nation's largest network of veterinary-exclusive diagnostic laboratories
serving over 13,000 animal hospitals located in 49 states. The Company
plans to continue its aggressive hospital acquisition program. The Company
will also consider acquiring multiple hospital organizations and veterinary
diagnostic laboratories, as opportunities arise.

CONSOLIDATE OPERATIONS TO ENHANCE PROFITABILITY. Upon the
acquisition of an animal hospital or veterinary diagnostic laboratory,
the Company immediately begins to implement management programs to enhance
the productivity of veterinarians and to improve operating results. The
Company's business model enables it to realize improved operating margins
at its animal hospitals and veterinary diagnostic laboratories through a
strategy of centralizing various corporate and administrative functions and
leveraging fixed costs while providing its customers with improved
services. This model includes the following objectives:

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MARKETING MATERIALS. The Company seeks to market additional services
to clients at its hospitals by providing its hospitals marketing and
educational materials promoting pet health and quality pet care
programs.

CENTRALIZE ADMINISTRATIVE FUNCTIONS. The Company consolidates most
administrative functions at its corporate office, including purchasing,
accounting, payroll, data processing, personnel, accounts payable,
information services, marketing, planning and budgeting and other
administrative functions.

CONSOLIDATE PURCHASING. When advantageous, the Company purchases its
supplies on a consolidated basis in order to negotiate better prices
and terms from vendors.

STANDARDIZE TRAINING PROCEDURES. The Company implements standardized
training procedures for its administrators and professional personnel.
These programs are developed in conjunction with the Medical Advisory
Board and Client Services Advisory Board, two entities which are
staffed by Company personnel to recommend medical standards and to
establish service and training standards for local hospitals and
laboratories.

INCREASE INTERNAL REVENUES. The Company also seeks to expand through
internal growth. To achieve this, the Company (i) increases veterinarian
productivity by freeing the veterinarian from administrative tasks and
providing state-of-the-art equipment and technical support, (ii) expands
the services and operating hours of certain of its facilities in selected
markets, (iii) provides its facilities with client education and marketing
materials promoting pet health, additional services available and quality
pet health care programs, (iv) provides its facilities with access to medical
specialists, (v) adds VCA's name to the acquired facilities to enhance
customer awareness, (vi) implements sales programs to attract new
customers, and (vii) publishes and distributes to over 600,000 of its clients
a pet care magazine which builds brand loyalty, educates consumers on the
value of preventive pet health care and promotes utilization of the Company's
animal hospitals. By implementing these strategies, VCA seeks to become
the most convenient and most recognized provider of veterinary services in
its markets.

UPGRADE AND EXPAND FACILITIES. The Company seeks to enhance client
satisfaction by providing a pleasant, attractive, state-of-the-art hospital
environment. The Company continually evaluates its facilities and seeks
opportunities to upgrade or expand its animal hospitals in order to increase
capacity, improve visibility or enhance its attractiveness. The Company is
currently rebuilding or performing an extensive remodeling of 18 of its
hospitals for a total cost of approximately $10.4 million.

CONTINUE TO CAPITALIZE ON EXISTING RELATIONSHIPS TO LEVERAGE LINES OF
BUSINESS. The Company believes that its two lines of business -- Animal
Hospitals and Laboratory -- are complementary. As a result of the Company's
national presence and name recognition throughout the veterinary services
industry, the Company believes it is building a reputation of professional
integrity and trust among veterinary professionals and brand identification
among pet owners. The Company's strategy is to leverage this professional
reputation and leadership position to expand its operations, both in other
geographic areas and related products and services. An example of the
results of this strategy is the Company's joint venture, Vet's Choice, to
market premium pet food. The Company uses its relationships, as well as its
national presence and name recognition in one line of business to facilitate
growth in other lines. Often, new business opportunities arise in one line
of business from contacts made in connection with and relations developed
through the Company's other lines of business. For example, animal hospital
acquisitions may be developed through contacts initially established in the
Company's laboratory business.

ACQUISITION STRATEGY

ANIMAL HOSPITALS. The Company seeks to enter a new market through the
acquisition of one or more relatively large, high quality animal hospitals.
It has been the Company's experience that this initial acquisition in a new
market requires substantially more time to identify, negotiate and
consummate than additional acquisitions in the same market. Following this
initial acquisition, the Company seeks to increase its presence in such
market as opportunities arise.

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<PAGE>

The Company identifies potential candidates for acquisition through its
reputation in the professional community, direct contacts, finder
relationships and advertisements. The Company believes that acquisition
opportunities will continue to increase as it expands the geographic scope
of its operations and the products and services it offers to the animal
health care community. The typical acquisition candidate targeted by the
Company is located in a 4,000-6,000 square foot, free-standing facility, has
annual revenues of between $700,000 and $1.5 million per year, employs two
to six veterinarians, has an operating history of at least five years and
has achieved positive cash flow at an attractive location with an established
reputation in the community.

VETERINARY DIAGNOSTIC LABORATORIES. The Company intends to expand its
nationwide network of veterinary-exclusive diagnostic laboratories through
selective acquisitions and internal growth. The Company seeks acquisition
opportunities in the veterinary diagnostic laboratory industry which will
complement its existing business or will expand the geographic area which it
services. Although the Company continues to evaluate laboratory acquisition
opportunities, the Company anticipates that the pace of laboratory
acquisitions will slow down in future periods when compared to historical
activity. The Company has been able to realize significant cost savings at
its veterinary diagnostic laboratories by consolidating acquired operations
into the existing operations, reducing fixed overhead, sample collection,
analysis and the reporting of results to veterinarians. By obtaining
additional testing volume for the laboratories and spreading fixed costs
over a larger revenue base, the unit costs of providing laboratory services
to clients should decline, producing improved operating margins. As a
result of these economies of scale, the Company believes it is competitively
positioned to continue to service its customers.

ACQUISITION CONSIDERATION. Historically, consideration for
acquisitions has consisted of a combination of cash, the assumption of
liabilities, promissory notes and VCA common stock. The Company normally
obtains noncompetition and employment agreements from the selling owners.
The Company presently is evaluating and negotiating a number of potential
acquisitions, none of which are, individually, material to the Company.
There can be no assurance, however, that the Company will be able to identify
and acquire animal hospitals or veterinary diagnostic laboratories on terms
favorable to the Company in the future, or in a timely manner, or convert
the acquisitions to the VCA business model as planned. See "Item 7 -- Risk
Factors -- Rapid Expansion and Management of Growth".

OPERATIONS AND MARKETING

ANIMAL HOSPITALS

The Company believes it operates one of the largest networks of free-
standing, full-service animal hospitals in the United States. At
December 31, 1997, the Company operated 160 animal hospitals. From
January 1, 1998 through March 23, 1998, the Company acquired one animal
hospital and sold or closed three animal hospitals. At March 23, 1998,
the Company operated 158 animal hospitals in 26 states, as detailed in the
following tables:

WESTERN STATES CENTRAL STATES EASTERN STATES
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C>
Alaska 4 Illinois 14 Connecticut 1
Arizona 1 Indiana 7 Delaware 3
California 36 Michigan 12 Florida 17
Colorado 2 Nebraska 1 Georgia 1
Hawaii 1 Ohio 4 Maryland 8
Nevada 6 Massachusetts 7
New Mexico 3 New Jersey 3
Texas 8 New York 1
Utah 2 North Carolina 1
Pennsylvania 10
Virginia 4
West Virginia 1
--- --- ---
Totals 63 38 57

</TABLE>

The animal hospitals operated by the Company offer a full range of
general medical and surgical services for small animals, including dogs,
cats, birds and other household pets. In addition to treating disease and
injury, the Company's hospitals emphasize pet wellness through pet health
education and preventative care. To accomplish this, the Company's animal
hospitals offer programs to encourage routine vaccinations, health
examinations, spaying and

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neutering and dental care. The Company also publishes and mails to its
client base a magazine promoting the benefits of preventative pet health
care. The Company offers specialized treatment, including advanced
diagnostic services, internal medicine, surgery, oncology, ophthalmology,
dermatology and cardiology. Additional services provided by the Company at
certain locations include grooming, bathing and boarding. The Company also
sells specialty pet products at its hospitals, including pet food, a full
range of pharmaceuticals, vitamins, therapeutic shampoos and conditioners,
flea collars and sprays and other accessory products.

The Company's facilities are open an average of 10 to 15 hours per
day, six to seven days per week. Several of its facilities provide 24-hour
emergency care service.

The Company seeks to provide a uniform and broad range of quality
veterinary services. To accomplish this goal, the Company actively
recruits highly qualified veterinarians and technicians and is committed to
supporting continuing professional education for its professional and lay
staff. The Company operates two of the largest teaching programs
maintained at privately owned animal hospitals. The Company believes that
these programs enhance its reputation in the veterinary profession and
provide it with access to qualified recruits among graduating classes of
veterinarians. The Company believes it is an employer of choice for
veterinarians because it offers an increased patient flow and a diverse
case mix, employee benefits not generally available to a sole practitioner,
continuing education, management opportunities, scheduling flexibility to
accommodate personal lifestyles and the ability to relocate to different
regions of the country.

To support the Company's operations, VCA has established a Medical
Advisory Board, whose function, under the direction of the Company's Chief
Medical Officer, is to recommend medical standards, for local hospitals.
The committee is comprised of leading veterinarians representing different
geographic regions and medical specialties served by the Company.

Seeking to provide state-of-the-art medical care in a clean,
attractive environment, the Company renovates facilities and upgrades its
equipment on a periodic basis. In addition, the Company provides, at some
of its locations, board certified or board eligible veterinarians in such
specialized fields as internal medicine, surgery, oncology, ophthalmology,
dermatology, orthopedics and cardiology to expand the range of services
available at its facilities.

The Company's animal hospitals generally require a staff of between
10 to 60 full-time equivalent employees, depending upon the facility's size
and customer base. The staff includes administrative and technical support
personnel, two or more veterinarians, an office manager who supervises the
day-to-day activities of the facility and a small office staff. The
Company employs a relatively small corporate staff to provide centralized
administrative services to all of its veterinary hospitals. Financial
control is maintained through uniform fiscal and accounting policies which
are established at the corporate level for use at the hospitals. Financial
information is centralized through a computerized data collection and
processing system at the corporate level.

Use of veterinary services has traditionally been seasonal. In
addition, use of veterinary services may be affected by weather conditions,
levels of infestation of fleas, heartworms and ticks, the number of
daylight hours and general economic conditions. The seasonality of the use
of veterinary services may cause operating results to vary significantly
from quarter to quarter. Historically, demand for the Company's services
has been greater in the second and third quarters than in the first and
fourth quarters.

The Company's internal marketing programs rely heavily on its existing
client-base in order to increase the frequency and intensity of the
services used by its clients. Reminder notices are used to increase
awareness among the Company's customers of the advantages of regular,
comprehensive veterinary medical care, including preventive care, such as
vaccinations, dental screening and geriatric care. The Company seeks to
obtain referrals from veterinarians by promoting its specialized diagnostic
and treatment capabilities to veterinarians and veterinary practices which
cannot offer their clients such services.

As the number of hospitals in a single regional network grows, media
advertising of the Company's services will become increasingly cost
effective. The Company believes that an effective media advertising
program will allow

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the Company to establish brand identification as well as expand the
revenues derived from the sale of new and existing services and products.
Such programs, services and products, the Company believes, may increase
the opportunities to expand the Company's market share in the regional
markets for veterinary services in which it competes.

The Company consolidates professional corporations ("PCs") in which
it obtains a controlling financial interest by virtue of a long-term practice
management agreement between a wholly-owned subsidiary of the Company and
the PCs. The laws of some states prohibit veterinarians from splitting
fees with non-veterinarians and prohibit business corporations from
providing veterinary services through the direct employment of
veterinarians. The Company has established operations in six of such
states that it believes comply in all material respects with applicable
laws. In these states, the Company has long-term management agreements
("Management Agreements") with PCs, ranging from 10 to 40 years with non-
binding renewal options available. The PCs are owned by veterinarians who
provide veterinary medical services at the animal hospitals located in
their particular state. Pursuant to the Management Agreements, the PCs are
each solely responsible for all aspects of the practice of veterinary
medicine, as defined by their respective state. The Company is responsible
for providing the following: (i) day-to-day financial and administrative
supervision and management; (ii) non-veterinarian personnel needed to
operate and support the animal hospital; (iii) maintenance of patient
records; (iv) recruitment of veterinary staff; (v) marketing; and (vi)
malpractice and general insurance. As compensation for these services, the
Company is entitled to a monthly management fee. The amount of such fees
are not specifically defined in the Management Agreements. In most
instances, the PCs receive a salary for its services, and the Company
enjoys the risks and rewards related to the overall profitability of the
animal hospital.

VETERINARY DIAGNOSTIC LABORATORIES

The Company operates one of the largest networks of veterinary-
exclusive diagnostic laboratories in the United States, servicing over
13,000 animal hospitals located in 49 states. The Company operates four
full-service laboratories located in Irvine, California (serving the West
Coast), Chicago, Illinois (serving the Chicago metropolitan area and other
parts of the Midwest), Phoenix, Arizona (serving the Southwest) and
Farmingdale, New York (serving the East Coast). These laboratories also
serve as STAT (quick response) laboratories, which are in addition to the
Company's STAT laboratories located in Dallas and Houston, Texas; Tampa and
Orlando, Florida; Portland, Oregon; San Jose, California; Atlanta, Georgia;
and Memphis, Tennessee.

The Company regularly performs numerous types of diagnostic laboratory
tests, including chemistry, hematology, cytology, anatomical pathology as
well as other disease-specific tests. Clinical tests are performed on
animal fluids such as blood or urine and provide information that is used
by veterinarians for medical diagnosis. The Company does not conduct
experiments on animals and is not engaged in animal research. The Company
performs most of its clinical tests with state-of-the-art automated
laboratory testing equipment.

The first step in the testing process is for a veterinarian to take
a specimen from the patient and complete a test request form indicating the
tests to be performed on that specimen. The specimen is then picked up by
the laboratory's driver or by a commercial courier service and delivered to
one of the Company's laboratories for testing. When received at the
laboratory, each specimen and related request form is checked for accuracy
and completeness and then given a unique identification number to ensure
that the results are attributed to the appropriate animal. The test
request information is entered into the laboratory's computer system, where
a file of testing and billing information is established for each specimen.

Once this information is entered, the tests are performed by one of the
laboratory technicians or by utilizing the Company's automated testing
equipment. Test results are entered into the computer system through a
computer interface or, in some instances, manually, depending upon the test
and the type of equipment used to conduct the test. Most routine testing is
completed at night and the test results are automatically transmitted via
fax machine to the veterinarian before the start of business the next
morning.

The Company's STAT laboratories perform certain routine tests quickly
and report results to veterinarians within hours of being picked up from
the veterinarian. The turnaround time at the Company's STAT laboratories
for reporting test results is generally three hours or less. The STAT
laboratories are located in geographic areas where there is high
concentration of veterinarians and an airline hub-operation. The Company
may establish or close STAT laboratories depending upon the volume of tests
performed and the needs of its veterinarian-clients.

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In addition to testing operations, the Company provides a variety of
laboratory services to its veterinarian-clients which the Company believes
enhances its competitive position. These include:

REPORTING. Rapid turnaround of test results is critical to the
successful operation of a clinical laboratory. Usually, routine
testing is performed overnight and results are transferred to the
veterinarian by fax machine before 8:00 a.m. the following day.

SPECIMEN TRANSPORTATION. The Company has developed an extensive
network of drivers and independent couriers which enables the Company
to provide timely pickup and delivery of specimens to its
laboratories. Specimens are picked up from clients and transported
to the Company's laboratory facilities on a daily basis, and in some
areas, twice each day.

CLIENT SERVICE. Veterinarians are not obligated to use any
particular laboratory's services and can change laboratory service
providers at any time. Therefore, the services offered by a
laboratory are critical to client satisfaction and retention. In
addition to emphasizing client service through rapid turnaround time
and electronic reporting, the Company has veterinarian specialists on
staff to assist the veterinarians to interpret the lab's results, make
diagnoses or treat disease. Accordingly, the laboratories' staff of
professionals include board certified specialists in pathology,
internal medicine, oncology, cardiology, dermatology, neurology and
endocrinology.

QUALITY ASSURANCE. The Company's quality assurance programs are
intended to ensure that specimens are collected and transported
properly, tests are performed accurately, and client, patient and test
information is reported and billed correctly. The quality assurance
programs include testing quality control specimens of known
concentration or reactivity in order to ensure accuracy and precision,
routine checks and preventive maintenance of laboratory testing
equipment, and personnel standards which ensure that only qualified
personnel perform testing.

The Company has 25 full-time sales and field service representatives
who sell and maintain relationships with existing customers. To support its
marketing efforts, the Company, among other activities, develops marketing
literature, attends trade shows, involves itself in trade associations and
provides educational services.

FEES AND SOURCES OF PAYMENT

The Company's fees for provision of veterinary and laboratory services
vary upon the complexity of the required procedure, the relative
involvement of the applicable professionals and local market conditions.
The Company does not incur a significant amount of accounts receivable for
the provision of veterinary services since payment for these services is
generally received at the time services are provided. The Company offers
its laboratory services and sells its pet food on customary commercial
terms, requiring payment within 30 days of the date the service or product
is performed or shipped. The Company is not dependent upon third party
payors for collection of its fees.

SYSTEMS

The Company realized the importance of management information systems
in the past and thus has made a significant investment in these systems.
Currently, substantially all of the animal hospitals operate on one of four
computer systems. All of the Company's financial and customer records and
laboratory results are stored in computer databases, most of which may be
accessed by the Company's management.

The Company intends to further upgrade and integrate its management
information system. When completed, the Company believes that this
enhanced management information system will allow for further cost savings
and provide management with a powerful tool in implementing its marketing
and operating strategies.

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COMPETITION

The animal health care industry is highly competitive. In its Animal
Hospital segment, the Company competes primarily with independent
veterinarians established in private practices or small regional multi-
clinic practices. In addition, certain regional start-up companies and
certain national companies in the pet care industry, including the
operators of super-stores, are developing multi-regional networks of animal
hospitals in markets which include the Company's markets. The provision of
veterinary services is highly fragmented, with approximately 55,000
veterinarians nationwide practicing in an estimated 16,000 veterinary
hospitals and clinics. The Company believes that convenient location,
recommendation of friends, reasonable fees and convenient hours are the
principal factors in a pet owner's decision as to which veterinarian to
use. The Company believes its facilities are competitive and are designed
to respond to the needs of the pet owner.

Competition in the veterinary diagnostic laboratory industry is
intense. The Company believes that there are many diagnostic laboratory
companies which provide a broad range of laboratory testing services in the
same markets serviced by the Company. Additionally, there are many animal
hospitals that provide in-house laboratory services. Competition is based
primarily upon quality, price and the time required to report results.

JOINT VENTURE AND INVESTMENT

Through 1996, the Company's operations included the management of the
Company's joint venture, Vet's Choice, with HPP. In February 1997, Vet's
Choice was restructured and management of the joint venture was assumed by
HPP. Pursuant to a restructuring agreement, the Company maintains its
50.5% equity interest in Vet's Choice but profits and losses are allocated
99.9% to HPP and 0.1% to the Company. Additionally, the Company agreed to
provide certain consulting and management services to HPP for a three year
period commencing on February 1, 1997 and to continue to support and sell
the SELECT BALANCE and SELECT CARE brands through its network of animal
hospitals.

The two products developed by Vet's Choice were a complete line of
premium, life-stage pet foods marketed under the brand name SELECT BALANCE
and a line of premium therapeutic pet foods, marketed under the brand name
SELECT CARE. The SELECT BALANCE line consists of dry and canned dog and
cat food products nutritionally tailored to meet the specific dietary needs
of dogs and cats in different stages of their lives. The SELECT CARE line
consists of dry and canned dog and cat food products, nutritionally
tailored to meet the specific dietary needs of dogs and cats afflicted with
illness or disease or other medical conditions requiring special diets.
From inception of the joint venture through 1996 these products were
marketed under the Vet's Choice brand name. Commencing in 1997, the SELECT
BALANCE and the SELECT CARE products are marketed and distributed under
HPP's NATURE'S RECIPE and the INNOVATIVE VETERINARY DIETS brand names,
respectively.

