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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION


Washington, D.C. 20549


Form 10-K

for annual and transition reports pursuant to


Sections 13 or 15(d) of the Securities Exchange Act of
1934


(MARK ONE)



|  |                                              
|- | ---------------------------------------------
|þ | Annual report pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934


For the Fiscal Year ended December 31,
2002

OR



|  |                                                             
|- | ------------------------------------------------------------
|o | Transition report pursuant to Section 13 or 15(d) of
    the

Securities Exchange Act of 1934


For the transition period
from                               to                               .

Commission file number 000-49765.

Inveresk Research Group, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 43-1955097                              
|(State or other jurisdiction of incorporation
    or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|11000 Weston Parkway, Suite 100, Cary,
    NC                      |  | 27513                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

919-460-9005

(Registrants telephone number, including
area code)


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

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

Title of each class

Common Stock, $0.01 par value


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     þ No     o

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.     Yes     o               No     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Exchange Act
Rule 12b-2).   Yes     o               No     þ

As of February 14, 2002, the aggregate
market value of the registrants common stock held by
non-affiliates was approximately $255 million. As of that
date, there were outstanding 36,017,455 shares of the
registrants common stock, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the companys definitive proxy
statement relating to its 2003 Annual Stockholders Meeting are
incorporated herein by reference in Part III.



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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | Item 1. Business                                                                                       
|                                                 | Item 2. Properties                                                                                     
|                                                 | Item 3. Legal Proceedings                                                                              
|                                                 | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II                                         
|                                                 | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                 | Item 6. Selected Consolidated Financial Data                                                           
|                                                 | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation           
|                                                 | Item 8. Financial Statements and Supplementary Data                                                    
|                                                 | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                 | Item 11. Executive Compensation                                                                        
|                                                 | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                 | Item 13. Certain Relationships and Transactions                                                        
|                                                 | Item 14. Controls and Procedures                                                                       
|SIGNATURES                                      
|EXHIBIT INDEX                                   
|AMENDMENT NO. 1 TO REGISTRATION RIGHTS AGREEMENT
|AMENDMENT NO.1 TO EMPLOYMENT AGREEMENT          
|LETTER FROM THE ROYAL BANK OF SCOTLAND          
|DEED AMONG THE ROYAL BANK OF SCOTLAND           
|LIST OF SUBSIDIARIES                            
|CONSENT OF DELOITTE & TOUCHE LLP                



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TABLE OF CONTENTS

|         |                                                                                                              |      |    |    | 
|-------- | ------------------------------------------------------------------------------------------------------------ | ---- | -- | -- | 
|         |                                                                                                              | Page
|         |                                                                                                              |     
|PART I   |                                                                                                              |      | 1  |   
|         | ITEM 1.   Business                                                                                           |      |    | 1  | 
|         | ITEM 2.   Properties                                                                                         |      |    | 10 | 
|         | ITEM 3.   Legal Proceedings                                                                                  |      |    | 10 | 
|         | ITEM 4.   Submission of Matters to
    a Vote of Security Holders                                            |      |    | 10 | 
|        
|PART II  |                                                                                                              |      | 11 |   
|         | ITEM 5.   Market for
    Registrants Common Equity and Related Stockholder Matters                          |      |    | 11 | 
|         | ITEM 6.   Selected Consolidated
    Financial Data                                                           |      |    | 11 | 
|         | ITEM 7.   Managements
    Discussion and Analysis of Financial Conditions and Results of
    Operations     |      |    | 15 | 
|         | ITEM 8.   Financial Statements and
    Supplementary Data                                                    |      |    | 32 | 
|         | ITEM 9.   Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure       |      |    | 64 | 
|        
|PART III |                                                                                                              |      | 64 |   
|         | ITEM 10.  Directors and Executive
    Officers                                                               |      |    | 64 | 
|         | ITEM 11.  Executive Compensation                                                                             |      |    | 64 | 
|         | ITEM 12.  Security Ownership of Certain
    Beneficial Owners and Management and Related Stockholder Matters |      |    | 64 | 
|         | ITEM 13.  Certain Relationships and
    Transactions                                                         |      |    | 64 | 
|         | ITEM 14.  Controls and Procedures                                                                            |      |    | 64 | 
|         | ITEM 15.  Exhibits, Financial Statement
    Schedules, and Reports on Form 8-K                               |      |    | 65 | 

-i-



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PART I






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a leading provider of drug development
services to companies in the pharmaceutical and biotechnology
industries. Through our pre-clinical and clinical business
segments, we offer a broad range of drug development services,
including pre-clinical safety and pharmacology evaluation
services, laboratory sciences services and clinical development
services. We are one of a small number of drug development
services companies currently providing a comprehensive range of
pre-clinical and clinical development services on a worldwide
basis. Our client base includes major pharmaceutical companies
in North America, Europe and Japan, as well as many
biotechnology and specialty pharmaceutical companies. We
completed our initial public offering of common stock in July
2002.

Our pre-clinical development business was
established over 35 years ago, employs approximately 1,830
people and operates from two principal facilities, one located
in Tranent, Scotland and the other in Montreal, Canada. This
business segment provides pre-clinical safety and pharmacology
evaluation services and laboratory sciences services (including
clinical support services). Based upon net service revenue, we
estimate that we are the third largest provider of pre-clinical
safety evaluation services in the world. Our pre-clinical
business has a diverse client base, with no single client
representing more than 7.5% of our net service revenue in 2002.
More than 85% of the 2002 net service revenue from our
pre-clinical business was generated from repeat clients.

Our clinical development business was established
in 1988 and operates from 15 facilities located across the
United States and Europe, employing approximately 720 people.
This business segment conducts Phase I clinical trials and
provides Phase II-IV clinical trials management services
(including medical data sciences services and regulatory
support). Our 62-bed clinic in Edinburgh conducts a wide range
of Phase I clinical trials and has completed an average of 11
first-in-man studies annually over the past five years. The
global infrastructure of our clinical development business
permits us to offer our clients multi-country Phase II-IV
clinical trials, as well as smaller single-country projects.

Corporate History

Prior to 1999 we operated as a division of SGS
Société Générale de Surveillance SA. In
September 1999 we were acquired in a management buyout supported
by Candover Investments PLC. As a result of that transaction,
Candover Investments PLC and certain of its affiliated entities
became our principal stockholders and Inveresk Research Group
Limited, a newly created Scottish company, became the ultimate
holding company for the Inveresk Research group of companies. In
April 2001 we acquired a Nasdaq-traded company, ClinTrials
Research Inc., for $115.1 million, net of cash acquired of
$5.7 million. ClinTrials provided drug development
services, with significant pre-clinical operations in Canada and
clinical operations primarily in the United States and Europe.
We subsequently implemented a major restructuring of
ClinTrials clinical business and, since the time we
acquired it, its profitability has improved significantly.

Effective June 25, 2002 we changed our
ultimate parent company from a company organized in Scotland to
a corporation organized in Delaware.

We completed our initial public offering of
12 million shares of common stock, at a price of
$13 per share, in the third quarter of 2002.

Industry Trends



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

The drug development services industry has
evolved from providing limited pre-clinical and clinical trial
services in the 1970s to a full-service industry today that
encompasses broader relationships with clients, covering the
entire drug development process, including pre-clinical safety
evaluation, pharmacology, study

1



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design, clinical trial management, data
collection, statistical analysis, product support and regulatory
services. Pharmaceutical companies are now using drug
development services companies not only to cover gaps in
capacity, but also to increase their skills base, help to
control costs and reduce drug development timelines.




| |                                                                   
| | ------------------------------------------------------------------
| | Demand for New Drugs Based on Changing
    Population Demographics

There is a strong demand in the marketplace to
treat diseases such as cancer and HIV as well as illnesses
associated with aging such as osteoporosis, arthritis and
Alzheimers disease. The development and testing of some of
the compounds that treat such illnesses require complex clinical
trials. In addition, the cost of developing therapies for
chronic disorders, such as arthritis, Alzheimers disease
and osteoporosis, is higher because the treatments must be
studied for a longer period to demonstrate their effectiveness
and to determine any possible long-term side effects. The
complexity and expense of these trials prompts pharmaceutical
and biotechnology companies to outsource all or a portion of
these trials to drug development services organizations to take
advantage of the experience and expertise of such organizations
in conducting complicated trials.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Escalating Research and Development
    Expenditures by Pharmaceutical Companies

Increases in global research and development
expenditures by the major pharmaceutical companies have broadly
tracked the increase in pharmaceutical revenues over the past
ten years. The outsourcing of pre-clinical and clinical trials
for pharmaceutical, biotechnology and medical device products is
estimated to be growing at least as much as the rate of growth
in global research and development expenditures by major
pharmaceutical companies.



| |                                             
| | --------------------------------------------
| | The Growth of the Biotechnology
    Industry

The United States, European and Japanese
biotechnology industries and the number of drugs produced by
them have grown substantially over the past decade. According to
the Biotechnology Industry Organization, 35 new biotechnology
drugs and vaccines received approval in 2002 compared with seven
in 1993. The biotechnology industry is expected to increase its
expenditure on drug development in the coming years.
Biotechnology companies typically do not have the staff,
operating procedures, experience or expertise in-house to
conduct their own pre-clinical testing or clinical trials. In
addition, while biotechnology companies have historically sought
to defray the costs of pre-clinical and clinical development by
licensing their products to pharmaceutical companies, they are
now increasingly seeking to license out their technology at a
later stage of clinical development.



| |                                                               
| | --------------------------------------------------------------
| | The Emergence of New Research and
    Development Technologies

Over the past 20 years, technological
advances have dramatically changed the drug discovery process.
New and improved technologies have evolved such as combinatorial
chemistry, ultra high-throughput screening, new in vitroand in vivopre-clinical profiling techniques, and
the evolution in genetic-based drug research commonly referred
to as genomics and proteomics. The objective of these
innovations is to find more drug targets and to screen against
targets much more quickly with literally millions of chemical
compounds. This process should produce many more molecules
having the ability to affect biological activity. The increased
numbers of drug candidates will make it imperative that the
development and regulatory processes be rapid and
cost-effective. Pharmaceutical and biotechnology companies may
also find that they do not have sufficient internal development
resources or know-how to cope with the increased number of new
drug candidates emerging as a consequence of the emergence of
new technologies. These resource shortages are expected to
increase demand for the services of drug development services
companies.



| |                                                              
| | -------------------------------------------------------------
| | The Need for Improved Productivity and Cost
    Effectiveness

Pharmaceutical companies face increased pressure
and competition to bring new drugs to market in the shortest
possible time. The development time of a potential new drug is
crucial to the competitive advantage and profitability of that
drug because it determines the market exclusivity available to a
pharmaceutical

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company to recoup its research and development
expenditure. We believe that drug development services
organizations are able to perform the needed services with a
higher level of expertise or specialization, and more quickly,
than a pharmaceutical company could perform such services
internally.




| |                                                                  
| | -----------------------------------------------------------------
| | The Increasingly Complex and Demanding
    Regulatory Environment

Increasingly complex and stringent regulatory
requirements throughout the world have increased the volume of
high quality data required for regulatory filings and escalated
the demand for data collection and analysis during the drug
development process. As regulatory requirements become more
complex, we believe the pharmaceutical and biotechnology
industries will increasingly outsource to drug development
services organizations to take advantage of their data
management and regulatory expertise, technological capabilities
and global presence.



| |                                          
| | -----------------------------------------
| | Globalization of Clinical
    Development

With the increasing cost of new drug development,
pharmaceutical companies are increasingly attempting to maximize
returns from a given drug by pursuing regulatory approvals in
multiple countries simultaneously rather than sequentially. A
pharmaceutical company seeking approval in a country in which it
lacks experience or internal resources will frequently turn to a
drug development services organization for assistance in
interacting with regulators or in organizing and conducting
clinical trials.

