UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
Commission File Number: 1-12213



COVANCE INC.(Exact name of Registrant as specified in its Charter)

Delaware(State of Incorporation)

22-3265977(I.R.S. Employer Identification No.)210 Carnegie Center, Princeton, New Jersey(Address of Principal Executive Offices)

08540(Zip Code)


Registrant's telephone number, including area code: (609) 452-4440



Securities registered pursuant to Section 12(b) of the Act:

Title of Each ClassCommon Stock, $.01 Par Value

Name of Each Exchangeon Which RegisteredNew York Stock Exchange


Securities registered pursuant to Section 12(g) of the Act: None



Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes X No

Indicate
by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange
Act (the "Exchange Act") of 1934. Yes  No X

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

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

Indicate
by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large
Accelerated Filer X    Accelerated
Filer     Non-Accelerated Filer     Smaller Reporting
Company

Indicate
by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes   NoX

The
aggregate market value of the shares of common stock held by non-affiliates of the Registrant was $5,372,919,048 on June 30, 2008,
the last business day of Registrant's most recently completed second fiscal quarter.

As
of February 17, 2009, the Registrant had 63,352,824 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Those portions of the Company's definitive Proxy Statement which are responsive to Items 10, 11,
12, 13, and 14 of Part III of this Form 10-K are incorporated by reference into this Form 10-K.



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PART I

Item 1.    Business

General

Covance Inc. is a leading drug development services company providing a wide range of early-stage and late-stage
product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. We also provide laboratory testing services to the chemical,
agrochemical and food industries. We believe Covance is one of the world's largest drug development services companies, based on annual net revenues, and one of a few that are capable of providing
comprehensive global product development services. Covance maintains offices in more than 20 countries.

Business Strategy

Drug development services companies like Covance typically derive substantially all of their revenue from the research, development
and marketing expenditures of the pharmaceutical, biotechnology and medical device industries. We believe outsourcing of these services has increased in the past and will increase in the future
because of several factors, including: pressures to contain costs, limitations on internal capacity, the need for faster development time for new drugs, research in multiple countries simultaneously,
stringent government regulation and expertise that customers lack internally. We believe the investment and amount of time required to develop new drugs has been increasing, and that these trends
create opportunities for companies that can help make the process of drug development more efficient.

Our
strategy is to provide services that will generate high-quality and timely data in support of new drug approval or use expansion. We do this by developing and delivering
innovative high-quality services that apply science and technology and global reach to capture, manage and integrate a vast array of drug development data. In early development services,
an increasing portion of our business is being provided through strategic, long-term arrangements with clients. These strategic arrangements include dedicated laboratory testing services
contracts, in which our clients commit to purchasing a specific dollar amount of services in exchange for guaranteed access to a portion of our facilities. This arrangement benefits our customers by
guaranteeing them long-term capacity and infrastructure to run their preclinical studies, and benefits Covance by allowing us to more efficiently utilize our capacity and resources. The
trend towards dedicated service agreements has been moving into non toxicology work as evidenced by our 2008 strategic research and development collaboration with Eli Lilly and Company ("Lilly").
Under this agreement, Covance acquired Lilly's 450 acre early development campus in Greenfield, Indiana and assumed the employment of over 250 Lilly employees. Covance agreed to provide Lilly with a
broad range of drug development services over a ten year period for a minimum agreement value of $1.6 billion. Under this agreement, Lilly transferred responsibility to Covance for its
non-GLP (Good Laboratory Practice) toxicology, in vivo pharmacology, quality control laboratory, and imaging services. In addition, the agreement includes a committed level of clinical
pharmacology, central laboratory, GLP toxicology studies and clinical Phase II-IV services.

Other
types of strategic arrangements include multi-year sole source central laboratory services agreements and strategic clinical development alliances. Sole source
partnerships for central
laboratory services benefit our clients by reducing the time and effort spent contracting services on a project-by-project basis. Under strategic clinical development alliances
a pharmaceutical sponsor selects one or two trusted Phase III clinical development providers to perform all clinical trial management activities, typically within selected therapeutic classes.

Operational Excellence.Our goal is to deliver consistently outstanding service to our
clients on a global scale through our platform focused on
people, process and clients. As a scientific services company, people are integral to our success. We work to recruit, develop and retain talented people through our "Compelling Offer" program which
is designed to provide and encourage highly qualified people to initiate and build a career at Covance. We aim to enhance the effectiveness of these people with superior processes to

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efficiently
deliver a high level of client service. Among other tools, we use Six Sigma to optimize our processes to increase our cost competitiveness, eliminate variability in our client service
levels and build competitive advantage. Finally, we seek to leverage consistently outstanding client service by building strategic relationships with our clients that drive growth and help sustain our
competitive advantage. Across our People, Process and Clients platform, we seek to utilize technology to augment the talent of our people, to automate robust processes, and to link us more closely to
our clients via proprietary systems such as StudyTracker®, LabLink and Trial Tracker®.

Global Reach.We believe that it is important to provide a broad range of drug research
and development services on a global basis. We have offices,
regional monitoring sites and laboratories in over 50 locations in more than 20 different countries and conduct field work in many other countries. We believe we are a leader among drug development
services companies in our ability to support large, global clinical trial programs.

Acquisitions.In addition to internal development of services, we consider acquisitions
that are complementary to our existing services and that
expand our ability to serve our clients. While we cannot exclude the possibility that we may opportunistically seek to take advantage of other situations, we generally expect acquisitions to enhance
our existing services either qualitatively or geographically or to add new services that can be integrated with our existing services. In 2008, we enhanced our biomarker service offerings by
purchasing a minority stake in Caprion Proteomics, a leading provider of proteomics based services to the pharmaceutical industry. In 2006 and 2005, respectively, we enhanced our preclinical
pharmacology service offering with the acquisitions of clinical pharmacology sites of Radiant Research Inc. ("Radiant") and GFI Clinical Services ("GFI"), and in 2006 we enhanced our research
products antibody services offering with the acquisition of Signet Laboratories, Inc. ("Signet").

Services

The services we provide constitute two segments for financial reporting purposes: (1) early development services, which
includes preclinical services and clinical pharmacology services, and (2) late-stage development services, which includes central laboratory, clinical development, and
commercialization services (periapproval and market access services). Although each segment has separate services within it, they can be and increasingly are combined in integrated service offerings
and we believe clients increasingly are interested in the opportunities for such combined services.

Early Development

Preclinical Services

Our preclinical services include toxicology services, pharmaceutical chemistry and related services. Our preclinical area has been a
source of innovation by introducing new technologies for client access to data such as StudyTracker®, electronic animal identification, multimedia study reports and animal and test tube
measures of induced cell proliferation or reproduction. StudyTracker® is an internet-based client access product which allows customers of toxicology, bioanalytical, metabolism and
reproductive and developmental toxicology services to review study data and schedules on a near real-time basis. We have laboratories in locations which include Madison, Wisconsin;
Greenfield, Indiana and Vienna, Virginia in the United States and Harrogate, United Kingdom and Muenster, Germany in Europe. We also have bioanalytical laboratories in the United States in
Indianapolis, Indiana and Chantilly, Virginia, and an administrative and a sales office in Tokyo, Japan. In 2004, we announced major expansions to each of our Madison, Wisconsin and Harrogate, United
Kingdom facilities. The Harrogate expansion opened for studies in the fourth quarter of 2005 and in Madison the new expansion was brought online in the first quarter of 2006. In 2007, Covance
completed a significant expansion of its Germany facility and opened a nutritional chemistry laboratory in Singapore. Also in 2007, Covance purchased a partially constructed manufacturing facility on
a 47 acre property in Prince William County, Virginia, for a planned future early drug development laboratory offering safety testing and chemistry analysis services. In 2008, Covance purchased
Lilly's 450 acre research campus in Greenfield, Indiana for cash payments

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totaling
$51.6 million and is currently providing a number of services at that location, including non-GLP toxicology, in vivo pharmacology, quality control laboratory and imaging.
Covance is also building an early development facility in Chandler, Arizona which is scheduled to open in the first half of 2009.

Toxicology.Our preclinical toxicology services includein
vivotoxicology studies, which are
studies of the effects of drugs in animals, genetic toxicology studies, which include studies of the effects of drugs on chromosomes, as well as on genetically modified mice, and other specialized
toxicology services. For example, we provide immunotoxicology services in which we assess the impact of drugs or chemicals on the structure and function of the immune system and reproductive
toxicology services which help our clients access the risk that a potential new medicine may cause birth defects.

Pharmaceutical and Nutritional Chemistry.In our pharmaceutical chemistry services, we
determine the metabolic profile and bioavailability of drug
candidates. We also provide laboratory testing services to the chemical, agricultural chemical and food industries. We offer a complete range of services to agricultural chemical manufacturers to
determine the potential risk to humans, animals and the environment from plant protection products such as pesticides. We also offer a broad range of services to the food, nutriceutical and animal
feed industries, including nutritional analysis, nutritional content fact labels, safety analysis, and stability testing.

Research Products.We provide custom polyclonal and monoclonal antibody services for
research purposes and purpose-bred animals for
biomedical research. In May 2006, we expanded our offerings in monoclonal antibodies with the purchase of Signet of Dedham, Massachusetts for cash payments totaling $9.1 million. Signet was a
leading provider of monoclonal antibodies used in the research of cancer, and infectious and other diseases. The purpose-bred research animals we provide are required by pharmaceutical and
biotechnology companies, university research centers and contract research organizations as part of required preclinical animal safety and efficacy testing. Through a variety of processes, technology
and specifically constructed facilities, we provide purpose-bred, pre-acclimated and specific pathogen free animals that meet our clients' rigorous quality control
requirements. In 2007, Covance opened a dedicated animal biosafety level 2 (ABSL-2) containment vivarium to allow us to provide full service vaccine testing.

Bioanalytical Services.Our bioanalytical testing services, which are conducted in our
bioanalytical laboratory in Indianapolis, Indiana and in our
immunoanalytical facility in Chantilly, Virginia, as well as in our laboratories in Madison, Wisconsin; Harrogate, United Kingdom and Shanghai, China, help determine the appropriate dose and frequency
of drug application from late discovery evaluation through Phase III clinical testing on a full-scale, globally integrated basis.

Clinical Pharmacology Services

We provide clinical pharmacology services, including first-in-human trials, of new pharmaceuticals at our
seven clinics located throughout the United States and our one clinic in Leeds, United Kingdom, and also offer our clients access to specialized patient populations needed for Phase II trials
in specific therapeutic areas. We have grown this service offering through acquisitions. In 2006, we significantly expanded our capacity and capabilities in the United States with the acquisition of
Radiant's clinical pharmacology sites and its access to specialized patient populations, for cash payments totaling $66.6 million. In 2005, we acquired GFI for cash payments totaling
$6.2 million and in 2008 we relocated and significantly upgraded this Evansville, Indiana clinical pharmacology research unit.

Late-Stage Development

Central Laboratory Services

We are the world's largest provider of central laboratory services. We have four central laboratories, one in each of the United
States, Switzerland, Singapore and China that provide central laboratory services,

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including
biomarker services, to biotechnology and pharmaceutical customers. In 2007, we opened a new purpose built facility in Shanghai, China.

Our
capabilities provide clients the flexibility to conduct studies on a multinational and simultaneous basis. The data we provide is combinable and results in global clinical trial
reference ranges because we use consistent laboratory methods, identical reagents and calibrators, and similar equipment globally. Combinable data eliminates the cumbersome process of statistically
correlating results generated using different methods and different laboratories on different equipment.

We
also employ a proprietary clinical trials management system that enables us to enter a sponsor's protocol requirements directly into our database. The laboratory data can be audited
because all laboratory data can be traced to source documents. In addition, the laboratories are capable of delivering customized
data electronically within 24 hours of test completion. Covance also offers pharmacogenomic testing and sample storage technologies in conjunction with our central laboratory services. Central
laboratory services also offers LabLink, an internet-based client access program that allows customers to review and query clinical trial lab data on a near real-time basis, and the
Covance Local Laboratories service, which uses a proprietary system to harmonize laboratory results from local and regional laboratories to help expand the reach of traditional central laboratory
services.

Our
central laboratories have an automated kit production line that is located in the United States and supplies kits to investigator sites around the world. This system allows the
flexibility to expand kit production volume more quickly and uses consistent methods to reduce supply variation for our customers.

In
2008, we purchased a minority interest in Caprion Proteomics, a leading provider of proteomics-based services to the pharmaceutical industry for $3.1 million in cash. Under
the terms of our agreement with Caprion, Covance will serve as the exclusive contract research organization distributor of Caprion's proteomic biomarker services.

Clinical Development Services

We offer a comprehensive range of clinical trial services, including the full management of Phase II and III clinical studies.
We have extensive experience in a number of therapeutic areas, and we provide the following core services either on an individual or aggregated basis to meet clients' needs: study design and modeling;
study orchestration; trial logistics; enablement of study site performance; clinical data management and biostatistical analysis; and medical writing and regulatory services.

We
have extensive experience in managing clinical trials in North America, Europe, Latin America and Asia Pacific. These trials may be conducted separately or simultaneously as part of
a multinational development plan. We can manage every aspect of clinical trials from clinical development plans and protocol design to New Drug Applications, among other supporting services. Over the
last several years, clinical development services has continued its expansion into Eastern Europe, Asia Pacific and South America.

Our
clinical development services utilize Trial Tracker®, a web-enabled clinical trial project management and tracking tool which allows both our employees and
customers to review and manage all aspects of clinical trial projects. We have also integrated the management of clinical data across our Phase I through IV clinical services using the
Oracle® clinical platform.

Clinical Trial Support Services

Cardiac Safety Services.In November 2007, we sold our centralized ECG business to
eResearchTechnology Inc. for an upfront cash payment of
approximately $35 million with the opportunity to receive up to an additional $14 million in contingent consideration relating to transferred backlog as well as from revenues generated
from new contracts secured under a long-term marketing arrangement. We continue to offer this service to our clients through this marketing arrangement.

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Interactive Voice and Web Response Services.To expedite the drug development process
and to help reduce costs, we created a proprietary interactive
trial management system. This system uses touch-tone telephone technology and, when requested, the internet for data entry purposes and assists our clients in managing clinical trials on a
real-time basis and in reducing product waste with just-in-time inventory processing. This system, which is multi-lingual, is available world-wide
through toll-free numbers 24 hours per day, seven days per week. We offer this system both in conjunction with clinical trials we conduct and as a stand-alone service.

Commercialization Services

Periapproval Services.Periapproval trials are studies conducted "around the time of NDA
approval", generally after a drug has successfully
undergone clinical efficacy and safety testing and the New Drug Application has been submitted to the Food and Drug Administration ("FDA"). We offer a range of periapproval services, including:
Treatment Investigational New Drug applications; Phase IIIb clinical studies, which involve studies conducted after New Drug Application submission, but before regulatory approval is obtained;
Phase IV clinical studies which are studies conducted after initial approval of the drug; and other types of periapproval studies such as post-marketing surveillance studies, FDA
mandated
post-marketing commitments generally focusing on characterizing a drug's safety in large, diverse patient groups, product withdrawal support services and prescription to
over-the-counter switch studies.

Market Access Services.We offer a wide range of reimbursement and healthcare economics
consulting services, including outcomes and pharmacoeconomic
studies, reimbursement planning, reimbursement advocacy programs and registry services. Pharmaceutical, biotechnology and medical device manufacturers purchase these services from us to help optimize
their return on research and development investments. We offer InTeleCenter® services that employ state of the art phone, internet and electronic media to manage customer communications.
InTeleCenter programs include reimbursement hotlines, patient assistance programs and patient compliance programs. We also field and process telephone calls and inquiries relating to adverse
experiences with a drug in connection with the performance of periapproval studies.

Customers and Marketing

We provide product development services on a global basis to, among others, the pharmaceutical and biotechnology industries. In 2008,
we served in excess of 300 biopharmaceutical companies, ranging from the world's largest pharmaceutical companies and biotechnology companies to small and start-up organizations.

While
no single customer accounted for more than ten percent of our aggregate net revenue in 2008, we had two customers accounting for more than five but less than ten percent of our
net revenues, and our top five customers accounted for less than 25 percent of our net revenues. In our early development segment, one customer accounted for ten percent of net revenues. All
other customers in our early development segment individually accounted for less than five percent of its aggregate net revenues. In our late-stage development segment, one customer
accounted for more than ten percent of net revenues and one customer accounted for more than five but less than ten percent of its aggregate net revenues.

For
net revenues from external customers, assets attributable to each of our business segments and other segment information for each of the last three fiscal years, please review
Note 12 to the audited consolidated financial statements included elsewhere in this Annual Report.

For
net revenues from external customers and long-lived assets attributable to operations in the United States, United Kingdom, Switzerland and other countries for each of
the last three fiscal years, please review Note 12 to the audited consolidated financial statements included elsewhere in this Annual Report.

Our
global sales activities are conducted by sales personnel based in our operations in the United States, Europe and Asia Pacific.

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Contractual Arrangements

Many of our contracts with our clients are either fixed price or fee-for-service with a cap. To a lesser
extent, some of our contracts are fee-for-service without a cap. In cases where the contracts are fixed price, we may bear the cost of overruns, or we benefit if the costs are
lower than we anticipated. In cases where our contracts are fee-for-service with a cap, the contracts contain an overall budget for the trial based on time and cost estimates.
If our costs are lower than anticipated, the customer generally keeps the savings, but if our costs are higher than estimated, we may be responsible for the overrun unless the increased cost is a
result of a scope change or other factors outside of our control, such as an increase in the number of patients to be enrolled or the type or amount of data to be collected. Contracts may range in
duration from a few months to several years or longer depending on the nature of the work performed. Billing schedules and payment terms are generally negotiated on a
contract-by-contract basis. In some cases, we bill the client for the total contract value in progress-based installments as we reach certain non-contingent billing
milestones over the contract duration. For additional information please refer to Item 7. Critical Accounting PoliciesRevenue Recognition.

Most
of our contracts may be terminated by the customer either immediately or upon notice. These contracts typically require payment to Covance of expenses to wind down a study, payment
to Covance of fees earned to date, and, in some cases, a termination fee or payment to Covance of some portion of the fees or profit that could have been earned under the contract if it had not been
terminated early.

We
also have dedicated capacity arrangements with certain clients ranging in duration from one to ten years. Underlying these arrangements are individual project contracts for the
specific services to be provided. Dedicated capacity arrangements enable our clients to secure space in our facilities in exchange for which they agree to provide a guaranteed annual minimum dollar
value ("volume") of work. Under these types of arrangements, if the annual minimum volume commitment is not reached, the client is required to pay Covance for the shortfall. Progress towards the
achievement of annual minimum volume guarantees is monitored throughout the year. Annual minimum guarantee shortfalls are included in net revenues when the amount of the shortfall is determinable and
realization is assured.

Backlog

Some of our studies and projects are performed over an extended period of time, which may exceed several years. We maintain an order
backlog to track anticipated net revenues yet to be earned for work that has not yet been performed. However, we do not maintain an order backlog for other services that are performed within a short
period of time or where it is not otherwise practical or feasible to maintain an order backlog. Our aggregate backlog at December 31, 2008 and December 31, 2007 was $4.33 billion
and $2.68 billion respectively.

Backlog
generally includes work to be performed under signed agreements (i.e., contracts and letters of intent). Once work under a signed agreement begins, net revenues are
recognized over the life of the project. However, in some cases we will begin work on a project once we conclude we have a legally binding agreement, but before executing a signed agreement, and
backlog may include the net revenues expected from that project.

We
cannot provide any assurance that we will be able to realize all or most of the net revenues included in backlog or estimate the portion expected to be filled in the current year.
Although backlog can provide meaningful information to our management with respect to a particular study, we believe that our aggregate backlog as of any date is not necessarily a meaningful indicator
of our future results for a variety of reasons. These reasons include the following: studies vary in duration; the scope of studies may change, which may either increase or decrease their value; and
studies may be terminated, reduced in scope or delayed at any time by the client or regulatory authorities.

Competition

The contract research organization industry has many participants ranging from hundreds of small, limited-service providers to a
limited number of full-service contract research organizations with global

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capabilities.
We primarily compete against in-house departments of pharmaceutical companies, full-service and limited-service contract research organizations and, to a lesser
extent, selected universities and teaching hospitals.

In
early development services, our significant competitors include Charles River Laboratories International Inc., MDS Inc., PPD, Inc., WIL Laboratories,
Aptuit, Inc. and MPI Research, among others. In late-stage development services our significant competitors include PPD, Inc., Quintiles Transnational Corp., Parexel
International Corporation, Kendle International Inc., Icon PLC., PRA
International, i3 Research, Pharmanet Development Group Inc. and Quest Diagnostics Incorporated, among others. Covance represents an important market presence in each segment's principal
services.

There
is competition for customers on the basis of many factors, including the following: reputation for on-time quality performance; expertise and experience in specific
areas; scope of service offerings; strengths in various geographic markets; price; technological expertise and efficient drug development processes; ability to acquire, process, analyze and report
data in a rapid and accurate manner; historic experience and relationship; ability to manage large- scale clinical trials both domestically and internationally; quality of facilities; expertise and
experience in reimbursement and healthcare consulting; and size. We believe that we compete favorably in these areas.

Government Regulation

Our laboratory services are subject to various regulatory requirements designed to ensure the quality and integrity of the testing
processes. Covance's standard operating procedures are written in accordance with regulations and guidelines appropriate to the region and the nation where they will be used.

The
industry standards for conducting preclinical laboratory testing are embodied in the Good Laboratory Practice (GLP) and for central laboratory operations in the Clinical Laboratory
Improvement Amendments of 1988 (CLIA). The standards of GLP are required by the FDA, by the Department of Health in the United Kingdom, by the European Agency for the Evaluation of Medicinal Products
(EMEA) in Europe and by similar regulatory authorities in other parts of the world. To help satisfy its compliance obligations, Covance has established quality assurance controls at its laboratory
facilities which monitor ongoing compliance with GLP and CLIA.

Our
clinical services are subject to industry standards for the conduct of clinical research and development studies that are embodied in the regulations for Good Clinical Practice
(GCP). The FDA, EMEA and other regulatory authorities require that test results submitted to such authorities be based on studies conducted in accordance with GCP. As with GLP and Good Manufacturing
Practice (GMP), noncompliance with GCP can result in the disqualification of data collected during the clinical trial.

We
strive to perform all clinical research in accordance with the International Conference on HarmonizationGood Clinical Practice Guidelines, and the requirements of the
applicable country. Although the U.S. is a signatory to these guidelines, the FDA has not adopted all of these guidelines as statutory regulations, but has currently adopted them only as guidelines.
From an international perspective, when applicable, we have implemented common standard operating procedures across regions to assure consistency whenever it is feasible and appropriate to do so.

Our
animal import and breeding facilities and toxicology facilities are also subject to a variety of federal and state laws and regulations, including The Animal Welfare Act and the
rules and regulations promulgated thereunder by the United States Department of Agriculture ("USDA") and corresponding rules and regulations in other jurisdictions. These facilities maintain detailed
standard operating procedures and the documentation necessary to comply with applicable regulations for the humane treatment of the animals in their custody. Besides being licensed by the USDA as a
dealer and/or research facility, as appropriate, these businesses are also accredited by the Association for Assessment and Accreditation of Laboratory Animal Care

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International
and have registered assurance with the United States National Institutes of Health Office of Laboratory Animal Welfare.

The
use of controlled substances in testing for drugs with a potential for abuse is regulated in the United States by the U.S. Drug Enforcement Administration and by similar regulatory
bodies in other parts of the world. All Covance United States laboratories using controlled substances for testing purposes are licensed by the U.S. Drug Enforcement Administration.

Our
United States laboratories are subject to licensing and regulation under federal, state and local laws relating to hazard communication and employee
right-to-know regulations, the handling and disposal of medical specimens and hazardous waste and radioactive materials, as well as the safety and health of laboratory
employees. All of our laboratories are subject to applicable federal and state laws and regulations relating to the storage and disposal of all laboratory specimens including the regulations of the
Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Transportation, the National Fire Protection Agency and the Resource Conservation and Recovery Act. Although we
believe that Covance is currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject Covance to denial of the right to conduct business,
fines, criminal penalties and other enforcement actions.

In
addition to its comprehensive regulation of safety in the workplace, the Occupational Safety and Health Administration and similar regulatory authorities in foreign countries have
established extensive requirements relating to workplace safety for health care employers, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. Covance
employees receive initial and periodic training focusing on compliance with applicable hazardous materials regulations and health and safety guidelines.

In
the past few years, both the United States and foreign governments have become more concerned about the disclosure of confidential personal data. The European Union, or EU, now
prohibits certain disclosures of personal confidential information, including medical information, to any entity that does not comply with certain security safeguards. We will continue to monitor our
compliance with applicable regulations.

The
regulations of the U.S. Department of Transportation, the U.S. Public Health Service and the U.S. Postal Service apply to the surface and air transportation of laboratory specimens.
Covance's laboratories also must comply with the applicable International Air Transport Association regulations, which govern
international shipments of laboratory specimens. Furthermore, when materials are sent to a foreign country, the transportation of such materials becomes subject to the laws, rules and regulations of
such foreign country.

Intellectual Property

We have developed certain computer software and technically derived procedures and products intended to maximize the quality and
effectiveness of our services. Although our intellectual property rights are important to our results of operations, we believe that such factors as the technical expertise, knowledge, ability and
experience of our professionals are more important, and that, overall, these technological capabilities provide significant benefits to our clients.

Employees

At December 31, 2008, we had approximately 9,600 employees, approximately 36% of whom were employed outside of the United
States and 8,826 of whom were full time employees. Our records indicate that 193 of our employees hold M.D. degrees, 355 hold Ph.D. degrees, and 1,303 hold masters or other postgraduate degrees. We
believe that Covance's relations with its employees are good.