In December 1997 and January 1998, the Company made a combined $5
million strategic investment in Veterinary Pet Insurance, Inc., the largest
provider of pet health insurance in the United States.

GOVERNMENT REGULATION

All of the states in which the Company operates impose various
registration requirements. To fulfill these requirements, the Company has
properly registered each of its facilities with appropriate governmental
agencies and, where required, has appointed a licensed veterinarian to act
on behalf of each facility. All veterinary doctors practicing in the
Company's clinics are required to maintain valid, unexpired and unrevoked
state licenses to practice.

In addition, the laws of some states prohibit veterinarians from
splitting fees with non-veterinarians and prohibit business corporations
from providing veterinary medical services through the direct employment of
veterinarians. These laws vary from state to state and are enforced by the
courts and by regulatory authorities with broad discretion. While the
Company seeks to structure its operations to comply with the corporate
practice of veterinary medicine laws of each state in which it operates,
there can be no assurance that, given varying and uncertain interpretations
of such laws, the Company would be found to be in compliance with
restrictions on the corporate

Page 9
<PAGE>

practice of veterinary medicine in all states. A determination that the
Company is in violation of applicable restrictions on the practice of
veterinary medicine in any state in which it operates could have a material
adverse effect on the Company if the Company were unable to restructure its
operations to comply with the requirements of such states.

The Company's growth strategy is dependent principally on its
ability to acquire existing animal hospitals. Acquisitions may be subject
to pre-merger or post-merger review by governmental authorities for
anti-trust and other legal compliance. Adverse regulatory action could
negatively affect the Company's operations through the assessment of fines or
penalties against the Company or the possible requirement of divestiture of
one or more of the Company's operations.

EMPLOYEES

At December 31, 1997, the Company had approximately 2,178 full-time-
equivalent employees, including approximately 560 licensed veterinarians.
None of the Company's employees are covered by a collective bargaining
agreement. The Company believes that its relations with its employees are
satisfactory.

ITEM 2. PROPERTIES

The Company's corporate headquarters and principal executive offices
are located in Santa Monica, California, in approximately 21,000 square
feet of space occupied under two leases which expire on March 3, 1999. The
leases currently provide for aggregate minimum monthly rental payments of
approximately $27,000. The Company maintains leased and owned facilities
at 200 other locations which house its animal hospitals and laboratories.
The Company owns 60 facilities and the remainder are leased from third
parties. For the year ended December 31, 1997, the Company had lease costs
of approximately $7,908,000 and the Company expects to have lease costs at
facilities existing at December 31, 1997 of approximately $7,681,000 in
1998. Lease costs for the hospitals acquired since December 31, 1997 will
amount to approximately $104,000 in 1998. The Company believes that its
real property facilities are adequate for its current needs.

ITEM 3. LEGAL PROCEEDINGS

For discussion of legal proceedings see "Item 7 -- Risk Factors -- Pending
Litigation," and Footnote 16 of Notes to Consolidated Financial Statements.

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

No matters were submitted to a vote of security holders of the
Company during the fourth quarter of 1997.

Page 10
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the NASDAQ Stock Market
under the symbol "VCAI". The following table sets forth the range of high
and low last sale prices per share for the common stock as quoted on the
NASDAQ Stock Market for the periods indicated:

High Low
____ ___
<S> <C> <C>
Fiscal 1996
First Quarter......................... 29 3/8 13 5/8
Second Quarter........................ 32 3/8 21 7/8
Third Quarter......................... 23 1/4 16
Fourth Quarter........................ 22 7/8 9

Fiscal 1997
First Quarter......................... 11 5/8 9
Second Quarter........................ 13 9 3/16
Third Quarter......................... 15 1/8 12
Fourth Quarter........................ 16 1/4 11 1/2

</TABLE>

At March 23, 1998, the closing price of the common stock on the Nasdaq
Stock Market was $15.875.

At March 23, 1998, there were approximately 630 holders of record of
the Company's common stock.

The Company has not paid cash dividends on its common stock and does
not anticipate that it will do so in the near future. The present policy
of the Company is to retain earnings to finance the development and
expansion of its operations.

ITEM 6. SELECTED FINANCIAL DATA

On June 19, 1996, VCA completed the merger with Pets' Rx, Inc.
("Pets' Rx"). This transaction has been accounted for as a pooling of
interests. As a result of this merger, the Company has restated its
historical financial statements to include the historical results of Pets'
Rx with VCA. Certain adjustments to conform Pets' Rx's accounting policies
to VCA's are reflected in these financial statements.

The historical selected financial data set forth below for the three
years ended December 31, 1997 are derived from the Company's Consolidated
Financial Statements included elsewhere in this Annual Report on Form 10-K
and should be read in conjunction with those financial statements and notes
thereto. Those financial statements have been audited by Arthur Andersen
LLP, independent public accountants, whose report with respect thereto
appears elsewhere in this Annual Report on Form 10-K. The selected
financial data set forth for the two years ended December 31, 1994 is
derived from the Company's audited consolidated financial statements.
Reference is made to Note 3 of Notes to Consolidated Financial Statements
for information regarding the Company's acquisitions.

Page 11
<PAGE>

CONSOLIDATED STATEMENT OF OPERATIONS DATA: For the Years Ended December 31,
----------------------------------------------------
(In thousands, except for per share data) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues............................................ $239,389 $182,160 $107,694 $ 51,871 $ 31,098
Gross profit........................................ 57,283 42,574 27,595 11,112 5,536
Selling, general and administrative expense......... 17,676 19,735 13,684 8,779 4,916
Depreciation and amortization expense............... 11,199 7,496 4,144 2,065 1,410
Merger costs........................................ -- 2,901 -- -- --
Restructuring charges and write-down of assets...... -- 15,213 3,234 -- 4,506
Operating income (loss)............................. 28,408 (2,771) 6,533 268 (5,296)
Interest income..................................... 4,182 4,487 828 404 469
Interest expense.................................... 11,593 7,812 3,377 2,388 1,225
Minority interest in income (loss) of subsidiaries.. 424 6,577 2,960 (540) (334)
Provision (benefit) for income taxes................ 9,347 1,959 2,238 731 (152)
Net income (loss)................................... 11,226 (14,632) (1,214) (1,907) (5,345)
Diluted earnings per share:
Net earnings (loss) per common share............... $ 0.53 $ (0.92) $ (0.13) $ (0.31) $ (0.90)
Shares used for computing
diluted earnings (loss) per share................ 21,013 15,942 9,224 6,202 5,966

CONSOLIDATED BALANCE SHEET DATA: For the Years Ended December 31,
----------------------------------------------------
(In thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------

Cash and cash equivalents........................... $ 19,882 $ 29,621 $ 5,396 $ 7,807 $ 12,967
Marketable securities............................... 51,371 73,306 42,155 -- --
Total assets........................................ 386,089 354,009 153,416 67,902 52,589
Current portion of long-term obligations
and notes payable.................................. 19,369 14,055 7,496 5,552 2,318
Long-term obligations, less current portion......... 154,506 134,767 36,778 25,057 20,565
Guaranteed purchase price contingently
payable in cash or common stock.................... -- -- -- 72 542
Total stockholders' equity.......................... 180,851 167,350 90,217 25,370 21,998

</TABLE>

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

GENERAL

Veterinary Centers of America, Inc. and subsidiaries ("VCA" or the
"Company") is a leading animal health care company. The Company has
established a premier position in two core businesses, animal hospitals and
veterinary diagnostic laboratories. In addition, the Company owns a
partnership interest in a joint venture with Heinz Pet Products ("HPP"),
which markets and distributes premium pet foods. The Company also has an
investment in Veterinary Pet Insurance, Inc., the nation's largest pet
health insurance company. The Company operates the largest network of
free-standing, full service animal hospitals in the country and one of the
largest networks of veterinary-exclusive laboratories in the nation.

The Company made its first animal hospital acquisition in December
1986, when it acquired West Los Angeles Animal Hospital, one of the largest
privately-owned teaching animal hospitals in the United States. Between
1987 and 1995, the Company's operations were directed primarily at
establishing a corporate infrastructure and building a network of animal
hospitals in selected regional markets. During this period, the Company
grew with the acquisition of 53 additional animal hospitals. In 1996, the
Company completed two significant acquisitions which more than doubled the
Company's animal hospital operations. Pets' Rx, Inc. ("Pets' Rx") was
acquired in June 1996 (16 hospitals) and The Pet Practice, Inc. ("Pet
Practice") was acquired in July 1996 (84 hospitals). The Company made
these acquisitions in order to promote the growth of the Company's hospital
network, broaden the geographic scope of the Company's operations, and to
take advantage of synergies that the Company believes exist between its
business lines. In addition to

Page 12
<PAGE>

the two significant 1996 acquisitions, the Company has acquired 37 animal
hospitals in 1996 and 1997. At December 31, 1997, the Company owned or
operated 160 animal hospitals, throughout 26 states.

In 1994, the Company expanded its veterinary diagnostic laboratory
operations by acquiring a 70% interest in Professional Animal Laboratory
("PAL"). In 1995, the Company acquired the remaining 30% of PAL, a 51%
interest in Vet Research Laboratories, LLC ("Vet Research"), and acquired
three smaller regional veterinary diagnostic laboratories. The Company's
laboratory operations were expanded with the acquisition of Southwest
Veterinary Diagnostics Laboratory, Inc. ("Southwest") in 1996. Throughout
1996 and 1997, an additional eight laboratories were purchased, as well as
the remaining interest in Vet Research in January 1997. At December 31,
1997, the Company's network of veterinary diagnostic laboratories consisted
of four full-service laboratories and eight "STAT" (quick response)
laboratories located throughout the country.

The Company entered into a joint venture called Vet's Choice with HPP,
in 1993, to develop, manufacture and market a full-line of premium pet
food. Vet's Choice was primarily engaged in developing and testing the
formulas for its first product line, SELECT BALANCE, and building a
marketing infrastructure in anticipation of commencing distribution in
1994. Vet's Choice began to generate revenue in 1994 with the launch of
SELECT BALANCE. In 1995, Vet's Choice began selling its second product
line, SELECT CARE. Through 1996, the Company as majority owner and
managing general partner, exercised day-to-day operating control for all
aspects of Vet's Choice, including sales, marketing, administration and
distribution. As a result of the acquisition of two other premium pet food
companies during 1996, HPP obtained expanded capabilities to manufacture,
market and distribute premium pet foods. In order for the Vet's Choice
business to benefit from the economies of scale in marketing, sales and
distribution that HPP had attained with the acquisitions in 1996, the joint
venture agreement was restructured effective February 1, 1997. Under the
terms of the restructuring, HPP was made managing partner and assumed the
day-to-day control of the joint venture and the operations of the joint
venture were merged into HPP's other premium pet food business. In
connection with the restructuring, the Company and HPP entered into certain
consulting and management services agreements whereby the Company will
provide certain consulting and marketing services and continue to support
the SELECT BALANCE and SELECT CARE products in the veterinary marketplace.

The acquisition of all of the outstanding shares of Pets' Rx in June
1996 was treated for accounting purposes as a pooling of interests.
Accordingly, the accompanying financial statements reflect the combined
results of the pooled businesses for the respective periods presented.
Previously reported financial information for VCA and Pets' Rx for each of
the two years in the period ended December 31, 1996, is shown in the table
below.

Years Ended December 31,
------------------------------------
1996 1995
-------------- --------------
<S> <C> <C>

Revenues:
Pre-merger (pre-June 19, 1996)
VCA $ 64,763,000 $ 92,072,000
Pets' Rx 7,849,000 15,622,000
-------------- --------------
72,612,000 107,694,000
Post-merger (post June 19, 1996) 109,548,000 --
-------------- --------------
$ 182,160,000 $ 107,694,000
============== ==============
Net (loss) income:
Pre-merger (pre-June 19, 1996)
VCA $ 1,647,000 $ 2,564,000
Pets' Rx (658,000) (1,977,000)
Merger adjustments 212,000 (1,801,000)
-------------- --------------
1,201,000 (1,214,000)
Post-merger (post June 19, 1996) (15,833,000) --
-------------- --------------
$ (14,632,000) $ (1,214,000)
============== ==============

</TABLE>

Page 13
<PAGE>

adjustments were recorded to conform certain accounting methods of Pets' Rx
to those of VCA. These adjustments reduced intangible asset amortization
expense by $212,000 and $347,000 in 1996 and 1995, respectively, and wrote-
off intangible assets of $2,148,000 in 1995 associated with certain animal
hospitals whose projected future operating results would not result in the
recovery of such intangible assets under VCA's accounting method.

RECENT ACQUISITIONS

During 1997, the Company completed the acquisitions of 15 animal
hospitals and three veterinary diagnostic laboratories. In connection with
these acquisitions, which were accounted for as purchases, VCA paid an
aggregate consideration of $22,198,000 consisting of $9,358,000 in cash,
$10,531,000 in debt, 189,998 shares of common stock of the Company with a
value of $1,900,000 and the assumption of liabilities totaling $409,000,
including acquisition costs.

Since January 1, 1998 through March 23, 1998, the Company has acquired
one animal hospital and one laboratory for an aggregate consideration of
$11,500,000 consisting of $10,900,000 in cash and the assumption of
liabilities totaling $600,000. Also since January 1, 1998 through March
23, 1998, the Company has sold or closed three hospitals and one laboratory
with annual revenues of approximately $3.3 million.

In December 1997 and January 1998, the Company made a combined $5
million strategic investment in Veterinary Pet Insurance, Inc., the largest
provider of pet health insurance in the United States.

BASIS OF REPORTING

The Company reports its operations in two business lines -- Animal
Hospital and Laboratory. Animal Hospital operations include the operations
of the Company's animal hospitals. Laboratory operations include the
operations of the Company's veterinary diagnostic laboratories. Throughout
1996, the Company owned a 51% interest in Vet Research. The Company
acquired the remaining 49% of Vet Research in January 1997. The Company's
operating results include the results of operations of joint ventures on a
consolidated basis.

Through 1996, the Company reported a third business line -- Premium Pet
Food. Premium Pet Food includes the operations of the Vet's Choice joint
venture of which the Company owns a 50.5% interest. Commencing February 1,
1997, the day-to-day management of Vet's Choice was assumed by HPP. The
Company maintains its 50.5% equity interest in Vet's Choice, but profits
and losses are allocated 99.9% to HPP and 0.1% to the Company. Effective
February 1, 1997, the Company no longer reports the results of operations
of Vet's Choice on a consolidated basis.

At December 31, 1997, the Company invested $1 million in convertible
preferred stock of Veterinary Pet Insurance, Inc., the largest provider of
pet health insurance in the United States. The Company accounts for this
investment on a cost basis.

The Company's animal hospitals use the Company's veterinary diagnostic
laboratory services and purchase and resell the pet food products of Vet's
Choice. Revenue and the corresponding expense from intercompany sales
totaling $4,696,000, $4,130,000 and $1,727,000 in 1997, 1996, 1995,
respectively, have been eliminated from the Company's operating results.

Page 14
<PAGE>

The Company is responsible for providing the following: (i) day-to-day
financial and administrative supervision and management; (ii) non-
veterinarian personnel needed to operate and support the animal hospital;
(iii) maintenance of patient records; (iv) recruitment of veterinary staff;
(v) marketing; and (vi) malpractice and general insurance. As compensation
for these services, the Company is entitled to a monthly management fee.
The amount of such fees are not specifically defined in the Management
Agreements. In most instances, the PCs receive a salary for its services,
and the Company enjoys the risks and rewards related to the overall
profitability of the animal hospital. All significant intercompany
transactions have been eliminated in consolidation.

FUTURE OPERATING RESULTS

This filing contains statements that constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. The words "expect", "estimate", "anticipate", "predict",
"believe" and similar expressions and variations thereof are intended to
identify forward-looking statements. Such statements appear in a number of
places in this filing and include statements regarding the intent, belief
or current expectations of the Company, its directors or its officers with
respect to, among other things (i) trends affecting the Company's financial
condition or results of operations; and (ii) the Company's business and
growth strategies. The readers of this filing are cautioned that any such
forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and that actual results may differ
materially from those projected in this filing, including, without
limitation, the information set forth under the heading "Risk Factors," as
well as the information set forth below.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the
percentage of certain items in relation to revenues:

<TABLE>
<CAPTION>
Percentage of Revenues
For the Years Ended December 31,
--------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>

Revenues . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Direct costs . . . . . . . . . . . . . . . 76.1 76.6 74.4
------ ------ ------
Gross profit . . . . . . . . . . . . . . . 23.9 23.4 25.6
Selling, general and administrative expense 7.4 10.8 12.7
Depreciation and amortization expense 4.6 4.1 3.8
Merger costs . . . . . . . . . . . . . . . -- 1.6 --
Restructuring charges. . . . . . . . . . . -- 3.1 1.0
Write-down of assets . . . . . . . . . . . -- 5.3 2.0
----- ------ ------
Operating income (loss). . . . . . . . . . 11.9 (1.5) 6.1
Interest income. . . . . . . . . . . . . . 1.7 2.5 0.8
Interest expense . . . . . . . . . . . . . 4.8 4.3 3.2
Income (loss) before minority interest ------ ------ ------
and income taxes 8.8 (3.3) 3.7
Minority interest in income of subsidiaries .2 3.6 2.7
------ ------ ------
Income (loss) before income taxes 8.6 (6.9) 1.0
Provision for income taxes . . . . . . . . 3.9 1.1 2.1
------ ------ -------
Net income (loss). . . . . . . . . . . . . 4.7% (8.0)% (1.1)%
====== ====== =======
</TABLE>

REVENUES

Animal Hospital operations represented 72.7%, 66.3% and 62.2% of total
Company revenues in 1997, 1996 and 1995, respectively. Laboratory
operations represented 26.9%, 30.0% and 34.2% of total Company revenues in
1997, 1996 and 1995, respectively. Premium Pet Food operations represented
0.4%, 3.7% and 3.6% of total Company revenues in 1997, 1996 and 1995,
respectively. The Company's consolidated revenues in 1997 only include one
month of revenue from Premium Pet Food operations, as the Company ceased
consolidating the results of operations of Vet's Choice, effective February
1, 1997. The Company anticipates that Animal Hospital revenues as a
percentage of total revenues will increase in future periods as a result
of the expansion of the Company's Animal Hospital operations.

The following table summarizes the Company's revenues for each of the
three years in the period ended December 31, 1997:

Page 15
<PAGE>

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Animal Hospital. . . . . . $174,024,000 $120,842,000 $67,059,000
Laboratory . . . . . . . . 68,997,000 56,774,000 37,606,000
Premium Pet Food . . . . . 1,064,000 8,674,000 4,756,000
Intercompany Sales . . . . (4,696,000) (4,130,000) (1,727,000)
------------ ------------ ------------
$239,389,000 $182,160,000 $107,694,000
============ ============ ============
</TABLE>

Revenues of the Animal Hospital operations increased 44.0% from 1996
to 1997 and 80.2% from 1995 to 1996. This growth was primarily the result
of growth in the number of facilities owned and operated by the Company.
In 1997, the increase in revenues resulting from changes in volume or
prices at facilities operated during all of 1996 and 1997 was 2.2%. In
1996, the increase in revenues resulting from changes in volume or prices
at facilities operated during all of 1995 and 1996 was 4.7%.

Revenues of the Laboratory operations increased by 21.5% from 1996 to
1997, primarily as a result of the 1996 and 1997 acquisitions. Revenues of
the Laboratory operations increased 51.0% from 1995 to 1996 due primarily
to the acquisition of Southwest in March 1996.

Revenues of Premium Pet Food operations increased 82.4% from 1995 to
1996 due to the introduction of the SELECT CARE product line in the
beginning of 1995.

Effective February 1, 1997, Vet's Choice is no longer reported as part
of the Company's consolidated results of operations. Pursuant to the
restructuring agreement and other related agreements between HPP and the
Company, the Company has agreed to provide certain consulting and
management services for a three-year period commencing February 1, 1997,
and to continue to support and sell the SELECT BALANCE and SELECT CARE
brands through its network of animal hospitals. The agreements call for
the Company to receive an aggregate of $15.3 million payable in semi-annual
installments over a five-year period (the "Consulting Fees"). The
Consulting Fees earned in the year ended December 31, 1997 of $4.7 million
are included in Animal Hospital revenues.

