<PAGE>
 
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                    U.S. SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                  FORM 10-KSB
 
                  [X] ANNUAL REPORT UNDER SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                     FOR THE YEAR ENDED DECEMBER 31, 1998
 
                                      OR
 
                [_] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
                    OF THE SECURITIES EXCHANGE ACT OF 1934
                        COMMISSION FILE NUMBER 0-11303
 
                            SYNBIOTICS CORPORATION
                (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
 
<TABLE>
<S>                                            <C>
                 CALIFORNIA                                      95-3737816
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
       INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
</TABLE>
 
<TABLE>
<S>                                            <C>
             11011 VIA FRONTERA
            SAN DIEGO, CALIFORNIA                                  92127
  (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                       (ZIP CODE)
</TABLE>
 
        ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE: (619) 451-3771
 
      SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT: NONE
 
        SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
                                 COMMON STOCK
 
  Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [_]
 
  Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [X]
 
  The issuer's revenues for the year ending December 31, 1998 were
$31,379,000.
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant as of December 14, 1998 was approximately $11,284,000 based on the
closing sale price as reported by the Nasdaq National Market.
 
  As of March 19, 1999, 8,898,941 shares of Common Stock were outstanding.
 
  Transitional Small Business Disclosure Format (check one): Yes [_]  No [X]
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
  Synbiotics Corporation (the "Company") is a leading provider of rapid
diagnostic and laboratory diagnostic products for the animal health care
industry. The Company also markets a line of animal vaccine products.
Synbiotics was founded in 1982 to research and develop monoclonal antibody-
based diagnostic and therapeutic products. In the early years, the Company,
like most biotechnology firms, was focused on developing therapeutics for
human diseases. The high cost of human drug development, coupled with the
lengthy FDA approval process, motivated Synbiotics to begin commercializing
its technology through the less restrictive animal health care market.
Synbiotics is one of a small number of companies that focuses exclusively on
animal health and is the second largest provider of diagnostic products to the
animal health market.
 
  On March 6, 1998, the Company acquired by merger Prisma Acquisition Corp.
("Prisma"), a privately-held company located in Rome, NY, which develops,
manufactures and markets instruments and reagents used by veterinarians to
measure blood chemistry information at the point-of-care.
 
  On July 9, 1997, the Company acquired Synbiotics Europe SAS ("SBIO-E")
(formerly Rhone Merieux Diagnostics, S.A.S.), the worldwide veterinary
diagnostic business of Rhone Merieux S.A.S.
 
  On October 25, 1996 the Company acquired substantially all of the assets of
International Canine Genetics, Inc. ("ICG"). The operations acquired from ICG
consist of the manufacturing and marketing of canine reproduction diagnostic
products and services, PennHIP(R) (a diagnostic test for canine hip dysplasia)
and nutritional supplements sold to breeders and owners of purebred dogs and
their veterinarians.
 
  Synbiotics is combining its ability to generate products through research
and development, acquisitions, and licensing agreements with its ability to
distribute products through established global channels. The Company's product
portfolio consists of sixty-two diagnostic test kits and detection devices,
one veterinary immunotherapeutic product, and seven vaccines. Many of its
products hold strong positions in their specific markets.
 
BUSINESS STRATEGY
 
  The Company's strategy is to grow from its established position in the
market through new products and technologies, expanded distribution, enhanced
marketing and acquisitions and licensing.
 
MARKET AND PRODUCT OVERVIEW
 
  The Company sells its products both in the United States and in foreign
countries. The total number of family owned dogs and cats is estimated to
exceed 120 million in the United States alone. The Company believes that its
current and intended future products will offer veterinarians an opportunity
to improve the quality and expand the scope of veterinary health care
services.
 
  Synbiotics' most commercially successful products are its canine heartworm
diagnostics (representing 33% of 1998 sales). The Company estimates that it
has a 30% share of the estimated $35 million U.S. heartworm diagnostics
market. Sales of these products have historically been strongest during the
first half of the year when distributors purchase merchandise to sell to
veterinarians for the heartworm season.
 
MARKETING
 
  Synbiotics sells its products in the United States, Canada, Europe, Asia
and, to a limited extent, Latin America. In the United States, the Company
markets its line both directly and through independent distributors
 
                                       1
<PAGE>
 
which, taken together, have approximately 90 outlets, 600 field sales
representatives, and 200 telemarketing representatives covering the 25,000
veterinary clinics throughout the country. In addition, Synbiotics sells
vaccine products to distributors, on a private label basis, for resale to the
over-the-counter market and through catalogs. Sales to laboratories and other
centralized facilities (approximately 50 in the U.S.) are handled directly.
Outside the United States, Synbiotics sells its small animal products through
distributors and on an OEM basis, and its large animal products directly to
laboratories. The Company maintains a small marketing and sales force, which
sells products directly to veterinarians, services the sales network by
training distributor representatives, responding to technical inquiries,
advertising and promoting products through direct mail, telemarketing, and
journal advertisements, and providing other marketing support functions. This
strategy results in a large percentage of sales being to only a few customers.
Sales to two distributors totalled 33% and 40% of the Company's net sales
during 1998 and 1997, respectively.
 
MANUFACTURING
 
  Synbiotics manufactures most of its products at its facilities located in
San Diego, California, Rome, New York and Lyons, France. However, Synbiotics
relies on outside manufacturers for its ICT Gold(TM), VetRED(R) and WITNESS(R)
diagnostic tests and for all of its vaccine products. The ICT Gold(TM),
VetRED(R) and WITNESS(R) products and feline leukemia virus vaccine are
licensed to Synbiotics by their respective outside manufacturers.
 
PATENTS AND TRADE SECRETS
 
  The Company believes that its proprietary technology is an important
competitive factor in its business, and that protection of its intellectual
property rights is a high priority. The basic hybridoma (the cell that
produces the monoclonal antibody) technology is in the public domain and is
therefore not patentable. However, numerous improvements, variations and
applications of hybridoma technology which may prove to be patentable.
Considering the difficulty of enforcing any patent rights to such
improvements, and the rapid advancements in the field, the Company generally
has sought and will continue to seek to protect its interests by treating its
particular variations in the production of monoclonal antibodies as trade
secrets. The Company also has pursued and intends to continue aggressively to
pursue protection for new products, new methodological concepts, and
compositions of matter through the use of patents where obtainable. We
currently are in litigation to enforce our important canine heartworm patent
against a competitor. At present, the Company has been granted eleven U.S.
patents and has three U.S. patents pending.
 
GOVERNMENT REGULATION
 
  Most diagnostic test kits and vaccines for animal health applications
marketed in the U.S. require approval by the United States Department of
Agriculture ("USDA"). Animal vaccines also require governmental approval in
foreign countries, but Germany and Japan are the only foreign countries in
which the Company markets its diagnostic products that require governmental
approval. The Company's instrumentation products are not subject to USDA
regulation. Synbiotics' semen freezing products and ovulation timing
diagnostic products for dogs fall within the definition of devices as that
term is defined in the Federal Food, Drug, and Cosmetic Act and, therefore,
may be subject to regulation by the FDA. The Company is also subject to
additional regulation in connection with its pet food products.
 
  The Company's manufacturing facility in San Diego is licensed by the USDA
and adheres to Good Manufacturing Practices ("GMP") standards. The
instrumentation manufacturing facility located in Rome, New York is not
licensed by the USDA as the manufactured products are not subject to USDA
regulation. The Company's SBIO-E manufacturing facility is not licensed by any
foreign regulatory agency (as there is no licensing requirement) nor by the
USDA (as the products manufactured at the facility are not currently sold in
the United States). Should the Company wish to sell in the U.S. the products
manufactured by SBIO-E, the facility will have to obtain a license from the
USDA. The manufacturing facilities of important suppliers to the Company are
subject to licensing and regulatory approval in both the United States and
Europe.
 
 
                                       2
<PAGE>
 
  In addition to the foregoing, the Company's operations may be subject to
future legislation and/or rules issued by domestic or foreign governmental
agencies with regulatory authority relating to the Company's business. The
Company has no reason to believe that any such future legislation and/or rules
would be materially adverse to its business.
 
COMPETITION
 
  The Company believes that it is the second-leading competitor in the animal
health diagnostic market. Most of the Company's competitors are either small
divisions of larger human health and chemical companies or smaller companies
that sell veterinary products while trying to diversify into the higher
profile, and more regulated, human health field. The principal competitor in
the industry is IDEXX Laboratories, Inc., a publicly traded company with
annual revenues of $320,000,000 that develops, manufactures, and distributes
detection and diagnostic products for animal health, food, and environmental
testing applications.
 
  Competition in the animal health care industry is intense, and is
particularly intense in vaccines. Many competitors, such as Pfizer Animal
Health, Merial Animal Health, Schering-Plough, and IDEXX Laboratories, have
substantially greater financial, manufacturing, marketing and product research
resources than the Company. Large companies in particular have extensive
expertise in conducting pre-clinical and clinical testing of new products and
in obtaining the necessary regulatory approvals to market products.
Competition in animal diagnostics is based on test sensitivity, accuracy and
speed; product price; and similar factors. IDEXX Laboratories requires its
distributors not to carry the products of competitors such as the Company.
 
RESEARCH AND DEVELOPMENT
 
  The Company spent approximately $2,386,000 and $1,692,000 on research and
development activities during the years ended December 31, 1998 and 1997,
respectively. These figures include both internal research and development and
expenditures under contracts for research and development activities with
outside parties relating to certain veterinary diagnostic products which
utilize licensed technology.
 
EMPLOYEES
 
  As of December 31, 1998, the Company had a total of 135 employees worldwide,
133 of whom were full-time.
 
RAW MATERIALS
 
  The manufacturing of diagnostics, diagnostic instruments, therapeutics and
vaccines requires raw materials which generally are, and have been, readily
available from several sources. All of the Company's vaccine products
(exclusive of its feline leukemia and canine corona vaccine products) are
manufactured using bulk antigen fluids that have been supplied by a third
party. The supply agreement has expired and the Company has been unable to
locate a replacement supplier for these bulk antigen fluids. The Company has
decided to discontinue the sales of the affected products once its remaining
supplies have been exhausted, which the Company believes will be in the second
quarter of 1999. Sales of the affected products totalled $2,073,000,
$1,596,000 and $1,225,000 during 1998, 1997 and 1996, respectively.
 
                                       3
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company leases two buildings in San Diego, California. The buildings
contain approximately 49,000 square feet of space, and house the Company's
corporate and sales headquarters, executive offices, U.S. research and
development laboratories and manufacturing facilities. In addition, the
manufacturing and research and development facilities related to the products
obtained in the acquisition of Prisma are housed in a 6,000 square foot
building located in Rome, New York. The Company also leases an approximately
25,000 square foot building in Lyons, France which houses SBIO-E's corporate
and sales headquarters, executive offices, research and development
laboratories and manufacturing facilities. The Company also leases a Malvern,
Pennsylvania facility for operating its PennHIP(R) business and a sales office
in Kansas City, Missouri.
 
  Management believes that these facilities are adequate for the Company's
current level of operations.
 
ITEM 3. LEGAL PROCEEDINGS
 
Synbiotics Corporation v. Heska Corporation--United States District Court for
the Southern District of California
 
  On November 12, 1998, the Company filed a lawsuit against Heska Corporation
("Heska") claiming that Heska infringes a patent owned by the Company, which
covers both the Company's and Heska's heartworm diagnostic products. On
January 14, 1999, Heska filed a counterclaim against the Company seeking a
declaratory judgment that the Company's patent is invalid and unenforceable.
The Company denies Heska's allegations that its patent is invalid and
unenforceable, and plans to vigorously defend its patent against the
allegations. In the event that Synbiotics were to lose its lawsuit against
Heska, management believes its only direct liability would be its out-of-
pocket legal expenses. Although Heska's counterclaim does not include a claim
for damages, if Synbiotics were to lose on Heska's counterclaim, the Company
could face additional competition for its canine heartworm diagnostic products
as other third parties would be able to manufacture products incorporating
Synbiotics' patented technology.
 
Arbitration of Contractual Dispute Between Synbiotics Corporation and Bio-
Trends International, Inc.
 
  In November 1998, Bio-Trends International, Inc. ("Bio-Trends"), Synbiotics'
supplier of feline leukemia virus ("FeLV") vaccine, declared Synbiotics'
previously exclusive domestic rights to the vaccine to be non-exclusive, based
on an alleged insufficiency of marketing expenditures by Synbiotics.
Synbiotics has filed an arbitration action against Bio-Trends, seeking a
declaration that its rights remain exclusive.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
                                       4
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  The Company's common stock is quoted in the Nasdaq National Market under the
symbol SBIO. Price ranges reported are the high and low trade price
information as reported by the Nasdaq National Market. No cash dividends have
ever been paid, and the Company does not anticipate paying cash dividends in
the foreseeable future. As of March 19, 1999, there were approximately 578
shareholders of record of the Company's common stock.
 
<TABLE>
<CAPTION>
      YEAR                  QUARTER                             HIGH                           LOW
      ----                  -------                             ----                           ---
      <S>                <C>                                    <C>                           <C>
      1997               First Quarter                          $5.38                         $3.00
                         Second Quarter                         $4.38                         $3.13
                         Third Quarter                          $4.63                         $3.13
                         Fourth Quarter                         $4.13                         $2.63
 
      1998               First Quarter                          $4.00                         $2.88
                         Second Quarter                         $3.88                         $2.75
                         Third Quarter                          $3.67                         $2.31
                         Fourth Quarter                         $2.88                         $2.00
</TABLE>
 
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
 
  The information contained in this Management's Discussion and Analysis or
Plan of Operation and elsewhere in this Annual Report on Form 10-KSB contains
both historical financial information and forward-looking statements.
Synbiotics does not provide forecasts of future financial performance. While
management is optimistic about the Company's long-term prospects, the
historical financial information may not be indicative of future financial
performance. In fact, future financial performance may be materially different
than the historical financial information presented herein. Moreover, the
forward-looking statements about future business or future results of
operations are subject to significant uncertainties and risks, which could
cause actual future results to differ materially from what is suggested by the
forward-looking information. The following risk factors should be considered
in evaluating the Company's forward-looking statements:
 
No Assurance that Acquired Businesses Can Be Successfully Combined
 
  There can be no assurance that the anticipated benefits of the 1998
acquisition of Prisma, the 1997 acquisition of the veterinary diagnostics
business of SBIO-E, the 1996 acquisition of the business of ICG, or any other
future acquisitions (collectively, the "Acquired Business") will be realized.
Acquisitions of businesses involve numerous risks, including difficulties in
the assimilation of the operations, technologies and products of the Acquired
Business, introduction of different distribution channels, potentially
dilutive issuances of equity and/or increases in leverage and risk resulting
from issuances of debt securities, the need to establish internally operating
functions which had been previously provided pre-acquisition by a corporate
parent, accounting charges, operating companies in different geographic
locations with different cultures, the potential loss of key employees of the
Acquired Business, the diversion of management's attention from other business
concerns and the risks of entering markets in which Synbiotics has no or
limited direct prior experience. In addition, there can be no assurance that
the acquisitions will not have a material adverse effect upon Synbiotics'
business, results of operations or financial condition, particularly in the
quarters immediately following the consummation of the acquisition due to
operational disruptions, unexpected expenses and accounting charges which may
be associated with the integration of the Acquired Business and Synbiotics, as
well as operating and development expenses inherent in the Acquired Business
itself as opposed to integration of the Acquired Business.
 
                                       5
<PAGE>
 
Competition
 
  Competition in the animal health care industry is intense, and is
particularly intense in vaccines. Many competitors, such as Pfizer Animal
Health, Merial Animal Health (the successor to Rhone Merieux), Schering-Plough
and IDEXX Laboratories, have substantially greater financial, manufacturing,
marketing and product research resources than the Company. Large companies in
particular have extensive expertise in conducting pre-clinical and clinical
testing of new products and in obtaining the necessary regulatory approvals to
market products. Competition is based on test sensitivity, accuracy and speed;
product price; and similar factors. IDEXX Laboratories requires its
distributors not to carry the products of competitors such as Synbiotics.
There can be no assurance that such competition will not adversely affect
Synbiotics' results of operations or ability to maintain or increase sales and
market share.
 
