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

_________________

FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002Commission File Number: 1-12213

_________________

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

|Delaware                                   | 22-3265977                          
|------------------------------------------ | ------------------------------------
|(State of Incorporation)                   | (I.R.S. Employer Identification No.)
|                                           |                                     
|210 Carnegie Center, Princeton, New Jersey | 08540                               
|(Address of Principal Executive Offices)   | (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 Class          | Name of Each Exchangeon Which Registered
|---------------------------- | ----------------------------------------
|                             |                                         
|Common Stock, $.01 Par Value | New York Stock Exchange                 

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

_________________

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

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes
X No

As
of February 11, 2003, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was $1,513,785,289 (based on the closing
price of the Companys Common Stock on the New York Stock Exchange on
February 11, 2003 of $24.75).

As
of February 11, 2003, the Registrant had 61,163,042 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The
Companys definitive Proxy Statement is incorporated by reference into
Items 10, 11, 12 and 13 of Part III of 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 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 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, a Delaware corporation, was incorporated
in 1994. Covance maintains offices in 17 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 may increase in the
future because of several factors, including: pressures to contain costs,
limitations on internal capacity, 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 speed the drug development process or make
the process of drug development more efficient.

Our
strategy is to meet the needs for outsourcing and to speed and improve the
drug development process by developing and delivering innovative
services that apply science and technology to provide high quality
service with global reach and to capture, manage and integrate a vast array of
drug development data in near real-time.

Information
Technology.  We intend to capitalize on our
investments in carefully selected hardware and software products, systems and
networks and in more than 500 information systems professionals to provide
processes and solutions for both employees and clients to meet the changing
demands of drug development. In the past two years, we introduced new
internet-based products including the following. Study Tracker is an
internet-based client access product which permits customers of toxicology
services to review study data and schedules on a near real-time basis. LabLink
is an internet-based client access program that allows customers of central
laboratory services to review and query lab data on a near real-time basis.
Trial Tracker® is a web-enabled clinical trial project management and
tracking tool which is intended to allow both employees and customers of our
late-stage clinical business to review and manage all aspects of clinical trial
projects. Digitography in our Central Diagnostics business allows on
screen digital ECG waveform measurement with resolution unmatched in the
industry. We continue to pursue new innovative systems and use
those systems to improve the provision of drug development data to
our customers.

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 30 locations in 17 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 deliver services globally.

Acquisitions.  
In addition to internal development, we seek to make strategic
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.

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Services

The
services we provide constitute two segments for financial reporting purposes:
(1) early development services, which
includes preclinical services and Phase I clinical services, and (2)
late-stage development, which includes central laboratory, clinical
development, commercialization services and other support services.

Early Development

Our
early development services include preclinical services and Phase I clinical
services. Although these are separate services, they are sometimes
combined in joint service offerings.

Preclinical Services

Our
preclinical services include toxicology services and pharmaceutical and related
chemistry services. Our preclinical area has been a source of
innovation by introducing new technologies for client access to data such as
Study Tracker, electronic animal identification, multimedia study reports, and
animal and test tube measures of induced cell proliferation or reproduction.
We have four major laboratories, located in Madison, Wisconsin 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
sales office in Tokyo, Japan. In 2002, we completed a significant
expansion of our Madison, Wisconsin facility and commenced the expansion of our
Harrogate, United Kingdom facility, which we expect to complete in the first
half of 2003.

Toxicology.
  Our preclinical toxicology services include in
vivo toxicology studies, which are studies of the effects of
drugs in animals, and genetic toxicology
studies, which include studies of the effects of drugs on
chromosomes, as well as on genetically modified mice. We offer
immunotoxicology services in which we assess the impact of drugs or chemicals on
the structure and function of the immune system. Our immunotoxicology
and cell culture laboratory features online data capture capabilities
and Good Laboratory Practices compliant instrumentation monitoring systems.

Research
Products.  We provide custom polyclonal and
monoclonal antibody services for research purposes and purpose-bred animals for
biomedical research. These research animals are required by pharmaceutical and
biotechnology companies, university research centers and contract research
organizations as part of their 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.

Pharmaceutical
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 and nutriceutical industries, including
nutritional analysis and nutritional content fact labels.

BioLink®.
  In 2000, we introduced our BioLink service offering. This
bioanalytical testing service, which is conducted in our bioanalytical
laboratory in Indianapolis, Indiana and in our immunoanalytical facility in
Chantilly, Virginia, helps 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.

Phase I Clinical Services

We
provide Phase I clinical services, primarily first-in-human trials of
new pharmaceuticals, at our clinics in Madison, Wisconsin, and Leeds,
United Kingdom.

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Late-Stage Development

Central Laboratory Services

We
provide central laboratory services on a global basis. We have three central
laboratories, one in each of the United States, Switzerland and Singapore, that
provide central laboratory services to biotechnology and pharmaceutical
customers. We also have contractual arrangements with a leading South African
laboratory and a leading Australian laboratory. In 2002, we acquired Virtual
Central Laboratory b.v., a Netherlands-based company 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
capabilities provide clients the flexibility to conduct studies on a
multinational and simultaneous basis. The data we provide is
combinable because we use consistent laboratory methods, the same reagent
manufacturers and identical equipment calibration and clinical trial reference
ranges. 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 easily 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 technologies in conjunction with our central
laboratory services.

Clinical Development Services

We
offer a comprehensive range of clinical trial services, including Phase II
through 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 small, medium and large trials in the
United States, Europe and in many other parts of the world. 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.

Clinical Trial Support Services

Central
Diagnostics.  Our ability to collect and centralize clinical trial data
is enhanced by our central diagnostics service offerings which include the
capture and interpretation of electrocardiograms. Electrocardiogram analysis,
one of the most frequently used tools in clinical trials, is included in more
than one-half of clinical trials as part of the study protocol. We distribute a
proprietary hand-held electrocardiogram device to clinical trial sites. The
device, which can be used anywhere in the world, collects the data, performs a
real-time quality check, and transmits the information by telephone to a
full-time central operations center where cardiologists read the results. In
1999, Covance introduced ambulatory cardiac monitoring capabilities, often
referred to as Holter monitoring. Holter monitoring involves the ambulatory
monitoring of cardiac activity and permits long-term monitoring  often 24
to 48 hours as opposed to the

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ten seconds of data typically provided by stationary ECGs, and therefore
may reveal certain conditions which may not be discovered by a stationary ECG.

In
2000, we opened a centralized imaging center to meet a growing pharmaceutical
industry need for imaging to document clinical efficacy and safety. In 2002, we
introduced Digitography, a system for use in clinical trials which allows on screen
digital ECG waveform measurement with resolution unmatched in the industry.

Interactive
Voice 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 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. The most frequently used functions include
patient screening, patient enrollment, patient randomization, drug assignments,
drug inventory management, unblinding, discontinuations and patient diaries. 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, product
withdrawal support services, and prescription to over-the-counter switch studies.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
also field and process telephone calls and inquiries relating to adverse
experiences with a drug while we perform the safety services in the context of
periapproval studies.

Health
Economics and Outcomes Services.  We offer a wide range of health economics
services, including outcomes and pharmacoeconomic studies, reimbursement
planning and reimbursement advocacy programs. Pharmaceutical, biotechnology and
medical device manufacturers purchase these services from us to help optimize
their return on research and development investments.

Divested Businesses

In
February 2001, Covance sold its pharmaceutical packaging business, which offered
full-service contract drug packaging services for clinical trials, for the
aggregate amount of $137.5 million. In June 2001, Covance sold its
biomanufacturing unit, Covance Biotechnology Services Inc., which manufactured
recombinant proteins for biotechnology and pharmaceutical clients, for the
aggregate amount of approximately $190 million, including the assumption of debt
and other liabilities. Primarily as a result of these divestitures, Covance
substantially eliminated debt, improved its cash flow and is now focused on its
core services.

Customers and Marketing

We
provide product development services on a global basis to, among others, the
pharmaceutical and biotechnology industries. In 2002, 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.

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While
no single customer accounts for more than ten percent of our aggregate net
revenues, we have two customers accounting for more than five but less than ten
percent of our revenues, and our top five customers account for approximately 24
 percent of our net revenues. Our late-stage development segment has one
customer which accounts for approximately ten  percent of the aggregate net
revenues of that segment and has four customers which each account for more than
five but less than ten percent of the aggregate net revenues of that segment.
Our early development segment has one customer accounting 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 13 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, Canada, Europe, Australia, Japan and Singapore.

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 generally bear the cost of
overruns, but 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 are responsible for the overrun unless the
increased cost is a result of a change requested by the customer, 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 from a few months to several years or
longer depending on the nature of the work performed. In some cases for
multi-year contracts, a portion of the contract fee is paid at the time the
study or trial is started with the balance of the contract fee payable in
installments upon the achievement of milestones over the study or trial
duration.

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.

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 for work that has yet to be earned. 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, 2002 and December 31, 2001 was
$1,122 million and $1,013 million, respectively.

Backlog
usually 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. Some of our studies and projects are
performed over an extended period of time.

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, including the following: studies
vary

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

In
early development services our significant competitors include Charles River
Laboratories International Inc., Inveresk Research Group Inc., and MDS Inc., among
others. In late-stage development services our significant competitors include PPD,
Inc., Quintiles Transnational Corp., Parexel International Corporation 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 time-saving
and accurate manner; ability to manage large-scale clinical trials both
domestically and internationally; expertise and experience in health economics
and outcomes services; 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 and manufacturing 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 Good Manufacturing Practice (GMP)
regulations, and for central laboratory operations in the Clinical Laboratory
Improvement Amendments of 1988 (CLIA). The standards of GLP and GMP are required
by the FDA, by the Department of Health in the United Kingdom 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, GMP 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 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 GMP, noncompliance
with GCP can result in the disqualification of data collection 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 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). Our breeding and animal import facilities
maintain detailed standard operating procedures and the documentation necessary
to comply with applicable regulations for the humane treatment of the animals in
its custody. Besides being licensed by the USDA as both a dealer and research
facility, this business is also accredited by the Association for Assessment and
Accreditation of Laboratory Animal Care International and has registered
assurance with the United States National Institutes of Health Office of
Protection for Research Risks.

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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. All
Covance 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 has 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 the disclosure of personal confidential information,
including medical information, to any entity that does not comply with certain
security safeguards. The Department of Health and Human Services recently
promulgated final regulations under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, that will govern the disclosure of
confidential medical information in the United States. We will continue to
monitor our compliance with these new regulations as these and other privacy
regulations come into effect.

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 comply with the
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, 2002, we had approximately 6,900 employees, approximately 36%
of whom are employed outside of the United States. Approximately 6,300 of our
employees are full time employees, 32 of our employees hold M.D. degrees, 126
hold Ph.D. degrees, and 468 hold masters or other postgraduate degrees. We
believe that Covances relations with its employees are good.

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.

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Item 2.  Properties

Covance
both owns and leases its facilities. Covance owns substantial facilities in
Madison, Wisconsin, in Vienna, Virginia, in the United Kingdom in Harrogate and
Leeds, and in Muenster, Germany for its early development services. Covance
leases substantial facilities in Indianapolis, Indiana and in Geneva,
Switzerland 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 and Horsham. Covance also owns or leases other
facilities in the United States, Canada, Europe, Asia 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  10 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 or results of operations.

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

None.

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PART II

Item 5.  Market for Registrants Common Equity and
Related Stockholder Matters

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    | Low    
| | ------------------- | ------- | -------
| |                     |         |        
| | First Quarter 2001  | $15.500 | $10.375
| |                     |         |        
| | Second Quarter 2001 | $22.750 | $11.600
| |                     |         |        
| | Third Quarter 2001  | $25.500 | $15.290
| |                     |         |        
| | Fourth Quarter 2001 | $23.490 | $14.800
| |                     |         |        
| | First Quarter 2002  | $22.950 | $15.810
| |                     |         |        
| | Second Quarter 2002 | $21.300 | $16.810
| |                     |         |        
| | Third Quarter 2002  | $20.490 | $12.110
| |                     |         |        
| | Fourth Quarter 2002 | $25.000 | $17.900

As
of February 11, 2003, there were 6,290 holders of record of Covances
common stock.

Covance
has not paid any dividends during 2002 or 2001. Covance does not currently
intend to pay dividends, but rather, currently intends to reinvest earnings in
its business. Covance is also subject to certain restrictions on its ability to
pay cash dividends on its common stock by certain covenants contained in a
credit agreement to which Covance is a party.

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, 2002, 2001, 2000,
1999 and 1998. 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 below is on an as reported basis and has not
been restated to exclude the results of our biomanufacturing and packaging
operations, which were divested on June 15, 2001 and February 14, 2001,
respectively. The information below also includes special charges recorded
during all periods presented, as well as the net gain on sale of businesses
recorded during 2001. Certain of the information below has been presented on a
pro forma basis in Managements Discussion and Analysis of Financial
Condition and Results of Operations  Quarterly Results and in Note
14 to the consolidated financial statements included elsewhere in this Annual
Report after giving effect to: 1) the exclusion of the results of Packaging and
Biomanufacturing and the net gain reported in connection with these
divestitures; 2) the exclusion of the impact of restructuring charges recorded;
and 3) the exclusion of goodwill amortization in accordance with the adoption of
FASB Statement No. 142.

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|
|
|Income Statement Data:                            | 
|Net revenues                                      | 
|Reimbursable out-of-pockets                       | 
|                                                  | 
|Total revenues                                    | 
|                                                  | 
|Costs and expenses:                               | 
|Cost of revenue (including reimbursable expenses) | 
|Selling, general and administrative               | 
|Depreciation and amortization                     | 
|Special charges                                   | 
|                                                  | 
|Total                                             | 
|                                                  | 
|Income from operations                            | 
|                                                  | 
|Other (income) expense, net:                      | 
|Interest expense, net                             | 
|Foreign exchange transaction losses               | 
|Net gain on sale of businesses                    | 
|                                                  | 
|Other (income) expense, net                       | 
|                                                  | 
|Income before taxes and equity investee results   | 
|Taxes on income                                   | 
|Equity investee loss                              | 
|                                                  | 
|Net income                                        | 
|                                                  | 
|                                                  | 
|Basic earnings per share                          | 
|Diluted earnings per share                        | 
|                                                  | 
|Balance Sheet Data:                               | 
|Working capital                                   | 
|Total assets                                      | 
|Long-term debt                                    | 
|Stockholders' equity                              | 
|                                                  | 
|Other Financial Data:                             | 
|Gross margin                                      | 
|Operating margin                                  | 
|Net income margin                                 | 
|                                                  | 
|Current ratio                                     | 
|Debt to capital                                   | 
|Book value per share                              | 
|Net days sales outstanding                        | 

__________

|(a) |  | Excluding the revenues of our packaging and biomanufacturing operations, net
revenues in 2001 and 2000 would have been $800,265 and $737,276, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Cost of revenue for the years ended December 31, 2002, 2001, 2000, 1999 and 1998
includes reimbursable expenses totaling $41,623, $40,167, $48,298, $43,093 and
$37,004, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) |  | Special charges in 2001 and 2000 consist of restructuring charges totaling
$8,178 and $12,514, respectively, and in 1999 consist of merger-related costs
totaling $5,249 and a restructuring charge totaling $7,719.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) |  | Excluding 1) the results of our packaging and biomanufacturing operations, 2)
reduced interest expense from the applications of the net proceeds from these
divestitures to reduce outstanding indebtedness, 3) the net gain recorded in
connection with these divestitures, 4) special charges, and 5) goodwill
amortization, income from operations in 2001 and 2000 would have been $64,062
and $51,890, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) |  | Amount
represents the net gain reported on the divestitures of our biomanufacturing and
packaging businesses.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(f) |  | Excluding the $6.5 million reduction in our income tax reserve, taxes on income,
net income and diluted earnings per share would have been $33,158, $57,283 and
$0.93, respectively.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(g) |  | Excluding 1) the results of our packaging and biomanufacturing operations, 2)
reduced interest expense from the applications of the net proceeds from these
divestitures to reduce outstanding indebtedness, 3) the net gain recorded in
connection with these divestitures, 4) special charges, and 5) goodwill
amortization, net income and diluted earnings per share for 2001 would have been
$38,027 and $0.63, respectively, and in 2000 would have been $28,806 and $0.50,
respectively .
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Quarterly Results and Note 14
to the consolidated financial statements included elsewhere in this Annual
Report.