Strategy

We believe the increasing demand for outsourced
drug development services will provide us with opportunities to
continue to grow our pre-clinical and clinical businesses
profitably. Our strategy is to build upon our core pre-clinical
and clinical development expertise and to further our reputation
as a provider of a comprehensive range of high quality,
value-added drug development services. Our aim is to become the
leading research and development partner to the pharmaceutical
and biotechnology industries.

Our Services



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

We provide a full range of product development
services on a worldwide basis. We derive approximately 88% of
our net service revenue from services that we provide to the
pharmaceutical and biotechnology industries. We also service the
product development needs of the veterinary products,
agrochemical and chemical industries. One of our primary
objectives is to assist our clients to optimize the time for new
product development and provide regulatory advice and direction.

Our pre-clinical development services business
offers pre-clinical safety evaluation and pharmacology services
as well as selected laboratory sciences services. Our clinical
development services business offers a wide range of drug
development services including Phase I clinical safety
evaluation, Phase II-IV clinical trials and regulatory services.
Our approach is to work in partnership with our clients,
providing regulatory advice and direction and tailoring our
services to their requirements at every stage of a project.



| |                                      
| | -------------------------------------
| | Pre-clinical Development
    Services

Our pre-clinical development services business
offers a broad range of services including pre-clinical safety
evaluation, pharmacology and laboratory sciences. In 2002 this
business segment generated net service revenue of
$142.2 million and income from operations of
$43.5 million.



| |                    
| | -------------------
| | Pre-clinical Safety

We conduct pre-clinical safety evaluation studies
and pharmacological services in our facilities located in
Tranent and Montreal. We conduct product development and safety
evaluation programs, involving both mammalian and in vitro
toxicology and we have the necessary resources in specialist
ancillary groups to support fully toxicology studies and provide
a complete safety evaluation service. We perform standard or

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tailored safety evaluation studies designed to
satisfy the needs of our clients and the different requirements
of regulatory agencies across the world. Both of our facilities
are compliant with the regulations imposed by the regulatory
authorities in North America, Europe and Japan including Good
Laboratory Practice (GLP). We are one of the few
Western drug development services organizations with an
established market presence for pre-clinical development
services in Japan.


Pre-clinical safety evaluation and
pharmacological services that we undertake on behalf of our
clients are wide-ranging and include:



| |   |                                
| | - | -------------------------------
| |  | pre-clinical toxicology studies
|
| |  | genetic toxicology studies     
|
| |  | immunotoxicology studies       
|
| |  | bioanalytical chemistry studies
|
| |  | toxicokinetic evaluations      

In addition, we have an established reputation in
the field of specialist toxicology safety evaluation services
relating to specific routes of administration, including
infusion and inhalation studies, highly specialized areas in
which we have experienced increasing demands for our services.

We utilize modern, industry-standard validated
software systems wherever possible to assist in the collection,
analysis and reporting of toxicology data.



| |                    
| | -------------------
| | Laboratory Sciences

We provide a wide range of laboratory-based
analytical services, primarily to the pharmaceutical and
biotechnology industries. These services are provided from our
pre-clinical facilities located in Tranent and Montreal. We
believe that all of the activities of our laboratory sciences
business are conducted in compliance with GLP.

The laboratory sciences services we offer to our
clients include the following:



| |   |                                               
| | - | ----------------------------------------------
| |  | bioanalytical services                        
|
| |  | drug metabolism services                      
|
| |  | clinical support services                     
|
| |  | product characterization and stability testing

We also offer a wide range of studies to register
new compounds and support existing materials worldwide for the
agrochemical, animal health, biocide and chemical industries. In
addition to the services described above, we carry out
environmental toxicity and related investigations, environmental
fate studies, veterinary clinical trials, livestock studies,
plant metabolism studies and field trials for agricultural
products on behalf of these clients.



| |                              
| | -----------------------------
| | Clinical Development Services

Our clinical development services business offers
a broad range of services including Phase I clinical safety
evaluation, Phase II-IV clinical trials services (including
medical data sciences) and regulatory support. In 2002 this
business segment generated net service revenue of
$80.3 million and income from operations of
$9.0 million.



| |                                   
| | ----------------------------------
| | Phase I Clinical Safety Evaluation

Our Phase I clinical safety evaluation service is
designed to move lead pharmaceutical candidates rapidly from
pre-clinical development through Phase I tolerability
assessments to explore the human pharmacology. Blending the
experience of our physicians, scientists, project managers and
specialist nursing staff, we can

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design for our clients an optimal program for the
early and later stage development of their drug candidates. We
are one of the few drug development services organizations
worldwide able to offer this breadth of service.


We conduct Phase I safety evaluations at our
facility in Edinburgh that is capable of housing up to 62
volunteers at any one time. This facility is in close proximity
to our laboratory sciences segment in Tranent, which is
responsible for performing the analysis of biological samples
generated by our Phase I clinic, guaranteeing fast response
times. All of our volunteers go through an intensive screening
process to ensure suitability for our studies.

We believe one of our core competencies is our
ability to provide in-depth analysis of the results of
Phase I clinical safety evaluation and meaningful
information for our clients with respect to the product being
tested.

Our clinic in Edinburgh conducts a wide range of
Phase I clinical trials and has completed an average of 11
first-in-man studies annually over the past five years.



| |                                                       
| | ------------------------------------------------------
| | Phase I Trials in Patients and Special
    Populations

We conduct Phase I trials in patients for
specific indications at investigational sites throughout the
United States. We also have the ability to undertake special
population studies, including in groups such as the elderly,
post-menopausal women or patients with specific diagnoses, such
as renal failure or asymptomatic HIV disease.



| |                                 
| | --------------------------------
| | Phase II-IV Clinical Development

From our 15 offices worldwide, we can manage
every aspect of clinical trials from clinical development plans
and protocol design to New Drug Applications. In addition to
providing small or single site studies, we have the ability to
conduct large international multi-center trials. We also have
extensive experience in managing small, medium and large trials
in many parts of the world. We have a proven track record of
managing integrated projects in Europe and North America, as
well as single-continent and country specific projects,
culminating in regulatory filings. We have supported studies in
over 20 countries, working in 17 different languages.

We offer customized program management to
coordinate and manage a clinical trial development program. The
design of each study is agreed with the client at the beginning
of the study and set out in a protocol.

As part of conducting clinical trials, we provide
the following core services, either on an individual or
integrated basis, depending on our clients needs:



| |   |                                        
| | - | ---------------------------------------
| |  | advice on clinical development strategy
|
| |  | study design                           
|
| |  | investigator recruitment               
|
| |  | project management                     
|
| |  | quality assurance                      
|
| |  | patient recruitment services           
|
| |  | study monitoring                       
|
| |  | clinical data management               
|
| |  | biostatistical analysis                
|
| |  | medical writing services               
|
| |  | medical overview                       

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| |   |                   
| | - | ------------------
| |  | product safety    
|
| |  | Phase IV studies  
|
| |  | Rx to OTC switches



| |                   
| | ------------------
| | Regulatory Support

Before a product can be launched in any country,
it must be approved by the regulatory agency in that particular
country. We offer comprehensive global regulatory product
registration services at all stages of development for
pharmaceutical and biotechnology products and have particular
expertise with the regulations in Europe, North America and
Japan. Our regulatory affairs experts review existing published
literature, assess the scientific background of a product,
assess the competitive and regulatory environment, identify
deficiencies and define the steps necessary to obtain
registration in the most expeditious manner. Through this
service, we help our clients determine the feasibility of
developing a particular product or product line.

Clients and Marketing

We provide product development services on a
global basis to, among others, the pharmaceutical and
biotechnology industries. In 2002, no single client accounted
for more than 7.5% of our net service revenue, and in 2002 our
top 20 clients together accounted for less than 45% of our net
service revenue.

Our pre-clinical business has historically been
successful in maintaining clients, as is evidenced by the fact
that more than 85% of our pre-clinical revenues in 2002 came
from repeat clients. Our clinical operations are marketed
primarily to our existing pre-clinical clients. In addition, we
have appointed a business development manager who, together with
a team of business development personnel, markets our clinical
operations on a global basis. We also engage in promotional
activities including organizing scientific symposia, publishing
scientific papers, making presentations and exhibiting at
scientific conferences and trade shows in North America, Europe
and Japan.

Contractual Arrangements

Most of our contracts with our clients are fixed
priced contracts. Contracts may range from a few weeks to
several years depending upon the nature of the work performed.
In many cases of 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 over the
study or trial duration. Sometimes the installments are tied to
meeting performance milestones; for example, in clinical trials,
installment payments may be related to investigator recruitment,
patient enrollment or delivery of a report.

We generally bill our clients upon the completion
of negotiated performance requirements and, to a lesser extent,
on a date certain basis. In cases where our contracts are fixed
price, we generally bear the cost of overruns, but we benefit if
the costs are lower than we anticipated. Over the past five
years the cost of overruns on our fixed price contracts have not
had a material adverse impact on our results of operations.
Where there are material changes in the scope of review or any
study-specific assumptions, we typically negotiate appropriate
amendments of the contract price.

Most of our contracts may be terminated by the
client with or without cause upon little or no notice. These
contracts typically require payment to us of expenses to wind
down and close out a study, payment to us of fees earned to date
and payment to us for committed resources that cannot be
reallocated to existing studies. Contracts may be terminated for
various reasons, including our failure to discharge our
obligations properly, the failure of a product to satisfy safety
requirements, unexpected or undesired results of the product,
inadequate patient enrollment or investigator recruitment,
production problems resulting in shortages of the drug being
tested or adverse patient reactions to the drug being tested or
clients decisions to forego or terminate a particular
study.

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Backlog

Our studies and projects are performed over
varying times, from a short period of time to extended periods
of time, which may be as long as several years. We maintain an
order backlog to track anticipated revenue from projects that
either have not started, but are anticipated to begin in the
near future, or are in process and have not been completed. We
only recognize a contract in backlog when it is evidenced by a
signed contract or other written evidence of a firm commitment.
Cancelled contracts are removed from backlog. Based upon the
foregoing, our aggregate backlog at December 31, 2002 was
approximately $210 million, compared to approximately
$172 million at December 31, 2001.