History of Operating Losses; Accumulated Deficit
 
  Although the Company's operations were profitable for the years ended
December 31, 1997 and 1996, the Company has had a history of losses. Due to
the settlement with the Barnes-Jewish Hospital of St. Louis (the "Hospital"),
the Company incurred a loss of $1,911,000 for 1998. Synbiotics has incurred a
consolidated accumulated deficit of $11,776,000 at December 31, 1998, even
after the release in 1996 of a $7,158,000 valuation allowance related to
deferred tax assets.
 
Reliance on Third Party Manufacturers
 
  Certain of Synbiotics' products (including its ICT Gold(TM), VetRED(R) and
WITNESS(R) diagnostic kits and all of its vaccines) are, and certain
anticipated new products are expected to be, manufactured by third parties
under the terms of distribution and/or manufacturing agreements. The ICT
Gold(TM), VetRED(R) and WITNESS(R) products and feline leukemia virus vaccine
are licensed to Synbiotics by their respective outside manufacturers. In the
event that these third parties are unable (due to operational, licensing,
financial or other reasons) to supply Synbiotics with sufficient finished
products capable of being sold in Synbiotics' markets, Synbiotics would suffer
significant disruption of its business. Synbiotics has the right, under
certain circumstances, pursuant to the agreements to use alternate
manufacturing sources. In some circumstances, however, the Company would lack
such a right.
 
  In November 1998, Bio-Trends International, Inc. ("Bio-Trends"), Synbiotics'
supplier of feline leukemia virus ("FeLV") vaccine, declared Synbiotics'
previously exclusive domestic rights to the vaccine to be non-exclusive, based
on an alleged insufficiency of marketing expenditures by Synbiotics.
Synbiotics has filed an arbitration action against Bio-Trends, seeking a
declaration that its rights remain exclusive. In addition, in February 1999,
Binax, Inc. ("Binax"), the licensor and manufacturer of the ICT Gold(TM)
products, purported to invoke a contract clause, based on number of products
marketed, which could result in Synbiotics losing the right to sell the
products. Synbiotics has denied that Binax is entitled to invoke the clause.
In the event that Synbiotics were to lose its right to sell these products,
management believes that the Company would be able to replace most of the lost
sales with sales of its other canine heartworm diagnostic and FeLV diagnostic
products.
 
  In addition, Synbiotics' sales of FeLV vaccine to Merial Animal Health and
other distributors for resale in Europe will be at risk in 1999 unless Bio-
Trends obtains European Union regulatory approvals for the product and its
manufacturing facilities. Loss of these sales would have a material adverse
effect on Synbiotics' profitability.
 
  If Synbiotics should encounter delays or difficulties in its relationships
with manufacturers, the resulting problems could have a material adverse
effect on Synbiotics. In fact, all of the Company's vaccine products
(exclusive of its FeLV and canine corona virus vaccine products) are
manufactured using bulk antigen fluids that have been supplied by a third
party. The supply agreement has expired and the Company has been unable to
locate a replacement supplier for these bulk antigen fluids. The Company has
decided to discontinue the sales of the affected products once its remaining
supplies have been exhausted, which the Company believes will be during the
second quarter of 1999. Sales of the affected products totalled $2,073,000,
$1,596,000 and $1,225,000 during 1998, 1997 and 1996, respectively.
 
                                       6
<PAGE>
 
Sales and Marketing
 
  The Company's product distribution strategy results in a large percentage of
sales being to only a few customers. During the year ended December 31, 1998,
sales to two distributors totalled 33% of the Company's net sales. In
addition, SBIO-E's small animal products are presently sold through
distributors, while its large animal products are sold directly to
laboratories. (Small animals mean pet dogs and cats; large animals mean farm
animals.) There can be no assurance that Synbiotics will be able to establish
an adequate sales and marketing capability in any or all targeted markets or
that it will be successful in gaining market acceptance of its products. To
the extent Synbiotics enters into distributor arrangements, any revenues
received by Synbiotics will be dependent on the efforts of third parties and
there can be no assurance that such efforts will be successful. IDEXX
Laboratories' requirement that its distributors not carry the products of
competitors such as Synbiotics has induced certain distributors to stop doing
business with Synbiotics in order to carry IDEXX products instead. In
addition, Synbiotics' sales of products, on a private-label basis, toward the
over-the-counter market may cause an adverse reaction among Synbiotics'
regular distributor and veterinarian customers.
 
Attraction of Key Employees
 
  The success of Synbiotics depends, in part, on its ability to retain highly
qualified personnel, including senior management and scientific personnel.
Competition for such personnel is intense and the inability to retain
additional key employees or the loss of one or more current key employees
could adversely affect Synbiotics. Although Synbiotics has been successful in
retaining required personnel to date, there can be no assurance that
Synbiotics will be successful in the future.
 
Reliance on New and Recent Products
 
  Synbiotics relies to a significant extent on new and recently developed
products, and expects that it will need to continue to introduce new products
to be successful in the future. There can be no assurance that Synbiotics will
obtain and maintain market acceptance of its products. With respect to future
products, there can be no assurance that such products will meet applicable
regulatory standards, be capable of being produced in commercial quantities at
acceptable cost or be successfully commercialized.
 
  There can be no assurance that new products can be manufactured at a cost or
in quantities necessary to make them commercially viable. If Synbiotics were
unable to produce internally, or to contract for, a sufficient supply of its
new products on acceptable terms, or if it should encounter delays or
difficulties in its relationships with manufacturers, the introduction of new
products would be delayed, which could have a material adverse effect on
Synbiotics.
 
Future Capital Needs; Uncertainty of Additional Funding
 
  The development and commercialization of Synbiotics' products require
substantial funds. Synbiotics' future capital requirements will depend on many
factors, including cash flow from operations, the need to finance further
acquisitions, if any, continued scientific progress in its products and
development programs, the cost of manufacturing scale-up, the costs involved
in preparing, filing, prosecuting, maintaining and enforcing patent claims,
the cost involved in patent infringement litigation, competing technological
and market developments, and the cost of establishing effective sales and
marketing arrangements. Synbiotics anticipates that its existing, available
cash, cash equivalents and short-term investments will be adequate to satisfy
its current capital requirements and fund its current operations, although any
large acquisition would require additional capital resources. There can be no
assurance that additional financing, if required, will be available on
acceptable terms or at all. If additional funds are raised by issuing equity
securities, further dilution to then existing shareholders may result. Debt
financing would result in increased leverage and risk.
 
  In July 1997, the Company obtained $15,000,000 of debt financing from Banque
Paribas, of which $11,493,000 was used in connection with the acquisition of
SBIO-E. The $15,000,000 included a $5,000,000 revolving line of credit.
However, draws on the line of credit are subject to certain requirements and
can be used only for certain purposes. Additionally, Banque Paribas requires
the Company to maintain certain financial ratios
 
                                       7
<PAGE>
 
and levels of tangible net worth and also restricts the Company's ability to
pay dividends and make loans, capital expenditures or investments without the
Bank's consent. Through December 31, 1998, the Company had repaid $1,500,000
of principal on the loans and had an outstanding principal balance on the
loans of $8,500,000 as of December 31, 1998.
 
Seasonality
 
  The Company's operations have become seasonal due to the success of its
canine heartworm diagnostic products. Sales and profits tend to be
concentrated in the first half of the year, as distributors prepare for the
heartworm season by purchasing diagnostic products for resale to
veterinarians. This seasonality was somewhat reduced by the newly acquired
European operations and later by the Prisma instrumentation business, which
are relatively less seasonal.
 
Patents and Proprietary Technology
 
  Synbiotics generally has sought and will continue to seek to protect its
interests by treating its particular variations in the production of
monoclonal antibodies as trade secrets. Synbiotics also has pursued and
intends to continue aggressively to pursue protection for new products, new
methodological concepts, and compositions of matter through the use of patents
where obtainable. At present, Synbiotics has been granted eleven U.S. patents
and has three U.S. patents pending..
 
  There can be no assurance that Synbiotics will be issued any additional
patents or that, if any patents are issued, they will provide Synbiotics with
significant protection or will not be challenged. Even if such patents are
enforceable, Synbiotics anticipates that any attempt to enforce its patents
would be time consuming and costly. Synbiotics is currently suing Heska
Corporation for infringing Synbiotics' canine heartworm patent, and Heska has
countersued seeking to invalidate the patent. In the event that Synbiotics
were to lose its lawsuit against Heska, management believes its only direct
liability would be its out-of-pocket legal expenses. Although Heska's
counterclaim does not include a claim for damages, if Synbiotics were to lose
on Heska's counterclaim, the Company could face additional competition for its
canine heartworm diagnostic products as other third parties would be able to
manufacture products incorporating Synbiotics' patented technology. Moreover,
the laws of some foreign countries do not protect Synbiotics' proprietary
rights in its products to the same extent as do the laws of the United States.
 
  The patent positions of biotechnology companies, including Synbiotics, are
uncertain and involve complex legal and factual issues. Additionally, the
coverage claimed in a patent application can be significantly reduced before
the patent is issued. As a consequence, there can be no assurance that any of
Synbiotics' future patent applications will result in the issuance of patents
or, if any patents issue, that they will provide significant proprietary
protection or will not be circumvented or invalidated. Because patent
applications in the United States are maintained in secrecy until patents
issue and publication of discoveries in the scientific or patent literature
often lag behind actual discoveries, Synbiotics cannot be certain that it was
the first inventor of inventions covered by its pending patent applications or
that it was the first to file patent applications for such inventions.
Moreover, Synbiotics may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine priority of
invention that could result in substantial cost to Synbiotics, even if the
eventual outcome is favorable to Synbiotics. There can be no assurance that
Synbiotics' patents would be held valid by a court of competent jurisdiction.
An adverse outcome of any patent litigation based on third parties' patents
could subject Synbiotics to significant liabilities to third parties, require
disputed rights to be licensed from or to third parties or require Synbiotics
to cease using the technology in dispute.
 
  In October 1997, the Hospital filed a lawsuit against the Company claiming
that the Company infringed a patent owned by the Hospital which covers the
Company's canine heartworm diagnostic products. On July 28, 1998, the Company
entered into a settlement agreement with the Hospital calling for the Company
to pay the Hospital or its affiliates $1,600,000 in cash, 333,000 shares of
the Company's common stock, and undisclosed future payments and royalties. The
Company recorded a one-time pre-tax charge of approximately $3,922,000
 
                                       8
<PAGE>
 
and reclassified $678,000 of legal expenses related to the patent litigation
from general and administrative expenses in the year ended December 31, 1998.
 
  There can be no assurance that other third parties will not assert other
infringement claims against Synbiotics in the future or that any such
assertions will not result in costly litigation or require Synbiotics to
obtain a license to intellectual property rights of such parties. There can be
no assurance that any such licenses would be available on terms acceptable to
Synbiotics, if at all. Furthermore, parties making such claims may be able to
obtain injunctive or other equitable relief that could effectively block
Synbiotics' ability to further develop, or commercialize, its products in the
United States and abroad. Such claims could also result in the award of
substantial damages. Finally, litigation, regardless of outcome, could result
in substantial cost to, and a diversion of efforts by, Synbiotics.
 
Government Regulation
 
  Synbiotics' business is subject to substantial regulation by the United
States government (see Item 1 - Business--Government Regulation). In addition,
Synbiotics' operations may be subject to future legislation and/or rules
issued by domestic or foreign governmental agencies with regulatory authority
relating to Synbiotics' business. There can be no assurance that Synbiotics
will be found in compliance with any of the various regulations to which it is
subject.
 
  For marketing outside the United States, Synbiotics and its suppliers are
subject to foreign regulatory requirements in such foreign jurisdictions,
which vary widely from country to country. There can be no assurance that
Synbiotics and its suppliers will meet and sustain compliance with any such
requirements. In particular, Synbiotics' sales of feline leukemia virus
vaccine to Merial Animal Health and other distributors for resale in Europe
will be at risk in 1999 unless Bio-Trends, our supplier, obtains European
Union regulatory approvals for the product and for its manufacturing
facilities.
 
Product Liability and Insurance
 
  The design, development and manufacture of Synbiotics' products involve an
inherent risk of product liability claims and associated adverse publicity.
Synbiotics has obtained liability insurance for potential product liability
associated with the commercial sale of its products. There can be no
assurance, however, that Synbiotics will be able to obtain or maintain such
insurance. Although Synbiotics currently maintains general liability
insurance, there can be no assurance that the coverage limits of Synbiotics'
insurance policies will be adequate.
 
Hazardous Materials
 
  Synbiotics' manufacturing and research and development processes involve the
controlled use of hazardous materials, chemicals and various radioactive
compounds. Although Synbiotics believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by local state and federal regulations, the risk of accidental contamination
or injury from these materials cannot be completely eliminated. In the event
of such an accident, Synbiotics could be held liable for any damages that
result and any such liability could exceed the resources of Synbiotics.
Synbiotics may incur substantial costs to comply with environmental
regulations.
 
RESULTS OF OPERATIONS
 
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
 
  Net sales for the year ended December 31, 1998 increased by $8,093,000 or
35% over the year ended December 31, 1997. The increase in net sales is due to
$3,649,000 resulting from a full year of SBIO-E sales, an increase in the
overall sales of diagnostic products of $4,008,000 and an increase in vaccine
product sales of $437,000. The increase in the sales of diagnostic products is
due to an increase in canine heartworm diagnostics sales of 33% and an
increase in feline diagnostics sales of 33%. The increased canine heartworm
diagnostics sales were due to a full year of sales of VetRED(R), the
introduction of the Company's WITNESS(R) product in the U.S. and further
increases in DiroCHEK(R) and ICT Gold(TM). The increase in feline diagnostic
sales was due to the introduction of the Company's feline heartworm diagnostic
test and WITNESS(R) FeLV diagnostic test. The
 
                                       9
<PAGE>
 
increased vaccine sales comprises an increase of 39% in sales of vaccines to
private label partners and an increase of 19% in sales of bulk FeLV vaccine
(related to the timing of shipments as requested by Merial Animal Health, our
OEM customer), offset by a 38% decrease in sales of other vaccine products
resulting from the phase-out of sales of most Synbiotics-label vaccines.
 
  All of the Company's vaccine products (exclusive of its FeLV and canine
corona virus vaccine products) are manufactured using bulk antigen fluids that
have been supplied by a third party. The supply agreement has expired and the
Company has been unable to locate a replacement supplier for these bulk
antigen fluids. The Company has decided to discontinue the sales of the
affected products once its remaining supplies have been exhausted, which the
Company believes will be during the second quarter of 1999. Sales of the
affected products totalled $2,073,000, $1,596,000 and $1,225,000 during 1998,
1997 and 1996, respectively.
 
  The cost of sales as a percentage of net sales was 49% during the year ended
December 31, 1998 compared to 55% during the year ended December 31, 1997
(i.e., gross margin increased to 51% from 45%). The higher gross margin is a
direct result of two factors: i) the fact that a high percentage of SBIO-E's
sales relate to products manufactured by SBIO-E rather than by third party
manufacturers and ii) the Company's domestic sales (i.e., exclusive of the
SBIO-E sales) during the year ended December 31, 1998 had a 46% gross margin
as compared to 43% during the year ended December 31, 1997. The increased
margin on 1998 domestic sales is due primarily to increases in the Company's
average selling prices as a result of the non-recurrence of the severe canine
heartworm diagnostics price competition encountered during the first six
months of 1997, the non-recurrence of distributor promotional programs and a
general price increase in January 1998. These factors were offset by the
increased sales of bulk FeLV vaccine to Merial Animal Health's U.S. arm. Those
sales are at cost; instead, the Company received a royalty on the U.S. sales
of the Merial's FeLV vaccine products. The gross margin, exclusive of the no
margin bulk FeLV vaccine sales, would have been 54% and 48% for 1998 and 1997,
respectively. The Company's manufacturing costs are predominantly fixed costs.
Among the Company's major products, DiroCHEK(R) canine heartworm diagnostic
products are manufactured at Company facilities, whereas ICT GOLD(TM) HW,
VetRED(R), WITNESS(R) and all vaccines are manufactured by third parties. In
addition to affecting gross margins, outsourcing of manufacturing renders the
Company relatively more dependent on the third-party manufacturers. See the
"Reliance on Third Party Manufacturers" statement above.
 
