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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10QSB

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(Mark One)

| | x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| | o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO.
| | - | --------------------------------------------------------------------------------------------------------------------------

Commission file number:
021145

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COVALENT GROUP, INC.(Name of small business issuer in its charter)

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| | Delaware(State or other jurisdiction ofincorporation or organization) |  | 561668867(I.R.S. Employer Identification No.) | 
| | --------------------------------------------------------------------- |  | ---------------------------------------------- | 

One Glenhardie Corporate Center, 1275 Drummers LaneWayne, Pennsylvania 19087(address of principal executive
offices)

Issuers telephone number: 6109759533

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 o

State the number of shares outstanding of each of the issuers classes of common equity as of November 12, 2002.

| | Common Stock, Par Value $.001(Class) |  | 12,660,083Outstanding | 
| | ------------------------------------ |  | --------------------- | 

Transitional Small Business Disclosure Format (check one): Yes o No x

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1



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##### Table of Contents

COVALENT GROUP, INC.

INDEX

|               |    |                       |    |                                                                                                        | Page
|-------------- | -- | --------------------- | -- | ------------------------------------------------------------------------------------------------------ | ----
|               |    |                       |    |                                                                                                        |     
|PART I.        |    | Financial Information | 3 
|               |    |                       |    |                                                                                                        |     
|               |    | Item 1.               |    | Consolidated Financial Statements (Unaudited)                                                          | 3   
|               |    |                       |    |                                                                                                        |     
|               |    |                       |    | Consolidated Balance Sheet  September 30, 2002 and December 31, 2001                                  | 3   
|               |    |                       |    |                                                                                                        |     
|               |    |                       |    | Consolidated Statements of Operations  Three Months and Nine Months Ended September 30, 2002 and 2001 | 4   
|               |    |                       |    |                                                                                                        |     
|               |    |                       |    | Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2002 and 2001                  | 5   
|               |    |                       |    |                                                                                                        |     
|               |    |                       |    | Notes to Consolidated Financial Statements                                                             | 6   
|               |    |                       |    |                                                                                                        |     
|               |    | Item 2.               |    | Managements Discussion and Analysis of Financial Condition and Results of Operations                  | 10  
|               |    |                       |    |                                                                                                        |     
|               |    | Item 3.               |    | Controls and Procedures                                                                                | 16  
|               |    |                       |    |                                                                                                        |     
|               |    |                       |    |                                                                                                        |     
|               |    |                       |    |                                                                                                        |     
|PART II.       |    | Other Information     | 18
|               |    |                       |   
|Signatures     | 19
|               |   
|Certifications | 20
|               |   
|Exhibit Index  | 22



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PART I      FINANCIAL INFORMATION

| | ITEM 1. | 
| | ------- | 

Covalent Group, Inc.Consolidated Balance Sheets(Unaudited)

|                                                                                                                         |  | September 30,2002 |            | December 31,2001 |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ---------- | ---------------- | -
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Assets                                                                                                                   |  |                   |            |                  |  
|Current Assets                                                                                                           |  |                   |            |                  |  
|Cash and cash equivalents                                                                                                |  | $                 | 1,599,882  |                  | $
|Restricted cash                                                                                                          |  |                   | 192,096    |                  |  
|Accounts receivable                                                                                                      |  |                   | 5,872,700  |                  |  
|Prepaid expenses and other                                                                                               |  |                   | 715,104    |                  |  
|Costs and estimated earnings in excess of related billings on uncompleted         contracts                              |  |                   | 10,035,427 |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Total Current Assets                                                                                                     |  |                   | 18,415,209 |                  |  
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Property and Equipment, Net                                                                                              |  |                   | 1,143,212  |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Other Assets                                                                                                             |  |                   | 35,106     |                  |  
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Total Assets                                                                                                             |  | $                 | 19,593,527 |                  | $
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Liabilities and Stockholders Equity                                                                                     |  |                   |            |                  |  
|Current Liabilities                                                                                                      |  |                   |            |                  |  
|Accounts payable                                                                                                         |  | $                 | 2,549,996  |                  | $
|Accrued expenses                                                                                                         |  |                   | 68,712     |                  |  
|Income tax payable                                                                                                       |  |                   |           |                  |  
|Obligations under capital leases                                                                                         |  |                   | 64,946     |                  |  
|Billings in excess of related costs and estimated earnings on uncompleted         contracts                              |  |                   | 1,668,664  |                  |  
|Customer advances                                                                                                        |  |                   | 3,938,883  |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Total Current Liabilities                                                                                                |  |                   | 8,291,201  |                  |  
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Long Term Liabilities                                                                                                    |  |                   |            |                  |  
|Obligations under capital leases                                                                                         |  |                   | 14,677     |                  |  
|Deferred income tax                                                                                                      |  |                   | 244,225    |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Total Long Term Liabilities                                                                                              |  |                   | 258,902    |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Total Liabilities                                                                                                        |  |                   | 8,550,103  |                  |  
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Stockholders Equity                                                                                                     |  |                   |            |                  |  
|Common stock, $.001 par value 25,000,000 shares authorized, 12,660,083 and         12,502,713 shares issued respectively |  |                   | 12,660     |                  |  
|Additional paid-in capital                                                                                               |  |                   | 10,890,324 |                  |  
|Retained earnings (accumulated deficit)                                                                                  |  |                   | 182,386    |                  |  
|Accumulated other comprehensive income                                                                                   |  |                   | 8,370      |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Less:                                                                                                                    |  |                   | 11,093,740 |                  |  
|Treasury stock, at cost, 12,500 shares                                                                                   |  |                   | (50,316    | )                |  
|                                                                                                                         |  |                   |            |                  |  
|Total Stockholders Equity                                                                                               |  |                   | 11,043,424 |                  |  
|                                                                                                                         |  |                   |            |                  |  
|                                                                                                                         |  |                   |            |                  |  
|Total Liabilities and Stockholders Equity                                                                               |  | $                 | 19,593,527 |                  | $
|                                                                                                                         |  |                   |            |                  |  