We believe 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. First,
studies vary in duration. For instance, some studies that are
included in 2002 backlog may be completed in 2003, while others
may be completed in later years. Second, the scope of studies
may change, which may either increase or decrease their value.
Third, studies included in backlog may be subject to bonus or
penalty payments. Fourth, studies may be terminated or delayed
at any time by the client or regulatory authorities.
Terminations or delays can result from a number of reasons.
Delayed contracts remain in our backlog until a determination of
whether to continue, modify or cancel the study has been made.

Competition

The competitive landscape for our two core
businesses varies. Nevertheless, both businesses primarily
compete with in-house departments of pharmaceutical companies,
other drug development services organizations, universities and
teaching hospitals.

We believe we are the third largest provider of
pre-clinical safety evaluation services in the world, based on
net service revenue. Our primary pre-clinical competitor on a
global basis is Covance, although we also face competition from
publicly traded companies such as Charles River Laboratories,
Life Sciences Research and MDS Pharma, as well as from a number
of privately-held companies. Certain of these competitors are
also expanding their pre-clinical operations.

The clinical development services market is
highly fragmented, with participants ranging from hundreds of
small, limited-service providers to a few full service drug
development services organizations with global operations. Based
on this, we believe that we compete with a number of publicly
traded companies, primarily Quintiles, PPD, Covance, MDS Pharma,
Parexel, ICON and Kendle, as well as with a number of
privately-held companies.

In contrast to the pre-clinical drug development
industry, the clinical drug development industry has few
barriers to entry. Newer, smaller companies with specialty
focuses, such as those aligned to a specific disease or
therapeutic area, may compete aggressively against larger
companies for clients. Increased competition might lead to price
and other forms of competition that may adversely affect our
operating results.

Providers of outsourced drug development services
compete on the basis of many factors, including the following:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | reputation for on-time quality performance;                                                    
|
| |  | expertise, experience and stability;                                                           
|
| |  | scope of service offerings;                                                                    
|
| |  | how well services are integrated;                                                              
|
| |  | strength in various geographic markets;                                                        
|
| |  | technological expertise and efficient drug
    development processes;                          
|
| |  | ability to acquire, process, analyze and report
    data in a time-saving, accurate manner; and
|
| |  | ability to manage large-scale clinical trials
    both domestically and internationally.       

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We have traditionally competed effectively on the
basis of the factors noted above, but we may not be able to
continue to do so. If we fail to compete successfully, our
business could be seriously harmed.

United States and Foreign Government
Regulation

Our laboratory services are subject to various
regulatory requirements designed to ensure the quality and
integrity of the development processes. The industry standards
for conducting pre-clinical laboratory testing are embodied in
the GLP and Good Manufacturing Practice (GMP)
regulations. The standards of GLP and GMP are required by the
FDA, the U.S. Environmental Protection Agency, the Department of
Health in the United Kingdom, the Health Protection Branch of
Health Canada, the Japanese Ministry of Health and Welfare, the
European Agency for the Evaluation of Medicinal Products and
similar regulatory authorities in other parts of the world. Such
standards are also the subject of guidance endorsed by the
Organisation for Economic Co-operation and Development. GLP and
GMP stipulate requirements for facilities, equipment and
professional staff. The regulations require standardized
procedures for conducting studies, including procedures for
recording and reporting data and for managing study materials
and records. To help satisfy our compliance obligations, we have
established quality assurance and quality control systems at our
laboratories that monitor ongoing compliance with GLP and GMP
regulations and the Clinical Laboratory Improvement Amendments,
as applicable, by auditing development data and conducting
inspections of development procedures. In addition, we have
obtained FDA approval to conduct Stability and Lot Release
Testing in compliance with GMP.

The industry standards for the conduct of
clinical research and development studies are embodied in the
regulations for Good Clinical Practice (GCP). The
FDA and other regulatory authorities require that results of
clinical trials that are submitted to such authorities be based
on studies conducted in accordance with GCP. These regulations
require that we, among other things:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | comply with specific requirements governing the
    selection of qualified investigators; 
|
| |  | obtain specific written commitments from the
    investigators;                           
|
| |  | verify that appropriate patient informed consent
    is obtained;                         
|
| |  | ensure adverse drug reactions are medically
    evaluated and reported in a timely manner;
|
| |  | monitor the validity and accuracy of data;                                                
|
| |  | verify drug or device accountability;                                                     
|
| |  | instruct investigators and studies staff to
    maintain records and reports; and         
|
| |  | permit appropriate governmental authorities
    access to data for their review.          

We must also maintain reports for each study for
specified periods for auditing by the study sponsor and by the
FDA or similar regulatory authorities in other parts of the
world. As with GLP, noncompliance with GCP can result in the
disqualification of data collected and reports issued during the
clinical trial. In addition, under certain clinical contracts,
we have directly assumed certain obligations of the study
sponsor under FDA regulations.

Our standard operating procedures are written in
accordance with regulations and guidelines appropriate to the
region and the nation where they will be used. All clinical
research is carried out in accordance with the International
Conference on Harmonization  Good Clinical Practice
Guidelines and the requirements of the applicable country.
Although the United States is a signatory to these guidelines,
the FDA has not adopted all of the 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 facilities are subject to a
variety of national, regional, and local laws and regulations,
including the U.K. Home Office Code of Practice for the Housing
and Care of Animals, the U.K. Animals (Scientific Procedures)
Act of 1986, the Canadian Health of Animals Act and regulations
promulgated under

8



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##### Table of Contents



such act by the Canada Food Inspection Agency,
the Japanese Basic Law on Food, Agriculture and Rural Areas and
regulations promulgated under such law by the Japanese Ministry
of Agriculture, Forestry and Fisheries. We also incorporate the
U.S. Department of Agriculture Animal Welfare Regulation into
our standard operating procedures. These regulations establish
the standards for the humane treatment, care and handling of
animals by dealers and research facilities. Our animal import
facilities maintain the certificates, licenses, detailed
standard operating procedures and other documentation necessary
to comply with applicable regulations for the humane treatment
of the animals in our custody. In addition, our animal research
facilities in Canada are accredited by the American Association
for Accreditation of Laboratory Animal Care and maintain a
Certification of Good Animal Practice with the Canadian Council
on Animal Care.


Our pre-clinical laboratories are subject to
licensing and regulation under national, regional and local laws
relating to the surface and air transportation of laboratory
specimens, the handling, storage and disposal of laboratory
specimens, hazardous waste and radioactive materials, and the
safety and health of laboratory employees, including, but not
limited to, the regulations of the U.K. Home Office, the
Scottish Environmental Protection Agency, the International Air
Transport Association, Environment Canada, the Canadian Nuclear
Safety Commission, the Quebec Ministry of the Environment and
Health and Social Services Quebec. Although we believe we are
currently in compliance in all material respects with such
national, regional and local laws, failure to comply could
subject us to denial of the right to conduct business, fines,
criminal penalties and other enforcement actions.

To ensure that we comply with all scientific and
medical regulatory matters we are subject to, each division of
our business has established an independent quality assurance
group that is responsible for monitoring compliance and that
reports directly to the relevant division president. In
compliance with GCP, we conduct our Phase I clinical trials
under the supervision of an Ethics Committee and have undertaken
measures to ensure the protection of personal data.

Potential Product Liability and
Insurance

We are liable to our clients for any failure to
conduct their studies properly according to the agreed upon
protocol and contract. If we fail to conduct a study properly in
accordance with the agreed upon procedures, we may have to
repeat the study at our expense, reimburse the client for the
cost of the study and pay additional damages.

At our Phase I clinic in Edinburgh, we study the
effects of drugs on healthy volunteers. In addition, in our
clinical business we, on behalf of our clients, contract with
physicians who render professional services, including the
administration of the substance being tested, to participants in
clinical trials, many of whom are seriously ill and are at great
risk of further illness or death as a result of factors other
than their participation in a trial. As a result, we could be
held liable for bodily injury, death, pain and suffering, loss
of consortium, or other personal injury claims and medical
expenses arising from a clinical trial.

To reduce our potential liability, informed
consent is sought from each volunteer and we obtain indemnity
provisions in our contracts with clients. These indemnities
generally do not, however, protect us against certain of our own
actions such as those involving negligence or misconduct. Our
business, financial condition and operating results could be
materially and adversely affected if we were required to pay
damages or incur defense costs in connection with a claim that
is not indemnified, that is outside the scope of an indemnity or
where the indemnity, although applicable, is not honored in
accordance with its terms.

We maintain errors and omissions professional
liability insurance in amounts we believe to be appropriate.
This insurance provides coverage for vicarious liability due to
negligence of the investigators who contract with us, as well as
claims by our clients that a clinical trial was compromised due
to an error or omission by us. If our insurance coverage is not
adequate, or if insurance coverage does not continue to be
available on terms acceptable to us, our business, financial
condition and operating results could be materially and
adversely affected.

9



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##### Table of Contents



Intellectual Property Rights

We have developed, and continually develop and
update, certain computer software related methodologies intended
to maximize the quality and effectiveness of our services. We
believe such factors as the technical expertise, knowledge,
ability and experience of our professionals are significantly
more important to our performance than are any intellectual
property rights developed by us.

Employees

At December 31, 2002, we had 2,556
employees, of whom 124 held a Ph.D. or M.D. degree, 20 held
D.V.M. degrees and 172 held masters degrees. Approximately
13% of our employees are located in the United States, 44% are
located in Canada, 42% are located in Europe and less than 1%
are located in other international locations. We believe our
relations with our employees are good.

Our performance depends on our ability to attract
and retain a qualified management, professional, scientific and
technical staff. Competition from both our clients and
competitors for skilled personnel is high. While we have not
experienced any significant problems in attracting or retaining
qualified staff to date, there can be no assurance we will be
able to continue to attract and retain personnel in the future.

Suppliers

We purchase the animals used in our in vivostudies from a number of different suppliers. We do not have
long-term contracts with any of these suppliers. However, we
believe that we will continue to be able to meet our current
supply needs and any increase in these needs resulting from the
planned expansion of our pre-clinical operations.






|        |           
|------- | ----------
|Item 2. | Properties

We own some of our facilities and lease others.
We lease our corporate headquarters office space in Cary, North
Carolina. Our pre-clinical operations are conducted from our
300,000 square foot facility located in Tranent, Scotland and
our 323,000 square foot facility located in Montreal, Canada,
both of which we own. Our clinical operations are conducted from
our 180,000 square foot leased facility in Cary, North Carolina,
our 20,700 square foot owned Phase I facility in Edinburgh, our
smaller owned facility in Edinburgh, our pre-clinical facility
in Tranent and our leased facilities in Maidenhead (England),
Glasgow, Brussels, Milan, Paris, Tel Aviv, Warsaw, Madrid,
Prague, and Munich.

We believe the space we own and lease is adequate
for our operations.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

From time to time we are subject to claims, suits
and administrative proceedings arising in the ordinary course of
business. We do not expect that any of the claims, suits or
proceedings of which we have been notified will have a material
adverse effect upon our operations or financial condition.






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

None.