  In March 1999, the Company amended its FeLV vaccine supply agreement with
Merial. Since 1992, Synbiotics has supplied FeLV vaccine to Merial in the
United States. This has included shipments to Merial at Synbiotics' cost,
while Merial has paid a royalty to Synbiotics on Merial's sales of Merial-
labeled FeLV vaccine. In exchange for $1,500,000 in cash (which the Company
will record as a one-time license fee in the first quarter of 1999), the
revised supply agreement broadens Merial U.S. distribution rights (which had
been an area of ongoing discussions) and eliminates the royalty. In addition,
the Company and Merial will work with Bio-Trends to have Bio-Trends supply
FeLV vaccine directly to Merial for U.S. distribution. The FeLV vaccine sales
to Merial totalled $2,029,000, $1,309,000 and $1,374,000 during 1998, 1997 and
1996, respectively. In the meantime, Synbiotics' will continue to resell Bio-
Trends-supplied FeLV vaccine to Merial at cost for the U.S. Synbiotics' sales
of its own VacSyn and other FeLV-labeled vaccine products, its sales to Merial
S,.A. in France, which are at a profit rather than at cost, and the
collaborative research relationship between Merial Limited and Synbiotics are
not affected by this amendment.
 
  Research and development expenses increased during the year ended December
31, 1998 by $694,000 or 41% over the year ended December 31, 1997. The
increase is primarily due to the acquisitions of SBIO-E and Prisma, which have
their own research and development groups, as well as increased contracted
research and development expenses. Research and development expenses as a
percentage of net sales were 8% and 7% during the year ended December 31, 1998
and 1997, respectively.
 
  Selling and marketing expenses increased during the year ended December 31,
1998 by $1,677,000 or 37% over the year ended December 31, 1997. The increase
is due primarily to the acquisition of SBIO-E, which has its own sales and
marketing group. Selling and marketing expenses as a percentage of net sales
were 20% and 19% during the year ended December 31, 1998 and 1997.
 
                                      10
<PAGE>
 
  General and administrative expenses increased during the year ended December
31, 1998 by $1,833,000 or 52% over the year ended December 31, 1997. The
increase is due primarily to amortization of goodwill and additional payroll
costs related to the acquisitions of SBIO-E and Prisma. General and
administrative expenses as a percentage of net sales were 17% and 15% during
the year ended December 31, 1998 and 1997, respectively.
 
  On July 28, 1998, the Company entered into a settlement agreement with the
Hospital resolving the Hospital's patent infringement lawsuit by calling for
the Company to pay the Hospital or its affiliates $1,600,000 in cash, 333,000
shares of the Company's common stock, and undisclosed future payments and
royalties. The Company settled the case to avoid future litigation expenses
and to eliminate the risk to its key canine heartworm diagnostic products. The
Company recorded a one-time pre-tax charge of approximately $3,922,000 and
reclassified $678,000 of legal expenses related to the patent litigation from
general and administrative expenses.
 
  The change in royalty income during 1998 was not significant. As a result of
the amended supply agreement with Merial (see above), the Company will no
longer receive royalties beginning in 1999. Royalty income totalled $317,000,
$332,000 and $410,000 during 1998, 1997 and 1996, respectively. Net interest
expense during 1998 decreased by $812,000 from 1997 due to a full year of
interest expense related to the debt incurred in conjunction with the
acquisition of SBIO-E.
 
  The Company recognized a benefit from income taxes of $1,422,000 during
1998, as compared to a provision for income taxes of $559,000 for 1997. The
benefit from income taxes in 1998 is a result of a deferred tax asset related
to the patent litigation settlement , offset by a decrease in deferred state
tax assets resulting from enacted tax rate changes, as well as foreign income
taxes related to the operations of SBIO-E.
 
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
  Net sales for the year ended December 31, 1997 increased by $6,069,000 or
35% over the year ended December 31, 1996. The increase in net sales was
primarily due to $3,724,000 in sales of diagnostic products acquired in
conjunction with the acquisition of SBIO-E in July 1997 and $1,117,000 in
sales of the canine breeding diagnostic products acquired from ICG in October
1996. In addition, the sales of non-SBIO-E and non-ICG diagnostic products
increased 13% during 1997. Sales of vaccine products in 1997 were flat
compared to 1996. However, sales of vaccines to private label partners in 1997
increased by 60% over 1996, offset by a 14% decrease in other vaccine sales
due to decreased sales of bulk FeLV (related to the timing of shipments as
requested by Merial). Sales of vaccines were also negatively impacted by
severe competition from Pfizer, Fort Dodge and Solvay who manufacture their
own vaccine products, whereas the Company's vaccines are all manufactured by
third parties. During the fourth quarter of 1997, the Company stopped selling
its vaccines (except for its FeLV vaccines) to distributors and focused its
efforts on selling vaccines to private label partners for resale to the over-
the-counter market and through catalogs.
 
  The cost of sales as a percentage of net sales decreased to 55% during 1997
compared to 56% for 1996 (i.e., gross margin increased to 45% from 44%). The
higher gross margin is a direct result of the fact that 81% of SBIO-E's sales
relate to products manufactured by SBIO-E rather than by third party
manufacturers. In comparison, the Company's sales, exclusive of the SBIO-E
sales, in 1997 had a 43% gross margin. The reduced margin on 1997 non-SBIO-E
sales is due to the fact that a larger percentage of net sales during 1997
were generated from products which are manufactured for the Company by third
parties. The Company's manufacturing costs are predominantly fixed costs.
Among the Company's major products, DiroCHEK(R) canine heartworm diagnostic
products are manufactured at Company facilities, whereas ICT GOLD(TM) HW,
VetRED(R), WITNESS(R) and all vaccines are manufactured by third parties. In
addition to affecting gross margins, this shift in product mix renders the
Company relatively more dependent on the third-party manufacturers. Vaccines
(other than FeLV vaccine) have particularly been a drain on profitability.
Gross margin during 1997 was also affected by a decrease in the average
selling prices for the Company's canine heartworm products during the first
six months of 1997 due to severe price competition from IDEXX Laboratories,
the Company's main diagnostic competitor, as well as a decrease in average
selling prices for certain potentially short-dated vaccines during the first
quarter of 1997.
 
                                      11
<PAGE>
 
  Research and development expenses during 1997 increased by $698,000 or 70%
over 1996. The increase is primarily due to the acquisition of SBIO-E, which
has its own research and development group, as well as increased contracted
research and development expenses and legal expenses related to patent
filings. Research and development expenses as a percentage of net sales were
7% and 6% during 1997 and 1996, respectively.
 
  Selling and marketing expenses during 1997 increased by $327,000 or 8% over
1996. The increase is due primarily to the acquisition of SBIO-E, which has
its own sales and marketing group. Selling and marketing expenses as a
percentage of net sales were 19% and 24% during 1997 and 1996, respectively.
 
  General and administrative expenses during 1997 increased by $1,484,000 or
72% over 1996. The increase is due primarily to amortization of goodwill and
additional payroll costs related to the acquisition of both SBIO-E and the
operations of ICG. General and administrative expenses as a percentage of net
sales were 15% and 12% during 1997 and 1996, respectively.
 
  Other income (expense) during 1997 decreased by $1,759,000 or 99% from 1996
due primarily to the non-recurrence of the $1,159,000 gain in 1996 from the
sale of the Company's investment in Texas Biotechnology Corporation ("TBC").
The remaining decrease is due to interest expense related to the debt incurred
in conjunction with the acquisition of SBIO-E and the non-recurrence of
license fees received in conjunction with an exclusive distribution agreement
with Daiichi Pharmaceutical Co., Ltd. for the distribution of the Company's
products in Japan. The interest expense was partially offset by an increase in
interest revenue due to an increased level of invested cash resulting from the
proceeds received from the sale of the TBC shares in 1996.
 
  The income tax provision for 1997 includes $97,000 in foreign income taxes
resulting from the SBIO-E operations. The combined Federal and state effective
tax rate was 73% during 1997 as compared to -325% during 1996. The income tax
provision during 1997, in addition to the foreign income taxes, comprises a
current income tax provision of $6,000 and a deferred income tax provision of
$456,000. The income tax provision during 1996 comprises a current income tax
provision of $64,000 and a deferred income tax benefit of $7,158,000. The
current provision for income taxes during 1997 and 1996 arose from alternative
minimum taxes due to the utilization of net operating loss carryforwards. The
increase in the deferred provision for income taxes is due to the fact that as
of December 31, 1995 the Company provided a deferred tax asset valuation
allowance for deferred tax assets which management determined were "more
likely than not" to be unrealizable based on recent trends in operating
results. At the end of 1996, the Company released the valuation allowance
related to its deferred tax assets based on management's assessment that it
was "more likely than not" that the Company would realize those assets in
future periods due to improvements in the Company's operating results. As a
result, $463,000 (representing the tax effect of the change in the carrying
amount of the deferred tax assets) was included in the 1997 statement of
operations because, unlike in 1996, there was no longer any valuation
allowance left to release it from. In addition, the 1997 deferred state tax
provision includes $294,000 related to the expiration of state net operating
loss carryforwards. The deferred tax provision reduces the Company's deferred
tax assets, but the amount of the deferred tax provision does not actually
have to be paid to the Government.
 
FINANCIAL CONDITION
 
  Management believes that the Company's present capital resources, which
included working capital of $9,228,000 at December 31, 1998, are sufficient to
meet its current working capital needs and service the debt related to the
acquisitions of SBIO-E and Prisma through 1999. However, pursuant to a debt
agreement with Banque Paribas, the Company is required to maintain certain
financial ratios and levels of tangible net worth and is also restricted in
its ability to pay dividends and make loans, capital expenditures or
investments without Banque Paribas' consent. As of December 31, 1998, the
Company had outstanding principle balances on its Banque Paribas debt of
$8,500,000, and may borrow up to $5,000,000 (subject to a borrowing base
calculation) on it revolving line of credit. In February 1999, the Company
repaid the $1,000,000 note issued in conjunction with the acquisition of
Prisma for $800,000, and will recognize in the first quarter of 1999 a
$200,000 extraordinary gain which will be recorded net of income tax.
 
                                      12
<PAGE>
 
  The Company's operations have become seasonal due to the success of its
canine heartworm diagnostic products. Sales and profits tend to be
concentrated in the first half of the year, as distributors prepare for the
heartworm season by purchasing diagnostic products for resale to
veterinarians. This seasonality has been somewhat reduced by the SBIO-E
operations, which are relatively less seasonal. Increased sales of the Prisma
instruments and supplies would also reduce seasonality.
 
IMPACT OF THE YEAR 2000 ISSUE
 
  The year 2000 issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. Any of the
Company's embedded microprocessors or computer programs that have date-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculation
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 determined that the financial and manufacturing systems used
in its U.S. operations are not year 2000 compliant. However, the software
manufacturer has provided the necessary software to make the systems year 2000
compliant, and the Company plans on implementing the software changes in the
second quarter of 1999. As the Company has an ongoing maintenance agreement
with the software vendor, which includes the year 2000 software changes, the
Company does not expect to have a material impact on its results of operations
related to implementing the software changes. However, the Company has also
determined that its current information system is inadequate to meet its
growth goals and objectives. The Company selected an enterprise resource
planning system, and began implementation of the new system in March 1999. The
total cost of the new system (including software, hardware and implementation)
is expected to be approximately $1,000,000, for which the Company is in the
process of obtaining lease financing.
 
  The computer systems of SBIO-E are not affected by the year 2000 issue as
new systems were implemented during 1999, and those systems are year 2000
compliant. The Company has also determined that its telephone systems and
equipment used in its manufacturing and research and development processes are
year 2000 compliant.
 
  The Company is currently in the process of determining the year 2000
compliance status of its major suppliers and customers. The Company has sent
letters requesting the status of the suppliers' and customers' year 2000
compliance, and has yet to receive any responses. In the event that these
suppliers and customers fail to become year 2000 compliant and suffer
disruptions in their own operations, there could be a material adverse impact
on the Company's results of operations and financial condition beginning in
2000. The greatest disruption would occur if third-party manufacturers of
Synbiotics' diagnostic products and vaccines were interrupted due to their
own, or their own suppliers', year 2000 problems.
 
                                      13
<PAGE>
 
ITEM 7. FINANCIAL STATEMENTS
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Report of Independent Accountants ........................................  15
 
Consolidated Balance Sheet as of December 31, 1998 and 1997...............  16
 
Consolidated Statement of Operations and Comprehensive Income for the
 years ended December 31, 1998, 1997 and 1996.............................  17
 
Consolidated Statement of Cash Flows for the years ended December 31,
 1998, 1997 and 1996......................................................  18
 
Consolidated Statement of Non-Mandatorily Redeemable Common Stock and
 Other Shareholders' Equity for the years ended December 31, 1998, 1997
 and 1996.................................................................  19
 
Notes to Consolidated Financial Statements................................  21
</TABLE>
 
                                       14
<PAGE>
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Shareholders
  of Synbiotics Corporation
 
  In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Synbiotics Corporation and its subsidiary at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
 
PRICEWATERHOUSECOOPERS LLP
 
San Diego, California
March 11, 1999
 
                                      15
<PAGE>
 
                             SYNBIOTICS CORPORATION
 
                           CONSOLIDATED BALANCE SHEET
 
<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                      ------------------------
                                                         1998         1997
                                                      -----------  -----------
<S>                                                   <C>          <C>
ASSETS
Current assets:
  Cash and equivalents............................... $ 4,357,000  $ 2,190,000
  Securities available for sale......................   1,613,000    3,394,000
  Accounts receivable (net of allowance for doubtful
   accounts of $109,000 and $196,000 at December 31,
   1998 and 1997)....................................   4,135,000    4,396,000
  Inventories........................................   5,179,000    5,187,000
  Deferred taxes.....................................     341,000      303,000
  Other current assets...............................     820,000      359,000
                                                      -----------  -----------
    Total current assets.............................  16,445,000   15,829,000
Property and equipment, net..........................   1,774,000    1,102,000
Goodwill.............................................  13,372,000   11,542,000
Deferred taxes.......................................   7,873,000    6,417,000
Deferred debt issuance costs.........................     653,000      905,000
Other assets.........................................   5,329,000    5,832,000
                                                      -----------  -----------
                                                      $45,446,000  $41,627,000
                                                      ===========  ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued expenses.............. $ 5,217,000  $ 3,546,000
  Note payable and current portion of long-term
   debt..............................................   2,000,000    1,000,000
  Income taxes payable...............................                   25,000
                                                      -----------  -----------
    Total current liabilities........................   7,217,000    4,571,000
                                                      -----------  -----------
Long-term debt.......................................   6,716,000    7,543,000
Other liabilities....................................   1,369,000
                                                      -----------  -----------
                                                        8,085,000    7,543,000
                                                      -----------  -----------
Mandatorily redeemable common stock..................   2,287,000    2,756,000
                                                      -----------  -----------
Commitments and contingencies (Note 11)
Non-mandatorily redeemable common stock and other
 shareholders' equity:
 Common stock, no par value, 24,800,000 shares
  authorized, 8,246,000 and 7,426,000 shares issued
  and outstanding at December 31, 1998 and 1997......  38,134,000   35,659,000
 Common stock warrants...............................   1,003,000    1,003,000
 Accumulated other comprehensive income..............     496,000     (151,000)
 Accumulated deficit................................. (11,776,000)  (9,754,000)
                                                      -----------  -----------
    Total non-mandatorily redeemable common stock and
     other shareholders' equity......................  27,857,000   26,757,000
                                                      -----------  -----------
                                                      $45,446,000  $41,627,000
                                                      ===========  ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       16
<PAGE>
 