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Executive Officers

Joseph L. Herring, 53, has been Covance's Chairman since January 1, 2006 and Chief Executive Officer since January 1,
2005. Mr. Herring was President and Chief Operating Officer from November 2001 to December 31, 2004 and was Covance's Corporate Senior Vice President and PresidentEarly
Development Services from September 1999 to November 2001. From September 1996 to September 1999, Mr. Herring was Corporate Vice President and General Manager of Covance Laboratories North
America. Prior to joining Covance, Mr. Herring was Vice President of Caremark International, a provider of home care and physician practice management services, and he also served as a Vice
President of Baxter International where he was employed for 14 years.

William
E. Klitgaard, 55, has been Covance's Corporate Senior Vice President, Chief Financial Officer and Treasurer since September 2000. From September 1999 to September 2000,
Mr. Klitgaard was Covance's Corporate Vice President, Strategy and Corporate Development and Treasurer. From October 1996 to September 1999, Mr. Klitgaard was Covance's Corporate Vice
President and Treasurer. Prior to that, Mr. Klitgaard was Treasurer at Kenetech Corporation in San Francisco, and prior to that Mr. Klitgaard spent eleven years in positions of
increasing responsibility with Consolidated Freightways Inc.

Wendel
Barr, 47, has been Covance's Executive Vice President and Chief Operating Officer since January 1, 2008, prior to which he had served as Corporate Senior Vice President
and PresidentEarly Development North America since February 2003. From October 2000 to February 2003, Mr. Barr was Corporate Vice President and General ManagerLabs
North America. Prior to joining Covance, Mr. Barr was the Global Vice President and General Manager of Service for Marconi Medical Systems, which he joined in October 1999. Prior to that,
Mr. Barr was the General Manager of Service for General Electric Medical Systems. Mr. Barr was employed by General Electric Co. from 1984 to 1999, in positions of increasing
responsibility in services, marketing and global business.

Richard
Cimino, 49, has been Covance's Corporate Senior Vice President and PresidentClinical Development, since December 2004. Prior to that, Mr. Cimino was
Covance's General Manager of Cardiac Safety Services commencing December 2003. Prior to that, Mr. Cimino was General Manager, America's Health Imaging Group and Corporate Vice President of
Eastman Kodak Company. Mr. Cimino serves at Covance's request as a director of Bio-Imaging Technologies, Inc.

Michele
A. Kennedy, 41, has been Covance's Corporate Vice President, Chief Accounting Officer and Controller since March 2007. Prior to this, Ms. Kennedy served as Assistant
Controller of Covance. Ms. Kennedy has been with Covance for 12 years in positions of increasing responsibility. Prior to joining Covance, Ms. Kennedy was an audit manager with
Ernst & Young.

Donald
Kraft, 49, has been Covance's Corporate Senior Vice PresidentHuman Resources since July 2002. From January 2001 to June 2002, Mr. Kraft was Corporate Vice
PresidentHuman Resources of Covance. From June 2000 to January 2001, Mr. Kraft was Director, Organizational Development of Zurich Financial Services, an insurance company. Prior to
June 2000, Mr. Kraft was Director, Organizational Effectiveness of Abbott Laboratories Inc.

James
W. Lovett, 44, has been Covance's Corporate Senior Vice President, General Counsel and Secretary since February 2003. From December 2001 to February 2003, Mr. Lovett was
Corporate Vice President, General Counsel and Secretary of Covance. From 1997 to 2001, Mr. Lovett was with FMC Corporation in positions of increasing responsibility and, prior to that, was a
partner in the law firm of McDermott, Will & Emery.

Deborah
L. Tanner, 46, has been Covance's Corporate Senior Vice President and PresidentGlobal Central Laboratory Services since February 2006. Prior to that
Ms. Tanner was Covance's Global Vice President of Operations in Central Laboratory Services commencing in August 2001 and prior to that was Vice PresidentAnalytical Services for
Covance LaboratoriesEurope. Ms. Tanner has been with Covance for over 20 years in positions of increasing responsibility.

9

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Available Information

Covance makes available free of charge on its website at www.covance.com, its Annual Report on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The charters of the Audit Committee, the Compensation Committee, and
the Corporate Governance Committee, as well as the Corporate Governance Guidelines, the Code of Ethics for Financial Professionals and the Company's Business Integrity Program may be accessed through
our website atwww.covance.comand are available without charge upon written request to Secretary, Covance Inc., 210 Carnegie Center, Princeton,
NJ 08540.

Item 1A.    Risk Factors

This section discusses various risk factors that are attendant with our business and the provision of our services. If the events
outlined below were to occur individually or in the aggregate, our business, results of operations, financial condition, and cash flows could be materially adversely affected.

Changes in government regulation or in practices relating to the pharmaceutical industry could decrease the need for the services we provide.

Governmental agencies throughout the world, including in the United States, strictly regulate the drug development process. Our
business involves helping pharmaceutical and biotechnology companies navigate the regulatory drug approval process. Changes in regulation, such as a relaxation in regulatory requirements or the
introduction of simplified drug approval procedures, or an increase in regulatory requirements that we have difficulty satisfying or that make our services less competitive, could eliminate or
substantially reduce the demand for our services. Also, if government efforts to contain drug costs and pharmaceutical and biotechnology company profits from new drugs, our customers may spend less,
or reduce their growth in spending on research and development. If health insurers were to change their practices with respect to reimbursements for pharmaceutical products, our customers may spend
less, or reduce their growth in spending on research and development.

Failure to comply with existing regulations could result in a loss of revenue or earnings or in increased costs.

Any failure on our part to comply with applicable regulations could result in the termination of on-going research or the
disqualification of data for submission to regulatory authorities. For example, if we were to fail to properly monitor compliance by clinical trial investigators with study protocols, the data
collected from that trial could be disqualified. If this were to happen, we could be contractually required to repeat the trial at no further cost to our customer, but at substantial cost to us.

We may bear financial losses because most of our contracts are of a fixed price nature and may be delayed or terminated or reduced in scope for
reasons beyond our control.

Many of our contracts provide for services on a fixed price or fee-for-service with a cap basis and they may
be terminated or reduced in scope either immediately or upon notice. Cancellations may occur for a variety of reasons, including:



10

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The
loss, reduction in scope or delay of a large contract or the loss or delay of multiple contracts could materially adversely affect our business, although our contracts frequently
entitle us to receive the costs of winding down the terminated projects, as well as all fees earned by us up to the time of termination. Some contracts also entitle us to a termination fee.

We may bear financial risk if we under price our contracts or overrun cost estimates.

Since our contracts are often structured as fixed price or fee-for-service with a cap, we bear the financial
risk if we initially under price our contracts or otherwise overrun our cost estimates. Such under pricing or significant cost overruns could have a material adverse effect on our business, results of
operations, financial condition, and cash flows.

We may not be able to successfully develop and market or acquire new services.

We may seek to develop and market new services that complement or expand our existing business or expand our service offerings through
acquisition. If we are unable to develop new services and/or create demand for those newly developed services, or to expand our service offerings through acquisition, our future business, results of
operations, financial condition, and cash flows could be adversely affected.

Our quarterly operating results may vary.

Our operating results may vary significantly from quarter to quarter and are influenced by factors over which we have little control
such as:



We
believe that operating results for any particular quarter are not necessarily a meaningful indication of future results. While fluctuations in our quarterly operating results could
negatively or positively affect the market price of our common stock, these fluctuations may not be related to our future overall operating performance.

We depend on the pharmaceutical and biotechnology industries.

Our revenues depend greatly on the expenditures made by the pharmaceutical and biotechnology industries in research and development.
In some instances, companies in these industries are reliant on their ability to raise capital in order to fund their research and development projects. Accordingly, economic factors and industry
trends that affect our clients in these industries also affect our business. If companies in these industries were to reduce the number of research and development projects they conduct or outsource,
our business could be materially adversely affected.

11

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We operate in a highly competitive industry.

Competitors in the contract research organization industry range from small, limited-service providers to full service global contract
research organizations. Our main competition consists of in-house departments of pharmaceutical companies, full-service
and functional contract research organizations, and, to a lesser degree, universities and teaching hospitals. We compete on a variety of factors, including:



For
instance, our clinical development services have from time to time experienced periods of increased price competition which had a material adverse effect on Covance's
late-stage development profitability and consolidated net revenues and net income.

There
is competition among the larger contract research organizations for both clients and potential acquisition candidates. Additionally, small, limited-service entities considering
entering the contract research
organization industry will find few barriers to entry, thus further increasing possible competition. These competitive pressures may affect the attractiveness of our services and could adversely
affect our financial results.

Unfavorable general economic conditions could negatively impact our operating results and financial condition.

Unfavorable global economic conditions, including the current recession in the United States and the recent financial crisis affecting
the banking system and financial markets, could negatively affect our business. While it is difficult for us to predict the impact of general economic conditions on our business, these conditions
could reduce customer demand for some of our services, which could cause our revenue to decline. Also, our customers, particularly smaller biotechnology companies which are especially reliant on the
credit and capital markets, may not be able to obtain adequate access to credit or equity funding, which could affect their ability to make timely payments to us. If that were to occur, we could be
required to increase our allowance for doubtful accounts, and the number of days outstanding for our accounts receivable could increase. For these reasons, among others, if the current economic
conditions persist or decline, our operating results and financial condition could be adversely affected.

Weaknesses in the credit markets could negatively impact the Company's access to capital.

The Company's early development services have in the past required continuing infrastructure expansions and acquisition of capital
assets. The Company has been able to fund its capital needs largely from cash on hand and cash from operations as well as from its revolving credit facility. The Company's present facility will expire
in June 2009 and while the Company believes its credit quality, strength of earnings and bank relationships will provide adequate options for bank participation and will result in replacement of its
Credit Facility at commercially reasonable terms, the recent turmoil in the credit markets could affect the Company's ability to replace this facility and/or further increase the Company's funding
costs.

12

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We may expand our business through acquisitions.

We review many acquisition candidates and, in addition to acquisitions which we have already made, we are continually evaluating new
acquisition opportunities. Factors which may affect our ability to grow successfully through acquisitions include:



We may be affected by potential health care reform.

In recent years the United States Congress and state legislatures have considered various types of health care reform in order to
control growing health care costs. We are unable to predict what legislative proposals will be adopted in the future, if any. Similar reform movements have occurred in Europe and Asia.

Implementation
of health care reform legislation that contain costs could limit the profits that can be made from the development of new drugs. This could adversely affect research and
development expenditures by pharmaceutical and biotechnology companies which could in turn decrease the business opportunities available to us both in the United States and abroad. In addition, new
laws or regulations may create a risk of liability, increase our costs or limit our service offerings.

We rely on third parties for important services.

We depend on third parties to provide us with services critical to our business. The failure of any of these third parties to
adequately provide the needed services could have a material adverse effect on our business.

Our revenues and earnings are exposed to exchange rate fluctuations.

We derive a large portion of our net revenues from international operations. For the years ended December 31, 2008 and 2007, we
derived approximately 40% and 38%, respectively, of our net revenues from our operations outside the United States. Since our consolidated financial statements are denominated in U.S. dollars,
fluctuations in exchange rates from period to period will have an impact on our reported results. For example, during the latter part of 2008 the U.S. Dollar strengthened considerably against the
currencies of our most significant foreign operations (the British Pound, the Swiss Franc and the Euro). This strengthening of the U.S. Dollar negatively impacted Covance's fourth quarter year over
year net revenue growth by approximately $17 million or 420 basis points. In addition, in certain circumstances, we may incur costs in one currency related to our services or products for which
we are paid in a different currency. As a result, factors associated with international operations, including changes in foreign currency exchange rates, could significantly affect our results of
operations, financial condition and cash flows.

13

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The loss of our key personnel could adversely affect our business.

Our success depends to a significant extent upon the efforts of our senior management team and other key personnel. The loss of the
services of such personnel could adversely affect our business. Also, because of the nature of our business, our success is dependent upon our ability to attract and retain technologically qualified
personnel. There is substantial competition for qualified personnel, and an inability to recruit or retain qualified personnel may impact our ability to grow our business and compete effectively in
our industry.

Contract research services create a risk of liability.

In contracting to work on drug development trials and studies, we face a range of potential liabilities, for example:



We
also contract with physicians, also referred to as investigators, to conduct the clinical trials to test new drugs on human volunteers. These tests can create a risk of liability for
personal injury or death to volunteers, resulting from negative reactions to the drugs administered or from professional malpractice by third party investigators. We believe that our risks in this
area are generally reduced by the following:



Contractual
indemnifications generally do not protect us against liability arising from certain of our own actions, such as negligence or misconduct. We could be materially and
adversely affected if we were required to pay damages or bear the costs of defending any claim which is not covered by a contractual indemnification provision or in the event that a party who must
indemnify us does not fulfill its indemnification obligations or which is beyond the level of our insurance coverage. There can be no assurance that we will be able to maintain such insurance coverage
on terms acceptable to us.

Hardware and software failures, delays in the operation of our computer and communications systems or the failure to implement system enhancements
may harm our business.

Our success depends on the efficient and uninterrupted operation of our computer and communications systems. A failure of our network
or data gathering procedures could impede the processing of data, delivery of databases and services, client orders and day-to-day management of our business and could result
in the corruption or loss of data. While certain of our operations have appropriate disaster recovery plans in place, we currently do not have redundant facilities everywhere in the world to provide
IT capacity in the event of a system failure. Despite any precautions we may take, damage from fire, floods, hurricanes, power loss, telecommunications failures, computer viruses,
break-ins and similar events at our various computer facilities could result in interruptions in the flow of data to our servers and from our servers to our clients. In addition, any
failure by our computer environment to provide our required data communications capacity could result in interruptions in our service. In the event of a delay in the delivery of data, we could be
required to

14

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transfer
our data collection operations to an alternative provider of server hosting services. Such a transfer could result in delays in our ability to deliver our products and services to our
clients. Additionally, significant delays in the planned delivery of system enhancements, improvements and inadequate performance of the systems once they are completed could damage our reputation and
harm our business. Finally, long-term disruptions in the infrastructure caused by events such as natural disasters, the outbreak of war, the escalation of hostilities, and acts of
terrorism (particularly involving cities in which we have offices) could adversely affect our businesses. Although we carry property and business interruption insurance, our coverage may not be
adequate to compensate us for all losses that may occur.

Reliance on facilities.

Covance relies on certain of its facilities. In particular, Covance's preclinical and central laboratory facilities are highly
specific and would be difficult to replace in a short period of time. Any event that causes a disruption of the operation of these facilities might impact the Company's ability to provide service to
its customers and therefore could have a material adverse affect on its financial condition, results of operations and cash flows.

Reliance on air transportation.

Our central laboratories and certain of our other businesses are heavily reliant on air travel for transport of clinical trial kits
and other material, products and people, and a significant disruption to the air travel system, or our access to it, could have a material adverse effect on our business.

Certain service offerings and research products are dependent on limited sources of supply of services or products which if interrupted could affect
our business.

We depend on a limited number of suppliers for certain services and for certain animal populations. Disruptions to the continued
supply of these services or products may arise from export import restrictions or embargoes, foreign political or economic instability, or otherwise. Disruption of supply could have a material adverse
effect on our business.

Actions of animal rights extremists may affect our business.

Our early development services utilize animals in preclinical testing of the safety and efficacy of drugs and also breed and sell
animals for biomedical research. Such activities are required for the development of new medicines and medical devices under regulatory regimes in the United States, Europe, Japan and other countries.
Acts of vandalism and other acts by animal rights extremists who object to the use of animals in drug development could have a material adverse effect on our business.

Our animal populations may suffer diseases that can damage our inventory, harm our reputation, result in decreased sales of research products or
result in other liability to us.

It is important that our research products be free of diseases, including infectious diseases. The presence of diseases can distort or
compromise the quality of research results, can cause loss of animals in our inventory, can result in harm to humans or outside animal populations if the disease is not contained to animals in
inventory, or can result in other losses. Such results could harm our reputation or have a material adverse effect on our financial condition, results of operations, and cash flows.

Item 1B.    Unresolved Staff Comments

None.

15

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Item 2.    Properties

Covance both owns and leases its facilities. Covance owns substantial facilities in the United States in Madison, Wisconsin, in
Vienna, Virginia, in Greenfield, Indiana, in the United Kingdom in Harrogate and Leeds, and in Muenster, Germany for its early development services. Covance is in the process of constructing early
development facilities on land it owns in Chandler, Arizona and owns land for a planned future early development facility in Prince Williams County, Virginia. Covance owns a substantial facility in
Geneva, Switzerland and leases a substantial facility in the United States in Indianapolis, Indiana for its central laboratory services and leases facilities in Indianapolis, Indiana and Chantilly,
Virginia for its bioanalytical services. Covance leases substantial facilities for its clinical development services in the United States in Princeton, New Jersey, and in the United Kingdom in
Maidenhead. Covance also owns or leases other properties and facilities in the United States, Europe, Asia Pacific and Latin America. Covance believes that its facilities are adequate for its
operations and that suitable additional space will be available when needed.

For
additional information, please see Note 11 to the audited consolidated financial statements included elsewhere in this Annual Report.

Item 3.    Legal Proceedings

Covance is party to lawsuits and administrative proceedings incidental to the normal course of its business. Covance does not believe
that any liabilities related to such lawsuits or proceedings will have a material effect on its financial condition, results of operations or cash flows.

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

None.

16

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PART II

Item 5.    Market for Registrant's Common Stock and Related Stockholder Matters and Issuer Purchases of Equity Securities

Covance's common stock is traded on the New York Stock Exchange (symbol: CVD). The following table shows the high and low sales prices
on the New York Stock Exchange for each of the most recent eight fiscal quarters.

Quarter

High

LowFirst Quarter 2007

$
63.57

$
57.15Second Quarter 2007

$
70.26

$
58.95Third Quarter 2007

$
78.35

$
67.50Fourth Quarter 2007

$
90.59

$
76.65First Quarter 2008

$
96.81

$
78.43Second Quarter 2008

$
88.55

$
77.53Third Quarter 2008

$
99.08

$
82.78Fourth Quarter 2008

$
88.32

$
31.47


As
of February 17, 2009, there were 4,208 holders of record of Covance's common stock.

Covance
has not paid any dividends during 2008 or 2007. Covance does not currently intend to pay dividends, but rather, intends to reinvest earnings in its business.

17

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Item 5a.    Performance Graph

The graph below provides an indicator of cumulative total shareholder returns for Covance as compared with the Standard &
Poor's 500 Stock Index® and the Standard & Poor's Health Care Sector Index®. The graph covers the period of time from December 31, 2003 through
December 31, 2008 and assumes $100 was invested on December 31, 2003.

GRAPHIC

Item 6.    Selected Financial Data

The following table presents selected historical consolidated financial data of Covance as of and for each of the years ended
December 31, 2008, 2007, 2006, 2005 and 2004. This data has been derived from the audited consolidated financial statements of Covance. You should read this selected historical consolidated
financial data in conjunction with Covance's audited consolidated financial statements and accompanying notes included elsewhere in this Annual Report. Historical consolidated financial data may not
be indicative of Covance's future performance. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."

The
information provided in the following table is on an "as reported" basis for all years presented, and includes the results of Covance's cardiac safety service offering ("Cardiac
Safety Services") through November 27, 2007. Items affecting comparability between periods include an additional pre-tax gain on sale of $4.1 million representing contingent
consideration received in 2008 associated with the November 2007 sale of Cardiac Safety Services related to transferred backlog; the sale of Cardiac Safety Services in November 2007 and the resultant
$6.6 million pre-tax gain on sale; the accounting for stock-based compensation, which effective January 1, 2006 was done under SFAS No. 123R, Share-Based Payments, and which prior to
January 1, 2006 was done under the disclosure-only provisions of SFAS 123; a
$2.5 million reduction in income tax reserves in 2006 resulting from favorable income tax developments during that year; and the impact of a $4.4 million income tax charge in 2005
associated with the repatriation of $103 million of accumulated foreign earnings under the American Jobs Creation Act of 2004.

18

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|                                                 |                                             |                   |           |           |           |           |           |           |           |         |           |           |         |           |           |         |           |  
|------------------------------------------------ | ------------------------------------------- | ----------------- | --------- | --------- | --------- | --------- | --------- | --------- | --------- | ------- | --------- | --------- | ------- | --------- | --------- | ------- | --------- | -
|
|
|
|Income Statement Data:                           |                                             |                   |           |           |           |           |           |           |           |         |           |           |         |           |           |        
|Net revenues                                     |                                             | $                 | 1,728,098 |           | $         | 1,546,419 |           | $         | 1,340,203 |         | $         | 1,192,950 |         | $         | 1,020,429 |        
|Reimbursable out-of-pockets                      |                                             |                   | 98,969    |           |           | 85,097    |           |           | 65,855    |         |           | 57,504    |         |           | 35,968    |        
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|                                                 |                                             | Total revenues    |           |           | 1,827,067 |           |           | 1,631,516 |           |         | 1,406,058 |           |         | 1,250,454 |           |         | 1,056,397 |  
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|Costs and expenses:                              |                                             |                   |           |           |           |           |           |           |           |         |           |           |         |           |           |        
|                                                 | Cost of revenue                             |                   |           | 1,142,697 |           |           | 1,017,686 |           |           | 882,190 |           |           | 791,654 |           |           | 677,945 |          
|                                                 | Reimbursed out-of-pocket expenses           |                   |           | 98,969    |           |           | 85,097    |           |           | 65,855  |           |           | 57,504  |           |           | 35,968  |          
|                                                 | Selling, general and administrative         |                   |           | 250,180   |           |           | 233,890   |           |           | 207,388 |           |           | 178,368 |           |           | 155,656 |          
|                                                 | Depreciation and amortization               |                   |           | 71,571    |           |           | 66,197    |           |           | 57,388  |           |           | 47,821  |           |           | 46,354  |          
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|                                                 |                                             | Total             |           |           | 1,563,417 |           |           | 1,402,870 |           |         | 1,212,821 |           |         | 1,075,347 |           |         | 915,923   |  
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|Income from operations                           |                                             |                   | 263,650   |           |           | 228,646   |           |           | 193,237   |         |           | 175,107   |         |           | 140,474   |        
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|Other (income) expense, net:                     |                                             |                   |           |           |           |           |           |           |           |         |           |           |         |           |           |        
|                                                 | Interest income, net                        |                   |           | (6,461    | )         |           | (9,801    | )         |           | (7,564  | )         |           | (3,637  | )         |           | (2,290  | )        
|                                                 | Foreign exchange transaction (gains) losses |                   |           | (142      | )         |           | (1,375    | )         |           | 212     |           |           | 1,073   |           |           | 238     |          
|                                                 | Gain on sale of business                    |                   |           | (4,070    | )         |           | (6,590    | )         |           |        |           |           |        |           |           |        |          
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|                                                 |                                             | Other income, net |           |           | (10,673   | )(c)      |           | (17,766   | )(d)      |         | (7,352    | )         |         | (2,564    | )         |         | (2,052    | )
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|Income before taxes and equity investee earnings |                                             |                   | 274,323   | (c)       |           | 246,412   | (d)       |           | 200,589   |         |           | 177,671   |         |           | 142,526   |        
|Taxes on income                                  |                                             |                   | 79,415    | (c)       |           | 72,934    | (d)       |           | 57,179    | (e)     |           | 58,786    | (f)     |           | 45,532    |        
|Equity investee earnings                         |                                             |                   | 1,852     |           |           | 2,451     |           |           | 1,588     |         |           | 734       |         |           | 953       |        
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|Net income                                       |                                             | $                 | 196,760   | (c)       | $         | 175,929   | (d)       | $         | 144,998   | (e)     | $         | 119,619   | (f)     | $         | 97,947    |        
|                                                 |                                             |                   |           |           |           |           |           |           |           |         |          
|Basic earnings per share                         |                                             | $                 | 3.12      |           | $         | 2.76      |           | $         | 2.28      |         | $         | 1.91      |         | $         | 1.57      |        
|Diluted earnings per share                       |                                             | $                 | 3.08      | (c)       | $         | 2.71      | (d)       | $         | 2.24      | (e)     | $         | 1.88      | (f)     | $         | 1.52      |        
|Balance Sheet Data:                              |                                             |                   |           |           |           |           |           |           |           |         |           |           |         |           |           |        
|Working capital                                  |                                             | $                 | 277,895   |           | $         | 411,897   |           | $         | 349,862   |         | $         | 293,982   |         | $         | 289,828   |        
|Total assets                                     |                                             | $                 | 1,753,088 |           | $         | 1,560,185 |           | $         | 1,297,678 |         | $         | 1,056,603 |         | $         | 924,685   |        
|Stockholders' equity                             |                                             | $                 | 1,194,849 |           | $         | 1,110,188 |           | $         | 923,295   |         | $         | 731,771   |         | $         | 637,686   |        
|Other Financial Data:                            |                                             |                   |           |           |           |           |           |           |           |         |           |           |         |           |           |        
|Gross margin                                     |                                             |                   | 33.9      | %         |           | 34.2      | %         |           | 34.2      | %       |           | 33.6      | %       |           | 33.6      | %      
|Operating margin                                 |                                             |                   | 15.3      | %         |           | 14.8      | %         |           | 14.4      | %       |           | 14.7      | %       |           | 13.8      | %      
|Net income margin                                |                                             |                   | 11.4      | %         |           | 11.4      | %         |           | 10.8      | %       |           | 10.0      | %       |           | 9.6       | %      
|Current ratio                                    |                                             |                   | 1.60      |           |           | 2.15      |           |           | 2.21      |         |           | 2.16      |         |           | 2.32      |        
|Book value per share                             |                                             |                   | 18.88     |           |           | 17.34     |           |           | 14.44     |         |           | 11.65     |         |           | 10.24     |        
|Net days sales outstanding                       |                                             |                   | 37        |           |           | 36        |           |           | 49        |         |           | 56        |         |           | 51        |        

---



19

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Covance is a leading drug development services company providing a wide range of early-stage and late-stage product
development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. Covance also provides services such as laboratory testing to the chemical,
agrochemical and food industries. The foregoing services comprise two reportable segments for financial reporting purposes: early development services, which includes preclinical and clinical
pharmacology service offerings; and late-stage development services, which includes central laboratory, clinical development and commercialization services
(periapproval and market access services). Although each segment has separate services within it, they can be combined in joint service offerings and we believe clients increasingly are interested in
opportunities for such combined services. Covance believes it is one of the largest drug development services companies, based on annual net revenues, and one of a few that is capable of providing
comprehensive global product development services. Covance offers its clients high quality services designed to provide data to clients as rapidly as possible and reduce product development time. We
believe this enables Covance's customers to introduce their products into the marketplace faster and as a result, maximize the period of market exclusivity and monetary return on their research and
development investments. Additionally, Covance's comprehensive services and broad experience provide its customers with a variable cost alternative to fixed cost internal development capabilities.