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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 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 segments for financial reporting purposes: early
development services, which includes preclinical and Phase I clinical; and
late-stage development services, which includes central laboratory, clinical
development, commercialization and other clinical support services. Covance
believes it is one of the largest drug development services companies, based on
2002 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.

On
June 15, 2001, Covance sold its biomanufacturing business
(Biomanufacturing) to Akzo Nobels pharma business unit,
Diosynth, for gross proceeds of $113.6 million, subject to post-closing
adjustments, including finalization of the closing balance sheet and earnout
provision in accordance with the Stock Purchase Agreement between Covance and
Akzo Nobel, which remains to be resolved between the parties. Covance recognized
a loss of $7.5 million ($4.5 million after tax) from this transaction. On
February 14, 2001, Covance sold its pharmaceutical packaging business
(Packaging) to Fisher Scientific International Inc. for gross
proceeds of $137.5 million. Covance recognized a pre-tax gain of $38.4 million
($24.3 million after tax) from this transaction.

Critical Accounting Policies

Covances
consolidated financial statements are prepared in accordance with accounting
principals generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. 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 upon 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. Service contracts
generally take the form of fee-for-service or fixed-price arrangements. In the
case of fee-for-service contracts, revenue is recognized as services are
performed, based upon, for example, hours worked or samples tested. For
long-term fixed-price service contracts, revenue is recognized as services are
performed, with performance generally assessed using output measures, such as
units-of-work performed to date as compared to the total units-of-work
contracted. Changes in the scope of work generally result in a renegotiation of
contract pricing terms. Renegotiated amounts are not included in net revenues
until earned and realization is assured. Estimates of costs to complete are
made, as appropriate, to provide for losses expected on contracts. Costs are not
deferred in anticipation of contracts being awarded, but instead are expensed as
incurred. In some cases, for multi-year contracts a portion of the contract fee
is paid at the time the trial is initiated. These advances are deferred and
recognized as revenue as services are performed, as discussed above. Additional
payments may be made based upon the achievement of performance-based milestones
over the contract duration. 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. Despite these provisions, the unexpected termination of a
large study or the termination of several studies over a relatively short period
of time could cause periods of excess capacity which could negatively impact
revenues and earnings. 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,

11



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##### 

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.

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
to provide for the possibility that amounts due Covance 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.

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 the contracts Covance executes with its customers since from time to
time contracts are denominated in a currency different than the particular
Covance subsidiarys local currency. These risks are generally applicable
only to a portion of the contracts executed by Covances foreign
subsidiaries providing clinical services. The first risk occurs as revenue
recognized for services rendered is denominated in a currency different from the
currency in which the subsidiarys expenses are incurred. As a result, the
subsidiarys net revenues and resultant earnings can be affected by
fluctuations in exchange rates. 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.

The
second risk results from the passage of time between the invoicing of customers
under these contracts and the ultimate collection of customer payments against
such invoices. Because the contract is 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. Changes in exchange rates from the time the invoice is prepared and
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 established. This
difference is recognized by Covance as a foreign currency transaction gain or
loss, as applicable, and is reported in other expense (income) in Covances
Consolidated Statements of Income. Foreign currency transaction losses for the
year ended December 31, 2002 negatively impact pre-tax income by $3.4 million.

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. To date such cumulative translation
adjustments have not been material to Covances consolidated financial
position.

Taxes
on Income.  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 particular, as the geographic mix of Covances
pre-tax earnings among various tax jurisdictions changes, Covances
effective tax rate may vary from period to period. Covance has established, and
periodically reevaluates, an estimated income tax reserve on its consolidated
balance sheet to provide for the possibility of adverse outcomes in income tax
proceedings. While Covance believes that it has identified all reasonably
identifiable exposures and that 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 that the
amounts reserved. For example, in the third quarter of 2002 favorable income tax
developments relating primarily to the settlement of a longstanding foreign
income tax audit caused Covance to revise its estimated exposure and to reduce
the amount of its income tax reserve by $6.5 million. It is possible that
changes in estimates in the future could cause Covance to either materially
increase or reduce the carrying

12



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##### 

amount of its income tax reserve. In addition, Covances
policy is to provide income taxes on earnings of foreign subsidiaries to the extent
those earnings are taxable or are expected to be remitted. Taxes have not been provided
on accumulated foreign unremitted earnings totaling $88.9 million as of December 31,
2002 because Covance currently intends to leave these earnings invested in those
countries. If Covance were to repatriate these earnings, or a portion of these earnings,
Covance might incur a significant income tax liability.

Stock
Based Compensation. Covance grants stock options to its employees
at an exercise price equal to the fair value of the shares at the date of grant
and accounts for these stock option grants in accordance with APB Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and
related interpretations. Under APB 25, when stock options are issued with an
exercise price equal to the market price of the underlying stock on the date of
grant, no compensation expense is recognized in the income statement.

Operating
Expenses.  Covance segregates its recurring operating expenses
among three categories: cost of revenue; selling, general and administrative
expenses; and depreciation and amortization. Cost of revenue consists of
appropriate amounts necessary to complete the revenue and earnings process, and
includes direct labor and related benefits, other direct costs, and an
allocation of facility charges and information technology costs, and excludes
depreciation and amortization. Also, cost of revenue includes shipping and
handling fees and reimbursable out-of-pocket costs. 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.

Impairment
of Assets.  Covance reviews its long-lived assets for impairment,
when events or changes in circumstances occur that indicate that 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.

In
2002, Covance began to perform an annual test for impairment of goodwill. This
test is performed by comparing, at the reporting unit level, the carrying value
of goodwill to its fair value. Covance assesses fair value based upon its best
estimate of the present value of the future cash flows that it expects to be
generated by the reporting unit. The test performed for 2002 did not identify
any instances of impairment. However, changes in expectations as to the present
value of the reporting units future cash flows might impact subsequent
years assessments of impairment.

Defined
Benefit Pension Plans.  Covance sponsors defined benefit pension
plans for the benefit of its employees at three foreign subsidiaries. The
measurement of the related pension benefit obligation and the expense recorded
in each year is based upon actuarial computations which require judgment as to
(a) the appropriate discount rate to use in computing the present value of the
benefit obligation, (b) the expected return on plan assets and (c) the expected
future rate of salary increases. Actual results will likely differ, in some
periods materially, from the assumptions used in the actuarial valuation. For
example, in 2002 as a result of the poor performance of the European equity
markets Covances United Kingdom plans suffered a decline in the fair value
of their assets in the aggregate amount of $7.2 million which caused an increase
in the under-funded status of these plans. This is likely to result in an
increase in the annual expense of these plans going forward.

Results of Operations

Variances
explained below are on an as reported basis, but also include
certain pro forma variances (where so noted). Pro forma variances give effect to
1) the exclusion of a $6.5 million reduction in our income tax reserve and
provision recorded in the third quarter of 2002 explained below, 2) the
divestiture of Packaging and Biomanufacturing as if these transactions had
occurred on January 1, 2000, 3) the exclusion of the impact of restructuring
charges totaling $8.2 million ($5.0 million net of tax) and $12.5 million ($7.6
million net of tax) recorded in 2001 and 2000, respectively, and 4) the
exclusion of goodwill amortization from the 2001 and 2000 periods in accordance
with the adoption of FASB Statement No. 142.

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##### 

Year
Ended December 31, 2002 Compared with Year Ended  December 31, 2001.  Net
revenues increased 3.2% to $883.1 million  for 2002 from $855.9 million for 2001. The
2001 period includes revenues from  Covances biomanufacturing operations through
June 15, 2001 and includes  revenues from Covances packaging operations through
February 14, 2001. On  a pro forma basis, net revenues increased 10.3% from $800.3
million for 2001.  Excluding the impact of foreign exchange rate variances between both
periods,  net revenues increased 8.5% on a pro forma basis, as compared to 2001. Net
revenues from Covances early development segment grew 18.1%, or 16.6%  excluding
the impact of foreign exchange rate variances between both periods,  driven primarily by
growth in our toxicology service offering. On a pro forma  basis, net revenues from
Covances late-stage development segment increased  5.4%, or 3.4% excluding the
impact of foreign exchange rate variances between  both periods. The modest late-stage
development revenue growth, in part,  resulted from our strategy to first improve our
operating margins by an  increased focus on contract selectivity in our Phase II/III
services, and the  slower conversion of our backlog to revenue in our central laboratory
business  during the first half of 2002.

Cost
of revenue, excluding reimbursable out-of-pocket expenses totaling $41.6
million, decreased 0.9% to $612.5 million or 69.4% of net revenues for the year
ended December 31, 2002 as compared to $618.1 million (excluding reimbursable
out-of-pocket expenses totaling $40.2 million) or 72.2% of net revenues for the
corresponding 2001 period. Excluding reimbursable out-of-pocket expenses, gross
margins were 30.6% for the year ended December 31, 2002 and 27.8% for the
corresponding 2001 period, as the 2001 period includes Covances
biomanufacturing operations through June 15, 2001 and Covances packaging
operations through February 14, 2001. Also, the 2001 period included higher
investment spending on internet initiatives and lower margins on bioanalytical
services. On a pro forma basis, as a percentage of net revenues, cost of
revenue, excluding reimbursable out-of-pocket expenses, was 71.7% for 2001.

Overall,
selling, general and administrative expenses increased 5.0% to $133.5 million
for 2002 from $127.2 million for 2001. As a percentage of net revenues, selling,
general and administrative expenses increased to 15.1% for 2002 from 14.9% for
2001, as 2001 includes Covances biomanufacturing operations through June
15, 2001 and Covances packaging operations through February 14, 2001. On a
pro forma basis, as a percentage of net revenues, selling, general and
administrative expenses were 15.3% for 2001.

Depreciation
and amortization decreased 11.1% to $42.4 million or 4.8% of net revenues for
2002 from $47.7 million or 5.6% of net revenues for 2001, due primarily to the
divestiture of our capital intensive biomanufacturing and packaging businesses
in the first half of 2001, and the implementation of FASB Statement No. 142 in
the first quarter of 2002, which has eliminated the amortization of goodwill. On
a pro forma basis, depreciation and amortization increased 7.7% over 2001.

Income
from operations increased 73.2% to $94.7 million for 2002 from $54.7 million for
the corresponding 2001 period. Income from operations from Covances early
development segment increased $18.7 million or 39.0% to $66.7 million or 18.1%
of net revenues for the year ended December 31, 2002 from $48.0 million or 15.4%
of net revenues for the corresponding 2001 period, primarily driven by growth in
our toxicology services offering. Income from operations from Covances
late-stage development segment increased $39.8 million or 120.0% to $73.0
million or 14.2% of net revenues for 2002 from $33.2 million or 6.1% of net
revenues for the corresponding 2001 period. Corporate expenses increased $18.5
million to $45.0 million or 5.1% of net revenues for 2002 from $26.5 million or
3.3% of net revenues for 2001. The increase is primarily attributable to the
centralization of information technology infrastructure in 2002 and investments
made therein, increased marketing and higher variable compensation expenses.

On
a pro forma basis, income from operations increased 47.8% to $94.7 million for
2002 from $64.1 million for 2001. As a percentage of net revenues on a pro forma
basis, income from operations increased to 10.7% for 2002 from 8.0% for 2001. On
a pro forma basis, income from operations from Covances early development
segment increased $17.6 million or 35.9% to $66.7 million, as compared to $49.1
million for 2001. On a pro forma basis, income from operations from
Covances late-stage development segment increased $31.5 million or 76.0%
to $73.0 million as compared to $41.5 million for 2001, primarily driven by
growth in our toxicology service offering. The increase in late-stage
development operating income on a pro forma basis was due to Covances
continued focus on margin improvements in our Phase II/III services, increased
volume in our Phase III and central laboratory services during the second half
of 2002, and margin growth in our commercialization services.

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Other
expense, net for the 2001 period includes a $30.8 million net pre-tax gain on
the sale of Packaging and Biomanufacturing in first half of 2001. Excluding this
gain, other expense, net decreased $2.9 million to $4.2 million for 2002 from
$7.1 million for 2001, due primarily to a $6.0 million reduction in interest
expense resulting from lower weighted average borrowings under our long-term
credit facility, partially offset by a $3.1 million increase in foreign exchange
transaction losses, as a result of the weakening U.S. dollar.

Covances
effective tax rate for the year ended December 31, 2002 was 29.5% as compared to
38.9% for the corresponding 2001 period. The pro forma effective tax rate for
the 2001 period was 38.3%. Covances 2002 effective tax rate reflects the
reversal of a $6.5 million income tax reserve due to a change in estimate
relating primarily to the favorable settlement of a longstanding multi-year
foreign income tax audit. Excluding the effect of this adjustment,
Covances effective tax rate for the year ended December 31, 2002 was
36.7%.

Net
income was $63.8 million for the year ended December 31, 2002 versus $47.9
million for 2001. On a pro forma basis, net income increased 50.6% or $19.3
million to $57.3 million for the year ended December 31, 2002 as compared to
$38.0 million for the corresponding 2001 period.

Year
Ended December 31, 2001 Compared with Year Ended December 31,
2000.  Net revenues decreased 1.4% to $855.9 million for 2001 from
$868.1 million for 2000, as the 2000 period includes revenues from
Covances biomanufacturing and packaging operations for the full year,
whereas 2001 only includes these revenues through the respective dates of
divestiture. Pro forma net revenues increased 8.5% to $800.3 million for 2001
from $737.3 million for 2000. Excluding the impact of foreign exchange rate
variances between both periods, pro forma net revenues increased 9.6% as
compared to 2000. Net revenues from Covances early development segment
grew 8.3%, or 10.0% excluding the impact of foreign exchange rate variances
between both periods, driven primarily by growth in our toxicology service
offering. Pro forma net revenues from Covances late-stage development
segment increased 8.7%, or 9.3% excluding the impact of foreign exchange
rate variances between both periods. Late-stage development revenue growth is
primarily attributable to our European central laboratory and our Phase IV
services.

Cost
of revenue decreased 1.2% to $618.1 million or 72.2% of net revenues for the
year ended December 31, 2001 from $625.6 million or 72.1% of net revenues
for the corresponding 2000 period. Gross margins were 27.8% for the year ended
December 31, 2001 and 27.9% for the corresponding 2000 period.

Overall,
selling, general and administrative expenses decreased 3.0% to $127.2 million
for 2001 from $131.2 million for 2000. As a percentage of net revenues, selling,
general and administrative expenses decreased to 14.9% for 2001 from 15.1% for
2000.

Depreciation
and amortization decreased 12.0% to $47.7 million or 5.6% of net revenues for
2001 from $54.2 million or 6.2% of net revenues for 2000, due primarily to
the divestiture of our capital intensive biomanufacturing and packaging
businesses in the first half of 2001.

In
June 2001, Covance announced plans to reorganize its internet initiatives
subsidiary, Nexigent, integrating Nexigents newly developed clinical
trials service offerings into Covances core business and reducing
Nexigents infrastructure. Under the plan, certain of Nexigents
service offerings were to continue to be marketed by Covances core
business units. Covance recorded a pre-tax restructuring charge in the
second quarter of 2001, totaling approximately $8.2 million ($5.0 million
net of tax). The charge consisted of approximately $6.5 million in asset
write-offs in June 2001, and approximately $1.6 million in severance and related
benefits in connection with the elimination of approximately 30 redundant
Nexigent positions. Severance payments began in August 2001 and continued into
2002. Approximately $0.7 million of the severance liability remained accrued at
December 31, 2001.

Income
from operations increased 22.5% to $54.7 million for the year ended December 31,
2001 from $44.6 million for the corresponding 2000 period. Income from
operations from Covances early development segment increased $1.6 million
or 3.5% to $48.0 million or 15.4% of net revenues for the year ended December
31, 2001 from $46.3 million or 16.1% of net revenues for the corresponding 2000
period. Income from operations from Covances late-stage development
segment increased $7.6 million or 29.8% to $33.2 million or 6.1% of net revenues
for the year ended December 31, 2001 from $25.6 million or 4.4% of net revenues
for the corresponding 2000 period.