                             SYNBIOTICS CORPORATION
 
         CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
 
<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                                        -------------------------------------
                                           1998         1997         1996
                                        -----------  -----------  -----------
<S>                                     <C>          <C>          <C>
Revenues:
  Net sales............................ $31,379,000  $23,286,000  $17,217,000
  Royalties............................     317,000      332,000      410,000
                                        -----------  -----------  -----------
                                         31,696,000   23,618,000   17,627,000
                                        -----------  -----------  -----------
Operating expenses:
  Cost of sales........................  15,352,000   12,791,000    9,572,000
  Research and development.............   2,386,000    1,692,000      994,000
  Selling and marketing................   6,187,000    4,510,000    4,183,000
  General and administrative...........   5,374,000    3,541,000    2,057,000
  Patent litigation settlement.........   4,600,000
                                        -----------  -----------  -----------
                                         33,899,000   22,534,000   16,806,000
                                        -----------  -----------  -----------
(Loss) income from operations..........  (2,203,000)   1,084,000      821,000
Other income (expense):
  Interest, net........................  (1,130,000)    (318,000)     204,000
  Gain on sale of securities available
   for sale............................                             1,159,000
                                        -----------  -----------  -----------
(Loss) income before income taxes......  (3,333,000)     766,000    2,184,000
(Benefit from) provision for income
 taxes.................................  (1,422,000)     559,000   (7,094,000)
                                        -----------  -----------  -----------
Net (loss) income......................  (1,911,000)     207,000    9,278,000
Cumulative translation adjustment......     647,000     (151,000)
Unrealized holding gain on securities
 available for sale....................                             1,035,000
                                        -----------  -----------  -----------
Comprehensive (loss) income............ $(1,264,000) $    56,000  $10,313,000
                                        ===========  ===========  ===========
Basic net (loss) income per share...... $      (.23) $       .02  $      1.49
                                        ===========  ===========  ===========
Diluted net (loss) income per share.... $      (.23) $       .02  $      1.46
                                        ===========  ===========  ===========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       17
<PAGE>
 
                             SYNBIOTICS CORPORATION
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                           ------------------------------------
                                              1998         1997         1996
                                           -----------  -----------  ----------
<S>                                        <C>          <C>          <C>
Cash flows from operating activities:
 Net (loss) income.......................  $(1,911,000) $   207,000  $9,278,000
 Adjustments to reconcile net (loss)
  income to net cash provided by (used
  for) operating activities:
   Depreciation and amortization.........    1,897,000    1,399,000     843,000
   Gain on sale of securities available
    for sale.............................                            (1,159,000)
   Changes in assets and liabilities:
    Accounts receivable..................      261,000   (1,989,000)    166,000
    Inventories..........................        8,000    2,216,000  (1,657,000)
    Deferred taxes.......................   (1,494,000)     438,000  (7,158,000)
    Other assets.........................      236,000      761,000    (764,000)
    Accounts payable and accrued
     expenses............................    1,062,000      395,000    (127,000)
    Income taxes payable.................      (25,000)      23,000
    Other liabilities....................    1,369,000     (650,000)    (47,000)
                                           -----------  -----------  ----------
Net cash provided by (used for) operating
 activities..............................    1,403,000    2,800,000    (625,000)
                                           -----------  -----------  ----------
Cash flows from investing activities:
 Acquisition of property and equipment...     (499,000)    (479,000)   (121,000)
 Proceeds from sale of securities
  available for sale.....................    1,781,000                4,727,000
 Investment in securities available for
  sale...................................                  (522,000) (2,872,000)
 Acquisition of Synbiotics Europe SAS....               (10,659,000)
                                           -----------  -----------  ----------
Net cash provided by (used for) investing
 activities..............................    1,282,000  (11,660,000)  1,734,000
                                           -----------  -----------  ----------
Cash flows from financing activities:
 Payments of long-term debt..............   (1,133,000)  (1,993,000)
 Proceeds from issuance of long-term
  debt...................................                11,493,000
 Debt issuance costs.....................                  (949,000)
 Mandatorily redeemable common stock
  issuance costs.........................      (17,000)    (493,000)
 Proceeds from issuance of non-
  mandatorily redeemable common stock,
  net....................................      (15,000)      93,000     924,000
                                           -----------  -----------  ----------
Net cash (used for) provided by financing
 activities..............................   (1,165,000)   8,151,000     924,000
                                           -----------  -----------  ----------
Net increase (decrease) in cash..........    1,520,000     (709,000)  2,033,000
Effect of exchange rates on cash.........      647,000     (151,000)
Cash and equivalents - beginning.........    2,190,000    3,050,000   1,017,000
                                           -----------  -----------  ----------
Cash and equivalents - ending............  $ 4,357,000  $ 2,190,000  $3,050,000
                                           ===========  ===========  ==========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       18
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
  CONSOLIDATED STATEMENT OF NON-MANDATORILY REDEEMABLE COMMON STOCK AND OTHER
                             SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                            ACCUMULATED
                              COMMON STOCK        COMMON       OTHER
                          ---------------------   STOCK    COMPREHENSIVE ACCUMULATED
                           SHARES     AMOUNT     WARRANTS     INCOME       DEFICIT        TOTAL
                          --------- ----------- ---------- ------------- ------------  -----------
<S>                       <C>       <C>         <C>        <C>           <C>           <C>
BALANCE AT DECEMBER 31,
 1995...................  5,816,000 $29,351,000             $(1,035,000) $(19,168,000) $ 9,148,000
Issuance of common stock
 in conjunction with a
 license and research
 and development
 agreement..............    154,000     400,000                                            400,000
Issuance of common stock
 in conjunction with the
 acquisition of
 substantially all of
 the assets of
 International Canine
 Genetics, Inc. (Note
 3).....................  1,389,000   5,704,000                                          5,704,000
Sale of securities
 available for sale.....                                      1,035,000                  1,035,000
Issuance of common stock
 pursuant to an
 employment agreement...     10,000      39,000                                             39,000
Issuance of common stock
 pursuant to exercise of
 stock options..........     23,000      72,000                                             72,000
Net income..............                                                    9,278,000    9,278,000
                          --------- ----------- ----------  -----------  ------------  -----------
BALANCE AT DECEMBER 31,
 1996...................  7,392,000  35,566,000                            (9,890,000)  25,676,000
Issuance of common stock
 warrants in conjunction
 with the acquisition of
 Synbiotics Europe SAS
 (Note 3)...............                        $1,003,000                               1,003,000
Issuance of common stock
 pursuant to exercise of
 stock options..........     34,000      93,000                                             93,000
Cumulative translation
 adjustment.............                                       (151,000)                  (151,000)
Accretion of mandatorily
 redeemable common
 stock..................                                                      (71,000)     (71,000)
Net income..............                                                      207,000      207,000
                          --------- ----------- ----------  -----------  ------------  -----------
BALANCE AT DECEMBER 31,
 1997...................  7,426,000  35,659,000  1,003,000     (151,000)   (9,754,000)  26,757,000
Issuance of common stock
 in conjunction with the
 acquisition of Prisma
 Acquisition Corp. (Note
 3).....................    458,000   1,423,000                                          1,423,000
Issuance of common stock
 in conjunction with the
 settlement of patent
 litigation (Note 2)....    333,000   1,000,000                                          1,000,000
Issuance of common stock
 pursuant to exercise of
 stock options..........      4,000      12,000                                             12,000
Issuance of common stock
 pursuant to employee
 bonus plan.............     25,000      40,000                                             40,000
Cumulative translation
 adjustment.............                                        647,000                    647,000
Accretion of mandatorily
 redeemable common
 stock..................                                                     (111,000)    (111,000)
Net loss................                                                   (1,911,000)  (1,911,000)
                          --------- ----------- ----------  -----------  ------------  -----------
BALANCE AT DECEMBER 31,
 1998...................  8,246,000 $38,134,000 $1,003,000  $   496,000  $(11,776,000) $27,857,000
                          ========= =========== ==========  ===========  ============  ===========
</TABLE>
 
         See accompanying notes to consolidated financial statements.
 
                                       19
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES:
 
THE COMPANY
 
  Synbiotics Corporation (the "Company"), incorporated in 1982, is an animal
health business which develops, manufactures and markets diagnostic products
and biological products for animals. In addition, the Company also develops
and manufactures specialty products which are marketed to veterinarians and
purebred dog enthusiasts. The Company's principal markets are veterinarians
and veterinary clinical laboratories in the United States and Europe. The
Company's products are sold primarily to wholesale distributors and direct to
veterinarians and veterinary clinical laboratories.
 
PRINCIPLES OF CONSOLIDATION
 
  The consolidated financial statements of the Company include the accounts of
its wholly-owned subsidiary Synbiotics Europe SAS (Note 3). All significant
intercompany transactions and accounts have been eliminated in consolidation.
 
INVENTORIES
 
  Inventories are stated at the lower of cost or market; cost is determined
using the first-in, first-out method.
 
PROPERTY AND EQUIPMENT
 
  Property and equipment, including leasehold improvements, are recorded at
cost. Maintenance costs are charged to operations as incurred. Depreciation
and amortization are computed using the straight-line method over the
estimated useful lives of five to eight years or the lease terms, if shorter.
 
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES
 
  The Company determines the appropriate classification of its U.S. Government
and debt securities at the time of acquisition and reevaluates such
designation as of each balance sheet date. The Company has recorded these
investments at fair market value as it has designated them as "available for
sale".
 
PATENTS AND LICENSES
 
  Patents and licenses are recorded at cost and are amortized ratably over the
life of the respective patents or licenses.
 
LONG-LIVED ASSETS
 
  The Company investigates potential impairments of long-lived assets, certain
identifiable intangibles and associated goodwill, on an exception basis, when
there is evidence that events or changes in circumstances have made recovery
of an asset's carrying value unlikely. An impairment loss is recognized when
the sum of the expected future net cash flows is less than the carrying amount
of the asset. No such impairments of long-lived assets existed through
December 31, 1998.
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
  The carrying amounts for cash and cash equivalents at December 31, 1998 and
1997 approximate their fair values. The carrying amount of long-term debt
approximates fair value at December 31, 1998 and 1997 as the variable interest
rate on the debt approximates current market rates of interest.
 
                                      20
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
TRANSLATION OF FINANCIAL STATEMENTS
 
  The financial statements for subsidiaries whose functional currency is not
the U.S. dollar are translated in the following manner: assets and liabilities
at the year end rates; shareholders' equity at historical rates; and results
of operations at the monthly average exchange rates. The effects of exchange
rate changes are reflected as a separate component of shareholders' equity.
 
REVENUE RECOGNITION
 
  Revenue from products is recognized when the products are shipped.
 
ADVERTISING COSTS
 
  The Company recognizes the production costs of advertising at the time such
charges are incurred. Advertising expense totalled $605,000, $450,000 and
$505,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
 
STOCK-BASED COMPENSATION
 
  The Company measures its stock-based employee compensation using the
intrinsic value method and provides pro forma disclosures of net income and
earnings per share as if the fair value method had been applied in measuring
compensation expense.
 
INCOME TAXES
 
  The Company's current income tax expense is the amount of income taxes
expected to be payable for the current year. A deferred income tax asset or
liability is computed for the expected future impact of differences between
the financial reporting and tax bases of assets and liabilities as well as the
expected future tax benefit to be derived from tax loss and tax credit
carryforwards. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount "more likely than not" to be realized in
future tax returns. Tax rate changes are reflected in income during the period
such changes are enacted.
 
NET INCOME PER SHARE
 
  Basic net income per share is computed as net income less accretion of
mandatorily redeemable common stock divided by the weighted average number of
common shares outstanding during the period. Diluted net income per share is
computed as net income less accretion of mandatorily redeemable common stock
divided by the weighted average number of common shares and potential common
shares, using the treasury stock method, outstanding during the period (Note
10).
 
STATEMENT OF CASH FLOWS
 
  For purposes of this statement, cash includes cash investments which are
highly liquid and have an original maturity of three months or less.
 
USE OF ESTIMATES AND KNOWN UNCERTAINTY
 
  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.
 
                                      21
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  All of the Company's vaccine products (exclusive of its feline leukemia and
canine corona vaccine products) are manufactured using bulk antigen fluids
that have been supplied by a third party. The supply agreement has expired and
the Company has been unable to locate a replacement supplier. The Company has
decided to discontinue the sales of the affected products once its remaining
supplies have been exhausted, which the Company believes will be in the second
quarter of 1999. Sales of the affected products totalled $2,073,000 and
$1,596,000 during 1998 and 1997, respectively.
 
COMPREHENSIVE INCOME
 
  During the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
This statement requires the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency items and unrealized gains and losses on certain investments
in debt and equity securities. Comprehensive income is defined as "the change
in equity (net assets) of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners."
 
SEGMENT REPORTING
 
  For the year ended December 31, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures About
Segments of an Enterprise and Related Information" (Note 12). This statement
establishes standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Under SFAS 131, operating segments are
to be determined consistent with the way that management organizes and
evaluates financial information internally for making operating decisions and
assessing performance.
 
NEW ACCOUNTING PRONOUNCEMENTS
 
  In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities", which the Company will be
required to adopt in the first quarter of 2000. This statement establishes a
new model for accounting for derivatives and hedging activities. Under SFAS
133, all derivatives must be recognized as assets and liabilities and measured
at fair value. The Company has not determined the impact of the adoption of
this new accounting standard on its consolidated financial position or results
of operations.
 
NOTE 2 - PATENT LITIGATION SETTLEMENT:
 
  In September 1997, Barnes-Jewish Hospital of St. Louis (the "Hospital")
filed a lawsuit against the Company claiming that the Company infringed a
patent owned by the Hospital which covers the Company's canine heartworm
diagnostic products. On July 28, 1998, the Company entered into a settlement
agreement with the Hospital calling for the Company to pay the Hospital or its
affiliates $1,600,000 in cash, 333,000 shares of the Company's common stock,
and undisclosed future payments and royalties. The Company recorded a one-time
pre-tax charge of approximately $3,922,000 and reclassified $678,000 of legal
expenses related to the patent litigation from general and administrative
expenses. The common stock portion of the settlement of $1,000,000 is
considered a non-cash financing activity for purposes of the statement of cash
flows.
 
                                      22
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 3 - ACQUISITIONS:
 
  On March 6, 1998, the Company acquired by merger Prisma Acquisition Corp.
("Prisma"), a privately-held company located in Rome, NY, which develops,
manufactures and markets instruments and reagents used by veterinarians to
measure blood chemistry information at the point-of-care. The consideration
paid to the stockholders of Prisma was a $1,000,000 convertible note (Note 6),
458,000 newly issued, unregistered shares of the Company's common stock valued
at $1,490,000 (based on the average closing price of Synbiotics' common stock
for the thirty trading days prior to March 6, 1998, which was $3.25) and the
issuance of options to purchase 157,000 shares of the Company's common stock
for $.0016 per share in replacement of Prisma's outstanding stock options. The
157,000 stock options were valued at $609,000 using the Black-Scholes option
pricing model.
 
  The transaction was accounted for as a purchase. Goodwill arising from the
transaction totalled $2,848,000 which is being amortized over an estimated
useful life of 15 years utilizing the straight-line method. The convertible
debt, common stock and common stock option portion of the of the purchase
price and liabilities assumed totalling $3,632,000 is considered a non-cash
financing activity for purposes of the statement of cash flows.
 
  On July 9, 1997, the Company acquired Synbiotics Europe SAS ("SBIO-E")
(formerly Rhone Merieux Diagnostics, S.A.S.), the worldwide veterinary
diagnostic business of Rhone Merieux S.A.S. (now known as "Merial"), pursuant
to purchase agreements dated May 14, 1997 and amended July 9, 1997. The
consideration paid to Merial was $10,659,000 in cash and 759,000 shares of
newly issued, unregistered Synbiotics common stock valued at $3,178,000 (based
upon the closing price of Synbiotics' common stock on July 9, 1997 which was
$4.1875 per share) (Note 7). The shares issued by the Company included 230,000
shares which were placed in escrow pending certain U.S. regulatory approvals
and subsequent sales of related products. During 1998, 138,000 of the 230,000
escrowed shares were cancelled due to delays in obtaining U.S. regulatory
approvals and subsequent sales of related products. The cancellations were
recorded as a reduction of the purchase price. The cash portion of the
consideration was provided by a series of loans obtained from Banque Paribas
(Note 6). Depending on performance of the combined business in the three years
following the acquisition, Synbiotics may also pay up to $3,600,000 in
contingent cash payments; any such payments will be recorded as additional
purchase price. The transaction was accounted for as a purchase. Goodwill
arising from the transaction totalled $6,612,000 which is being amortized over
an estimated useful life of 15 years utilizing the straight-line method. The
$3,178,000 common stock portion of the purchase price is considered a non-cash
financing activity for purposes of the statement of cash flows. The
acquisition was effective as of July 1, 1997.
 