Critical Accounting Policies

Covance's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP"),
which require management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from
these estimates. The following discussion highlights what we believe to be the critical accounting policies and judgments made in the preparation of these consolidated financial statements.

Revenue Recognition.Covance recognizes revenue either as services are performed
or products are delivered, depending on the nature of the work
contracted. Historically, a majority of Covance's net revenues have been earned under contracts which range in duration from a few months to two years, but can extend in duration up to five years or
longer. We also have dedicated capacity arrangements with certain clients ranging in duration from one to ten years. Underlying these arrangements are individual project contracts for the specific
services to be provided. Dedicated capacity arrangements enable our clients to secure space in our facilities in exchange for which they agree to provide a guaranteed annual minimum dollar value
("volume") of work. Under these types of arrangements, if the annual minimum volume commitment is not reached, the client is required to pay Covance for the shortfall. Progress towards the achievement
of annual minimum volume guarantees is monitored throughout the year. Annual minimum guarantee shortfalls are included in net revenues when the amount of the shortfall is determinable and realization
is assured.

We
do not have any individual significant contracts as pertains to revenue recognition. By way of background, at any point in time we are working on thousands of active clients
projects, which are governed by individual contracts. In addition, we have not had a single customer who accounted for more than ten percent of our aggregate net revenues during any one of the last
three years. In 2008, we served in excess of 300 biopharmaceutical companies and at December 31, 2008, we had over 8,000 active client projects. Most projects are customized based on the needs
of the client, the type of services being provided, therapeutic indication of the drug, geographic locations and other variables. Project specific terms related to pricing, billing milestones and the
scope and type of services to be provided are generally negotiated and contracted on a project-by-project basis.

20

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Service
contracts generally take the form of fee-for-service or fixed-price arrangements. In cases where performance spans multiple accounting periods, revenue
is recognized as services are performed, measured on a proportional-performance basis, generally using output measures that are specific to the service provided. Examples of output measures in our
early development segment include the number of slides read, dosings performed, or specimens prepared for preclinical laboratory services, or number of dosings or number of volunteers enrolled for
clinical pharmacology. Examples of output measures in our late-stage development segment's clinical development service offering include among others, number of investigators enrolled,
number of sites initiated, number of patients enrolled and number of monitoring visits completed. Revenue is determined by dividing the actual units of work completed by the total units of work
required under the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of
the agreed upon services to be provided. We do not have any contractual arrangements spanning multiple accounting periods where revenue is recognized on a proportional-performance basis under which we
have earned more than an immaterial amount of performance-based revenue (i.e. potential additional revenue tied to specific deliverables or performance). Changes in the scope of work are
common, especially under long-term contracts, and generally result in a change in contract value. Once the client has agreed to the changes in scope and renegotiated pricing terms, the
contract value is amended and revenue is recognized as described above. Estimates of costs to complete are made to provide, where appropriate, for losses expected on contracts. Costs are not deferred
in anticipation of contracts being awarded, but instead are expensed as incurred. For the year ended December 31, 2008, we did not experience a change in the estimates used to determine the
amounts recognized as revenue (i.e. output measures or costs to complete) for any project resulting in a material impact on our financial position, results of operations or cash flows.

Billing
schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, we bill the client for the total contract value in
progress-based installments as we reach certain non-contingent billing milestones over the contract duration, such as, but not limited to, contract signing, initial dosing, investigator
site initiation, patient enrollment or database lock. The term "billing milestone" relates only to a billing trigger in a contract whereby amounts become billable and payable in accordance with a
negotiated predetermined billing schedule throughout the term of a project. These billing milestones are not performance-based (i.e., potential additional arrangement consideration tied to
specific deliverables or performance). In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract value and aggregate
amounts billed to the client would be the same at the end of the project. While we attempt to negotiate terms that provide for billing and payment of services prior to or within close proximity to the
provision of services, this is not always the case, as evidenced by fluctuations in the levels of unbilled receivables and unearned revenue from period to period. While a project is ongoing, cash
payments are not necessarily representative of aggregate revenue earned at any particular point in time, as revenues are recognized when services are provided, while amounts billed and paid are in
accordance with the negotiated billing and payment terms.

In
some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide for an upfront payment of 10% of the full contract value
upon contract signing, but at the time of signing, performance of services has not yet begun, and therefore, no revenue has yet been
recognized. Payments received in advance of services being provided, such as in this example, are deferred as unearned revenue on the balance sheet. As the contracted services are subsequently
performed and the associated revenue is recognized, the unearned revenue balance is reduced by the amount of revenue recognized during the period.

21

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In
other cases, services may be provided and revenue is recognized before we have invoiced the client. In these cases, revenue recognized will exceed amounts billed, and the difference,
representing an unbilled receivable, is recorded for this amount that is currently unbillable to the customer pursuant to contractual terms. Once we have invoiced the client, the unbilled receivable
is reduced for the amount billed, and a corresponding account receivable is recorded. All unbilled receivables are billable to customers within one year from the respective balance sheet date.

Most
contracts are terminable by the client either immediately or upon notice. These contracts typically require payment to Covance of expenses to wind down the study, fees earned to
date and, in some cases, a termination fee or a payment to Covance of some portion of the fees or profits that could have been earned by Covance under the contract if it had not been terminated early.
Termination fees are included in net revenues when realization is assured.

Bad Debts.Covance endeavors to assess and monitor the creditworthiness of its
customers to which it grants credit terms in the ordinary course of
business. Covance maintains a provision for doubtful accounts relating to amounts due that may not be collected. This bad debt provision is monitored on a monthly basis and adjusted as circumstances
warrant. Since the recorded bad debt provision is based upon management's judgment, actual bad debt write-offs may be greater or less than the amount recorded. Historically, bad debt
write-offs have not been material.

Taxes.Since Covance conducts operations on a global basis, its effective tax
rate has and will continue to depend upon the geographic distribution
of its pre-tax earnings among locations with varying tax rates. Covance's profits are further impacted by changes in the tax rates of the various jurisdictions in which Covance operates.
In addition, Covance maintains a tax reserve for unrecognized tax benefits, changes to which could impact Covance's effective tax rate in the period such changes are made.

Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48,Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109("FIN 48"). Under the guidance of FIN 48, the Company may recognize the
tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on
the technical merits of the position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company
believes is more likely than not to be realized upon ultimate settlement of the position. Components of the reserve are classified as either a current or long-term liability in the
consolidated balance sheet based on when the Company expects each of the items to be settled. Covance records interest and penalties accrued in relation to unrecognized tax benefits as a component of
income tax expense.

As
of December 31, 2008, the balance of the reserve for unrecognized tax benefits was $11.9 million, including accrued interest of $1.2 million, of which
$3.3 million is recorded as a current liability in accrued expenses and other current liabilities, and $8.6 million is recorded as a long-term liability in other liabilities
on the consolidated balance sheet. As of December 31, 2007, the balance of the reserve for unrecognized tax benefits was $8.9 million, including accrued interest of $1.3 million,
of which $2.6 million is recorded as a current liability in accrued expenses and other current liabilities, and $6.3 million is recorded as a long-term liability in other
liabilities on the consolidated balance sheet. This reserve relates to exposures for income tax matters such as transfer pricing, nexus, deemed income and research and development credits. The net
increase in the reserve for unrecognized tax benefits from December 31, 2007 to December 31, 2008 resulted from the accrual of additional reserves relating to deemed income and the
accrual of interest on existing reserves partially offset by the recognition of previously unrecognized tax benefits in jurisdictions where the statute of limitations has lapsed.

22

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Following
is a reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest for the years ended December 31, 2008 and 2007:

(dollars in millions)Unrecognized tax benefits as of January 1, 2007, at date of adoption

$
7.8Additions related to tax positions in the prior year


1.1Additions related to tax positions in the current year


1.3Reductions due to settlements and payments


(0.8
)Reductions due to statute expiration


(1.8
)Unrecognized tax benefits as of December 31, 2007


7.6Additions related to tax positions in the prior year


2.1Additions related to tax positions in the current year


2.7Reductions due to statute expiration


(1.7
)Unrecognized tax benefits as of December 31, 2008

$
10.7


Any future changes in the $11.9 million liability for unrecognized tax benefits, resulting from the recognition of tax benefits,
would
impact the effective tax rate of Covance. Over the next twelve months, it is reasonably possible that the uncertainty surrounding a portion of the reserve for unrecognized tax benefits related to
certain income taxes, deemed income, transfer pricing and state tax issues will be resolved as a result of the expiration of the statute of limitations or the conclusion of various federal, state and
foreign tax audits. As a result, Covance would reduce the carrying value of its reserve for these items by up to $3.9 million including interest of $0.6 million.

The
following tax years remain open to investigation as of December 31, 2008, for the Company's major jurisdictions:

Tax Jurisdiction

YearsUS Federal and State


2003-2008United Kingdom


2005-2008Switzerland


2004-2008Germany


2007-2008


The Company also maintains a tax reserve related to exposures for non-income tax matters including value-added tax and state sales
and use and other taxes, which are accounted for in accordance with Statement of Financial Accounting Standards No. 5,Accounting for
Contingencies. The balance of this
reserve at December 31, 2008 and 2007 is $0.9 million and $0.8 million, respectively, and is recorded as a current liability in accrued expenses and other current liabilities on
the consolidated balance sheet.

While
Covance believes it has identified all reasonably identifiable exposures and the reserve it has established for identifiable exposures is appropriate under the circumstances, it
is possible that additional exposures exist and that exposures will be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause
Covance to either materially increase or reduce the carrying amount of its tax reserves.

Covance's
policy is to provide income taxes on earnings of foreign subsidiaries only to the extent those earnings are taxable or are expected to be remitted. Covance's historical policy
has been to leave its unremitted foreign earnings invested indefinitely outside the United States, except for amounts remitted under the American Jobs Creation Act of 2004. Covance intends to continue
to leave its unremitted foreign earnings invested indefinitely outside the United States. As a result, taxes have not been provided on any of the remaining accumulated foreign unremitted earnings
totaling approximately $373 million at December 31, 2008.

23

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Stock-Based Compensation.The Company sponsors several stock-based compensation
plans pursuant to which non-qualified stock options and
restricted stock awards are granted to eligible employees.

The
Company recognizes stock-based compensation under the provisions of Statement of Financial Accounting Standards No. 123R,Share-Based
Payments, ("SFAS 123R"), pursuant to which the grant-date fair value of awards expected to vest is expensed on a straight-line basis over the
vesting period of the related awards.

The
grant-date fair value of stock awards is based upon the underlying price of the stock on the date of grant. The grant-date fair value of stock option awards
must be determined using an option pricing model. Option pricing models require the use of estimates and assumptions as to (a) the expected term of the option, (b) the expected
volatility of the price of the underlying stock, (c) the risk-free interest rate for the expected term of the option and (d) pre-vesting forfeiture rates. For
stock options granted on or subsequent to January 1, 2006, the Company is using the Lattice-Binomial option pricing formula for determining the grant-date fair value of stock option
awards, whereas for stock options granted prior to January 1, 2006, the Company used the Black-Scholes-Merton option pricing formula.

The
expected term of the option is based upon the contractual term and expected employee exercise and expected post-vesting employment termination behavior. The expected
volatility of the price of the underlying stock is based upon the historical volatility of the Company's stock computed over a period of time equal to the expected term of the option. The risk free
interest rate is based upon the implied yields currently available from the U.S. Treasury zero-coupon yield curve for issues with a remaining duration equal to the expected term of the
option. Pre-vesting forfeiture rates are estimated based upon past voluntary termination behavior and past option forfeitures.

The
following table sets forth the weighted-average assumptions used to calculate the fair value of options granted for the years ended December 31, 2008, 2007 and 2006:

2008

2007

2006Expected stock price volatility


39%


42%


44%Risk free interest rate(s)


1.9% - 3.7%


4.7% - 5.1%


3.9% - 4.5%Expected life of options (years)


4.4


4.3


4.3


Changes
in any of these assumptions could impact, potentially materially, the amount of expense recorded in future periods related to stock-based awards.

As
of December 31, 2008, the total unrecognized compensation cost related to non-vested stock options granted was $6.2 million and is expected to be recognized
over a weighted average period of 1.3 years, and the total unrecognized compensation cost related to non-vested performance-based shares and restricted stock awards was
$19.3 million and is expected to be recognized over a weighted average period of 1.7 years.

Impairment of Assets.Covance reviews its long-lived assets other than goodwill
and other indefinite lived intangible assets for
impairment, when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable. The assessment of possible impairment is based upon Covance's judgment
of its ability to recover the asset from the expected future undiscounted cash flows of the related operations. Actual future cash flows may be greater or less than estimated.

Covance
performs an annual test for impairment of goodwill and other indefinite lived intangible assets during the fourth quarter. This test is performed by comparing, at the reporting
unit level, the carrying value of the reporting unit to its fair value. Covance assesses fair value based upon its estimate of the present value of the future cash flows that it expects to be
generated by the reporting unit. The test performed for 2008 did not identify any instances of impairment. However, changes in expectations as to the present value of a reporting unit's future cash
flows might impact subsequent years' assessments of impairment.

24

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Defined Benefit Pension Plans.Covance sponsors defined benefit pension plans for
the benefit of its employees at three foreign subsidiaries as well
as a non-qualified supplemental executive retirement plan and a post-employment retiree health and welfare plan for the benefit of eligible employees at certain U.S.
subsidiaries. The measurement of the related benefit obligation and net periodic benefit cost recorded each year is based upon actuarial computations which require the use of judgment as to certain
assumptions. The more significant of these assumptions are: (a) the appropriate discount rate to use in computing the present value of the benefit obligation; (b) the expected return on
plan assets (for funded plans); and (c) the expected future rate of salary increases (for pay-related plans). Actual results (such as the return on plan assets, future rate of
salary increases and plan participation rates) will likely differ from the assumptions used. Those differences, along with changes that may be made in the assumptions used from period to period, will
impact the amounts reported in the financial statements and footnote disclosures.

Set
forth below is a discussion of the impact that (a) differences between assumed results and actual results and (b) assumption changes have had on our results of
operations for the years ended December 31, 2008, 2007 and 2006 and on the financial position of the plans as of December 31, 2008 and 2007 for our United Kingdom defined benefit pension
plans (the largest of our defined benefit-type pension plans).

|                                                                          |                                   |   |     |      |   |     |      |   |     |      |   |     |      |  
|------------------------------------------------------------------------- | --------------------------------- | - | --- | ---- | - | --- | ---- | - | --- | ---- | - | --- | ---- | -
|
|
|Net periodic pension cost                                                 |                                   | $ | 3.4 |      | $ | 4.0 |      | $ | 4.6 |      | $ | 4.1 |     
|                                                                          |                                   |   |     |      |   |     |      |   |    
|Weighted average assumptions used to determine net periodic pension cost: |                                   |   |     |      |   |     |      |   |     |      |   |     |     
|                                                                          | Discount rate                     |   |     | 5.50 | % |     | 5.25 | % |     | 5.00 | % |     | 5.75 | %
|                                                                          | Expected rate of return on assets |   |     | 6.75 | % |     | 6.75 | % |     | 6.75 | % |     | 6.75 | %
|                                                                          | Salary increases                  |   |     | 4.25 | % |     | 4.00 | % |     | 4.00 | % |     | 4.00 | %

The increase (decrease) in the net periodic benefit cost from period to period is attributable to the following:

|                                                                            |  |   |      |   |   |      |   |   |      |  
|--------------------------------------------------------------------------- |  | - | ---- | - | - | ---- | - | - | ---- | -
|
|
|Change in discount rate                                                     |  | $ | (1.1 | ) | $ | (1.3 | ) | $ | 2.4  |  
|Change in rate of salary increases                                          |  |   | (0.1 | ) |   |     |   |   |     |  
|Other, including differences between actual experience and assumptions used |  |   | 0.9  |   |   | 0.3  |   |   | (1.9 | )
|Foreign currency exchange rate changes                                      |  |   | (0.3 | ) |   | 0.4  |   |   |     |  
|                                                                            |  |   |      |   |   |      |  
|Net change in periodic benefit cost                                         |  | $ | (0.6 | ) | $ | (0.6 | ) | $ | 0.5  |  
|                                                                            |  |   |      |   |   |      |  



|                                                                   |                  |  |  |      |   |  |      |   |  |      |  
|------------------------------------------------------------------ | ---------------- |  |  | ---- | - |  | ---- | - |  | ---- | -
|
|
|Weighted average assumptions used to determine benefit obligation: |                  |  |  |      |   |  |      |   |  |     
|                                                                   | Discount rate    |  |  | 6.25 | % |  | 5.50 | % |  | 5.25 | %
|                                                                   | Salary increases |  |  | 4.25 | % |  | 4.25 | % |  | 4.00 | %

25

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The change in the projected benefit obligation from period to period is attributable to the following:

|                                                                      |                                                                             |   |       |       |   |       |      |  
|--------------------------------------------------------------------- | --------------------------------------------------------------------------- | - | ----- | ----- | - | ----- | ---- | -
|
|
|Projected benefit obligation, beginning of year                       |                                                                             | $ | 152.1 |       | $ | 141.3 |     
|Service/interest cost components of net periodic benefit cost in year |                                                                             |   | 13.1  |       |   | 13.5  |     
|Benefits paid                                                         |                                                                             |   | (1.7  | )     |   | (2.1  | )   
|Actuarial gain (loss):                                                |                                                                             |   |       |       |   |       |     
|                                                                      | Increase in discount rate                                                   |   |       | (23.5 | ) |       | (8.5 | )
|                                                                      | Other, including differences between actual experience and assumptions used |   |       | 8.1   |   |       | 6.3  |  
|Foreign currency exchange rate changes                                |                                                                             |   | (36.2 | )     |   | 1.6   |     
|                                                                      |                                                                             |   |       |       |  
|Projected benefit obligation, end of year                             |                                                                             | $ | 111.9 |       | $ | 152.1 |     
|                                                                      |                                                                             |   |       |       |  

Foreign Currency Risks

Since Covance operates on a global basis, it is exposed to various foreign currency risks. Two specific risks arise from the nature of
certain contracts. The first risk can occur when Covance executes contracts with its customers where the contracts are denominated in a currency different than the local currencies of the Covance
subsidiaries performing work under the contracts. As a result, revenue recognized for services rendered may be denominated in a currency different from the currencies in
which the subsidiaries' expenses are incurred. Fluctuations in exchange rates (from those in effect at the time the contract is executed and pricing is established to the time services are rendered
and revenue is recognized) can affect the subsidiary's net revenues and resultant earnings. This risk is generally applicable only to a portion of the contracts executed by Covance's subsidiaries
providing clinical services. Historically, fluctuations in exchange rates from those in effect at the time contracts were executed have not had a material effect upon Covance's consolidated financial
results. See "Risk Factors".

We
also have other cross-currency contracts executed by other Covance subsidiaries where the foreign currency amounts billed are determined by converting local currency revenue amounts
to the contract billing currency using the exchange rates in effect at the time services are rendered. These contracts do not give rise to foreign currency denominated revenue and local currency
denominated expenses, but they do give rise to a second type of risk. This second type of risk results from the passage of time between the invoicing of customers under both of these types of
contracts and the ultimate collection of customer payments against such invoices. Because such invoices are denominated in a currency other than the subsidiary's local currency, Covance recognizes a
receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount as of the invoice date. Subsequent changes in exchange rates from the time the invoice is
prepared to the time payment from the customer is received will result in Covance receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time
the invoice was prepared and the receivable was recorded. This difference is recognized by Covance as a foreign currency transaction gain or loss, as applicable, in the consolidated statements of
income.

Finally,
Covance's consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar
will affect the translation of each foreign subsidiary's financial results into U.S. dollars for purposes of reporting Covance's consolidated financial results. The process by which each foreign
subsidiary's financial results are translated into U.S. dollars is as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability
accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the stockholders'
equity account, referred to as the cumulative translation adjustment account. This account exists only in the foreign subsidiary's U.S. dollar balance sheet and is necessary to keep the foreign
balance sheet stated in U.S. dollars in balance. At December 31, 2008, accumulated other comprehensive income on the consolidated balance sheet includes the cumulative translation account
balance of $4.8 million.

26

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Operating Expenses and Reimbursable Out-of-Pockets

Covance segregates its recurring operating expenses among four categories: cost of revenue; reimbursed
out-of-pocket expenses; selling, general and administrative expenses; and depreciation and amortization. Cost of revenue includes direct labor and
related benefits, other direct costs, shipping and handling fees, and an allocation of facility charges and information technology costs, and excludes depreciation and amortization. Cost of revenue,
as a percentage of net revenues, tends and is expected to fluctuate from one period to another, as a result of changes in labor utilization and the mix of service offerings involving hundreds of
studies conducted during any period of time. Selling, general and administrative expenses consist primarily of administrative payroll and related benefit charges, advertising and promotional expenses,
administrative travel and an allocation of facility charges and information technology costs, and excludes depreciation and amortization.

In
connection with the management of multi-site clinical trials, Covance pays on behalf of its customers fees to investigators, volunteers and other
out-of-pocket costs (such as for travel, printing, meetings, couriers, etc.), for which it is reimbursed at cost, without mark-up or profit. Investigator fees are
not reflected in total revenues or expenses where Covance acts in the capacity of an agent on behalf of the pharmaceutical company sponsor, passing through these costs without risk or reward to
Covance. All other out-of-pocket costs are included in total revenues and expenses.

Results of Operations

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007.Net revenues increased 11.7%, or 10.7% excluding the
favorable impact of foreign exchange rate variances between both periods, to $1.73 billion for 2008 from $1.55 billion for 2007. Net revenues from Covance's early development segment
grew 8.6%, or 9.8% excluding the unfavorable impact of foreign exchange rate variances between both periods. Growth in the segment was driven by a 10.9% increase in net revenues in our preclinical
laboratory services, resulting from an increase in available capacity due to our facility expansions and sustained high levels of client satisfaction resulting in more repeat business, partially
offset by fourth quarter softness in clinical pharmacology and toxicology services resulting from a lower level of new study initiations and increased project delays. Net revenues from Covance's
late-stage development segment grew 14.9%, or 11.7% excluding the favorable impact of foreign exchange rate variances between both periods. Growth in the segment was led by a strong
performance in our central laboratory services where net revenues grew 23.6% on increased investigator and patient enrollment, an overall higher level of study activity and the favorable impact of
foreign exchange rate variances between both periods. Also contributing to growth in the segment was a strong performance in our clinical development services, where net revenues grew 18.6% on
increased study activity. Negatively impacting growth in the segment over the prior year was the divestiture of our cardiac safety service offering in November 2007, which contributed
$23.4 million of net revenue in 2007.

Cost
of revenue increased 12.3% to $1.14 billion or 66.1% of net revenues for the year ended December 31, 2008 as compared to $1.02 billion or 65.8% of net revenues
for the corresponding 2007 period. Gross margins decreased by 30 basis points to 33.9% for 2008 from 34.2% for 2007.

Overall,
selling, general and administrative expenses increased 7.0% to $250.2 million for 2008 from $233.9 million for 2007. As a percentage of net revenues, selling,
general and administrative expenses decreased 60 basis points to 14.5% in 2008 from 15.1% in 2007. The 60 basis point decrease resulted from the impact of cost management initiatives put in place late
in 2008 in response to softening market conditions as well as increased efficiencies gained from the leveraging of our existing support functions across a larger base of revenues. Selling, general and
administrative expenses as a percentage of net revenue can and does vary depending on the timing and nature of various professional fees and other discretionary spending.

Depreciation
and amortization increased 8.1% to $71.6 million or 4.1% of net revenues for 2008 from $66.2 million or 4.3% of net revenues for 2007 primarily as a result of
higher levels of capital spending related to assets placed into service over the last eighteen months.

27

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Income
from operations increased 15.3% to $263.7 million or 15.3% of net revenues for 2008 from $228.6 million or 14.8% of net revenues for the corresponding 2007 period.
Income from operations from Covance's early development segment increased $9.5 million or 4.8% to $205.4 million or 24.3% of net revenues for the year ended December 31, 2008 from
$195.9 million or 25.2% of net revenues for the corresponding 2007 period. The $9.5 million increase in the segment over the prior year was driven by additional income from operations
resulting from the 10.9% growth in preclinical laboratory services net revenues explained above. The decline in operating income as a percent of net revenues is primarily attributable to softening
market conditions in the fourth quarter of 2008. Income from operations from Covance's late-stage development segment increased $42.0 million or 32.8% to $170.1 million or
19.3% of net revenues for 2008 from $128.1 million or 16.7% of net revenues for the corresponding 2007 period. Growth was driven by central laboratory and clinical development services, where
income from operations grew 38.3% and 46.7%, respectively, over the prior year primarily on the increase in net revenues explained above. Partially offsetting the growth from central laboratory and
clinical was weakness in our commercialization services where operating income declined 15.2% over 2007 on a decline in net revenues. Corporate expense increased $16.5 million to
$111.9 million or 6.5% of net revenues for 2008 from $95.4 million or 6.2% of net revenues for 2007. The higher level of Corporate expenses reflects an increase in headcount-related
expenses and investments in infrastructure to enhance our ability to manage expected future growth. Also included in Corporate expense is stock-based compensation expense of $25.5 million or
1.5% of net revenues for 2008, as compared to $21.9 million or 1.4% of net revenues for the corresponding 2007 period.