See accompanying notes to the consolidated financial statements.



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Covalent Group, Inc.Consolidated Statements Of Operations(Unaudited)

|                                                                      |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30, |  
|--------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | -
|                                                                      |  |                                 |            |                                |  
|                                                                      |  | 2002                            |            | 2001                           |  
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Net revenue                                                           |  | $                               | 6,001,436  |                                | $
|Reimbursement revenue                                                 |  |                                 | 1,300,065  |                                |  
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Total Revenue                                                         |  | $                               | 7,301,501  |                                | $
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Operating Expenses                                                    |  |                                 |            |                                |  
|Direct                                                                |  |                                 | 4,236,848  |                                |  
|Reimbursement out-of-pocket expenses                                  |  |                                 | 1,300,065  |                                |  
|Selling, general and administrative                                   |  |                                 | 1,020,808  |                                |  
|Depreciation and amortization                                         |  |                                 | 170,586    |                                |  
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Total Operating Expenses                                              |  |                                 | 6,728,307  |                                |  
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Income from Operations                                                |  |                                 | 573,194    |                                |  
|                                                                      |  |                                 |            |                                |  
|Net Interest Income (Expense)                                         |  |                                 | 1,943      |                                |  
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Income before Income Taxes                                            |  |                                 | 575,137    |                                |  
|                                                                      |  |                                 |            |                                |  
|Income Tax Provision                                                  |  |                                 | 195,000    |                                |  
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Net Income                                                            |  | $                               | 380,137    |                                | $
|                                                                      |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Net Income per Common Share                                           |  |                                 |            |                                |  
|                                                                      |  |                                 |            |                                |  
|Basic                                                                 |  | $                               | 0.03       |                                | $
|Diluted                                                               |  | $                               | 0.03       |                                | $
|                                                                      |  |                                 |            |                                |  
|Weighted Average Common and Common      Equivalent Shares Outstanding |  |                                 |            |                                |  
|Basic                                                                 |  |                                 | 12,605,383 |                                |  
|Diluted                                                               |  |                                 | 13,075,539 |                                |  

See accompanying notes to the consolidated financial statements.



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Covalent Group, Inc.Consolidated Statements of Cash Flows(Unaudited)

|                                                                                            |  | Nine Months EndedSeptember 30, |           
|------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------
|                                                                                            |  |                                |           
|                                                                                            |  | 2002                           |           
|                                                                                            |  |                                |           
|Operating Activities:                                                                       |  |                                |           
|                                                                                            |  |                                |           
|Net income                                                                                  |  | $                              | 1,784,678 
|Adjustments to reconcile net income to net cash provided by operating activities            |  |                                |           
|Depreciation and amortization                                                               |  |                                | 460,563   
|Changes in assets and liabilities (Increase) decrease in                                   |  |                                |           
|Restricted cash                                                                             |  |                                | 459,951   
|Accounts receivable                                                                         |  |                                | (3,779,846
|Prepaid expenses and other                                                                  |  |                                | (417,902  
|Costs and estimated earnings in excess of related billings on uncompleted         contracts |  |                                | (2,717,485
|Other assets                                                                                |  |                                | 2,964     
|Deferred income taxes                                                                       |  |                                |          
|Increase (decrease) in                                                                     |  |                                |           
|Accounts payable                                                                            |  |                                | 967,748   
|Accrued expenses                                                                            |  |                                | (492,888  
|Income taxes payable                                                                        |  |                                | (628,898  
|Billings in excess of related costs and estimated earnings on uncompleted         contracts |  |                                | 1,473,542 
|Customer advances                                                                           |  |                                | 1,056,523 
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Net (Cash Used)/Provided by Operating Activities                                            |  |                                | (1,831,050
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Investing Activities:                                                                       |  |                                |           
|                                                                                            |  |                                |           
|Purchases of property and equipment                                                         |  |                                | (343,577  
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Net (Cash Used)/Provided by Investing Activities                                            |  |                                | (343,577  
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Financing Activities:                                                                       |  |                                |           
|Principal repayments of obligations under capital leases                                    |  |                                | (49,370   
|Borrowings under short term debt                                                            |  |                                |          
|Proceeds from exercise of stock options                                                     |  |                                | 369,349   
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Net Cash Provided By Financing Activities                                                   |  |                                | 319,979   
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Effect of Exchange Rate Changes on Cash and Cash Equivalents                                |  |                                | (13       
|                                                                                            |  |                                |           
|Net Increase (Decrease) In Cash and Cash Equivalents                                        |  |                                | (1,854,661
|                                                                                            |  |                                |           
|Cash and Cash Equivalents, Beginning of Period                                              |  |                                | 3,454,543 
|                                                                                            |  |                                |           
|                                                                                            |  |                                |           
|Cash and Cash Equivalents, End of Period                                                    |  | $                              | 1,599,882 
|                                                                                            |  |                                |           

See accompanying notes to the consolidated financial statements.