  Merial and Synbiotics also entered into related agreements covering the
supply of various products and services, collaborative research and
development, licenses of Merial patents, and the distribution of certain of
the acquired products by Merial. The collaborative research agreement gives
Synbiotics a right of first refusal to acquire technology or products
emanating from Merial's future research efforts that have potential veterinary
diagnostic applications.
 
  On October 25, 1996, the Company acquired substantially all of the assets of
International Canine Genetics, Inc. ("ICG") pursuant to a purchase agreement
dated July 23, 1996 and amended September 7, 1996. The operations acquired
from ICG consist of the manufacturing and marketing of canine reproduction
diagnostic products and services, PennHIP(R) (a diagnostic test for canine hip
dysplasia), nutritional supplements and a line of coat and skin care products
to breeders and owners of purebred dogs and their veterinarians.
 
  The consideration paid to ICG was $1.00 plus 1,152,000 shares of Synbiotics
common stock valued at $4,852,000 (based upon the average closing price of
Synbiotics' common stock, for the period October 18, 1996 through October 24,
1996, which was $4.2125 per share). The Company also assumed approximately
$262,000 of outstanding ICG liabilities which were due and payable as of the
closing date. In addition, all of ICG's
 
                                      23
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
outstanding warrants and stock options were made exercisable for an adjusted
number of shares of Synbiotics common stock. Prior to the acquisition, S.R.
One, Limited, ICG's largest shareholder, purchased 237,000 shares of newly
issued Synbiotics common stock for $1,000,000 (based upon the average closing
price of Synbiotics' common stock, for the period October 18, 1996 through
October 24, 1996, which was $4.2125 per share). The transaction was accounted
for as a purchase. Goodwill arising from the transaction totalled $5,407,000
which is being amortized over an estimated useful life of 15 years utilizing
the straight-line method. The assets acquired and liabilities assumed are
considered non-cash investing activities for the purposes of the statement of
cash flows.
 
  The Company's statement of operations includes the results of operations of
Prisma for the period March 6, 1998 to December 31, 1998, the results of
operations of SBIO-E for the period July 1, 1997 to December 31, 1997 and for
the year ended December 31, 1998, and the results of operations of ICG for the
period October 25, 1996 to December 31, 1996 and for the years ended December
31, 1997 and 1998. The following are unaudited pro forma results of operations
as if the Prisma transaction had been consummated on January 1, 1997, the
SBIO-E transaction had been consummated on January 1, 1996 and the ICG
transaction had been consummated on January 1, 1995:
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                          -------------------------------------
                                             1998         1997         1996
                                          -----------  -----------  -----------
                                          (UNAUDITED)  (UNAUDITED)  (UNAUDITED)
   <S>                                    <C>          <C>          <C>
   Revenues:
     As reported......................... $31,379,000  $23,286,000  $17,217,000
                                          ===========  ===========  ===========
     Pro forma........................... $31,446,000  $27,410,000  $25,845,000
                                          ===========  ===========  ===========
   Net income:
     As reported......................... $(1,911,000) $   207,000  $ 9,278,000
                                          ===========  ===========  ===========
     Pro forma........................... $(1,997,000) $    70,000  $10,338,000
                                          ===========  ===========  ===========
   Basic net income per share:
     As reported......................... $      (.23) $       .02  $      1.49
                                          ===========  ===========  ===========
     Pro forma........................... $      (.23) $       .01  $      1.28
                                          ===========  ===========  ===========
   Diluted net income per share:
     As reported......................... $      (.23) $       .02  $      1.46
                                          ===========  ===========  ===========
     Pro forma........................... $      (.23) $       .01  $      1.22
                                          ===========  ===========  ===========
</TABLE>
 
NOTE 4 - DISPOSITION OF INVESTMENT AND RELATED PARTY TRANSACTION:
 
  On July 25, 1994, ImmunoPharmaceutics, Inc. ("IPI"), of which the Company
was a 41% shareholder, was acquired by Texas Biotechnology Corporation ("TBC")
in a triangular merger transaction whereby unregistered shares of TBC common
stock were issued in exchange for all of the outstanding stock of IPI. The
Company's 655,000 TBC shares were registered effective December 6, 1995. On
June 30, 1995, the Company received an additional 573,000 shares of TBC common
stock resulting from the satisfaction of a certain contingency on May 31, 1995
related to the acquisition of IPI by TBC.
 
  On February 27, 1996 and February 28, 1996, the Company sold a total of
614,000 shares of TBC common stock on the American Stock Exchange at an
average selling price of $3.573 per share. During the period April 25, 1996 to
May 2, 1996, the Company sold its remaining 614,000 shares of TBC common stock
on the American Stock Exchange at an average selling price of $4.205 per
share. As a result of the transactions, the Company received net proceeds
totalling $4,727,000 and recognized a gain of $1,159,000.
 
                                      24
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company charged its former affiliate, IPI, now a wholly-owned subsidiary
of TBC, for shared costs including, but not limited to, rent, utilities and
property taxes through December 31, 1996. Such charges totalled $343,000
during the year ended December 31, 1996.
 
NOTE 5 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
   <S>                                                  <C>         <C>
   Inventories:
     Raw materials..................................... $2,219,000  $2,639,000
     Work in process...................................    904,000   1,235,000
     Finished goods....................................  2,056,000   1,313,000
                                                        ----------  ----------
                                                        $5,179,000  $5,187,000
                                                        ==========  ==========
   Property and equipment:
     Laboratory equipment.............................. $3,002,000  $2,436,000
     Leasehold improvements............................  1,835,000   1,770,000
     Office equipment..................................    950,000     604,000
     Construction in progress..........................     81,000     205,000
                                                        ----------  ----------
                                                         5,868,000   5,015,000
     Less accumulated depreciation and amortization.... (4,094,000) (3,913,000)
                                                        ----------  ----------
                                                        $1,774,000  $1,102,000
                                                        ==========  ==========
 
  Depreciation expense was $364,000, $256,000 and $344,000 during the years
ended December 31, 1998, 1997 and 1996, respectively.
 
<CAPTION>
                                                            DECEMBER 31,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
   <S>                                                  <C>         <C>
   Other assets:
     Patents........................................... $4,104,000  $4,069,000
     Licenses..........................................  1,165,000   1,549,000
     Other.............................................     60,000     214,000
                                                        ----------  ----------
                                                        $5,329,000  $5,832,000
                                                        ==========  ==========
 
  Accumulated amortization of patents, licenses and goodwill was $2,719,000
and $3,079,000 at December 31, 1998 and 1997, respectively.
 
<CAPTION>
                                                            DECEMBER 31,
                                                        ----------------------
                                                           1998        1997
                                                        ----------  ----------
   <S>                                                  <C>         <C>
   Accounts payable and accrued liabilities:
     Accounts payable.................................. $2,725,000  $2,229,000
     Accrued vacation..................................    419,000     341,000
     Accrued compensation..............................  1,153,000     281,000
     Accrued royalties.................................    457,000
     Other.............................................    463,000     695,000
                                                        ----------  ----------
                                                        $5,217,000  $3,546,000
                                                        ==========  ==========
</TABLE>
 
                                      25
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 6 - NOTE PAYABLE AND LONG-TERM DEBT:
 
  The $1,000,000 convertible note issued in conjunction with the acquisition
of Prisma (Note 3) (which was issued to only one of the Prisma stockholders)
is due March 5, 1999, bears interest at the rate of 5% per year and is
unsecured. The note is convertible at any time, at the option of the Company,
into a number of unregistered shares of the Company's common stock equal to
the outstanding principal and accrued interest divided by the average closing
price of the Company's common stock for the thirty trading days immediately
prior to the conversion. The note is subordinate to the Company's notes
payable to Banque Paribas, which were issued in conjunction with the July 1997
acquisition of SBIO-E. In February 1999, the Company repaid the note prior to
its original due date for $800,000.
 
  In conjunction with the acquisition of SBIO-E (Note 3), the Company obtained
a series of loans from Banque Paribas (the "Bank") as follows: 1) $5,000,000,
due May 31, 2002, bearing interest at the rate of LIBOR plus 2.50%
(effectively 7.75% at December 31, 1998), payable quarterly beginning August
31, 1997 in the amount of $250,000 of principal plus accrued interest, and
secured by substantially all of the Company's assets; and 2) $5,000,000, due
May 31, 2003, bearing interest at the rate of LIBOR plus 3.00% (effectively
8.25% at December 31, 1998), interest only payable quarterly beginning August
31, 1997, and secured by substantially all of the Company's assets. In
accordance with the debt agreements, the Company has entered into an interest
rate collar agreement with a financial institution, which expires in May 2003,
whereby the LIBOR rate payable by the Company, on a notional principal amount
equal to the then outstanding principal balance, cannot fall below 5.70% nor
rise above 7.08%. The Company did not pay or receive any premiums associated
with this agreement, which is maintained for interest rate protection and not
for speculative purposes. Accordingly, no amounts have been recorded in the
accompanying financial statements with respect to this agreement. At December
31, 1998, the fair value of the interest collar, as confirmed by the
counterparty to the instrument, was not material.
 
  The Company incurred deferred debt issuance costs totalling $949,000 and a
debt discount totalling $1,003,000, representing the value of common stock
warrants issued to the Bank (Note 8). The debt discount and deferred debt
issuance costs, which have been allocated evenly to the two notes payable, are
being amortized over the lives of the loans using the effective interest
method.
 
  In addition, the Company also obtained a revolving line of credit from the
Bank whereby the Company may borrow up to $5,000,000 as determined by a
borrowing base calculation. The line of credit bears interest at the rate of
prime plus .75% (effectively 8.50% at December 31, 1998), with interest only
payments to be made quarterly beginning August 31, 1997. Any outstanding
principal is due May 31, 2002, although a portion of the outstanding principal
may become due and payable as determined by a monthly borrowing base
calculation. There were no borrowings outstanding under the line of credit at
December 31, 1998. The Company is required to pay a quarterly commitment fee
equal to 0.5% per annum on the average unused portion of the line of credit
facility.
 
  The Bank requires the Company to maintain certain financial ratios and
levels of tangible net worth and also restricts the Company's ability to pay
dividends and make loans, capital expenditures or investments without the
Bank's consent.
 
  Principal payments scheduled during the next five years are as follows:
1999--$1,000,000, 2000--$1,000,000, 2001--$1,000,000, 2002--$500,000 and
2003--$5,000,000. Interest paid during 1998 and 1997 totalled $880,000 and
$262,000, respectively.
 
                                      26
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 7 - MANDATORILY REDEEMABLE COMMON STOCK:
 
  The 759,000 shares issued in conjunction with the acquisition of SBIO-E
(Note 3) are subject to certain registration rights as well as put and call
provisions. The put option gives Merial the right, beginning on July 9, 2001,
to sell all or any portion of its shares to the Company at a price of $5 per
share. The call option gives the Company the right to acquire, at any time,
all or any portion of the shares then owned by Merial at a per share price of
the greater of the average closing sale price of the Company's common stock
for the 30 day period prior to the call or $5. Should the Company exercise its
call option prior to July 9, 2001 at a call option price greater than $5 per
share, the agreement requires the difference between the per share call option
price and $5 to be shared by the Company and Merial on a sliding scale basis.
In addition, should Merial sell all or any portion of the shares to a third
party prior to July 9, 2001 at a price greater than $5 per share, the
agreement requires the difference between the per share sales price and $5 to
be shared by the Company and Merial on a sliding scale basis. The Company has
classified the shares on the balance sheet as mandatorily redeemable and is
accreting the value of the shares to the put option price, using the interest
method, with the accretion being charged directly to retained earnings. During
1998, 138,000 of the 230,000 escrowed shares were cancelled due to delays in
obtaining U.S. regulatory approvals and subsequent sales of related products.
The cancellations were recorded as a reduction of the purchase price.
 
NOTE 8 - SHAREHOLDERS' EQUITY:
 
  In February 1998, the Company issued to its employees, under the 1995 Stock
Option/Stock Issuance Plan, 25,000 shares of common stock. The stock vests
quarterly over two years beginning January 1, 1998. The Company is recognizing
compensation expense, as the shares vest, at the rate of $3.19 per share
(based upon the closing price of the stock on the date of grant). Compensation
expense related to these shares totalled $40,000 during 1998.
 
  In May 1996, in conjunction with an employment agreement, the Company
granted an award of 10,000 shares of unregistered Synbiotics common stock and
recognized compensation expense in the amount of $39,000.
 
PREFERRED STOCK
 
  In August 1998, the Company amended its Articles of Incorporation to
authorize the issuance of up to 25,000,000 shares of preferred stock. The
preferred stock may be issued in one or more series. The Board of Directors is
authorized to fix or alter the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and the liquidation preferences of
any wholly unissued series of preferred stock, and the number of shares
constituting any such series and the designation thereof, or any of them; and
to increase or decrease the number of shares of any series subsequent to the
issuance of shares of that series, but not below the number of shares of such
series then outstanding. In case the number of shares of any series shall be
so decreased, the shares constituting such decrease shall resume the status
that they had prior to the adoption of the resolution originally fixing the
number of shares of such series.
 
  In September 1998, the Company created the Series A Junior Participating
Preferred Stock (the "Series A Preferred") consisting of 200,000 shares. Each
share of Series A Preferred is entitled to 1,000 votes. Each Series A
Preferred share is entitled to dividends, payable in cash quarterly, in an
amount equal to 1,000 times the aggregate per share amount of dividends
declared on the common stock. In the event that no common stock dividends are
declared, each share of Series A Preferred is entitled to $.001 per share. The
Series A Preferred is entitled to a liquidation preference of $1,000 per
share, plus accrued and unpaid dividends; provided, however, that each Series
A Preferred share is entitled to receive an aggregated amount per share equal
to 10,000 times
 
                                      27
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
the aggregate amount per share distributed to the holders of common stock. In
the event of a consolidation, merger, combination, etc., each share of Series
A Preferred shall be exchanged into 1,000 times the aggregate per share
consideration of the common stock.
 
  There were no shares of Series A Preferred issued and outstanding as of
December 31, 1998,
 
PREFERRED STOCK PURCHASE RIGHTS
 
  In September 1998, Synbiotics declared a dividend on each share of common
stock outstanding on October 7, 1998. The per-share dividend consisted of one
preferred share purchase right (the "Rights") to purchase, for $10.00 (the
"Purchase Price"), 1/1000th of a share of Synbiotics' Series A Preferred (the
"Unit"). The dividend was paid on October 7, 1998 and was part of Synbiotics'
implementation of a poison pill shareholder rights plan. The Rights are not
exercisable until the earlier to occur of (i) a public announcement that
beneficial ownership of 20% or more of the Company's outstanding common stock
has been acquired or (ii) 10 business days (or a later date as determined by
the Board of Directors) following the commencement of, or announcement of an
intention to make, a tender offer or exchange offer to acquire beneficial
ownership of 20% or more of the outstanding common stock of the Company.
 
  At any time after the beneficial ownership of 20% or more of the outstanding
shares of the Company's common stock has been acquired (but before the
acquiring party has acquired 50% of the outstanding common stock) the Company
may exchange all or part of the Rights for Units at an exchange ratio equal to
(subject to adjustment to reflect stock splits, stock dividends and similar
transactions) the Purchase Price divided by the then current per share market
price per Unit on the Distribution Date.
 