GROSS PROFIT

The following table summarizes the Company's gross profit for each of
the three years in the period ended December 31, 1997:

Animal Hospital. . . . . . . $32,390,000 $17,858,000 $11,767,000
Laboratory . . . . . . . . . 24,325,000 21,184,000 14,277,000
Premium Pet Food . . . . . . 568,000 3,532,000 1,551,000
----------- ----------- -----------
$57,283,000 $42,574,000 $27,595,000
=========== =========== ===========

</TABLE>

Animal Hospital gross profit represents the contribution from the
Animal Hospital operations and is comprised of revenues less all costs of
services and products, including salaries of veterinarians, technicians and
all other hospital-based personnel, facilities rent and occupancy costs,
medical supply costs and costs of goods sold associated with the retail
sales of pet food and pet supplies. Animal Hospital gross profit increased
$14,532,000, or 81.4%, from 1996 to 1997, and $6,091,000, or 51.8%, from
1995 to 1996. As a percentage of Animal Hospital revenues, gross profit
decreased from 17.5% in 1995 to 14.8% in 1996 and increased to 18.6% in
1997. The 1997 increase was primarily attributable to the addition of the
Consulting Fees, as well as to the higher gross profit margins at newly
acquired hospitals (those acquired on or after January 1, 1996). The gross
profit margin for the newly acquired hospitals was 21.0% for 1997, where as
the gross profit margin for existing hospitals (those acquired prior to
January 1, 1996) was 16% for both 1996 and 1997. The 1996 decrease in
Animal Hospital gross profit was attributable primarily to a 4.7% increase
in revenues compared to a 6.6% increase in direct costs, composed primarily
of a 7.4% increase in salaries and benefits and a 10.6% increase in supply
costs, at existing hospitals. Gross profit margins at existing hospitals
decreased to 16.8% in 1996 from 18.3% in 1995. Gross profit margins at
newly acquired hospitals were 13.5% in 1996.

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<PAGE>

Laboratory gross profit is comprised of revenues less all direct costs
of services, including salaries of veterinarians, technicians and other
non-administrative laboratory-based personnel, facilities rent and
occupancy costs and supply costs. Laboratory gross profit increased
$3,141,000, or 14.8%, from 1996 to 1997, and $6,907,000, or 48.4%, from
1995 to 1996. As a percentage of Laboratory revenues, gross profit
decreased from 38.0% in 1995 to 37.3% in 1996 and to 35.3% in 1997. The
decrease in gross profit as a percentage of revenue in 1997 compared to
1996, was primarily the result of the expansion of Laboratory services,
particularly in the east coast operations, and the strengthening of the
Laboratory division's management team. The decrease in gross profit as a
percentage of revenue in 1996 compared to 1995, was attributable to
difficulties with the assimilation of the 1996 laboratory acquisitions
primarily on the west coast, an increase in advertising costs associated
with the Laboratory's name change to the "Antech Diagnostics" name at all
laboratories, the effect of promotional pricing programs and the addition
of operating personnel.

Premium Pet Food gross profit is comprised of revenues less cost of
goods sold, including freight and distribution costs. Premium Pet Food
gross profit , as a percentage of revenues, was 53.4% in 1997, 40.7% in
1996 and 32.6% in 1995. The increase in gross profit as a percentage of
revenues from 1995 to 1996 was primarily attributable to decreased
distribution costs.

The Company's Animal Hospital business historically has realized gross
profit margins that are lower than that of the Laboratory business. As the
portion of the Company's revenues attributable to its Animal Hospitals
operations grow in the future, the historical gross profit margins for the
Company as a whole may not be indicative of those to be expected in the
future.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSE

The following table sets forth the Company's selling, general and
administrative expense for each of the three years in the period ended
December 31, 1997:

1997 1996 1995
----------- ------------ -----------
<S> <C> <C> <C>
VCA Corporate . . . . . . . . $13,093,000 $10,450,000 $ 6,029,000
Laboratory. . . . . . . . . . 4,183,000 4,619,000 3,569,000
Premium Pet Food. . . . . . . 400,000 4,666,000 4,086,000
----------- ----------- -----------
$17,676,000 $19,735,000 $13,684,000
=========== =========== ===========

</TABLE>

VCA Corporate selling, general and administrative expense consists of
administrative expense at the Company's headquarters, including the
salaries of corporate officers and other personnel, accounting, legal and
other professional expense, and rent and occupancy costs. VCA Corporate
selling, general and administrative expense increased $2,643,000, or 25.3%,
from 1996 to 1997, and $4,421,000, or 73.3%, from 1995 to 1996. As a
percentage of Animal Hospital revenues, VCA Corporate selling, general and
administrative expense decreased from 9.0% in 1995 to 8.6% in 1996 and to
7.5% in 1997. The decreases from 1995 to 1997 are primarily attributable
to spreading the expenses over a larger revenue base.

Laboratory selling, general and administrative expense consists
primarily of sales and administrative personnel and selling, marketing and
promotional expense. Laboratory selling, general and administrative
expense decreased $436,000, or 9.4%, from 1996 to 1997, and increased
$1,050,000, or 29.4%, from 1995 to 1996. As a percentage of Laboratory
revenues, Laboratory selling, general and administrative expense decreased
from 9.5% in 1995 to 8.1% in 1996 and to 6.1% in 1997. The decreases in
selling, general and administrative expense as a percentage of revenue were
primarily attributable to spreading the expenses over a larger revenue
base.

Premium Pet Food selling, general and administrative expense consists
primarily of sales and administrative personnel and selling, marketing and
promotional expense. Premium Pet Food general and administrative expense
decreased $4,266,000, or 91.4%, from 1996 to 1997, and increased $580,000,
or 14.2%, from 1995 to 1996. The decrease from 1996 to 1997 was
attributable to the assumption of management responsibilities for Vet's
Choice by HPP

Page 17
<PAGE>

in February 1997. The increase from 1995 to 1996 was primarily
attributable to increases in selling and promotional costs.

DEPRECIATION AND AMORTIZATION EXPENSE

Depreciation and amortization expense primarily relates to the
depreciation of capital assets and the amortization of excess cost over the
fair value of net assets acquired (goodwill) and certain other intangibles.

Depreciation and amortization expense increased $3,703,000, or 49.4%, from
1996 to 1997, and $3,352,000, or 80.9%, from 1995 to 1996. The Company's
policy is to amortize goodwill over the expected period to be benefited,
not exceeding forty years. The increase in depreciation and amortization
expense is primarily due to the acquisition of animal hospitals and
veterinary diagnostic laboratories.

RESTRUCTURING AND ASSET WRITE-DOWN

During 1996, the Company adopted and implemented a restructuring plan
(the "1996 Plan") and recorded a restructuring and asset write-down charge
of approximately $15.2 million. The 1996 Plan was designed to restructure
the Company's Animal Hospital and Laboratory operations in connection with
its 1996 acquisitions of Pets' Rx, Pet Practice and Southwest. In
addition, certain hospitals which did not meet the new standards for
performance adopted in light of the increase in the size of the Company's
Animal Hospital operations, were to be closed or sold. Of the $15.2 million
in restructuring and asset write-down charges recorded in 1996, $5.7
million represents cash charges. The remainder represents non-cash charges
of $5.5 million in write-downs of goodwill, $1.1 million in write-downs of
other intangible assets and $2.9 million in write-downs of other assets.

The major components of the 1996 Plan included: (1) the termination
of leases, the write-down of intangibles, property and equipment, and
employee terminations in connection with the closure, sale or consolidation
of twelve animal hospitals; (2) the termination of contracts and leases,
the write-down of certain property and equipment and the termination of
employees in connection with the restructuring of the Company's Laboratory
operations; and (3) contract terminations and write-down of assets in
connection with the move to common communications and computer systems. The
restructuring of the Laboratory operations consists primarily of: (i)
plans to relocate the Company's facility in Indiana to Chicago; (ii) the
downsizing of its Arizona operations; (iii) the standardization of
laboratory and testing methods throughout all the Company's laboratories;
and (iv) the shut-down of another of its facilities in the Midwest.

The 1997 activity within the 1996 Plan restructuring reserves was as
follows:

(a) During the quarter ended March 31, 1997, the Company sold four of
its animal hospitals resulting in non-cash net asset write-downs of
$194,000. The Company incurred $565,000 of cash expenditures for
lease and other contractual obligations.

(b) During the quarter ended June 30, 1997, the Company incurred
$222,000 of cash expenditures for lease and other contractual
obligations.

(c) During the quarter ended September 30, 1997, the Laboratory division
relocated its facility in Indiana to Illinois, downsized its Arizona
operations, substantially completed its standardization of
laboratory and testing methods, and replaced its communications
system resulting in total non-cash asset write-downs of $844,000.
The Animal Hospital division completed its evaluation of the
property value at one of its hospitals and replaced certain
equipment and software resulting in total non-cash asset write-downs
of $378,000. The Company incurred $515,000 of cash expenditures for
lease and other contractual obligations.

(d) At September 30, 1997, the Company reversed $2.1 million of the
restructuring reserve established for the 1996 Plan (see discussion
of 1997 restructuring charge and asset write-downs below). The
events that triggered the need to reverse a portion of the 1996 Plan
charge were as follows:

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<PAGE>

(i) A favorable termination of a communications system contract was
negotiated and became effective October 1, 1997.

(ii) A hospital practice was acquired on May 15, 1997 and was
merged into an animal hospital that was scheduled to be
closed. The Company evaluated the performance of the merged
practices during the 1997 third quarter and decided to rescind
its decision to close the animal hospital.

(iii) The Company completed negotiations to terminate a lease
agreement early for one of the hospitals scheduled to be
closed at a favorable amount.

(iv) The Company rescinded its decision to close three other animal
hospitals due to their improved performance.

(e) During the quarter ended December 31, 1997, the Company incurred
non-cash asset write-downs of $346,000, primarily resulting from the
write-off of inventory from the animal hospitals that were sold
during the first quarter of 1997, that was not utilized at other VCA
animal hospitals. The Company also incurred $349,000 of cash
expenditures for lease and other contractual obligations.

Of the remaining four hospitals included in the 1996 Plan, one closed
in February 1998, two are expected to be closed by the second quarter of
1998 and the other is currently for sale.

At December 31, 1997, $2,985,000 of the restructuring reserve from the
1996 Plan remains on the Company's balance sheet, consisting primarily of
lease and other contractual obligations. As of December 31, 1997, the
Company has completed a majority of its restructuring plans, with remaining
actions expected to be completed in 1998, although certain lease
obligations will continue through 2014.

During 1997, the Company reviewed the financial performance of its
hospitals. As a result of this review, an additional twelve hospitals were
determined not to meet the Company's performance standards. Accordingly,
the Company adopted phase two of its restructuring plan (the "1997 Plan"),
resulting in restructuring and asset write-down charges of $2.1 million.
The reversal restructuring charge from the 1996 Plan was offset against the
restructuring and asset write-down charges for the 1997 Plan, resulting in
no effect to the 1997 statement of operations. The major components of the
1997 Plan consists of the termination of leases, amounting to $1,198,000,
and the write-down of intangibles, property and equipment, amounting to
$876,000, in connection with the closure or sale of twelve animal
hospitals. Collectively, the twelve hospitals have aggregate annual
revenue of approximately $5.8 million.

During the three months ended September 30, 1997, the Company, as part
of the 1997 Plan, recorded $432,000 of non-cash write-downs, consisting of
a write-down of intangibles. At December 31, 1997, $1,642,000 of the
restructuring reserve from the 1997 Plan remains on the Company's balance
sheet, consisting primarily of lease obligations and non-cash charges. The
1997 Plan is expected to be completed in 1998, although certain lease
obligations will continue through 2005.

The operations of Cenvet, Inc. (acquired January 1, 1995) were merged
into the operations of Vet Research, Inc., a full-service veterinary
laboratory, to form Vet Research. The combined operations were
restructured in 1995 to eliminate duplicate operating and overhead costs.
In connection with the restructuring, the Company recorded a charge of
$1,086,000 in the first quarter of 1995 to accrue the estimated costs
associated with the restructuring, consisting primarily of lease
termination and severance costs. At December 31, 1997, $369,000 remains on
the Company's balance sheet.

During 1995, the Company charged $2,148,000 to operations related to a
write-down of goodwill and certain intangible assets at three Pets' Rx
facilities.

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<PAGE>

MERGER COSTS

In connection with the Pets' Rx merger in 1996, the Company recorded
estimated costs to complete the transaction amounting to $2,901,000,
primarily comprised of legal, accounting, investment advisor, termination
of employment agreements and severance costs.

OPERATING INCOME (LOSS)

Operating income (loss) increased to income of $28,408,000 in 1997
from a loss of $2,771,000 in 1996, which had decreased from income of
$6,533,000 in 1995. The operating loss in 1996 includes restructuring
charges, asset write-downs and merger costs, totaling $18,114,000.
Operating income in 1995 includes restructuring charges and asset write-
downs, totaling $3,234,000. Operating income (loss) in 1996 and 1995 also
includes the operating losses of Vet's Choice amounting to $1,263,000 and
$2,573,000, respectively. Excluding these items, operating income would
have been $16,606,000 and $12,340,000 in 1996 and 1995, respectively.
Operating income would have increased $11,802,000 from 1996 to 1997, and
$4,266,000 from 1995 to 1996. The increase from 1996 to 1997 is primarily
the result of the increased number of animal hospitals and veterinary
diagnostic laboratories owned and operated by the Company and the addition
of the Consulting Fees. The increase from 1995 to 1996 primarily reflects
higher operating income at the Company's veterinary diagnostic
laboratories, increased pet food sales and an increase in the number of
animal hospitals and veterinary diagnostic laboratories owned and operated
by the Company. As a percentage of revenues, operating income, excluding
the Vet's Choice losses and the restructuring charges, asset write-downs
and merger costs, would have been 11.5% in 1995 and 9.1% in 1996, compared
to 11.9% in 1997.

INTEREST INCOME

Interest income decreased $305,000 from 1996 to 1997 to $4,182,000.
This decrease was the result of a decrease in the Company's cash and
marketable securities balances in 1997. Interest income increased from
$828,000 in 1995 to $4,487,000 in 1996, an increase of $3,659,000. This
increase was primarily due to an increase in the Company's cash and
marketable securities balances in 1996, which was attributable to the
proceeds from the sale of the convertible debentures.

INTEREST EXPENSE

Interest expense increased from $3,377,000 in 1995 to $7,812,000 in
1996 and to $11,593,000 in 1997, increases of $4,435,000, or 131.3%, and
$3,781,000, or 48.4%, respectively. These increases were primarily due to
increases in the Company's outstanding indebtedness incurred for
acquisitions and the sale of $84,385,000 of 5.25% convertible subordinated
debentures in April 1996.

INCOME TAXES

Income tax expense was $9,347,000, $1,959,000 and $2,238,000 in 1997,
1996 and 1995, respectively. A reconciliation of the provision for income
taxes to the amount computed at the Federal statutory rate for each of the
three years in the period ended December 31, 1997 is included in Note 12 of
Notes to Consolidated Financial Statements. The Company's effective income
tax rate for each of the years was higher than the statutory rate and the
Company expects that its effective income tax rate will be higher than the
statutory rate in the future primarily due to the nondeductibility for
income tax purposes of the amortization of goodwill at certain of the
Company's facilities. In addition, the Company's effective tax rate was
higher than the statutory rate in 1996 and 1995 due to the nondeductibility
of the write-down of certain assets, restructuring charges and acquisition
related costs.

MINORITY INTEREST

Minority interest in income of the consolidated subsidiaries was
$424,000, $6,577,000 and $2,960,000 in 1997, 1996 and 1995, respectively.
The decrease from 1996 to 1997 is primarily due to the Company acquiring
the remaining

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<PAGE>

49% interest in the Vet Research joint venture and the restructuring of the
Vet's Choice joint venture. The increase from 1995 to 1996 is primarily
due to the earnings of the Vet Research joint venture and the reduced
losses of Vet's Choice.

LIQUIDITY AND CAPITAL RESOURCES

The Company's operations require continued access to cash, primarily
to fund acquisitions, reduce long-term debt obligations and to fund
property and equipment additions.

Cash provided by operations during the years ended December 31, 1997,
1996 and 1995 was $22,674,000, $1,603,000 and $3,837,000, respectively.
The increase from 1996 to 1997 is primarily attributable to an increase in
income as a result of the growth in the number of facilities operated by
the Company and the addition of the Consulting Fees. The Company's
operating cash flow for 1996 and 1995 was adversely impacted by the Vet's
Choice joint venture, which had a net cash outflow of $1,715,000 and
$3,043,000, respectively. Excluding the Vet's Choice operations, cash
provided by operations in 1996 and 1995 was $3,318,000 and $6,880,000,
respectively.

During 1997, 1996 and 1995, in connection with acquisitions, the
Company used cash in the amounts of $28,988,000, (acquisition of 15
hospitals, three veterinary diagnostic laboratories and the remaining
interest in Vet Research), $27,496,000 (acquisition of 22 hospitals and
six veterinary diagnostic laboratories) and $9,147,000 (acquisition of 25
hospitals, four veterinary diagnostic laboratories and the remaining
30%interest in PAL), respectively. Additionally, in 1995 the Company paid
$250,000 to acquire options to purchase the land and building of four
facilities. From January 1, 1998 through March 23, 1998, the Company used
approximately $600,000 in connection with the acquisition of a 60% interest
in one animal hospital and $10.9 million in cash to acquire the clinical
veterinary laboratory business from Laboratory Corporation of America
Holdings.

During 1997, 1996 and 1995, the Company used $7,241,000, $6,962,000
and $2,983,000 to purchase property, plant and equipment and $16,198,000,
$11,135,000 and $6,241,000 to reduce long-term obligations.

In April 1996, the Company received net proceeds of $82,034,000
related to the sale, in an offshore offering and concurrent private
placement in the United States, of $84,385,000 of 5.25% convertible
subordinated debentures due in 2006. The debentures, non-callable for
three years, are convertible into approximately 2.5 million shares of the
Company's common stock at a rate of $34.35 per share. Also in 1996 and in
1995, the Company received net proceeds of $13,800,000 and $8,896,000 in
connection with the exercise of 1,962,452 and 1,271,508, respectively, of
its redeemable warrants. The warrants expired in October 1996. In
connection with the formation of Vet Research in March 1995, the Company
issued warrants to purchase 363,636 shares of its common stock at $11.00
per share (the "Vet Research warrants"). During 1996 and 1995, the Company
received $2,134,000 and $550,000 in connection with the exercise of 194,000
and 50,000 of these warrants, respectively. The warrants expired in the
first quarter of 1997.

In January 1995, Star-Kist Foods, Inc. through its division, HPP,
purchased 1,159,420 shares of the Company's common stock at $8.625 per
share, resulting in net proceeds to the Company of $9,980,000. In November
1995, the Company completed a secondary public offering of 2,965,026 shares
of common stock for net proceeds of approximately $33,932,000.

Of its cash and equivalents on hand at December 31, 1996 and 1995,
approximately $2,023,000 and $1,907,000, respectively, was restricted for
use by Vet's Choice. During the year ended December 31, 1995, Vet's Choice
used $3,075,000 of cash to fund its operating losses, the opening of three
regional warehouses, marketing and promotional expenses and an increase in
its sales force. In connection with the restructuring of the Vet's Choice
joint venture agreement in February 1997, the Company made a capital
distribution to Vet's Choice amounting to $1,329,000. As provided for in
its joint venture agreement, the Company and HPP each contributed $1.0
million to Vet's Choice in 1996 and 1995.

The Company has achieved its growth in the past, and anticipates it
will continue its growth in the future, through the acquisition of animal
hospitals for cash, stock and notes. Subject to available capital, the
Company anticipates it will complete the acquisition of an additional 10 to
20 individual animal hospitals in 1998, which will

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<PAGE>

require cash of up to $15.0 million. In addition, the Company continues to
examine acquisition opportunities in the veterinary laboratory field which
may impose additional cash requirements.

The Company has debt payment obligations related to the Animal
Hospital and Laboratory operations owned as of December 31, 1997, of
approximately $19.4 million and $16.3 million in the years ended December
31, 1998 and 1999, respectively. Interest payments on the convertible
debentures amount to $4,430,000 annually. In addition, the Company is
building or has plans to upgrade, expand or replace facilities for 18
animal hospitals for a total cost of approximately $10.4 million, as well
as to replace or upgrade equipment, as needed. The Company also expects to
continue to upgrade its management information systems in 1998 for
approximately $1 million.