10



---



##### Table of Contents






PART II






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

Our common stock began trading on the Nasdaq
Stock Markets National Market on June 28, 2002 under
the symbol IRGI. The following table sets forth the
high and low sales prices of our common stock as reported by the
Nasdaq Stock Market for the periods indicated.

|     |                                           |      |   |       |  |  |   |       | 
|---- | ----------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                                           | High |   | Low  
|     |                                           |      |   |      
|2003 |                                           |      |   |       |  |  |   |      
|     | First quarter (through February 14, 2003) |      | $ | 21.65 |  |  | $ | 16.67 | 

|     |                                     |      |   |       |  |  |   |       | 
|---- | ----------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|     |                                     | High |   | Low  
|     |                                     |      |   |      
|2002 |                                     |      |   |       |  |  |   |      
|     | Second quarter (from June 28, 2002) |      | $ | 13.15 |  |  | $ | 12.96 | 
|     | Third quarter                       |      | $ | 19.05 |  |  | $ | 8.67  | 
|     | Fourth quarter                      |      | $ | 22.12 |  |  | $ | 16.55 | 

Stockholders

As of February 12, 2003, there were
approximately 25 holders of record of our shares of common
stock.

Dividends

We have not paid any dividends in the past and
currently we do not expect to pay cash dividends or make any
other distributions in the foreseeable future. We expect to
retain our future earnings, if any, for use in the operation and
expansion of our business. Any future determination to pay
dividends will be at the discretion of our board of directors
and will depend upon our financial condition, operating results,
capital requirements and such other factors as our board deems
relevant. In addition, our ability to declare and pay dividends
on our shares is restricted by (i) covenants in our credit
facilities and (ii) our corporate organizational structure
(which imposes a significant tax burden on intercompany
dividends and distributions of earnings to us by our operating
subsidiaries).

Equity Compensation Plan Information

|                                                               |       |                         |           |                      |  |                         |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------------- | --------- | -------------------- |  | ----------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       |                         |           |                      |  | Number of securities   
|                                                               |       |                         |           |                      |  | remaining available for
|                                                               |       |                         |           |                      |  | future issuance under  
|                                                               |       | Number of securities to |           | Weighted-average     |  | equity compensation    
|                                                               |       | be issued upon exercise |           | exercise price of    |  | plans (excluding       
|                                                               |       | of outstanding options, |           | outstanding options, |  | securities reflected in
|Plan category                                                  |       | warrants and rights     |           | warrants and rights  |  | column(a))             
|                                                               |       |                         |           |                      |  |                        
|                                                               |       | (a)                     |           | (b)                  |  | (c)                    
|Equity compensation plans approved by security
    holders     |       |                         | 2,366,217 |                      |  | $                       | 5.05 |      |  |  | 2,765,190 |          
|Equity compensation plans not approved by
    security holders |       |                         |          |                      |  |                         |     |      |  |  |          |          
|                                                               |       |                         |           |                      |  |                         |      |      |  |  |           |          
|                                                               | Total |                         |           | 2,366,217            |  |                         | $    | 5.05 |  |  |           | 2,765,190 | 
|                                                               |       |                         |           |                      |  |                         |      |      |  |  |           |          






|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

You should read the selected consolidated
financial information presented below in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the related notes. The financial
information presented below for the three years ended
December 31, 2002, December 30, 2001 and
December 31, 2000 and for the period from
September 20, 1999 to December 26, 1999 reflect the
results of operations of Inveresk Research Group, Inc. and
Inveresk Research Group Limited, which became our direct
subsidiary immediately prior to our initial public offering. The
financial information for the period from December 28, 1998 to
September 19, 1999 and for the year ended December 27,
1998 reflects the results of operations of our business while it
operated as a

11



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##### Table of Contents



division of SGS Société
Générale de Surveillance SA. Information for the year
ended December 30, 2001 includes the results of operations
of ClinTrials Research Inc. from April 5, 2001.


The selected consolidated financial data
presented below for each of the three years ended
December 31, 2002, December 30, 2001 and
December 31, 2000 were derived from the audited
consolidated financial statements of Inveresk Research Group,
Inc., included herein. The selected consolidated financial data
presented below for the periods from September 20, 1999 to
December 26, 1999 and from December 28, 1998 to
September 19, 1999 were derived from the audited
consolidated financial statements of Inveresk Research Group
Limited, which are not included herein. The selected
consolidated financial data presented below for the year ended
December 27, 1998 were derived from unaudited financial
statements prepared on the basis of data furnished by SGS
Société Générale de Surveillance SA, which
are not presented herein.

As a consequence of the adoption of FAS 142 with
effect from January 1, 2002, the amortization expense shown
for 2002 in the selected consolidated financial data presented
below is not on a consistent basis of accounting with earlier
periods. The impact of this is shown in Note 4 of our
consolidated financial statements included herein.

12



---



##### Table of Contents



Statement of Operations Data:

|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |         |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------------ | - | ------------ | ------- | ------------- | - | ------------- | ------- | ------------ | - | - | ------ | ---------- | - | - | ------- | ------ | - | - | ------- | ------- | -
|                                                                |                                                                                       |                                                         |          |             
|                                                                |                                                                                       | Inveresk Research Group(1)(4)                           |          | Predecessor 
|                                                                |                                                                                       |                                                         |          |             
|                                                                |                                                                                       |                                                         |          | 52 Weeks     |   | 53 Weeks     |         | September 20, |   | December 28,  |         | 52 Weeks    
|                                                                |                                                                                       | Year Ended                                              |          | Ended        |   | Ended        |         | 1999 to       |   | 1998 to       |         | Ended       
|                                                                |                                                                                       | December 31,                                            |          | December 30, |   | December 31, |         | December 26,  |   | September 19, |         | December 27,
|                                                                |                                                                                       | 2002                                                    |          | 2001         |   | 2000         |         | 1999          |   | 1999          |         | 1998        
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |             
|                                                                |                                                                                       |                                                        
|                                                                |                                                                                       | (Dollars in thousands, except share and per share data)
|Net service revenues                                            |                                                                                       | $                                                       | 222,462  |              |   | $            | 156,296 |               |   | $             | 65,540  |              |   | $ | 16,832 |            |   | $ | 47,088  |        |   | $ | 58,219  |        
|Direct costs excluding depreciation                             |                                                                                       |                                                         | (110,099 | )            |   |              | (83,975 | )             |   |               | (36,133 | )            |   |   | (9,645 | )          |   |   | (27,177 | )      |   |   | (31,816 | )      
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|                                                                |                                                                                       |                                                         | 112,363  |              |   |              | 72,321  |               |   |               | 29,407  |              |   |   | 7,187  |            |   |   | 19,911  |        |   |   | 26,403  |        
|Selling, general and administrative expenses:                   |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|                                                                | Compensation expense in respect of share options
    and management equity incentives |                                                         |          | (53,020      | ) |              |         |              |   |               |         |             |   |   |        |           |   |   |         |       |   |   |         |        |  
|                                                                | U.K. stamp duty taxes on change of ultimate
    parent company                        |                                                         |          | (1,545       | ) |              |         |              |   |               |         |             |   |   |        |           |   |   |         |       |   |   |         |        |  
|                                                                | Other selling, general and administrative expenses                                    |                                                         |          | (56,455      | ) |              |         | (41,934       | ) |               |         | (13,825      | ) |   |        | (3,275     | ) |   |         | (9,013 | ) |   |         | (12,746 | )
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Total selling, general and administrative expenses              |                                                                                       |                                                         | (111,020 | )            |   |              | (41,934 | )             |   |               | (13,825 | )            |   |   | (3,275 | )          |   |   | (9,013  | )      |   |   | (12,746 | )      
|Depreciation                                                    |                                                                                       |                                                         | (10,315  | )            |   |              | (8,028  | )             |   |               | (4,513  | )            |   |   | (809   | )          |   |   | (3,731  | )      |   |   | (4,268  | )      
|Amortization of goodwill and intangibles(5)                     |                                                                                       |                                                         |         |              |   |              | (7,910  | )             |   |               | (3,281  | )            |   |   | (973   | )          |   |   | (242    | )      |   |   | (345    | )      
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Income (loss) from operations                                   |                                                                                       |                                                         | (8,972   | )            |   |              | 14,449  |               |   |               | 7,788   |              |   |   | 2,130  |            |   |   | 6,925   |        |   |   | 9,044   |        
|Interest income (expense), net                                  |                                                                                       |                                                         | (11,312  | )            |   |              | (17,101 | )             |   |               | (7,522  | )            |   |   | (2,004 | )          |   |   | (560    | )      |   |   | 195     |        
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Income (loss) before income taxes and
    extraordinary items   |                                                                                       |                                                         | (20,284  | )            |   |              | (2,652  | )             |   |               | 266     |              |   |   | 126    |            |   |   | 6,365   |        |   |   | 9,239   |        
|Provision for income taxes                                      |                                                                                       |                                                         | (6,144   | )            |   |              | (2,049  | )             |   |               | (682    | )            |   |   | (325   | )          |   |   | (2,308  | )      |   |   | (2,465  | )      
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Net income (loss) before extraordinary items                    |                                                                                       |                                                         | (26,428  | )            |   |              | (4,701  | )             |   |               | (416    | )            |   |   | (199   | )          |   |   | 4,057   |        |   |   | 6,774   |        
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Extraordinary items(6)                                          |                                                                                       |                                                         | (1,581   | )            |   |              | (419    | )             |   |               |        |              |   |   |       |            |   |   |        |        |   |   |        |        
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Net income (loss)                                               |                                                                                       | $                                                       | (28,009  | )            |   | $            | (5,120  | )             |   | $             | (416    | )            |   | $ | (199   | )          |   | $ | 4,057   |        |   | $ | 6,774   |        
|                                                                |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|Earnings (loss) per share before
    extraordinary items:(2)(3) |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|                                                                | Basic                                                                                 |                                                         | $        | (0.89        | ) |              | $       | (0.22         | ) |               | $       | (0.03        | ) |   | $      | (0.01      | ) |   |         | N/A    |   |   |         | N/A     |  
|                                                                | Diluted                                                                               |                                                         | $        | (0.89        | ) |              | $       | (0.22         | ) |               | $       | (0.03        | ) |   | $      | (0.01      | ) |   |         | N/A    |   |   |         | N/A     |  
|Earnings (loss) per share after
    extraordinary items:(2)(3)  |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|                                                                | Basic                                                                                 |                                                         | $        | (0.94        | ) |              | $       | (0.24         | ) |               | $       | (0.03        | ) |   | $      | (0.01      | ) |   |         | N/A    |   |   |         | N/A     |  
|                                                                | Diluted                                                                               |                                                         | $        | (0.94        | ) |              | $       | (0.24         | ) |               | $       | (0.03        | ) |   | $      | (0.01      | ) |   |         | N/A    |   |   |         | N/A     |  
|Weighted average number of common shares
    outstanding:(2)(3) |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|                                                                | Basic                                                                                 |                                                         |          | 29,735,957   |   |              |         | 21,489,571    |   |               |         | 15,803,724   |   |   |        | 15,803,724 |   |   |         | N/A    |   |   |         | N/A     |  
|                                                                | Diluted                                                                               |                                                         |          | 29,735,957   |   |              |         | 21,489,571    |   |               |         | 15,803,724   |   |   |        | 15,803,724 |   |   |         | N/A    |   |   |         | N/A     |  
|Dividends per share(2)(3)                                       |                                                                                       |                                                         |         |              |   |              |        |               |   |               |        |              |   |   |       |            |   |   | N/A     |        |   |   | N/A     |        
|Other data:                                                     |                                                                                       |                                                         |          |              |   |              |         |               |   |               |         |              |   |   |        |            |   |   |         |        |   |   |         |        
|                                                                | Depreciation and amortization                                                         |                                                         | $        | 10,315       |   |              | $       | 15,938        |   |               | $       | 7,794        |   |   | $      | 1,782      |   |   | $       | 3,973  |   |   | $       | 4,613   |  
|                                                                | Capital expenditures                                                                  |                                                         | $        | 25,497       |   |              | $       | 11,145        |   |               | $       | 6,792        |   |   | $      | 1,307      |   |   | $       | 5,305  |   |   | $       | 6,725   |  