Other
income, net decreased $7.1 million to $10.7 million for 2008 from $17.8 million for 2007, primarily due to a $2.5 million decrease in gain on sale of
business and a $2.0 million decrease in interest income resulting from a reduction in invested cash balances coupled with lower interest rates on those balances. In addition, interest expense
increased $1.4 million due to outstanding short-term debt during 2008 and foreign exchange transaction gains declined $1.2 million from 2007 to 2008.

Covance's
effective tax rate for the year ended December 31, 2008 was 28.9% compared to 29.6% for the corresponding 2007 period. The year over year decrease in Covance's
effective tax rate was attributable to a number of factors, including the mix of our pre-tax earnings across various tax jurisdictions and tax planning initiatives, partially offset by
changes in the reserve for unrecognized tax benefits.

Covance
has a 47% minority equity position in Noveprim Limited ("Noveprim"), a supplier of research products. During the years ended December 31, 2008 and 2007, Covance
recognized $1.4 million and $2.0 million, respectively, representing its share of Noveprim's earnings, less an elimination of profit on inventory purchased from Noveprim and still on
hand at Covance at December 31, 2008 and 2007.

Covance
has a minority equity position (less than 20%) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging technologies to process and
analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text. During the years ended
December 31, 2008 and 2007, Covance recognized income of $0.5 million and $0.4 million, respectively, representing its pro-rata share of BITI's results. In the fourth
quarter of 2008, Covance suspended the use of the equity method of accounting for its investment in BITI as its ownership interest fell below 20% and it could no longer exercise significant influence
over BITI's operations. In the fourth quarter of 2008, Covance began accounting for its investment in BITI as an available-for-sale security in accordance with Statement of
Financial Accounting Standards No. 115,Accounting for Certain Investments in Debt and Equity Securities. Under SFAS 115, Covance
increased the carrying value of its investment in BITI to $8.6 million, representing the fair value of the shares in BITI common stock owned by Covance at December 31, 2008. This
resulted in an unrealized gain of approximately $7.2 million, or $4.4 million net of tax, which is included within accumulated other comprehensive income on the consolidated balance
sheet.

Net
income of $196.8 million for the year ended December 31, 2008 increased $20.8 million or 11.8% as compared to $175.9 million for the corresponding 2007
period.

28

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Year Ended December 31, 2007 Compared with Year Ended December 31, 2006.Net revenues increased 15.4%, or 12.8% excluding the impact
of foreign exchange rate variances between both periods, to $1.55 billion for 2007 from $1.34 billion for 2006. Net revenues from Covance's early development segment grew 22.9%, or 20.0%
excluding the impact of foreign exchange rate variances between both periods, on strong broad-based performance across the segment's service offerings. Net revenues from Covance's
late-stage development segment grew 8.7%, or 6.3% excluding the impact of foreign exchange rate variances between both periods. Strength in clinical development more than offset softness
in (1) central laboratory services during the first half of 2007, caused by delays in enrollment, longer trial durations and a shift in the geographic and therapeutic mix of studies;
(2) cardiac safety services, due to low orders; and (3) commercialization services, due primarily to fewer new biological service launches.

Cost
of revenue increased 15.4% to $1.02 billion or 65.8% of net revenues for the year ended December 31, 2007 as compared to $882.2 million or 65.8% of net
revenues for the corresponding 2006 period.

Overall,
selling, general and administrative expenses increased 12.8% to $233.9 million for 2007 from $207.4 million for 2006. As a percentage of net revenues, selling,
general and administrative expenses decreased 40 basis points to 15.1% in 2007 from 15.5% in 2006.

Depreciation
and amortization increased 15.3% to $66.2 million or 4.3% of net revenues for 2007 from $57.4 million or 4.3% of net revenues for 2006 primarily as a result
of higher levels of capital spending during 2007.

Income
from operations increased 18.3% to $228.6 million or 14.8% of net revenues for 2007 from $193.2 million or 14.4% of net revenues for the corresponding 2006 period.
Income from operations from Covance's early development segment increased $42.3 million or 27.6% to $195.9 million or 25.2% of net revenues for the year ended December 31, 2007
from $153.6 million or 24.3% of net revenues for the corresponding 2006 period. The $42.3 million increase over the prior year was driven primarily by strength in our global toxicology,
chemistry and clinical pharmacology services. Income from operations from Covance's late-stage development segment increased $4.5 million or 3.6% to $128.1 million or 16.7%
of net revenues for 2007 from $123.7 million or 17.5% of net revenues for the corresponding 2006 period. While clinical development services operating margin expanded over the prior year,
revenue softness in central laboratory in the first half of 2007, cardiac safety and commercialization services, resulted in a decline in Late-Stage Development operating margin as a
percentage of revenue as compared to the prior year. Corporate expense increased $11.4 million to $95.4 million or 6.2% of net revenues for 2007 from $84.0 million or 6.3% of net
revenues for 2006. Included in Corporate expense is stock-based compensation expense of $21.9 million or 1.4% of net revenues for 2007, as compared to $21.5 million or 1.6% of net
revenues for the corresponding 2006 period. The increase in Corporate expenses also reflects an increase in compensation-related expenses and investments in infrastructure to support higher levels of
current and expected future growth.

Other
income, net increased $10.4 million to $17.8 million for 2007 from $7.4 million for 2006 primarily as a result of the $6.6 million gain on sale of
Covance's cardiac safety service offering and a $2.5 million increase in interest income resulting from higher invested cash balances and higher average interest rates earned on those balances
in 2007.

Covance's
effective tax rate for the year ended December 31, 2007 was 29.6% compared to 28.5% for the corresponding 2006 period. The effective tax rate for 2006 included the
impact of a $2.5 million reduction in income tax reserves resulting from favorable income tax developments arising in the third quarter, which reduced the effective tax rate in 2006 by 120
basis points.

Covance
has a minority equity position (approximately 20% at December 31, 2007) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical
imaging technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and
text. During
the years ended December 31, 2007 and 2006, Covance recognized income of $0.4 million and $0.02 million, respectively, representing its share of BITI's results.

29

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Covance
has a 47% minority equity position in Noveprim Limited, a supplier of research products. During the years ended December 31, 2007 and 2006, Covance recognized
$2.0 million and $1.6 million, respectively, representing its share of Noveprim's earnings, less an elimination of profit on inventory purchased from Noveprim Limited and still on hand
at Covance at December 31, 2007 and 2006.

Net
income of $175.9 million for the year ended December 31, 2007 increased $30.9 million or 21.3% as compared to $145.0 million for the corresponding 2006
period, and includes the $4.1 million after tax gain on the sale of Covance's cardiac safety service offering.

Quarterly Results

Covance's quarterly operating results are subject to variation, and are expected to continue to be subject to variation, as a result
of factors such as (1) delays in initiating or completing significant drug development trials, (2) termination or reduction in size of drug development trials, (3) acquisitions
and divestitures, (4) changes in the mix of our services, and (5) exchange rate fluctuations. Delays and terminations of trials are often the result of actions taken by Covance's
customers or regulatory authorities and are not typically controllable by Covance. Since a large amount of Covance's operating costs are relatively fixed while revenue is subject to fluctuation,
moderate variations in the commencement, progress or completion of drug development trials may cause significant variations in quarterly results.

The
following table presents unaudited quarterly operating results of Covance for each of the eight most recent fiscal quarters during the period ended December 31, 2008. In the
opinion of Covance, the information in the table below has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report and reflects all
adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results of operations for those periods. This quarterly financial data should be read in conjunction
with the audited consolidated financial statements included elsewhere in this Annual Report. Operating results for any quarter are not necessarily indicative of the results that may be reported in any
future period.

|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         | 
|--------------------------- | ----------------------------------- | ----- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | 
|
|
|
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|Net revenues                |                                     | $     | 438,645 |         | $       | 440,109 |         | $       | 436,912 |         | $       | 412,432 |         | $       | 410,966 |         | $       | 395,989 |         | $       | 381,145 |         | $       | 358,319 |        
|Reimbursable out-of-pockets |                                     |       | 25,190  |         |         | 27,263  |         |         | 24,911  |         |         | 21,605  |         |         | 24,736  |         |         | 18,712  |         |         | 23,029  |         |         | 18,620  |        
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|                            | Total revenues                      |       |         | 463,835 |         |         | 467,372 |         |         | 461,823 |         |         | 434,037 |         |         | 435,702 |         |         | 414,701 |         |         | 404,174 |         |         | 376,939 |        
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|Costs and expenses:         |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|                            | Cost of revenue                     |       |         | 294,679 |         |         | 287,804 |         |         | 286,884 |         |         | 273,330 |         |         | 273,874 |         |         | 258,355 |         |         | 251,078 |         |         | 234,379 |        
|                            | Reimbursed out-of-pocket expenses   |       |         | 25,190  |         |         | 27,263  |         |         | 24,911  |         |         | 21,605  |         |         | 24,736  |         |         | 18,712  |         |         | 23,029  |         |         | 18,620  |        
|                            | Selling, general and administrative |       |         | 61,071  |         |         | 64,850  |         |         | 65,242  |         |         | 59,017  |         |         | 58,918  |         |         | 61,089  |         |         | 58,092  |         |         | 55,791  |        
|                            | Depreciation and amortization       |       |         | 19,399  |         |         | 17,493  |         |         | 17,331  |         |         | 17,348  |         |         | 17,182  |         |         | 16,447  |         |         | 16,457  |         |         | 16,111  |        
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|                            |                                     | Total |         |         | 400,339 |         |         | 397,410 |         |         | 394,368 |         |         | 371,300 |         |         | 374,710 |         |         | 354,603 |         |         | 348,656 |         |         | 324,901 | 
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|Income from operations      |                                     |       | 63,496  |         |         | 69,962  |         |         | 67,455  |         |         | 62,737  |         |         | 60,992  |         |         | 60,098  |         |         | 55,518  |         |         | 52,038  |        
|Other income, net           |                                     |       | (302    | )(a)    |         | (801    | )       |         | (2,931  | )(b)    |         | (6,639  | )(c)    |         | (10,757 | )(d)    |         | (2,582  | )       |         | (2,096  | )       |         | (2,331  | )      
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|Income before taxes         |                                     |       | 63,798  | (a)     |         | 70,763  |         |         | 70,386  | (b)     |         | 69,376  | (c)     |         | 71,749  | (d)     |         | 62,680  |         |         | 57,614  |         |         | 54,369  |        
|Taxes on income             |                                     |       | 18,195  | (a)     |         | 20,167  |         |         | 20,330  | (b)     |         | 20,723  | (c)     |         | 21,608  | (d)     |         | 18,469  |         |         | 16,816  |         |         | 16,041  |        
|Equity investee earnings    |                                     |       | 75      |         |         | 511     |         |         | 817     |         |         | 449     |         |         | 768     |         |         | 403     |         |         | 714     |         |         | 566     |        
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|Net income                  |                                     | $     | 45,678  | (a)     | $       | 51,107  |         | $       | 50,873  | (b)     | $       | 49,102  | (c)     | $       | 50,909  | (d)     | $       | 44,614  |         | $       | 41,512  |         | $       | 38,894  |        
|                            |                                     |       |         |         |         |         |         |         |         |         |         |         |         |         |         |         |        
|Basic earnings per share    |                                     | $     | 0.72    |         | $       | 0.81    |         | $       | 0.81    |         | $       | 0.78    |         | $       | 0.80    |         | $       | 0.70    |         | $       | 0.65    |         | $       | 0.61    |        
|Diluted earnings per share  |                                     | $     | 0.72    | (a)     | $       | 0.80    |         | $       | 0.80    | (b)     | $       | 0.76    | (c)     | $       | 0.78    | (d)     | $       | 0.69    |         | $       | 0.64    |         | $       | 0.60    |        

---



30

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Liquidity and Capital Resources

Covance has a centralized cash management function. In the United States, cash received from operations is swept daily to a centrally
managed concentration account, while cash disbursements for operations are funded as needed from the concentration account. Outside of the United States, cash balances are generally pooled by currency
in order to facilitate cash management and improve investment returns. As in the United States, cash balances are generally maintained in the functional currency of the operating unit.

Cash
and cash equivalents at December 31, 2008 and 2007 were $221.3 million and $319.5 million, respectively. Amounts are principally invested in
short-term money market funds and bank deposits with major financial institutions in countries whose governments guarantee those investments (primarily in Ireland and the United Kingdom).
Covance's expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible future acquisitions, geographic expansion, working
capital and other general corporate purposes, including possible share repurchases. On August 12, 2008, Covance's revolving credit facility (the "Credit Facility") was expanded to
$125.0 million at Covance's election. Covance intends to secure a new revolving credit facility to replace its Credit Facility which will expire in June 2009. Covance believes its credit
quality, strength of earnings and bank relationships will provide adequate options for bank participation and will result in replacement of its Credit Facility at commercially reasonable terms.
Covance believes that cash on hand plus
cash from operations and available borrowings under the Credit Facility and the planned replacement credit facility will provide sufficient liquidity for the foreseeable future. At December 31,
2008, there were $50.0 million of outstanding borrowings and $1.4 million of outstanding letters of credit under the Credit Facility. Interest on all outstanding borrowings under the
Credit Facility is based upon the London Interbank Offered Rate ("LIBOR") plus a 75 basis point margin and approximated 3.66% per annum during 2008. Costs associated with the Credit Facility consisted
primarily of bank fees totaling $0.7 million which are being amortized over the five year facility term. The Credit Facility contains various financial and other covenants. At
December 31, 2008, Covance was in compliance with the terms of the Credit Facility. The Credit Facility is collateralized by guarantees of certain of Covance's domestic subsidiaries and a
pledge of 65 percent of the capital stock of certain of Covance's foreign subsidiaries. A commitment fee of 15 basis points on the undrawn balance of the Credit Facility is payable in arrears
on the first day of each July, October, January and April, and totaled approximately $0.1 million during each of the years ended December 31, 2008 and 2007.

During
the year ended December 31, 2008, Covance's operations provided net cash of $286.2 million, a decrease of $7.3 million from the corresponding 2007 period.
The change in net operating assets used $12.0 million in cash during 2008, primarily due to an increase in unbilled services, inventory, accounts receivable, and prepaid and other current
assets, partially offset by an increase in accrued liabilities, unearned revenue and accounts payable. The change in net operating assets provided $40.2 million in cash in 2007, primarily due
to an increase in accrued liabilities and unearned revenue, partially offset by an increase in accounts receivable, inventory and prepaids and other current assets, and a decrease in accounts payable.
Covance's ratio of current assets to current liabilities was 1.60 at December 31, 2008 and 2.15 at December 31, 2007.

Investing
activities for the year ended December 31, 2008 used $317.6 million versus $165.5 million for the corresponding 2007 period. Capital spending for 2008
totaled $318.9 million, and was primarily for the expansion of preclinical facilities in North America and Europe (including $50 million for the purchase of Eli Lilly and Company's
Greenfield Indiana campus), outfitting of new facilities, upgrade of existing equipment, purchase of new equipment, hardware and software. Approximately $150.2 million of capital spending in
2008 represents expenditures primarily related to ongoing significant facility expansions and transformational information technology projects that have not yet been placed in service. Capital
spending for the corresponding 2007 period totaled $201.0 million, and was primarily for the expansion of our preclinical facilities in North America and Europe, outfitting of new facilities,
upgrade of existing equipment, purchase of new equipment, hardware and software.

31

---



Investing
activities for 2008 also included $4.1 million of contingent consideration received during the period associated with the November 2007 sale of Covance's cardiac safety
service offering related to transferred backlog. Investing activities for 2007 included the initial proceeds from the sale of Covance's cardiac safety service offering totaling $35.2 million.
On November 28, 2007, Covance sold its centralized ECG business ("Cardiac Safety Services"), part of Covance's Late Stage Development segment, to eResearchTechnology Inc. ("eRT").
Covance recognized a pre-tax gain of $6.6 million ($4.1 million after tax) from this transaction. Covance and eRT also entered into a ten year marketing agreement under which
Covance will continue to offer its clients cardiac safety services. Covance may receive up to an additional $8.1 million in future contingent consideration relating to transferred backlog and
revenues generated by eRT from new contracts secured under the first three years of the marketing agreement. In addition, Covance expects to receive referral fees during the term of the
long-term marketing agreement.

Investing
activities for 2008 also included the purchase of a minority equity investment in Caprion Proteomics ("Caprion") for $3.1 million. This investment is recorded at cost
and is included in other assets on the consolidated balance sheet.

Investing
activities for 2006 included cash payments totaling $75.7 million for the acquisitions of Radiant and Signet. In 2006, Covance acquired the stock of Radiant in a merger
transaction for cash payments aggregating approximately $66.6 million (including direct acquisition costs of $0.5 million). Radiant's early development clinical sites perform
Phase I/IIa clinical trial services. Results of operations for Radiant, which are now part of Covance's Early Development segment, and the fair value of Radiant's assets and liabilities
acquired, are included in Covance's consolidated financial statements beginning June 1, 2006. The fair value of Radiant's net assets was $9.2 million. Intangible assets acquired were
valued at $6.8 million. The remaining purchase price of $50.6 million represents goodwill.

In
2006, Covance also acquired certain assets and liabilities of Signet for cash payments totaling $9.1 million (including direct acquisition costs of $0.2 million).
Signet specializes in the development of monoclonal antibodies and diagnostic assays for cancer, infectious diseases and neurodegenerative diseases. Results of operations for Signet, which are now
part of Covance's Early Development segment, and the fair value of Signet's assets and liabilities acquired, are included in Covance's consolidated financial statements beginning June 1, 2006.
The fair value of Signet's net assets was $0.4 million. Intangible assets acquired were valued at $0.9 million. The remaining purchase price of $7.9 million represents goodwill.

Financing
activities for the year ended December 31, 2008 used $51.4 million and were comprised of the purchase into treasury of 1,500,000 shares of common stock in
connection with a 3.0 million share buyback program authorized by Covance's Board of Directors in February 2007, and the purchase into treasury of 102,247 shares in connection with employee
benefit plans, for an aggregate cost of $132.9 million, partially offset by the proceeds from the exercise of stock options of $17.9 million, excess tax benefits realized on the exercise
of stock options of $7.3 million and employee contributions to Covance's employee stock purchase plan of $6.3 million. Additionally, Covance borrowed $50 million under the Credit
Facility during 2008. Financing activities for the year ended December 31, 2007 used $32.9 million and were comprised of the purchase into treasury of 977,000 shares of common stock in
connection with a 3.0 million share buyback program authorized by Covance's Board of Directors in February 2007, and the purchase into treasury of 85,699 shares in connection with employee
benefit plans, for an aggregate cost of $66.4 million, partially offset by proceeds from the exercise of stock options of $22.2 million, excess tax benefits realized on the exercise of
stock options of $6.0 million and employee contributions to Covance's employee stock purchase plan of $5.2 million. At December 31, 2008, there are approximately
0.8 million shares remaining for repurchase under the Board authorized buyback program.

The
effect of exchange rate changes on cash for the year ended December 31, 2008 was a decrease of $15.3 million versus an increase of $4.6 million for the year
ended December 31, 2007. Covance's cash balances decreased by $98.2 million during 2008.

32

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As
discussed in Note 11 to the audited consolidated financial statements included elsewhere in this Annual Report, and as set forth in the table below, Covance is obligated under
non-cancelable operating leases, primarily for offices and laboratory facilities. Covance is also obligated under outsourcing agreements related to certain aspects of its information
technology and human resources support functions and purchase commitments primarily related to the completion of ongoing facility expansions, both of which are reflected under the caption purchase
obligations in the table below. Actual amounts paid under these outsourcing agreements could be higher or lower than the amounts shown below as a result of changes in volume and other variables. In
addition, early termination of these outsourcing agreements by Covance could result in the payment of termination fees which are not reflected in the table below.

Payments due by periodContractual Obligations(a)

Total

<1 Year

1-3 Years

3-5 Years

> 5 Years(Dollars in thousands)Operating Leases

$
122,973

$
23,214

$
34,330

$
24,657

$
40,772Purchase Obligations


79,183


40,082


32,423


6,678


Total

$
202,156

$
63,296

$
66,753

$
31,335

$
40,772


---



Off-Balance Sheet Arrangements

At December 31, 2008 and 2007, Covance was not a party to any off-balance sheet arrangements as defined by
Regulation S-K Item 303(a)(4)(i), promulgated under the Exchange Act.

Inflation

While most of Covance's net revenues are earned under contracts, the long-term contracts (those in excess of one year)
generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. As a result, Covance believes that the effects of
inflation generally do not have a material effect on its operations or financial condition.

Recently Issued Accounting Standards

In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business
Combinations("SFAS 141R") which replaces SFAS No. 141,Business Combinations. The scope of SFAS 141R is
broader than that of SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration. SFAS 141R revises accounting and reporting
standards for business combinations and applies to all transactions or other events in which an entity obtains control of one or more businesses by transferring consideration as well as combinations
achieved without the transfer of consideration. By applying the same method of accountingthe acquisition methodto all transactions and other events in which one entity
obtains control over one or more other businesses, this statement is intended to improve the comparability of the information about business combinations provided in financial reports.
SFAS 141R applies prospectively to business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Beginning January 1, 2009, Covance will adopt SFAS 141R and the impact of implementing this statement will depend on the nature and significance of business combinations consummated that
would be subject to this statement.

On
February 12, 2008, the FASB issued FASB Staff Position 157-2 ("FSP 157-2), which delays the effective date of the application of SFAS No. 157, Fair Value Measurements, ("SFAS 157") to
fiscal years beginning after November 15, 2008 for all non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. Covance's assets and liabilities subject to the provisions of
SFAS 157 are limited to non-recurring non-financial assets such as goodwill and other indefinite

33

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lived
intangible assets measured at fair value for impairment testing. As such, the adoption of SFAS 157, as amended by FSP 157-2, is deferred until our fiscal year beginning
January 1, 2009. Covance does not expect the adoption of SFAS 157, as amended, to have a material impact on its consolidated results of operations or financial position.

In
November 2008, the Emerging Issues Task Force reached a consensus on EITF No. 08-6,Equity Method Investment Accounting
Considerations("EITF 08-6"), which provides additional guidance for investments accounted for under the equity method. Under EITF 08-6,
equity method investments are initially measured at cost, with contingent consideration included in the initial measurement if it is recognized by specific authoritative guidance other than
SFAS 141(R). EITF 08-6 applies prospectively for fiscal years beginning on or after December 15, 2008, consistent with the effective date of SFAS 141R.
Beginning January 1, 2009, Covance will consider EITF 08-6 in the accounting for its equity method investments. Covance does not expect the adoption of
EITF 08-6 to have a material impact on its consolidated results of operations or financial position.

In
December 2008, the FASB issued FASB Staff Position 132(R)-1 ("FSP 132(R)-1"), which provides guidance on an employer's disclosures about plan assets of a
defined benefit pension or other postretirement plan. FSP 132(R)-1 requires disclosure of investment allocation methodologies and information that enables users of financial statements to
assess the inputs and valuation techniques used to develop fair value measurements of plan assets in order to provide users with an understanding of significant concentrations of risk in plan assets.
FSP 132(R)-1 is effective for years ending after December 15, 2009. FSP 132(R)-1 requires additional disclosure only and therefore will not impact Covance's consolidated
results of operations or financial position.

Forward Looking Statements.Statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as
well as in certain other parts of this Annual Report on Form 10-K that look forward in time, are forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations,
predictions, and assumptions and other statements which are other than statements of historical facts. All such forward-looking statements are based on the current expectations of management and are
subject to, and are qualified by, risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These risks and uncertainties
include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract
and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume,
the pace of translation of orders into revenue in late-stage development services, and other factors described in Covance's filings with the Securities and Exchange Commission, including,
without limitation, this Annual Report on Form 10-K.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

For the year ended December 31, 2008, approximately 40% of our net revenues were derived from our operations outside the United
States. We do not engage in material or long-term derivative or hedging activities related to our potential foreign exchange exposures. See "Management's Discussion and Analysis of
Financial Condition and Results of OperationsForeign Currency Risks" for a more detailed discussion of our foreign currency risks and exposures.

Covance's
short-term investments are with major financial institutions in countries whose governments guarantee those investments (primarily in Ireland and the United
Kingdom). These short-term investments are in bank deposits and money market funds which can be readily purchased and sold using established markets. Covance's cash investment policy is to
maximize utilization of excess cash according to the following specific criteria (in order of priority): (1) preserve capital (minimize financial market risk); (2) maintain liquidity;
(3) manage foreign exchange rate exposure (internal hedging); (4) maximize rate of return; and (5) enhance strategic relationships with select financial institutions. Covance also
has strong operating cash flow and ready access to credit available under its Credit Facility, as evidenced by its ability to expand the Credit Facility to $125 million in August 2008 and its
ability to borrow $50 million under the Credit Facility in early October 2008.

34

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Item 8.    Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                             |  |  |    | 
|-------------------------------------------------------------------------------------------- |  |  | -- | 
|
|Management's Report on Consolidated Financial Statements and Internal Control                |  |  | 36 | 
|Internal Control Report of Ernst & Young LLPIndependent Registered Public Accounting Firm   |  |  | 37 | 
|Report of Ernst & Young LLPIndependent Registered Public Accounting Firm                    |  |  | 38 | 
|Consolidated Balance SheetsDecember 31, 2008 and 2007                                       |  |  | 39 | 
|Consolidated Statements of IncomeYears ended December 31, 2008, 2007 and 2006               |  |  | 40 | 
|Consolidated Statements of Cash FlowsYears ended December 31, 2008, 2007 and 2006           |  |  | 41 | 
|Consolidated Statements of Stockholders' EquityYears ended December 31, 2008, 2007 and 2006 |  |  | 42 | 
|Notes to Consolidated Financial Statements                                                   |  |  | 43 | 

35

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Management's Report on Consolidated Financial Statements and Internal Control

The
management of Covance Inc. ("Covance") has prepared, and is responsible for, Covance's consolidated financial statements and related footnotes. These consolidated financial
statements have been prepared in conformity with U.S. generally accepted accounting principles.