15



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##### 

Pro
forma income from operations increased 25.1% to $60.5 million for the year ended
December 31, 2001 from $48.4 million for 2000. As a percentage of pro forma net
revenues, pro forma income from operations increased to 7.6% for the year ended
December 31, 2001 from 6.6% for 2000. Pro forma income from operations from
Covances early development segment totaled $48.6 million and $47.0
million, for the years ended December 31, 2001 and 2000, respectively. Excluding
the impact of our bioanalytical service offering, early development operating
income growth is 11.6%. Pro forma income from operations from Covances
late-stage development segment totaled $38.4 million and $27.6 million for the
years ended December 31, 2001 and 2000, respectively. The increase in late-stage
development pro forma operating income was due to the return to profitability
experienced in Phase II/III clinical, margin growth in Phase IV services and
stronger European central laboratory margins and volume experienced during 2001,
which offset lower margins and volume in our North American central laboratory
during 2001.

Other
expense, net includes a $30.8 million net pre-tax gain on the sales of Packaging
and Biomanufacturing in 2001. Excluding this gain, other expense, net decreased
$12.5 million to $7.1 million for 2001 from $19.6 million for 2000, primarily
due to a decrease in interest expense of $12.1 million resulting from a decrease
in the weighted average borrowings under our long-term credit facility resulting
from the divestitures as previously mentioned, as well as positive cash flows in
2001.

Covances
effective tax rate decreased to 38.9% for 2001 from 39.0% for 2000.

Net
income was $47.9 million for the year ended December 31, 2001 versus $15.2
million for 2000. Pro forma net income increased 35.5% to $35.2 million for the
year ended December 31, 2001 from $26.0 million for the corresponding 2000
period.

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, and (4) 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 tables present unaudited quarterly operating results of Covance for
each of the eight most recent fiscal quarters during the period ended December
31, 2002. The quarterly information provided in the first table below is on an
as reported basis. The information in the second table below has
been presented on a pro forma basis.

In
the opinion of Covance, the information in the first table 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.

16



---



##### 

|                                    | Quarter Ended
|----------------------------------- | -------------
|
|
|                                   
|Net revenues                        |              
|Reimbursable out-of-pockets         |              
|                                    |              
|Total revenues                      |              
|                                    |              
|Costs and expenses:                 |              
|Cost of revenue (including          |              
|reimbursable expenses)              |              
|Selling, general and administrative |              
|Depreciation and amortization       |              
|Restructuring charge                |              
|                                    |              
|Total                               |              
|                                    |              
|Income from operations              |              
|Other expense (income), net         |              
|                                    |              
|Income (loss) before taxes          |              
|Taxes on income                     |              
|                                    |              
|Net income (loss)                   |              
|                                    |              
|Basic earnings (loss) per share     |              
|Diluted earnings (loss) per share   |              

The
quarterly information below is presented on a pro forma basis, and reflects: 1)
the exclusion of a $6.5 million reduction in our income tax reserve and
provision due to a change in estimate recorded in the third quarter of 2002; 2)
the divestiture of Packaging and Biomanufacturing as if these transactions had
occurred on December 31, 2000; 3) the exclusion of the impact of a restructuring
charge in the second quarter of 2001; and 4) the exclusion of goodwill
amortization in the 2001 periods in accordance with the adoption of FASB
Statement No. 142. See Note 14 to the consolidated financial statements included
elsewhere in this Annual Report.

|                                     | Quarter Ended
|------------------------------------ | -------------
|
|
|
|
|                                    
|Total revenues:                      |              
|Early Development                    |              
|Late-stage Development               |              
|Reimbursable out-of-         pockets |              
|Total                                |              
|                                    
|Income from operations:              |              
|Early Development                    |              
|Late-stage Development               |              
|Other                                |              
|Total                                |              
|                                    
|Operating income %                   |              
|Other expense, net                   |              
|Income before taxes                  |              
|Taxes on income                      |              
|Net income                           |              
|Diluted earnings per share           |              

17



---



##### 

Liquidity and Capital Resources

Covance
has a centralized domestic cash management function whereby cash received from
operations is generally swept daily to a centrally managed concentration
account. Cash disbursements for operations are funded as needed from the
concentration account. From time to time excess cash balances are maintained at
Covance, generally for specific cash requirements.

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 June 28, 2001, Covance replaced its credit
facility with a new $150.0 million senior revolving credit facility (the
Credit Facility). Covance believes cash from operations and
available borrowings under the Credit Facility will provide sufficient liquidity
for the foreseeable future. At December 31, 2002, there were no outstanding
borrowings and $1.6 million of outstanding letters of credit under the Credit
Facility. At December 31, 2002, Covance has a remaining availability under the
Credit Facility of $148.4 million of which $23.4 million remains available for
letters of credit. Interest on all outstanding borrowings under the Credit
Facility is based upon the London Interbank Offered Rate (LIBOR)
plus a margin and approximated 3.28% per annum for the year ended December 31,
2002. Costs associated with replacing the previous credit facility in June 2001,
consisting primarily of bank fees totaling $1.7 million, are being amortized to
interest expense over the three year facility term. The Credit Facility contains
various covenants, which among other things, restrict certain uses of cash such
as certain restrictions on its ability to pay cash dividends on the Covance
common stock. At December 31, 2002, Covance was in compliance with the terms of
its Credit Facility. Commitment fees for the year ended December 31, 2002 under
the Credit Facility were 0.5 percent of the undrawn balance of the Credit
Facility and approximated $0.7 million. 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.

As
discussed in Note 10 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 its offices and
laboratory facilities, as follows:

| | Year Ending December 31, |         
| | ------------------------ | --------
|
|
| | 2003                     | $ 29,487
| | 2004                     | $ 25,440
| | 2005                     | $ 19,382
| | 2006                     | $ 15,798
| | 2007                     | $ 13,607
| | 2008 and beyond          | $ 40,139

During
the year ended December 31, 2002, Covances operations provided net cash of
$127.8 million, an increase of $61.1 million from the corresponding 2001 amount.
The change in net operating assets used $8.7 million in cash during 2002,
primarily due to a decrease in unearned revenue, while this net change used
$20.4 million in cash during 2001, primarily due to an increase in inventory and
a decrease in accounts payable and accrued expenses. Covances ratio of
current assets to current liabilities was 1.61 at December 31, 2002 and 1.43 at
December 31, 2001.

Net
days sales outstanding (DSOs) at both December 31, 2002 and 2001
were 41 days. DSOs have historically followed a seasonal pattern whereby they
are generally at their lowest levels at year end and increase during the first
six to nine months of the year, before returning to their seasonally lower
levels at year end. The impact upon liquidity from a one day change in DSO is
approximately $2 million in cash flow.

Investing
activities for the year ended December 31, 2002 used $69.6 million compared to
$78.1 million for the corresponding 2001 period, excluding the $251.1 million in
proceeds from the sales of Packaging and Biomanufacturing in the first half of
2001. Capital spending for 2002 totaled $66.8 million, and was primarily for the
expansion of Covances toxicology capacity in Madison, Wisconsin, expansion
and enhancement of our Harrogate, England facility, outfitting of new
facilities, purchase of new equipment, upgrade of existing equipment and
computer equipment and software for newly hired employees. Investing activities
for 2002 also include the July 2002 acquisition of Virtual Central Laboratory
b.v. for a gross cash payment of $3.0 million. Capital spending for the corresponding

18



---



##### 

2001 period totaled $78.1 million, and included $19.8
million for the purchase of land at Covances Vienna, Virginia facility which had
previously been under lease. The remainder of capital spending during 2001 was primarily
for outfitting of new facilities, purchase of new equipment, upgrade of existing
equipment and computer equipment and software for newly hired employees.

Free
cash flow (operating cash flow less capital expenditures) for 2002 was $61.1
million, up $72.4 million from ($11.4 million) during the corresponding 2001
period, as a result of our strong 2002 earnings and improved working capital
management.

Financing
activities for the year ended December 31, 2002 used $17.8 million and consisted
of the purchase of the remaining 1,005,000 shares of common stock for an
aggregate cost of $16.6 million, pursuant to a Board of Directors authorized
3,000,000 share buyback program, and repayments under the Credit Facility
totaling $15.0 million, offset by $13.9 million received from stock option
exercises and employee contributions to Covances noncompensatory employee
stock purchase plan. Financing activities for the year ended December 31, 2001
used $211.6 million, and primarily consisted of repayments under the Credit
Facility totaling $209.0 million, and repayment of the Packaging mortgage totaling
$18.7 million, offset by $16.3 million received from stock option exercises and
employee contributions to Covances noncompensatory employee stock purchase
plan.

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 Pronouncements

On
December 31, 2002, the Financial Accounting Standards Board issued FASB Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure. Statement
No. 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition to Statement No. 123's fair value method of
accounting for stock-based employee compensation for an entity that voluntarily changes
to the fair value based method of accounting for stock-based employee compensation.
Statement No. 148 also requires prominent disclosure of the effects of an entity's
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
Covance intends to continue to follow the disclosure-only provisions of FASB
Statement No. 123 and, accordingly, will continue to apply Accounting Principles
Board Opinion No. 25 and its related interpretations in accounting for its plans. The
adoption of Statement No. 148 will have no impact on Covance's results of operations,
financial position or cash flows.

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 profitability of its clinical development services and to increase
order volume in central laboratory and commercialization services, and continued
growth in demand for bioanalytical services and Covances ability to
provide these services on a large scale basis, and other factors described in
Covances filings with the Securities and Exchange Commission, including,
without limitation, this Annual Report on Form 10-K.

19



---



##### 

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 could decrease the need for
the services we provide.

Governmental
agencies throughout the world, but particularly 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, could eliminate or
substantially reduce the need 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.

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

Any
failure on our part to comply with applicable regulations could result in the
termination of on-going research or sales and marketing projects or the
disqualification of data for submission to regulatory authorities. For example,
if we were to fail to verify that patient participants were fully informed and
have fully consented to a particular clinical trial, 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:

| |  | the
failure of products to satisfy safety requirements;
|- |  | -------------------------------------------------------

| |  | unexpected
or undesired results of the products;
|- |  | ------------------------------------------------

| |  | insufficient
patient enrollment;
|- |  | --------------------------------

| |  | insufficient
investigator recruitment;
|- |  | --------------------------------------

| |  | the
client's decision to terminate the development of a product or to end a particular study;
and
|- |  | -------------------------------------------------------------------------------------------------

| |  | our
failure to perform properly our duties under the contract.
|- |  | --------------------------------------------------------------

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 underprice 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 underprice our contracts or otherwise
overrun our cost estimates. Such underpricing 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 new
services.

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

20



---



##### 

Our quarterly operating results may vary.

Our
operating results may vary significantly from quarter to quarter and are
influenced by such factors as:

| |  | exchange
rate fluctuations;
|- |  | ---------------------------

| |  | the
commencement, completion or cancellation of large contracts;
|- |  | ----------------------------------------------------------------

| |  | the
progress of ongoing contracts;
|- |  | ----------------------------------

| |  | the
timing of and charges associated with completed acquisitions or other events; and
|- |  | -------------------------------------------------------------------------------------

| |  | changes
in the mix of our services.
|- |  | -----------------------------------

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. 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 outsource, our business could be
materially adversely affected.

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 contract research organizations, and universities and
teaching hospitals, although to a lesser degree. We compete on a variety of
factors, including:

| |  | 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 time-saving and accurate manner;
|- |  | ------------------------------------------------------------------------------------------

| |  | ability
to manage large-scale clinical trials both domestically and internationally;
|- |  | ------------------------------------------------------------------------------------

| |  | expertise
and experience in health economics and outcomes services; and
|- |  | -----------------------------------------------------------------------

| |  | size.
|- |  | -----

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. Covance took actions in 2000 to mitigate the effects of
this price competition; however, if market conditions were to deteriorate,
additional actions might be required in the future.

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 effect our financial results.

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:

21



---



##### 

| |  | difficulties
and expenses in connection with integrating the acquired companies and achieving the
expected benefits;
|- |  | --------------------------------------------------------------------------------------------------------------------

| |  | diversion
of managements attention from current operations;
|- |  | ------------------------------------------------------------

| |  | the
possibility that we may be adversely affected by risk factors facing the acquired
companies;
|- |  | ------------------------------------------------------------------------------------------------

| |  | acquisitions
could be dilutive to earnings, or in the event of acquisitions made through the issuance
of our common stock to the shareholders of the acquired company, dilutive to the
percentage of ownership of our existing stockholders;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | potential
losses resulting from undiscovered liabilities of acquired companies not covered by the
indemnification we may obtain from the seller;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

| |  | risks
of not being able to overcome differences in foreign business practices, language and
other cultural barriers in connection with the acquisition of foreign companies; and
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | loss
of key employees of the acquired companies.
|- |  | ------------------------------------------------

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.

Our revenues and earnings are exposed to exchange rate
fluctuations.

We
derive a large portion of our net revenues from international operations. For
the fiscal year ended December 31, 2002, we derived approximately 33% of our net
revenues from outside the United States. Our financial statements are
denominated in U.S. dollars. 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.

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, we face a range of potential
liabilities, For example:

| |  | errors
or omissions that create harm during a trial to study volunteers or after a trial to
consumers of the drug after regulatory approval of the drug;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | general
risks associated with Phase I facilities, including negative consequences from the
administration of drugs to clinical trial participants or the professional malpractice
of Phase I medical care providers;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | errors
or omissions arising from tests conducted for the agrochemical and food industries;
|- |  | ------------------------------------------------------------------------------------------

| |  | risks
that animals in breeding facilities may be infected with diseases that may be harmful
and even lethal to themselves and humans despite preventive measures contained in our
company policies for the quarantine and handling of imported animals; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | errors
and omissions during a trial that may undermine the usefulness of a trial or data from
the trial.
|- |  | --------------------------------------------------------------------------------------------------------

22



---



##### 

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, particularly to volunteers with life-threatening
illnesses. We believe that our risks in this area are generally reduced by the
following:

| |  | contract
provisions entitling us to be indemnified or entitling us to a limitation of liability;
|- |  | ------------------------------------------------------------------------------------------------

| |  | insurance
maintained by our clients, investigators, and by us; and
|- |  | ------------------------------------------------------------------

| |  | various
regulatory requirements we must follow in connection with our business.
|- |  | -------------------------------------------------------------------------------

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.

Reliance on air transportation.

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

Actions of animal rights extremists may affect our business.

Our
early development services utilize animals (predominantly rodents) in
preclinical testing of the safety and efficacy of drugs and also breed and sell
animals for biomedical research. 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.

Contaminations in our animal populations can damage our
inventory, harm our reputation for contaminant-free production and result in
decreased sales of research products.

It
is important that our research products be free of contaminants and disease. The
presence of contaminants or disease can distort or compromise the quality of
research results and result in the loss of animals. Contaminations could disrupt
our contaminant-free research products, harm our reputation for contaminant-free
production and have a material adverse effect on our financial condition,
results of operations and cash flows.

Item 7a. Quantitative and Qualitative Disclosures About
Market Risk

Our
$150.0 million credit facility is U.S. Dollar denominated and is not subject to
transaction or translation exposure. Interest on all outstanding borrowings
under this credit facility is based upon LIBOR plus a margin and approximated
3.28% per annum for the year ended December 31, 2002. At December 31, 2002 we
did not have any outstanding borrowings under our credit facility.

For
the year ended December 31, 2002, approximately 33% of our net revenues were
derived from our operations outside the United States. We do not engage in
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 for a more
detailed discussion of our foreign currency risks and exposures.