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Balance Sheet Data:

|                                     |  |                         |         |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |        | 
|------------------------------------ |  | ----------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- |  |  | - | ------ | 
|                                     |  |                         |         |             
|                                     |  | Inveresk Research Group |         | Predecessor 
|                                     |  |                         |         |             
|                                     |  | December 31,            |         | December 30, |  | December 31, |         | December 26, |  | December 27,
|                                     |  | 2002                    |         | 2001         |  | 2000         |         | 1999         |  | 1998        
|                                     |  |                         |         |              |  |              |         |              |  |             
|                                     |  |                        
|                                     |  | (Dollars in thousands) 
|Cash and cash equivalents            |  | $                       | 19,909  |              |  | $            | 16,118  |              |  | $            | 9,686   |  |  | $ | 7,009   |  |  | $ | 4,039  | 
|Total assets                         |  |                         | 332,467 |              |  |              | 301,826 |              |  |              | 124,568 |  |  |   | 129,180 |  |  |   | 79,039 | 
|Current portion of long-term debt    |  |                         | 217     |              |  |              | 127,648 |              |  |              | 3,080   |  |  |   | 3,261   |  |  |   | 1,041  | 
|Long-term debt                       |  |                         | 67,768  |              |  |              | 85,109  |              |  |              | 80,898  |  |  |   | 84,653  |  |  |   | 70     | 
|                                     |  |                         |         |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |        | 
|Total shareholders equity (deficit) |  | $                       | 152,403 |              |  | $            | (7,385  | )            |  | $            | 247     |  |  | $ | 712     |  |  | $ | 37,109 | 
|                                     |  |                         |         |              |  |              |         |              |  |              |         |  |  |   |         |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective as of the beginning of 2002, our fiscal
    years end consistently on December 31 and our fiscal
    quarters end consistently on the last calendar day in the
    quarter. Before 2002, our fiscal years ended on the last Sunday
    on or prior to December 31 and our fiscal quarters ended on
    the last Sunday on or prior to the relevant quarter end.                                                                                                                                   
|   
|(2) | Prior to September 20, 1999, our businesses
    were operated as a division of SGS Société
    Générale de Surveillance Holdings SA. Share and per
    share data for these periods is not meaningful and has not been
    presented.                                                                                                                                                                                                                                                                       
|   
|(3) | As more fully described in Note 4 to the
    consolidated financial statements, share and earnings per share
    data for periods prior to the date of our initial public
    offering in June 2002, have been calculated as if the historical
    outstanding shares in Inveresk Research Group Limited had been
    converted to common stock in Inveresk Research Group, Inc. using
    the conversion ratios applicable to change in ultimate parent
    company which took place on June 25, 2002.     
|   
|(4) | We have completed two significant acquisitions
    during the period covered by the above selected consolidated
    financial information presented above. These are the management
    buyout completed on September 20, 1999 and our acquisition
    of ClinTrials, which was completed on April 5, 2001. A
    description of these acquisitions is given in the overview to
    Managements Discussion and Analysis of Financial
    Condition and Results of Operation section of this
    document.
|   
|(5) | FAS 142 was adopted with effect from
    January 1, 2002. As a consequence, there is no amortization
    of goodwill in 2002. The effect of adoption of FAS 142 is shown
    in Note 4 of our consolidated financial statements included
    herein.                                                                                                                                                                                                                                                        
|   
|(6) | Extraordinary items represent the extinguishment
    of deferred debt costs on debt facilities which were cancelled
    at the time of the acquisition of ClinTrials in April 2001 and
    also at the time of our initial public offering in June 2002.                                                                                                                                                                                                                                                    

14



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operation

The following discussion should be read in
conjunction with our consolidated financial statements.

Recent Corporate History and
Overview

On September 20, 1999, we completed a
management buyout supported by Candover Investments PLC. In that
transaction, Inveresk Research Group Limited, a newly created
Scottish company, acquired the businesses that comprise our
European pre-clinical operations, our Phase I clinical trials
operations located in Edinburgh and the original Inveresk
Research Phase II-IV clinical development services operations.
As part of the transaction, we also acquired Inveresk Research
North America, Inc., which operated a small Phase II-IV
clinical development services business located in the United
States. The total acquisition cost was $78.8 million, net
of cash acquired of $9.1 million. In connection with
financing this acquisition we received a $0.8 million
equity investment from Candover Investments PLC, Candover
(Trustees) Limited (a wholly-owned subsidiary of Candover
Investments PLC), certain investment funds indirectly controlled
by Candover Investments PLC and management, borrowed
$43.8 million from certain of these Candover entities by
issuing to them 10% unsecured subordinated loan stock due 2008
and borrowed $41.4 million under bank credit facilities.

The financial information in this document
divides the 1999 financial year into two periods  the
period prior to September 20, 1999, when the original
Inveresk Research businesses were under the ownership and
control of its previous parent company, and the post acquisition
period from September 20, 1999 to December 26,1999.

On April 5, 2001, we completed the
acquisition of ClinTrials. The total acquisition cost was
$115.1 million, net of cash acquired of $5.7 million.
To finance this acquisition we received a $0.4 million
additional equity investment from Candover Investments PLC,
Candover (Trustees) Limited and certain investment funds
indirectly controlled by Candover Investments PLC, borrowed
$64.8 million from certain of these Candover entities by
issuing to them an additional 10% unsecured subordinated loan
stock due 2008 and borrowed $93.7 million under bank credit
facilities, $38.3 million of which was used to repay loans
under other credit facilities.

Effective June 25, 2002, we changed our
ultimate parent company from a company organized in Scotland to
a corporation organized in Delaware.

On July 3, 2002, we completed our initial
public offering of 12 million shares of common stock at a
price of $13 per share. The net proceeds from the offering,
together with drawings under our new bank credit facility and
existing cash resources, were used to repay all of the
outstanding principal and interest under our former bank
facility and our 10% unsecured subordinated loan stock due 2008.

We were highly leveraged from the time of our
management buyout in 1999 until the completion of our initial
public offering. This leverage was due in part to the structure
of our management buyout and in part to the incurrence of
additional significant indebtedness in connection with our
acquisition of ClinTrials in 2001. Our interest expense has
therefore been high in relation to our income before taxes. We
believe that, because of the size of our interest expense during
the period preceding the completion of our initial public
offering, our income from operations (i.e., before interest
income and interest expenses) is a better measure of the past
performance of our businesses than income (or loss) before
income taxes or net income (loss).

15



---



##### Table of Contents



We operate in two segments for financial
reporting purposes: pre-clinical and clinical. The following
table shows, for the periods indicated, a summary of our
financial performance by business segment.

|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |        |  
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | -------- | ------------ | - | ------------ | ------- | ------ | - | - | ------- | ------ | -
|                                                                                      |                                                                                                                                    | Year Ended             |          | Year Ended   |   | Year Ended  
|                                                                                      |                                                                                                                                    | December 31,           |          | December 30, |   | December 31,
|                                                                                      |                                                                                                                                    | 2002                   |          | 2001         |   | 2000        
|                                                                                      |                                                                                                                                    |                        |          |              |   |             
|                                                                                      |                                                                                                                                    |                       
|                                                                                      |                                                                                                                                    | (Dollars in thousands)
|Net service revenue:                                                                  |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Pre-clinical                                                                          |                                                                                                                                    | $                      | 142,174  |              |   | $            | 95,172  |        |   | $ | 45,136  |       
|Clinical                                                                              |                                                                                                                                    |                        | 80,288   |              |   |              | 61,124  |        |   |   | 20,404  |       
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      |                                                                                                                                    |                        | 222,462  |              |   |              | 156,296 |        |   |   | 65,540  |       
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Direct costs excluding depreciation:                                                  |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Pre-clinical                                                                          |                                                                                                                                    |                        | (62,959  | )            |   |              | (44,952 | )      |   |   | (22,666 | )     
|Clinical                                                                              |                                                                                                                                    |                        | (47,140  | )            |   |              | (39,023 | )      |   |   | (13,467 | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      |                                                                                                                                    |                        | (110,099 | )            |   |              | (83,975 | )      |   |   | (36,133 | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Selling, general and administrative
    expenses:                                     |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Pre-clinical                                                                          |                                                                                                                                    |                        | (27,772  | )            |   |              | (21,907 | )      |   |   | (9,850  | )     
|Clinical                                                                              |                                                                                                                                    |                        | (21,728  | )            |   |              | (15,619 | )      |   |   | (2,278  | )     
|Corporate overhead:                                                                   |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Other selling, general and administrative expenses                                    |                                                                                                                                    |                        | (6,955   | )            |   |              | (4,408  | )      |   |   | (1,697  | )     
|Compensation expense in respect of share options
    and management equity incentives |                                                                                                                                    |                        | (53,020  | )            |   |              |        |        |   |   |        |       
|U.K. stamp duty taxes arising on change of
    ultimate parent company                |                                                                                                                                    |                        | (1,545   | )            |   |              |        |        |   |   |        |       
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      |                                                                                                                                    |                        | (111,020 | )            |   |              | (41,934 | )      |   |   | (13,825 | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Depreciation:                                                                         |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Pre-clinical                                                                          |                                                                                                                                    |                        | (7,939   | )            |   |              | (6,062  | )      |   |   | (4,158  | )     
|Clinical                                                                              |                                                                                                                                    |                        | (2,376   | )            |   |              | (1,966  | )      |   |   | (355    | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      |                                                                                                                                    |                        | (10,315  | )            |   |              | (8,028  | )      |   |   | (4,513  | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Amortization of goodwill and
    intangibles:(1)                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Pre-clinical                                                                          |                                                                                                                                    |                        |         |              |   |              | (4,293  | )      |   |   | (2,364  | )     
|Clinical                                                                              |                                                                                                                                    |                        |         |              |   |              | (3,617  | )      |   |   | (917    | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      |                                                                                                                                    |                        |         |              |   |              | (7,910  | )      |   |   | (3,281  | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      | Income (loss) from operations:                                                                                                     |                        |          |              |   |              |         |        |   |   |         |        |  
|                                                                                      | Pre-clinical                                                                                                                       |                        |          | 43,504       |   |              |         | 17,958 |   |   |         | 6,098  |  
|                                                                                      | Clinical                                                                                                                           |                        |          | 9,044        |   |              |         | 899    |   |   |         | 3,387  |  
|                                                                                      | Corporate overhead including compensation expense
    and UK stamp duty and other selling, general and administrative
    expenses |                        |          | (61,520      | ) |              |         | (4,408 | ) |   |         | (1,697 | )
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      |                                                                                                                                    |                        | (8,972   | )            |   |              | 14,449  |        |   |   | 7,788   |       
|Interest expense, net                                                                 |                                                                                                                                    |                        | (11,312  | )            |   |              | (17,101 | )      |   |   | (7,522  | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      | Income (loss) before income taxes and
    extraordinary items                                                                      |                        |          | (20,284      | ) |              |         | (2,652 | ) |   |         | 266    |  
|Provision for income taxes                                                            |                                                                                                                                    |                        | (6,144   | )            |   |              | (2,049  | )      |   |   | (682    | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|                                                                                      | Net income (loss) before extraordinary
    items                                                                                   |                        |          | (26,428      | ) |              |         | (4,701 | ) |   |         | (416   | )
|Extraordinary items                                                                   |                                                                                                                                    |                        | (1,581   | )            |   |              | (419    | )      |   |   |        |       
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       
|Net income (loss)                                                                     |                                                                                                                                    | $                      | (28,009  | )            |   | $            | (5,120  | )      |   | $ | (416    | )     
|                                                                                      |                                                                                                                                    |                        |          |              |   |              |         |        |   |   |         |       