Covance's
management is responsible for establishing and maintaining effective internal control over financial reporting and for assessing the effectiveness of internal control over
financial reporting. The purpose of this system of internal accounting controls over financial reporting is to provide reasonable assurance that assets are safeguarded, that transactions are executed
in accordance with management's authorization and are properly recorded, and that accounting records may be relied upon for the preparation of accurate and complete consolidated financial statements.
The design, monitoring and revision of internal accounting control systems involve, among other things, management's judgment with respect to the relative cost and expected benefits of specific
control measures. Covance also maintains an internal
audit function that evaluates and reports on the adequacy and effectiveness of internal controls, policies and procedures.

Covance's
management concluded that its internal control over financial reporting as of December 31, 2008 was effective and adequate to accomplish the objectives described above.
Management's assessment was based upon the criteria in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Covance's
consolidated financial statements and the effectiveness of control over financial reporting have been audited by an independent registered public accounting firm, Ernst & Young LLP, as
stated in their reports which are included elsewhere herein.

|                                                                                                                        |  |                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                        |  |                                                                                                                                        
|                                                                                                                        |  |                                                                                                                                        
|/s/ Joseph L. Herring Joseph L. Herring
Chairman of the Board and
Chief Executive Officer
(Principal Executive Officer) |  | /s/ William E. Klitgaard William E. Klitgaard
Corporate Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)

36

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Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Covance Inc.

We
have audited Covance Inc.'s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Covance Inc.'s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying report on consolidated financial statements and internal
control. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In
our opinion, Covance Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Covance Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2008 and our report dated February 19, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP


MetroPark,
New Jersey
February 19, 2009

37

---



Report of Independent Registered Public Accounting Firm

The
Board of Directors and Stockholders
Covance Inc.

We
have audited the accompanying consolidated balance sheets of Covance Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based on our audits.

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

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Covance Inc. and subsidiaries at
December 31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with
U.S. generally accepted accounting principles.

As
discussed in Note 2 to the consolidated financial statements, the Company adopted SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" at the end of fiscal year 2006, and FIN 48, "Accounting for Uncertainty in Income Taxesan
Interpretation of FASB Statement No. 109", as of January 1, 2007.

We
also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Covance Inc.'s internal control over financial reporting
as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and
our report dated February 19, 2009 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP


MetroPark,
New Jersey
February 19, 2009

38

---





COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007

(Dollars in thousands)

2008

2007AssetsCurrent Assets:Cash and cash equivalents

$
221,334

$
319,485Accounts receivable


228,951


217,657Unbilled services


112,719


88,835Inventory


68,206


54,788Deferred income taxes


15,029


7,825Prepaid expenses and other current assets


91,451


81,467Total Current Assets


737,690


770,057Property and equipment, net


860,957


646,040Goodwill, net


105,486


105,486Other assets


48,955


38,602Total Assets

$
1,753,088

$
1,560,185Liabilities and Stockholders' EquityCurrent Liabilities:Accounts payable

$
41,887

$
32,252Accrued payroll and benefits


104,607


95,313Accrued expenses and other current liabilities


86,521


66,838Unearned revenue


162,556


144,870Short-term debt


50,000


Income taxes payable


14,224


18,887Total Current Liabilities


459,795


358,160Deferred income taxes


51,385


32,562Other liabilities


47,059


59,275Total Liabilities


558,239


449,997Commitments and ContingenciesStockholders' Equity:Preferred stockPar value $1.00 per share; 10,000,000 shares authorized; no shares issued and outstanding at December 31, 2008 and
2007





Common stockPar value $0.01 per share; 140,000,000 shares authorized; 75,447,578 and 74,590,229 shares issued and outstanding, including those held
in treasury, at December 31, 2008 and 2007, respectively


754


746Paid-in capital


551,598


492,373Retained earnings


1,129,569


933,106Accumulated other comprehensive (loss) income


(13,975
)

24,154Treasury stock at cost (12,150,495 and 10,548,248 shares at December 31, 2008 and 2007, respectively)


(473,097
)

(340,191
)Total Stockholders' Equity


1,194,849


1,110,188Total Liabilities and Stockholders' Equity

$
1,753,088

$
1,560,185


The
accompanying notes are an integral part of these consolidated financial statements.

39

---





COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(Dollars in thousands, except per share data)

2008

2007

2006Net revenues

$
1,728,098

$
1,546,419

$
1,340,203Reimbursable out-of-pockets


98,969


85,097


65,855Total revenues


1,827,067


1,631,516


1,406,058Costs and expenses:Cost of revenue (excluding depreciation and amortization)


1,142,697


1,017,686


882,190Reimbursed out-of-pocket expenses


98,969


85,097


65,855Selling, general and administrative (excluding depreciation and amortization)


250,180


233,890


207,388Depreciation and amortization


71,571


66,197


57,388Total costs and expenses


1,563,417


1,402,870


1,212,821Income from operations


263,650


228,646


193,237Other (income) expense, net:Interest income


(8,304
)

(10,269
)

(7,809
)Interest expense


1,843


468


245Foreign exchange transaction (gain) loss, net


(142
)

(1,375
)

212Gain on sale of business


(4,070
)

(6,590
)

Other income, net


(10,673
)

(17,766
)

(7,352
)Income before taxes and equity investee earnings


274,323


246,412


200,589Taxes on income


79,415


72,934


57,179Equity investee earnings


1,852


2,451


1,588Net income

$
196,760

$
175,929

$
144,998Basic earnings per share

$
3.12

$
2.76

$
2.28Weighted average shares outstandingbasic


63,096,155


63,747,732


63,585,722Diluted earnings per share

$
3.08

$
2.71

$
2.24Weighted average shares outstandingdiluted


63,981,505


64,820,406


64,782,212


The
accompanying notes are an integral part of these consolidated financial statements.

40

---





COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

(Dollars in thousands)

2008

2007

2006Cash flows from operating activities:Net income

$
196,760

$
175,929

$
144,998Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


71,571


66,197


57,388Non-cash compensation expense associated with employee benefit and stock compensation plans


25,389


26,508


30,397Deferred income tax provision (benefit)


9,343


(4,903
)

561Gain on sale of business


(4,070
)

(6,590
)

Loss (gain) on sale of property and equipment


1,064


(1,346
)

11Equity investee earnings


(1,852
)

(2,451
)

(1,588
)Changes in operating assets and liabilities, net of businesses acquired and sold:Accounts receivable


(11,294
)

(16,847
)

6,332Unbilled services


(23,884
)

304


(842
)Inventory


(13,418
)

(5,336
)

(8,921
)Accounts payable


9,635


(2,836
)

8,380Accrued liabilities


26,952


37,153


12,547Unearned revenue


17,686


35,392


10,544Income taxes payable


(2,702
)

9,310


6,754Other assets and liabilities, net


(15,023
)

(16,954
)

(12,392
)Net cash provided by operating activities


286,157


293,530


254,169Cash flows from investing activities:Capital expenditures


(318,928
)

(201,037
)

(136,800
)Proceeds from sale of business


4,070


35,200


Acquisition of businesses








(75,668
)Minority equity investment


(3,136
)




Other, net


385


322


806Net cash used in investing activities


(317,609
)

(165,515
)

(211,662
)Cash flows from financing activities:Net borrowings under revolving credit facility


50,000





Stock issued under employee stock purchase and option plans


31,500


33,423


39,905Purchase of treasury stock


(132,906
)

(66,356
)

(28,032
)Net cash (used in) provided by financing activities


(51,406
)

(32,933
)

11,873Effect of exchange rate changes on cash


(15,293
)

4,593


4,713Net change in cash and cash equivalents


(98,151
)

99,675


59,093Cash and cash equivalents, beginning of year


319,485


219,810


160,717Cash and cash equivalents, end of year

$
221,334

$
319,485

$
219,810


The
accompanying notes are an integral part of these consolidated financial statements.

41

---





COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |           |         |        |  
|------------------------------------------------------------------------- | ------------------------------------------ | -------------------------- | --- | - | - | ------- | - | - | --------- | ------- | - | ------- | ------- | ------ | - | ------- | ------- | -------- | - | - | --------- | ------- | ------ | -
|
|Balance, December 31, 2005                                                |                                            | $                          | 718 |   | $ | 350,678 |   | $ | 612,811   |         | $ | 13,367  |         |        |   |         | $       | (245,803 | ) | $ | 731,771   |        
|Comprehensive income:                                                     |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |           |        
|                                                                          | Net income                                 |                            |     |  |   |         |  |   |           | 144,998 |   |         |        |        | $ | 144,998 |         |          |  |   |           | 144,998 |       
|                                                                          | Currency translation adjustment            |                            |     |  |   |         |  |   |           |        |   |         | 21,803  |        |   | 21,803  |         |          |  |   |           | 21,803  |       
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |          
|                                                                          |                                            | Total comprehensive income |     |   |  |         |   |  |           |         |  |         |         |       |   | $       | 166,801 |          |   |  |           |         |       |  
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |          
|Adjustment from initially applying SFAS 158, net of tax                   |                                            |                            |    |   |   |        |   |   |          |         |   | (23,389 | )       |        |   |         |         |         |   |   | (23,389   | )      
|Shares issued under various employee benefit and stock compensation plans |                                            |                            | 6   |   |   | 34,594  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 34,600    |        
|Stock option exercises                                                    |                                            |                            | 10  |   |   | 28,347  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 28,357    |        
|Tax benefit from stock issued                                             |                                            |                            |    |   |   | 13,187  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 13,187    |        
|Treasury stock, at cost                                                   |                                            |                            |    |   |   |        |   |   |          |         |   |        |         |        |   |         |         | (28,032  | ) |   | (28,032   | )      
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |        
|Balance, December 31, 2006                                                |                                            |                            | 734 |   |   | 426,806 |   |   | 757,809   |         |   | 11,781  |         |        |   |         |         | (273,835 | ) |   | 923,295   |        
|Adjustment from adoption of FIN 48                                        |                                            |                            |    |   |   |        |   |   | (632      | )       |   |        |         |        |   |         |         |         |   |   | (632      | )      
|Comprehensive income:                                                     |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |           |        
|                                                                          | Net income                                 |                            |     |  |   |         |  |   |           | 175,929 |   |         |        |        | $ | 175,929 |         |          |  |   |           | 175,929 |       
|                                                                          | Currency translation adjustment            |                            |     |  |   |         |  |   |           |        |   |         | 10,158  |        |   | 10,158  |         |          |  |   |           | 10,158  |       
|                                                                          | Defined benefit pension plans, net of tax: |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |           |         |       
|                                                                          |                                            | Actuarial gain             |     |   |   |         |   |   |           |         |   |         |         | 1,119  |   |         | 1,119   |          |   |   |           |         | 1,119  |  
|                                                                          |                                            | Prior service credit       |     |   |  |         |   |  |           |         |  |         |         | 1,096  |   |         | 1,096   |          |   |  |           |         | 1,096  |  
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |          
|                                                                          |                                            | Total comprehensive income |     |   |  |         |   |  |           |         |  |         |         |       |   | $       | 188,302 |          |   |  |           |         |       |  
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |          
|Shares issued under various employee benefit and stock compensation plans |                                            |                            | 5   |   |   | 31,909  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 31,914    |        
|Stock option exercises                                                    |                                            |                            | 7   |   |   | 22,239  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 22,246    |        
|Tax benefit from stock issued                                             |                                            |                            |    |   |   | 11,419  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 11,419    |        
|Treasury stock, at cost                                                   |                                            |                            |    |   |   |        |   |   |          |         |   |        |         |        |   |         |         | (66,356  | ) |   | (66,356   | )      
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |        
|Balance, December 31, 2007                                                |                                            |                            | 746 |   |   | 492,373 |   |   | 933,106   |         |   | 24,154  |         |        |   |         |         | (340,191 | ) |   | 1,110,188 |        
|Effect of change in plan measurement date under SFAS 158                  |                                            |                            |    |   |   |        |   |   | (297      | )       |   |        |         |        |   |         |         |         |   |   | (297      | )      
|Comprehensive income:                                                     |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |           |        
|                                                                          | Net income                                 |                            |     |  |   |         |  |   |           | 196,760 |   |         |        |        | $ | 196,760 |         |          |  |   |           | 196,760 |       
|                                                                          | Currency translation adjustment            |                            |     |  |   |         |  |   |           |        |   |         | (40,544 | )      |   | (40,544 | )       |          |  |   |           | (40,544 | )     
|                                                                          | Unrealized gain on securities, net of tax  |                            |     |  |   |         |  |   |           |        |   |         | 4,359   |        |   | 4,359   |         |          |  |   |           | 4,359   |       
|                                                                          | Defined benefit pension plans, net of tax: |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |           |         |       
|                                                                          |                                            | Actuarial loss             |     |   |  |         |   |  |           |         |  |         |         | (1,867 | ) |         | (1,867  | )        |   |  |           |         | (1,867 | )
|                                                                          |                                            | Prior service cost         |     |   |  |         |   |  |           |         |  |         |         | (77    | ) |         | (77     | )        |   |  |           |         | (77    | )
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |          
|                                                                          |                                            | Total comprehensive income |     |   |  |         |   |  |           |         |  |         |         |       |   | $       | 158,631 |          |   |  |           |         |       |  
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |         |         |          |   |   |          
|Shares issued under various employee benefit and stock compensation plans |                                            |                            | 3   |   |   | 32,075  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 32,078    |        
|Stock option exercises                                                    |                                            |                            | 5   |   |   | 17,884  |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 17,889    |        
|Tax benefit from stock issued                                             |                                            |                            |    |   |   | 9,266   |   |   |          |         |   |        |         |        |   |         |         |         |   |   | 9,266     |        
|Treasury stock, at cost                                                   |                                            |                            |    |   |   |        |   |   |          |         |   |        |         |        |   |         |         | (132,906 | ) |   | (132,906  | )      
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |        
|Balance, December 31, 2008                                                |                                            | $                          | 754 |   | $ | 551,598 |   | $ | 1,129,569 |         | $ | (13,975 | )       |        |   |         | $       | (473,097 | ) | $ | 1,194,849 |        
|                                                                          |                                            |                            |     |   |   |         |   |   |           |         |   |         |         |        |   |        

The accompanying notes are an integral part of these consolidated financial statements.

42

---





COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

1.    Organization

Covance Inc. and its subsidiaries ("Covance" or the "Company") is a leading drug development services company providing a wide range of early-stage
and late-stage
product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. Covance also provides services such as laboratory testing to the
chemical, agrochemical and food industries. Covance's operations constitute two segments for financial reporting purposes. The first segment, early development services, includes preclinical and
clinical pharmacology service offerings. The second segment, late-stage development services, includes central laboratory, clinical development and commercialization services (periapproval
and market access services). Operations are principally focused in the United States and Europe.

2.    Summary of Significant Accounting Policies



The consolidated financial statements include the accounts of all entities controlled by Covance. All significant intercompany
accounts and transactions are eliminated. The equity method of accounting is used for investments in affiliates in which Covance owns between 20 and 50 percent and does not have the ability to
exercise control. For investments in which Covance owns less than 20 percent and does not have the ability to exercise significant influence over operating or financial decisions of the
investee, the cost method of accounting is applied. Where the fair value of the shares of the cost method investee are readily available, Covance accounts for such investment as
available-for-sale securities under Statement of Financial Accounting Standards ("SFAS") No. 115,Accounting for Certain Investments in Debt and
Equity Securities("SFAS 115"). See Note 5.



These consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("GAAP"),
which requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ
from these estimates.



For subsidiaries outside of the United States that operate in a local currency environment, income and expense items are translated to
United States dollars at the monthly average rates of exchange prevailing during the year, assets and liabilities are translated at year-end exchange rates and equity accounts are
translated at historical exchange rates. Translation adjustments are accumulated in a separate component of stockholders' equity in the consolidated balance sheets and are included in the
determination of comprehensive income in the consolidated statements of stockholders' equity. Transaction gains and losses are included in the determination of net income in the consolidated
statements of income.



Cash and cash equivalents include all highly liquid investments with an original maturity of three months or less at date of purchase
and consist principally of amounts invested in money market funds and bank deposits.

43

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximate their carrying
amounts as reported at December 31, 2008 and 2007.

Accounts
receivable and unbilled services represent amounts due from Covance customers who are concentrated primarily in the pharmaceutical and biotechnology industries. Covance
endeavors to monitor the creditworthiness of its customers to which it grants credit terms in the ordinary course of business. Although Covance customers are concentrated primarily within these two
industries, management considers the likelihood of material credit risk as remote. In addition, in some cases Covance requires advance payment for a portion of the contract price from its customers
upon the signing of a contract for services. These amounts are deferred and recognized as revenue as services are performed. Historically, bad debts have been immaterial.



Inventories, which consist principally of finished goods and supplies, are valued at the lower of cost (first-in,
first-out method) or market.



In connection with the management of multi-site clinical trials, Covance pays on behalf of its customers fees to
investigators, volunteers and other out-of-pocket costs (such as travel, printing, meetings, couriers, etc.), for which we are reimbursed at cost, without mark-up
or profit. Amounts receivable from customers in connection with billed and unbilled investigator fees, volunteer payments and other out-of-pocket pass-through costs
are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets and totaled $52.7 million and $47.4 million at December 31, 2008 and
2007, respectively. See Note 2 "Reimbursable Out-of-Pocket Expenses".



Property and equipment are recorded at cost. Depreciation and amortization are provided on the straight-line method at
rates adequate to allocate the cost of the applicable assets over their estimated useful lives, which generally range from ten to forty years for buildings and improvements, three to ten years for
equipment, furniture and fixtures and three to five years for computer hardware and software, except for certain large enterprise-wide software applications which are depreciated over
eight years. Leasehold improvements are capitalized and amortized on a straight-line basis over the shorter of the estimated useful life of the improvement or the associated remaining
lease term. The cost of computer software developed or obtained for internal use is accounted for in accordance with the Accounting Standards Executive Committee's Statement of Position
98-1,Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.Repairs and maintenance are expensed as
incurred.



Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business
combinations. In accordance with SFAS No. 142,Goodwill and Other Intangible Assets,Covance performs an annual test for impairment of goodwill
and other indefinite lived intangible assets

44

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)

during
the fourth quarter. This test is performed by comparing, at the reporting unit level, the carrying value of the reporting unit to its fair value. Covance assesses fair value based upon its
estimate of the present value of the future cash flows that it expects to be generated by the reporting unit. The annual test for impairment performed for 2008, 2007 and 2006 did not identify any
instances of impairment.

Intangible
assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range in term from one to ten years. The Company
periodically evaluates the reasonableness of the estimated useful lives of these intangible assets. See Note 4.



Covance assesses impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Assessments of the recoverability of long-lived assets are
conducted when events or changes in circumstances occur that indicate the carrying value of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover
the asset from the expected future undiscounted cash flows of related operations. No events have been identified that caused an evaluation of the recoverability of the long-lived assets
for the years ended December 31, 2008, 2007 and 2006.



Covance recognizes revenue either as services are performed or products are delivered, depending on the nature of the work contracted.
Historically, a majority of Covance's net revenues have been earned under contracts which range in duration from a few months to two years, but can extend in duration up to five years or longer. We
also have dedicated capacity arrangements with certain clients ranging in duration from one to ten years. Underlying these arrangements are individual project contracts for the specific services to be
provided. Dedicated capacity arrangements enable our clients
to secure space in our facilities in exchange for which they agree to provide a guaranteed annual minimum dollar value ("volume") of work. Under these types of arrangements, if the annual minimum
volume commitment is not reached, the client is required to pay Covance for the shortfall. Progress towards the achievement of annual minimum volume guarantees is monitored throughout the year. Annual
minimum guarantee shortfalls are included in net revenues when the amount of the shortfall is determinable and realization is assured.

Service
contracts generally take the form of fee-for-service or fixed-price arrangements. In cases where performance spans multiple accounting periods, revenue
is recognized as services are performed, measured on a proportional-performance basis, generally using output measures that are specific to the service provided. Examples of output measures in our
early development segment include the number of slides read, dosings performed, or specimens prepared for preclinical laboratory services, or number of dosings or number of volunteers enrolled for
clinical pharmacology. Examples of output measures in our late-stage development segment's clinical development service offering include among others, number of investigators enrolled,
number of sites initiated, number of patients enrolled and number of monitoring visits completed. Revenue is determined by dividing the actual units of work completed by the total units of work
required under the contract and multiplying that percentage by the total contract value. The total contract value, or total contractual payments, represents the aggregate contracted price for each of
the agreed upon services to be provided. We do not have any contractual arrangements spanning multiple accounting periods where revenue is recognized on a proportional-performance basis under which we
have earned more than an immaterial amount of performance-based revenue (i.e. potential additional revenue tied to specific deliverables or performance). Changes in the scope of work are
common, especially under long-term contracts, and generally result in a

45

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)

change
in contract value. Once the client has agreed to the changes in scope and renegotiated pricing terms, the contract value is amended and revenue is recognized as described above. Estimates of
costs to complete are made to provide, where appropriate, for losses expected on contracts. Costs are not deferred in anticipation of contracts being awarded, but instead are expensed as incurred.

Billing
schedules and payment terms are generally negotiated on a contract-by-contract basis. In some cases, we bill the client for the total contract value in
progress-based installments as we reach certain non-contingent billing milestones over the contract duration, such as, but not limited to, contract signing, initial dosing, investigator
site initiation, patient enrollment or database lock. The term "billing milestone" relates only to a billing trigger in a contract whereby amounts become billable and payable in accordance with a
negotiated predetermined billing schedule throughout the term of a project. These billing milestones are not performance-based (i.e., potential additional arrangement consideration tied to
specific deliverables or performance). In other cases, billing and payment terms are tied to the passage of time (e.g., monthly billings). In either case, the total contract value and aggregate
amounts billed to the client would be the same at the end of the project. While we attempt to negotiate terms that provide for billing and payment of services prior to or within close proximity to the
provision of services, this is not always the case, as evidenced by fluctuations in the levels of unbilled receivables and unearned revenue from period to period.
While a project is ongoing, cash payments are not necessarily representative of aggregate revenue earned at any particular point in time, as revenues are recognized when services are provided, while
amounts billed and paid are in accordance with the negotiated billing and payment terms.

In
some cases, payments received are in excess of revenue recognized. For example, a contract invoicing schedule may provide for an upfront payment of 10% of the full contract value
upon contract signing, but at the time of signing, performance of services has not yet begun, and therefore, no revenue has yet been recognized. Payments received in advance of services being
provided, such as in this example, are deferred as unearned revenue on the balance sheet. As the contracted services are subsequently performed and the associated revenue is recognized, the unearned
revenue balance is reduced by the amount of revenue recognized during the period.

In
other cases, services may be provided and revenue is recognized before we have invoiced the client. In these cases, revenue recognized will exceed amounts billed, and the difference,
representing an unbilled receivable, is recorded for this amount that is currently unbillable to the customer pursuant to contractual terms. Once we have invoiced the client, the unbilled receivable
is reduced for the amount billed, and a corresponding account receivable is recorded. All unbilled receivables are billable to customers within one year from the respective balance sheet date.

Most
contracts are terminable by the client either immediately or upon notice. These contracts typically require payment to Covance of expenses to wind down the study, fees earned to
date and, in some cases, a termination fee or a payment to Covance of some portion of the fees or profits that could have been earned by Covance under the contract if it had not been terminated early.
Termination fees are included in net revenues when realization is assured. In connection with the management of multi-site clinical trials, Covance pays on behalf of its customers fees to
investigators, volunteers and other out-of-pocket costs (such as for travel, printing, meetings, couriers, etc.), for which it is reimbursed at cost, without
mark-up or profit. Investigator fees are not reflected in total revenues or expenses where Covance acts in the capacity of an agent on behalf of the pharmaceutical company sponsor, passing
through these costs without risk or reward to Covance. All other out-of-pocket costs are included in total revenues and expenses.

46

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



Cost of revenue includes direct labor and related benefit charges, other direct costs, shipping and handling fees, and an allocation
of facility charges and information technology costs and excludes depreciation and amortization. Selling, general and administrative expenses consist primarily of administrative payroll and related
benefit charges, advertising and promotional expenses, administrative
travel and an allocation of facility charges and information technology costs and excludes depreciation and amortization. Cost of advertising is expensed as incurred.



Covance uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year
in which the temporary differences are expected to reverse. The effect on deferred taxes of a change in enacted tax rates is recognized in income in the period when the change is effective. See
Note 7.

The
Company accounts for uncertain income tax positions in accordance with the provisions of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of
FASB Statement No. 109("FIN 48"). Under the guidance of
FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the
position. The amount of the accrual for which an exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than
not to be realized upon ultimate settlement of the position. Components of the reserve are classified as either a current or long-term liability in the consolidated balance sheet, based on
when the Company expects each of the items to be settled. Covance records interest and penalties accrued in relation to unrecognized tax benefits as a component of income tax expense.

The
Company also maintains a tax reserve related to exposures for non-income tax matters including value-added tax and state sales and use and other taxes, which are
accounted for in accordance with Statement of Financial Accounting Standards No. 5,Accounting for Contingencies. The balance of this reserve at
December 31, 2008 and 2007 is $0.9 million and $0.8 million, respectively, and is recorded as a current liability in accrued expenses and other current liabilities on the
consolidated balance sheet. This reserve was increased by $0.1 million from the December 31, 2007 balance of $0.8 million, due to the accrual of interest on outstanding reserves
in 2008.

While
Covance believes it has identified all reasonably identifiable exposures and the reserve it has established for identifiable exposures is appropriate under the circumstances, it
is possible that additional exposures exist and that exposures may be settled at amounts different than the amounts reserved. It is also possible that changes in facts and circumstances could cause
Covance to either materially increase or reduce the carrying amount of its tax reserves.