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Covalent Group, Inc.Notes To Consolidated Financial Statements(Unaudited)

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

| |  | Consolidation
| |  | -------------

| |  | The consolidated financial statements for 2002 and 2001 include our accounts and the accounts of our whollyowned subsidiaries. Intercompany transactions and balances have been eliminated in
consolidation.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Use of Estimates
| |  | ----------------

| |  | The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (generally accepted accounting principles) require 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
period. Actual results could differ from those estimates.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Basis of Presentation
| |  | ---------------------

| |  | The financial statements for the three and nine months ended September 30, 2002 and September 30, 2001 have been prepared without audit and, in the opinion of management, reflect all adjustments necessary (consisting only
of normal recurring adjustments) to present fairly our financial position at September 30, 2002 and December 31, 2001 and the results of our operations and our cash flows for the interim periods presented. Such financial statements do not include
all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the financial statements and footnotes thereto included in our Annual Report on Form
10KSB, for the year ended December 31, 2001.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Operating results for the three and nine months ended September 30, 2002 may not necessarily be indicative of the results for the year ending December 31, 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Revenue Recognition
| |  | -------------------

| |  | Revenues are earned by performing services primarily under fixedprice contracts. Revenues from contracts are recognized on the percentage of completion method, measured principally by the total direct costs incurred
as a percentage of estimated total direct costs for each contract. The estimated total direct costs of contracts are reviewed and revised periodically throughout the lives of the contracts with adjustments to revenues resulting from such revisions
being recorded on a cumulative basis in the period in which the revisions are made. Hence, the effect of the changes on future periods of contract performance is recognized as if the revised estimates had been the original estimates. Because of the
inherent uncertainties in estimating costs, it is possible that the estimates used will change in the near term and could result in a material change. If we determine that a loss will result
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | from the performance of a fixedprice contract, the entire amount of the estimated loss is charged against income in the period in which such determination is made. During the quarter ended September 30, 2002, we
made an adjustment to cost and revenue estimates on a significant contract, the effect of which was to reduce income from operations by $564 thousand. A significant portion of the adjustment reflects the determination that, based upon the overall
progress of the study, fewer interim monitoring visits (for which we receive fees) will be required. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Costs and estimated earnings in excess of related billings on uncompleted contracts represents revenue recognized to date that is currently unbillable to the customer pursuant to contractual terms. In general, amounts
become billable upon the achievement of milestones or in accordance with predetermined payment schedules. The balance at September 30, 2002 primarily consisted of 4clinical trials, which individually
constitute 40%, 21%, 15% and 15% of the balance. These clinical trials are expected to be completed during 2003 and 2004. The liability account billings in excess of related costs and estimated earnings on uncompleted contracts represents amounts
billed in excess of revenue recognized at the balance sheet date.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Reimbursable OutofPocket Expenses
| |  | -----------------------------------

| |  | On behalf of our clients, we pay fees to investigators and other outofpocket costs for which we are reimbursed at cost, without markup or profit. Effective January 1, 2002, in connection with the required
implementation of Financial Accounting Standards Board Emerging Issues Task Force Rule No. 0114 (EITF 0114), Income Statement Characterization of Reimbursements Received for OutofPocket Expenses
Incurred, outofpocket costs are now included in Operating Expenses, while the reimbursements received are reported separately as Reimbursement Revenue in the Consolidated Statements of Operations. We will continue to exclude from
revenue and expense in the Consolidated Statement of Operations fees paid to investigators and the associated reimbursement since we will continue to act as agent on behalf of our clients with regard to investigator
payments.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Restricted Cash
| |  | ---------------

| |  | We received advance payments from one of our clients as part of a longterm contract, which includes a separate restricted cash account to be utilized for payment of investigator fees. As of September 30, 2002, this
restricted cash amount was $192 thousand. This amount is also included in customer advances in the accompanying balance sheet.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Net Income Per Common and Common Equivalent Share
| |  | -------------------------------------------------