23



---



##### 

Item 8.  Financial Statements and Supplementary Data

#### INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                | Page
|----------------------------------------------------------------------------------------------- | ----
|                                                                                               
|Report of Ernst & Young LLP -- Independent Auditors                                             | 25  
|                                                                                               
|Report of PricewaterhouseCoopers LLP -- Independent Accountants                                 | 26  
|                                                                                               
|Consolidated Balance Sheets -- December 31, 2002 and 2001                                       | 27  
|                                                                                               
|Consolidated Statements of Income -- Years ended December 31, 2002, 2001 and 2000               | 28  
|                                                                                               
|Consolidated Statements of Cash Flows -- Years ended December 31, 2002, 2001 and 2000           | 29  
|                                                                                               
|Consolidated Statements of Stockholders' Equity -- Years ended December 31, 2002, 2001 and 2000 | 30  
|                                                                                               
|Notes to Consolidated Financial Statements                                                      | 31  

24



---



##### 

Report of Independent Auditors

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, 2002 and 2001, and the related consolidated
statements of income, stockholders equity, and cash flows for the
years ended December 31, 2002 and 2001. 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 auditing standards generally accepted in
the 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 provided 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, 2002 and 2001, and the consolidated results of
their operations and their cash flows for the years
ended December 31, 2002 and 2001, in conformity with accounting principles
generally accepted in the United States.

As
discussed in Note 2 to the financial statements, the Company adopted Statement of
Financial Accounting Standards No. 142 in 2002.

| | 
| | 
| | 

MetroPark, New Jersey
January 17, 2003

25



---



##### 

Report of Independent Accountants

To the Board of Directors and Stockholders of Covance Inc.

In
our opinion, the consolidated statements of income, stockholders equity,
and of cash flows included in this Annual Report on Form 10-K present fairly, in
all material respects, the consolidated results of operations and cash flows of
Covance Inc. and its subsidiaries for the year ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of Covances
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provided a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Covance Inc. for any period
subsequent to December 31, 2000.PricewaterhouseCoopers LLP
Florham Park, NJ

January 30, 2001

26



---



##### 

COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001

|(Dollars in thousands)                                                               | 2002 |            | 2001 |           
|------------------------------------------------------------------------------------ | ---- | ---------- | ---- | ----------
|                                                                                    
|Assets                                                                               |      |            |      |           
|Current Assets:                                                                      |     
|Cash and cash equivalents                                                            |      | $   75,913 |      | $   35,404
|Accounts receivable                                                                  |      | 159,368    |      | 167,840   
|Unbilled services                                                                    |      | 39,073     |      | 40,895    
|Inventory                                                                            |      | 40,472     |      | 36,131    
|Deferred income taxes                                                                |      | 1,839      |      | 13,445    
|Prepaid expenses and other current assets                                            |      | 28,721     |      | 30,778    
|                                                                                     |      |            |      |           
|Total Current Assets                                                                 |      | 345,386    |      | 324,493   
|Property and equipment, net                                                          |      | 258,407    |      | 228,092   
|Goodwill, net                                                                        |      | 56,805     |      | 54,038    
|Other assets                                                                         |      | 16,405     |      | 5,405     
|                                                                                     |      |            |      |           
|Total Assets                                                                         |      | $ 677,003  |      | $ 612,028 
|                                                                                     |      |            |      |           
|                                                                                    
|Liabilities and Stockholders' Equity                                                 |     
|Current Liabilities:                                                                 |     
|Accounts payable                                                                     |      | $   24,123 |      | $   21,134
|Accrued payroll and benefits                                                         |      | 57,803     |      | 45,902    
|Accrued expenses and other current liabilities                                       |      | 40,828     |      | 40,296    
|Unearned revenue                                                                     |      | 91,681     |      | 116,712   
|Income taxes payable                                                                 |      | --         |      | 2,739     
|                                                                                     |      |            |      |           
|Total Current Liabilities                                                            |      | 214,435    |      | 226,783   
|Long-term debt                                                                       |      | --         |      | 15,000    
|Deferred income taxes                                                                |      | 16,432     |      | 11,613    
|Other liabilities                                                                    |      | 14,469     |      | 13,687    
|                                                                                     |      |            |      |           
|Total Liabilities                                                                    |      | 245,336    |      | 267,083   
|                                                                                     |      |            |      |           
|Commitments and Contingent Liabilities                                               |     
|Stockholders' Equity:                                                                |     
|Preferred stock --Par value $1.00 per share; 10,000,000 shares authorized; no shares |     
|issued and outstanding at December 31, 2002 and 2001                                 |      | --         |      | --        
|Common stock--Par value $0.01 per share; 140,000,000 shares authorized;              |     
|63,661,060 and 61,882,084 shares issued and outstanding, including those held        |     
|in treasury, at December 31, 2002 and 2001, respectively                             |      | 637        |      | 619       
|Paid-in capital                                                                      |      | 147,745    |      | 122,217   
|Retained earnings                                                                    |      | 319,109    |      | 255,326   
|Accumulated other comprehensive income (loss)--                                      |     
|Cumulative translation adjustment                                                    |      | 1,714      |      | (12,310   
|Treasury stock at cost (3,098,322 and 2,073,772 shares at December 31, 2002 and      |     
|2001, respectively)                                                                  |      | (37,538    | )    | (20,907   
|                                                                                     |      |            |      |           
|Total Stockholders' Equity                                                           |      | 431,667    |      | 344,945   
|                                                                                     |      |            |      |           
|Total Liabilities and Stockholders' Equity                                           |      | $ 677,003  |      | $ 612,028 
|                                                                                     |      |            |      |           

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

27



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##### 

COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|(Dollars in thousands, except per share data)     | 2002 |                 | 2001 |                 | 2000 |                
|------------------------------------------------- | ---- | --------------- | ---- | --------------- | ---- | ---------------
|                                                 
|Net revenues                                      |      | $      883,074  |      | $      855,877  |      | $      868,087 
|Reimbursable out-of-pockets                       |      | 41,623          |      | 40,167          |      | 48,298         
|                                                  |      |                 |      |                 |      |                
|Total revenues                                    |      | 924,697         |      | 896,044         |      | 916,385        
|                                                  |      |                 |      |                 |      |                
|Costs and expenses:                               |     
|Cost of revenue (including reimbursable expenses) |      | 654,088         |      | 658,286         |      | 673,893        
|Selling, general and administrative               |      | 133,508         |      | 127,211         |      | 131,158        
|Depreciation and amortization                     |      | 42,434          |      | 47,719          |      | 54,200         
|Special charges                                   |      | --              |      | 8,178           |      | 12,514         
|                                                  |      |                 |      |                 |      |                
|Total                                             |      | 830,030         |      | 841,394         |      | 871,765        
|                                                  |      |                 |      |                 |      |                
|Income from operations                            |      | 94,667          |      | 54,650          |      | 44,620         
|                                                  |      |                 |      |                 |      |                
|Other (income) expense, net:                      |     
|Interest expense                                  |      | 2,143           |      | 8,173           |      | 20,283         
|Interest income                                   |      | (1,312          | )    | (1,325          | )    | (1,232         
|Foreign exchange transaction losses               |      | 3,395           |      | 263             |      | 598            
|Net gain on sale of businesses                    |      | --              |      | (30,803         | )    | --             
|                                                  |      |                 |      |                 |      |                
|Other (income) expense, net                       |      | 4,226           |      | (23,692         | )    | 19,649         
|                                                  |      |                 |      |                 |      |                
|Income before taxes                               |      | 90,441          |      | 78,342          |      | 24,971         
|Taxes on income                                   |      | 26,658          |      | 30,442          |      | 9,735          
|                                                  |      |                 |      |                 |      |                
|Net income                                        |      | $        63,783 |      | $        47,900 |      | $        15,236
|                                                  |      |                 |      |                 |      |                
|                                                 
|Basic earnings per share                          |      | $1.06           |      | $0.81           |      | $0.27          
|Weighted average shares outstanding--basic        |      | 60,285,330      |      | 58,903,095      |      | 57,424,403     
|                                                 
|Diluted earnings per share                        |      | $1.03           |      | $0.79           |      | $0.27          
|Weighted average shares outstanding--diluted      |      | 61,641,367      |      | 60,430,060      |      | 57,492,384     

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

28



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##### 

COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|(Dollars in thousands)                                         | 2002 |            | 2001 |            | 2000 |          
|-------------------------------------------------------------- | ---- | ---------- | ---- | ---------- | ---- | ---------
|                                                              
|Cash flows from operating activities:                          |      |            |      |            |      |          
|Net income                                                     |      | $   63,783 |      | $   47,900 |      | $ 15,236 
|Adjustments to reconcile net income to net cash provided by    |     
|operating activities:                                          |     
|Depreciation and amortization                                  |      | 42,434     |      | 47,719     |      | 54,200   
|Stock issued under employee benefit and stock compensation     |     
|plans                                                          |      | 11,672     |      | 12,509     |      | 3,291    
|Deferred income tax provision (benefit)                        |      | 16,656     |      | 1,164      |      | (9,443   
|Net gain on sale of businesses                                 |      | --         |      | (30,803    | )    | --       
|Restructuring charge, net of cash paid                         |      | --         |      | 7,287      |      | 2,351    
|Other                                                          |      | 2,036      |      | 1,399      |      | 1,087    
|Changes in operating assets and liabilities, net of businesses |     
|acquired and sold:                                             |     
|Accounts receivable                                            |      | 9,054      |      | (25,798    | )    | (28,326  
|Unbilled services                                              |      | 1,822      |      | 746        |      | (13,488  
|Inventory                                                      |      | (4,341     | )    | (8,542     | )    | (4,489   
|Accounts payable                                               |      | 2,867      |      | (4,020     | )    | 2,597    
|Accrued liabilities                                            |      | 11,689     |      | (9,555     | )    | 13,080   
|Unearned revenue                                               |      | (25,175    | )    | 25,627     |      | 20,554   
|Income taxes payable                                           |      | (2,739     | )    | 2,334      |      | (2,449   
|Other assets and liabilities, net                              |      | (1,923     | )    | (1,184     | )    | (5,448   
|                                                               |      |            |      |            |      |          
|Net cash provided by operating activities                      |      | 127,835    |      | 66,783     |      | 48,753   
|                                                               |      |            |      |            |      |          
|Cash flows from investing activities:                          |     
|Capital expenditures                                           |      | (66,784    | )    | (78,136    | )    | (95,833  
|Acquisition of business, net of cash acquired                  |      | (2,796     | )    | --         |      | --       
|Contingent purchase price paid in connection with prior        |     
|acquisition                                                    |      | --         |      | --         |      | (909     
|Proceeds from sale of businesses                               |      | --         |      | 251,059    |      | --       
|Other, net                                                     |      | 11         |      | 73         |      | 1,208    
|                                                               |      |            |      |            |      |          
|Net cash (used in) provided by investing activities            |      | (69,569    | )    | 172,996    |      | (95,534  
|                                                               |      |            |      |            |      |          
|Cash flows from financing activities:                          |     
|Net (repayments) borrowings under revolving credit facility    |      | (15,000    | )    | (209,000   | )    | 34,000   
|Repayments of debt                                             |      | --         |      | (18,723    | )    | (9,071   
|Stock issued under employee stock purchase and option plans    |      | 13,874     |      | 16,303     |      | 3,928    
|Purchase of treasury stock                                     |      | (16,631    | )    | (146       | )    | (329     
|                                                               |      |            |      |            |      |          
|Net cash (used in) provided by financing activities            |      | (17,757    | )    | (211,566   | )    | 28,528   
|                                                               |      |            |      |            |      |          
|Net change in cash and cash equivalents                        |      | 40,509     |      | 28,213     |      | (18,253  
|Cash and cash equivalents, beginning of year                   |      | 35,404     |      | 7,191      |      | 25,444   
|                                                               |      |            |      |            |      |          
|Cash and cash equivalents, end of year                         |      | $   75,913 |      | $   35,404 |      | $   7,191
|                                                               |      |            |      |            |      |          

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

29



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##### 

COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

|(Dollars in thousands)          | CommonStock |                | Paid-inCapital |              | RetainedEarnings |             | AccumulatedOtherComprehensiveIncome (Loss) |                | ComprehensiveIncome |                | TreasuryStock |              | TotalStockholders'Equity
|------------------------------- | ----------- | -------------- | -------------- | ------------ | ---------------- | ----------- | ------------------------------------------ | -------------- | ------------------- | -------------- | ------------- | ------------ | ------------------------
|                               
|Balance, December 31, 1999      |             | $          590 |                | $     85,361 |                  | $   192,190 |                                            | $      (6,504  | )                   |                |               | $    (19,578 | )                       
|Comprehensive income:           |            
|Net income                      |             | --             |                | --           |                  | 15,236      |                                            | --             |                     | $      15,236  |               | --           |                         
|Currency translation adjustment |             | --             |                | --           |                  | --          |                                            | (8,434         | )                   | (8,434         | )             | --           |                         
|                                |             |                |                |              |                  |             |                                            |               
|Total comprehensive income      |             | --             |                | --           |                  | --          |                                            | --             |                     | $        6,802 |               | --           |                         
|                                |             |                |                |              |                  |             |                                            |               
|Shares issued under various     |            
|employee benefit and stock      |            
|compensation plans              |             | 8              |                | 7,211        |                  | --          |                                            | --             |                     |                |               | --           |                         
|Treasury stock, at cost         |             | --             |                | --           |                  | --          |                                            | --             |                     |                |               | (329         | )                       
|                                |             |                |                |              |                  |             |                                            |                |                     |                |               |              |                         
|                               
|Balance, December 31, 2000      |             | 598            |                | 92,572       |                  | 207,426     |                                            | (14,938        | )                   |                |               | (19,907      | )                       
|                               
|Comprehensive income:           |            
|Net income                      |             | --             |                | --           |                  | 47,900      |                                            | --             |                     | $      47,900  |               | --           |                         
|Currency translation adjustment |             | --             |                | --           |                  | --          |                                            | 2,628          |                     | 2,628          |               | --           |                         
|                                |             |                |                |              |                  |             |                                            |               
|Total comprehensive income      |             | --             |                | --           |                  | --          |                                            | --             |                     | $      50,528  |               | --           |                         
|                                |             |                |                |              |                  |             |                                           
|Shares issued under various     |            
|employee benefit and stock      |            
|compensation plans              |             | 11             |                | 15,643       |                  | --          |                                            | --             |                     |                |               | --           |                         
|Stock option exercises          |             | 10             |                | 14,002       |                  | --          |                                            | --             |                     |                |               | --           |                         
|Treasury stock, at cost         |             | --             |                | --           |                  | --          |                                            | --             |                     |                |               | (1,000       | )                       
|                                |             |                |                |              |                  |             |                                            |                |                     |                |               |              |                         
|                               
|Balance, December 31, 2001      |             | 619            |                | 122,217      |                  | 255,326     |                                            | (12,310        | )                   |                |               | (20,907      | )                       
|                               
|Comprehensive income:           |            
|Net income                      |             | --             |                | --           |                  | 63,783      |                                            | --             |                     | $      63,783  |               | --           |                         
|Currency translation adjustment |             | --             |                | --           |                  | --          |                                            | 14,024         |                     | 14,024         |               | --           |                         
|                                |             |                |                |              |                  |             |                                           
|Total comprehensive income      |             | --             |                | --           |                  | --          |                                            | --             |                     | $      77,807  |               | --           |                         
|                                |             |                |                |              |                  |             |                                           
|Shares issued under various     |            
|employee benefit and stock      |            
|compensation plans              |             | 9              |                | 14,349       |                  | --          |                                            | --             |                     |                |               | --           |                         
|Stock option exercises          |             | 9              |                | 11,179       |                  | --          |                                            | --             |                     |                |               | --           |                         
|Treasury stock, at cost         |             | --             |                | --           |                  | --          |                                            | --             |                     |                |               | (16,631      | )                       
|                                |             |                |                |              |                  |             |                                            |                |                     |                |               |              |                         
|                               
|Balance, December 31, 2002      |             | $          637 |                | $   147,745  |                  | $   319,109 |                                            | $        1,714 |                     |                |               | $    (37,538 | )                       
|                                |             |                |                |              |                  |             |                                            |                |                     |                |               |              |                         

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

30



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

1.  Organization

Covance
Inc. and its subsidiaries (Covance) is a leading drug development
services company providing a wide range of 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 Phase I clinical service
offerings. The second segment, late-stage development services, includes central
laboratory, clinical development, commercialization and other clinical support
services. Operations are principally focused in the United States and Europe.