Covance's
historical policy has been to leave its unremitted foreign earnings invested indefinitely outside the United States. Covance intends to continue to leave its unremitted
foreign earnings invested indefinitely outside the United States. As a result, taxes have not been provided on any of the remaining accumulated foreign unremitted earnings as of December 31,
2008. See Note 7.

47

---





COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



Covance's total comprehensive income represents net income plus the change in the cumulative translation adjustment equity account for
the periods presented. For the year ended December 31, 2008, comprehensive income also includes a $4.4 million unrealized gain on securities, net of tax, resulting from the change in
classification of Covance's minority equity investment in Bio-Imaging Technologies ("BITI") from an equity method investment to an available-for-sale security in
accordance with SFAS 115. For the years ended December 31, 2008 and 2007, comprehensive income also includes adjustments net of tax, for the current year actuarial gains (losses) and
prior service credits (costs) in accordance with SFAS 158. For the year
ended December 31, 2006, accumulated other comprehensive income also includes the adjustment resulting from the adoption of Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),("SFAS 158") to record the under funded status of the Company's defined benefit postretirement plans on its balance sheet at December 31, 2006, net of tax.



The Company sponsors several stock-based compensation plans pursuant to which non-qualified stock options and restricted
stock awards are granted to eligible employees. These plans are described more fully in Note 10. The Company recognizes stock-based compensation under the provisions of Statement of Financial
Accounting Standards No. 123R,Share-Based Payments, ("SFAS 123R"), pursuant to which the grant-date fair value of awards
expected to vest is expensed on a straight-line basis over the vesting period of the related awards.



Covance sponsors various pension and other post-retirement benefit plans which are more fully described in Note 9.
The measurement of the related benefit obligations and the net periodic benefit costs recorded each year are based upon actuarial computations, which require management's judgment as to certain
assumptions. These assumptions include the discount rates to use in computing the present value of the benefit obligations and the net periodic benefit costs, the expected future rate of salary
increases (for pay-related plans) and the expected long-term rate of return on plan assets (for funded plans). The discount rates are derived based on a hypothetical yield
curve represented by a series of annualized individual discount rates. The expected long-term rate of return on plan assets is based on the target asset allocation and the average expected
rate of growth for the asset classes invested. The average expected rate of growth is derived from a combination of historic returns, current market indicators, the expected risk premium for each
asset class and the opinion of professional advisors.

Effective
December 31, 2008, Covance adopted the measurement date provisions of Statement of Financial Accounting Standards No. 158,Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements Nos. 87, 88, 106 and 132(R) ("SFAS 158"). The
measurement date provision of SFAS 158 eliminated the early measurement date option and requires a plan's funded status to be measured as of the employer's fiscal year end. As such, liabilities
related to all of Covance's pension and other post-retirement benefit plans are now measured as of December 31. See Note 9.

48

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding
during the period. The computation of diluted EPS is similar to the computation of basic EPS, except that the denominator is increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued; computed under the treasury stock method in accordance with the requirements of SFAS No. 128, Earnings Per Share.

In
computing diluted EPS for the years ended December 31, 2008, 2007 and 2006, the denominator was increased by 885,350 shares, 1,072,674 shares and 1,196,490 shares,
respectively, representing the dilutive effect of stock options outstanding at December 31, 2008, 2007 and 2006, with exercise prices less than the average market price of Covance's common
stock during each respective period. Excluded from the computation of diluted EPS for the year ended December 31, 2008 were options to purchase 251,588 shares of common stock at prices ranging
from $77.72 to $94.34 per share because the exercise prices of such options were greater than the average market price of Covance's common stock during 2008. Excluded from the computation of diluted
EPS for the year ended December 31, 2007 were options to purchase 4,805 shares of common stock at prices ranging from $70.57 to $87.33 per share because the exercise prices of such options were
greater than the average market price of Covance's common stock during 2007. Excluded from the computation of diluted EPS for the year ended December 31, 2006 were options to purchase 12,263
shares of common stock at prices ranging from $61.26 to $66.86 per share because the exercise prices of such options were greater than the average market price of Covance's common stock during 2006.



As discussed in Note 2 "Prepaid Expenses and Other Current Assets", Covance pays on behalf of its customers fees to
investigators, volunteers and other out-of-pocket costs for which the Company is reimbursed at cost, without mark-up or profit. In connection with the requirements
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, amounts paid to volunteers and other out-of-pocket costs are
reflected in operating expenses, while the reimbursements received are reflected in revenues in the consolidated statements of income. Covance will continue to exclude from revenue and expense in the
consolidated statements of income fees paid to investigators and the associated reimbursement since Covance acts as an agent on behalf of the pharmaceutical company sponsors with regard to
investigator payments.



Cash paid for interest for the years ended December 31, 2008, 2007 and 2006 totaled $1.5 million, $0.3 million
and $0.2 million, respectively. Cash paid for income taxes for the years ended December 31, 2008, 2007 and 2006 totaled $53.8 million, $63.2 million and
$47.8 million, respectively. The change in income taxes payable in the consolidated statement of cash flows for the years ended December 31, 2008, 2007 and 2006 includes as an operating
cash outflow the excess tax benefit received from the exercise of non-qualified stock options as measured under SFAS 123R of $7.3 million, $6.0 million and
$7.4 million, respectively (a corresponding cash inflow of $7.3 million, $6.0 million and $7.4 million, respectively, has been included in financing cash flows).

49

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



In December 2007, the FASB issued SFAS No. 141 (revised 2007),Business
Combinations("SFAS 141R") which replaces SFAS No. 141,Business Combinations. The scope of SFAS 141R is
broader than that of SFAS No. 141, which applied only to business combinations in which control was obtained by transferring consideration. SFAS 141R revises accounting and reporting
standards for business combinations and applies to all transactions or other events in which an entity obtains control of one or more businesses by transferring consideration as well as combinations
achieved without the transfer of consideration. By applying the same method of accountingthe acquisition methodto all transactions and other events in which one entity
obtains control over one or more other businesses, this statement is intended to improve the comparability of the information about business combinations provided in financial reports.
SFAS 141R applies prospectively to business combinations with an acquisition date on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.
Beginning January 1, 2009, Covance will adopt SFAS 141R and the impact of implementing this statement will depend on the nature and significance of business combinations consummated that
would be subject to this statement.

On
February 12, 2008, the FASB issued FASB Staff Position 157-2 ("FSP 157-2), which delays the effective date of the application of SFAS No. 157, Fair Value Measurements, ("SFAS 157") to
fiscal years beginning after November 15, 2008 for all non-financial assets and
liabilities that are recognized or disclosed at fair value in the financial statements on a non-recurring basis. Covance's assets and liabilities subject to the provisions of
SFAS 157 are limited to non-recurring non-financial assets such as goodwill and other indefinite lived intangible assets measured at fair value for impairment testing.
As
such, the adoption of SFAS 157, as amended by FSP 157-2, is deferred until our fiscal year beginning January 1, 2009. Covance does not expect the adoption of SFAS 157,
as amended, to have a material impact on its consolidated results of operations or financial position.

In
November 2008, the Emerging Issues Task Force reached a consensus on EITF No. 08-6,Equity Method Investment Accounting
Considerations("EITF 08-6"), which provides additional guidance for investments accounted for under the equity method. Under EITF 08-6,
equity method investments are initially measured at cost, with contingent consideration included in the initial measurement if it is recognized by specific authoritative guidance other than
SFAS 141(R). EITF 08-6 applies prospectively for fiscal years beginning on or after December 15, 2008, consistent with the effective date of SFAS 141R.
Beginning January 1, 2009, Covance will consider EITF 08-6 in the accounting for its equity method investments. Covance does not expect the adoption of
EITF 08-6 to have a material impact on its consolidated results of operations or financial position.

In
December 2008, the FASB issued FASB Staff Position 132(R)-1 ("FSP 132(R)-1"), which provides guidance on an employer's disclosures about plan assets of a
defined benefit pension or other postretirement plan. FSP 132(R)-1 requires disclosure of investment allocation methodologies and information that enables users of financial statements to
assess the inputs and valuation techniques used to develop fair value measurements of plan assets in order to provide users with an understanding of significant concentrations of risk in plan assets.
FSP 132(R)-1 is effective for years ending after December 15, 2009. FSP 132(R)-1 requires additional disclosure only and therefore will not impact Covance's consolidated
results of operations or financial position.

50

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

3.    Property and Equipment

Property and equipment at December 31, 2008 and 2007 consist of the following:

2008

2007Property and equipment at cost:Land

$
87,247

$
83,106Buildings and improvements


501,552


430,063Equipment


235,342


248,289Computer hardware and software


245,984


200,583Furniture, fixtures & leasehold improvements


73,414


75,025Construction-in-progress


211,892


105,5991,355,431


1,142,665Less: Accumulated depreciation and amortization


(494,474
)

(496,625
)Property and equipment, net

$
860,957

$
646,040


Depreciation
and amortization expense aggregated $70.6 million, $65.0 million and $56.6 million for the years ended December 31, 2008, 2007 and 2006,
respectively.

4.    Goodwill and Amortizable Intangible Assets

The following table sets forth changes in the carrying amount of goodwill by operating segment, net of accumulated amortization of $17.7 million, for
the years ended
December 31, 2008 and 2007, respectively:

Early
Development

Late-Stage
Development

TotalBalance, December 31, 2006

$
69,570

$
50,155

$
119,725Goodwill removed due to 2007 divestiture of business





(14,239
)

(14,239
)Balance, December 31, 2007 and 2008

$
69,570

$
35,916

$
105,486


The
following table summarizes the Company's acquired amortizable intangible assets (see Note 6), which are reflected in Other Assets on the Consolidated Balance Sheet, as of
December 31, 2008 and 2007:

2008

2007Intangible assets at cost:Customer Lists (10 year weighted average useful life)

$
4,510

$
4,510Technology (5 year weighted average useful life)


2,340


2,340OtherPatient List, Backlog and Non-Compete Agreements (weighted average useful lives ranging from 1 to 4 years)


820


8207,670


7,670Less: Accumulated amortization


(3,016
)

(1,968
)Net carrying value

$
4,654

$
5,702


51

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

4.    Goodwill and Amortizable Intangible Assets (Continued)

Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was $1.0 million, $1.2 million and $0.8 million, respectively. Amortization expense
expected to be recorded for each of the next five years is as follows:

Year Ending December 31,2009

$
1,0102010

$
9372011

$
6492012

$
4662013

$
466


5.    Equity Investments

In December 2008, Covance acquired a minority equity position (less than 20%) in Caprion Proteomics ("Caprion"), a privately held company headquartered in
Montreal, Canada for a total
cost of $3.1 million. Caprion is a leading provider of proteomics-based services to the pharmaceutical industry. Under the terms of the agreement, Covance will serve as the exclusive contract
research organization distributor of Caprion's proteomic biomarker services and Caprion will serve as Covance's exclusive proteomic discovery provider. As Covance owns less than a 20% interest in
Caprion and does not exercise significant influence over the operating or financial decisions of Caprion, the investment is accounted for under the cost method of Accounting Principles Board Opinion
No. 18,The Equity Method of Accounting for Investments in Common Stock. This investment is included in other assets on the consolidated balance
sheet at December 31, 2008.

Covance
has a 47% minority equity position in Noveprim Limited, a supplier of research products, which was acquired in March 2004 at a total cost of $20.7 million. The excess of
the purchase price over the underlying equity in Noveprim's net assets at the date of acquisition of $13.8 million represents goodwill and is included in the carrying value of Covance's
investment. This investment is reflected in other assets on the consolidated balance sheet. During the years ended December 31, 2008, 2007 and 2006, Covance recognized income of
$1.4 million, $2.0 million and $1.6 million, respectively, representing its share of Noveprim's earnings, less the elimination of profit on inventory purchased from Noveprim and
still on hand at Covance at December 31, 2008, 2007 and 2006. The carrying value of Covance's investment in Noveprim as of December 31, 2008 and 2007 was $23.4 million and
$23.2 million, respectively.

Covance
has a minority equity position (less than 20%) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging technologies to process and
analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text. During the years ended
December 31, 2008, 2007 and 2006, Covance recognized income of $0.4 million, $0.4 million and $0.02 million, respectively, representing its pro rata share of BITI's
earnings. In the fourth quarter of 2008, Covance suspended the use of the equity method of accounting as its ownership interest in BITI fell below 20% and it could no longer exercise significant
influence over BITI's operations. Covance has begun accounting for its investment in BITI as an available-for-sale security in accordance with SFAS No. 115. Under
SFAS 115, Covance increased the carrying value of its investment in BITI to $8.6 million, representing

52

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

5.    Equity Investments (Continued)

the
fair value of the shares in BITI common stock owned by Covance at December 31, 2008. This resulted in an unrealized gain of approximately $7.2 million, or $4.4 million net of
tax, which is included within accumulated other comprehensive income on the consolidated balance sheet. The carrying value of Covance's investment in BITI under the equity method at
December 31, 2007 was $0.9 million, while the fair market value was $19.0 million.

6.    Acquisitions and Divestitures

In October 2008, Covance acquired certain assets from Eli Lilly and Company ("Lilly") for cash payments totaling $51.6 million (including transaction
related costs of
$1.6 million). The acquired assets consisted of 450-acres of Lilly's early drug development campus (land, buildings and equipment) located in Greenfield, Indiana ("Greenfield"). In
addition, Covance and Lilly entered into a 10-year agreement with a minimum value of $1.6 billion pursuant to which Covance will provide Lilly a broad range of drug development
services. The results of operations for Greenfield and the acquired assets, which are now part of Covance's Early Development segment service offering, are included in Covance's consolidated financial
statements beginning in October 2008.

In
November 2007, Covance sold its centralized ECG business ("Cardiac Safety Services"), part of Covance's late stage development segment, to eResearchTechnology Inc. ("eRT") and
simultaneously therewith entered into a ten year marketing agreement with eRT under which Covance will continue to offer its clients cardiac safety services. Covance received initial cash proceeds of
$35.2 million in connection with the sale and recorded a pre-tax gain of $6.6 million ($4.1 million after tax) during the quarter ended December 31, 2007.
During 2008, Covance received contingent consideration associated with this sale related to transferred backlog totaling $4.1 million and recognized an additional pre-tax gain of
$4.1 million ($2.6 million after tax). Covance may receive up to approximately $8.1 million in additional future contingent consideration relating to transferred backlog and
revenues generated by eRT from new contracts secured under the first three years of the marketing agreement. In addition, Covance expects to receive referral fees during the term of the
long-term marketing agreement.

In
May 2006, Covance acquired the stock of Radiant Research Inc. ("Radiant") in a merger transaction for cash payments aggregating $66.6 million (including direct
acquisition costs of $0.5 million). The Radiant acquisition included eight early development clinical sites performing Phase I/IIa clinical trial services. Results of operations for
Radiant, which are now part of Covance's Early Development segment service offering, and the fair value of Radiant's assets and liabilities acquired, are included in Covance's consolidated financial
statements beginning in June 2006.

In
May 2006, Covance also acquired certain assets and liabilities of Signet Laboratories, Inc. ("Signet") for cash payments totaling $9.1 million (including direct
acquisition costs of $0.2 million). Signet specializes in the development of monoclonal antibodies and diagnostic assays for cancer, infectious diseases and neurodegenerative diseases. Results
of operations for Signet, which are now part of Covance's Early Development segment service offering, and the fair value of Signet's assets and liabilities acquired, are included in Covance's
consolidated financial statements beginning in June 2006.

53

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

6.    Acquisitions and Divestitures (Continued)

The
table below summarizes the purchase price allocations for the Radiant and Signet acquisitions:

Radiant

SignetEstimated fair value of net tangible assets acquired

$
9,183

$
352Fair value of intangible assets acquired (8 year weighted average useful life)


6,820


850Goodwill


50,567


7,896Net assets acquired

$
66,570

$
9,098


The
goodwill resulting from the Signet acquisition is deductible for tax purposes, while the goodwill resulting from the merger with Radiant is not deductible for tax purposes.

7.    Taxes on Income

The components of income before taxes and the related provision (benefit) for taxes on income for 2008, 2007 and 2006 are as follows:

2008

2007

2006Income before taxes and equity investee earnings:Domestic

$
148,636

$
161,451

$
123,896International


125,687


84,961


76,693Total

$
274,323

$
246,412

$
200,589Federal income taxes:Current provision

$
42,892

$
53,457

$
41,503Deferred provision (benefit)


9,738


2,099


243International income taxes:Current provision


20,993


17,022


12,958Deferred (benefit) provision


(391
)

(6,600
)

(3,992
)State and other income taxes:Current provision


3,616


6,945


5,872Deferred provision (benefit)


2,567


11


595Income tax provision

$
79,415

$
72,934

$
57,179


The
differences between the provision for income taxes and income taxes computed using the Federal statutory income tax rate for 2008, 2007 and 2006 are as follows:

2008

2007

2006Taxes at statutory rate


35.0
%

35.0
%

35.0
%State and local taxes, net of Federal benefit


1.5


1.8


2.1Impact of international operations


(8.6
)

(7.8
)

(8.9
)Other, net


1.0


0.6


0.3Total


28.9
%

29.6
%

28.5
%


54

---





COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

7.    Taxes on Income (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2008 and
2007 are as follows:

2008

2007Current deferred tax assets:Liabilities/expenses not currently deductible

$
11,072

$
5,337Deferred equity compensation


2,839


1,370Net operating losses


1,118


1,118Total current deferred tax assets

$
15,029

$
7,825Non-current deferred taxes:Deferred tax assets:Net operating losses

$
3,467

$
11,237Deferred equity compensation


8,497


6,143Liabilities/expenses not currently deductible


3,202


6,567Total non-current deferred tax assets


15,166


23,947Deferred tax liabilities:Property and equipment


(60,591
)

(53,106
)Earnings not currently taxable


(5,960
)

(3,403
)Total non-current deferred tax liabilities


(66,551
)

(56,509
)Net non-current deferred tax liabilities

$
(51,385
)
$
(32,562
)


As
of December 31, 2008, Covance has United States net operating loss carryforwards of $11.1 million relating to the acquisition of Radiant. These net operating loss
carryforwards are subject to limitation under
Internal Revenue Code §382 and will expire at various dates through 2026. It is expected that all loss carryforwards will be realized, and accordingly, no valuation allowance has been
provided.

Covance
currently provides income taxes on the earnings of foreign subsidiaries to the extent those earnings are taxable or are expected to be remitted. Covance's historical policy has
been to leave its unremitted foreign earnings invested indefinitely outside the United States. Covance intends to continue to leave its unremitted foreign earnings invested indefinitely outside the
United States. It is not practical to estimate the amount of additional tax that might be payable if such accumulated earnings were remitted. Additionally, if such accumulated earnings were remitted,
certain countries impose withholding taxes that, subject to certain limitations, are available for use as a tax credit against any Federal income tax liability arising from such remittance. As a
result, taxes have not been provided on the remaining accumulated foreign unremitted earnings totaling approximately $373 million at December 31, 2008.

Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board Interpretation No. 48,Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109("FIN 48"). Under the guidance of FIN 48, the Company may recognize the
tax benefit from an uncertain tax position only if it is more likely than not to be sustained upon examination based on the technical merits of the position. The amount of the accrual for which an
exposure exists is measured as the largest amount of benefit determined on a cumulative probability basis that the Company believes is more likely than not to be realized upon ultimate settlement of
the position. Components of the reserve are classified as either a

55

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

7.    Taxes on Income (Continued)

current
or long-term liability in the consolidated balance sheet, based on when the Company expects each of the items to be settled. Covance records interest and penalties accrued in
relation to unrecognized tax benefits as a component of income tax expense.

As
of December 31, 2008, the balance of the reserve for unrecognized tax benefits was $11.9 million, including accrued interest of $1.2 million, of which
$3.3 million is recorded as a current liability in accrued expenses and other current liabilities, and $8.6 million is recorded as a long-term liability in other liabilities
on the consolidated balance sheet. As of December 31, 2007, the balance of the reserve for unrecognized tax benefits was $8.9 million, including accrued interest of $1.3 million,
of which $2.6 million is recorded as a current liability in accrued expenses and other current liabilities, and $6.3 million is recorded as a long-term liability in other
liabilities on the consolidated balance sheet. This reserve relates to exposures for income tax matters such as transfer pricing, nexus, deemed income and research and development credits. The net
increase in the reserve for unrecognized tax benefits from December 31, 2007 to December 31, 2008 resulted from the accrual of additional reserves relating to deemed income and the
accrual of interest on existing reserves partially offset by the recognition of previously unrecognized tax benefits in jurisdictions where the statute of limitations has lapsed.

Following
is a reconciliation of the beginning and ending amount of unrecognized tax benefits, excluding accrued interest for the years ended December 31, 2008 and 2007:

(dollars in millions)Unrecognized tax benefits as of January 1, 2007, at date of adoption

$
7.8Additions related to tax positions in the prior year


1.1Additions related to tax positions in the current year


1.3Reductions due to settlements and payments


(0.8
)Reductions due to statute expiration


(1.8
)Unrecognized tax benefits as of December 31, 2007


7.6Additions related to tax positions in the prior year


2.1Additions related to tax positions in the current year


2.7Reductions due to statute expiration


(1.7
)Unrecognized tax benefits as of December 31, 2008

$
10.7


Any
future changes in the $11.9 million liability for unrecognized tax benefits, resulting from the recognition of tax benefits, would impact the effective tax rate of Covance.
Over the next twelve months, it is reasonably possible that the uncertainty surrounding a portion of the reserve for unrecognized tax benefits, related to certain income taxes, deemed income, transfer
pricing and state tax issues, will be resolved as a result of the expiration of the statute of limitations or the conclusion of various federal, state and foreign tax audits. As a result, Covance
would reduce the carrying value of its reserve for these items by up to $3.9 million including interest of $0.6 million.

56

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

7.    Taxes on Income (Continued)

The
following tax years remain open to investigation as of December 31, 2008, for the Company's major jurisdictions:

Tax Jurisdiction

YearsUS Federal and State


2003-2008United Kingdom


2005-2008Switzerland


2004-2008Germany


2007-2008


8.    Credit Facility

In August 2008, Covance elected to expand its revolving credit facility (the "Credit Facility") from $75.0 million to $125.0 million. At
December 31, 2008, there
were $50.0 million of outstanding borrowings and $1.4 million of outstanding letters of credit under the Credit Facility. At December 31, 2007, there were no outstanding
borrowings and $1.1 million of outstanding letters of credit under the Credit Facility. Interest on all outstanding borrowings under the Credit Facility is based upon the London Interbank
Offered Rate ("LIBOR") plus a 75 basis point margin and approximated 3.66% per annum during 2008.

Commitment
fees paid during 2008, 2007 and 2006, which under the Credit Facility are 15 basis points on the undrawn balance, approximated $0.1 million in each year. The Credit
Facility, which expires in June 2009, contains various financial and other covenants and is collateralized by guarantees of certain of Covance's domestic subsidiaries and a pledge of 65 percent
of the capital stock of certain of Covance's foreign subsidiaries. At December 31, 2008, Covance was in compliance with the terms of the Credit Facility.

9.    Employee Benefit Plans

Covance sponsors various pension and other post-retirement benefit plans. As of December 31, 2008, Covance adopted the measurement date provisions of
SFAS 158.
Accordingly, each of the benefit plans described below has a 2008 measurement date of December 31. Prior to 2008, the measurement dates for the various benefit plans ranged from
September 30 to December 31.



Covance sponsors two defined benefit pension plans for the benefit of its employees at two United Kingdom subsidiaries and one defined
benefit pension plan for the benefit of its employees at a German subsidiary, all of which are legacy plans of previously acquired companies. Benefit amounts for all three plans are based upon years
of service and compensation. The German plan is unfunded while the United Kingdom pension plans are funded. Covance's funding policy has been to contribute annually a fixed percentage of the

57

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)

eligible
employee's salary at least equal to the local statutory funding requirements. The components of net periodic pension cost for these plans for 2008, 2007 and 2006 are as follows:

United Kingdom Plans

German Plan2008

2007

2006

2008

2007

2006Components of Net Periodic Pension Cost:Service cost

$
5,226

$
5,957

$
5,878

$
597

$
512

$
416Interest cost


7,825


7,506


6,284


486


394


310Expected return on plan assets


(8,877
)

(8,620
)

(7,144
)







Amortization of net actuarial loss


1,207


1,424


1,862


46


60


53Expected participant contributions


(1,999
)

(2,247
)

(2,265
)







Net periodic pension cost

$
3,382

$
4,020

$
4,615

$
1,129

$
966

$
779Weighted Average Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


5.50
%

5.25
%

5.00
%

5.60
%

4.90
%

4.65
%Expected rate of return on assets


6.75
%

6.75
%

6.75
%

n/a


n/a


n/aSalary increases


4.25
%

4.00
%

4.00
%

3.00
%

2.65
%

2.50
%


The
weighted average expected long term rate of return on the assets of the United Kingdom pension plans is based on the target asset allocation and the average rate of growth expected
for the asset classes invested. The weighted average rate of expected growth is derived from a combination of historic returns, current market indicators, the expected risk premium for each asset
class over the risk-free rate and the opinion of professional advisors.