The Company intends to fund its future cash requirements primarily
from cash on hand, the sale of its marketable securities and internally
generated funds. The Company believes these sources of funds will be
sufficient to continue the Company's operations and planned capital
expenditures for at least the next 12 months. A significant portion of the
Company's cash requirements is determined by the pace and size of its
acquisitions.

IMPACT OF YEAR 2000

The Company maintains its general ledger and accounting systems
primarily on four separate PC based systems. Some of the Company's older
computer programs were written using two digits rather than four to define
the applicable year. As a result, those computer programs have time-
sensitive software that recognize a date using "00" as the year 1900 rather
than the year 2000. This could cause a system failure or miscalculations
causing disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices, or engage in
similar normal business activities.

The Company has completed an assessment of its existing software
systems and after reviewing various factors, one of which being the year
2000 issue, has determined that modifications or upgrades to or
replacements of certain software is required. The Company anticipates that
the required changes to its existing computer systems will be substantially
completed no later than September 30, 1999, which is prior to any
anticipated impact on its operating systems. The Company believes that
with these changes, the year 2000 issue will not pose significant
operational problems for its computer systems. The total cost associated
with these changes is estimated at approximately $3 million.

The costs of the project and the date on which the Company believes it
will complete the changes to its computer systems are based on management's
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources and other
factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.

NEW ACCOUNTING PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS" 128). SFAS 128 revises and simplifies the computation for
earnings per share and requires certain additional disclosures. The
adoption of SFAS 128 did not have a material effect on the Company's
financial position or its results of operations.

The Emerging Issues Task Force of the FASB has recently issued its
Consensus Opinion 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific
matters pertaining to the contractual management relationships between
entities that operate in the health care industry, which includes the
practices of medicine, dentistry and veterinary science. EITF 97-2 will be
effective for the Company for its year ending December 31, 1998. EITF 97-2
address the ability of management companies to consolidate the results of
practices with which it has an existing contractual relationship. The
Company is still in the process of analyzing the effect of EITF 97-2 on all
of its contractual relationships, but currently believes that the adoption
of EITF 97-2 will not have a material effect on its financial position or
results of operations.

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SEASONALITY AND QUARTERLY FLUCTUATIONS

Although not readily detectable because of the impact of acquisitions,
the Company's operations are somewhat seasonal. In particular, revenues at
the Company's Animal Hospital and Laboratory operations historically have
been greater in the second and third quarters than in the first and fourth
quarters. The demand for the Company's veterinary services are
significantly higher during warmer months because pets spend a greater
amount of time outdoors, where they are more likely to be injured and are
more susceptible to disease and parasites. In addition, use of veterinary
services may be affected by levels of infestation of fleas, heartworms and
ticks, the number of daylight hours, as well as general economic
conditions. A substantial portion of the Company's costs are fixed and do
not vary with the level of demand. Consequently, net income for the second
and third quarters, at individual animal hospitals, generally has been
higher than that experienced in the first and fourth quarters.

The following table sets forth revenues, net income (loss) and diluted
earnings (loss) per share for each of the quarters in 1997 and 1996:

(In thousands) Quarter Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
1997
Revenues. . . . . . . . $ 56,023 $ 63,193 $ 62,163 $ 58,010
Net income. . . . . . . 1,410 4,351 3,415 2,050
Diluted earnings per share 0.07 0.22 0.18 0.10

Quarter Ended
------------------------------------------------------
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
---------- --------- ------------- ------------
1996
Revenues. . . . . . . . $ 35,232 $ 42,208 $ 52,399 $ 52,321
Net income (loss) . . . 760 (1,304) (11,469) (2,619)
Diluted earnings (loss)
per share 0.05 (0.09) (0.66) (0.14)

</TABLE>

INFLATION

Historically, the Company's operations have not been materially
affected by inflation. There can be no assurance that the Company's
operations will not be affected by inflation in the future.

RISK FACTORS

RAPID EXPANSION AND MANAGEMENT OF GROWTH

Due to the number and size of acquisitions completed since January 1,
1996, the Company has experienced rapid growth. In 1996, the Company
completed the acquisition of Pet Practice, as well as 22 individual animal
hospitals and six veterinary diagnostic laboratories and entered into a
combination with Pets' Rx in a transaction accounted for as a pooling of
interests. In 1997, the Company completed the acquisition of 15 animal
hospitals and three veterinary diagnostic laboratories. As a result of
these acquisitions, the Company's revenues have grown from $107.7 million
in 1995, to $182.2 million in 1996 and to $239.4 million in 1997. In 1998,
through March 23, 1998, the Company completed the acquisition of one animal
hospital and one veterinary diagnostic laboratory.

The Company's growth and pace of acquisitions have placed, and will
continue to place, a substantial strain on its management, operational,
financial and accounting resources. There can be no assurance that the
combined business will be able to identify, consummate or integrate
acquisitions without substantial delays, costs or other problems. Once
integrated, acquisitions may not achieve sales, profitability and asset
productivity commensurate with the combined business' other operations. In
addition, acquisitions involve several other risks, including adverse
short-term effects on the combined business' reported operating results,
impairments of goodwill and other intangible assets, the diversion of

Page 23
<PAGE>

management's attention, the dependence on retention, hiring and training of
key personnel, the amortization of intangible assets and risks associated
with unanticipated problems or legal liabilities. The combined business'
failure to manage growth effectively would have a material adverse effect
on the combined business' results of operations and its ability to execute
its business strategy.

DEPENDENCE ON ACQUISITIONS FOR FUTURE GROWTH

The Company's growth strategy is dependent on its ability to acquire
existing animal hospitals. Successful acquisitions involve a number of
factors which are difficult to control, including the identification of
potential acquisition candidates, the willingness of the owners to sell on
reasonable terms and the satisfactory completion of negotiations. In
addition, acquisitions may be subject to pre-merger or post-merger review
by governmental authorities for antitrust and other legal compliance.
Adverse regulatory action could negatively affect the Company's operations
through the assessment of fines or penalties against the Company or the
possible requirement of divestiture of one or more of the Company's
operations.

There can be no assurance that the Company will be able to identify
and acquire acceptable acquisition candidates on terms favorable to the
Company in a timely manner in the future. Assuming the availability of
capital, the Company's plans include an aggressive acquisition program
involving the acquisition of at least 15 to 25 facilities per year. The
Company continues to evaluate acquisitions and negotiate with several
potential acquisition candidates. The failure to complete acquisitions and
continue expansion could have a material adverse effect on the Company's
financial performance. As the combined business proceeds with its
acquisition strategy, it will continue to encounter the risks associated
with the integration of acquisitions described above.

SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS

The Company has incurred substantial indebtedness in connection with
the acquisition of its animal hospitals and veterinary diagnostic
laboratories and through the sale of the $84,385,000 of 5.25% convertible
debentures in April 1996. In certain instances, debt issued in connection
with the acquisition of animal hospitals is secured by the assets of the
hospital acquired. The Company has at December 31, 1997, consolidated
long-term obligations (including current portion) of $173.9 million. At
December 31, 1997, the Company's ratio of long-term debt (including current
portion) to total stockholders' equity was 96.1%.

RISKS ASSOCIATED WITH INTANGIBLE ASSETS

A substantial portion of the assets of the Company consists of
intangible assets, including goodwill and covenants not to compete relating
to the acquisition of animal hospitals and veterinary diagnostic
laboratories. At December 31, 1997, the Company's balance sheet reflected
$243.8 million of intangible assets of these types, a substantial portion
of the Company's $386.1 million in total assets at such date. The Company
expects the aggregate amount of goodwill and other intangible assets on its
balance sheet to increase in the future in connection with additional
acquisitions. This increase will have an adverse impact on earnings as
goodwill and other intangible assets will be amortized against earnings. In
the event of any sale or liquidation of the Company, there can be no
assurance that the value of these intangible assets will be realized.

In addition, the Company continually evaluates whether events and
circumstances have occurred that indicate the remaining balance of
intangible assets may not be recoverable. When factors indicate that these
intangible assets should be evaluated for possible impairment, they may be
required to reduce the carrying value of intangible assets, which could
have a material adverse effect on results of operations during the periods
in which such reduction is recognized. In accordance with this policy, the
Company has recognized a write-down of goodwill and related assets in the
amount of $9.5 million as part of its restructuring plan adopted during the
third and fourth quarters of 1996. There can be no assurance that the
Company will not be required to write-down assets further in future
periods.

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GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH OR COMMON STOCK

In connection with acquisitions in which the purchase price
consists,
in part, of the Company's common stock (the "Guarantee Shares"), the
Company often guarantees (the "Guarantee Right") that the value of such
stock (the "Measurement Price") two to three years following the date of
the acquisition (the "Guarantee Period") will equal or exceed the value of
the stock on the date of acquisition (the "Issue Price"). In the event the
Measurement Price does not equal or exceed the Issue Price, the Company
typically is obligated either to (i) pay to the seller in cash, notes
payable or additional shares of the Company's common stock the difference
between the Issue Price and the Measurement Price multiplied by the number
of Guarantee Shares then held by the seller, or (ii) purchase the Guarantee
Shares then held by the seller. Once the Guarantee Shares are delivered
and registered for resale under the Securities Act, which registration the
Company covenants to effect generally within nine months of issuance of the
Guarantee Shares, the seller's Guarantee Right typically terminates if the
Company's common stock trades at 110% to 120% of the Issue Price (the
"Release Price") for five to 20 consecutive days, depending on the terms of
the specific acquisition at issue. There are 288,559 Guarantee Shares
outstanding at March 23, 1998 with Issue Prices ranging from $11.70 to
$19.80, with a weighted average of $17.33, that have not met their
respective Release Prices for the specified period. The Guarantee Periods
the Guarantee Shares extend through February 1999 and the liability for
such shares as of March 23, 1998 totals approximately $612,000. If the
value of the Company's common stock decreases and is less than an Issue
Price at the end of the respective Guarantee Period for these shares, the
Company may be obligated to compensate these sellers.

HISTORY OF OPERATING LOSSES; SEASONALITY AND FLUCTUATING QUARTERLY RESULTS

A large portion of the business of the Company is seasonal, with
operating results varying substantially from quarter to quarter.
Historically, the Company's revenues have been greater in the second and
third quarters than in the first and fourth quarters. The demand for the
Company's veterinary services are significantly higher during warmer months
because pets spend a greater amount of time outdoors, where they are more
likely to be injured and are more susceptible to disease and parasites. In
addition, use of veterinary services may be affected by levels of
infestation of fleas, heartworms and ticks, and the number of daylight
hours, as well as general economic conditions. A substantial portion of
the Company's costs are fixed and do not vary with the level of demand.
Consequently, net income for the second and third quarters at individual
animal hospitals generally has been higher than that experienced in the
first and fourth quarters.

DEPENDENCE ON KEY MANAGEMENT

The Company's success will continue to depend to a significant
extent on the Company's executive officers and other key management,
particularly its Chief Executive Officer, Robert L. Antin. VCA has an
employment contract with Mr. Robert Antin, Mr. Arthur Antin, Chief Operating
Officer of VCA, and Mr. Neil Tauber, Senior Vice President of VCA, each of
which expires in January 2002. VCA has no other written employment agreements
with its executive officers. None of VCA's officers are parties to
noncompetition covenants which extend beyond the term of their employment
with VCA. VCA does not maintain any key man insurance on the lives of its
senior management. As VCA continues to grow, it will continue to hire,
appoint or otherwise change senior managers and other key executives.
There can be no assurance that VCA will be able to retain its executive
officers and key personnel or attract additional qualified members to
management in the future. In addition, the success of certain of VCA's
acquisitions may depend on VCA's ability to retain selling veterinarians of
the acquired companies. The loss of services of any key manager or selling
veterinarian could have a material adverse effect upon VCA's business.

COMPETITION

The animal health care industry is highly competitive and subject to
continual change in the manner in which services are delivered and
providers are selected. The Company believes that the primary competitive
factors in connection with animal hospitals are convenient location,
recommendation of friends, reasonable fees, quality of care and convenient
hours. The Company's primary competitors for its animal hospitals in most
markets are individual practitioners or small, regional multi-clinic
practices. In addition, regional pet care companies as well as certain
national

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<PAGE>

companies in the pet care industry, including the operators of super-stores,
are developing multi-regional networks of animal hospitals in markets which
include the Company's animal hospitals. Among veterinary diagnostic
laboratories, the Company believes that quality, price and the time required
to report results are the major competitive factors. There are many clinical
laboratory companies which provide a broad range of laboratory testing
services in the same markets serviced by the Company. In addition, several
national companies provide on-site diagnostic equipment that allows
veterinarians to perform their own laboratory tests.

GOVERNMENT REGULATION

The laws of many states prohibit veterinarians from splitting fees
with non-veterinarians and prohibit business corporations from providing,
or holding themselves out as providers of, veterinary medical care. These
laws vary from state to state and are enforced by the courts and by
regulatory authorities with broad discretion. While the Company seeks to
structure its operations to comply with the corporate practice of
veterinary medicine laws of each state in which it operates, there can be
no assurance that, given varying and uncertain interpretations of such
laws, the Company would be found to be in compliance with restrictions on
the corporate practice of veterinary medicine in all states. A
determination that the Company is in violation of applicable restrictions
on the practice of veterinary medicine in any state in which it operates
could have a material adverse effect on the Company if the Company were
unable to restructure its operations to comply with the requirements of
such states.

ANTI-TAKEOVER EFFECT

A number of provisions of the Company's Certificate of Incorporation
and Bylaws and certain Delaware laws and regulations relating to matters of
corporate governance, certain rights of directors and the issuance of
preferred stock without stockholder approval, may be deemed to have and may
have the effect of making more difficult, and thereby discouraging, a
merger, tender offer, proxy contest or assumption of control and change of
incumbent management, even when stockholders other than the Company's
principal stockholders consider such a transaction to be in their best
interest. In addition, H.J. Heinz Company has an option to purchase the
Company's interest in the Vet's Choice joint venture upon the occurrence of
a change in control (as defined in the joint venture agreement), which may
have the same effect. Accordingly, stockholders may be deprived of an
opportunity to sell their shares at a substantial premium over the market
price of the shares.

On December 22, 1997, the Company adopted a Stockholder Rights Plan
(the "Rights Agreement") and in connection therewith, out of its authorized
by unissued shares of preferred Stock, designated 400,000 shares as Series
B Preferred Stock, par value $0.001 per share (the "Series B Preferred
Stock"). Pursuant to the Rights Agreement, the Company distributed to its
stockholders, rights entitling the holders to purchase one one-hundredth of
a share of Series B Preferred Stock for each share of common stock then
held at an exercise price of $60.00. One one-hundredth of a share of
Series B Preferred Stock is functionally equivalent in all respects,
including voting and dividend rights to one share of common stock. Upon
the occurrence of certain "triggering events," each right entitles its
holder to purchase, at the rights then-current exercise price, a number of
one one-hundredths of a share of Series B Preferred Stock having a market
value equal to twice the exercise price. A triggering event occurs ten
days following the date a person or group (other than an "Exempt Person"),
without the consent of the Company's board of directors, acquires 15% or
more of the Company's common stock or upon the announcement of a tender
offer or an exchange offer, the consummation of which would result in the
ownership by a person or group of 15% or more of the Company's common
stock. The rights will expire on January 5, 2008.

IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE

Future sales by existing stockholders could adversely affect the
prevailing market price of the Company's common stock. As of March 23,
1998, the Company had 20,425,874 shares of common stock outstanding
(including 246,938 shares held in treasury), most of which are either
freely tradable in the public market without restriction or tradable in
accordance with Rule 144 under the Act. There are also 16,093 shares which
the Company is obligated to issue in connection with the Pets' Rx and Pet
Practice mergers and certain acquisitions; 3,708,948 shares of the
Company's common stock issuable upon exercise of outstanding stock options;
41,046 shares issuable upon conversion of

Page 26
<PAGE>

convertible notes; and 2,456,623 shares issuable upon conversion of
convertible debentures. Shares may also be issued under price guarantees
delivered in connection with acquisitions.

POSSIBLE VOLATILITY OF STOCK PRICE

The market price of the Company's common stock could be subject to
significant fluctuations caused by variations in quarterly operating
results, litigation involving the Company, announcements by the Company or
its competitors, general conditions in the animal health care industry and
other factors. The stock market in recent years has experienced extreme
price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of publicly traded companies.

The broad fluctuations may adversely affect the market price of the
Company's common stock.

PENDING LITIGATION

The Company and certain of its current and former officers and
directors have been named as defendants in two purported class action
lawsuits filed in Los Angeles Superior Court (MARILYN J. THOMPSON, ET AL.
V. VETERINARY CENTERS OF AMERICA, INC., ET AL., filed April 1, 1997, and
JOHN MARTIN V. VETERINARY CENTERS OF AMERICA, INC., ET AL., filed August 8,
1997), and a purported class action lawsuit filed on June 9, 1997, in the
United States District court for the Central District of California,
entitled MARILYN J. THOMPSON, ET AL. V. VETERINARY CENTERS OF AMERICA,
INC., ET AL. (collectively, the "Class Actions"). The Class Actions have
been filed on behalf of individuals claiming to have purchased common stock
of the Company during the time period from February 15, 1996 through
November 14, 1996, and the plaintiffs seek unspecified damages arising from
alleged misstatements regarding the Company's animal hospitals, diagnostic
laboratories, pet food operations and success in integrating certain
acquisitions.

Since discovery has only recently commenced in the Class Actions, the
Company is unable to assess the likelihood of an adverse result. There can
be no assurances as to the outcome of the Class Actions. The inability of
the Company to resolve the claims that are the basis for the lawsuits or to
prevail in any related litigation could result in the Company being
required to pay substantial monetary damages for which the Company may not
be adequately insured, which could have a material adverse effect on the
Company's business, financial position and results of operations. In any
event, the Company's defense of the Class Actions may result in substantial
costs to the Company, as well as significant dedication of management
resources, as the Company intends to vigorously defend the lawsuits.

Certain of the Company's current and former directors and officers
were named as defendants in a lawsuit filed on September 26, 1997, in the
Superior Court of California for the County of Los Angeles, entitled KENT
E. MASON IRA SEP V. ROBERT L. ANTIN, ET AL. (the "Derivative Action"). In
the Derivative Action, the plaintiff has alleged that the officer and
director defendants breached various duties owed to the Company, and seeks
unspecified damages on the Company's behalf. The Company may owe indemnity
obligations to the defendants named in the Derivative Action. None of the
defendants has been served with the complaint.

Page 27
<PAGE>

ITEM 8. FINANCIAL STATEMENTS

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

_________________

PAGE
----

Report of Independent Public Accountants 29
Consolidated Balance Sheets as of December 31, 1997 and 1996 30
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 31
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 32
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 33
Notes to Consolidated Financial Statements 35

Page 28
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Veterinary Centers of
America, Inc.:

We have audited the accompanying consolidated balance sheets of
Veterinary Centers of America, Inc. (a Delaware corporation) and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of
the three years in the period ended December 31, 1997. 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 Veterinary
Centers of America, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Los Angeles, California
February 19, 1998

Page 29
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996

A S S E T S
1997 1996
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $19,882,000 $29,621,000
Marketable securities 51,371,000 73,306,000
Trade accounts receivable, less allowance
for uncollectible accounts of $5,128,000
and $4,212,000 at December 31, 1997 and 1996,
respectively 8,964,000 9,583,000
Inventory, prepaid expenses and other 6,482,000 8,788,000
Deferred income taxes 3,068,000 2,331,000
Prepaid income taxes 5,634,000 2,137,000
------------ ------------
Total current assets 95,401,000 125,766,000
PROPERTY, PLANT AND EQUIPMENT, NET 39,985,000 37,467,000
DEFERRED INCOME TAXES -- 1,352,000
OTHER ASSETS:
Goodwill, net 239,117,000 178,806,000
Covenants not to compete, net 4,725,000 4,933,000
Notes receivable 1,921,000 1,486,000
Deferred costs and other 4,940,000 4,199,000
------------ ------------
$386,089,000 $354,009,000
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
Current portion of long-term obligations $19,369,000 $14,055,000
Accounts payable 6,267,000 6,923,000
Accrued payroll and related liabilities 7,502,000 7,177,000
Accrued restructuring costs 4,996,000 8,847,000
Other accrued liabilities 9,837,000 10,113,000
------------ ------------
Total current liabilities 47,971,000 47,115,000
LONG-TERM OBLIGATIONS, less current portion 154,506,000 134,767,000
DEFERRED INCOME TAXES 1,186,000 --
MINORITY INTEREST 1,575,000 4,777,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock; $.001 par value;
No shares issued and 416,667 shares authorized
at December 31, 1997 and 583,333 shares
issued and 1,000,000 shares authorized
at December 31, 1996 -- 1,000
Common stock; $.001 par value; authorized --
60,000,000 shares: Issued and outstanding
including shares in treasury -- 20,339,663
and 19,268,648 at December 31, 1997 and
1996, respectively 20,000 20,000
Additional paid-in capital 196,745,000 192,167,000
Notes receivable from stockholders (546,000) --
Accumulated deficit (12,888,000) (24,114,000)
Less cost of common stock held in treasury --
246,938 and 97,773 shares at December 31, 1997
and 1996, respectively (2,480,000) (724,000)
------------ ------------
Total stockholders' equity 180,851,000 167,350,000

------------ ------------
$386,089,000 $354,009,000
============ ============

</TABLE>

The accompanying notes are an integral part of these
consolidated balance sheets.