| |  | Basic net income per common share was computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted net income per common share for the period ended
September 30, 2002 reflects the potential dilution from the exercise of outstanding stock options into common stock.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The net income and weighted average common and common equivalent shares outstanding for purposes of calculating net income per common share were computed as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                                                                      |  | Three Months EndedSeptember 30, |            | Nine Months EndedSeptember 30, |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------- | ------------------------------ | -
|                                                                                                                      |  |                                 |            |                                |  
|                                                                                                                      |  | 2002                            |            | 2001                           |  
|                                                                                                                      |  |                                 |            |                                |  
|Net income used for basic and diluted                                                                                 |  |                                 |            |                                |  
|net income per common share                                                                                           |  | $                               | 380,137    |                                | $
|                                                                                                                      |  |                                 |            |                                |  
|                                                                                                                      |  |                                 |            |                                |  
|Weighted average common shares outstanding used      for basic net income per common share                            |  |                                 | 12,605,383 |                                |  
|                                                                                                                      |  |                                 |            |                                |  
|Dilutive effect of common stock options and      warrants outstanding                                                 |  |                                 | 470,156    |                                |  
|                                                                                                                      |  |                                 |            |                                |  
|                                                                                                                      |  |                                 |            |                                |  
|Weighted average common and common equivalent     shares outstanding used for diluted net income per     common share |  |                                 | 13,075,539 |                                |  
|                                                                                                                      |  |                                 |            |                                |  

| |  | Comprehensive Income
| |  | --------------------

| |  | A reconciliation of comprehensive income in accordance with Statement of Financial Accounting Standards No. 130 Reporting Comprehensive Income is as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30, |  
|--------------------------------------- |  | ------------------------------- | ------- | ------------------------------ | -
|                                        |  |                                 |         |                                |  
|                                        |  | 2002                            |         | 2001                           |  
|                                        |  |                                 |         |                                |  
|                                        |  |                                 |         |                                |  
|Net income                              |  | $                               | 380,137 |                                | $
|                                        |  |                                 |         |                                |  
|                                        |  |                                 |         |                                |  
|Foreign currency translation adjustment |  |                                 | 1,533   |                                |  
|                                        |  |                                 |         |                                |  
|                                        |  |                                 |         |                                |  
|Comprehensive Income                    |  | $                               | 381,670 |                                | $
|                                        |  |                                 |         |                                |  

| |  | New Accounting Pronouncements
| |  | -----------------------------

| |  | In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. Covalent adopted these Statements on January 1, 2002. SFAS No. 141 requires
that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142
addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible
assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives not be amortized, but will rather be tested at least annually for impairment. Adoption of these statements did not have a material impact on
our financial statements.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible
longlived assets and the associated asset
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 is not expected to have a material impact on our financial statements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of LongLived Assets. This Statement addresses the financial accounting and reporting for the impairment or disposal
of longlived assets. This Statement superceded FASB SFAS No. 121, Accounting for the Impairment of LongLived Assets. This Statement established a single accounting model, based on the framework established in SFAS No. 121,
and resolves some of the implementation issues related to Statement 121. SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Adoption of SFAS
No. 144 did not have a material impact on our financial statements.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | On January 1, 2002 we adopted Emerging Issues Task Force (EITF) No. 0114, Income Statement Characterization of Reimbursements Received for OutofPocket Expenses Incurred. EITF No.
0114 requires that in cases where the contractor acts as principal, reimbursements received for outofpocket expenses incurred be characterized as revenue and the associated costs be included as operating expenses in the statement
of operations. As required by this rule, we also reclassified comparative financial information for the three and nine months ended September 30, 2001. The implementation of this rule resulted in an increase by equal amounts in Total Revenue and
Total Operating Expenses totaling $1.3 million and $629 thousand for the three months, and $3.2 million and $1.1 million for the nine months, ended September 30, 2002 and 2001, respectively. The implementation of this rule had no impact upon Net
Income.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 rescinds SFAS No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, and SFAS No. 64, Accounting for Leases, to eliminate an inconsistency between the required accounting for saleleaseback transactions and the
required accounting for certain lease modifications that have economic effects that are similar to saleleaseback transactions. SFAS also amends other existing authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. Adoption of SFAS No. 145 is not expected to have a material impact on our financial statements.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In July, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit or disposal plan. Previous accounting guidance was provided by EITF No. 943, Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS No. 146 replaces EITF No. 943 and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146 is
not expected to have a material impact on our financial statements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Reclassifications | 
| | ----------------- | 

| |  | Certain prior year balances have been reclassified to conform to the current year presentation.
| |  | -----------------------------------------------------------------------------------------------

2.       LINE OF CREDIT

| |  | We maintain a demand line of credit with a bank which matures on June 30, 2003. Maximum borrowings under this facility are the lesser of $2.5 million or 75% of eligible accounts receivable, as defined in the loan
agreement, and bear interest at the banks Prime Rate. There were no outstanding borrowings under this facility at September 30, 2002.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ITEM 2. 
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 
| | ---------------------------------------------------------------------------------------------- | 