2.  Summary of Significant Accounting Policies

Principles
of Consolidation

The
consolidated financial statements include the accounts of all entities
controlled by Covance, including through June 15, 2001, Covance Biotechnology
Services Inc. (Biomanufacturing), a majority owned business. All
significant intercompany accounts and transactions are eliminated.

Use
of Estimates

These
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States, which requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.

Reclassifications

Certain
prior period balances have been reclassified to conform with current year
presentation.

Foreign
Currencies

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

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 temporarily invested in money market funds.

Financial
Instruments

The
fair value of cash and cash equivalents, accounts receivable, accounts payable,
accrued expenses and long and short-term debt are not materially different than
their carrying amounts as reported at December 31, 2002 and 2001.

31



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

2.  Summary of Significant Accounting Policies (Continued)

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 minimal.

Inventory

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

Prepaid
Expenses and Other Current Assets

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 $13.3 million and $17.2 million at December 31, 2002
and 2001. See Note 2 Reimbursable Out-of-Pocket Expenses.

Property
and Equipment

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 range in term from
three to thirty years. 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
and Impairment of Goodwill

Effective
January 1, 2002, in accordance with the adoption of FASB Statement No. 142,
Goodwill and Other Intangible Assets, Covance ceased amortization of
goodwill. Prior to January 1, 2002, goodwill (investment costs in excess of the
fair value of net tangible and identifiable intangible assets acquired) was
capitalized and amortized on a straight-line basis over the period expected to
be benefited, which was generally twenty years or less, except for acquisitions
prior to 1996 which were being amortized over forty years. Had amortization
expense not been recorded for the years ended December 31, 2001 and 2000, the
impact on income from operations, net income and earnings per share would have
been an increase of $3.6 million, $2.9 million and $0.05 per share, respectively
in 2001 and $3.5 million, $2.8 million and $0.05 per share, respectively, in
2000. See Note 14 Unaudited 2001 and 2000 Pro Forma Financial
Information. Statement No. 142 also outlines the requirements for annual
goodwill impairment tests, and accordingly, Covance performs an annual test for
impairment of goodwill. The annual test for impairment performed for 2002 did
not identify any instances of impairment.

Impairment
of Long-Lived Assets

Effective
January 1, 2002, Covance assesses impairment of long-lived assets in accordance
with FASB Statement 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 that
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.

32



---



##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

2.  Summary of Significant Accounting Policies (Continued)

Revenue
Recognition

Covance
recognizes revenue either as services are performed or products are delivered,
depending upon 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. Service contracts generally take the form of fee-for-service or
fixed-price arrangements. In the case of fee-for-service contracts, revenue is
recognized as services are performed, based upon, for example, hours worked or
samples tested. For long-term fixed-price service contracts, revenue is
recognized as services are performed, with performance generally assessed using
output measures, such as units-of-work performed to date as compared to the
total units-of-work contracted. Changes in the scope of work generally result in
a renegotiation of contract pricing terms. Renegotiated amounts are not included
in net revenues until earned and realization is assured. Estimates of costs to
complete are made, as appropriate, to provide for losses expected on contracts.
Costs are not deferred in anticipation of contracts being awarded, but instead
are expensed as incurred. In some cases, for multi-year contracts a portion of
the contract fee is paid at the time the trial is initiated. These advances are
deferred and recognized as revenue as services are performed, as discussed
above. Additional payments may be made based upon the achievement of
performance-based milestones over the contract duration. 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. 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.

Unbilled
services are recorded for revenue recognized to date and relate to amounts that
are currently unbillable to the customer pursuant to contractual terms. In
general, amounts become billable upon the achievement of milestones or in
accordance with predetermined payment schedules. Unbilled services are billable
to customers within one year from the respective balance sheet date. Unearned
revenue is recorded for cash received from customers for which revenue has not
been recognized at the balance sheet date.

Costs
and Expenses

Cost
of revenue generally includes appropriate amounts necessary to complete the
revenue and earnings process and includes direct labor and related benefit
charges, other direct costs and an allocation of facility charges and
information technology costs and excludes depreciation and amortization. Also,
cost of revenue includes shipping and handling fees and reimbursable
out-of-pocket costs. Selling, general and administrative expenses primarily
consist of administrative payroll and related benefit charges, advertising and
promotional expenses, administrative travel and an allocation of facility
charges and information technology costs. Advertising expense is recognized as
incurred.

Taxes
on Income

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 6.

33



---



##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

2.  Summary of Significant Accounting Policies (Continued)

Covance
has established, and periodically reviews and reevaluates, an estimated income
tax reserve on its consolidated balance sheet to provide for the possibility of
adverse outcomes in tax proceedings. When matters are settled or when facts
indicate a material change in the probability or amount of the potential
exposure, Covance adjusts the carrying value of the related reserve. As a result
of favorable income tax developments, relating primarily to the settlement of a
longstanding multi-year foreign income tax audit, Covance reduced its income tax
reserve and provision by $6.5 million during 2002.

Comprehensive
Income

Covances
total comprehensive income represents net income plus the change in the
cumulative translation adjustment equity account for the periods presented.

Stock
Based Compensation

Covance
grants stock options for a fixed number of shares to employees with an exercise
price equal to the fair value of the shares at the date of grant. Covance
accounts for stock option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related
Interpretations. Under APB 25, when stock options are issued with an exercise
price equal to the market price of the underlying stock on the date of grant, no
compensation expense is recognized.

Earnings
Per Share (EPS)

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 FASB Statement No. 128, Earnings Per Share.

In
computing diluted EPS for the years ended December 31, 2002, 2001 and 2000, the
denominator was increased by 1,356,037 shares, 1,526,965 shares and 67,981
shares, respectively, representing the dilutive effect of stock options
outstanding at December 31, 2002, 2001 and 2000, 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, 2002 were options to purchase 3,035,281 shares of common stock at prices
ranging from $18.98 to $29.13 per share because the exercise prices of such
options were greater than the average market price of Covances common
stock during 2002. Excluded from the computation of diluted EPS for the year
ended December 31, 2001 were options to purchase 3,242,366 shares of common
stock at prices ranging from $17.78 to $29.13 per share because the exercise
prices of such options were greater than the average market price of
Covances common stock during 2001. Excluded from the computation of
diluted EPS for the year ended December 31, 2000 were options to purchase
6,966,550 shares of common stock at prices ranging from $10.75 to $29.13 per
share because the exercise prices of such options were greater than the average
market price of Covances common stock during 2000.

Reimbursable
Out-of-Pocket Expenses

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 we are reimbursed at cost, without mark-up
or profit. Effective January 1, 2002, in connection with the required
implementation of Financial Accounting Standards Board Emerging Issues Task
Force Rule No. 01-14 (EITF 01-14), Income Statement
Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred, amounts paid to volunteers and other out-of-

34



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

2.  Summary of Significant Accounting Policies (Continued)

pocket costs are now included in cost of revenue, while the
reimbursements received are reported as 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 where Covance acts as an agent on behalf of the pharmaceutical
company sponsors with regard to investigator payments.

Supplemental
Cash Flow Information

Cash
paid for interest for the years ended December 31, 2002, 2001 and 2000 totaled
$1.2 million, $9.0 million and $19.9 million, respectively. Cash paid for income
taxes for the years ended December 31, 2002, 2001 and 2000 totaled $24.0
million, $24.0 million and $21.4 million, respectively.

Recently
Issued Accounting Standards

On
December 31, 2002, the Financial Accounting Standards Board issued FASB Statement
No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure.
Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition to Statement No. 123's
fair value method of accounting for stock-based employee compensation for an entity
that voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. Statement No. 148 also requires prominent disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. Covance intends to continue to follow the disclosure-only
provisions of FASB Statement No. 123 and, accordingly, will continue to apply
Accounting Principles Board Opinion No. 25 and its related interpretations in
accounting for its plans. The adoption of Statement No. 148 will have no impact on
Covance's results of operations, financial position or cash flows.

3.  Property and Equipment

Property
and equipment at December 31, 2002 and 2001 consist of the following:

| | 2002                                            |                 | 2001 |                  
| | ----------------------------------------------- | --------------- | ---- | -----------------
|
| | Property and equipment at cost:                 |                 |      |                  
| | Land                                            | $        24,390 |      | $           3,711
| | Buildings and improvements                      | 175,153         |      | 116,214          
| | Equipment and vehicles                          | 144,734         |      | 127,149          
| | Computer hardware and software                  | 136,590         |      | 105,720          
| | Furniture, fixtures & leasehold improvements    | 66,458          |      | 71,936           
| | Construction-in-progress                        | 12,046          |      | 64,827           
| |                                                 |                 |      |                  
| |                                                 | 559,371         |      | 489,557          
| | Less: Accumulated depreciation and amortization | (300,964        | )    | (261,465         
| |                                                 |                 |      |                  
| | Property and equipment, net                     | $      258,407  |      | $       228,092  
| |                                                 |                 |      |                  

Depreciation
and amortization expense aggregated $42.4 million, $44.0 million and $49.5
million for 2002, 2001 and 2000, respectively.

4.  Goodwill

Effective
January 1, 2002, in accordance with the adoption of FASB Statement No. 142,
Goodwill and Other Intangible Assets, Covance ceased amortization of
goodwill. Goodwill, net of accumulated amortization of $17.7 million, aggregated
$56.8 million and $54.0 million at December 31, 2002 and 2001, respectively.
Amortization expense aggregated $3.7 million and $4.5 million for 2001 and 2000,
respectively. Early Development segment goodwill, net of amortization totaled
$6.7 million at both December 31, 2002 and 2001. Late-Stage Development segment
goodwill, net of accumulated amortization totaled $50.1 million and $47.3
million at December 31, 2002 and 2001, respectively.

35



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

5.  Acquisitions and Divestitures

In
July 2002, Covance acquired the stock of Virtual Central Laboratory b.v. (now
known as Covance Virtual Central Laboratory b.v.) for a cash payment of $3.0
million. The goodwill resulting from this transaction aggregated $2.7 million.

On
June 15, 2001, Covance sold its biomanufacturing business (Biomanufacturing)
to Akzo Nobels pharma business unit, Diosynth, for gross proceeds of $113.6
million, subject to post-closing adjustments, including finalization of the closing
balance sheet and earnout provision, in accordance with the Stock Purchase Agreement
between Covance and Akzo Nobel, which remains to be resolved between the parties.
Covance recognized a loss of $7.5 million ($4.5 million after tax) from this
transaction. Covance used the net proceeds from the sale of approximately $95 million to
reduce borrowings under its senior revolving credit facility. See Note 14.

On
February 14, 2001, Covance sold its pharmaceutical packaging business (Packaging)
to Fisher Scientific International Inc. for gross proceeds of $137.5 million. Covance
recognized a pre-tax gain of $38.4 million ($24.3 million after tax) from this
transaction. Covance used the net proceeds from the sale to repay the $18.5 million
balance outstanding on the mortgage on its North American packaging facility and the
remaining net proceeds of approximately $95 million were used to reduce borrowings under
its senior revolving credit facility. See Note 14.

6.  Taxes on Income

The
components of income before taxes and the related provision (benefit) for taxes on income
for 2002, 2001 and 2000 are as follows:

| | 2002                                             |  | 2001           |  | 2000           | 
| | ------------------------------------------------ |  | -------------- |  | -------------- | 
| | Income before taxes and equity investee results: |  |                |  |                | 
| | Domestic                                         |  | $      53,564  |  | $      17,090  | 
| | International                                    |  | 36,877         |  | 61,252         | 
| |                                                  |  |                |  |                | 
| | Total                                            |  | $      90,441  |  | $      78,342  | 
| |                                                  |  |                |  |                | 
| | Federal income taxes:                            | 
| | Current provision                                |  | $        6,251 |  | $        8,839 | 
| | Deferred provision (benefit)                     |  | 6,162          |  | 1,549          | 
| | International income taxes:                      | 
| | Current provision                                |  | 8,501          |  | 15,835         | 
| | Deferred (benefit) provision                     |  | 1,229          |  | 409            | 
| | State and other income taxes:                    | 
| | Current provision                                |  | 3,635          |  | 3,589          | 
| | Deferred provision (benefit)                     |  | 880            |  | 221            | 
| |                                                  |  |                |  |                | 
| | Net income tax provision                         |  | $      26,658  |  | $      30,442  | 
| |                                                  |  |                |  |                | 

The
differences between the provision for income taxes and income taxes computed using the
Federal statutory income tax rate for 2002, 2001 and 2000 are as follows:

| | 2002                                          |  | 2001 |   | 2000 |  
| | --------------------------------------------- |  | ---- | - | ---- | -
| | Taxes at statutory rate                       |  | 35.0 | % | 35.0 | %
| | State and local taxes, net of Federal benefit |  | 3.2  |   | 3.2  |  
| | Goodwill amortization                         |  | --   |   | 1.0  |  
| | Impact of international operations            |  | (3.5 | ) | (2.4 | )
| | Reduction of income tax reserve               |  | (7.2 | ) | --   |  
| | Other, net                                    |  | 2.0  |   | 2.1  |  
| |                                               |  |      |   |      |  
| | Total                                         |  | 29.5 | % | 38.9 | %
| |                                               |  |      |   |      |  

36



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

6.  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, 2002 and 2001 are as follows:

| | 2002                                    |                 | 2001 |               
| | --------------------------------------- | --------------- | ---- | --------------
| | Current deferred tax assets:            |                 |      |               
| | Liabilities not currently deductible    | $           727 |      | $      11,536 
| | Net operating loss carryforwards        | 657             |      | 964           
| | Other                                   | 455             |      | 945           
| |                                         |                 |      |               
| | Current deferred tax assets             | $        1,839  |      | $      13,445 
| |                                         |                 |      |               
| | Noncurrent deferred tax assets:        
| | Liabilities not currently deductible    | $        4,265  |      | $        4,420
| | Less: Valuation allowance               | (1,212          | )    | (1,212        
| |                                         |                 |      |               
| | Net noncurrent deferred tax assets      | 3,053           |      | 3,208         
| | Noncurrent deferred tax liabilities:   
| | Property and equipment                  | (19,485         | )    | (14,821       
| |                                         |                 |      |               
| | Net noncurrent deferred tax liabilities | $     (16,432   | )    | $     (11,613 
| |                                         |                 |      |               

During
the third quarter of 2002, Covance recognized a tax benefit of $6.5 million resulting
from favorable income tax developments, relating primarily to the settlement of a
longstanding foreign income tax audit.

At
December 31, 2002 and 2001, Covance has net operating loss carryforwards of
approximately $1.6 million and $2.4 million, respectively, which expire in the years
2009 through 2020 and are available to offset future Federal taxable income.

Covance
currently provides income taxes on the earnings of foreign subsidiaries to the extent
those earnings are taxable or are expected to be remitted. Taxes have not been provided
on the remaining $88.9 million of accumulated foreign unremitted earnings because those
earnings are expected to remain invested indefinitely. 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.

7.  Short and Long-Term Debt

On
June 28, 2001, Covance replaced its credit facility with a new $150.0 million senior
revolving credit facility (the Credit Facility) which expires in June 2004.
At December 31, 2002 there were no outstanding borrowings and $1.6 million of
outstanding letters of credit, under the Credit Facility. At December 31, 2001 there was
$15.0 million of outstanding borrowings and $0.9 million of outstanding letters of
credit, under the Credit Facility. At December 31, 2002, Covance has a remaining
availability under the Credit Facility of $148.4 million of which $23.4 million remains
available for letters of credit. Interest on all outstanding borrowings under Covances
Credit Facility is based upon the London Interbank Offered Rate (LIBOR) plus
a margin and approximated 3.28%, 7.21% and 7.50% per annum for the years ended December
31, 2002, 2001 and 2000, respectively. Costs associated with replacing the senior
revolving credit facility, consisting primarily of bank fees totaling $1.7 million, are
being amortized over the three year term of the Credit Facility. The Credit Facility
contains various covenants, which among other things, restrict certain uses of cash such
as certain restrictions on Covances ability to pay cash dividends on the Covance
common stock. At December 31, 2002, Covance was in compliance with the terms of its
Credit Facility. Commitment fees paid during 2002, 2001 and 2000, which under the prior
senior revolving credit facility were 0.5 percent of the revolving committed amount, and
under the new Credit Facility were 0.5 percent of the undrawn balance of the Credit
Facility, approximated $0.7 million, $1.0 million, and $0.3 million, respectively. 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.