Page 30
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $239,389,000 $182,160,000 $107,694,000
Direct costs 182,106,000 139,586,000 80,099,000
------------ ------------ ------------
Gross profit 57,283,000 42,574,000 27,595,000
Selling, general and administrative expense 17,676,000 19,735,000 13,684,000
Depreciation and amortization expense 11,199,000 7,496,000 4,144,000
Merger costs -- 2,901,000 --
Restructuring charges -- 5,701,000 1,086,000
Write-down of assets -- 9,512,000 2,148,000
------------ ------------ ------------
Operating income (loss) 28,408,000 (2,771,000) 6,533,000
Interest income 4,182,000 4,487,000 828,000
Interest expense 11,593,000 7,812,000 3,377,000
------------ ------------ ------------
Income (loss) before minority interest and provision for
income taxes 20,997,000 (6,096,000) 3,984,000
Minority interest in income of subsidiaries 424,000 6,577,000 2,960,000
------------ ------------ ------------
Income (loss) before provision for income taxes 20,573,000 (12,673,000) 1,024,000
Provision for income taxes 9,347,000 1,959,000 2,238,000
------------ ------------ ------------
Net income (loss) $11,226,000 $(14,632,000) $(1,214,000)
============ ============= ============
Basic earnings (loss) per common share $0.57 $(0.92) $(0.13)
============ ============= ============
Diluted earnings (loss) per common share $0.53 $(0.92) $(0.13)
============ ============= ============
Shares used for computing basic earnings per shar 19,626,000 15,942,000 9,224,000
============ ============= ============
Shares used for computing diluted earnings per share 21,013,000 15,942,000 9,224,000
============ ============= ============

The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>

Page 31
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>

Common Stock Preferred Stock Treasury Stock Additional
------------------- ----------------- ------------------ Paid-In Accumulated
Shares Amount Shares Amount Shares Amount Capital (Deficit)
--------- ------- ------- ------- ------ ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, December 31, 1994 6,248,126 $6,000 583,333 $1,000 -- $-- $33,630,000 $(8,268,000)
Sale of common stock 4,129,616 4,000 -- -- -- -- 44,058,000 --
Sale of redeemable warrants 4,607 -- -- -- -- -- 58,000 --
Exercise of redeemable warrants 1,271,508 2,000 -- -- -- -- 8,894,000 --
Exercise of warrants issued in
connection with the Vet Research
joint venture 50,000 -- -- -- -- -- 550,000 --
Exercise of stock options 29,367 -- -- -- -- -- 209,000 --
Business acquisitions 1,075,288 1,000 -- -- -- -- 11,979,000 --
Conversion of convertible debt 37,319 -- -- -- -- -- 254,000 --
Settlement of guaranteed purchase
price contingently payable in
cash or common stock -- -- -- -- -- -- 53,000 --
Net loss -- -- -- -- -- -- -- (1,214,000)
---------- ------- -------- ------ --------- ------------ ------------ -------------
BALANCES, December 31, 1995 12,845,831 13,000 583,333 1,000 -- -- 99,685,000 (9,482,000)
Sale of common stock 7,514 -- -- -- -- -- 207,000 --
Exercise of redeemable warrants 1,962,452 2,000 -- -- -- -- 13,798,000 --
Exercise of warrants issued in
connection with the Vet Research
joint venture 194,000 -- -- -- -- -- 2,134,000 --
Exercise of stock options 79,090 -- -- -- -- -- 337,000 --
Business acquisitions 4,120,100 5,000 -- -- -- -- 74,814,000 --
Conversion of convertible debt 5,742 -- -- -- -- -- 54,000 --
Settlement of guaranteed purchase
price contingently payable in
cash or common stock 9,169 -- -- -- -- -- -- --
Purchase of treasury shares -- -- -- -- (97,773) (724,000) -- --
Issuance of stock in settlement of
employment obligations 44,750 -- -- -- -- -- 1,138,000 --
Net loss -- -- -- -- -- -- -- (14,632,000)
---------- ------- -------- ------ --------- ------------ ------------ -------------
BALANCES, December 31, 1996 19,268,648 20,000 583,333 1,000 (97,773) (724,000) 192,167,000 (24,114,000)
Exercise of stock options 277,752 -- -- -- -- -- 2,455,000 --
Business acquisitions and earn-outs 175,856 -- -- -- -- -- 2,122,000 --
Settlement of guaranteed purchase
price contingently payable in
cash or common stock 34,074 -- -- -- -- -- -- --
Conversion of preferred stock to
common stock 583,333 -- (583,333) (1,000) -- -- 1,000 --
Purchase of treasury shares -- -- -- -- (149,165) (1,756,000) -- --
Net income -- -- -- -- -- -- -- 11,226,000
---------- ------- -------- ------ --------- ------------ ------------ -------------
BALANCES, December 31, 1997 20,339,663 $20,000 -- $ -- (246,938) $(2,480,000) $196,745,000 $(12,888,000)
========== ======= ======== ====== ========= ============ ============ =============

The accompanying notes are an integral part of these
consolidated financial statements.
</TABLE>

Page 32
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $11,226,000 $(14,632,000) $(1,214,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 11,199,000 7,496,000 4,144,000
Provision for uncollectible accounts 2,726,000 1,844,000 772,000
Gain on sale of land and building -- -- (19,000)
Amortization of debt discount 392,000 290,000 454,000
Utilization of acquired NOL carryforwards -- -- 69,000
Restructuring costs and asset write-downs -- 15,213,000 3,234,000
Minority interest in income of subsidiary 424,000 6,577,000 2,960,000
Distributions to minority interest partners (424,000) (7,292,000) (4,058,000)
Issuance of common stock in settlement of employment
obligations -- 1,138,000 --
Increase in accounts receivable and other receivables, net (3,176,000) (2,573,000) (2,912,000)
Decrease (increase) in inventory 201,000 (2,111,000) (1,875,000)
Increase in prepaid income taxes (3,497,000) (1,643,000) (322,000)
Decrease (increase) in prepaid expenses and other 655,000 (231,000) (208,000)
Decrease (increase) in deferred income tax asset 615,000 1,249,000 (737,000)
Increase (decrease) in accounts payable and accrued liabilities 1,147,000 (2,421,000) 3,112,000
Increase (decrease) in deferred income tax liability 1,186,000 (1,301,000) 437,000
------------ ------------- ------------
Net cash provided by operating activities 22,674,000 1,603,000 3,837,000
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired (28,988,000) (27,496,000) (9,147,000)
Property, plant and equipment additions, net (7,241,000) (6,962,000) (2,983,000)
Investments in marketable securities (102,363,000) (249,934,000) (58,322,000)
Proceeds from sales or maturities of marketable securities 124,298,000 218,783,000 16,167,000
Proceeds from the sale of assets 153,000 209,000 600,000
Payments for building purchase options -- -- (250,000)
Capital contribution of minority interest partners 246,000 990,000 1,000,000
Capital distribution to minority interest partner (1,318,000) -- --
Investment in Veterinary Pet Insurance (1,000,000) -- --
------------ ------------- ------------
Net cash used in investing activities (16,213,000) (64,410,000) (52,935,000)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of convertible subordinated debentures -- 82,034,000 --
Repayment of line of credit -- -- (1,100,000)
Reduction of long-term obligations and notes payable (16,198,000) (11,135,000) (6,241,000)
Payments received on notes receivable 110,000 379,000 272,000
Advances for notes receivable not related to sale of assets (265,000) -- --
Payments on guaranteed purchase price
contingently payable in cash or common stock -- -- (19,000)
Net proceeds from sale of common stock -- 207,000 44,062,000
Net proceeds from exercise of redeemable warrants -- 13,800,000 8,896,000
Proceeds from exercise of warrants issued
in connection with Vet Research joint venture -- 2,134,000 550,000
Proceeds from sale of warrants -- -- 58,000
Proceeds from issuance of common stock under stock option plans 1,909,000 337,000 209,000
Purchase of treasury stock (1,756,000) (724,000) --
------------ ------------- ------------
Net cash provided by (used in) financing activities (16,200,000) 87,032,000 46,687,000
------------ ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (9,739,000) 24,225,000 (2,411,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 29,621,000 5,396,000 7,807,000
------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $19,882,000 $29,621,000 $5,396,000
============ ============= ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

Page 33
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
<TABLE>
<CAPTION>

1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid $10,900,000 $6,828,000 $2,878,000
Income taxes paid 9,664,000 3,774,000 2,688,000

SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
In connection with acquisitions, assets acquired
and liabilities assumed were as follows:
Fair value of assets acquired $72,331,000 $146,756,000 $43,223,000
Less: Consideration given
Cash paid (28,880,000) (25,345,000) (9,147,000)
Cash paid in settlement of assumed liabilities (108,000) (2,151,000) --
Common stock issued (2,122,000) (74,819,000) (11,980,000)
------------ ------------ ------------
Liabilities assumed including notes payable issued $41,221,000 $44,441,000 $22,096,000
============ ============ ============
In connection with the formation of the joint venture and
partnerships, assets and liabilities contributed
by the partners were as follows:
Assets $-- $295,000 $ 3,467,000
Liabilities -- -- 1,063,000
------------ ------------ ------------
Non-cash capital contribution of minority
interest partners $-- $295,000 $2,404,000
============ ============ ============
Issuance of common stock in exchange
for convertible debt $-- $54,000 $254,000
============ ============ ============
Non-cash increase in long-term obligations due to
purchase of equipment and building $-- $510,000 $262,000
============ ============ ============
Conversion of accounts payable to notes payable $-- $-- $381,000
============ ============ ============

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

Page 34
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997

1. THE COMPANY

Veterinary Centers of America, Inc. ("VCA" or the "Company"), a Delaware
corporation, was founded in 1986 and is a leading animal health care company.
The Company has established a premier position in two core businesses, animal
hospitals and veterinary diagnostic laboratories. In addition, the Company
owns a partnership interest in a joint venture with Heinz Pet Products
("HPP"), which markets and distributes premium pet foods. The Company also
has an investment in Veterinary Pet Insurance, Inc., the nation's largest pet
health insurance company. The Company operates one of the largest networks
of free-standing, full service animal hospitals in the country and one of the
largest networks of veterinary-exclusive diagnostic laboratories in the
nation.

In 1993, the Company began to expand the scope of its operations in
order to realize its goals of integrating the markets for veterinary care,
veterinary diagnostic laboratories and premium pet food. The integration
of these markets is the foundation of the Company's business strategy to
leverage it access to its primary customers, veterinarians and pet owners.
From 1993 through 1995, the Company acquired and integrated into its
operations 36 animal hospitals. In 1996, the Company completed two
significant acquisitions, which more than doubled the Company's animal
hospital operations. Pets' Rx, Inc. ("Pets' Rx") was acquired in June 1996
(16 hospitals) and The Pet Practice, Inc. ("Pet Practice") was acquired in
July 1996 (84 hospitals). The Company made these acquisitions in order to
promote the growth of the Company's hospital network, broaden the geographic
scope of the Company's operations, and to take advantage of synergies that
the Company believes exist between its business lines. In addition to the
two significant 1996 acquisitions, the Company has acquired 37 animal
hospitals in 1996 and 1997. At December 31, 1997, the Company owned or
operated 160 animal hospitals, throughout 26 states, as detailed in the
following tables:

Western States Central States Eastern States
---------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C>
Alaska 4 Illinois 14 Connecticut 1
Arizona 1 Indiana 7 Delaware 3
California 36 Michigan 13 Florida 18
Colorado 2 Nebraska 1 Georgia 1
Hawaii 1 Ohio 4 Maryland 8
Nevada 6 Massachusetts 7
New Mexico 3 New Jersey 3
Texas 8 New York 1
Utah 2 North Carolina 1
Pennsylvania 10
Virginia 4
West Virginia 1
-- -- --
Totals 63 39 58

</TABLE>

In 1993, the Company entered into a joint venture called Vet's Choice
with HPP to develop, manufacture and market a full-line of premium pet food.
Vet's Choice was primarily engaged in developing and testing the formulas
for its first product line, SELECT BALANCE, and building a marketing
infrastructure in anticipation of commencing distribution in 1994. Vet's
Choice began to generate revenue in 1994 with the launch of SELECT

Page 35
<PAGE>

BALANCE. In 1995, Vet's Choice began selling its second product line,
SELECT CARE. Through 1996, the Company as majority owner and managing
general partner, exercised day-to-day operating control for all aspects of
Vet's Choice, including sales, marketing, administration and distribution.
As a result of the acquisition of two other premium pet food companies
during 1996, HPP obtained expanded capabilities to manufacture, market and
distribute premium pet foods. In order for the Vet's Choice business to
benefit from the economies of scales in marketing, sales and distribution
that HPP had attained with the acquisitions in 1996, the joint venture
agreement was restructured effective February 1, 1997. Under the terms of
the restructuring, HPP was made managing partner and assumed the day-to-day
control of the joint venture and the operations of the joint venture were
merged into HPP's other premium pet food business. The Company maintains its
50.5% equity interest in Vet's Choice, but profits and losses are allocated
99.9% to HPP and 0.1% to the Company. In connection with the restructuring,
the Company and HPP entered into certain consulting and management services
agreements whereby the Company will provide certain consulting and marketing
services and continue to support the SELECT BALANCE and SELECT CARE products
in the veterinary marketplace.

Years Ended December 31 ,
----------------------------
1996 1995
---- ----
Revenues:
Pre-merger (pre-June 19, 1996)
VCA $64,763,000 $92,072,000
Pets' Rx 7,849,000 15,622,000
----------- -----------
72,612,000 107,694,000
Post-merger (post June 19, 1996) 109,548,000 --
----------- -----------
$182,160,000 $107,694,000
============ ============
Net (loss) income:
Pre-merger (pre-June 19, 1996)
VCA $ 1,647,000 $ 2,564,000
Pets' Rx (658,000) (1,977,000)
Merger adjustments 212,000 (1,801,000)
----------- -------------
1,201,000 (1,214,000)
Post-merger (post June 19, 1996) (15,833,000) --
----------- -------------
$(14,632,000) $(1,214,000)
=========== =============

VCA's 1996 pre-merger net income includes merger expenses of $2,901,000;
these expenses consist principally of legal, accounting, investment advisor,
termination of employment agreements and severance costs. The merger
adjustments were recorded to conform certain accounting methods of Pets' Rx
to those of VCA. These adjustments reduced intangible asset amortization
expense by $212,000 and $347,000 in 1996 and 1995 respectively, and wrote-off
intangible assets of $2,148,000 in 1995 associated with certain animal
hospitals whose projected future operating results would not result in the
recovery of such intangible assets under VCA's accounting method.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. PRINCIPLES OF CONSOLIDATION

The financial statements include the accounts of the Company and all
those majority-owned subsidiaries where the Company has control. Significant
intercompany transactions and balances have been eliminated.

Page 36
<PAGE>

The Company consolidates professional corporations ("PCs") in which it
obtains a controlling financial interest by virtue of a long-term practice
management agreement between a wholly-owned subsidiary of the Company and the
PCs. The laws of some states prohibit veterinarians from splitting fees with
non-veterinarians and prohibit business corporations from providing
veterinary services through the direct employment of veterinarians. The
Company has established operations in six of such states that it believes
comply in all material respects with applicable laws. In these states, the
Company has long-term management agreements ("Management Agreements") with
PCs, ranging from 10 to 40 years with non-binding renewal options available.
The PCs are owned by veterinarians who provide veterinary medical services
at the animal hospitals located in their particular state. Pursuant to the
Management Agreements, the PCs are each solely responsible for all aspects
of the practice of veterinary medicine, as defined by their respective state.
The Company is responsible for providing the following: (i) day-to-day
financial and administrative supervision and management; (ii) non-
veterinarian personnel needed to operate and support the animal hospital;
(iii) maintenance of patient records; (iv) recruitment of veterinary staff;
(v) marketing; and (vi) malpractice and general insurance. As compensation
for these services, the Company is entitled to a monthly management fee. The
amount of such fees are not specifically defined in the Management
Agreements. In most instances, the PCs receive a salary for its services,
and the Company enjoys the risks and rewards related to the overall
profitability of the animal hospital. All significant intercompany
transactions have been eliminated in consolidation.

B. CASH AND CASH EQUIVALENTS

For purposes of the balance sheets and statements of cash flows, the
Company considers only highly liquid investments to be cash equivalents. Of
its cash on hand at December 31, 1996, $2,023,000 was restricted for use in
the conduct of the Vet's Choice joint venture.

Cash and cash equivalents consisted of:

1997 1996
---- ----
<S> <C> <C>
Cash $14,649,000 $21,763,000
Money market funds 5,233,000 7,858,000
---------- ----------
$19,882,000 $29,621,000
=========== ===========

</TABLE>

C. MARKETABLE SECURITIES

All marketable securities are classified as held for sale and are
available to support current operations and acquisitions. The Company
currently invests in only high quality, short-term investments. There were
no significant differences between amortized cost and estimated fair value at
December 31, 1997 and 1996. Additionally, because investments are short-term
and are generally allowed to mature, realized gains and losses for both years
were not significant.

Marketable securities consisted of:

1997 1996
---- ----
<S> <C> <C>
Corporate bonds $30,041,000 $46,127,000
Mutual funds - municipalities 11,165,000 9,091,000
Municipal bonds 1,126,000 5,492,000
Short-term notes 4,534,000 4,141,000
Mutual funds - taxable auction securities 4,505,000 5,021,000
Other securities -- 3,434,000
---------- -----------
$51,371,000 $73,306,000
=========== ===========
</TABLE>

Gross proceeds on sales of marketable securities were $46,060,000,
$115,738,000 and $2,308,000 for the years ended December 31, 1997, 1996
and 1995, respectively.

Page 37
<PAGE>

D. INVENTORY

Inventory is valued at the lower of cost or market using the first-in,
first-out method.

E. NOTES RECEIVABLE

Notes receivable are not market traded financial instruments. The
amounts recorded approximate fair value. The notes bear interest at rates
varying from 7% to 9% per annum.

F. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment is recorded at cost. Land, buildings
and equipment held under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the
equipment at the beginning of the lease term.

Depreciation and amortization are provided for on the straight-line
method over the following estimated useful lives:

Buildings and improvements...............................5 to 30 years
Leasehold improvements................Lesser of lease term or 15 years
Furniture and equipment...................................5 to 7 years
Property held under capital leases.......................5 to 30 years

Property, plant and equipment consisted of:

1997 1996
-------- --------

<S> <C> <C>
Land.........................................$ 6,993,000 $6,635,000
Land held under capital leases...................362,000 362,000
Building and improvements.....................14,091,000 13,774,000
Buildings held under capital leases..............835,000 835,000
Leasehold improvements.........................7,217,000 3,915,000
Furniture and equipment.......................19,455,000 17,468,000
Equipment held under capital leases............1,552,000 1,552,000
---------- ----------
Total fixed assets 50,505,000 44,541,000
Less -- Accumulated depreciation
and amortization (10,520,000) (7,074,000)
----------- -----------
$39,985,000 $37,467,000
=========== ===========

</TABLE>

Accumulated depreciation on buildings and equipment held under capital
leases amounted to $763,000 and $527,000 at December 31, 1997 and 1996,
respectively.

G. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill relating to acquisitions represents the purchase price paid
and liabilities assumed in excess of the fair market value of net assets
acquired. Goodwill is amortized over the expected period to be benefited,
not exceeding 40 years, on a straight-line basis.

Subsequent to its acquisitions, the Company continually evaluates
whether events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors
indicate that goodwill should be evaluated for possible impairment, the
Company uses an estimate of the related facility's undiscounted net income
over the remaining life of the goodwill in measuring whether the goodwill
is recoverable.

Page 38
<PAGE>

Other intangible assets principally include covenants not to compete.
The value assigned to the covenants not to compete is amortized on a
straight-line basis over the term of the agreements (principally 5 to 10
years).

Accumulated amortization of goodwill and covenants not to compete at
December 31, 1997 was $23,664,000 and $5,419,000, respectively.
Accumulated amortization of goodwill and covenants not to compete at
December 31, 1996 was $14,424,000 and $3,871,000, respectively.

H. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS

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.

I. RECENT ACCOUNTING PRONOUNCEMENTS

In March 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS 128"). SFAS 128 revises and simplifies the computation for
earnings per share and requires certain additional disclosures. The
adoption of SFAS 128 did not have a material effect on the Company's
financial position or its results of operations.

The Emerging Issues Task Force of the FASB has recently issued its
Consensus Opinion 97-2 ("EITF 97-2"). EITF 97-2 addresses certain specific
matters pertaining to the contractual management relationships between
entities that operate in the health care industry, which includes the
practices of medicine, dentistry and veterinary science. EITF 97-2 will be
effective for the Company for its year ending December 31, 1998. EITF 97-2
addresses the ability of EITF 97-2 management companies to consolidate the
results of practices with which it has an existing contractual
relationship. The Company is still in the process of analyzing the effect
of EITF 97-2 on all of its contractual relationships, but currently
believes that the adoption of EITF 97-2 will not have a material effect on
its financial position or results of operations.

J. RECLASSIFICATIONS

Certain 1996 balances have been reclassified to conform with the 1997
financial statement presentation.

3. ACQUISITIONS

In January 1997, the Company acquired the remaining 49% interest in
the Vet Research joint venture for a price as computed in accordance with
the operating agreement, amounting to $18,703,000 in cash and a $29,002,000
note payable, payable in quarterly installments over six years. During
1997, the Company purchased 15 animal hospitals and three veterinary
diagnostic laboratories for an aggregate consideration (including
acquisition costs) of $22,198,000 consisting of $9,358,000 in cash,
$10,531,000 in debt, 155,924 shares of VCA common stock, with a value of
$1,900,000, and the assumption of liabilities totaling $409,000. The
$69,903,000 aggregate purchase price was allocated $5,099,000 to tangible
assets, $64,012,000 to goodwill and $792,000 to other intangible assets.

On July 19, 1996, the Company completed the acquisition of Pet
Practice for a total consideration (including acquisition costs) of
$97,930,000 consisting of 3,516,268 shares of VCA common stock, with a
value at the date of acquisition of $65,930,000, and the assumption of
liabilities totaling $32,000,000. In addition, outstanding employee stock
options were converted into options to purchase an additional 41,280 shares
of VCA common stock. On the acquisition date, Pet Practice was the
operator of 84 veterinary clinics located in 11 states. The acquisition of
Pet Practice was accounted for as a purchase. The $97,930,000 purchase
price was allocated $13,485,000 to tangible assets, $80,020,000 to goodwill
and $4,425,000 to other intangible assets. As of December

Page 39
<PAGE>

31, 1997, the Company has closed or sold 23 former Pet Practice animal
hospitals that did not meet the Company's standard operating model.

On June 19, 1996, the Company completed the merger with Pets' Rx for
801,054 shares of VCA common stock. In addition, outstanding Pets' Rx
warrants, options and convertible securities were converted into the right
to purchase an additional 111,607 shares of VCA common stock. Pets' Rx
owned 16 veterinary hospitals in the San Jose and Sacramento, California
and the Las Vegas, Nevada markets. The Pets' Rx acquisition was accounted
for as a pooling of interests.

During 1996, the Company purchased 22 animal hospitals for an
aggregate consideration (including acquisition costs) of $28,261,000,
consisting of $9,691,000 in cash, $9,296,000 in debt, 518,056 shares of VCA
common stock, with a value of $7,389,000, and the assumption of liabilities
totaling $1,885,000. Also during 1996, the Company purchased six
veterinary diagnostic laboratories for an aggregate consideration
(including acquisition costs) of $20,565,000, consisting of $15,654,000 in
cash, $2,510,000 in long-term obligations, 85,776 shares of VCA common
stock, with a value of $1,500,000 and the assumption of liabilities
totaling $901,000. The $48,826,000 aggregate purchase price was allocated
$4,388,000 to tangible assets, $41,091,000 to goodwill and $3,347,000 to
other intangible assets.

During 1995, the Company purchased 26 animal hospitals for an
aggregate consideration (including acquisition costs) of $29,237,000,
consisting of $6,476,000 in cash, $10,899,000 in debt, 836,576 shares of
common stock of the Company with a value of $9,780,000, and the assumption
of liabilities totaling $2,082,000. The Company paid $250,000 to acquire
an option to purchase the land and building of two of the hospitals. In
addition, a limited liability company (LLC) was formed in 1995, by
combining a veterinary clinic owned by Pets' Rx with the practice of
another veterinary clinic owned by an unrelated party. Certain assets were
contributed by each party to form the new entity, which is not liable for
any contracts or for any indebtedness relating to the predecessor clinics.
The Company has an 80% interest in the LLC. Also during 1995, the Company
purchased substantially all of the assets of Cenvet, Inc. ("Cenvet"), a
full-service veterinary diagnostic laboratory, three other veterinary
diagnostic laboratories and the remaining 30% interest in PAL, for an
aggregate consideration (including acquisition costs) of $13,986,000,
consisting of $2,671,000 in cash, $8,633,000 in long-term obligations,
238,712 shares of VCA common stock with a value of $2,200,000 and the
assumption of liabilities totaling $482,000. The $43,473,000 aggregate
purchase price was allocated $3,438,000 to tangible assets, $32,694,000 to
goodwill and $7,341,000 to other intangible assets.

On March 20,1995, the Company and Vet Research, Inc. ("VRI"), formed
Vet Research. In connection with the formation of Vet Research, VRI
contributed all of the assets and certain of the liabilities of VRI's full-
service veterinary diagnostic laboratory located in Farmingdale, New York.
The Company contributed substantially all of the assets and certain of the
liabilities of Cenvet for a 51% controlling interest in the joint venture.

In connection with the formation of Vet Research, the Company issued
warrants to purchase 363,636 shares of the common stock of the Company at
$11.00 per share, which was the market price of the Company's common stock
at the date of formation. The warrants were purchased at $0.001 per
warrant and were exercisable until January 1997. Warrants to purchase
194,000 and 50,000 shares of common stock were exercised in 1996 and 1995,
respectively. The remaining warrants to purchase 119,636 shares of common
stock expired in January 1997.

All acquisitions described above, with the exception of the merger
with Pets' Rx, have been accounted for using the purchase method of
accounting. The operations of the acquisitions accounted for using the
purchase method of accounting are included in the accompanying consolidated
financial statements from the dates of acquisition.

The pro forma results listed below are unaudited and reflect purchase
price accounting adjustments assuming 1997 and 1996 acquisitions occurred
at January 1, 1996. The pro forma results are not necessarily indicative
of what actually would have occurred if the acquisitions had been in effect
for the entire periods

Page 40
<PAGE>

presented. In addition, they are not intended to be a projection of future
results and do not reflect any efficiencies that might be achieved from the

combined operation.

(Unaudited)
1997 1996
------ ------

<S> <C> <C>
Revenue........................................$251,698,000 $249,958,000
Net income (loss)..............................$ 12,034,000 $(12,045,000)
Diluted earnings (loss) per share..............$ 0.57 $ (0.61)

Shares used for computing diluted
earnings (loss) per share................... 21,053,000 19,850,000

</TABLE>

Certain purchase agreements provide for contingent consideration based
upon the future market price of the Company's common stock. Under these
arrangements, if, at a specified date in the future, the market value of
the common stock issued in connection with the acquisition does not at
least equal the value at the acquisition date, the Company is required to
issue additional common stock or transfer cash or other assets sufficient
to make the current value of the total consideration equal to the value at
the acquisition date. The common stock issued unconditionally at the date
the acquisition is consummated is recorded at that date at the specified
amount. Once the contingency is resolved and the additional consideration
is distributable, the Company records the current fair value of the
additional consideration issued or issuable. The amount previously
recorded for the securities issued at the date of the acquisition is
simultaneously reduced to the lower current value of the common stock.

Certain purchase agreements also provide for contingent earn-out
arrangements. When the contingency is resolved and the additional
consideration is distributable, the Company records the current fair value
of such consideration issued or issuable as an additional cost of the
acquired company. The additional costs of affected assets, usually
goodwill, is amortized over the remaining life of the asset.

4. JOINT VENTURES

In February 1997, the Company's joint venture, Vet's Choice, was
restructured and management of the joint venture was assumed by the
Company's partner, HPP. Pursuant to a restructuring agreement, the Company
maintains its 50.5% equity interest in Vet's Choice. Profits and losses
are allocated 99.9% to HPP and 0.1% to the Company and all management
control has been transferred from the Company to HPP. Additionally, the
Company agreed to provide certain consulting and management services for a
three-year period commencing on February 1, 1997 for an aggregate fee of
$15.3 million payable in semi-annual installments over a five-year period.
On or after the earlier of a change of control in the Company or January 1,
2000, HPP may purchase all of the Company's interest in the partnership at
a purchase price equal to 51% of 1.3 times the annual sales of all products
bearing the SELECT BALANCE or SELECT CARE brand (the "Annual Sales") less
$4.5 million. If HPP fails to exercise its option prior to January 1,
2001, the Company may purchase all of the interest of HPP in the
partnership at a purchase price equal to 49.5% of 1.3 times the Annual
Sales plus $4.5 million. Effective February 1, 1997, the Company no longer
reports the results of operations of Vet's Choice on a consolidated basis.

Through December 31, 1996, the Company operated Vet Research, a joint
venture with VRI. Vet Research's operating results have been accounted for
as part of the consolidated operations of the Company. Distributions of
distributable cash, as defined, were made pursuant to a formula contained
in the operating agreement between the Company and VRI. Pursuant to that
formula, during each contract year, the first $1.5 million of distributable
cash was distributed to VRI; the next $3 million of distributable cash was
distributed to the Company; and the remaining distributable cash was
distributed 25% to the Company and 75% to VRI. The Company has recorded
minority interest expense related to the joint venture of $6,809,000 and
$3,646,000 in 1996 and 1995, respectively, representing 57.3% and 52.4%,
respectively, of Vet Research's income. In January 1997, the Company
acquired the remaining 49% interest in the Vet Research.

Page 41
<PAGE>

5. LONG-TERM OBLIGATIONS

Long-term obligations consisted of the following at December 31, 1997
and 1996:

<TABLE>
1997 1996
----- -----
<S> <C> <C>
MORTGAGE
DEBT Notes payable and other
obligations, various
maturities through 2006,
secured by land and buildings
of certain subsidiaries, various
interest rates ranging from 7.0%
to 9.0% with a weighted average of
7.5% at December 31, 1997............. $1,191,000 $2,381,000

SECURED
DEBT Notes payable and other
obligations, various maturities
through 2014, secured by assets
and stock of certain subsidiaries,
various interest rates ranging
from 4.0% to 12.5% with a weighted
average of 7.8% at December 31, 1997.. 82,405,000 53,813,000

CONVERTIBLE
DEBT Notes payable, convertible into VCA
common stock at prices ranging from
$7.00 to $15.00 per share, due through
2003, secured by stock of certain
subsidiaries at a range of interest
from 7.0% to 12.0% with a weighted
average of 9.0% at December 31, 1997... 1,074,000 1,659,000

UNSECURED
DEBT Notes payable, various maturities
through 2015, adjustable interest
rates from 6.2% to 10.5% adjusted
annually, and fixed interest rates
ranging from 5.0% to 10.0% with a
weighted average of 6.9%
at December 31, 1997.................. 3,385,000 4,847,000

DEBENTURES Convertible subordinated 5.25%
debentures, due in 2006, convertible
into VCA common stock at $34.35 per
share................................ 84,385,000 84,385,000
----------- ----------
Total debt obligations.......................... 172,440,000 147,085,000
Capital lease obligations....................... 1,583,000 1,901,000
Less--unamortized discount...................... (148,000) (164,000)
----------- ----------
173,875,000 148,822,000
Less--current portion........................... (19,369,000) (14,055,000)
----------- -----------
$154,506,000 $134,767,000
============ ============

</TABLE>

The annual aggregate scheduled maturities of debt obligations for the
five years subsequent to December 31, 1997 are presented below:

1998............................................... $19,369,000
1999............................................... 16,252,000
2000............................................... 16,169,000
2001............................................... 13,438,000
2002............................................... 12,398,000
Thereafter......................................... 96,249,000
----------
$173,875,000
============

The convertible subordinated debentures may be redeemed at the option
of the Company in whole or in part at any time after May 15, 1999 at 103%,
after May 15, 2000 at 102%, after May 15, 2001 at 101%, and after May 15,
2002 at 100%.

Certain acquisition debt of the Company included above and amounting
to $83,596,000 and $56,194,000 at December 31, 1997 and 1996, respectively,
is non-recourse debt secured solely by the assets or the stock of the
veterinary hospital acquired under security arrangements whereby the
creditor's sole remedy in the event of default

Page 42
<PAGE>

is the contractual right to take possession of the entire veterinary
hospital
regardless of the outstanding indebtedness at the time of default.

The following disclosure of the estimated fair value of the Company's
debt is made in accordance with the requirements of Statement of Financial
Accounting Standards No. 107 "Disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. Considerable judgment is required to develop the estimates
of fair value, the estimates provided herein are not necessarily indicative
of the amounts that could be realized in a current market exchange.

December 31, 1997
------------------------
Carrying Fair
Amount Value
--------- ----------
<S> <C> <C>
Fixed-rate long-term debt.................. $170,761,000 $137,221,000
Variable-rate long-term debt............... 3,114,000 3,114,000

</TABLE>

The estimated fair value of the Company's fixed-rate long-term debt is
based on market value or prime plus an estimated spread at December 31,
1997 for similar securities with similar remaining maturities. The
carrying value of variable-rate long-term debt is a reasonable estimate of
its fair value.

6. PREFERRED STOCK

On December 22, 1992, the Company completed the sale of 583,333 shares
of convertible preferred stock for net proceeds of $2,985,000. In October
1997, the 583,333 shares of the preferred stock were converted in 583,333
shares of common stock.

Under the Company's certificate of incorporation, the Company is
authorized to issue additional series of preferred stock. The rights,
preferences and privileges of the preferred stock are to be determined by
the board of directors and do not require stockholder approval. At
December 31, 1997, 16,667 of the shares authorized remain undesignated.

7. COMMON STOCK

During 1997, the Company issued 189,998 shares of its common stock
valued at $1,900,000, the fair market value at the date of commitment, as a
portion of the consideration for certain acquisitions.

At December 31, 1997, the Company held two notes receivable with
balances totaling $546,000 from stockholders of the Company. These notes
arose from transactions whereby the Company loaned the stockholders money
to purchase an aggregate of 182,666 shares of the Company's common stock.
These notes, which bear

Page 44
<PAGE>

interest at 6.1% per annum, mature on January 22, 2001. The receivables
are shown on the balance sheet as a reduction in equity.

On July 19, 1996, the stockholders of the Company approved an
amendment to its Certificate of Incorporation to increase the number of
authorized shares of VCA Common Stock from 30,000,000 to 60,000,000.

On July 19, 1996, the stockholders of the Company approved the
adoption of the Veterinary Centers of America, Inc. 1996 Employee Stock
Purchase Plan and authorized the reservation of up to 250,000 shares of VCA
Common Stock for issuance under the Plan. No shares have been issued under
the Plan.

On November 13, 1996, the Company's Board of Directors authorized the
Company to repurchase its common stock on the open market. During 1997 and
1996, respectively, the Company acquired 149,165 shares for a total
consideration of $1,756,000 and 97,773 shares of common stock for a total
consideration of $724,000.

During 1996, the Company issued 3,516,268 shares of VCA common stock,
with a value of $65,930,000, as a portion of the consideration for the Pet
Practice acquisition and 603,832 shares of VCA common stock, with a value
of $8,889,000 as a portion of the consideration for 22 animal hospitals and
six veterinary diagnostic laboratories acquired in separate transactions.
Also, in 1996, the Company issued 801,054 shares of its stock in the merger
with Pets' Rx.

In January 1995, Star-Kist Foods, Inc. through its division, HPP,
purchased 1,159,420 shares of the Company's common stock at $8.625 per
share, resulting in net proceeds to the Company of $9,980,000.

In November 1995, the Company completed a secondary public offering of
2,965,026 shares of common stock for net proceeds of $33,932,000.

During 1995, the Company issued 1,075,288 shares of its common stock
valued at $11,980,000, the fair market value at the date of commitment, as
a portion of the consideration for 15 animal hospitals and three veterinary
diagnostic laboratories.

On October 6, 1991, the Company completed an initial public offering
of 2,400,000 shares of common stock and 3,240,000 redeemable warrants for
$12,598,000. Each redeemable warrant entitled the holder to purchase one
share of common stock for $7.20 commencing April 10, 1992 until October 10,
1996. During 1996 and 1995, redeemable warrants were exercised for
1,962,452 and 1,271,508 shares of common stock, respectively. Cash
proceeds from the exercise of redeemable warrants in 1996 and 1995 amounted
to $13,800,000 and $8,896,000, respectively.

8. STOCK-BASED COMPENSATION PLANS

The Company has granted stock options to various employees and
directors. The Company accounts for these plans under APB Opinion No. 25,
under which no compensation cost has been recognized.

In November 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-
Based Compensation" ("SFAS 123"). SFAS 123 recommends changes in accounting
for employee stock-based compensation plans, and requires certain
disclosures with respect to these plans. SFAS 123's disclosures have been
adopted by the Company effective January 1, 1996.

Had compensation cost for these plans been determined consistent with
SFAS 123, the Company's net income (loss) and earnings (loss) per share
would have been reduced to the following PRO FORMA amounts:

Page 44
<PAGE>

1997 1996
------------ -------------
<S> <C> <C>
Net income (loss)
As reported........................... $11,226,000 $(14,632,000)
Pro forma............................. 8,276,000 (17,510,000)

Diluted earnings (loss) per share
As reported........................... $ 0.57 $ (0.92)
Pro forma............................. 0.42 (1.09)

</TABLE>

Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in
future years.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants in 1997 and 1996: risk free interest
rates of 6.4% for both years; expected volatility of 60.6% and 55.1%,
respectively; weighted average fair value of options of $6.85 and $10.76,
respectively; expected lives of seven years for both years and no expected
dividend yield for either year.

Under the provisions of the Company's non-qualified and incentive
stock option plans for officers and key employees, 750,000 shares of common
stock were reserved for issuance at December 31, 1992. On May 5, 1995, the
stockholders of the Company approved the adoption of the Veterinary Centers
of America, Inc. 1995 Stock Incentive Plan, and authorized the reservation
of 750,000 shares of common stock for issuance under the Plan. On July 19,
1996, the stockholders of the Company approved the adoption of the
Veterinary Centers of America, Inc. 1996 Stock Incentive Plan, and
authorized the reservation of 1,500,000 shares of common stock for issuance
under the Plan. The options become exercisable over a two to five year
period, commencing at the date of grant or one year from the date of grant
depending on the option. All options expire 10 years from the date of
grant. The prices of all options granted were greater than or equal to the
fair market value at the date of the grant.