| |  | Forward Looking Statements
| |  | --------------------------

| |  | The following discussion and analysis should be read in conjunction with the Companys Annual Report on Form 10KSB, as well as the Companys financial statements and notes thereto included elsewhere in
this Quarterly Report on Form 10QSB. When used in this Report on Form 10QSB and in other public statements, both oral and written, by the Company and Company officers, the words estimate, project,
intend, believe, anticipate and similar expressions are intended to identify forwardlooking statements regarding events and financial trends that may affect our future operating results and financial
position. Such statements are subject to risks and uncertainties that could cause our actual results and financial position to differ materially. Such factors include, among others: (i) our success in attracting new business and retaining existing
clients and projects; (ii) the size, duration and timing of clinical trials; (iii) the termination, delay or cancellation of clinical trials; (iv) the timing difference between our receipt of contract milestone or scheduled payments and our
incurring costs to manage these trials; (v) outsourcing trends in the pharmaceutical, biotechnology and medical device industries; (vi) the ability to maintain profit margins in a competitive marketplace; (vii) our ability to attract and retain
qualified personnel; (viii) the sensitivity of our business to general economic conditions; and (ix) other economic, competitive, governmental and technological factors affecting our operations, markets, products, services and prices. We undertake
no obligation to publicly release the result of any revision of these forwardlooking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. These and other factors that
could cause the forwardlooking statements to be materially different are described in greater detail in our Annual Report on Form 10KSB in the section entitled Factors that Might Affect our Business or Stock
Price.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Company Overview
| |  | ----------------

| |  | In this discussion, the terms Company, we, us and our refer to Covalent Group, Inc. and our subsidiaries, except where it is made clear
otherwise.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | We are a leader in the design and management of complex clinical trials for the pharmaceutical, biotechnology and medical device industries. Our mission is to provide our clients with high quality, fullservice
support for their clinical trials. We offer therapeutic expertise, experienced team management and advanced technologies. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Our current clients consist of many of the best known, largest and most demanding companies in the pharmaceutical, biotechnology and medical device industries. From clinical program development, to patient recruitment, to
managing the regulatory submission process, we have the resources to implement fullscale studies as well as selected aspects of Phase I through IV clinical trials. We have clinical trial experience across a wide variety of therapeutic areas.
We currently have operational capabilities in the United States, Canada, Western and Eastern Europe, Scandinavia and the Middle East.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | In November 2000, we established Covalent Group, Ltd., a whollyowned subsidiary in the United Kingdom, to support existing contracts on clinical trials and expand our presence internationally. In June 2002, the
Company changed its state of incorporation to the State of Delaware.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | General
| |  | -------

| |  | The information set forth and discussed below for the three and nine months ended September 30, 2002 and 2001 is derived from the Financial Statements included elsewhere herein. The financial information set forth and
discussed below is unaudited but, in the opinion of management, reflects all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such information. The results of our operations for a particular quarter may
not be indicative of results expected during the other quarters or for the entire year.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our quarterly results can fluctuate as a result of a number of factors, including our success in attracting new business, the size and duration of clinical trials, the timing of client decisions to conduct new clinical
trials or to cancel or delay ongoing trials, and other factors, many of which are beyond our control.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We are a research management organization that designs, coordinates and monitors clinical trials in drug development for some of the worlds leading pharmaceutical firms. Revenue is derived principally from the
design, placement, monitoring and management of clinical development studies.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our clinical research service contracts generally have terms ranging from several months to several years. A portion of the contract fee is generally payable upon execution of the contract, with the balance payable in
installments (either scheduled or milestonebased) over the life of the contract. Revenues from contracts are generally recognized on the percentage of completion method, measured principally by the total direct costs incurred as a percentage
of estimated total direct costs for each contract.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | As work progresses on our contracts, original estimates might be changed due to changes in the scope of work. The Company attempts to negotiate contract amendments with the sponsor to cover these services provided outside
the terms of the original contract. The timing of contract amendments could result in changes to our revenue recognition and expense estimates that may impact operating margins and result in variability in our operating results from quarter to
quarter. Historically, the Company has been successful in negotiating amendments in the majority of
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | these instances. However, there can be no assurance that the sponsor will agree to the proposed amendments, and the Company ultimately bears the risk of cost overruns. | 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Contracts generally may be terminated by clients with or without cause. Clinical trials may be terminated or delayed for several reasons, including unexpected results or adverse patient reactions to the drug, inadequate
patient enrollment or investigator recruitment, manufacturing problems resulting in shortages of the drug or decisions by the client to deemphasize or terminate a particular trial or development efforts on a particular drug. Depending on the
size of the trial in question, a clients decision to terminate or delay a trial in which we participate could have a materially adverse effect on our backlog, future revenue and profitability. As a result, we believe that our backlog as of any
date is not necessarily a meaningful indicator of future results.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our backlog, which consists of anticipated revenues from signed contracts, was approximately $20 million at September 30, 2002, as compared to approximately $30 million as of December 31, 2001. During the quarter, two
studies were terminated by two separate sponsors. We were advised by the sponsor of the first study, which reduced backlog by $2.7 million, that the study was terminated by the sponsor due to internal budget constraints. We were advised by the
sponsor of the second study, which reduced backlog by $1.0 million, that the study was terminated by the sponsor based upon interim data that did not support further development of the drug. We are currently performing a separate study for this
sponsor under a separate contract.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The following chart provides a commonsized presentation of our Consolidated Statements of Operations, excluding the impact of reimbursement revenue and reimbursement of outofpocket expenses, for the
three and nine months ended September 30, 2002 and 2001:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30, | 
|----------------------------------- |  | ------------------------------- | ----- | ------------------------------ | 
|                                    |  |                                 |       |                                | 
|                                    |  | 2002                            |       | 2001                           | 
|                                    |  |                                 |       |                                | 
|                                    |  | (Unaudited)                     |       | (Unaudited)                    | 
|                                    |  |                                 |       |                                | 
|Net revenue                         |  |                                 | 100.0 | %                              | 
|Operating Expenses                  |  |                                 |       |                                | 
|Direct                              |  |                                 | 70.6  | %                              | 
|Selling, general and administrative |  |                                 | 17.0  | %                              | 
|Depreciation                        |  |                                 | 2.8   | %                              | 
|Income from Operations              |  |                                 | 9.6   | %                              | 
|Net Income                          |  |                                 | 6.3   | %                              | 