  At any time prior to the public announcement that the beneficial ownership
of 20% or more of the outstanding common stock of the Company has been
acquired, the Company may redeem the Rights in whole, but not in part, at a
price of $0.001 per Right (the "Redemption Price"). The redemption of the
rights will be effective at such time as the Board of Directors in its sole
discretion may establish.
 
  The Rights will expire on October 7, 2008, unless the expiration date is
extended or unless the Rights are earlier redeemed or exchanged by the
Company.
 
STOCK WARRANTS
 
  In conjunction with the acquisition of SBIO-E (Note 3), the Company issued
to Banque Paribas a warrant to purchase 240,000 unregistered shares of the
Company's common stock at an exercise price of $.01 per share. The warrant is
exercisable at any time through May 31, 2007 and contains certain anti-
dilution provisions and registration rights. The Company has valued the
warrant at $1,003,000 using the Black-Scholes option pricing model.
 
  In conjunction with the acquisition of ICG (Note 3), the Company assumed all
of the outstanding ICG stock warrants, which expire March 24, 2000, after
giving effect to the exchange ratio inherent in the transaction. As a result,
284,000 shares of the Company's common stock were reserved for issuance with
an exercise price of $4.54 per share.
 
                                      28
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
STOCK OPTION PLANS
 
  The Company recognizes compensation expense related to its stock option
plans using the intrinsic value method. Had compensation expense for the
Company's stock option plans been determined based on the fair value at the
grant dates, the Company's net (loss) income and net (loss) income per share
would have been reduced to the pro forma amounts indicated below:
 
<TABLE>
<CAPTION>
                                                   YEAR ENDED DECEMBER 31,
                                               --------------------------------
                                                  1998        1997      1996
                                               -----------  -------- ----------
   <S>                                         <C>          <C>      <C>
   Net (loss) income:
     As reported.............................. $(1,911,000) $207,000 $9,278,000
                                               ===========  ======== ==========
     Pro forma................................ $(2,100,000) $ 17,000 $8,932,000
                                               ===========  ======== ==========
   Basic net (loss) income per share:
     As reported.............................. $      (.23) $    .02 $     1.49
                                               ===========  ======== ==========
     Pro forma................................ $      (.24) $    .00 $     1.43
                                               ===========  ======== ==========
   Diluted net (loss) income per share:
     As reported.............................. $      (.23) $    .02 $     1.46
                                               ===========  ======== ==========
     Pro forma................................ $      (.25) $    .00 $     1.46
                                               ===========  ======== ==========
</TABLE>
 
  The Company had adopted a series of non-qualified and incentive stock option
plans (the "Predecessor Plans"). In April 1995, the Company adopted the 1995
Stock Option/Stock Issuance Plan (the "1995 Plan") whereby an aggregate of
1,300,000 shares of the Company's common stock, inclusive of all optioned
shares that were exercisable and/or issuable under the Predecessor Plans, were
reserved for issuance. No further option grants may be made under the
Predecessor Plans. The 1995 Plan is administered by the Board of Directors and
provides that exercise prices shall not be less than 85 percent (non-qualified
options) and 100 percent (incentive options) of the fair market value of the
shares at the date of grant. Options will generally vest at the rate of 1/16th
of the granted shares in each continuous quarter of employment and have an
exercise period not more than ten years from date of grant.
 
  In October 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan") whereby an aggregate of 250,000 shares of the Company's common stock
were reserved for issuance. The 1996 Plan is administered by the Board of
Directors and provides for the issuance of non-qualified options to key
employees, consultants and other independent contractors (excluding officers
and directors, other than newly-hired directors or officers) at exercise
prices to be determined by the Board of Directors at its discretion. Options
will generally vest at the rate of 1/16th of the granted shares in each
continuous quarter of employment and have an exercise period not more than ten
years from date of grant.
 
  In April 1997, the 1995 Plan was amended to incorporate the 1996 Plan into
the 1995 Plan and add an additional 450,000 shares to the maximum authorized
for issuance. Under the 1995 Plan, an aggregate of 2,000,000 shares of the
Company's common stock, inclusive of all optioned shares that were exercisable
and/or issuable under the 1996 Plan, were reserved for issuance. No further
option grants may be made under the 1996 Plan.
 
                                      29
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following is a summary of the stock option plans' activity:
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED-
                                                                        AVERAGE
                                                                       EXERCISE
                                                             SHARES      PRICE
                                                            ---------  ---------
   <S>                                                      <C>        <C>
   Outstanding at December 31, 1995........................   899,000    $3.49
   Granted.................................................   701,000    $3.78
   Exercised...............................................   (23,000)   $2.91
   Forfeited...............................................  (311,000)   $3.56
                                                            ---------
   Outstanding at December 31, 1996........................ 1,266,000    $3.64
   Granted.................................................   329,000    $3.69
   Exercised...............................................   (34,000)   $2.88
   Forfeited...............................................    (7,000)   $3.77
                                                            ---------
   Outstanding at December 31, 1997........................ 1,554,000    $3.67
   Granted.................................................   366,000    $3.08
   Exercised...............................................    (4,000)   $2.57
   Forfeited...............................................   (32,000)   $3.57
                                                            ---------
   Outstanding at December 31, 1998........................ 1,884,000    $3.56
                                                            =========
</TABLE>
 
  Options to purchase an aggregate of 1,171,000 shares and 946,000 shares were
exercisable under the 1995 Plan as of December 31, 1998 and 1997,
respectively. The weighted-average fair value of options granted under the
1995 Plan during the years ended December 31, 1998, 1997 and 1996 was $1.22
per share, $1.53 per share and $1.63 per share, respectively. The Company
recognized compensation expense of $36,000 and $121,000 during the years ended
December 31, 1998 and 1996, respectively. There was no compensation expense
during 1997.
 
  The following is a summary of stock options outstanding at December 31,
1998:
 
<TABLE>
<CAPTION>
                                                      OPTIONS OUTSTANDING
                                                --------------------------------
                                                           WEIGHTED-
                                                            AVERAGE    WEIGHTED-
                                                           REMAINING    AVERAGE
                                                          CONTRACTUAL  EXERCISE
   PRICE RANGE                                   NUMBER   LIFE (YEARS)   PRICE
   -----------                                  --------- ------------ ---------
   <S>                                          <C>       <C>          <C>
   $1.63 - $2.44...............................     8,000     6.0        $2.22
   $2.45 - $3.68...............................   695,000     6.6        $2.99
   $3.69 - $5.63............................... 1,181,000     5.4        $3.91
                                                ---------
   $1.63--$5.63................................ 1,884,000     5.8        $3.56
                                                =========
</TABLE>
 
<TABLE>
<CAPTION>
                                                             OPTIONS EXERCISABLE
                                                             -------------------
                                                                       WEIGHTED-
                                                                        AVERAGE
                                                                       EXERCISE
                                                              NUMBER     PRICE
                                                             --------- ---------
   <S>                                                       <C>       <C>
   $1.63 - $2.44............................................     8,000   $2.22
   $2.45 - $3.68............................................   363,000   $2.90
   $3.69 - $5.63............................................   800,000   $3.94
                                                             ---------
   $1.63 - $5.63............................................ 1,171,000   $3.61
                                                             =========
</TABLE>
 
                                      30
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  For disclosure purposes, the fair value of each option granted is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions for grants in 1998, 1997 and 1996,
respectively: dividend yield of 0% for all years; expected volatility of
54.8%, 56.8% and 57.8%; risk-free interest rates of 5.1%, 6.2% and 5.8%; and
expected lives of 2.7 years, 2.7 years and 2.5 years.
 
  In conjunction with the acquisition of Prisma (Note 3), the Company assumed
all of the outstanding Prisma stock options (the "1998 Plan"), after giving
effect to the exchange ratio inherent in the transaction. As a result, 157,000
shares of the Company's common stock were reserved for issuance with an
exercise price of $.0016 per share. As of December 31, 1998, there were
153,000 shares outstanding under the 1998 Plan with a weighted-average
exercise price of $.0016 per share and a weighted-average remaining
contractual life of 9.2 years. Options to purchase 153,000 shares were
exercisable under the 1998 Plan with a weighted-average exercise price of
$.0016 per share. No compensation expense was recognized by the Company
related to the 1998 Plan during the year ended December 31, 1998.
 
  In conjunction with the acquisition of ICG (Note 3), the Company assumed all
of the outstanding ICG stock options (the "ICG Plan"), after giving effect to
the exchange ratio inherent in the transaction. As a result, 93,000 shares of
the Company's common stock were reserved for issuance with exercise prices
ranging from $4.54 to $25.42 per share. As of December 31, 1998, there were
53,000 shares outstanding under the ICG Plan with a weighted-average exercise
price of $9.86 per share and a weighted-average remaining contractual life of
4.2 years. Options to purchase 29,000 shares were exercisable under the ICG
Plan with a weighted-average exercise price of $9.86 per share. No
compensation expense was recognized by the Company related to the ICG Plan
during the years ended December 31, 1998 and 1997.
 
NOTE 9 - INCOME TAXES:
 
  The Company recorded a net (benefit from) provision for income taxes for the
years ended December 31, 1998, 1997 and 1996 as follows:
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                            ----------------------------------
                                               1998        1997       1996
                                            -----------  --------  -----------
   <S>                                      <C>          <C>       <C>
   Current income tax expense:
     Federal............................... $        --  $     --  $    35,000
     State.................................      62,000     6,000       29,000
     Foreign...............................       7,000   122,000
                                            -----------  --------  -----------
                                                 69,000   128,000       64,000
                                            -----------  --------  -----------
   Deferred income tax (benefit) expense:
     Federal...............................  (1,149,000)  194,000   (6,305,000)
     State.................................    (322,000)  262,000     (853,000)
     Foreign...............................     (20,000)  (25,000)
                                            -----------  --------  -----------
                                             (1,491,000)  431,000   (7,158,000)
                                            -----------  --------  -----------
   Net income tax (benefit) expense........ $(1,422,000) $559,000  $(7,094,000)
                                            ===========  ========  ===========
</TABLE>
 
                                      31
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  As of December 31, 1998 and 1997 the Company had foreign deferred tax assets
of $47,000 and $25,000, respectively. Federal and state deferred tax assets
comprise the following:
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                          ---------------------
                                                             1998       1997
                                                          ---------- ----------
   <S>                                                    <C>        <C>
   Federal:
     Net operating loss carryforwards.................... $4,988,000 $4,740,000
     Tax credit carryforwards............................    866,000    888,000
     Patent litigation settlement........................    804,000
     Equity in losses of investees.......................    313,000    262,000
     Accrued compensation................................    126,000    157,000
     Other reserves and accruals.........................    168,000     69,000
                                                          ---------- ----------
                                                          $7,265,000 $6,116,000
                                                          ========== ==========
   State:
     Net operating loss carryforwards.................... $  168,000 $  146,000
     Tax credit carryforwards............................    254,000    227,000
     Patent litigation settlement........................    209,000
     Equity in losses of investees.......................    150,000    144,000
     Accrued compensation................................     33,000     43,000
     Other reserves and accruals.........................     88,000     19,000
                                                          ---------- ----------
                                                          $  902,000 $  579,000
                                                          ========== ==========
</TABLE>
 
  A reconciliation of the (benefit from) provision for income taxes to the
amount computed by applying the statutory federal income tax rate to income
before income taxes follows:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             ----------------------------------
                                                1998        1997       1996
                                             -----------  --------  -----------
   <S>                                       <C>          <C>       <C>
   Amounts computed at statutory Federal
    rate...................................  $(1,133,000) $260,000  $   743,000
   State income taxes, net of Federal
    benefit................................     (295,000)   47,000      135,000
   Foreign income taxes....................      (13,000)  122,000
   Income (deductions) for financial
    reporting purposes for which there is
    no current tax (benefit) provision.....      (72,000)  164,000
   Utilization of Federal net operating
    loss carryforwards.....................               (260,000)    (743,000)
   Utilization of state net operating loss
    carryforwards..........................                (47,000)    (115,000)
   Federal alternative minimum tax.........                              35,000
   State minimum franchise tax.............       69,000     6,000        9,000
   Expiration of state general business tax
    credits................................       22,000
   Expiration of state net operating loss
    carryforwards..........................                267,000
   Release of valuation allowance..........                          (7,158,000)
                                             -----------  --------  -----------
                                             $(1,422,000) $559,000  $(7,094,000)
                                             ===========  ========  ===========
</TABLE>
 
  The Company has available Federal net operating loss carryforwards at
December 31, 1998 of approximately $14,672,000, which expire from 2001 to
2013. Available state net operating loss carryforwards at December 31, 1998
total approximately $1,896,000, which expire from 1999 to 2003. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of carryforwards which can be utilized. Unused
investment tax and research and development and alternative minimum tax
credits at December 31, 1998 aggregate approximately $1,120,000 and expire
from 2000 to 2006.
 
                                      32
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
NOTE 10 - EARNINGS PER SHARE:
 
  The following is a reconciliation of net income and share amounts used in
the computations of earnings per share:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                             ---------------------------------
                                                1998        1997       1996
                                             -----------  --------  ----------
   <S>                                       <C>          <C>       <C>
   Net (loss) income used:
     Net (loss) income...................... $(1,911,000) $207,000  $9,278,000
     Less accretion of mandatorily
      redeemable common stock...............    (111,000)  (71,000)
                                             -----------  --------  ----------
     Net (loss) income used in computing
      basic and diluted net (loss) income
      per share............................. $(2,022,000) $136,000  $9,278,000
                                             ===========  ========  ==========
</TABLE>
 
<TABLE>
<CAPTION>
                                                     YEAR ENDED DECEMBER 31,
                                                  -----------------------------
                                                    1998      1997      1996
                                                  --------- --------- ---------
   <S>                                            <C>       <C>       <C>
   Shares used:
     Weighted average common shares outstanding
      used in computing basic net (loss) income
      per share.................................  8,679,000 7,710,000 6,236,000
     Weighted average options and warrants to
      purchase common stock as determined by
      application of the treasury method........              318,000   108,000
                                                  --------- --------- ---------
     Shares used in computing diluted net (loss)
      income per share..........................  8,679,000 8,028,000 6,344,000
                                                  ========= ========= =========
</TABLE>
 
  Weighted average options and warrants to purchase common stock as determined
by the application of the treasury method and weighted average shares of
common stock issuable upon assumed conversion of debt totalling 694,000 shares
have been excluded from the shares used in computing diluted net (loss) income
per share for the year ended December 31, 1998 as their effect is anti-
dilutive. In addition, warrants to purchase 284,000 shares of common stock at
$4.54 per share have been excluded from the shares used in computing diluted
net (loss) income per share for the years December 31, 1998, 1997 and 1996 as
their exercise price is higher than the weighted average market price for
those periods, and in addition their effect is anti-dilutive for the year
ended December 31, 1998.
 
NOTE 11 - COMMITMENTS AND CONTINGENCIES:
 
  The Company leases office, laboratory and manufacturing facilities and
equipment under operating leases. The facilities leases provide for escalating
rental payments. Future minimum rentals under noncancelable operating leases
as of December 31, 1998 are as follows:
 
<TABLE>
   <S>                                                                <C>
   1999.............................................................. $  757,000
   2000..............................................................    772,000
   2001..............................................................    655,000
   2002..............................................................    458,000
   2003..............................................................    358,000
   Thereafter........................................................  3,837,000
                                                                      ----------
                                                                      $6,837,000
                                                                      ==========
</TABLE>
 
                                      33
<PAGE>
 
                            SYNBIOTICS CORPORATION
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
 
 
  Total rent expense under noncancelable operating leases was $542,000,
$608,000 and $362,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
 
  The Company has filed a lawsuit against Heska Corporation ("Heska") claiming
that Heska infringes a patent owned by the Company and is seeking unspecified
damages. Heska has filed a counterclaim against the Company seeking a
declaratory judgment that the Company's patent is invalid and unenforceable.
The Company denies Heska's allegations that its patent is invalid and
unenforceable, and plans to vigorously defend its patent against the
allegations.
 
NOTE 12 - SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS:
 
  The Company has determined that it has only one reportable segment based on
the fact that all of its products are animal health products. Although the
Company sells both diagnostic and vaccine products, it does not base its
business decision making on a product category basis.
 