37



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

7.  Short and Long-Term Debt (Continued)

Covance
used the net proceeds from the 2001 sales of Packaging and Biomanufacturing of
approximately $180.0 million to reduce borrowings under its senior revolving credit
facility. In addition, the $18.5 million mortgage debt associated with the North
American packaging facility and the Biomanufacturing $10.0 million short-term revolving
credit facility were repaid at the time of the divestitures.

8.  Employee Benefit Plans

Covance
sponsors various pension and other post-retirement benefit plans.

Defined
Contribution Plans

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 $12.3 million, $12.4
million and $13.3 million for 2002, 2001 and 2000, respectively.

Defined
Benefit Pension Plans

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 UK plans are funded. Covances
funding policy has been to contribute annually a fixed percentage of the eligible
employees salary at least equal to the local statutory funding requirements.
Pension plan assets are administered by the plans trustees and are principally
invested in equity and fixed income securities. The components of net periodic pension
expense for these plans for 2002, 2001 and 2000 are as follows:

|                                            | United Kingdom Plans |          | German Plan |         
|------------------------------------------- | -------------------- | -------- | ----------- | --------
|
|Components of net periodic pension expense: |                      |          |             |         
|Service cost                                |                      | $  3,844 |             | $  3,924
|Interest cost                               |                      | 2,905    |             | 2,562   
|Expected return on plan assets              |                      | (2,518   | )           | (2,484  
|Amortization of net transition asset        |                      | (59      | )           | (58     
|Net (gain)/loss from earlier periods        |                      | 201      |             | --      
|Participant contributions                   |                      | (1,392   | )           | (1,289  
|                                            |                      |          |             |         
|Net periodic pension cost                   |                      | $  2,981 |             | $  2,655
|                                            |                      |          |             |         

The
change in the projected benefit obligation and plan assets and a reconciliation of the
funded status of the plans to the amounts reported in the consolidated balance sheets as
of December 31, 2002 and 2001 is as follows:

|                                        | United Kingdom Plans |              | German Plan |             
|--------------------------------------- | -------------------- | ------------ | ----------- | ------------
|
|Change in Projected Benefit Obligation: |                      |              |             |             
|Benefit obligation beginning of year    |                      | $     44,439 |             | $     42,055
|Service cost                            |                      | 3,844        |             | 3,924       
|Interest cost                           |                      | 2,905        |             | 2,562       
|Actuarial loss (gain)                   |                      | 5,533        |             | (2,961      
|Benefits paid                           |                      | (472         | )           | (648        
|Foreign currency exchange rate changes  |                      | 5,607        |             | (493        
|                                        |                      |              |             |             
|Benefit obligation end of year          |                      | $     61,856 |             | $     44,439
|                                        |                      |              |             |             

38



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

8.  Employee Benefit Plans (Continued)

|                                                | United Kingdom Plans |                | German Plan |                 
|----------------------------------------------- | -------------------- | -------------- | ----------- | ----------------
|
|Change in Fair Value of Assets:                 |                      |                |             |                 
|Fair value of plan assets beginning of year     |                      | $       36,622 |             | $       38,980  
|Covance contributions                           |                      | 15,632         |             | 2,523           
|Employee contributions                          |                      | 1,392          |             | 1,289           
|Actual return on plan assets                    |                      | (7,229         | )           | (5,030          
|Benefits paid                                   |                      | (472           | )           | (648            
|Foreign currency exchange rate changes          |                      | 4,585          |             | (492            
|                                                |                      |                |             |                 
|Fair value of plan assets end of year           |                      | $       50,530 |             | $       36,622  
|                                                |                      |                |             |                 
|                                               
|Reconciliation of Funded Status of the Plans to |                     
|Balance Sheet Position:                         |                     
|Funded status - over (under) funded             |                      | $      (11,326 | )           | $        (7,817 
|Unrecognized net actuarial loss                 |                      | 24,541         |             | 7,313           
|                                                |                      |                |             |                 
|Balance sheet position - prepaid (accrued)      |                      | $       13,215 |             | $           (504
|                                                |                      |                |             |                 
|                                               
|Assumptions Used:                               |                     
|Discount rate                                   |                      | 6.00           | %           | 6.50            
|Expected rate of return on assets               |                      | 6.00           | %           | 6.50            
|Salary increases                                |                      | 3.50           | %           | 3.50            

Supplemental
Executive Retirement Plan

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, 2002, 2001 and 2000 are as follows:

|                                         | 2002 |                  | 2001 |                  | 2000 |                 
|---------------------------------------- | ---- | ---------------- | ---- | ---------------- | ---- | ----------------
|Components of Net Periodic Pension Cost: |      |                  |      |                  |      |                 
|Service cost                             |      | $            500 |      | $            424 |      | $            496
|Interest cost                            |      | 300              |      | 170              |      | 138             
|                                         |      |                  |      |                  |      |                 
|Net periodic pension cost                |      | $            800 |      | $            594 |      | $            634
|                                         |      |                  |      |                  |      |                 

The
change in the projected benefit obligation and the reconciliation of such amount to that
reported in the consolidated balance sheets as of December 31, 2002 and 2001 is as
follows:

|                                        | 2002 |                 | 2001 |                
|--------------------------------------- | ---- | --------------- | ---- | ---------------
|Change in Projected Benefit Obligation: |      |                 |      |                
|Benefit obligation beginning of year    |      | $         3,690 |      | $         2,765
|Service cost                            |      | 442             |      | 424            
|Interest cost                           |      | 300             |      | 176            
|Actuarial loss                          |      | 798             |      | 325            
|                                        |      |                 |      |                
|Benefit obligation end of year          |      | $         5,230 |      | $         3,690
|                                        |      |                 |      |                

39



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

8.  Employee Benefit Plans (Continued)

|                                               | 2002 |                 | 2001 |                
|---------------------------------------------- | ---- | --------------- | ---- | ---------------
|Reconciliation of Funded Status of the Plan to |      |                 |      |                
|Balance Sheet Position:                        |     
|Funded status - over (under) funded            |      | $        (5,230 | )    | $        (3,690
|Unrecognized actuarial net loss (gain)         |      | 595             |      | (145           
|                                               |      |                 |      |                
|Accrued benefit liability                      |      | $        (4,635 | )    | $        (3,835
|                                               |      |                 |      |                
|                                              
|Assumptions Used:                              |     
|Discount rate                                  |      | 6.75            | %    | 7.25           
|Salary increases                               |      | 4.50            | %    | 4.75           

Post-Employment
Retiree Health and Welfare Plan

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 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 benefits expense for 2002, 2001 and 2000 is as follows:

|                                                          | 2002 |                    | 2001 |                    | 2000 |                   
|--------------------------------------------------------- | ---- | ------------------ | ---- | ------------------ | ---- | ------------------
|Components of Net Periodic Post-retirement Benefits Cost: |      |                    |      |                    |      |                   
|Service cost                                              |      | $              190 |      | $              175 |      | $              160
|Interest cost                                             |      | 328                |      | 319                |      | 309               
|Net amortization and deferral                             |      | (318               | )    | (320               | )    | (322              
|                                                          |      |                    |      |                    |      |                   
|Net periodic post-retirement benefits cost                |      | $              200 |      | $              174 |      | $              147
|                                                          |      |                    |      |                    |      |                   

The
change in the projected post-retirement benefit obligation and the reconciliation of
such amount to that reported in the consolidated balance sheets as of December 31, 2002
and 2001 is as follows:

|                                               | 2002 |                   | 2001 |                  
|---------------------------------------------- | ---- | ----------------- | ---- | -----------------
|Change in Projected Benefit Obligation:        |      |                   |      |                  
|Benefit obligation beginning of year           |      | $           4,520 |      | $           4,260
|Service cost                                   |      | 190               |      | 175              
|Interest cost                                  |      | 328               |      | 319              
|Participant contributions                      |      | 89                |      | 79               
|Actuarial loss                                 |      | 360               |      | 126              
|Benefits paid                                  |      | (500              | )    | (439             
|                                               |      |                   |      |                  
|Benefit obligation end of year                 |      | $           4,987 |      | $           4,520
|                                               |      |                   |      |                  
|                                              
|Reconciliation of Funded Status of the Plan to |     
|Balance Sheet Position:                        |     
|Funded status - over (under) funded            |      | $         (4,987  | )    | $         (4,520 
|Unrecognized actuarial net loss                |      | 1,371             |      | 1,112            
|Unrecognized prior service cost                |      | (787              | )    | (1,184           
|                                               |      |                   |      |                  
|Accrued benefit liability                      |      | $         (4,403  | )    | $         (4,592 
|                                               |      |                   |      |                  
|                                              
|Assumptions Used:                              |     
|Discount rate                                  |      | 6.75              | %    | 7.25             
|Health care cost trend rate                    |      | 9.90              | %(a) | 9.50             

_______________

(a) decreasing to ultimate trend of 5.00% in 2010

40



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

8.  Employee Benefit Plans (Continued)

A
one-percentage-point increase in the assumed health care cost trend rate would increase
the net service and interest cost components of the net periodic post-retirement
benefits expense by $9 and would increase the post-retirement benefit obligation by $73.
A one-percentage-point decrease in the assumed health care cost trend rate would
decrease the net service and interest cost components of the net periodic
post-retirement benefits expense by $9 and would decrease the post-retirement benefit
obligation by $72.

9.  Stockholders Equity

Preferred
Stock

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, 2002, no Covance Series Preferred Stock has been issued or is outstanding.

Dividends-Common
Stock

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 addition, the Credit Facility restricts certain uses of cash such as
certain restrictions on paying cash dividends on the Covance common stock.

Treasury
Stock

During
2002, Covance purchased into treasury 1,005,000 shares of its common stock for the
aggregate cost of $16.6 million, pursuant to a Board of Directors authorized 3,000,000
share buyback program. There are no shares remaining to be purchased under this
program. In addition, Covance acquired approximately 43,000 shares of its common stock
into treasury in connection with re-load stock option exercises and a total of
approximately 55,000 shares of its common stock to satisfy income tax withholding
associated with the vesting of stock awards during the three year period ended December
31, 2002. The fair value of common stock obtained for re-load stock option exercises was
approximately $1.0 million during the three year period ended December 31, 2002.

Stock
Compensation Plans

In
June 2002, Covances Board of Directors adopted the 2002 Employee Stock Option Plan
(the 2002 ESOP). The 2002 ESOP will expire on June 24, 2012. The 2002 ESOP
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 2002 ESOP, to grant awards to employees of Covance
or entities in which Covance has a controlling or significant interest, except that
officers as defined in Rule 16(a)-1(f) of the Securities Exchange Act of 1934, and
members of the Board of Directors are not eligible to receive awards. The 2002 ESOP
authorizes the Compensation Committee to grant the following awards to eligible
employees: options to purchase common stock and stock appreciation rights. The number of
shares of Covance common stock initially available for grant under the 2002 ESOP totaled
5.9 million. At December 31, 2002, there were approximately 5.8 million shares remaining
available for grants or awards under the 2002 ESOP.

41



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

9.  Stockholders Equity (Continued)

In
May 2002, Covances shareholders approved the 2002 Employee Equity Participation
Plan (the 2002 EEPP) in replacement of the 2000 Employee Equity
Participation Plan (the 2000 EEPP). The 2002 EEPP became effective on May 7,
2002 and will expire on May 6, 2012. The 2002 EEPP authorizes the Compensation
Committee, or such committee as is appointed by the Covance Board of Directors, to
administer the 2002 EEPP, to grant awards to employees and consultants of Covance or
entities in which Covance has a controlling or significant interest. The 2002 EEPP
authorizes the Compensation Committee to grant the following awards to eligible
employees: options to purchase common stock; stock appreciation rights; and other stock
awards either singly or in combination. The number of shares of Covance common stock
initially available for grant under the 2002 EEPP totaled approximately 3.25 million
plus approximately 0.9 million shares remaining available under the 2000 EEPP at the
time the 2002 EEPP was approved. Effective upon approval of the 2002 EEPP, no further
grants or awards were permitted under the 2000 EEPP. All grants and awards under the
2000 EEPP remaining outstanding are now administered and paid in accordance with the
provisions of the 2000 EEPP out of shares issuable under the 2002 EEPP. At December 31,
2002 there were approximately 4.2 million shares remaining available for grants or
awards under the 2002 EEPP. Covance records compensation expense related to awards of
stock ratably over the three year vesting period, which totaled $3.1 million, $1.5
million and $0.9 million, during 2002, 2001 and 2000, respectively.

Covance
also has a noncompensatory 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 2002, 2001 and 2000, a total of 167,422 shares, 329,513
shares and 490,034 shares of common stock, respectively, were issued under the ESPP. At
December 31, 2002, there were approximately 1.3 million shares remaining for purchase
under the ESPP.

Covance
has adopted the disclosure-only provisions of FASB Statement No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, and accordingly, applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for its plans.
Had Covance elected to recognize compensation expense in accordance with the provisions
of SFAS 123 for the stock option awards and for the stock purchased by Covance employees
under the ESPP, its net income in 2002, 2001 and 2000 would have been $56.4 million,
$42.2 million and $8.6 million, respectively; its basic and diluted earnings per share
would have been $0.94 and $0.92, respectively, in 2002; its basic and diluted earnings
per share would have been $0.72 and $0.70 in 2001; and its basic and diluted earnings
per share would both have been $0.15 in 2000. The fair value of the Covance stock
options used to compute the net income and earnings per share disclosures required under
SFAS 123 is the estimated present value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions for 2002, 2001 and
2000, respectively: expected volatility of 47.1%, 47.7% and 45.0%; risk free interest
rate of 4.71%, 4.74% and 6.00%; and an expected holding period of seven years.

42



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

9.  Stockholders Equity (Continued)

The
following table sets forth Covances stock option activity during 2002, 2001 and
2000:

|                                       | Numberof Shares(in thousands) |          | WeightedAveragePrice |             
|-------------------------------------- | ----------------------------- | -------- | -------------------- | ------------
|Options outstanding, December 31, 1999 |                               | 4,750.3  |                      | $     21.17 
|Granted                                |                               | 3,473.6  |                      | $       9.85
|Exercised                              |                               | --       |                      | --          
|Forfeited                              |                               | (453.0   | )                    | $     23.91 
|                                       |                               |          |                     
|Options outstanding, December 31, 2000 |                               | 7,770.9  |                      | $     15.97 
|Granted                                |                               | 284.3    |                      | $     19.16 
|Exercised                              |                               | (1,023.0 | )                    | $     13.68 
|Forfeited                              |                               | (424.3   | )                    | $     14.66 
|                                       |                               |          |                     
|Options outstanding, December 31, 2001 |                               | 6,607.9  |                      | $     16.53 
|Granted                                |                               | 1,588.3  |                      | $     17.67 
|Exercised                              |                               | (877.3   | )                    | $     12.75 
|Forfeited                              |                               | (270.7   | )                    | $     14.69 
|                                       |                               |          |                     
|Options outstanding, December 31, 2002 |                               | 7,048.2  |                      | $     17.36 
|                                       |                               |          |                     

The
weighted average fair value of the stock options granted during 2002, calculated using
the Black-Scholes option-pricing model with the assumptions as set forth above, is $9.74
per share.