In addition to the options granted under VCA's stock option plans, the
Company had 2,031,000 and 30,667 options outstanding at December 31, 1997
and 1996, respectively, to certain members of the board of directors and to
the previous owners of certain acquired companies. During 1997, the
Company granted to certain officers of the Company 2,025,000 options with
an exercise price of $10.25 per share. The options vest in 54 equal
monthly installments commencing in September 1997. None of these options
were exercised in 1997.

The table below summarizes the transactions in the Company's stock
option plans during 1997, 1996 and 1995:

1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Options outstanding at beginning of year..... 1,739,461 1,625,520 808,171
Granted...................................... 2,170,658 254,780 859,966
Exercised.................................... (277,752) (79,090) (29,367)
Canceled..................................... (48,403) (61,749) (13,250)
--------- --------- --------
Options outstanding at end of year
($0.75 to $36.79 per share).............. 3,583,964 1,739,461 1,625,520
========= ========= =========

Exercisable at end of year.................. 1,318,140 878,145 710,309
========= ========= =========
</TABLE>

Page 45
<PAGE>

The following table summarizes information about certain options in
the stock option plans outstanding as of December 31, 1997 in accordance
with SFAS 123:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------- -----------------------------------------------
Weighted Avg.
Range of Number Remaining Weighted Avg. Number Weighted Avg.
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------- ----------- --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Less than $15.00 3,577,033 8.26 years $ 9.91 1,315,777 $ 9.29
$15.00 to $26.00 2,854 8.04 years 23.77 734 24.21
Greater than $26.00 4,077 7.72 years 31.27 1,629 31.27
--------- ---------
3,583,964 1,318,140
========= =========

</TABLE>

9. GUARANTEED PURCHASE PRICE CONTINGENTLY PAYABLE IN CASH, NOTES OR COMMON
STOCK

The Company has guaranteed the value of certain shares of its common
stock ("Stock Guarantees") issued in connection with the acquisition of
certain animal hospitals in 1996 and 1995. If the aggregate market value
of the stock (as quoted by a nationally recognized stock exchange) at
various specified valuation dates is below the value of the stock on the
acquisition date, the Company has agreed to pay the difference in
additional shares of stock, cash or notes payable. The Company's guarantee
of the value, however, terminates if the common stock is registered for
resale and trades at 110% to 120% of the issue price of the stock for five
to 20 consecutive days. At December 31, 1997, there were 593,003 shares of
stock outstanding with such guarantees, with issue prices ranging from
$11.70 to $24.53, with a weighted average of $17.22. The guarantee periods
extend through February 1998, and the liability for the guaranteed shares
at December 31, 1997 totals approximately $1,481,000.

In 1995, pursuant to two of these stock guarantee arrangements
pertaining to a total of 13,494 shares, the Company paid $19,000 in cash
for the difference between the guaranteed value of the stock held and the
market value of the stock, as defined. The difference between the $19,000
and the $72,000 liability for the guaranteed purchase price contingently
payable in cash or common stock, amounting to $53,000, was credited to
additional paid-in capital.

10. COMMITMENTS

The Company operates many of its animal hospitals from premises that
are leased from the hospitals' previous owners under operating leases with
terms, including renewal options, ranging from one to 35 years. Certain
leases include purchase options which can be exercised at the Company's
discretion at various times within the lease terms.

The annual lease payments under the lease agreements have provisions
for annual increases based on the Consumer Price Index or other amounts
specified within the lease contracts. The Company also leases certain
medical and computer equipment under operating leases.

The future minimum lease payments on operating leases at December 31,
1997, including renewal option periods, are as follows:

1998....................................... $7,681,000
1999....................................... 7,322,000
2000....................................... 6,878,000
2001....................................... 6,881,000
2002....................................... 6,898,000
Thereafter................................. 85,669,000
----------
$121,329,000
============

Page 46
<PAGE>

Rent expense totaled $8,624,000, $7,036,000 and $3,880,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. Rental income
totaled $235,000, $313,000 and $246,000 for the years ended December 31,
1997, 1996 and 1995, respectively.

In connection with the acquisition of Pet Practice, the Company
assumed certain contractual arrangements, whereby additional shares of the
Company's common stock and cash may be issued to former owners of acquired
hospitals upon attainment of specified financial criteria over periods of
three to five years, as set forth in the respective agreements ("Earn-out
Payments"). The number of shares of common stock and cash to be issued
cannot be determined until the earn-out periods expire and the attainment
of criteria is established. Earn-out Payments in 1997 amounted to
approximately $1,879,000, consisting of $740,000 in cash, 19,932 shares of
common stock valued on the date of issuance at $222,000, and a $917,000
note payable. If the specified financial criteria is attained in the
future, but not exceeded, the Company will be obligated to make cash
payments of approximately $657,000 and issue approximately 5,700 shares of
common stock over the next three years.

The Company has employment agreements with three officers of the
Company which currently expire on December 31, 2002. Each of the
agreements provide for annual compensation (subject to upward adjustment)
which aggregated $785,000 for the year ended December 31, 1997.

11. CALCULATION OF PER SHARE AMOUNTS

A reconciliation of the income (loss) and shares used in the
computations of the basic and diluted earnings (loss) per share ("EPS") for
each of the three years in the period ended December 31, 1997 follows:
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997

--------------------------------------------
Per-Share
Income Shares Amount
-------- --------- --------
<S> <C> <C> <C>
Basic EPS
Net Income $11,226,000 19,626,000 $0.57
=========
Effect of Dilutive Securities:
Convertible Preferred Stock -- 451,000
Stock Options -- 688,000
Convertible Debt 13,000 25,000
Contingently Issuable Shares -- 223,000
------------ -----------
Diluted EPS $ 11,239,000 21,013,000 $0.53
============ =========== =========
</TABLE>

During 1997, $84,385,000 of 5.25% convertible debentures, convertible
into 2,456,623 shares of common stock were outstanding, but were not
included in the computation of diluted EPS because conversion would have an
antidilutive effect on EPS.

<TABLE>
<CAPTION>
For the Year Ended December 31, 1996
--------------------------------------------
Per-Share
Income Shares Amount
-------- --------- --------
<S> <C> <C> <C>
Basic EPS
Net Loss $(14,632,000) 15,942,000 ($0.92)
=========
Effect of Dilutive
Securities -- --
----------- ----------
Diluted EPS $(14,632,000) 15,942,000 ($0.92)
============ ========== =========

</TABLE>

Because the Company had a net loss in 1996, the following dilutive
securities were not included in the computation of diluted EPS because they
would have an antidilutive effect: (i) convertible preferred stock

Page 47
<PAGE>

convertible into 583,333 shares of common stock, (ii) stock options
outstanding at December 31, 1996 to purchase 1,741,000 shares of common
stock at a weighted average price of $9.69 per share, and (iii) redeemable
warrants outstanding at December 31, 1996 to purchase 194,000 shares of
common stock at $11.00 per share. In addition, in April 1996, the Company
issued $84,385,000 of 5.25% convertible debentures, convertible into
2,456,623 shares of common stock. The debentures, due in April 2006, were
outstanding at December 31, 1996.

For the Year Ended December 31, 1995
--------------------------------------------
Per-Share
Income Shares Amount
-------- --------- --------
<S> <C> <C> <C>
Basic EPS
Net Loss ($1,214,000) 9,224,000 ($0.13)
=========
Effect of Dilutive Securities -- --
----------- ----------
Diluted EPS ($1,214,000) 9,224,000 ($0.13)
=========== ========== =========
</TABLE>

Because the Company had a net loss in 1995, the following dilutive
securities were not included in the computation of diluted EPS because they
would have an antidilutive effect: (i) convertible preferred stock
convertible into 583,333 shares of common stock, (ii) stock options
outstanding December 31, 1995 to purchase 1,626,000 shares of common stock
at a weighted average price of $8.30 per share, and (iii) redeemable
warrants outstanding at December 31, 1995 to purchase 313,636 shares of
common stock at $11.00 per share.

12. INCOME TAXES

The provision for income taxes is comprised of the following:

1997 1996 1995
------ ------- --------
<S> <C> <C> <C>
Federal:
Current.................... $5,952,000 $1,842,000 $1,888,000
Deferred................... 1,534,000 (444,000) (192,000)
---------- ---------- ----------
7,486,000 1,398,000 1,696,000
---------- ---------- ----------
State:
Current..................... 1,594,000 450,000 560,000
Deferred.................... 267,000 111,000 (18,000)
---------- ---------- ----------
1,861,000 561,000 542,000
---------- ----------- ----------
$9,347,000 $1,959,000 $2,238,000
========== ========== ==========
</TABLE>

The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future consequences of events that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.

The net deferred tax asset (liability) is comprised of the following:

1997 1996
----------- ----------
<S> <C> <C>
Current deferred tax assets (liabilities):
Accounts receivable........................ $ 1,998,000 $ 692,000
State taxes................................ (1,343,000) (923,000)
Other liabilities and reserves............. 1,930,000 1,072,000
Start-up costs............................. 66,000 33,000
Restructuring charges...................... 4,160,000 5,100,000
Other assets............................... (149,000) (2,000)
Inventory.................................. 815,000 768,000
Valuation allowance........................ (4,409,000) (4,409,000)
----------- ----------
Total current deferred tax asset, net... $ 3,068,000 $2,331,000
=========== ==========
</TABLE>

Page 48
<PAGE>

1997 1996
----------- ----------

<S> <C> <C>
Non-current deferred tax (liabilities)
assets:
Net operating loss carryforwards......... $7,676,000 $9,395,000
Write-down of assets..................... 1,589,000 1,587,000
Start-up costs........................... 288,000 288,000
Other assets............................. 73,000 59,000
Intangible assets........................ (2,037,000) 832,000
Property, plant and equipment............ 225,000 190,000
Valuation allowance...................... (9,000,000) (10,999,000)
---------- ------------
Total non-current deferred tax asset
(liability), net....................... $(1,186,000) $1,352,000
=========== ==========

</TABLE>

At December 31, 1997, the Company has federal net operating loss
("NOL") carryforwards of approximately $21,128,000, comprised principally
of NOL carryforwards acquired in the Pets' Rx and Pet Practice mergers.
These NOL carryforwards expire at various dates through 2010.

Under the Tax Reform Act of 1986, the utilization of NOL carryforwards
to reduce taxable income will be restricted under certain circumstances.
Events which cause such a limitation include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period.
Management believes that the Pets' Rx and Pet Practice mergers caused such
a change of ownership and, accordingly, utilization of the NOL
carryforwards may be limited in future years. Accordingly, the valuation
allowance is principally related to subsidiaries' NOL carryforwards, as
well as certain acquisition related expenditures where the realization of
this deduction is uncertain at this time.

A reconciliation of the provision for income taxes to the amount
computed at the federal statutory rate is as follows:

1997 1996 1995
------ ------ ------
<S> <C> <C>
Federal income tax at statutory rate................. 35.0% (34.0)% 34.0%
Effect of amortization of goodwill................... 4.0 5.0 5.0
State taxes, net of federal benefit.................. 6.0 3.0 8.0
Tax exempt income.................................... (1.0) (3.0) --
Subsidiary net operating loss........................ -- 10.0 --
Change in valuation allowance associated
with certain write-down of assets, restructuring
and acquisition related costs and other.............. 1.0 34.0 172.0
------ ------ ------
45.0% 15.0% 219.0%
====== ====== ======
</TABLE>

For financial reporting purposes, the benefit arising from the
utilization of NOL carryforwards generated by certain companies, including
Pet Practice, prior to their acquisition by the Company is accounted for as
a reduction of goodwill of the acquired companies. Such benefit amounted
to $69,000 for the year ended December 31, 1995. No benefit was realized
for the years ended December 31, 1996 and 1997.

13. 401(K) PLAN

During 1992, the Company established a voluntary retirement plan under
Section 401(k) of the Internal Revenue Code. The plan covers all eligible
employees, those with at least one year of employment with the Company, and
provides for annual matching contributions by the Company at the discretion
of the Company's board of directors. As part of the 1996 acquisitions of
Pets' Rx, Pet Practice and Southwest, the Company assumed the
administrative responsibilities of their respective 401(k) plans. In
January 1998, these plans were merged into the Company's plan. In 1997,
1996 and 1995, the Company provided a total matching contribution at the
discretion of the Board of Directors. Such matching contributions
approximated $496,000, $291,000 and $87,000 in 1997, 1996 and 1995,
respectively.

Page 49
<PAGE>

14. RESTRUCTURING AND ASSET WRITE-DOWN

During 1996, the Company adopted and implemented a restructuring plan
(the "1996 Plan") and recorded a restructuring and asset write-down charge
of approximately $15.2 million. The 1996 Plan was designed to restructure
the Company's animal hospital and laboratory operations in connection with
its 1996 acquisitions of Pets' Rx, Pet Practice and Southwest. In
addition, certain hospitals which did not meet the new standards for
performance adopted in light of the increase in the size of the Company's
animal hospital operations, were to be closed or sold. Of the $15.2 million
in restructuring and asset write-down charges recorded in 1996, $5.7
million represents cash charges. The remainder represents non-cash charges
of $5.5 million in write-downs of goodwill, $1.1 million in write-downs of
other intangible assets and $2.9 million in write-downs of other assets.

The major components of the 1996 Plan included: (1) the termination
of leases, the write-down of intangibles, property and equipment, and
employee terminations in connection with the closure, sale or consolidation
of twelve animal hospitals; (2) the termination of contracts and leases,
the write-down of certain property and equipment and the termination of
employees in connection with the restructuring of the Company's laboratory
operations; and (3) contract terminations and write-down of assets in
connection with the move to common communications and computer systems. The
restructuring of the laboratory operations consists primarily of: (i)
plans to relocate the Company's facility in Indiana to Chicago; (ii) the
downsizing of its Arizona operations; (iii) the standardization of
laboratory and testing methods throughout all the Company's laboratories;
and (iv) the shut-down of another of its facilities in the Midwest.

The activity that occurred within the 1996 Plan restructuring reserves
during 1997 was as follows:

(a) During the quarter ended March 31, 1997, the Company sold
four of its animal hospitals resulting in non-cash net asset
write-downs of $194,000. The Company incurred $565,000 of
cash expenditures for lease and other contractual
obligations.

(b) During the quarter ended June 30, 1997, the Company incurred
$222,000 of cash expenditures for lease and other
contractual obligations.

(c) During the quarter ended September 30, 1997, the laboratory
division relocated its facility in Indiana to Illinois,
downsized its Arizona operations, substantially completed
its standardization of laboratory and testing methods, and
replaced its communications system resulting in total non-
cash asset write-downs of $844,000. The hospital division
completed its evaluation of the property value at one of its
hospitals and replaced certain equipment and software
resulting in total non-cash asset write-downs of $378,000.
The Company incurred $515,000 of cash expenditures for lease
and other contractual obligations.

(d) At September 30, 1997, the Company reversed $2.1 million of
the restructuring reserve established for the 1996 Plan (see
discussion of 1997 restructuring charge and asset write-down
below). The events that triggered the need to reverse a
portion of the 1996 Plan charge were as follows:

(i) A favorable termination of a communications system
contract was negotiated and became effective October 1,
1997.
(ii) A hospital practice was acquired on May 15, 1997 and
was merged into an animal hospital that was scheduled
to be closed. The Company evaluated the performance of
the merged practices during the 1997 third quarter and
decided to rescind its decision to close the animal
hospital.
(iii) The Company completed negotiations to terminate a lease
agreement early for one of the hospitals scheduled to
be closed at a favorable amount.
(iv) The Company rescinded its decision to close three other
animal hospitals due to their improved performance.

Page 50
<PAGE>

(e) During the quarter ended December 31, 1997, the Company
incurred non-cash asset write-downs of $346,000, primarily
resulting from the write-off of inventory from the animal
hospitals that were sold during the first quarter of 1997, that
was not utilized at other VCA animal hospitals. The Company also
incurred $349,000 of cash expenditures for lease and other
contractual obligations.

Of the remaining four hospitals included in the 1996 Plan, one closed
in February 1998, two are expected to be closed by the second quarter of
1998 and the other is currently for sale.

During 1997, the Company reviewed the financial performance of its
hospitals. As a result of this review, an additional twelve hospitals were
determined not to meet the Company's performance standards. Accordingly,
the Company adopted phase two of its restructuring plan (the "1997 Plan"),
resulting in restructuring and asset write-down charges of $2.1 million.
The reversal restructuring charge from the 1996 Plan was offset against the
restructuring and asset write-down charges for the 1997 Plan, resulting in
no effect to in the 1997 statement of operations. The major components of
the 1997 Plan consists of the termination of leases, amounting to
$1,198,000, and the write-down of intangibles, property and equipment,
amounting to $876,000, in connection with the closure or sale of twelve
animal hospitals. Collectively, the twelve hospitals have aggregate annual
revenue of approximately $5.8 million.

The operations of Cenvet were merged into the operations of VRI to
form Vet Research. The combined operations were restructured in 1995 to
eliminate duplicate operating and overhead costs. In connection with the
restructuring, the Company recorded a charge of $1,086,000 in the first
quarter of 1995 to accrue the estimated costs associated with the
restructuring, consisting primarily of lease termination and severance
costs. At December 31, 1997, $369,000 remains on the Company's balance
sheet.

During 1995, the Company charged $2,148,000 to operations related to a
write-down of goodwill and certain intangible assets at three Pets' Rx
facilities.

15. LINES OF BUSINESS

The Company reports its business operations in two segments: Animal
Hospital and Laboratory. Through January 31, 1997, the Company reported a
third segment: Premium Pet Food.

The following is a summary of certain financial data for each of the
three segments:

Page 51
<PAGE>

<TABLE>
<CAPTION>
Animal Premium
(In thousands) Hospital Laboratory Pet Food Corporate Eliminations Total
-------- ---------- -------- --------- ------------ -----
<S> <C> <C> <C>
1997
Revenues $174,024 $ 68,997 $1,064 $ -- $ (4,696) $ 239,389
Operating income (loss) 25,027 16,813 156 (13,588) -- 28,408
Depreciation/amortization expense 7,363 3,329 12 495 -- 11,199
Identifiable assets 205,653 95,073 -- 85,363 -- 386,089
Capital expenditures 4,413 1,088 -- 575 -- 6,076

1996
Revenues $120,842 $ 56,774 $8,674 $ -- $(4,130) $ 182,160
Operating income (loss) (1,295) 13,120 (1,263) (13,333) -- (2,771)
Depreciation/amortization expense 5,156 1,823 129 388 -- 7,496
Identifiable assets 188,675 48,205 4,491 112,638 -- 354,009
Capital expenditures 4,575 1,049 169 1,679 -- 7,472

</TABLE>

Corporate operating loss includes salaries, general and administrative
expense for the executive, finance, accounting, human resources, marketing,
purchasing and regional operational management functions that support the
Animal Hospital, Laboratory and Premium Pet Food segments.

16. STOCKHOLDER LAWSUIT

17. SUBSEQUENT EVENTS

From January 1, 1998 through February 19, 1998, the Company purchased
one animal hospital and one laboratory in separate transactions for a total
consideration (including acquisition costs) of $11,500,000, consisting of
$10,900,000 in cash, and the assumption of liabilities totaling $600,000.

Page 52
<PAGE>

In January 1998, the Company invested an additional $4 million in
convertible preferred stock, for a total investment of $5 million in
Veterinary Pet Insurance, Inc., the largest provider of pet health
insurance in the United States.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

There have been no events or transactions requiring reporting under
this Item.

Page 53
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding directors and executive officers of the Company
will appear in the Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by this reference. The Proxy
Statement will be filed with the SEC within 120 days following December 31,
1997.

ITEM 11. EXECUTIVE COMPENSATION

Information regarding executive compensation will appear in the Proxy
Statement for the 1998 Annual Meeting of Stockholders and is incorporated
herein by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners
and management will appear in the Proxy Statement for the 1998 Annual
Meeting of Stockholders and is incorporated herein by this reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information regarding certain relationships and related transactions
will appear in the Proxy Statement for the 1998 Annual Meeting of
Stockholders and is incorporated herein by this reference.

Page 54
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Exhibits:

See attached exhibit index.

(b) Financial Statement Schedules:

Report of Independent Public Accounts

Schedules for the years ended December 31, 1997, 1996, 1995

II - Valuation and Qualifying Accounts

Schedules other than those listed above are omitted since they
are not applicable, not required or the information required to
be set forth herein is included in the consolidated financial
statements or notes thereto.