  The following are revenues for the Company's diagnostic and vaccine
products:
 
<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           ------------------------------------
                                              1998         1997        1996
                                           ----------- ------------ -----------
   <S>                                     <C>         <C>          <C>
   Diagnostics............................ $24,273,000 $ 16,616,000 $10,539,000
   Vaccines...............................   7,106,000    6,670,000   6,678,000
                                           ----------- ------------ -----------
                                           $31,379,000 $ 23,286,000 $17,217,000
                                           =========== ============ ===========
 
  The following are revenues and long-lived assets information by geographic
area:
 
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           ------------------------------------
                                              1998         1997        1996
                                           ----------- ------------ -----------
   <S>                                     <C>         <C>          <C>
   Revenues:
     United States........................ $21,205,000 $ 17,159,000 $14,421,000
     France...............................   4,961,000    5,004,000   1,880,000
     Other foreign countries..............   5,213,000    1,123,000     916,000
                                           ----------- ------------ -----------
                                           $31,379,000 $ 23,286,000 $17,217,000
                                           =========== ============ ===========
<CAPTION>
                                                             DECEMBER 31,
                                                       ------------------------
                                                           1998        1997
                                                       ------------ -----------
   <S>                                     <C>         <C>          <C>
   Long-lived assets:
     United States.................................... $ 13,038,000 $11,819,000
     France...........................................    8,090,000   7,562,000
                                                       ------------ -----------
                                                       $ 21,128,000 $19,381,000
                                                       ============ ===========
</TABLE>
 
  The Company had sales to two customers totalling $10,201,000 during the year
ended December 31, 1998. During the year ended December 31, 1997, sales to two
customers totalled $9,224,000. Sales totalling $6,648,000 during the year
ended December 31, 1996 were made to two customers.
 
 
                                      34
<PAGE>
 
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A)
    OF THE EXCHANGE ACT
 
ITEM 10. EXECUTIVE COMPENSATION
 
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required under Part III, Items 9, 10, 11 and 12, has been
omitted from this report since the Company intends to file with the Securities
and Exchange Commission, not later than 120 days after the close of its fiscal
year, a definitive proxy statement prepared pursuant to Regulation 14A, which
information is hereby incorporated by reference.
 
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibit Index
 
  Exhibits marked with an asterisk have not been included with this Annual
Report on Form 10-KSB, but instead have been incorporated by reference to
other documents filed by the Company with the Securities and Exchange
Commission. The Company will furnish a copy of any one or more of these
exhibits, except for Exhibit 27 which is for electronic filing purposes only,
to any shareholder who so requests.
 
<TABLE>
<CAPTION>
 EXHIBIT                     TITLE                              METHOD OF FILING
 -------   ----------------------------------------  --------------------------------------
 <S>       <C>                                       <C>
    2.2*   Purchase Agreement dated July 23, 1996    Incorporated herein by reference to
           by and Among Synbiotics, ICG and S.R.     Exhibit 2.2 to the Registrant's
           One.                                      Registration Statement Form S-4,
                                                     Registration No. 333-10343, dated
                                                     September 12, 1996.
    2.3*   Amendment to Purchase Agreement dated     Incorporated herein by reference to
           September 7, 1996 by and Among            Exhibit 2.3 to the Registrant's
           Synbiotics, ICG and S.R. One.             Registration Statement Form S-4,
                                                     Registration No. 333-10343, dated
                                                     September 12, 1996.
    2.4*   Asset Purchase Agreement between Rhone    Incorporated herein by reference to
           Merieux, Inc. and the Registrant, dated   Exhibit 2.4 to the Registrant's
           May 14, 1997.                             Current Report on Form 8-K, dated July
                                                     9, 1997.
  2.4.1*   Amendment No. 1 to Asset Purchase         Incorporated herein by reference to
           Agreement between Rhone Merieux, Inc.     Exhibit 2.4.1 to the Registrant's
           and the Registrant, dated July 9, 1997.   Current Report on Form 8-K, dated July
                                                     9, 1997.
  2.4.2*   Amendment No. 2 to Asset Purchase         Incorporated herein by reference to
           Agreement between Rhone Merieux, Inc.     Exhibit 2.4.2 to the Registrant's
           and the Registrant, dated July 9, 1997.   Current Report on Form 8-K, dated July
                                                     9, 1997.
    2.5*   Stock Purchase Agreement between Rhone    Incorporated herein by reference to
           Merieux S.A., Institut De Selection       Exhibit 2.5 to the Registrant's
           Animale S.A., Rhone Merieux Diagnostics   Current Report on Form 8-K, dated July
           S.A.S. and the Registrant, dated May 14,  9, 1997.
           1997.
</TABLE>
 
                                      35
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT                   TITLE                             METHOD OF FILING
 -------   -------------------------------------- --------------------------------------
 <S>       <C>                                    <C>
  2.5.1*   Amendment No. 1 to Stock Purchase      Incorporated herein by reference to
           Agreement between Rhone Merieux        Exhibit 2.5.1 to the Registrant's
           S.A.S., Institut De Selection Animale  Current Report on Form 8-K, dated July
           S.A., R.M.--Diagnostics S.A.S. and the 9, 1997.
           Registrant, dated July 9, 1997.
  2.5.2*   Amendment No. 2 to Stock Purchase      Incorporated herein by reference to
           Agreement between Rhone Merieux        Exhibit 2.5.2 to the Registrant's
           S.A.S., Institut De Selection Animale  Current Report on Form 8-K, dated July
           S.A., R.M.--Diagnostics S.A.S. and the 9, 1997.
           Registrant, dated July 9, 1997.
    2.6*   Agreement and Plan of Reorganization   Incorporated herein by reference to
           By and Among the Registrant, Prisma    Exhibit 2.1 to the Registrant's
           Acquisition Corp. and the Stockholders Current Report on Form 8-K dated March
           and an Optionholder of Prisma          6, 1998.
           Acquisition Corp., dated as of
           February 27, 1998.
    2.7*   Agreement of Merger By and Between     Incorporated herein by reference to
           Prisma Acquisition Corp. and the       Exhibit 2.2 to the Registrant's
           Registrant, dated as of March 6, 1998. Current Report on Form 8-K dated March
                                                  6, 1998.
    3.1*   Articles of Incorporation, as amended. Incorporated herein by reference to
                                                  Exhibit 3.1 to the Registrant's Annual
                                                  Report on Form 10-KSB for the year
                                                  ended December 31, 1996.
  3.1.1*   Certificate of Amendment of Articles   Incorporated herein by reference to
           of Incorporation, filed August 4,      Exhibit 3.1 to the Registrant's
           1998.                                  Quarterly Report on Form 10-QSB for
                                                  the year ended September 30, 1998.
    3.2*   Bylaws, as amended.                    Incorporated herein by reference to
                                                  Exhibit 3.2 to the Registrant's
                                                  Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended June 30,
                                                  1998.
    4.1    Certificate of Determination of Series Filed herewith.
           A Junior Participating Preferred Stock
           filed October 13, 1998.
    4.2*   Rights Agreement, dated as of October  Incorporated herein by reference to
           1, 1998, between the Company and       the Registrant's Form 8-A dated
           ChaseMellon Shareholder Services,      October 7, 1998.
           L.L.C., which includes the form of
           Certificate of Determination for the
           Series A Junior Participating
           Preferred Stock as Exhibit A, the form
           of Rights Certificate as Exhibit B and
           the Summary of Rights to Purchase
           Series A Preferred Shares as Exhibit
           C.
    4.3*   Credit Agreement among the Registrant, Incorporated herein by reference to
           the Banks Named Herein and Banque      Exhibit 10.64 to the Registrant's
           Paribas as Agent, dated as of July 9,  Quarterly Report on Form 10-QSB for
           1997.                                  the quarterly period ended September
                                                  30, 1997.
</TABLE>
 
                                       36
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT                    TITLE                             METHOD OF FILING
 -------    -------------------------------------- --------------------------------------
 <S>        <C>                                    <C>
  4.3.1*    Waiver and First Amendment to          Incorporated herein by reference to
            $15,000,000 Credit Agreement Among the Exhibit 10.64.1 to the Registrant's
            Registrant, the Banks Named Therein    Quarterly Report on Form 10-QSB for
            and Banque Paribas, as Agent, dated    the quarterly period ended September
            March 6, 1998.                         30, 1998.
   10.1*    Lease of Premises by Registrant        Incorporated herein by reference to
            located at 11011 Via Frontera, San     Exhibit 10.1 to the Registrant's
            Diego, California, dated November 28,  Annual Report on Form 10-K for its
            1989.                                  fiscal year ended March 31, 1991.
  10.2*+    Employment Agreement between the       Incorporated herein by reference to
            Registrant and Kenneth M. Cohen, dated Exhibit 10.2 to the Registrant's
            May 7, 1996.                           Registration Statement on Form S-4,
                                                   Registration No. 333-10343, dated
                                                   September 12, 1996.
  10.3*+    General Release and Severance          Incorporated herein by reference to
            Agreement between the Registrant and   Exhibit 10.3 to the Registrant's
            Robert L. Widerkehr, dated July 31,    Registration Statement on Form S-4,
            1996.                                  Registration No. 333-10343, dated
                                                   September 12, 1996.
  10.4*+    1983 Stock Option Plan.                Incorporated herein by reference to
                                                   the Registrant's Registration
                                                   Statement on Form S-18, Registration
                                                   No. 2-83602, dated August 25, 1983.
10.4.1*+    First Amendment to 1983 Stock Option   Incorporated herein by reference to
            Plan.                                  Exhibit 10.4.1 to the Registrant's
                                                   Annual Report on Form 10-K for its
                                                   fiscal year ended March 31, 1988.
  10.5*+    1984 Stock Option Plan.                Incorporated herein by reference to
                                                   Exhibit 10.5 to the Registrant's
                                                   Registration Statement on Form S-1,
                                                   Registration No. 33-5292, dated July
                                                   16, 1986.
10.5.1*+    First and Second Amendments to 1984    Incorporated herein by reference to
            Stock Option Plan.                     Exhibit 10.5.1 to the Registrant's
                                                   Annual Report on Form 10-K for its
                                                   fiscal year ended March 31, 1988.
  10.6*+    1986 Stock Option Plan.                Incorporated herein by reference to
                                                   Exhibit 10.6 to the Registrant's
                                                   Registration Statement on Form S-1,
                                                   Registration No. 33-5292, dated July
                                                   16, 1986.
10.6.1*+    First Amendment to 1986 Stock Option   Incorporated herein by reference to
            Plan.                                  Exhibit 10.6.1 to the Registrant's
                                                   Annual Report on Form 10-K for its
                                                   fiscal year ended March 31, 1988.
  10.7*+    Employment Agreement between the       Incorporated herein by reference to
            Registrant and Paul A. Rosinack, dated Exhibit 10.7 to the Registrant's
            October 25, 1996.                      Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended March 31,
                                                   1997.
</TABLE>
 
                                       37
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT                    TITLE                             METHOD OF FILING
 -------    -------------------------------------- --------------------------------------
 <S>        <C>                                    <C>
   10.8*+   Employment Agreement between the       Incorporated herein by reference to
            Registrant and Robert A. Behrens,      Exhibit 10.69 to the Registrant's
            dated as of March 6, 1998.             Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended March 31,
                                                   1998.
   10.21*   Distribution Agreement between Vedco,  Incorporated herein by reference to
            Inc. and the Registrant, dated October Exhibit 10.21 to the Registrant's
            15, 1986.                              Registration Statement on Form S-1,
                                                   Registration No. 33-5292, dated July
                                                   16, 1986.
  10.26*+   1987 Stock Option Plan.                Incorporated herein by reference to
                                                   Exhibit 28 to the Registrant's
                                                   Registration Statement on Form S-8,
                                                   Registration No. 33-15712, dated July
                                                   9, 1987.
10.26.1*+   First Amendment to 1987 Stock Option   Incorporated herein by reference to
            Plan.                                  Exhibit 10.26.1 to the Registrant's
                                                   Annual Report on Form 10-K for its
                                                   fiscal year ended March 31, 1988.
   10.34*   Single-Tenant Industrial Lease by the  Incorporated herein by reference to
            Registrant of Premises located at      Exhibit 10.34 to the Registrant's
            16420 Via Esprillo, San Diego,         Annual Report on Form 10-KSB for the
            California, dated as of May 1, 1996.   year ended December 31, 1996.
   10.36*   Marketing Agreement between the        Incorporated herein by reference to
            Registrant and Bio-Trends              Exhibit 10.36 to the Registrant's
            International, Inc., dated May 10,     Annual Report on Form 10-K for its
            1989.                                  fiscal year ended March 31, 1989.
 10.36.1*   Distribution Agreement between the     Incorporated herein by reference to
            Registrant and Bio-Trends              Exhibit 10.36.1 to the Registrant's
            International, Inc., dated February 7, Annual Report on Form 10-K for its
            1990.                                  fiscal year ended March 31, 1990.
 10.36.2*   Amendment to FeLV Distribution         Incorporated herein by reference to
            Agreement between the Registrant and   Exhibit 10.36.2 to the Registrant's
            Bio-Trends International, Inc., dated  Quarterly Report on Form 10-QSB for
            as of August 22, 1996.                 the quarterly period ended September
                                                   30, 1996.
 10.38.1*   Addendum to Distribution Agreement     Incorporated herein by reference to
            between the Registrant and Rhone-      Exhibit 10.38.1 to the Registrant's
            Merieux, dated April 11, 1996.         Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended September
                                                   30, 1996.
 10.38.2*   Second Addendum to Distribution        Incorporated herein by reference to
            Agreement between the Registrant and   Exhibit 10.38.2 to the Registrant's
            Rhone-Merieux, dated August 27, 1996.  Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended September
                                                   30, 1996.
   10.39*   Distribution Agreement between the     Incorporated herein by reference to
            Registrant and Bio-Trends              Exhibit 10.39 to the Registrant's
            International, Inc., dated August 1,   Annual Report on Form 10-K for its
            1990.                                  fiscal year ended March 31, 1991.
   10.41*   Agreement between the Registrant and   Incorporated herein by reference to
            Rhone Merieux, Inc., dated July 9,     Exhibit 7.01 to the Registrant's
            1992.                                  Current Report on Form 8-K dated July
                                                   23, 1992.
</TABLE>
 
                                       38
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT                    TITLE                             METHOD OF FILING
 -------    -------------------------------------- --------------------------------------
 <S>        <C>                                    <C>
10.41.1*    Addendum to Agreement between the      Incorporated herein by reference to
            Registrant and Rhone Merieux, Inc.,    Exhibit 10.41.1 to the Registrant's
            dated August 22, 1996.                 Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended September
                                                   30, 1996.
 10.43*+    1991 Stock Option Plan, as amended     Incorporated herein by reference to
                                                   Exhibit 4.1 to the Registrant's
                                                   Registration Statement on Form S-8,
                                                   Registration No. 33-55992, dated
                                                   December 21, 1992.
  10.46*    Agreement Regarding Licensing,         Incorporated herein by reference to
            Development, Marketing and             Exhibit 10.46 to the Registrant's
            Manufacturing between the Registrant   Quarterly Report on Form 10-QSB for
            and Binax, Inc., dated as of June 30,  the quarter ended December 31, 1993.
            1993.
  10.47*    Amendment No. One to Agreement         Incorporated herein by reference to
            Regarding Licensing, Development,      Exhibit 10.47 to the Registrant's
            Marketing and Manufacturing between    Quarterly Report on Form 10-QSB for
            the Registrant and Binax, Inc., dated  the quarter ended December 31, 1993.
            December 9, 1993.
  10.48*    Amendment No. Two to Agreement         Incorporated herein by reference to
            Regarding Licensing, Development,      Exhibit 10.48 to the Registrant's
            Marketing and Manufacturing between    Annual Report on Form 10-KSB for the
            the Registrant and Binax, Inc., dated  year ended December 31, 1995.
            as of July 27, 1994.
 10.50*+    1995 Stock Option/Stock Issuance Plan, Incorporated herein by reference to
            as amended.                            Exhibit 10.50 to the Registrant's
                                                   Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended September
                                                   30, 1995.
 10.51*+    Form of Notice of Grant/Stock Option   Incorporated herein by reference to
            Agreement, as used under the 1995      Exhibit 99.2 to the Registrant's
            Stock Option/Stock Issuance Plan.      Registration Statement on Form S-8,
                                                   Registration No. 33-61103, dated July
                                                   17, 1995.
  10.52*    Contract Manufacturing Agreement,      Incorporated herein by reference to
            dated as of March 31, 1995.            Exhibit 10.48 to the Registrant's
                                                   Annual Report on Form 10-KSB for the
                                                   year ended December 31, 1995.
  10.53*    Distribution Agreement between the     Incorporated herein by reference to
            Registrant and Daiichi Pharmaceutical  Exhibit 10.53 to the Registrant's
            Co., Ltd., dated January 16, 1996      Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended March 31,
                                                   1996.
  10.54*    License Agreement between the          Incorporated herein by reference to
            Registrant and Engene Biotechnologies, Exhibit 10.54 to the Registrant's
            Inc., dated March 6, 1996.             Quarterly Report on Form 10-QSB for
                                                   the quarterly period ended March 31,
                                                   1996.
  10.55*    Research and Development Agreement     Incorporated herein by reference to
            between the Registrant and Engene      Exhibit 10.55 to the Registrant's
            Biotechnologies, Inc., dated March 6,  Quarterly Report on Form 10-QSB for
            1996.                                  the quarterly period ended March 31,
                                                   1996.
</TABLE>
 