The
following table sets forth the status of all options outstanding at December 31, 2002:

|               | Stock Options Outstanding |       | Stock Options Exercisable |          
|-------------- | ------------------------- | ----- | ------------------------- | ---------
|
|$  8.10-$11.22 |                           | 2,011 |                           | 7.6 years
|$12.81-$18.98  |                           | 2,082 |                           | 7.8 years
|$19.30-$29.13  |                           | 2,955 |                           | 5.4 years

At
December 31, 2002, 2001 and 2000, respectively, there were stock options exercisable of
5,081,774 shares (weighted average price of $17.64), 4,583,343 shares (weighted average
price of $18.86), and 3,724,574 shares (weighted average price of $20.20).

43



---



##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

10.  Commitments and Contingent Liabilities

Minimum
annual rental commitments under non-cancelable operating leases, primarily office and
laboratory facilities in effect at December 31, 2002 are as follows:

| | Year ending December 31, |        
| | ------------------------ | -------
| | 2003                     | $29,487
| | 2004                     | $25,440
| | 2005                     | $19,382
| | 2006                     | $15,798
| | 2007                     | $13,607
| | 2008 and beyond          | $40,139

Operating
lease rental expense aggregated $30.1 million, $31.3 million and $33.7 million for 2002,
2001 and 2000, respectively.

11.  Restructuring

In
June 2001, Covance announced plans to reorganize its Nexigent subsidiary, integrating
Nexigents newly developed clinical trials service offerings into Covances
core business and reducing Nexigents infrastructure. Under the plan, certain of
Nexigents service offerings were to continue to be marketed by Covances core
business units. Covance recorded a pre-tax restructuring charge in the second
quarter of 2001, totaling approximately $8.2 million ($5.0 million net of tax),
consisting of approximately $6.5 million in asset write-offs in June 2001, and
approximately $1.6 million in severance and related benefits in connection with the
elimination of approximately 30 redundant Nexigent positions. Severance payments began
in August 2001 and continued through 2002. At December 31, 2002, there is no remaining
accrual on the Consolidated Balance Sheet. At December 31, 2001, $0.7 million was
included in accrued expenses and other current liabilities in the Consolidated Balance
Sheet.

During
2000, primarily in order to restructure its Phase III clinical trials unit to align its
cost base with revenue projections, Covance announced plans to close certain satellite
offices, consolidate other facilities and eliminate approximately 200 positions
globally. In connection with these actions, Covance recorded a net pre-tax restructuring
charge of $12.5 million ($7.6 million net of tax) in 2000, consisting primarily of $5.1
million in lease termination and other facility related costs and $6.7 million
for severance and related benefits. As of December 31, 2001, these positions were
eliminated. Severance payments began in June 2000 and continue into 2003. At December
31, 2002, $0.2 million and $1.7 million, respectively, is included in accrued expenses
and other liabilities in the Consolidated Balance Sheet.

12.  Segment Information

Covance
has two reportable segments: early development and late-stage development. Early
development services, which includes Covances preclinical and Phase I clinical
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, commercialization and other clinical support
capabilities, 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
information provided below is on an as reported basis and has not been
restated to exclude the results of Biomanufacturing and Packaging, which were divested
during 2001. The information below also includes special charges and goodwill
amortization recorded during all periods presented. Certain of the information below has
been presented on a pro forma basis in Note 14.

The
accounting policies of the reportable segments are the same as those described in Note
2.

44



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

12.  Segment Information (Continued)

|                                        | EarlyDevelopment |            | Late-StageDevelopment |            | OtherReconciling Items |             | Total | 
|--------------------------------------- | ---------------- | ---------- | --------------------- | ---------- | ---------------------- | ----------- | ----- | 
|Total revenues from external customers: |                  |            |                       |            |                        |             |       | 
|2002                                    |                  | $ 367,542  |                       | $ 515,532  |                        | $   41,623  | (a)   | 
|2001                                    |                  | $ 311,143  |                       | $ 544,734  |                        | $   40,167  | (a)   | 
|2000                                    |                  | $ 287,205  |                       | $ 580,882  |                        | $   48,298  | (a)   | 
|                                       
|Depreciation and amortization:          |                 
|2002                                    |                  | $   19,971 |                       | $   18,340 |                        | $     4,123 | (b)   | 
|2001                                    |                  | $   18,044 |                       | $   27,164 |                        | $     2,511 | (b)   | 
|2000                                    |                  | $   17,314 |                       | $   35,217 |                        | $     1,669 | (b)   | 
|                                       
|Operating income:                       |                 
|2002                                    |                  | $   66,682 |                       | $   72,979 |                        | $ (44,994   | )(c)  | 
|2001                                    |                  | $   47,963 |                       | $   33,166 |                        | $ (26,479   | )(c)  | 
|2000                                    |                  | $   46,339 |                       | $   25,556 |                        | $ (27,275   | )(c)  | 
|                                       
|Segment assets:                         |                 
|2002                                    |                  | $ 343,730  |                       | $ 314,428  |                        | $   18,845  | (d)   | 
|2001                                    |                  | $ 280,769  |                       | $ 311,061  |                        | $   20,198  | (d)   | 
|2000                                    |                  | $ 232,946  |                       | $ 496,568  |                        | $   41,577  | (d)   | 
|                                       
|Capital expenditures:                   |                 
|2002                                    |                  | $   50,362 |                       | $   12,789 |                        | $     3,633 | (e)   | 
|2001                                    |                  | $   46,401 |                       | $   29,394 |                        | $     2,341 | (e)   | 
|2000                                    |                  | $   17,130 |                       | $   73,734 |                        | $     4,969 | (e)   | 

_______________

|(a) |  | Represents
revenues associated with reimbursable out-of-pocket expenses
|--- |  | -----------------------------------------------------------------------

|(b) |  | Represents
depreciation and amortization on corporate fixed assets
|--- |  | ------------------------------------------------------------------

|(c) |  | Represents
corporate expenses (primarily information technology, marketing, communications, human
resources, finance and legal)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------

|(d) |  | Represents
corporate assets
|--- |  | ---------------------------

|(e) |  | Represents
corporate capital expenditures
|--- |  | -----------------------------------------

13.  Geographic Information

|                                        | UnitedStates |           | UnitedKingdom |           | Switzerland |             | Other |             | Total |          
|--------------------------------------- | ------------ | --------- | ------------- | --------- | ----------- | ----------- | ----- | ----------- | ----- | ---------
|Net revenues from external customers(1) |              |           |               |           |             |             |       |             |       |          
|2002                                    |              | $ 593,885 |               | $ 130,403 |             | $    99,875 |       | $    58,911 |       | $ 883,074
|2001                                    |              | $ 579,760 |               | $ 122,608 |             | $    95,140 |       | $    58,369 |       | $ 855,877
|2000                                    |              | $ 605,146 |               | $ 129,586 |             | $    78,174 |       | $    55,181 |       | $ 868,087

|                     | UnitedStates |           | UnitedKingdom |             | Other |             | Total |          
|-------------------- | ------------ | --------- | ------------- | ----------- | ----- | ----------- | ----- | ---------
|Long-lived assets(2) |              |           |               |             |       |             |       |          
|2002                 |              | $ 176,098 |               | $    60,230 |       | $    22,079 |       | $ 258,407
|2001                 |              | $ 162,208 |               | $    46,497 |       | $    19,387 |       | $ 228,092
|2000                 |              | $ 238,718 |               | $    66,970 |       | $    26,001 |       | $ 331,689

___________

|(1) |  | Net
revenues are attributable to geographic locations based on the physical location where
the services are performed.
|--- |  | ----------------------------------------------------------------------------------------------------------------------

|(2) |  | Long-lived
assets represents the net book value of property and equipment.
|--- |  | --------------------------------------------------------------------------

45



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
DECEMBER 31, 2002, 2001 AND 2000
(Dollars in thousands, unless otherwise indicated)

14.  Unaudited 2001 and 2000 Pro Forma Financial Information

The
following is a reconciliation between amounts on an as reported basis and
amounts on a pro forma basis for the years ended December 31, 2001 and 2000. The pro
forma results reflect (1) the exclusion of the results of Packaging and
Biomanufacturing, (2) reduced interest expense from the application of the net proceeds
from the sales of these businesses to outstanding debt, (3) the exclusion of the net
gain recognized on the sales of these businesses, (4) the exclusion of restructuring
charges, and (5) the exclusion of goodwill amortization in accordance with the adoption
of FASB Statement No. 142.

|                             | Pro Forma Adjustments to Remove |             
|---------------------------- | ------------------------------- | ------------
|
|                            
|Year Ended December 31, 2001 |                                 |             
|                            
|Net revenues                 |                                 | $ 855,877   
|                            
|Income from operations       |                                 | $   54,650  
|                            
|Income before taxes          |                                 | $   78,342  
|                            
|Taxes on income              |                                 | $   30,442  
|                            
|Net income                   |                                 | $   47,900  
|                            
|Diluted earnings per share   |                                 | $       0.79
|                            
|                            
|Year Ended December 31, 2000 |                                
|                            
|Net revenues                 |                                 | $ 868,087   
|                            
|Income from operations       |                                 | $   44,620  
|                            
|Income before taxes          |                                 | $   24,971  
|                            
|Taxes on income              |                                 | $     9,735 
|                            
|Net income                   |                                 | $   15,236  
|                            
|Diluted earnings per share   |                                 | $       0.27

15.  Subsequent Event

On
February 27, 2003, the Board of Directors authorized the repurchase of 3.0 million shares of
Covances outstanding common stock.

46



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##### 

Item 9.  Auditors

Ernst
& Young LLP was approved by the Audit and Finance Committee in March, 2001 to
replace PricewaterhouseCoopers LLP (PwC) which had served as the Companys
independent auditors since the Companys inception as a public company.

During
the last two fiscal years, the Companys independent auditors reports did not
contain an adverse opinion or a disclaimer of opinion, and were not modified as to
uncertainty, audit scope or accounting principles. During 1999 and 2000, and through
March 6, 2001, there were no disagreements between the Company and PwC on any matter of
accounting principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of PwC would have
caused them to make reference thereto in their report on the financial statements for
1999 or 2000.

47



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##### 

PART III

Item 10.  Directors and Executive Officers of the Registrant

|(a) |  | Identification
of Directors.
|--- |  | ----------------------------

Incorporated
by reference to the Companys definitive Proxy Statement in connection with its
2003 Annual Meeting of Shareholders to be held on May 1, 2003, which Proxy Statement is
intended to be filed not later than 120 days after December 31, 2002, pursuant to
Regulation 14A under the Securities and Exchange Act of 1934, as amended.

|(b) |  | Identification
of Officers.
|--- |  | ---------------------------

Christopher
A. Kuebler, 49, has been Covance's Chairman and Chief Executive Officer since
November 1994. From November 1994 to November 2001, Mr. Kuebler was also President of
Covance. From March 1993 through November 1994, he was the Corporate Vice President,
European Operations for Abbott Laboratories Inc. ("ALI"), a diversified
health care company. From January 1991 until March 1993, Mr. Kuebler was the Vice
President, Sales and Marketing for ALI's Pharmaceutical Division. Mr. Kuebler has
been a member of the Covance Board since November 1994, and was elected Chairman in
November 1996. Mr. Kuebler is a director of Inhale Therapeutic Systems, Inc., a
biotechnology company.

Joseph
L. Herring, 47, has been Covances President and Chief Operating Officer since
November 2001. Mr. Herring was 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, 49, has been Covances Corporate Senior Vice President, Chief
Financial Officer and Treasurer since September 2000. From September 1999 to
September 2000, Mr. Klitgaard had been 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.

James
A. Bannon, 49, has been Covances Corporate Senior Vice President and President
 Clinical, Periapproval and Central Diagnostic Services since April 2002. Prior to
that, Mr. Bannon was Covances Corporate Vice President  Periapproval
Services.

Michael
Giannetto, 40, has been Covance's Controller since July 1996 and a Corporate Vice
President since February 1998. From November 1996 to February 1998, Mr. Giannetto was
a Vice President of Covance. From March 1995 to July 1996, Mr. Giannetto was the
Business Controller for Covance. From December 1992 to March 1995, Mr. Giannetto
was the Manager of Financial Reporting and Technical Accounting for Corning Life Sciences
Inc., an affiliate of the Company prior to December 31, 1996. Prior to December 1992,
Mr. Giannetto was a Senior Audit Manager for Deloitte & Touche.

Donald
Kraft, 43, 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.

James
W. Lovett, 38, has been Covances Corporate Senior Vice President, General Counsel
and Secretary since February 27, 2003. From December 2001 to February 27, 2003, Mr.
Lovett was Corporate Vice President, General Counsel and Secretary of Covance. From 1997
to 2001, Mr. Lovett was with FMC Corporation, a manufacturer of machinery and

48



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##### 

chemicals for industry and agriculture, most recently as Associate General
Counsel and Assistant Secretary. Prior to that, Mr. Lovett was a partner at the law firm
of McDermott, Will & Emery.

Howard
Moody, 52, joined Covance in February 2000, as Corporate Senior Vice President and
Chief Information Officer. Prior to joining Covance, Mr. Moody was Vice President,
Information Systems, Core Business for Quest Diagnostics Inc., a position to which
Mr. Moody was appointed after Smithkline Beecham Clinical Laboratories was acquired
by Quest in 1999. Mr. Moody held that position with Smithkline Beecham Clinical
Laboratories from 1995 to 1999. From 1989 to 1995 Mr. Moody held various positions
of increasing responsibility with Smithkline Beecham.

Stephen
J. Sullivan, 56, joined Covance in June 1999 and has been Covances Corporate
Senior Vice President and President  Global Central Laboratory Services since May
2002. From September 1999 through April 2002, Mr. Sullivan was Corporate Senior Vice
President and President-Clinical Support Services. From 1996 to 1999, Mr. Sullivan
was Chairman of the Board, President and Chief Executive Officer of Xenometrix, Inc.,
a Boulder, Colorado-based biotechnology company. Prior to that, Mr. Sullivan was
Vice President, Worldwide Marketing for the Diagnostics Division, and Vice President and
General Manager of the Diagnostic Assay Sector of Abbott Laboratories. Mr. Sullivan
was Chairman of the Board of Xenometrix, Inc. prior to the sale of that company in
May 2001.

Item 11.  Executive Compensation

Incorporated
by reference to the Companys definitive Proxy Statement in connection with its
2003 Annual Meeting of Shareholders to be held on May 1, 2003, which Proxy Statement is
intended to be filed not later than 120 days after December 31, 2002, 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 Companys definitive Proxy Statement in connection
with its 2003 Annual Meeting of Shareholders to be held on May 1, 2003, which Proxy
Statement is intended to be filed not later than 120 days after December 31, 2002
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended.

Covance
maintains the Covance Inc. 2002 Employee Equity Participation Plan, the Covance Inc.
2002 Employee Stock Option Plan, the Employee Stock Purchase Plan, the Stock Option Plan
for Non-Employee Directors and the Restricted Stock Plan for Non-Employee Directors and
the Deferred Stock 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 two plans, please see
Note 9 to the Audited Consolidated Financial Statements included elsewhere in this
Annual Report.

49



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##### 

Equity Compensation Plan Information

|Plan Category                                           | Number of securities to be issued upon exercise of outstanding options, warrants and rights(a) | Weighted-average exercise price of outstanding options, warrants and rights(b) | Number of securities remaining available for future issuance under equity compensation plans
(excluding securities reflected in column (a))
|------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------
|Equity compensation plansapproved by securityholders    | 6,972,383                                                                                      | $17.3400                                                                       | 5,135,830                                                                                                                                  
|Equity compensation plansnot approved by securityholder | 88,900                                                                                         | $18.9951                                                                       | 7,150,8841                                                                                                                                 
|TOTAL                                                   | 7,061,283                                                                                      | $17.3631                                                                       | 12,286,7141                                                                                                                                

_______________

| | 1 Includes
1,339,784 securities available for issuance under Covances Employee Stock Purchase
Plan pursuant to which Covance makes available for sale to its employees shares of
Common Stock at a price equal to 85% of the lower of fair market value on the first or
last day of each calendar quarter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 13.  Certain Relationships and Related Transactions

Incorporated
by reference to the Companys definitive Proxy Statement in connection with its
2003 Annual Meeting of Shareholders to be held on May 1, 2003, which Proxy Statement is
intended to be filed not later than 120 days after December 31, 2002 pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.