| |  | Results of Operations
| |  | ---------------------

| |  | Three Months Ended September 30, 2002 Compared to Three Months Ended September 30, 2001
| |  | ---------------------------------------------------------------------------------------

| |  | Net revenue for the three months ended September 30, 2002 increased 31% to $6.0 million as compared to $4.6 million for the three month period ended September 30, 2001. The
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | increase of $1.4 million resulted from an increased number of trials being conducted as well as an increase in the average size of these trials. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------ | 

| |  | Direct expenses include compensation and other expenses directly related to conducting clinical studies. These costs increased by $1.5 million from $2.8 million to $4.2 million for the three months ended September 30,
2001 and 2002, respectively. The increase in direct expenses resulted principally from the increase in the number and average size of trials being conducted in 2002. Direct expenses as a percentage of revenues were 71% for the three months ended
September 30, 2002, as compared to 60% for the same period last year. During the quarter ended September 30, 2002, we made an adjustment to cost and revenue estimates on a significant contract, the effect of which was to reduce income from
operations by $564 thousand. A significant portion of the adjustment reflects the determination that, based upon the overall progress of the study, fewer interim monitoring visits (for which we receive fees) will be required. We are presently
engaged in discussions with the sponsor of this study regarding a potential change of scope amendment. If obtained, the amendment may enable us to recognize additional revenue on this contract beyond what was estimated as of September 30, 2002. The
change in the level of direct expenses as a percentage of revenues also reflects different cost structures of the clinical trials being conducted and different types of services requested by our clients.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selling, general, and administrative expenses includes the salaries, wages and benefits of all administrative and business development personnel and all other support expenses not directly related to specific contracts.
Selling, general and administrative expenses for the three months ended September 30, 2002 were $1.0 million, or 17% of net revenues, as compared to $1.0 million, or 23% of net revenues, for the same period last year. The decrease as a percent of
net revenues reflects some timing differences and adjustments to compensation expenses in 2002. Commencing in January 2003, the Company expects to have increased rent and occupancy costs in connection with additional leased premises to support
incremental staffing.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Depreciation and amortization expense increased to $171 thousand for the three months ended September 30, 2002, from $136 thousand for the three months ended September 30, 2001, as a result of additional purchases of
office and computer equipment.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Net interest income for the three months ended September 30, 2002 was $2 thousand compared to net interest expense of $25 thousand for the three months ended September 30, 2001, a positive change of $27 thousand, largely
the result of having more cash to invest during the quarter and less capital leases and other indebtedness. As of September 30, 2002 the Company had no short term debt outstanding, whereas as of September 30, 2001 $1.6 million was
outstanding.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The effective income tax rate for the three months ended September 30, 2002 and 2001 was 34% and 42%, respectively. The decrease of 8% is largely the result of the ability to utilize carryforwards available as the result
of prior losses generated outside the United States.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001
| |  | -------------------------------------------------------------------------------------