---



|    |                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | FAS 142 was adopted with effect from
    January 1, 2002. As a consequence, there is no amortization
    of goodwill in 2002. The effect of adoption of FAS 142 is shown
    in Note 4 to our audited financial statements included herein.

16



---



##### Table of Contents



The following table summarizes the above results
of operations as a percentage of net service revenue:

|                                                              |                                |              |       |              |    |              |       |      |   |  |       |      |  
|------------------------------------------------------------- | ------------------------------ | ------------ | ----- | ------------ | -- | ------------ | ----- | ---- | - |  | ----- | ---- | -
|                                                              |                                | Year Ended   |       | Year Ended   |    | Year Ended  
|                                                              |                                | December 31, |       | December 30, |    | December 31,
|                                                              |                                | 2002         |       | 2001         |    | 2000        
|                                                              |                                |              |       |              |    |             
|Net service revenue:                                          |                                |              |       |              |    |              |       |      |   |  |       |     
|Pre-clinical                                                  |                                |              | 100.0 | %            |    |              | 100.0 | %    |   |  | 100.0 | %   
|Clinical                                                      |                                |              | 100.0 | %            |    |              | 100.0 | %    |   |  | 100.0 | %   
|Total                                                         |                                |              | 100.0 | %            |    |              | 100.0 | %    |   |  | 100.0 | %   
|Direct costs excluding depreciation:                          |                                |              |       |              |    |              |       |      |   |  |       |     
|Pre-clinical                                                  |                                |              | 44.3  | %            |    |              | 47.2  | %    |   |  | 50.2  | %   
|Clinical                                                      |                                |              | 58.7  | %            |    |              | 63.8  | %    |   |  | 66.0  | %   
|Total                                                         |                                |              | 49.5  | %            |    |              | 53.7  | %    |   |  | 55.1  | %   
|Selling, general and administrative expenses:                 |                                |              |       |              |    |              |       |      |   |  |       |     
|Pre-clinical                                                  |                                |              | 19.5  | %            |    |              | 23.0  | %    |   |  | 21.8  | %   
|Clinical                                                      |                                |              | 27.1  | %            |    |              | 25.6  | %    |   |  | 11.2  | %   
|Total(1)                                                      |                                |              | 49.9  | %            |    |              | 26.8  | %    |   |  | 21.1  | %   
|Depreciation:                                                 |                                |              |       |              |    |              |       |      |   |  |       |     
|Pre-clinical                                                  |                                |              | 5.6   | %            |    |              | 6.4   | %    |   |  | 9.2   | %   
|Clinical                                                      |                                |              | 3.0   | %            |    |              | 3.2   | %    |   |  | 1.7   | %   
|Total                                                         |                                |              | 4.6   | %            |    |              | 5.1   | %    |   |  | 6.9   | %   
|Amortization of goodwill and intangibles:                     |                                |              |       |              |    |              |       |      |   |  |       |     
|Pre-clinical                                                  |                                |              | 0.0   | %            |    |              | 4.5   | %    |   |  | 5.2   | %   
|Clinical                                                      |                                |              | 0.0   | %            |    |              | 5.9   | %    |   |  | 4.5   | %   
|Total                                                         |                                |              | 0.0   | %            |    |              | 5.1   | %    |   |  | 5.0   | %   
|                                                              | Income (loss) from operations: |              |       |              |    |              |       |      |   |  |       |      |  
|                                                              | Pre-clinical                   |              |       | 30.6         | %  |              |       | 18.9 | % |  |       | 13.5 | %
|                                                              | Clinical                       |              |       | 11.3         | %  |              |       | 1.5  | % |  |       | 16.6 | %
|                                                              | Total(1)                       |              |       | (4.0         | )% |              |       | 9.2  | % |  |       | 11.9 | %
|Interest expense, net                                         |                                |              | (5.1  | )%           |    |              | (10.9 | )%   |   |  | (11.5 | )%  
|Income (loss) before income taxes and
    extraordinary items |                                |              | (9.1  | )%           |    |              | (1.7  | )%   |   |  | 0.4   | %   



---



|    |                              
|--- | -----------------------------
|(1) | Including corporate overhead.

Net Service Revenue.We recognize revenue as costs are
incurred and include estimated earned fees or profits calculated
on the basis of the relationship between costs incurred and
total estimated costs (cost-to-cost type of
percentage-of-completion method of accounting). We recognize
revenue related to contract modifications when realization is
assured and the amounts can be reasonably determined. When
estimated contract costs indicate that a loss will be incurred
on a contract, the entire loss is provided for in such period.

Costs associated with contracting with third
party investigators are excluded from net service revenue where
they are the direct responsibility of the clients and are passed
through to our clients without any mark-up.

Once a contract for a pre-clinical or clinical
trial has been signed, the commencement date may vary depending
upon the preparedness of the clients drug candidate and
our capacity availability.

Direct Costs Excluding Depreciation.These comprise the costs of the direct
work force, laboratory consumables and other direct costs
associated with the studies we perform for clients.

17



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##### Table of Contents



Selling, General and Administrative Expenses.These comprise administration costs,
marketing expenditure and overhead costs such as the costs of
running our facilities that are not allocated to direct costs.
These expenses also include corporate overhead costs that are
not directly attributable to our operating businesses and
include certain costs related to group management, insurance,
marketing, professional fees and property.

Depreciation and Amortization.Depreciation represents the
depreciation charged on our tangible fixed assets in accordance
with the accounting policies set out in Note 4 of our
consolidated financial statements included herein, Summary of
Significant Accounting Policies  Property, Plant and
Equipment.Amortization represents the amortization of
goodwill and other intangible assets over their estimated useful
lives. As described in Note 4 of our consolidated financial
statements included herein, Summary of Significant Accounting
Policies  Intangible Assets, the accounting
policy relating to amortization of goodwill changed with effect
from January 1, 2002 such that, unless it is necessary to
record an impairment of the goodwill, no amortization of the
goodwill is recorded after January 1, 2002.

Interest Expense (Net).Prior to our initial public offering
completed in July 2002 this included interest on our bank debt
and our 10% unsecured subordinated loan stock due 2008. The bank
debt bore interest at rates that ranged between LIBOR plus 2.25%
and LIBOR plus 2.75%. The unsecured subordinated loan stock due
2008 accumulated interest at a fixed rate of 10%. We entered
into an interest rate cap and collar transaction in 1999 on
borrowings in connection with our management buyout. In 2001 we
entered into two interest rate swap arrangements in connection
with the incremental borrowings used to fund the ClinTrials
acquisition. These swaps had the effect of fixing the LIBOR rate
at 6.03% on the pounds sterling borrowings and 5.41% on the
Canadian dollar borrowings. In years prior to 2001, interest
expense included the amortization of costs associated with the
cap and collar transaction, in line with the accounting
standards then in force. In 2001, interest expense included the
cost of recording the cap and collar transaction and the
interest rate swaps at their fair values.

Shortly after the completion of our initial
public offering, we used the net proceeds from the offering,
together with borrowings under our new bank credit facility and
existing cash resources, to repay all of the outstanding
principal and interest under our former bank facility and our
10% unsecured subordinated loan stock due 2008. The interest
rate hedges entered into in connection with our previously
outstanding bank borrowings were subsequently terminated.

At February 15, 2003 we had bank borrowings
of $65.0 million outstanding under the credit facility that
we put in place at the time of our initial public offering.
These bank borrowings bear interest at floating LIBOR based
rates. We have entered into two interest swap arrangements
related to these borrowings. The first arrangement is an
interest rate swap that has a notional amount of
$50 million and expires on October 5, 2005. Under this
arrangement the interest rate on $50 million of our debt
due under our credit facility is fixed at 4.23%. The second
arrangement is an interest rate swap that has a notional amount
of $10 million and expires on October 5, 2004. Under
this arrangement the interest rate on $10 million of our
debt due under our credit facility is fixed at 3.77%. The
interest expense in the fourth quarter of 2002 included the cost
of marking the value of these swaps to their market value at
December 31, 2002.

Critical Accounting Policies and
Estimates

Our significant accounting policies are described
in Note 4 to the consolidated financial statements included in
Item 8 of this Form 10-K. We believe our most critical
accounting policies include revenue recognition and cost
estimation on certain contracts for which we use a
percentage-of-completion method of accounting. In addition, the
preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United
States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ from those estimates. A discussion of our critical
accounting policies and areas where significant estimates are
made is set forth in the following paragraphs.