The
change in the projected benefit obligation and plan assets, the funded status of the plan and a reconciliation of such funded status to the amounts reported in the consolidated
balance sheets as of December 31, 2008 and 2007 is as follows:

United Kingdom Plans

German Plan2008

2007

2008

2007Change in Projected Benefit Obligation:Benefit obligation, beginning of year

$
152,144

$
141,343

$
8,514

$
7,349Service cost


5,226


5,957


597


512Interest cost


7,825


7,506


486


394Actuarial gain


(15,468
)

(2,123
)

(940
)

(265
)Benefits paid


(1,694
)

(2,107
)

(178
)

(112
)Effect of eliminating early measurement date








87


Foreign currency exchange rate changes


(36,165
)

1,568


125


636Benefit obligation, end of year

$
111,868

$
152,144

$
8,691

$
8,514


58

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)

United Kingdom Plans

German Plan2008

2007

2008

2007Change in Fair Value of Assets:Fair value of plan assets, beginning of year

$
136,709

$
123,736

$


$
Covance contributions


15,434


4,358





Employee contributions


2,087


2,189





Actual return on plan assets


(13,512
)

7,190





Benefits paid


(1,694
)

(2,107
)




Foreign currency exchange rate changes


(33,681
)

1,343





Fair value of plan assets, end of year

$
105,343

$
136,709

$


$
Funded status at end of yearunder funded

$
(6,525
)
$
(15,435
)
$
(8,691
)
$
(8,514
)




United Kingdom Plans

German Plan2008

2007

2008

2007Amounts recognized in the consolidated balance sheets:Current liabilities

$


$


$
(138
)
$
(130
)Non-current liabilities


(6,525
)

(15,435
)

(8,553
)

(8,384
)Total

$
(6,525
)
$
(15,435
)
$
(8,691
)
$
(8,514
)


Covance
contributed $15.4 million (including a discretionary contribution of $7.7 million) to its United Kingdom plans in 2008 and expects to contribute
$4.9 million in 2009. No contributions are expected to be made to the German plan, since that plan is unfunded.

The
accumulated benefit obligation for the United Kingdom pension plans was $89,033 and $126,396 at December 31, 2008 and 2007, respectively. The accumulated benefit obligation
for the German plan was $6,674 and $6,464 at December 31, 2008 and 2007, respectively.

The
amounts recognized in accumulated other comprehensive income as of December 31, 2008 and 2007 are as follows:

United Kingdom Plans

German Plan2008

2007

2008

2007Net actuarial loss

$
31,369

$
27,372

$
374

$
1,097Less: Tax benefit (deferred tax asset)


(9,083
)

(7,964
)

(162
)

(386
)Accumulated other comprehensive income impact

$
22,286

$
19,408

$
212

$
711Weighted Average Assumptions Used to Determine Benefit Obligations:Discount rate


6.25
%

5.50
%

6.25
%

5.60
%Salary increases


4.25
%

4.25
%

3.00
%

3.00
%


59

---





COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)

The net actuarial loss for the United Kingdom pension plan required to be amortized from accumulated other comprehensive income into net periodic pension
cost in 2009 is expected to be
$1,388. There is no net actuarial loss required to be amortized from accumulated other comprehensive income into net periodic pension cost for the German pension plan in 2009.

The
investment policies for the United Kingdom pension plans are set by the plan trustees, based upon the guidance of professional advisors and after consultation with the Company,
taking into consideration the plans' liabilities and future funding levels. The trustees have set the long-term investment policy largely in accordance with the asset allocation of a
broadly diversified investment portfolio. Assets are generally invested within the target ranges as follows:

Equity securities

50%60%Debt securities

35%45%Real estate

5%10%Other

0%5%


The
weighted average asset allocation of the United Kingdom pension plans as of December 31, 2008 and 2007 by asset category is as follows:

2008

2007Equity securities


40
%

56
%Debt securities


42
%

32
%Real estate


5
%

7
%Other


13
%

5
%Total


100
%

100
%


During
periods of extreme market volatility, the actual asset allocation as of a point in time could fall outside of the trustees' long-term asset allocation targets. This
is the case at December 31, 2008, as the severe decline in equity prices experienced during the fourth quarter brought the actual equity allocation down to 40% of total United Kingdom pension
plan assets. The United Kingdom pension plans' trustees periodically review the actual asset allocation and expect to make changes over time to maintain allocations within their long-term
target ranges. The increase in other United Kingdom pension plan assets at December 31, 2008 is attributable to the Company's December discretionary cash contribution of $7.7 million,
which had not yet been invested.

Investments
are made in pooled investment funds. Pooled investment fund managers are regulated by the Financial Services Authority in the United Kingdom and operate under terms which
contain restrictions on the way in which the portfolios are managed and require the managers to ensure that suitable internal operating procedures are in place. The trustees have set performance
objectives for each fund manager and routinely monitor and assess the managers' performance against such objectives.

60

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)

Expected
future benefit payments are as follows:

Year Ending December 31,

United Kingdom
Plans

German
Plan2009

$
2,778

$
1382010

$
2,628

$
1612011

$
2,471

$
1782012

$
3,142

$
1862013

$
3,765

$
2022014-2018

$
21,883

$
1,147




In addition to these foreign defined benefit pension plans, Covance also has a non-qualified Supplemental Executive
Retirement Plan ("SERP"). The SERP, which is not funded, is intended to provide retirement benefits for certain executive officers of Covance. Benefit amounts are based upon years of service and
compensation of the participating employees. The components of net periodic pension cost for the years ended December 31, 2008, 2007 and 2006 are as follows:

2008

2007

2006Components of Net Periodic Pension Cost:Service cost

$
1,234

$
1,085

$
926Interest cost


868


773


655Amortization of prior service (credit) cost


(119
)

76


76Amortization of net actuarial loss


107


41


33Net periodic pension cost

$
2,090

$
1,975

$
1,690Weighted Average Assumptions Used to Determine Net Periodic Pension
Cost:Discount rate


5.75
%

5.50
%

5.50
%Salary increases


4.00
%

4.00
%

4.00
%


The
change in the projected benefit obligation, the funded status of the plan and a reconciliation of such funded status to the amounts reported in the consolidated
balance sheets as of December 31, 2008 and 2007 is as follows:

2008

2007Change in Projected Benefit Obligation:Benefit obligation, beginning of year

$
13,869

$
12,954Service cost


1,234


1,085Interest cost


868


773Actuarial gain


(681
)

(943
)Benefits paid


(1,274
)

Effect of eliminating early measurement date


174


Benefit obligation, end of year

$
14,190

$
13,869Funded status at end of yearunder funded

$
(14,190
)
$
(13,869
)


61

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)



2008

2007Amounts recognized in the consolidated balance sheets:Current liabilities

$
(5,410
)
$
(2,359
)Non-current liabilities


(8,780
)

(11,510
)Total

$
(14,190
)
$
(13,869
)


The
accumulated benefit obligation as of December 31, 2008 and 2007 is $12,612 and $12,797, respectively.

The
amounts recognized in accumulated other comprehensive income and not yet recognized as a component of net periodic pension cost as of December 31, 2008 and 2007 are as
follows:

2008

2007Net actuarial loss

$
1,751

$
2,549Prior service (credit) cost


(1,163
)

(1,292
)Less: Tax benefit (deferred tax asset)


(235
)

(503
)Accumulated other comprehensive income impact

$
353

$
754


The
net actuarial loss and prior service credit required to be amortized from accumulated other comprehensive income into net periodic pension cost in 2009 are estimated to be $735 and
$(119), respectively.

2008

2007Weighted Average Assumptions Used to Determine Benefit Obligation:Discount rate


6.00
%

5.75
%Salary increases


4.00
%

4.00
%


Expected
future benefit payments are as follows:

Year Ending December 31,2009

$
5,4102010

$
1,1692011

$
2012

$
2013

$
1,4412014-2018

$
7,177




Covance also sponsors a post-employment retiree health and welfare plan for the benefit of eligible employees at certain
U.S. subsidiaries who retire after satisfying service and age requirements. This plan is

62

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)

funded
on a pay-as-you-go basis and the cost of providing these benefits is shared with the retirees. The components of net periodic post-retirement
benefit cost for 2008, 2007 and 2006 are as follows:

2008

2007

2006Components of Net Periodic Post-retirement Benefit Cost:Service cost

$
119

$
148

$
155Interest cost


313


304


293Amortization of net actuarial loss


5


20


4Net periodic post-retirement benefit cost

$
437

$
472

$
452Weighted Average Assumptions Used to Determine Net PeriodicPost-retirement Benefit Cost:Weighted average discount rate


5.75
%

5.50
%

5.50
%Health care cost trend rate


8.50
%(a)

9.00
%(a)

9.00
%(a)


---



The change in the projected post-retirement benefit obligation, the funded status of the plan and the reconciliation of such funded
status to the amounts reported in the consolidated balance sheets as of December 31, 2008 and 2007 is as follows:

2008

2007Change in Projected Benefit Obligation:Benefit obligation, beginning of year

$
5,519

$
5,305Service cost


119


148Interest cost


313


304Participant contributions


475


372Actuarial (gain) loss


(28
)

194Benefits paid


(900
)

(819
)Federal subsidy on benefits paid


103


15Effect of eliminating early measurement date


36


Benefit obligation, end of year

$
5,637

$
5,519Funded status at end of yearunder funded

$
(5,637
)
$
(5,519
)




2008

2007Amounts recognized in the consolidated balance sheets:Current liabilities

$
(586
)
$
(584)Non-current liabilities


(5,051
)

(4,935
)Total

$
(5,637
)
$
(5,519
)


63

---





COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

9.    Employee Benefit Plans (Continued)

The amounts recognized in accumulated other comprehensive income as of December 31, 2008 and 2007 are as follows:

2008

2007Net actuarial loss

$
447

$
503Less: Tax benefit (deferred tax asset)


(179
)

(201
)Accumulated other comprehensive income impact

$
268

$
302


There
is no net actuarial loss related to the retiree health and welfare plan required to be amortized from accumulated other comprehensive income into net periodic pension cost in
2009.

2008

2007Assumptions Used to Determine Benefit Obligation:Weighted average discount rate


6.00
%

5.75
%Health care cost trend rate


8.00
%(a)

8.50
%(a)


---



A one-percentage-point increase or decrease in the assumed health care cost trend rate would not impact the net service and interest
cost components of the net periodic post-retirement benefit cost or the post-retirement benefit obligation since future increases in plan costs are paid by participant
contributions. Covance expects to contribute $586 to the post-employment retiree health and welfare plan in 2009.

Expected
future gross benefit payments, Federal subsidies and net benefit payments are as follows:

Year Ending December 31,

Gross Benefit
Payments

Federal
Subsidies

Net Benefit
Payments2009

$
1,191

$
(115
)
$
1,0762010

$
1,241

$
(123
)
$
1,1182011

$
1,274

$
(133
)
$
1,1412012

$
1,301

$
(144
)
$
1,1572013

$
1,351

$
(152
)
$
1,1992014-2018

$
7,509

$
(159
)
$
7,350




U.S. employees are eligible to participate in Covance's 401(k) plan, while employees in international locations are eligible to
participate in either defined benefit or defined contribution plans, depending on the plan offered at their location. Aggregate Covance contributions to its various defined contribution plans totaled
$26.6 million, $20.9 million and $17.1 million for 2008, 2007 and 2006, respectively.

64

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

10.    Stockholders' Equity



Covance is authorized to issue up to 10.0 million shares of Series Preferred Stock, par value $1.00 per share (the "Covance
Series Preferred Stock"). The Covance Board of Directors has the authority to issue such shares from time to time, without stockholder approval, and to determine the designations, preferences, rights,
including voting rights, and restrictions of such shares, subject to the Delaware General Corporate Laws. Pursuant to this authority, the Covance Board of Directors has designated 1.0 million
shares of the Covance Series Preferred Stock as Covance Series A Preferred Stock. No other class of Covance Series Preferred Stock has been designated by the Board. As of December 31,
2008, no Covance Series Preferred Stock has been issued or is outstanding.



Covance's Board of Directors may declare dividends on the shares of Covance common stock out of legally available funds (subject to
any preferential rights of any outstanding Covance Series Preferred Stock). However, Covance has no present intention to declare dividends, but instead intends to retain earnings to provide funds for
the operation and expansion of its business.



In February 2007, the Covance Board of Directors authorized the repurchase of an additional 3.0 million shares under Covance's
stock repurchase program. For the years ended December 31, 2008, 2007, and 2006, Covance repurchased 1.5 million shares, 1.0 million shares, and 0.4 million shares,
respectively, under Covance's stock repurchase program. At December 31, 2008 there were 0.8 million shares remaining for purchase under the 2007 authorization. Covance also reacquires
shares of its common stock in connection with certain employee benefit plans primarily when employees tender shares to satisfy income tax withholdings associated with the vesting of stock awards. The
following table sets forth the treasury stock activity during 2008, 2007 and 2006:

2008

2007

2006(amounts in thousands)

$

# shares

$

# shares

$

# sharesShares repurchased in connection with:Board approved buyback programs

$
126,710


1,500.0

$
59,628


977.0

$
23,975


414.1Employee benefit plans


6,196


102.2


6,728


85.7


4,057


68.8Total

$
132,906


1,602.2

$
66,356


1,062.7

$
28,032


482.9




In May 2007, Covance's shareholders approved the 2007 Employee Equity Participation Plan (the "2007 EEPP") in replacement of the 2002
Employee Equity Participation Plan (the "2002 EEPP"). Effective upon approval of the 2007 EEPP, no further grants or awards were permitted under the 2002 EEPP. Shares remaining for grant under the
2002 EEPP are available for grant under the 2007 EEPP. In addition, the Covance Board of Directors directed that, effective May 3, 2007, no further grants would be permitted under the 2002
Employee Stock Option Plan (the "2002 ESOP") and, unlike the 2002 EEPP, shares remaining for grant under the 2002 ESOP are not available for grant under the 2007 EEPP. The 2007 EEPP became effective

65

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

10.    Stockholders' Equity (Continued)

on
May 3, 2007 and will expire on May 2, 2017. The 2007 EEPP authorizes the Compensation and Organization Committee of the Board of Directors (the "Compensation Committee") or such
committee as
is appointed by the Covance Board of Directors to administer the 2007 EEPP, to grant awards to employees and consultants of Covance or entities in which Covance has a controlling or significant equity
interest. The 2007 EEPP authorizes the Compensation Committee to grant the following awards: options to purchase common stock; stock appreciation rights; and other stock awards either singly or in
combination. The exercise period for stock options granted under the 2007 EEPP is determined by the Compensation Committee at the time of grant, and is generally ten years from the date of grant. The
vesting period for stock options and stock awards granted under the 2007 EEPP is determined by the Compensation Committee at the time of grant. Generally, options vest over a three year period for
senior executives and over a two year period for all other optionees. Stock awards generally vest over a three year period for all employees. The number of shares of Covance common stock initially
available for grant under the 2007 EEPP totaled approximately 1.6 million plus approximately 3.3 million shares remaining available under the 2002 EEPP at the time the 2007 EEPP was
approved. All stock option grants under the 2002 EEPP remaining outstanding are now administered in accordance with the provisions of the 2002 EEPP out of shares issuable under the 2007 EEPP. The
Company issues authorized but previously unissued shares when options are exercised or for stock awards. There have been no grants of stock appreciation rights or grants of options to purchase common
stock or other stock awards to consultants of Covance or employees or consultants of entities in which Covance has a controlling or significant equity interest under the 2002 ESOP, the 2002 EEPP or
the 2007 EEPP. At December 31, 2008 there were approximately 4.4 million shares remaining available for option grants or awards under the 2007 EEPP, up to 1.6 million of which are
available for issuance as stock awards.

The
Company recognizes stock-based compensation under the provisions of SFAS 123R, pursuant to which the grant-date fair value of awards expected to vest is expensed
on a straight-line basis over the vesting period of the related awards. Results of operations for the year ended December 31, 2008 include $25.5 million ($17.2 million
net of tax benefit of $8.3 million) of total stock-based compensation expense, $9.9 million of which has been included in cost of revenue and $15.6 million of which has been
included in selling, general and administrative expenses. Results of operations for the year ended December 31, 2007 include $21.9 million ($14.7 million net of tax benefit of
$7.2 million) of total stock-based compensation expense, $7.5 million of which has been included in cost of revenue and $14.4 million of which has been included in selling,
general and administrative expenses. Results of operations for the year ended December 31, 2006 include $21.5 million ($14.5 million net of tax benefit of $7.0 million) of
total stock-based compensation expense, $7.0 million of which has been included in cost of revenue and $14.5 million of which has been included in selling, general and administrative
expenses.

OptionsThe grant-date fair value of stock option awards is estimated using an option pricing model. For stock
options granted on or subsequent to January 1, 2006, the Company uses the Lattice-Binomial option pricing formula to estimate the grant-date fair value of stock option awards,
whereas for stock options granted prior to January 1, 2006, the Company used the Black-Scholes-Merton option pricing formula. In order to estimate the grant-date fair value, option
pricing models require the use of estimates and assumptions as to (a) the expected term of the option, (b) the expected volatility of the price of the underlying stock, (c) the
risk-free interest rate for the expected term of the option and (d) pre-vesting forfeiture rates. The expected term of the option is based upon the contractual term,
taking into account expected employee exercise and expected post-vesting employment termination behavior. The expected volatility of the price of the underlying stock is based upon the
historical volatility of the Company's stock computed over a period of time equal to the expected term of the option. The risk free interest rate is based upon the implied yields currently available
from

66

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

10.    Stockholders' Equity (Continued)

the
U.S. Treasury zero-coupon yield curve for issues with a remaining duration equal to the expected term of the option. Pre-vesting forfeiture rates are estimated based upon
past voluntary termination behavior and past option forfeitures.

The
following table sets forth the weighted-average assumptions used to calculate the fair value of options granted for the years ended December 31, 2008, 2007 and 2006:

2008

2007

2006Expected stock price volatility


39%


42%


44%Risk free interest rate(s)


1.9% - 3.7%


4.7% - 5.1%


3.9% - 4.5%Expected life of options (years)


4.4


4.3


4.3


The following table sets forth Covance's stock option activity as of and for the year ended December 31, 2008:

Number of
Shares
(in thousands)

Weighted
Average
Price

Weighted
Average
Remaining
Contractual Life

Aggregate
Intrinsic Value
(in millions)Options outstanding, December 31, 2007


2,490.6

$
36.37Granted


297.2

$
81.48Exercised


(546.8
)
$
32.72Forfeited


(39.7
)
$
42.88Options outstanding, December 31, 2008


2,201.3

$
43.25

5.9 years

$
23.8Vested & unvested expected to vest, December 31, 2008


2,150.3

$
42.68

5.8 years

$
23.8Exercisable at December 31, 2008


1,725.8

$
34.78

5.1 years

$
23.8


The weighted-average grant-date fair value per share of options granted during 2008, 2007 and 2006 was $28.34, $24.40 and $22.00,
respectively. As of December 31, 2008, the total unrecognized compensation cost related to non-vested stock options granted was $6.2 million and is expected to be recognized
over a weighted average period of 1.3 years.

The
following table sets forth the aggregate intrinsic value of options exercised and the aggregate grant-date fair value of shares which vested during 2008, 2007 and 2006:

2008

2007

2006(in millions)Aggregate intrinsic value of options exercised

$
30.3

$
28.6

$
32.7Aggregate grant-date fair value of shares vested

$
7.1

$
10.3

$
13.7


Cash proceeds from stock options exercised during the years ended December 31, 2008, 2007 and 2006 totaled $17.9 million,
$22.2 million and $28.4 million, respectively. SFAS 123R requires that the cash flows resulting from tax benefits realized on tax deductions "in excess of" the compensation
expense recognized for stock options exercised in the period be classified as a financing cash flow. The "excess tax benefit" classified as a financing cash inflow during the years ended
December 31, 2008, 2007 and 2006 was $7.3 million, $6.0 million

67

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

10.    Stockholders' Equity (Continued)

and
$7.4 million, respectively. The actual tax benefit realized on stock options exercised during the years ended December 31, 2008, 2007 and 2006 was $8.9 million,
$9.2 million and $12.8 million, respectively. The difference between the actual tax benefit received and the "excess tax benefit" computed in accordance with SFAS 123R for the
years ended December 31, 2008, 2007 and 2006, of $1.6 million, $3.2 million and $5.4 million, respectively, is classified as an operating cash inflow.

Restricted Stock AwardsRestricted stock awards are granted subject to either service conditions (restricted stock) or
service and performance conditions (performance-based shares). The grant-date fair value of restricted stock and performance-based share awards, which has been determined based upon the
market value of Covance's shares on the grant date, is expensed over the vesting period.

The
following table sets forth Covance's performance-based shares and restricted stock activity as of and for the year ended December 31, 2008:

Performance-based Shares

Restricted StockNumber of
Shares
(in thousands)

Weighted
Average Grant
Date Fair Value

Number of
Shares
(in thousands)

Weighted
Average Grant
Date Fair ValueNonvested at December 31, 2007


241.0

$
59.43


269.9

$
59.84Granted


85.5

$
71.58


163.8

$
82.23Vested


(133.9
)
$
56.60


(123.0
)
$
57.40Forfeited


(2.5
)
$
62.65


(22.5
)
$
70.15Nonvested at December 31, 2008


190.1

$
66.84


288.2

$
72.80


The blended weighted average grant-date fair value of performance-based shares and restricted stock awards granted during the year
ended December 31, 2008, 2007 and 2006 was $78.58, $61.16 and $53.65, respectively. As of December 31, 2008, the total unrecognized compensation cost related to non-vested
performance-based shares and restricted stock awards was $19.3 million. This cost is expected to be recognized over a weighted average period of 1.7 years. The total fair value of
performance-based shares and restricted stock which vested during 2008, 2007 and 2006 was $14.7 million, $9.6 million and $7.4 million, respectively.

Employee Stock Purchase PlanCovance also has an employee stock purchase plan (the "ESPP") pursuant to which Covance may make
available for sale to employees shares of its common stock at a price equal to 85% of the lower of the market value on the first or last day of each calendar quarter. The ESPP, administered by the
Compensation Committee, is intended to give Covance employees the opportunity to purchase shares of Covance common stock through payroll deductions. A maximum of 3.0 million shares may be
purchased by Covance employees under the ESPP. During 2008, 2007 and 2006, a total of 89,760 shares, 99,441 shares and 92,927 shares of common stock, respectively, were issued under the ESPP. At
December 31, 2008, there were approximately 0.7 million shares remaining for purchase under the ESPP.

68

---





COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

11.    Commitments and Contingencies

Minimum annual rental commitments under non-cancelable operating leases, primarily for offices and laboratory facilities, in effect at December 31,
2008 are as
follows:

Year Ending December 31,2009

$
23,2142010

$
19,1492011

$
15,1812012

$
12,9922013

$
11,6652014 and beyond

$
40,772


Operating lease rental expense aggregated $29.2 million, $28.4 million and $27.0 million for 2008, 2007 and 2006,
respectively.

12.    Segment Information

Covance has two reportable segments: early development and late-stage development. Early development services, which includes Covance's preclinical and
clinical pharmacology
service capabilities, involve evaluating a new compound for safety and early effectiveness as well as evaluating the absorption, distribution, metabolism and excretion of the compound in the human
body. It is at this stage that a pharmaceutical company, based on available data, will generally decide whether to continue further development of a drug. Late-stage development services,
which include Covance's central laboratory, clinical development and commercialization services (periapproval and market access services), are geared toward demonstrating the clinical effectiveness of
a compound in treating certain diseases or conditions, obtaining regulatory approval and maximizing the drug's commercial potential. The accounting policies of the reportable segments are the same as
those described in Note 2.

69

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

12.    Segment Information (Continued)

Early
Development

Late-Stage
Development

Other
Reconciling
Items

TotalTotal revenues from external customers:2008

$
844,782

$
883,316

$
98,969
(a)
$
1,827,0672007

$
777,665

$
768,754

$
85,097
(a)
$
1,631,5162006

$
632,786

$
707,417

$
65,855
(a)
$
1,406,058Depreciation and amortization:2008

$
48,010

$
16,808

$
6,753
(b)
$
71,5712007

$
41,342

$
21,098

$
3,757
(b)
$
66,1972006

$
32,085

$
21,089

$
4,214
(b)
$
57,388Operating income:2008

$
205,395

$
170,141

$
(111,886
)(c)
$
263,6502007

$
195,902

$
128,105

$
(95,361
)(c)
$
228,6462006

$
153,551

$
123,652

$
(83,966
)(c)
$
193,237Segment assets:2008

$
1,136,928

$
453,448

$
162,712
(d)
$
1,753,0882007

$
933,746

$
461,788

$
164,651
(d)
$
1,560,1852006

$
742,374

$
416,792

$
138,512
(d)
$
1,297,678Investment in equity method investees:2008

$
23,427
(e)
$


$


$
23,4272007

$
23,244
(e)
$


$
911
(f)
$
24,1552006

$
22,997
(e)
$


$
472
(f)
$
23,469Capital expenditures:2008

$
253,652

$
23,539

$
41,737
(g)
$
318,9282007

$
163,810

$
17,314

$
19,913
(g)
$
201,0372006

$
111,551

$
16,956

$
8,293
(g)
$
136,800


---



70

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2008, 2007 AND 2006
(Dollars in thousands, unless otherwise indicated)

12.    Segment Information (Continued)





Net revenues from external customers for each significant service area for the years ended December 31, 2008, 2007 and 2006 are
as follows:

Preclinical
Laboratory
Services

Central
(Clinical)
Laboratory
Services

Clinical
Development
Services

All Other
Services

Total2008

$
667,122

$
464,715

$
302,894

$
293,367

$
1,728,0982007

$
601,413

$
376,090

$
255,345

$
313,571

$
1,546,4192006

$
496,575

$
358,351

$
197,533

$
287,744

$
1,340,203


Net revenues from external customers and long-lived assets for each significant geographic location for the years ended
December 31, 2008, 2007 and 2006 are as follows:

United
States

United
Kingdom

Switzerland

Other

TotalNet revenues from external customers(1)2008

$
1,038,808

$
227,083

$
215,478

$
246,729

$
1,728,0982007

$
958,706

$
224,236

$
161,754

$
201,723

$
1,546,4192006

$
850,554

$
180,236

$
147,321

$
162,092

$
1,340,203Long-lived assets(2)2008

$
683,897

$
102,851

$
29,447

$
44,762

$
860,9572007

$
454,648

$
119,634

$
28,646

$
43,112

$
646,0402006

$
323,672

$
119,782

$
28,659

$
27,944

$
500,057


---



71

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Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None

Item 9A.    Controls and Procedures

(a)           Evaluation
of Disclosure Controls and Procedures. The Company's Principal Executive Officer and Principal Financial Officer have reviewed and evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end of the period covered in this report. Based on that evaluation, the Principal Executive Officer and the Principal
Financial Officer have concluded that the Company's current disclosure controls and procedures are effective.