| |  | Net revenue for the nine months ended September 30, 2002 increased 35% to $17.6 million as compared to $13.1 million for the ninemonth period ended September 30, 2001. The
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | increase of $4.6 million resulted from an increased number of trials being conducted as well as an increase in average size of these trials. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Direct expenses include compensation and other expenses directly related to conducting clinical studies. These costs increased by $3.7 million from $7.0 million to $10.7 million for the nine months ended September 30,
2001 and 2002, respectively. The increase in direct expenses resulted principally from the increase in the number and average size of trials being conducted in 2002. Direct expenses as a percentage of net revenues were 61% for the nine months ended
September 30, 2002 as compared to 54% for the same period last year. During the quarter ended September 30, 2002, we made an adjustment to cost and revenue estimates on a significant contract, the effect of which was to reduce income from operations
by $564 thousand. A significant portion of the adjustment reflects the determination that, based upon the overall progress of the study, fewer interim monitoring visits (for which we receive fees) will be required. We are presently engaged in
discussions with the sponsor of this study regarding a potential change of scope amendment. If obtained, the amendment may enable us to recognize additional revenue on this contract beyond what was estimated as of September 30, 2002. The change in
the level of direct expenses as a percentage of revenues also reflects different cost structures of the clinical trials being conducted and different types of services requested by our clients.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Selling, general, and administrative expenses include the salaries, wages and benefits of all administrative and business development personnel and all other support expenses not directly related to specific contracts.
Selling, general and administrative expenses for the nine months ended September 30, 2002 were $3.6 million, or 20% of net revenues, as compared to $3.2 million, or 25% of net revenues, for the same period last year. The increase of $352 thousand
reflects increased staff expenses, rent and insurance expenses. The decrease as a percent of net revenues reflects some timing differences and adjustments to compensation expenses in 2002. Commencing in January 2003, the Company expects to have
increased rent and occupancy costs in connection with additional leased premises to support incremental staffing.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Depreciation and amortization expense increased to $461 thousand for the nine months ended September 30, 2002 from $370 thousand for the nine months ended September 30, 2001 as a result of additional purchases of office
and computer equipment.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Net interest income for the nine months ended September 30, 2002 was $6 thousand compared to net interest expense of $66 thousand for the nine months ended September 30, 2001, a positive change of $72 thousand, largely
the result of having more cash to invest during the period and less capital leases and other indebtedness. As of September 30, 2002 the Company had no short term debt outstanding, whereas as of September 30, 2001 $1.6 million was
outstanding.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The effective income tax rate for the nine months ended September 30, 2002 and 2001 was 39% and 42%, respectively. The decrease of 3% is largely the result of the ability to utilize carryforwards available as the result
of prior losses generated outside the United States.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Liquidity and Capital Resources
| |  | -------------------------------

| |  | Our cash and cash equivalents balance at September 30, 2002 was $1.6 million as compared to $3.5 million at December 31, 2001. The net decrease in cash was primarily due to an
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | increase in accounts receivable and costs and estimated earnings in excess of related billings on uncompleted contracts. Collections of accounts receivable and additional billings would be expected to have a positive
impact on cash flow from operations in future periods. | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| |  | Our contracts usually require a portion of the contract amount to be paid at the time the contract is initiated. Additional payments are generally made upon completion of negotiated performance milestones, or on a
regularly scheduled basis, throughout the life of the contract. Cash receipts do not necessarily correspond to costs incurred and revenue recognized. Revenue recognition is based on the percentage of completion accounting method. We typically
receive a low volume of largedollar receipts. As a result, the number of days net revenue outstanding in accounts receivable, costs and estimated earnings in excess of related billings, customer advances, and billings in excess of related
costs will fluctuate due to the timing and size of billings and cash receipts. At September 30, 2002, the net days revenue outstanding was 157 days compared to 110 days at December 31, 2001. Compared to December 31, 2001, accounts receivable
increased $3.8 million to $5. 9 million at September 30, 2002, primarily due to the timing of billings and progress payments for clinical trials.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Compared to December 31, 2001, costs and estimated earnings in excess of related billings on uncompleted contracts increased $2.7 million to $10.0 million at September 30, 2002. The increase primarily represents timing
differences between the costs incurred to run the trials and the billing milestones contained in the contracts with our sponsors. The balance at September 30, 2002 primarily consisted of 4clinical
trials, which individually constitute 40%, 21%, 15% and 15% of the balance. These clinical trials are expected to be completed during 2003 and 2004. The increase in the liability account billings in excess of related costs and estimated earnings on
uncompleted contracts of $1.5 million to $1.7 million as of September 30, 2002 from $195 thousand as of December 31, 2001, resulted from the timing of billings and revenue recognition on clinical trial contracts. The increase in customer advances of
$1.1 million to $3.9 million as of September 30, 2002 from $2.9 million as of December 31, 2001, resulted primarily from additional customer advances for investigator payments on contracts signed in 2002.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | We purchased $344 thousand of equipment during the nine months ended September 30, 2002. We anticipate capital expenditures of approximately $100  $200 thousand during the fourth quarter of 2002, primarily for
computer equipment and leasehold improvements.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Our principal cash needs on both a short and longterm basis are for the funding of our operations and capital expenditure requirements. We expect to continue expanding our operations through internal growth,
expansion of our existing services, and the development of new service products for the pharmaceutical, biotechnology and medical device industries. We expect such activities to be funded from existing cash and cash equivalents, anticipated cash
flow from operations, and our line of credit. We maintain a demand line of credit with a bank under which maximum borrowings are the lesser of $2.5 million or 75% of eligible accounts receivable, as defined in the loan agreement, and bear interest
at the banks Prime Rate. There were no outstanding borrowings under this facility at September 30, 2002.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | Management believes that our operations and financial results are not materially affected by inflation. | 
| | ------------------------------------------------------------------------------------------------------- | 

| |  | Critical Accounting Policies and Estimates
| |  | ------------------------------------------