None

Page 55
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 30th day of March, 1998.

VETERINARY CENTERS OF AMERICA, INC.
(Registrant)

By: /s/ Tomas W. Fuller
Tomas W. Fuller
Its: Chief Financial Officer

Page 56
<PAGE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert L. Antin and Arthur J. Antin,
or any one of them, his attorney-in-fact and agent, with full power of
substitution, for him in any and all capacities, to sign any amendments to
this Annual Report, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorneys-in-
fact, or their substitutes, may do or cause to be done by virtue hereof.

In accordance with the Exchange Act, this Report has been signed below
by the following persons on behalf of the Registrant and in the capacities
indicated and on the dates indicated.

Signature Title Date
- --------- ----- -----

President, Chief Executive
Officer and Chairman of the
Board (Principal Executive
/s/ Robert L. Antin Officer and Director) March 30, 1998
- -------------------
Robert L. Antin

Senior Vice President,
Chief Operating Officer,
/s/ Arthur J. Antin Secretary and Director March 30, 1998
- -------------------
Arthur J. Antin

Senior Vice President,
/s/ Neil Tauber Treasurer and Director March 30, 1998
- --------------------
Neil Tauber

Vice President,
Chief Financial Officer
and Assistant Secretary
/s/ Tomas W. Fuller (Principal Accounting
- -------------------- Officer) March 30, 1998
Tomas W. Fuller

Director
- -------------------
John Heil

/s/ John Chickering Director March 30, 1998
- -------------------
John Chickering

Director
- --------------------
Dr. Richard Gillespie

Page 57
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders of Veterinary Centers of
America, Inc.:

We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements of Veterinary Centers of
America, Inc. and subsidiaries included in this Form 10-K and have issued
our report thereon dated February 19, 1998. Our audits were made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule identified as "Schedule II - Valuation and Qualifying
Accounts" is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the financial data
required to be set forth therein in a relation to the basic financial
statements taken as a whole.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Los Angeles, California
February 19, 1998

Page 58
<PAGE>

VETERINARY CENTERS OF AMERICA, INC. AND SUBSIDIARIES

SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
Balance at Charged to
beginning costs and Balance at
of period expenses Write-offs Other(1) end of period
--------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for uncollectible accounts $4,212,000 $2,726,000 $(2,184,000) $374,000 $5,128,000

Year ended December 31, 1996
Allowance for uncollectible accounts $1,671,000 $1,844,000 $(1,230,000) $1,927,000 $4,212,000

Year ended December 31, 1995
Allowance for uncollectible accounts $797,000 $ 772,000 $ (540,000) $642,000 $1,671,000

</TABLE>

(1) "Other" changes in the allowance for uncollectible accounts include
allowances acquired with hospital and laboratory acquisitions.

<PAGE>

EXHIBIT INDEX

ITEM EXHIBIT

2.1 Agreement and Plan of Reorganization dated March 21, 1996 by and
among Veterinary Centers of America, Inc., Golden Merger
Corporation and the Pet Practice, Inc. (attached as Appendix A to
the Joint Proxy Statement/Prospectus included in this Registration
Statement (1)

2.2 Agreement and Plan of Reorganization dated February 27, 1996, as
amended on April 11, 1996, May 23, 1996 and June 7, 1996 by and
among Veterinary Centers of America, Inc., PRI Merger Company, Pets
Rx, Inc. and the Principal Stockholder. (1)

2.3 Irrevocable Proxy dated March 21, 1996 by and between Abbingdon
Ventures Partners Limited Partnership-II and Veterinary Centers of
America, Inc. (1)

3.1 Certificate of Incorporation of Registrant, as amended to date.

3.2 Bylaws of Registrant, as currently in effect (3)

4.1 Specimen certificate evidencing Common Stock of Registrant (4)

4.2 Form of Warrant Agreement (4)

4.3 Indenture dates as of April 17, 1996 between Veterinary Centers of
America, Inc. and the Chase Manhattan Bank, N.A. (1)

4.4 Form of Rights Agreement, dated as of December 30, 1997, between
the Corporation and Continental Stock Transfer & Trust Company as
Rights Agent

4.5 Certificate of Designation of Rights, Preferences and Privileges of
Preferred Stock

4.6 Form of Rights Certificate

10.1 1987 Stock Option Plan of the Company and form of Stock Option
Agreement used therewith, as amended (2)

10.2 Form of Indemnification Agreement between the Company and its
Directors (3)

10.3 Employment Agreement, dated January 1, 1994, by and between Robert
L. Antin and the Company, as amended (6)

<PAGE>

10.4 Employment Agreement, dated January 1, 1994, by and between Arthur
J. Antin and the Company, as amended (6)

10.5 Employment Agreement, dated January 1, 1994, by and between Neil
Tauber and the Company, as amended (6)

10.6 Lease and Sublease Agreement, dated September 1, 1992, by and among
GSK Associates, Gebhart/Sevedge Properties and West Los Angeles
Veterinary Medical Group, Inc. (2)

10.7 Stock Purchase Agreement, dated as of December 9, 1992, between
Heinz Pet Products Company, a division of Star-Kist Foods, Inc. and
Veterinary Centers of America, Inc. (2)

10.8 Partnership Agreement, dated January 1, 1993, of Specialty Pet
Products Partners (2)

10.9 Stock Option Agreement, dated March 2, 1989, by and between the
Company and Robert L. Antin (3)

10.10 Stock Option Agreement, dated March 2, 1989, by and between
the Company and Arthur J. Antin (3)

10.11 Stock Option Agreement, dated March 2, 1989, by and between
the Company and Neil Tauber (3)

10.12 Revolving Line of Credit Agreement, dated December 19, 1995
for $3,100,000, by and between First Professional Bank and
Veterinary Centers of America, Inc. (11)

10.13 1993 Incentive Stock Plan of the Company and form of Stock
Plan Option Agreement used therewith (6)

10.14 Asset Purchase Agreement, dated March 4, 1994 by and among VCA
Professional Animal Laboratory, Inc., Professional Animal
Laboratory, Inc., and Dennis Moore, D.V.M., Paul Greenlee,
D.V.M., Andrew Loar, D.V.M. and Lon Rich, D.V.M. (5)

10.15 Agreement of Purchase and Sale, dated March 9, 1994 by and
among Veterinary Centers of America and NAWOC Partnership (6)

<PAGE>

10.16 Partnership Agreement dated as of March 4, 1994 by and between
Dr. Lon Rich, D.V.M., and VCA Professional Animal Laboratory,
Inc. (5)

10.17 Asset Purchase Agreement dated as of November 1, between VCA
Cenvet, Inc., and Cenvet Inc., a New York corporation and its
stockholders, Robert Wilkins, B.V. Sc and Steven R.
Gilbertson, D.V.M. (7)

10.18 Management Consulting Agreement by and between VCA Cenvet,
Inc. and R&B Management, Inc., a New York corporation, and
Robert Wilkins, its President (7)

10.19 Pathology Consulting Agreement by and between VCA Cenvet, Inc.
and R&B Management, Inc., a New York corporation, and Robert
Wilkins, its President (7)

10.20 Management Consulting Agreement by and between VCA Cenvet,
Inc. and SRG Consulting, Inc., a New York corporation, and
Steven Gilbertson, its President (7)

10.21 Pathology Consulting Agreement by and between VCA Cenvet, Inc.
and SRG Consulting Inc., a New York corporation, and Steven
Gilbertson, its President (7)

10.22 Lease of premises located at 32-50 57th Street, Woodside, New
York by and between VCA Cenvet, Inc., and RJW Associates, a
New York general partnership (7)

10.23 Security Agreement by and among VCA Cenvet, Inc., R&B
Management, Inc., and SRG Consulting, Inc. (7)

10.24 Noncompetition Agreement by and between VCA Cenvet, Inc., and
Robert Wilkins (7)

10.25 Noncompetition Agreement by and between VCA Cenvet, Inc., and
Steven Gilbertson (7)

10.26 Letter Agreement entered into by and between VCA Cenvet, Inc.,
and Robert Wilkins (7)

10.27 Letter Agreement entered into by and between VCA Cenvet, Inc.,
and Steven Gilbertson (7)

10.28 Stock Purchase Agreement, dated as of January 11, 1995, by and
between Star-Kist Foods, Inc. and Veterinary Centers of
America, Inc. (8)

<PAGE>

10.29 Registration Rights Agreement, dated as of January 11, 1995,
and between Star-Kist Foods, Inc. and Veterinary Centers of
America, Inc. (8)

10.30 Shareholders Agreement, dated as of January 11, 1995, by and
between Star-Kist Food, Inc., Robert L. Antin and Arthur J.
Antin (8)

10.31 First Amendment to Partnership Agreement, dated as of January
11, 1995 by and between HPP Specialty Pet Products Inc. and
VCA Specialty Pet Products, Inc. (8)

10.32 Operating Agreement for Vet Research Laboratories, L.L.C.
dated as of March 20, 1995 between Veterinary Centers of
America, Inc., VCA Cenvet, Inc., and Vet Research, Inc., a
Delaware corporation and its stockholders, Robert H. Schneider
and Bruce Schneider (9)

10.33 VRI Option Agreement entered into as of March 20, 1995 by and
between VCA Cenvet, Inc. and Vet Research Inc. (9)

10.34 VCA Option Agreement entered into as of March 20, 1995 by and
between Veterinary Center of America, Inc., VCA Cenvet, Inc.
and Vet Research Inc. (9)

10.35 Warrant Agreement entered into as of March 20, 1995 by and
between Veterinary Centers of America, Inc. and Robert H.
Schneider (9)

10.36 Warrant Agreement entered into as of March 20, 1995 by and
between Veterinary Centers of America, and Bruce T. Schneider
(9)

10.37 Asset Purchase Agreement, dated February 8, 1996, by and among
VCA Professional Animal Laboratory, Inc., Veterinary Centers
of America, Inc., Southwest Veterinary Diagnostics, Inc., and
is stockholders, Robert Bartsch and Merge Westhoff (10)

10.38 Lease Agreement dated June 7, 1996 between Barclay-Curci
Investment Company and Veterinary Centers of America, Inc. (1)

10.39 Letter Agreement dated September 9, 1996 between VCA Specialty
Pet Products, Inc., Veterinary Centers of America, Inc., HPP
Specialty Pet Products, Inc. and Heinz Pet Products. (12)

10.40 Restructuring Agreement between HPP Specialty Products, Inc.,
Heinz Pet Products, VCA Specialty Products, Inc. and
Veterinary Centers of America, Inc. (12)

<PAGE>

10.41 VCA 1996 Stock Incentive Plan (1)

10.42 VCA 1996 Employee Stock Purchase Plan (1)

21.1 Subsidiaries of Registrant

23.1 Consent of Arthur Andersen LLP

27.1 Financial Data Schedule

<PAGE>

(1) Incorporated by reference from Registrant's Registration Statement
on Form S-4, File No. 333-6667.

(2) Incorporated by reference from Registrant's Report on Form 10-KSB,
for the year ended December 31, 1992.

(3) Incorporated by reference from Registrant's Registration Statement
on Form S-1, File No. 33-40095.

(4) Incorporated by reference from Registrant's Registration Statement
on Form S-1, File No. 33-42504.

(5) Incorporated by reference from Registrant's Report on Form 8-K
filed on March 22, 1994.

(6) Incorporated by reference from Registrant's Report on Form 10-KSB,
for the year ended December 31, 1993.

(7) Incorporated by reference from Registrant's Report on Form 8-K,
filed on January 14, 1995.

(8) Incorporated by reference from Registrant's Report on Form 10-KSB,
for the year ended December 31, 1994.

(9) Incorporated by reference from Registrant's Report on Form 8-K,
filed on April 4, 1995.

(10) Incorporated by reference from Registrant's Report on Form 8-K,
filed on March 15, 1996.

(11) Incorporated by reference from Registrant's Report on 10-K, for the
year ended December 31, 1995.

(12) Incorporated by reference from Registrant's Report on 10-K for the
year ended December 31, 1997.

(13) Incorporated by reference from Registrant's Report on 8-K, filed on
January 5, 1998.

<PAGE>

<TABLE>
<S> <C> <C>
LEGAL NAME JURISDICTION DOING BUSINESS AS

West Los Angeles Veterinary Medical Group, Inc. California
VCA Clinical Veterinary Labs, Inc. California
Lakewood Animal Hospital, Inc. California VCA Lakewood Animal Hospital
Robertson Blvd. Animal Hospital, Inc. California VCA Robertson Blvd. Animal Hospital
VCA Bay Area Animal Hospital, Inc. California
Northern Animal Hospital Inc. Arizona VCA Northern Animal Hospital
VCA of San Jose, Inc California VCA Crocker Animal Hospital
VCA Real Property Acquisition Corporation California
VCA of Colorado - Anderson, Inc. California VCA Anderson Animal Hospital
Anderson Animal Hospital, Inc Colorado
VCA - Animal Hospital West, Inc. California
Westwood Dog and Cat Hospital, Inc. California VCA Animal Hospital West
VCA of Teresita, Inc. California VCA Teresita Animal Hospital
VCA of Asher, Inc. California VCA Asher Animal Hospital
Asher Veterinary Clinic, Inc. California
Wingate, Inc. Colorado VCA Wingate Animal Hospital
VCA-Mission, Inc. California VCA Mission Animal Hospital
VCA Albuquerque, Inc. California VCA Veterinary Care Animal Hospital
VCA Wyoming Animal Hospital, Inc. California
Berwyn Veterinary Associates, Inc. Illinois VCA Berwyn Animal Hospital
VCA Specialty Pet Products, Inc. California
VCA Rossmoor, Inc. California
Rossmoor-El Dorado Animal Hospital, Inc. California VCA-Rossmoor El Dorado Animal Hospital
VCA Albany Animal Hospital, Inc. California VCA Albany Animal Hospital
Albany Veterinary Clinic, Inc. California
VCA Howell Branch Animal Hospital Inc. California
VCA Cacoosing Animal Hospital, Inc. California
Cacoosing Animal Hospital, Ltd. Pennsylvania
Cacoosing Pet Care & Nutrition Center, Inc. Pennsylvania
Vet Research Laboratories, LLC Delaware
VCA Anderson of California, Inc. California
South County Veterinary Clinic, Inc. California
South County Animal Hospital, LLC California
VCA Clinipath Labs, inc. California
VCA Eagle River Animal Hospital, Inc. California
Eagle River Veterinary Hospital, Inc. Alaska
VCA Miller Animal Hospital, Inc. California
Miller Animal Hospital, Inc. California
VCA Marina Animal Hospital, Inc. California

<PAGE>

Veterinary Hospitals, Inc. California Marina Veterinary Clinic
VCA All Pet Animal Complex, Inc. California
VCA Castle Shannon Animal Hospital, Inc. California
VCA APAC Animal Hospital, Inc. California
VCA Northwest Diagnostic Labs, Inc. California
VCA Information Systems, Inc. California
VCA East Anchorage Animal Hospital, Inc. California
Fox Chapel Animal Hospital, Inc. Pennsylvania
VCA Animal Hospital East, Inc. California Burbank Animal Hospital
MS Animal Hospitals, Inc. California
VCA Professional Animal Laboratory, Inc. California Antech Diagnostics
VCA Detwiler Animal Hospital, Inc. California
Detwiler Veterinary Clinic, Inc. Pennsylvania
VCA Lakeside Animal Hospital, Inc. California
VCA Cenvet, Inc. California
VCA Golden Cove Animal Hospital, Inc. California
Berla, Inc. California VCA Golden Cove Animal Hospital
Animal Avian Clinic, Etc.
Animal Clinic of Golden Cove
VCA Tampa Animal Hospital, Inc. California
Tampa Animal Medical Center, Inc. Florida VCA Tampa Animal Hospital
VCA Silver Spur Animal Hospital, Inc. California
Silver Spur Animal Hospital, Inc. California
VCA Lewis Animal Hospital, Inc. California
Lewelling Veterinary Hospital, Inc. California
VCA South Shore Animal Hospital, Inc. California
VCA Alpine Animal Hospital, Inc. California
VCA Greater Savannah Animal Hospital, Inc. California
VCA Kaneohe Animal Hospital, Inc. California
VCA Lammers Animal Hospital, Inc. California
Lammers Veterinary Hospital, Inc. California
VCA Referral Associates Animal Hospital, Inc. California
VCA Clarmar Animal Hospital, Inc. California
Clarmar Animal Hospital, Inc. California
VCA St. Petersburg Animal Hospital, Inc. California
St. Petersburg Animal Hospital, LLC California
VCA Northboro Animal Hospital, Inc. California
VCA Animal Hospitals, Inc. California VCA Parkwood Animal Hospital
Agoura Meadows Veterinary Clinic
VCA Santa Anita Animal Hospital
VCA Bering Sea Animal Hospital
VCA Rock Creek Animal Hospital
VCA Rohrig Animal Hospital
Pets' Rx, Inc. Delaware
Pets' Rx Nevada, Inc. Nevada
William C. Fouts, Ltd. Nevada Decatur Animal Clinic
H.B. Animal Clinics, Inc. California Blossom Veterinary Clinic

<PAGE>

Princeton Animal Hospital California Almaden Valley Veterinary Hospital
Spring Mountain Animal Hospital, L.L.C. Nevada
Old Town Veterinary Hospital, Inc. Virginia
VCA North Rockville Animal Hospital, Inc. California
North Rockville Veterinary Hospital, Inc. Maryland
VCA Lamb & Steward Animal Hospital, Inc.
VCA Squire Animal Hospital, Inc. California
VCA Texas Management, Inc. California
VCA Centers-Texas, Inc. Texas
Veterinary Centers of Texas, L.P. Texas
VCA Animal Hospitals - Texas, L.P. Texas
VCA Coast Animal Hospital, LLC California
Golden Merger Corporation Delaware La Grange Park Animal Hospital
Eagle Park Animal Clinic, Inc. Indiana
Newark Animal Hospital, Inc. Delaware
Academy Animal, Inc. Maryland
Edgebrook, Inc. New Jersey
Riviera Animal Hospital, Inc. Florida
PPI of Pennsylvania, Inc. Delaware
Noyes Animal Hospital, Inc. Illinois
Professional Veterinary Services, Inc. Indiana Village Park Animal Center
Cross Point Animal Hospital
Indiana Spay - Neuter Health Clinic
Greenwood Spay Neuter Animal Hospital
The Pet Practice (Florida), Inc. Delaware
The Pet Practice (Illinois), Inc. Delaware
The Pet Practice of Michigan, Inc. Delaware
The Pet Practice (Massachusetts), Inc. Delaware
The Pet Practice (Massachusetts), Inc. Massachusetts

<PAGE>

</TABLE>

EXHIBIT-23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
of our reports included in this Form 10-K, into the Company's previously
filed Registration Statements on Form S-1 and Form S-3 File No. 33-42504,
on Form S-8 File No. 33-44622, File No. 33-56846, File No. 33-56848, File
No. 33-57768, File No. 33-57770, File No. 33-57772, File No. 33-67588 and
File No. 333-19017, on Form S-3 File No. 33-80212, File No. 333-97682, File
No. 333-00376, File No. 333-7677, File No. 333-8441 and File No. 333-18261
and on Form S-4 File No. 333-6667 and File No. 333-9119, on Form S-3 File
33-91678, on Form S-3 File 33-92582, on Form S-3 File 333-00324.

/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP

Los Angeles, California
March 26, 1998

<ARTICLE> 5

<LEGEND>
EXHIBIT 27.1
FINANCIAL DATA SCHEDULE

THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,882,000
<SECURITIES> 51,371,000
<RECEIVABLES> 8,964,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 95,401,000
<PP&E> 39,985,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 386,089,000
<CURRENT-LIABILITIES> 47,971,000
<BONDS> 0
0
0
<COMMON> 20,000
<OTHER-SE> 180,831,000
<TOTAL-LIABILITY-AND-EQUITY> 386,089,000
<SALES> 0
<TOTAL-REVENUES> 239,389,000
<CGS> 0
<TOTAL-COSTS> 182,106,000
<OTHER-EXPENSES> 11,199,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,593,000
<INCOME-PRETAX> 20,573,000
<INCOME-TAX> 9,347,000
<INCOME-CONTINUING> 11,226,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,226,000
<EPS-PRIMARY> .57
<EPS-DILUTED> .53

</TABLE>