(b)           Management's
Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework inInternal ControlIntegrated Frameworkissued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management concluded that our internal control over financial reporting was effective as of
December 31, 2008. See Management's Report on Consolidated Financial Statements and Internal Control, which is included herein.

For
additional information, please see "Management's Report on Consolidated Financial Statements and Internal Control" included in this Annual Report.

(c)           Attestation
Report of Independent Registered Public Accounting Firm. The attestation report of the Company's independent registered public accounting firm regarding
internal control over financial reporting is included in Item 8 of this Annual Report under the caption "Report of Independent Registered Accounting Firm" which is included herein.

(d)           Changes
in Internal Control over Financial Reporting. In connection with Covance's focus on investing in infrastructure to enhance our ability to manage expected
future growth, the Company is in the process of implementing a number of PeopleSoft® financial software modules ("PeopleSoft Financials"). Implementation began in the fourth quarter of
2008 and is scheduled to be substantially complete in late 2009. As the Company continues to implement PeopleSoft Financials, it expects that there will be future changes and further improvements in
internal controls as a result of this implementation. As of December 31, 2008, the majority of our Early Development segment had implemented PeopleSoft Financials, which resulted in certain
changes and enhancements to the Company's internal controls. PeopleSoft Financials, along with the internal controls over financial reporting impacted by the implementation, were tested for design
effectiveness. While some processes and controls will continue to evolve as the implementation progresses, existing controls and the controls affected by the implementation of PeopleSoft Financials
were evaluated as appropriate and effective. There were no other changes in the Company's internal control over financial reporting during the fourth quarter of 2008 that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over financial reporting.

Item 9B.    Other Information

None

72

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PART III

Item 10.    Directors, Executive Officers and Corporate Governance

The information required by this item for executive officers is set forth under the heading "Executive Officers" in Part I,
Item 1 of this report.

Directors

Kathleen G. Bang, 59, was the President and Chief Executive Officer of Northwestern Memorial Foundation, a
not-for-profit affiliate of Northwestern Memorial HealthCare ("Northwestern"), an academic medical center, from February 2002 until her retirement in 2004. Prior to February
2002, Ms. Bang was the Executive Vice President and Chief Operating Officer of Northwestern. Ms. Bang joined Northwestern in 1986 and was Executive Vice President and Chief Operating
Officer since 1988. Ms. Bang also was Chair of the Governing Council for Metropolitan Hospitals of the American Hospital Association from January 1996 to December 1998, and Board member of the
Illinois Hospital Association from 1995 through 2003 and served as Chair in 2002. Ms. Bang has been a member of the Covance Board since 1998.

Robert
Barchi, M.D., Ph.D., 62, has been President of Thomas Jefferson University since September 2004. Prior to that, Dr. Barchi was Provost of the University of Pennsylvania
since 1999. Previously, he served as Chair of the University's Department of Neurology and as founding Chair of the University's Department of Neuroscience. Dr. Barchi was also Director of the
Mahoney Institute of Neurological Sciences for more than 12 years and was the Director of the Dana Fellowship Program in Neuroscience and Director of the Clinical Neuroscience Track. He was the
founder and President of Penn Neurocare, a regional specialty network. Dr. Barchi has been a member of the Covance Board since October 2003.

Gary
E. Costley, Ph.D., 65, is a co-founder and managing director of C&G Capital and Management, LLC, which provides capital and management to health, medical and
nutritional products and services companies. He was Chairman and Chief Executive Officer of International Multifoods Corporation, a manufacturer and marketer of branded consumer food and food service
products from 2001 until 2004, and Chairman, President and Chief Executive Officer from 1997 through 2001. He is also a member of the Board of Directors of The Principal Financial Group,
Tiffany & Co., and Prestige Brand Holdings, Inc. Dr. Costley has been a member of the Covance Board since September 2007.

Sandra
L. Helton, 59, was Executive Vice President and Chief Financial Officer of Telephone & Data Systems, Inc., a telecommunications service company, ("TDS") from
October 2000 through December 2006. She joined TDS as Executive Vice PresidentFinance and Chief Financial Officer in August 1998. Prior to joining TDS, Ms. Helton was the Vice
President and Corporate Controller of Compaq Computer Corporation between 1997 and 1998. Prior to that time, Ms. Helton was employed by Corning Incorporated ("Corning"). At Corning,
Ms. Helton was Senior Vice President and Treasurer between 1994 and 1997 and was Vice President and Treasurer between 1991 and 1994. Ms. Helton is also the Director of The Principal
Financial Group, a global financial institution. Ms. Helton has been a member of the Covance Board since September 2003.

Joseph
L. Herring, 53, has been Covance's Chairman since January 1, 2006 and Chief Executive Officer since January 1, 2005. Mr. Herring was President and Chief
Operating Officer from 2001 to December 2004 and was Covance's Corporate Senior Vice President and PresidentEarly Development Services from 1999 to 2001. From 1996 to 1999,
Mr. Herring was Corporate Vice President and General Manager of Covance Laboratories North America. Prior to joining Covance, Mr. Herring was Vice President of Caremark International, a
provider of home care and physician practice management services, and he also served as a Vice President of Baxter International where he was employed for 14 years. Mr. Herring has been
a member of the Covance Board since 2004.

73

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Joseph
C. Scodari, 56, was Worldwide Chairman, Pharmaceuticals Group, of Johnson & Johnson, a diversified healthcare company, and a member of Johnson & Johnson's Executive
Committee from March 2005 until March 2008. From 2003 to March 2005, Mr. Scodari was Company Group Chairman of Johnson & Johnson's Biopharmaceutical Business. Mr. Scodari joined
Johnson & Johnson in 1999 as President and COO of Centocor, Inc., when Johnson & Johnson acquired the company. Mr. Scodari is also a Director of Endo Pharmaceuticals.
Mr. Scodari has been a member of the Covance Board since May 2008.

Bradley
T. Sheares, 52, served as Chief Executive Officer of Reliant Pharmaceuticals, Inc., a pharmaceutical company with integrated sales, marketing and development expertise
that markets a portfolio of branded cardiovascular pharmaceutical products, from January 2007 through its acquisition by GlaxoSmithKline plc in December 2007. Prior to joining Reliant,
Dr. Sheares served as President of U.S. Human Health, Merck & Co. from March of 2001 until July 2006. Prior to that time, he served as Vice President, Hospital Marketing and Sales
for Merck's U.S. Human Health business. Dr. Sheares joined Merck in 1987 as a
research fellow in the Merck Research Laboratories and held a wide range of positions within Merck, in business development, sales, and marketing, before becoming Vice President in 1996. He is also a
director of The Progressive Corporation and Honeywell International Inc. Dr. Sheares has been a member of the Covance Board since February 2009.

Information
under the headings "Proposal 1Election of Directors", "The Board of Directors and its Committees", "Committees of the Board", "Board Nomination Process" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement in connection with the 2009 Annual Meeting of Shareholders to be held May 7, 2009,
which Proxy Statement is intended to be filed not later than 120 days after December 31, 2008, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference.

The
Company has adopted a Code of Ethics for Finance Professionals in compliance with applicable rules of the Securities and Exchange Commission ("SEC") that applies to its principal
executive officer, its principal financial officer, and its principal accounting officer or controller, or persons performing similar functions. A copy of the Code of Ethics for Finance Professionals
is available on the Company's web site at www.covance.com, free of charge, under the caption, "Investor RelationsCorporate Governance." The Company intends to satisfy any disclosure
requirement under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Ethics for Finance Professionals by posting such information on
the Company's web site at the address and location specified above.

Item 11.    Executive Compensation

Information on Director and executive compensation is incorporated by reference to the headings "Directors' Compensation" and
"Executive Compensation" in the Company's definitive Proxy Statement in connection with its 2009 Annual Meeting of Shareholders to be held on May 7, 2009, which Proxy Statement is intended to
be filed not later than 120 days after December 31, 2008, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 12.    Security Ownership by Certain Beneficial Owners and Management of Covance

Information on security ownership by certain beneficial owners and management of Covance is incorporated by reference to the headings
"Stock Ownership of Directors, Executive Officers and Certain Shareholders" in the Company's definitive Proxy Statement in connection with its 2009 Annual Meeting of Shareholders to be held on
May 7, 2009, which Proxy Statement is intended
to be filed not later than 120 days after December 31, 2008 pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

74

---



Covance
maintains the Covance Inc. 2007 Employee Equity Participation Plan, the Covance Inc. 2002 Employee Stock Option Plan, the Employee Stock Purchase Plan, the 2008
Stock Option Plan for Non-Employee Directors, the 1998 Stock Option Plan for Non-Employee Directors, the Deferred Stock Unit Plan for Non-Employee Directors and the
Restricted Unit Plan for Non-Employee Members of the Board of Directors, pursuant to which it may grant equity awards to eligible persons.

The
following table gives information about equity awards under Covance's above mentioned plans. The only plans mentioned above which have not received shareholder approval are the
Covance Inc. 2002 Employee Stock Option Plan and the Employee Stock Purchase Plan. For a description of the material features of these plans, please see Note 10 to the audited
consolidated financial statements included elsewhere in this Annual Report.

Equity Compensation Plan Information

| |  |                                                            |  |  |  |  |           |  |  |  |   |       |  |  |  |  |           |     | 
| |  | ---------------------------------------------------------- |  |  |  |  | --------- |  |  |  | - | ----- |  |  |  |  | --------- | --- | 
|
| |  | Equity compensation plans approved by security holders     |  |  |  |  | 1,135,713 |  |  |  | $ | 46.03 |  |  |  |  | 4,564,074 |     | 
| |  | Equity compensation plans not approved by security holders |  |  |  |  | 1,065,537 |  |  |  | $ | 40.29 |  |  |  |  | 682,123   | (1) | 
| |  | TOTAL                                                      |  |  |  |  | 2,201,250 |  |  |  | $ | 43.25 |  |  |  |  | 5,246,197 | (1) | 

---



Item 13.   Certain Relationships and Related Transactions

Incorporated by reference to the heading "The Board of Directors and its Committees" in the Company's definitive Proxy Statement in
connection with its 2009 Annual Meeting of Shareholders to be held on May 7, 2009, which Proxy Statement is intended to be filed not later than 120 days after December 31, 2008,
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Item 14.    Principal Accountant Fees and Services

Incorporated by reference to the heading "Principal Accountant Fees and Services" in the Company's definitive Proxy Statement in
connection with its 2009 Annual Meeting of
Shareholders to be held on May 7, 2009, which Proxy Statement is intended to be filed not later than 120 days after December 31, 2008, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.

75

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

(a) Documents filed as part of this report.

1.

Financial Statements.The financial statements filed as part of this report are listed on the Index to Consolidated Financial Statements on page 35.2.

Financial Statement Schedules.Schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes
thereto.3.

Exhibits.The exhibits required by Item 601 of Regulation S-K filed as part of, or incorporated by reference in, this report are listed in (b) below and in the
accompanying Exhibit Index.


(b) Item 601 Exhibits.

Exhibit
Number

Description3.1

Certificate of Incorporation.Incorporated by reference to Covance's filing on Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.3.2

By-Laws.Incorporated by reference to Covance's filing on Form 8-K, filed with the SEC on December 16, 2008.4.1

Form of Common Stock Certificate.Incorporated by reference to Covance's filing on Amendment No. 3 on Form 10, filed with the SEC on December 16, 2008.10.1

Employee Stock Ownership Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.10.2

Stock Purchase Savings Plan, as amended.Incorporated by reference to Covance's Registration Statement on Form S-8 filed with the SEC on March 5, 2002.10.3

Restricted Share Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.10.4

Non-Employee Directors' Amended and Restated Restricted Stock Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.10.5

Directors' Deferred Compensation Plan, as amended.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.10.6

Conversion Equity Plan.Incorporated by reference to Covance's filing on a Registration Statement on Form S-8, Registration No. 333-29467, filed with the SEC on June 18,
1997.10.7

Non-Employee Directors' Stock Option Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.10.8

Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.10.9

2002 Employee Equity Participation Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.10.10

2002 Employee Stock Option Plan.Incorporated by reference to Covance's Registration Statement on Form S-8 filed with the SEC on July 31, 2002.10.11

Employee Stock Purchase Plan, as amended.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.10.12

Restricted Unit Plan for Non-Employee Members of the Board of Directors.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period ended June 30,
2003.10.13

Covance Inc. Variable Compensation Plan effective January 1, 2004.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31,
2003.


76

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Exhibit
Number

Description10.14

Letter Agreement between Covance Laboratories Limited and Anthony Cork dated as of February 25, 2004.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period
ended June 30, 2004.10.15

Credit Agreement among Covance Inc., PNC Bank, National Association, as agent, and the banks named therein dated as of June 30, 2004.Incorporated by reference to Covance's Quarterly
Report on Form 10-Q for the period ended June 30, 2004.10.16

Form of Executive Officer Restricted Stock Agreement.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period ended September 30, 2004.10.17

Form of Non-Employee Director Stock Option Agreement.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period ended September 30, 2004.10.18

Restricted Share Agreement between Covance Inc. and Richard Cimino dated as of December 17, 2004.Incorporated by reference to Covance's Form 8-K dated December 17,
2004.10.19

Restricted Share Agreement between Covance Inc. and Christopher A. Kuebler, dated as of December 31, 2004.Incorporated by reference to Covance's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004.10.20

Trust Deed Governing the Covance Laboratories Pension Scheme.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.10.21

Agreement between Covance Inc. and Deborah Tanner dated February 23, 2006.Incorporated by reference to Covance's Form 8-K dated February 23, 2006.10.22

Form of Restricted Share Agreement between Covance Inc. and each of Wendel Barr and Richard F. Cimino dated February 23, 2006.Incorporated by reference to Covance's Form 8-K dated
February 28, 2006.10.23

Agreement and Plan of Merger dated April 20, 2006 between Covance Clinical Research Unit Inc., TYD Inc., Radiant Research Inc., and James Stevenson and Christopher Grant, Jr.Incorporated by reference to Covance's Form 8-K dated April 26, 2006.10.24

Amendment No.1 to the Restricted Unit Plan for Non-Employee Members of the Board of Directors of Covance Inc.Incorporated by reference to Covance's Form 8-K dated May 16,
2006.10.25

Amendment No.1 to the 1998 Non-Employee Director Stock Option Plan.Incorporated by reference to Covance's Form 8-K dated December 12, 2006.10.26

Restricted Share Agreement between Covance Inc. and Joseph Herring dated February 22, 2007.Incorporated by reference to Covance's Form 8-K dated February 28,
2007.10.27

Covance Inc. 2007 Employee Equity Participation Plan.Incorporated by reference to Covance's Form 10-Q dated May 8, 2007.10.28

Covance Inc. Management Deferral Plan.Incorporated by reference to Covance's Form 8-K dated October 1, 2007.10.29

Amended and Restated Supplemental Executive Retirement Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.10.30

Restricted Stock Agreement between Covance Inc. and James Lovett dated March 31, 2008.Incorporated by reference to Covance's Form 8-K dated April 2, 2008.10.31

Covance Inc. 2008 Non-Employee Director Stock Option Plan.Incorporated by reference to Covance's Form 8-K dated May 12, 2008.10.32

Amended and Restated Restricted Unit Plan for Non-Employee Members of the Board of Directors of Covance Inc.Incorporated by reference to Covance's Form 8-K dated May 12,
2008.10.33

Letter agreement between Covance Inc. and Joseph Herring dated as of December 31, 2008.Incorporated by reference to Covance's Form 8-K dated December 16, 2008.


77

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Exhibit
Number

Description10.34

Form of letter agreement between Covance Inc. and each of Wendel Barr, Richard Cimino, Donald Kraft, William Klitgaard, James Lovett, and Deborah Tanner.Incorporated by reference to Covance's
Form 8-K dated December 16, 2008.10.35

Form of Executive Officer Stock Option Agreement.Incorporated by reference to Covance's Form 8-K dated February 25, 2009.10.36

Letter Agreement between Covance Inc. and Anthony Cork dated as of February 28, 2009.Incorporated by reference to Covance's Form 8-K dated February 25, 2009.10.37

Form of Indemnification Agreement between Covance Inc. and each of Kathleen G. Bang, Robert Barchi, Gary E. Costley, Sandra L. Helton, Joseph L. Herring, Joseph C. Scodari, and Bradley T. Sheares dated as of
February 19, 2009.Incorporated by reference to Covance's Form 8-K dated February 25, 2009.21

Subsidiaries.Filed herewith.23.1

Consent of Ernst & Young LLP.Filed herewith.31.1

Certification of Chief Executive Officer pursuant to SEC Rule 13(a)-14(a).Filed herewith.31.2

Certification of Chief Financial Officer pursuant to SEC Rule 13(a)-14(a).Filed herewith.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.Filed herewith.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.Filed herewith.


(c) Financial Statement Schedules.

None

78

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Covance has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

COVANCE INC.Dated: March 2, 2009

By:

/s/ Joseph L. Herring Joseph L. Herring
Chairman of the Board and Chief Executive Officer


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Covance and in the capacities and on the
dates indicated.

Signature

Title

Date/s/ Joseph L. Herring Joseph L. Herring

Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer)

March 2, 2009/s/ William E. Klitgaard William E. Klitgaard

Corporate Senior Vice President and Chief Financial Officer (Principal Financial Officer)

March 2, 2009/s/ Michele A. Kennedy Michele A. Kennedy

Corporate Vice President, Controller and Chief Accounting Officer (Principal Accounting Officer)

March 2, 2009/s/ Kathleen G. Bang Kathleen G. Bang

Director

March 2, 2009/s/ Robert Barchi Robert Barchi

Director

March 2, 2009/s/ Gary E. Costley Gary E. Costley

Director

March 2, 2009/s/ Sandra L. Helton Sandra L. Helton

Director

March 2, 2009/s/ Joseph C. Scodari Joseph C. Scodari

Director

March 2, 2009/s/ Bradley T. Sheares Bradley T. Sheares

Director

March 2, 2009


79

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EXHIBIT INDEX

| |       |  |                                                                                                                                                                                                                                              
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |       |  |                                                                                                                                                                                                                                              
| | 3.1   |  | Certificate of Incorporation.Incorporated by reference to Covance's filing on Amendment No. 2 on Form 10, filed with the SEC on November 19, 1996.                                                                                           
| | 3.2   |  | By-Laws.Incorporated by reference to Covance's filing on Form 8-K, filed with the SEC on December 16, 2008.                                                                                                                                  
| | 4.1   |  | Form of Common Stock Certificate.Incorporated by reference to Covance's filing on Amendment No. 3 on Form 10, filed with the SEC on December 16, 2008.                                                                                       
| | 10.1  |  | Employee Stock Ownership Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.                                                                                                 
| | 10.2  |  | Stock Purchase Savings Plan, as amended.Incorporated by reference to Covance's Registration Statement on Form S-8 filed with the SEC on March 5, 2002.                                                                                       
| | 10.3  |  | Restricted Share Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1996.                                                                                                         
| | 10.4  |  | Non-Employee Directors' Amended and Restated Restricted Stock Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.                                                            
| | 10.5  |  | Directors' Deferred Compensation Plan, as amended.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1997.                                                                             
| | 10.6  |  | Conversion Equity Plan.Incorporated by reference to Covance's filing on a Registration Statement on Form S-8, Registration No. 333-29467, filed with the SEC on June 18,
1997.                                                               
| | 10.7  |  | Non-Employee Directors' Stock Option Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 1998.                                                                                     
| | 10.8  |  | Deferred Stock Unit Plan for Non-Employee Members of the Board of Directors.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.                                                   
| | 10.9  |  | 2002 Employee Equity Participation Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.                                                                                       
| | 10.10 |  | 2002 Employee Stock Option Plan.Incorporated by reference to Covance's Registration Statement on Form S-8 filed with the SEC on July 31, 2002.                                                                                               
| | 10.11 |  | Employee Stock Purchase Plan, as amended.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.                                                                                      
| | 10.12 |  | Restricted Unit Plan for Non-Employee Members of the Board of Directors.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period ended June 30,
2003.                                                             
| | 10.13 |  | Covance Inc. Variable Compensation Plan effective January 1, 2004.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31,
2003.                                                             
| | 10.14 |  | Letter Agreement between Covance Laboratories Limited and Anthony Cork dated as of February 25, 2004.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period
ended June 30, 2004.                                
| | 10.15 |  | Credit Agreement among Covance Inc., PNC Bank, National Association, as agent, and the banks named therein dated as of June 30, 2004.Incorporated by reference to Covance's Quarterly
Report on Form 10-Q for the period ended June 30, 2004.
| | 10.16 |  | Form of Executive Officer Restricted Stock Agreement.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period ended September 30, 2004.                                                                           
| | 10.17 |  | Form of Non-Employee Director Stock Option Agreement.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period ended September 30, 2004.                                                                           
| | 10.18 |  | Restricted Share Agreement between Covance Inc. and Richard Cimino dated as of December 17, 2004.Incorporated by reference to Covance's Form 8-K dated December 17,
2004.                                                                    
| | 10.19 |  | Restricted Share Agreement between Covance Inc. and Christopher A. Kuebler, dated as of December 31, 2004.Incorporated by reference to Covance's Annual Report on Form 10-K for
the fiscal year ended December 31, 2004.                     
| | 10.20 |  | Trust Deed Governing the Covance Laboratories Pension Scheme.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.                                                                  
| | 10.21 |  | Agreement between Covance Inc. and Deborah Tanner dated February 23, 2006.Incorporated by reference to Covance's Form 8-K dated February 23, 2006.                                                                                           

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| |       |  |                                                                                                                                                                                                                                                                                                           
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 10.22 |  | Form of Restricted Share Agreement between Covance Inc. and each of Wendel Barr and Richard F. Cimino dated February 23, 2006.Incorporated by reference to Covance's Form 8-K
dated February 28, 2006.                                                                                                    
| | 10.23 |  | Agreement and Plan of Merger dated April 20, 2006 between Covance Clinical Research Unit Inc., TYD Inc., Radiant Research Inc., and James Stevenson and Christopher Grant, Jr.Incorporated by reference to Covance's Form 8-K dated April 26, 2006.                                                       
| | 10.24 |  | Amendment No. 1 to the Restricted Unit Plan for Non-Employee Members of the Board of Directors of Covance Inc.Incorporated by reference to Covance's Form 8-K dated May 16,
2006.                                                                                                                         
| | 10.25 |  | Amendment No. 1 to the 1998 Non-Employee Director Stock Option Plan.Incorporated by reference to Covance's Form 8-K dated December 12, 2006.                                                                                                                                                              
| | 10.26 |  | Restricted Share Agreement between Covance Inc. and Joseph Herring dated February 22, 2007.Incorporated by reference to Covance's Form 8-K dated February 28,
2007.                                                                                                                                       
| | 10.27 |  | Covance Inc. 2007 Employee Equity Participation Plan.Incorporated by reference to Covance's Form 10-Q dated May 8, 2007.                                                                                                                                                                                  
| | 10.28 |  | Covance Inc. Management Deferral Plan.Incorporated by reference to Covance's Form 8-K dated October 1, 2007.                                                                                                                                                                                              
| | 10.29 |  | Amended and Restated Supplemental Executive Retirement Plan.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December 31, 2007.                                                                                                                                
| | 10.30 |  | Restricted Stock Agreement between Covance Inc. and James Lovett dated March 31, 2008.Incorporated by reference to Covance's Form 8-K dated April 2, 2008.                                                                                                                                                
| | 10.31 |  | Covance Inc. 2008 Non-Employee Director Stock Option Plan.Incorporated by reference to Covance's Form 8-K dated May 12, 2008.                                                                                                                                                                             
| | 10.32 |  | Amended and Restated Restricted Unit Plan for Non-Employee Members of the Board of Directors of Covance Inc.Incorporated by reference to Covance's Form 8-K dated May 12,
2008.                                                                                                                           
| | 10.33 |  | Letter agreement between Covance Inc. and Joseph Herring dated as of December 31, 2008.Incorporated by reference to Covance's Form 8-K dated December 16, 2008.                                                                                                                                           
| | 10.34 |  | Form of letter agreement between Covance Inc. and each of Wendel Barr, Richard Cimino, Donald Kraft, William Klitgaard, James Lovett, and Deborah Tanner.Incorporated by reference to Covance's
Form 8-K dated December 16, 2008.                                                                         
| | 10.35 |  | Form of Executive Officer Stock Option Agreement.Incorporated by reference to Covance's Form 8-K dated February 25, 2009.                                                                                                                                                                                 
| | 10.36 |  | Letter Agreement between Covance Inc. and Anthony Cork dated as of February 28, 2009.Incorporated by reference to Covance's Form 8-K dated February 25, 2009.                                                                                                                                             
| | 10.37 |  | Form of Indemnification Agreement between Covance Inc. and each of Kathleen G. Bang, Robert Barchi, Gary E. Costley, Sandra L. Helton, Joseph L. Herring, Joseph C. Scodari, and
Bradley T. Sheares dated as of February 19, 2009.Incorporated by reference to Covance's Form 8-K dated February 25, 2009.
| | 21    |  | Subsidiaries.Filed herewith.                                                                                                                                                                                                                                                                              
| | 23.1  |  | Consent of Ernst & Young LLP.Filed herewith.                                                                                                                                                                                                                                                              
| | 31.1  |  | Certification of Chief Executive Officer pursuant to SEC Rule 13(a)-14(a).Filed herewith.                                                                                                                                                                                                                 
| | 31.2  |  | Certification of Chief Financial Officer pursuant to SEC Rule 13(a)-14(a).Filed herewith.                                                                                                                                                                                                                 
| | 32.1  |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.Filed herewith.                                                                                                                                                                                                               
| | 32.2  |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.Filed herewith.                                                                                                                                                                                                               

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