50



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##### 

PART IV

Item 14.  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 defined in Exchange Act Rules
240.13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of
this annual 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)          Changes
in internal controls. There were no significant changes in the Companys internal
controls or in other factors that could significantly affect those controls subsequent
to the date of evaluation.

Item 15.  Exhibits, Financial Statement Schedules and Reports
on Form 8-K

(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 24.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

|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 (c) below and in the accompanying Exhibit Index.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(b)  Reports on Form 8-K.

| | None.
| | -----

(c) Item 601 Exhibits.

51



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##### 

|ExhibitNumber | Description
|------------- | -----------
|              |            

|2.1 |  | Transaction
Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning Clinical
Laboratories Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc.
(Michigan), dated November 22, 1996. Incorporated by reference to Covance's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 Amendment No. 2 on Form 10, filed with
the SEC on November 19, 1996.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|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 November 25, 1996.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Rights
Agreement between Covance Inc. and Harris Trust and Savings Bank, dated December 31,
1996. Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Tax
Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and
Covance Inc., dated December 31, 1996. Incorporated by reference to Covance's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Spin-Off
Tax Indemnification Agreement between Corning Incorporated and Covance Inc., dated
December 31, 1996. Incorporated by reference to Covance's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Spin-Off
Tax Indemnification Agreement between Covance Inc. and Corning Clinical Laboratories
Inc., December 31, 1996. Incorporated by reference to Covance's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Spin-Off
Tax Indemnification Agreement between Corning Clinical Laboratories Inc. and Covance
Inc., dated December 31, 1996. Incorporated by reference to Covance's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Credit
Agreement among Covance Inc., NationsBank, N.A., Wachovia Bank of Georgia, N.A. and
Lenders named therein, dated November 26, 1996. Incorporated by reference to Covance's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Employee
Stock Ownership Plan. Incorporated by reference to Covance's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | 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.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Amended
and Restated Supplemental Executive Retirement Plan. Filed herewith.
|---- |  | ----------------------------------------------------------------------------

|10.9 |  | Restricted
Share Plan. Incorporated by reference to Covance's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | 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.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | 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.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

52



---



##### 

|ExhibitNumber | Description
|------------- | -----------
|              |            

|10.14 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Severance
Agreement and Release between Covance Inc. and James D. Utterback dated as of September
1, 1999. Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the
period ended September 30, 1999.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Employment
Agreement between Christopher A. Kuebler and Covance Inc. dated as of May 13, 1999.Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period
ended September 30, 1999.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | 2000
Employee Equity Participation Plan. Incorporated by reference to Covance's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Letter
Agreement between Covance Inc. and Stephen J. Sullivan. Incorporated by reference to
Covance's Quarterly Report on Form 10-Q for the period ended March 31, 2000.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Covance
Inc. Variable Compensation Plan. Incorporated by reference to Covance's Quarterly Report
on Form 10-Q for the period ended March 31, 2000.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Credit
Agreement among Covance Inc., Lenders named therein, and Bank of America, N.A. dated
June 28, 2000. Incorporated by reference to Covance's Quarterly Report on Form 10-Q
for the period ended June 30, 2000.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Third
Amendment to Credit Agreement dated November 26, 1996 among Covance Inc., Nationsbank,
N.A., Wachovia Bank of Georgia, N.A., and Lenders named therein (amended June 28,
2000). Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the
period ended June 30, 2000.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Letter
Agreement between Covance Inc. and Joseph L. Herring. Incorporated by reference to
Covance's Quarterly Report on Form 10-Q for the period ended June 30, 2000.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Amended
and Restated Letter Agreement between Covance Inc. and Charles C. Harwood, Jr. Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period
ended September 30, 2000.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Resignation
Agreement between Covance Inc. and Jeffrey S. Hurwitz. Incorporated by reference to
Covance's Quarterly Report on Form 10-Q for the period ended September 30, 2000.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Asset
and Stock Purchase Agreement, dated as of December 21, 2000 among Covance Inc.,
Covance Clinical and Periapproval Services Ltd., and Fisher Scientific International,
Inc. Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | First
Amendment to Credit Agreement dated November 13, 2000 among Covance Inc., Lenders named
therein, and Bank of America, N.A. Incorporated by reference to Covances Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | Fourth
Amendment to Credit Agreement dated November 13, 2000 among Covance Inc., Nationsbank,
N.A., Wachovia Bank of Georgia, and Lenders named therein. Incorporated by reference
to Covances Annual Report on Form 10-K for the period ended December 31, 2000.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Credit
Agreement among Covance Inc., Lenders named Therein, Bank of America, N.A., Barclays
Bank PLC, PNC Bank, National Association, The Bank of Nova Scotia and Bank of
Tokyo-Mitsubishi Trust Company dated June 28, 2001. Incorporated by reference to
Covances Quarterly Report on Form 10-Q for the period ended June 30, 2001.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Stock
Purchase Agreement between Covance Inc. and Akzo Nobel Inc. dated as of April 23, 2001.
Incorporated by reference to Covance's Quarterly Report on Form 10-Q
for the period ended June 30, 2001.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 |  | Covance
Inc. Variable Compensation Plan. Incorporated by reference to Covance's Quarterly Report
on Form 10-Q for the period ended September 30, 2001.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31 |  | Employment
Agreement between Covance Inc. and Christopher A. Kuebler dated November 7, 2001. Incorporated by reference to Covance's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.32 |  | Letter
Agreement between Covance Inc. and Joseph Herring dated November 7, 2001. Incorporated
by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December
31, 2001.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

53



---



##### 

|ExhibitNumber | Description
|------------- | -----------
|              |            

|10.33 |  | Amendment
and Restatement of Employment Relationship between Covance Inc. and Dr. F. John
Mills dated November 15, 2001. Incorporated by reference to Covance's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Letter
Agreement between Covance Inc. and James A. Bannon dated May 7, 2002. Filed herewith.
|----- |  | --------------------------------------------------------------------------------------------

|10.37 |  | Letter
Agreement between Covance Inc. and Donald Kraft dated June 25, 2002. Filed herewith.
|----- |  | -------------------------------------------------------------------------------------------

|10.38 |  | Employee
Stock Purchase Plan, as amended. Filed herewith.
|----- |  | ---------------------------------------------------------

|10.39 |  | Covance
Inc. Variable Compensation Plan, as amended. Filed herewith.
|----- |  | --------------------------------------------------------------------

|21 |  | Subsidiaries.Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
|-- |  | ---------------------------------------------------------------------------------------------------------------------------

|23.1 |  | Consent
of Ernst & Young LLP. Filed herewith.
|---- |  | ---------------------------------------------

|23.2 |  | Consent
of PricewaterhouseCoopers LLP. Filed herewith.
|---- |  | ------------------------------------------------------

|99.1 |  | Certification
pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - Christopher A. Kuebler. Filed herewith.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.2 |  | Certification
pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - William E. Klitgaard. Filed herewith.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

(d)  Financial Statement Schedules.

| | None.
| | -----

54



---



##### 

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 6, 2003 | By:  /s/ Christopher A. Kuebler                  
|                     | Christopher A. Kuebler                           
|                     | 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/ Christopher A. Kuebler |  | Chairman of the Board, Chief Executive Officer |  | March 6, 2003 | 
|Christopher A. Kuebler     |  | and Director                                   |  |               | 
|                           |  | (Principal Executive Officer)                  | 
|                           |  |                                               
|/s/ William E. Klitgaard   |  | Corporate Senior Vice President and            |  | March 6, 2003 | 
|William E. Klitgaard       |  | Chief Financial Officer                        |  |               | 
|                           |  | (Principal Financial Officer)                  | 
|                           |  |                                               
|/s/ Michael Giannetto      |  | Corporate Vice President and Controller        |  | March 6, 2003 | 
|Michael Giannetto          |  | (Principal Accounting Officer)                 |  |               | 
|                           |  |                                               
|/s/ Robert M. Baylis       |  | Director                                       |  | March 6, 2003 | 
|Robert M. Baylis           |  |                                                |  |               | 
|                           |  |                                               
|/s/ Irwin Lerner           |  | Director                                       |  | March 6, 2003 | 
|Irwin Lerner               |  |                                                |  |               | 
|                           |  |                                               
|/s/ J. Randall MacDonald   |  | Director                                       |  | March 6, 2003 | 
|J. Randall MacDonald       |  |                                                |  |               | 
|                           |  |                                               
|/s/ Kathleen G. Murray     |  | Director                                       |  | March 6, 2003 | 
|Kathleen G. Murray         |  |                                                |  |               | 
|                           |  |                                               
|/s/ William C. Ughetta     |  | Director                                       |  | March 6, 2003 | 
|William C. Ughetta         |  |                                                |  |               | 

55



---



##### 

EXHIBIT INDEX

|ExhibitNumber | Description
|------------- | -----------
|              |            

|2.1 |  | Transaction
Agreement among Corning Incorporated, Corning Life Sciences Inc., Corning Clinical
Laboratories Inc. (Delaware), Covance Inc. and Corning Clinical Laboratories Inc.
(Michigan), dated November 22, 1996. Incorporated by reference to Covance's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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 Amendment No. 2 on Form 10, filed with
the SEC on November 19, 1996.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------

|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 November 25, 1996.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2 |  | Rights
Agreement between Covance Inc. and Harris Trust and Savings Bank, dated December 31,
1996. Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Tax
Sharing Agreement among Corning Incorporated, Corning Clinical Laboratories Inc. and
Covance Inc., dated December 31, 1996. Incorporated by reference to Covance's Annual
Report on Form 10-K for the fiscal year ended December 31, 1996.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.2 |  | Spin-Off
Tax Indemnification Agreement between Corning Incorporated and Covance Inc., dated
December 31, 1996. Incorporated by reference to Covance's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.3 |  | Spin-Off
Tax Indemnification Agreement between Covance Inc. and Corning Clinical Laboratories
Inc., December 31, 1996. Incorporated by reference to Covance's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | Spin-Off
Tax Indemnification Agreement between Corning Clinical Laboratories Inc. and Covance
Inc., dated December 31, 1996. Incorporated by reference to Covance's Annual Report on
Form 10-K for the fiscal year ended December 31, 1996.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 |  | Credit
Agreement among Covance Inc., NationsBank, N.A., Wachovia Bank of Georgia, N.A. and
Lenders named therein, dated November 26, 1996. Incorporated by reference to Covance's
Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.6 |  | Employee
Stock Ownership Plan. Incorporated by reference to Covance's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996.
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|10.7 |  | 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.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.8 |  | Amended
and Restated Supplemental Executive Retirement Plan. Filed herewith.
|---- |  | ----------------------------------------------------------------------------

|10.9 |  | Restricted
Share Plan. Incorporated by reference to Covance's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------

|10.10 |  | 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.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.11 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.12 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.13 |  | 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.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

56



---



##### 

|ExhibitNumber | Description
|------------- | -----------
|              |            

|10.14 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.15 |  | Severance
Agreement and Release between Covance Inc. and James D. Utterback dated as of September
1, 1999. Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the
period ended September 30, 1999.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.16 |  | Employment
Agreement between Christopher A. Kuebler and Covance Inc. dated as of May 13, 1999. Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period
ended September 30, 1999.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.17 |  | 2000
Employee Equity Participation Plan. Incorporated by reference to Covance's Annual Report
on Form 10-K for the fiscal year ended December 31, 1999.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.18 |  | Letter
Agreement between Covance Inc. and Stephen J. Sullivan. Incorporated by reference to
Covance's Quarterly Report on Form 10-Q for the period ended March 31, 2000.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.19 |  | Covance
Inc. Variable Compensation Plan. Incorporated by reference to Covance's Quarterly Report
on Form 10-Q for the period ended March 31, 2000.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|10.20 |  | Credit
Agreement among Covance Inc., Lenders named therein, and Bank of America, N.A. dated
June 28, 2000. Incorporated by reference to Covance's Quarterly Report
on Form 10-Q for the period ended June 30, 2000.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.21 |  | Third
Amendment to Credit Agreement dated November 26, 1996 among Covance Inc., Nationsbank,
N.A., Wachovia Bank of Georgia, N.A., and Lenders named therein (amended June 28,
2000). Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the
period ended June 30, 2000.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.22 |  | Letter
Agreement between Covance Inc. and Joseph L. Herring. Incorporated by reference to
Covance's Quarterly Report on Form 10-Q for the period ended June 30, 2000.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.23 |  | Amended
and Restated Letter Agreement between Covance Inc. and Charles C. Harwood, Jr. Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the
period ended September 30, 2000.
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.24 |  | Resignation
Agreement between Covance Inc. and Jeffrey S. Hurwitz. Incorporated by reference to
Covance's Quarterly Report on Form 10-Q for the period ended September
30, 2000.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.25 |  | Asset
and Stock Purchase Agreement, dated as of December 21, 2000 among Covance Inc.,
Covance Clinical and Periapproval Services Ltd., and Fisher Scientific International,
Inc. Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.26 |  | First
Amendment to Credit Agreement dated November 13, 2000 among Covance Inc., Lenders named
therein, and Bank of America, N.A. Incorporated by reference to Covances
Annual Report on Form 10-K for the fiscal year ended December 31, 2000.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.27 |  | Fourth
Amendment to Credit Agreement dated November 13, 2000 among Covance Inc., Nationsbank,
N.A., Wachovia Bank of Georgia, and Lenders named therein. Incorporated by reference
to Covances Annual Report on Form 10-K for the period ended December 31, 2000.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.28 |  | Credit
Agreement among Covance Inc., Lenders named Therein, Bank of America, N.A., Barclays
Bank PLC, PNC Bank, National Association, The Bank of Nova Scotia and Bank of
Tokyo-Mitsubishi Trust Company dated June 28, 2001. Incorporated by reference to
Covances Quarterly Report on Form 10-Q for the period ended June 30, 2001.
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.29 |  | Stock
Purchase Agreement between Covance Inc. and Akzo Nobel Inc. dated as of April 23, 2001. Incorporated by reference to Covance's Quarterly Report on Form 10-Q for the period
ended June 30, 2001.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.30 |  | Covance
Inc. Variable Compensation Plan. Incorporated by reference to Covance's Quarterly Report
on Form 10-Q for the period ended September 30, 2001.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|10.31 |  | Employment
Agreement between Covance Inc. and Christopher A. Kuebler dated November 7, 2001. Incorporated by reference to Covance's Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57



---



##### 

|ExhibitNumber | Description
|------------- | -----------
|              |            

|10.32 |  | Letter
Agreement between Covance Inc. and Joseph Herring dated November 7, 2001. Incorporated
by reference to Covance's Annual Report on Form 10-K for the fiscal year ended December
31, 2001.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.33 |  | Amendment
and Restatement of Employment Relationship between Covance Inc. and Dr. F. John
Mills dated November 15, 2001. Incorporated by reference to Covance's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.34 |  | 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.
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

|10.35 |  | 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.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------

|10.36 |  | Letter
Agreement between Covance Inc. and James A. Bannon dated May 7, 2002. Filed herewith.
|----- |  | --------------------------------------------------------------------------------------------

|10.37 |  | Letter
Agreement between Covance Inc. and Donald Kraft dated June 25, 2002. Filed herewith.
|----- |  | -------------------------------------------------------------------------------------------

|10.38 |  | Employee
Stock Purchase Plan, as amended. Filed herewith.
|----- |  | ---------------------------------------------------------

|10.39 |  | Covance
Inc. Variable Compensation Plan, as amended. Filed herewith.
|----- |  | --------------------------------------------------------------------

|21 |  | Subsidiaries. Incorporated by reference to Covance's Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------

|23.1 |  | Consent
of Ernst & Young LLP. Filed herewith.
|---- |  | ---------------------------------------------

|23.2 |  | Consent
of PricewaterhouseCoopers LLP. Filed herewith.
|---- |  | ------------------------------------------------------

|99.1 |  | Certification
pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - Christopher A. Kuebler. Filed herewith.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|99.2 |  | Certification
pursuant to 18 U.S.C. Section 1350, as Adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 - William E. Klitgaard. Filed herewith.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

58



---