18



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##### Table of Contents





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

The majority of our revenues are recorded from
fixed-price contracts on a percentage-of-completion basis based
on assumptions regarding the estimated cost of completion of the
work. Each month costs are accumulated on each project and
compared to the budget for that particular project. This
determines the percentage-of-completion on the project. This
percentage is multiplied by the contract value to determine the
amount of revenue that can be recognized. Each month or each
quarter, management reviews the budget on each project to
determine if the assumptions within the budget are still correct
and budgets are adjusted accordingly. As the work progresses,
original estimates might be deemed incorrect due to revisions in
the scope of work or other factors and a contract modification
might be negotiated with the customer to cover additional costs.
We bear the risk of cost overruns. In the past, we have had to
commit unanticipated resources to complete projects, resulting
in lower gross margins on those projects. We might experience
similar situations in the future. Should our estimated costs on
fixed price contracts prove to be low in comparison to actual
costs, future margins could be reduced, absent our ability to
negotiate a contract modification. We accumulate information on
each project to refine our bidding process. Historically, the
majority of our estimates and assumptions have been materially
correct, but these estimates might not continue to be accurate.
Clients generally may terminate a study at any time, which might
cause unplanned periods of excess capacity and reduced revenues
and earnings. To offset the effects of early terminations of
significant contracts, we attempt to negotiate the payment of an
early termination fee as part of the original contract.



| |                                    
| | -----------------------------------
| | Reserve for Losses on
    Contracts

We have a reserve for losses on contracts which
is split between Unbilled Receivables, net and
Accrued Expenses on our Consolidated Balance Sheets.
This reflects the fact that our revenue recognition process
involves a significant element of judgement in order to estimate
the outcome of each contract and that there may be instances
where the estimated costs are not covered by the estimated
contract revenues. In such instances, we accrue for the whole of
the estimated loss on the contract as soon as the estimated loss
is identified. We believe our reserve for losses on contracts
was adequate as of December 31, 2002 based on our
experience of performing contractual work for clients. However,
no assurances can be given that actual losses will not exceed
the recorded reserve.



| |         
| | --------
| | Pensions

Certain of our U.K. based subsidiaries maintain a
defined benefit pension plan. This plan provides benefits to
substantially all employees and former employees of these
subsidiaries in the U.K. On December 31, 2002 this plan was
closed to new entrants but it will continue to provide benefits
to existing beneficiaries (including existing employees who have
not yet retired).

The net periodic pension charge for the defined
benefit pension plan was $3.5 million for the year ended
December 31, 2002, $2.8 million for the 52 weeks
ended December 30, 2001 and $2.4 million for the
53 weeks ended December 31, 2000. These charges have
been calculated based upon a number of actuarial assumptions.
These include an expected long-term rate of return on our plan
assets, expected long-term rates of compensation increase, price
inflation, expected rates of increase for pensions in payment
and the discount rate applicable to the plan liabilities.

We review these assumptions annually. At
December 31, 2002 the assumptions were as follows:

|                               |  |  |     |  
|------------------------------ |  |  | --- | -
|Expected return on plan assets |  |  | 7.5 | %
|Rate of compensation increase  |  |  | 3.5 | %
|Rate of increase in pensions   |  |  | 2.0 | %
|Price inflation                |  |  | 2.0 | %
|Discount rate                  |  |  | 5.6 | %

If experience were to differ from these
assumptions there would be an impact on our pension liability.

19



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##### Table of Contents



Our pension plan assets are valued at their
market value at the end of each year. The allocation of our
pension plan assets is approximately 80% equities and 20% fixed
interest securities. The expected rate of return established at
December 30, 2001 and used during 2002 was 6%. As a result
of the negative return on investments actually achieved in 2002
we believe that there is greater potential for growth than was
the case a year ago and our long term expected rate of return on
plan assets at December 31, 2002 is 7.5%. This change of
1.5% will, in isolation, reduce our 2003 pension expense before
taxes by approximately $0.6 million.

The discount rate is set as the yield on AA-
rated corporate bonds. The discount rate was 6.0% at
December 30, 2001 and this rate was used to determine the
interest cost element of our pension expense in 2002. At
December 31, 2002 the discount rate has reduced to 5.6%.
This change, in the absence of any other factors, increases our
projected benefit obligation by approximately $6.6 million.
Such an increase would lead to additional amortization expense
in 2003 of approximately $0.4 million. However, there are
other factors, including the negative return in 2002 on the
pension plan assets which will impact our 2003 amortization
expense and the actual anticipated increase in the 2003
amortization expense is described in the following paragraph.

The projected benefit obligations under our
defined benefit plan exceed the fair value of the pension plan
assets at December 31, 2002 by $24.3 million. This
deficit has increased by $14.9 million during 2002 from
$9.4 million at the start of the year. The deficit is of a
magnitude that Statement of Financial Accounting Standards
(FAS) 87 requires us to record additional
amortization of the deficit through our income statement in 2003
amounting to $0.8 million. The additional amortization
expense through 2002 was $0.1 million and thus we anticipate
that in 2003 the amortization of the deficit element of our
pension expense will increase by $0.7 million.

Our actuaries also calculate the accumulated
benefit obligation of the plan at the end of each year and we
are required to record an additional liability if the value of
the plan assets and the net liabilities recognized is less than
the accumulated benefit obligation. In consequence, at
December 30, 2001 we recorded an additional liability of
$1.6 million and at December 31, 2002 we recorded a
further $8.0 million to bring the total additional
liability recorded to $9.6 million.

This additional charge is recorded through other
comprehensive income net of deferred taxes and does not affect
the income statement. However, it does reduce shareholders
equity. Shareholders equity is used as one figure in the
covenant calculations set out in our bank facility agreement and
while we are currently in compliance with our covenants, if the
deterioration of the funding position of the pension plan
continues in the future and we are required to record further
liabilities in future years, this could impact compliance with
our bank covenants.

Implementation of FAS 142 on January 1,
2002

The statement of operations for the year ended
December 31, 2002 does not include any expenses in respect
of the amortization of goodwill and intangibles. FAS
No. 142, Goodwill and Other Intangible Assets
(FAS 142), which became effective on January 1,
2002, altered the treatment of goodwill. Goodwill is no longer
subject to amortization through the statement of operations.
Instead, goodwill is subject to impairment testing on at least
an annual basis. The following table contains a presentation of
our income before

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extraordinary items, net income (loss) and
related per share amounts, calculated as if FAS 142 had been in
effect throughout the periods presented.


|                                                          |         |                                    |         |              |   |              |       |            |  |   |       |            | 
|--------------------------------------------------------- | ------- | ---------------------------------- | ------- | ------------ | - | ------------ | ----- | ---------- |  | - | ----- | ---------- | 
|                                                          |         |                                    |         | 52 Weeks     |   | 53 Weeks    
|                                                          |         | Year Ended                         |         | Ended        |   | Ended       
|                                                          |         | December 31,                       |         | December 30, |   | December 31,
|                                                          |         | 2002                               |         | 2001         |   | 2000        
|                                                          |         |                                    |         |              |   |             
|                                                          |         |                                   
|                                                          |         | (Dollars in thousands except share
|                                                          |         | and per share amounts)            
|Net income (loss) before extraordinary items              |         | $                                  | (26,428 | )            |   | $            | 2,378 |            |  | $ | 2,529 |           
|                                                          |         |                                    |         |              |   |              |       |            |  |   |       |           
|Net income (loss)                                         |         | $                                  | (28,009 | )            |   | $            | 1,959 |            |  | $ | 2,529 |           
|                                                          |         |                                    |         |              |   |              |       |            |  |   |       |           
|Earnings (loss) per share before
    extraordinary items: |         |                                    |         |              |   |              |       |            |  |   |       |           
|                                                          | Basic   |                                    | $       | (0.89        | ) |              | $     | 0.11       |  |   | $     | 0.16       | 
|                                                          | Diluted |                                    | $       | (0.89        | ) |              | $     | 0.11       |  |   | $     | 0.16       | 
|Earnings (loss) per share after
    extraordinary items:  |         |                                    |         |              |   |              |       |            |  |   |       |           
|                                                          | Basic   |                                    | $       | (0.94        | ) |              | $     | 0.09       |  |   | $     | 0.16       | 
|                                                          | Diluted |                                    | $       | (0.94        | ) |              | $     | 0.09       |  |   | $     | 0.16       | 
|Weighted average number of common shares
    outstanding: |         |                                    |         |              |   |              |       |            |  |   |       |           
|                                                          | Basic   |                                    |         | 29,735,957   |   |              |       | 21,489,571 |  |   |       | 15,803,724 | 
|                                                          | Diluted |                                    |         | 29,735,957   |   |              |       | 21,489,571 |  |   |       | 15,803,724 | 

In accordance with FAS 128 there is no dilution
shown in the above table in relation to the share options
outstanding in the years ended December 30, 2001 and
December 31, 2000. This is because exercise of all the
options concerned was conditional upon completion of a listing
of our shares on a recognized stock exchange and this condition
had not been satisfied at either year end.

Earnings Charges in Respect of the Change in
Ultimate Parent Company and in Respect of Equity-Based
Compensation

The transactions through which we changed our
ultimate parent company had several effects that required us to
take charges against earnings in 2002. These charges comprised:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Stamp Duty Taxes.As a result of
    the change in our ultimate parent company we were required to
    pay stamp duty taxes to the U.K. Inland Revenue. The aggregate
    amount of the stamp duty taxes paid by us in connection with
    this transaction was $1.5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (ii) A Compensation Charge in Respect of
    a Change in the Relative Equity Ownership of Certain Members of
    Management.Under the terms of a management incentive scheme
    originally put in place at the time of our leveraged buy-out in
    1999, managements percentage ownership of our common stock
    increased as a consequence of the change in our ultimate parent
    company. We were required under applicable accounting rules to
    record a compensation expense, or charge, equal to the increase
    in value of the equity ownership position of management
    resulting from the increase in their percentage ownership of us.
    This compensation expense amounted to $29.1 million.
|
| | (iii) A Compensation Charge in Respect of
    Certain Outstanding Employee Stock Options.Due to certain
    features of the stock options granted by us prior to the initial
    public offering, we were required to record a compensation
    expense in connection with the offering of $19.4 million.
    In addition, we recorded a further charge of $4.5 million
    for compensation expense on the amendment and exercise of share
    options in the first quarter of 2002.                                                                                                                                                                                                                                

In addition to the above, we also expect to incur
compensation-related charges when certain of our U.K.-based
employees exercise stock options issued before the date of our
initial public offering. This is because we will be required to
pay U.K. National Insurance contributions at the time of
exercise based on the profit realized when the option is
exercised.

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If all the relevant options were exercised when
our shares were trading at our initial public offering price of
$13 per share, the compensation charge would be
$1.3 million. If all the relevant options were exercised
when our shares were trading at $25 per share, the charge would
increase to $1.5 million. In the period from our initial
public offering to December 31, 2002, we incurred
compensation charges related to U.K. National Insurance
Contributions on the exercise of these stock options amounting
to $0.1 million.

Exchange Rate Fluctuations

Our consolidated financial statements are
prepared in U.S. dollars. Our principal businesses are based in
the United States, the United Kingdom and Canada. Our United
Kingdom and Canadian operations record their transactions in
local currencies. Accordingly, fluctuations in the pound
sterling and Canadian dollar exchange rates will impact the
results of operations reported in U.S. dollars.

The results of our non-U.S. operations have been
translated from pounds sterling and Canadian dollars using the
following average exchange rates:

|            |  |                  |        |                  |  |   |        |    
|----------- |  | ---------------- | ------ | ---------------- |  | - | ------ | ---
|            |  | U.S. Dollars per |        | U.S. Dollars per
|            |  | Pound Sterling   |        | Canadian Dollar 
|            |  |                  |        |                 
|Fiscal Year |  |                  |        |                  |  |   |        |    
|2000        |  | $                | 1.5156 |                  |  |   | N/A    |    
|2001        |  |                  | 1.4405 |                  |  | $ | 0.6428 | (1)
|2002        |  |                  | 1.5032 |                  |  |   | 0.6368 |    
|            |  |                  |        |                  |  |   |        |    



---



|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(1) | Average for the period from April 5, 2001,
    the date we acquired ClinTrials, to December 30, 2001.