| |  | Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements which have been prepared in conformity with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the periods presented. On an ongoing basis, management evaluates its judgments and estimates. Management bases its judgments and estimates on historical experience and on various
other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Management considers the following policies to be most critical in understanding the
more complex judgments that are involved in preparing our consolidated financial statements and the uncertainties that could affect our results of operations and financial condition.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The majority of the Companys revenues are based upon fixedprice contracts calculated on a percentage of completion basis based upon assumptions regarding the estimated total costs for each contract. Costs are
incurred for each contract and compared to estimated total direct costs for each contract to determine a percentage of completion on the contract. The percentage of completion is multiplied by the estimated total contract value to determine the
amount of revenue recognized. Management reviews the estimated total direct costs on each contract to determine if estimated amounts are correct, and estimates are adjusted as needed. Except as described above, the majority of the Companys
estimates have been materially accurate, but there can be no assurance that these estimates will continue to be accurate. As work progresses, original estimates might be changed due to changes in the scope of work. The Company attempts to negotiate
contract amendments with the sponsor to cover these services provided outside the terms of the original contract. Historically, the Company has been successful in negotiating amendments in the majority of these instances. However, there can be no
assurance that the sponsor will agree to the proposed amendments, and the Company ultimately bears the risk of cost overruns.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | There have been no material changes to the Companys critical accounting policies and, except as described above, estimates since December 31, 2001. For more detailed information on the Companys critical
accounting policies and estimates, see our Annual Report on Form 10KSB for the year ended December 31, 2001.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ITEM 3. 
CONTROLS AND PROCEDURES | 
| | -------------------------------- | 

| | (a) |  | Evaluation of Disclosure Controls and Procedures. The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure
controls and procedures (as defined in Exchange Act Rule 13a14(c) and 15d14(c)) as of a date within 90 days of the filing date of this Quarterly
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

| | Report on Form 10QSB (the Evaluation Date), have concluded that as of the Evaluation Date, the Companys disclosure controls and procedures were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10QSB was being prepared. | 
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

| | (b) |  | Changes in Internal Controls. Subsequent to the evaluation of the Companys internal controls, there were no significant changes in the Companys internal controls or in other factors
that could significantly affect the Companys internal controls subsequent to the evaluation, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no
corrective actions were taken subsequent to such evaluation.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



---

##### Table of Contents

COVALENT GROUP, INC.

PART II.
OTHER INFORMATION

ITEM 1.         Legal
Proceedings

| |  | None.
| |  | -----

ITEM 2.         Changes in
Securities

| |  | None
| |  | ----

ITEM 3.         Defaults Upon
Senior Securities

| |  | None.
| |  | -----

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

| |  | None.
| |  | -----

ITEM 5.         Other
Information

| |  | None.
| |  | -----

ITEM 6.         Exhibits and
Reports on Form 8K

|Exhibit |                                                                                                                  
|------- | -----------------------------------------------------------------------------------------------------------------
|        |                                                                                                                  
|99.1    | Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.
|        |                                                                                                                  
|99.2    | Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002.

18



---

##### Table of Contents

SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

|                         |  | COVALENT GROUP, INC.
|------------------------ |  | --------------------
|Dated: November 13, 2002 |  | By:                 
|                         |  |                     
|                         |  |                     

|                         |  |    
|------------------------ |  | ---
|Dated: November 13, 2002 |  | By:
|                         |  |    
|                         |  |    

19



---

##### Table of Contents

Certification

I, Kenneth M. Borow, M.D., certify that:

|1. |  | I have reviewed this quarterly report on Form 10QSB of Covalent Group, Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                               
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
|   |  |                                                                                                                                                                                                                                                                                                                               
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;                   
|   |  |                                                                                                                                                                                                                                                                                                                               
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a14 and 15d14) for the
registrant and have:                                                                                                     

| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 
| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and                                                                                                  
| |    | 
| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 
| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and                                                                                                                                        

|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |  |                                                           
|----------------- |  |  | ----------------------------------------------------------
|November 13, 2002 |  |  | /s/ KENNETHM.BOROW, M.D.                                  
|                  |  |  |                                                           
|                  |  |  | Kenneth M. Borow, M.D.President andChief Executive Officer



---

##### Table of Contents

Certification

I, Jorge A. Leon, certify that:

|1. |  | I have reviewed this quarterly report on Form 10QSB of Covalent Group, Inc.;                                                                                                                                                                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |  |                                                                                                                                                                                                                                                                                                                               
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
|   |  |                                                                                                                                                                                                                                                                                                                               
|3. |  | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;                   
|   |  |                                                                                                                                                                                                                                                                                                                               
|4. |  | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Exchange Act Rules 13a14 and 15d14) for the
registrant and have:                                                                                                     

| | a. |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 
| | b. |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and                                                                                                  
| |    | 
| | c. |  | presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;                                                                                                                        

|5. |  | The registrants other certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons
performing the equivalent functions):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | a. |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the
registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 
| | b. |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and                                                                                                                                        

|6. |  | The registrants other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |  |                                                                 
|----------------- |  |  | ----------------------------------------------------------------
|November 13, 2002 |  |  | /s/ JORGEA.LEON                                                 
|                  |  |  |                                                                 
|                  |  |  | Jorge A. LeonExecutive Vice President andChief Financial Officer



---

##### Table of Contents

EXHIBIT INDEX

|Exhibit | Description                                                                                                      
|------- | -----------------------------------------------------------------------------------------------------------------
|        |                                                                                                                  
|99.1    | Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 
|        |                                                                                                                  
|99.2    | Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.