                                       39
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT                   TITLE                             METHOD OF FILING
 -------   -------------------------------------- --------------------------------------
 <S>       <C>                                    <C>
  10.56*   Scientific Advisor Agreement between   Incorporated herein by reference to
           the Registrant and J. Kevin Steele,    Exhibit 10.56 to the Registrant's
           dated March 6, 1996.                   Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended March 31,
                                                  1996.
  10.57*   Inducement Agreement between the       Incorporated herein by reference to
           Registrant and Engene Biotechnologies, Exhibit 10.57 to the Registrant's
           Inc., dated March 6, 1996.             Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended March 31,
                                                  1996.
 10.58*+   International Canine Genetics, Inc.    Incorporated herein by reference to
           Amended and Restated 1992 Stock Option Exhibit 99.1 to the Registrant's
           Plan.                                  Registration Statement on Form S-8,
                                                  Registration No. 333-18363, dated
                                                  December 20, 1996.
 10.59*+   Form of International Canine Genetics, Incorporated herein by reference to
           Inc. Grant of Nonstatutory Stock       Exhibit 99.2 to the Registrant's
           Option under the Amended and Restated  Registration Statement on Form S-8,
           1992 Stock Option Plan.                Registration No. 333-18363, dated
                                                  December 20, 1996.
 10.60*+   Form of International Canine Genetics, Incorporated herein by reference to
           Inc. Grant of Incentive Stock Option   Exhibit 99.3 to the Registrant's
           under the Amended and Restated 1992    Registration Statement on Form S-8,
           Stock Option Plan.                     Registration No. 333-18363, dated
                                                  December 20, 1996.
  10.61*   Patent and Know-How License Agreement  Incorporated herein by reference to
           Amdex A/S and the Registrant, dated    Exhibit 10.61 to the Registrant's
           August 29, 1996.                       Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended March 31,
                                                  1997.
  10.62*   License Agreement between American     Incorporated herein by reference to
           Home Products Corporation and the      Exhibit 10.62 to the Registrant's
           Registrant, dated August 16, 1996.     Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended March 31,
                                                  1997.
  10.63*   Supply Agreement between the           Incorporated herein by reference to
           Registrant and American Home Products  Exhibit 10.63 to the Registrant's
           Corporation, dated August 16, 1996.    Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended March 31,
                                                  1997.
  10.65*   Stock Restriction and Rights Agreement Incorporated herein by reference to
           between the Registrant and Rhone       Exhibit 10.65 to the Registrant's
           Merieux S.A.S., dated as of July 9,    Quarterly Report on Form 10-QSB for
           1997.                                  the quarterly period ended September
                                                  30, 1997.
  10.66*   Warrant Agreement between the          Incorporated herein by reference to
           Registrant and Banque Paribas, dated   Exhibit 10.66 to the Registrant's
           as of July 9, 1997.                    Quarterly Report on Form 10-QSB for
                                                  the quarterly period ended September
                                                  30, 1997.
  10.67*   Note Purchase Agreement By and Between Incorporated herein by reference to
           the Registrant and BioQuest Venture    Exhibit 99.1 to the Registrant's
           Leasing Partnership, L.P., dated as of Current Report on Form 8-K dated March
           March 6, 1998.                         6, 1998.
</TABLE>
 
                                       40
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT                   TITLE                             METHOD OF FILING
 -------   -------------------------------------- --------------------------------------
 <S>       <C>                                    <C>
  10.68*   Convertible Promissory Note By the     Incorporated herein by reference to
           Registrant to BioQuest Venture Leasing Exhibit 99.2 to the Registrant's
           Partnership, L.P., dated March 6,      Current Report on Form 8-K dated March
           1998.                                  6, 1998.
  10.69*   Settlement Agreement, Stipulation to   Incorporated herein by reference to
           Settlement Order Under Seal, Release   Exhibit 10.70 to the Registrant's
           and License Between Barnes-Jewish      Quarterly Report on Form 10-QSB for
           Hospital and the Registrant, dated as  the quarterly period ended September
           of July 28, 1998.                      30, 1998.
     21    List of Subsidiaries.                  Filed herewith.
     23    Consent of Independent Accountants.    Filed herewith.
     27    Financial Data Schedule.               Filed herewith for electronic filing
                                                  purposes only.
</TABLE>
--------
*  Incorporated by reference.
+  Management contract or compensatory plan or arrangement.
 
  (b) Reports on Form 8-K
 
  None.
 
                                       41
<PAGE>
 
                                  SIGNATURES
 
  In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
 
Dated: March 30, 1999                  SYNBIOTICS CORPORATION
 
                                       By /s/ Michael K. Green
                                          -------------------------------------
                                          Michael K. Green
                                          Vice President - Finance
 
  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 and on
the dates indicated.
 
<TABLE>
<CAPTION>
             SIGNATURE                           TITLE                    DATE
             ---------                           -----                    ----
 
<S>                                  <C>                           <C>
/s/ Kenneth M. Cohen                 Chief Executive Officer,        March 30, 1999
____________________________________ President and Director
Kenneth M. Cohen
 
/s/ Michael K. Green                 Chief Financial Officer         March 30, 1999
____________________________________
Michael K. Green
 
/s/ Keith A. Butler                  Chief Accounting Officer and    March 30, 1999
____________________________________ Corporate Controller
Keith A. Butler
 
/s/ Patrick Owen Burns               Director                        March 30, 1999
____________________________________
Patrick Owen Burns
 
/s/ James C. DeCesare                Director                        March 30, 1999
____________________________________
James C. DeCesare
 
/s/ Brenda D. Gavin                  Director                        March 30, 1999
____________________________________
Brenda D. Gavin
 
/s/ M. Blake Ingle                   Director                        March 30, 1999
____________________________________
M. Blake Ingle
 
 
/s/ Joseph Klein III                 Director                        March 30, 1999
____________________________________
Joseph Klein III
 
 
/s/ Donald E. Phillips               Director                        March 30, 1999
____________________________________
Donald E. Phillips
</TABLE>
 
                                      42
<PAGE>
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
 EXHIBIT NO. EXHIBIT
 ----------- -------
 <C>         <S>
 2.2*        Purchase Agreement dated July 23, 1996 by and Among Synbiotics,
             ICG and S.R. One.
 2.3*        Amendment to Purchase Agreement dated September 7, 1996 by and
             Among Synbiotics, ICG and S.R. One.
 2.4*        Asset Purchase Agreement between Rhone Merieux, Inc. and the
             Registrant, dated May 14, 1997.
 2.4.1*      Amendment No. 1 to Asset Purchase Agreement between Rhone Merieux,
             Inc. and the Registrant, dated July 9, 1997
 2.4.2*      Amendment No. 2 to Asset Purchase Agreement between Rhone Merieux,
             Inc. and the Registrant, dated July 9, 1997.
 2.5*        Stock Purchase Agreement between Rhone Merieux S.A., Institut De
             Selection Animale S.A., Rhone Merieux Diagnostics S.A.S. and the
             Registrant, dated May 14, 1997.
 2.5.1*      Amendment No. 1 to Stock Purchase Agreement between Rhone Merieux
             S.A.S., Institut De Selection Animale S.A., R.M.--Diagnostics
             S.A.S. and the Registrant, dated July 9, 1997.
 2.5.2*      Amendment No. 2 to Stock Purchase Agreement between Rhone Merieux
             S.A.S., Institut De Selection Animale S.A., R.M.--Diagnostics
             S.A.S. and the Registrant, dated July 9, 1997.
 2.6*        Agreement and Plan of Reorganization By and Among the Registrant,
             Prisma Acquisition Corp. and the Stockholders and an Optionholder
             of Prisma Acquisition Corp., dated as of February 27, 1998.
 2.7*        Agreement of Merger By and Between Prisma Acquisition Corp. and
             the Registrant, dated as of March 6, 1998.
 3.1*        Articles of Incorporation, as amended.
 3.1.1*      Certificate of Amendment of Articles of Incorporation, filed
             August 4, 1998.
 3.2*        Bylaws, as amended.
 4.1         Certificate of Determination of Series A Junior Participating
             Preferred Stock filed October 13, 1998.
 4.2*        Rights Agreement, dated as of October 1, 1998, between the Company
             and ChaseMellon Shareholder Services, L.L.C., which includes the
             form of Certificate of Determination for the Series A Junior
             Participating Preferred Stock as Exhibit A, the form of Rights
             Certificate as Exhibit B and the Summary of Rights to Purchase
             Series A Preferred Shares as Exhibit C.
 4.3*        Credit Agreement among the Registrant, the Banks Named Herein and
             Banque Paribas as Agent, dated as of July 9, 1997.
 4.3.1*      Waiver and First Amendment to $15,000,000 Credit Agreement Among
             the Registrant, the Banks Named Therein and Banque Paribas, as
             Agent, dated March 6, 1998.
 10.1*       Lease of Premises by Registrant located at 11011 Via Frontera, San
             Diego, California, dated November 28, 1989.
 10.2*+      Employment Agreement between the Registrant and Kenneth M. Cohen,
             dated May 7, 1996.
 10.3*+      General Release and Severance Agreement between the Registrant and
             Robert L. Widerkehr, dated July 31, 1996.
<CAPTION>
 10.4*+      1983 Stock Option Plan.
</TABLE>
 
                                       43
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT NO. EXHIBIT
 ----------- -------
 <C>         <S>
 10.4.1*+    First Amendment to 1983 Stock Option Plan.
 10.5*+      1984 Stock Option Plan.
 10.5.1*+    First and Second Amendments to 1984 Stock Option Plan.
 10.6*+      1986 Stock Option Plan.
 10.6.1*+    First Amendment to 1986 Stock Option Plan.
 10.7*+      Employment Agreement between the Registrant and Paul A. Rosinack,
             dated October 25, 1996.
 10.8*+      Employment Agreement between the Registrant and Robert A. Behrens,
             dated as of March 6, 1998.
 10.21*      Distribution Agreement between Vedco, Inc. and the Registrant,
             dated October 15, 1986.
 10.26*+     1987 Stock Option Plan.
 10.26.1*+   First Amendment to 1987 Stock Option Plan.
 10.34*      Single-Tenant Industrial Lease by the Registrant of Premises
             located at 16420 Via Esprillo, San Diego, California, dated as of
             May 1, 1996.
 10.36*      Marketing Agreement between the Registrant and Bio-Trends
             International, Inc., dated May 10, 1989.
 10.36.1*    Distribution Agreement between the Registrant and Bio-Trends
             International, Inc., dated February 7, 1990.
 10.36.2*    Amendment to FeLV Distribution Agreement between the Registrant
             and Bio-Trends International, Inc., dated as of August 22, 1996.
 10.38.1*    Addendum to Distribution Agreement between the Registrant and
             Rhone-Merieux, dated April 11, 1996.
 10.38.2*    Second Addendum to Distribution Agreement between the Registrant
             and Rhone-Merieux, dated August 27, 1996.
 10.39*      Distribution Agreement between the Registrant and Bio-Trends
             International, Inc., dated August 1, 1990.
 10.41*      Agreement between the Registrant and Rhone Merieux, Inc., dated
             July 9, 1992.
 10.41.1*    Addendum to Agreement between the Registrant and Rhone Merieux,
             Inc., dated August 22, 1996.
 10.43*+     1991 Stock Option Plan, as amended
 10.46*      Agreement Regarding Licensing, Development, Marketing and
             Manufacturing between the Registrant and Binax, Inc., dated as of
             June 30, 1993.
 10.47*      Amendment No. One to Agreement Regarding Licensing, Development,
             Marketing and Manufacturing between the Registrant and Binax,
             Inc., dated December 9, 1993.
 10.48*      Amendment No. Two to Agreement Regarding Licensing, Development,
             Marketing and Manufacturing between the Registrant and Binax,
             Inc., dated as of July 27, 1994.
 10.50*+     1995 Stock Option/Stock Issuance Plan, as amended.
 10.51*+     Form of Notice of Grant/Stock Option Agreement, as used under the
             1995 Stock Option/Stock Issuance Plan.
</TABLE>
 
                                       44
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT NO. EXHIBIT
 ----------- -------
 <C>         <S>
 10.52*      Contract Manufacturing Agreement, dated as of March 31, 1995.
 10.53*      Distribution Agreement between the Registrant and Daiichi
             Pharmaceutical Co., Ltd., dated January 16, 1996.
 10.54*      License Agreement between the Registrant and Engene
             Biotechnologies, Inc., dated March 6, 1996.
 10.55*      Research and Development Agreement between the Registrant and
             Engene Biotechnologies, Inc., dated March 6, 1996.
 10.56*      Scientific Advisor Agreement between the Registrant and J. Kevin
             Steele, dated March 6, 1996.
 10.57*      Inducement Agreement between the Registrant and Engene
             Biotechnologies, Inc., dated March 6, 1996.
 10.58*+     International Canine Genetics, Inc. Amended and Restated 1992
             Stock Option Plan.
 10.59*+     Form of International Canine Genetics, Inc. Grant of Nonstatutory
             Stock Option under the Amended and Restated 1992 Stock Option
             Plan.
 10.60*+     Form of International Canine Genetics, Inc. Grant of Incentive
             Stock Option under the Amended and Restated 1992 Stock Option
             Plan.
 10.61*      Patent and Know-How License Agreement Amdex A/S and the
             Registrant, dated August 29, 1996.
 10.62*      License Agreement between American Home Products Corporation and
             the Registrant, dated August 16, 1996.
 10.63*      Supply Agreement between the Registrant and American Home Products
             Corporation, dated August 16, 1996.
 10.65*      Stock Restriction and Rights Agreement between the Registrant and
             Rhone Merieux S.A.S., dated as of July 9, 1997.
 10.66*      Warrant Agreement between the Registrant and Banque Paribas, dated
             as of July 9, 1997.
 10.67*      Note Purchase Agreement By and Between the Registrant and BioQuest
             Venture Leasing Partnership, L.P., dated as of March 6, 1998.
 10.68*      Convertible Promissory Note By the Registrant to BioQuest Venture
             Leasing Partnership, L.P., dated March 6, 1998.
 10.69*      Settlement Agreement, Stipulation to Settlement Order Under Seal,
             Release and License Between Barnes-Jewish Hospital and the
             Registrant, dated as of July 28, 1998.
 21          List of Subsidiaries.
 23          Consent of Independent Accountants.
 27          Financial Data Schedule (for electronic filing purposes only).
</TABLE>
--------
*  Incorporated by reference.
+  Management contract or compensatory plan or arrangement.
 
                                       45