The following table sets forth the percentage of
our net service revenue arising in the United Kingdom and Canada:

|            |  |                |    |        |  |  |    |  
|----------- |  | -------------- | -- | ------ |  |  | -- | -
|            |  | United Kingdom |    | Canada
|            |  |                |    |       
|Fiscal Year |  |                |    |        |  |  |    |  
|2000        |  |                | 98 | %      |  |  | 0  | %
|2001        |  |                | 54 | %      |  |  | 31 | %
|2002        |  |                | 46 | %      |  |  | 38 | %
|            |  |                |    |        |  |  |    |  

Our Canadian business invoices a significant
proportion of its revenues in U.S. dollars, although its costs
are largely in Canadian dollars. This can result in transaction
exchange gains or losses that are reflected in its statement of
operations. The foreign currency gains or losses recognized in
the statement of operations and included in Selling,
general and administrative expenses were a loss of
$0.4 million for the fiscal year ended December 31,
2002, a gain of $1.2 million for the fiscal year ended
December 30, 2001 and a loss of less than $0.1 million
for the fiscal year ended December 31, 2000.

Results of Operations



| |                                        
| | ---------------------------------------
| | Fiscal 2002 Compared to Fiscal
    2001

Net Service
Revenue.Our aggregate net service
revenue in 2002 was $222.5 million, an increase of
$66.2 million, or 42%, over 2001 net service revenue of
$156.3 million.

Pre-clinical.Net
service revenue in 2002 was $142.2 million, an increase of
$47.0 million, or 49%, over revenues of $95.2 million
in 2001. The Canadian pre-clinical operations of ClinTrials,
which we acquired in April 2001, contributed $84.6 million
to net revenue in 2002 compared to $48.2 million for the
nine month post acquisition period in 2001. Net service revenue
for the (non-ClinTrials) balance of our pre-clinical business
increased by $10.6 million, or 23% (17% when expressed in local
currency). Net service revenue from the pre-clinical operations
of ClinTrials increased by $21.2 million, or 33%, in 2002
compared to 2001 (including the period prior to April 6,
2001 when we acquired ClinTrials). Movements in exchange rates
did not have a material impact on the net service revenue of
these operations in 2002.

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Our pre-clinical business experienced exceptional
demand for its services in 2002, both for toxicology and
laboratory sciences services. As a consequence of this, and
particularly the high levels of utilization in our toxicology
facilities, in 2002 we focused on shifting this business
segments revenue mix further towards higher value-added,
higher margin specialty services, such as inhalation and
infusion toxicology studies. In parallel with this shift, our
laboratory sciences business benefited in 2002 from increased
demand in connection with the provision of specialty toxicology
services by us, as well as through increased demand for its
services independent of our toxicology services business. This
increased demand reflects our continuing strategy to increase
the proportion of our revenues generated by our laboratory
sciences services business within our pre-clinical business
segment.

Clinical.Net
service revenue from our clinical operations in 2002 was $80.3
million, an increase of $19.2 million, or 31%, over
revenues of $61.1 million in 2001. The clinical operations
of ClinTrials contributed $55.7 million to net revenue in
2002 compared to $40.4 million for the nine month post
acquisition period in 2001. Net service revenue for the
(non-ClinTrials) balance of our clinical business increased by
$3.9 million or 19% (14% when expressed in local currency).
Net service revenue from the ClinTrials clinical operations
increased by $6.3 million, or 13%, in 2002 compared to 2001
(including the period prior to April 6, 2001 when we
acquired ClinTrials), or 11% when expressed in local currency.

The Phase II-IV business experienced a 16%
increase in net service revenues in 2002 compared to 2001
(including the period prior to April 5, 2001 for the
acquired ClinTrials businesses) reflecting higher activity
levels in those operations and improved hourly revenue recovery
rates as we replaced old, less profitable ClinTrials contracts
with more appropriately priced new business. Our Phase I clinic
experienced growth in net service revenues of 9% in 2002
compared to 2001.

Direct Costs Excluding Depreciation.In 2002 direct costs excluding
depreciation totaled $110.1 million, an increase of
$26.1 million, or 31%, from $84.0 million in 2001. Direct
costs were 49% of net service revenue in 2002 compared to 54% in
2001.

Pre-clinical.Direct
costs excluding depreciation of our pre-clinical business in
2002 were $63.0 million, an increase of $18.0 million,
or 40%, over costs of $45.0 million in 2001. In 2002, these
costs were 44% of net service revenue, compared to 47% in 2001.
This improvement in gross margins reflects a continued emphasis
by management of our pre-clinical business on cost control and
improved business processes at a time when demand for our higher
value-added, higher margin toxicology and laboratory sciences
services have increased significantly.

Clinical.Direct
costs excluding depreciation of our clinical business in 2002
were $47.1 million, an increase of $8.1 million, or
21% over costs of $39.0 million in 2001. In 2002 these
costs were 59% of net service revenues compared to 64% in 2001
reflecting the continued focus of the management of our clinical
business on improved contract pricing and cost control,
particularly in the former ClinTrials businesses.

Selling, General and Administrative
Expenses.In 2002 selling, general
and administrative expenses totaled $111.0 million as
compared to $41.9 million in 2001. In 2002, an aggregate of
$54.6 million of these expenses consisted of charges
associated with our initial public offering and related change
in ultimate parent company. Excluding these charges, selling,
general and administrative expenses represented 25% of net
service revenues in 2002, compared with 27% in 2001.

Pre-clinical.Selling, general and administrative
costs in 2002 were $27.8 million, an increase of
$5.9 million, or 27%, from $21.9 million in 2001.
Approximately $1.5 million of this increase was
attributable to transaction exchange losses, which realized a
loss of $0.3 million in 2002 as compared to a gain of
$1.2 million in 2001. When expressed as a percentage of net
service revenue, selling, general and administrative costs
declined to 20% in 2002, from 23% in 2001, reflecting a
continued emphasis by the management of our pre-clinical
business on cost control and improved business processes at a
time when revenues increased significantly.

Clinical.Selling,
general and administrative costs in 2002 were
$21.7 million, an increase of $6.1 million, or 39%,
from $15.6 million in 2001. When expressed as a percentage
of net service revenue, selling, general and administrative
costs were 27% in 2002, compared to 26% in 2001. The principal
reason for

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this increase is the inclusion of the higher
costs (relative to net service revenue) of the acquired
ClinTrials businesses for the whole of 2002 compared to only
nine months in 2001.


Corporate Overhead.Corporate overhead in 2002 includes a compensation charge of
$23.9 million in respect of stock options, a charge of
$29.1 million in respect of other equity-based compensation
and a charge of $1.5 million relating to stamp duty taxes
payable on the change of ultimate parent company effected by us
immediately before our initial public offering. Other corporate
overhead amounted to $7.0 million. The increase in other
corporate overhead of $2.5 million, or 58%, over 2001 is
due primarily to the additional costs associated with becoming a
publicly listed company.

Amortization of Intangible Assets.Pursuant to the requirements of
FAS 142 which took effect from January 1, 2002, our
2002 results reflect no amortization of goodwill or intangible
assets. Amortization of intangible assets in 2001 amounted to
$7.9 million.

Income from Operations.In 2002 the loss from operations
amounted to $9.0 million after giving effect to
compensation expenses and stamp duty costs of
$54.6 million. Income from operations in 2001 amounted to
$22.4 million, or 14% of net service revenue, after
excluding from the calculation an amortization expense incurred
in that year of $7.9 million.

Pre-clinical.Income
from operations in our pre-clinical business increased to
$43.5 million in 2002 compared to $18.0 million in
2001.

Clinical.Income
from operations in our clinical business was $9.0 million
in 2002 compared to $0.9 million in 2001.

Interest Expense.Interest expense in 2002 was
$11.3 million, a reduction of $5.8 million, or 34%,
from $17.1 million in 2001. In the first half of 2002,
interest expense increased by $3.3 million compared to the
equivalent period in 2001. This increase was due principally to
increases in borrowings used to finance the acquisition of
ClinTrials in April 2001. Immediately following our initial
public offering, at the start of the third quarter of 2002, we
refinanced our outstanding bank borrowings and our 10% unsecured
subordinated loan stock due 2008 using proceeds from the
offering, borrowings under a new bank credit facility and our
existing cash resources. As a result, our total debt declined
from $223.1 million to $74.3 million at July 31,
2002. Principally as a result of this reduction in total debt
our interest expense for the six months ended December 31,
2002 was $9.1 million lower than our interest expense for
the corresponding period in 2001. In the fourth quarter of 2002,
our interest expense includes a charge of $1.1 million,
reflecting a mark-to-market revaluation of the interest rate
swaps we entered into during the third quarter of 2002. The
interest expense of $17.1 million that we incurred in 2001
included a charge of $2.1 million, reflecting a
mark-to-market revaluation of our previous interest rate hedges.

Provision for Income Taxes.Our provision for income taxes in
2002 was $6.1 million, or 18% of adjusted income before
taxes of $34.3 million (calculated without giving effect to
the compensation expense and stamp duty taxes of
$54.6 million). U.K. and Canadian Federal research and
development tax credits amounted to $7.5 million, or 22% of
adjusted income before taxes. In 2001 our provision for taxes
was $2.0 million on losses before income taxes of
$2.7 million. This provision in 2001 was required because,
even though we reported a loss on a consolidated basis for that
year, a number of our subsidiaries were profitable.

Extraordinary Items.The extraordinary item of
$1.6 million we reported for 2002 relates to the write-off
of deferred debt issue costs on our 10% unsecured subordinated
loan stock due 2008 and on the bank credit facility we
terminated and replaced following our initial public offering.
This amount is net of a tax benefit of $0.4 million. The
extraordinary item reflected in our statement of operations for
2001 was the write-off of deferred debt issue costs on a bank
facility that was cancelled and replaced at the time of the
ClinTrials acquisition in April 2001.

Fiscal 2001
compared to Fiscal 2000

Net Service Revenue.Net service revenue in 2001 was
$156.3 million, an increase of $90.8 million, or 138%,
over 2000 net service revenue of $65.5 million.

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##### Table of Contents



Pre-clinical.Net
service revenue in 2001 was $95.2 million, an increase of
$50.1 million, or 111%, over revenues of $45.1 million
in 2000. The acquisition of the Canadian pre-clinical operations
of ClinTrials in April 2001 increased net service revenue in
2001 by $48.2 million, or 107%. Net service revenue for the
original Inveresk Research pre-clinical operations increased by
$1.9 million, or 4%. Net service revenue for the original
Inveresk Research pre-clinical operations when expressed in
local currency, pounds sterling, grew by 10% in 2001. Net
service revenue from our acquired Canadian pre-clinical
operations increased by $5.0 million, or 12%, for the
period from April 6, 2001 (the date we acquired ClinTrials)
to December 30, 2001 over revenues of $43.2 million in
the comparable period from April 2000 to December 31, 2000
when such operations were under prior ownership. Net service
revenue for our Canadian pre-clinical operations when expressed
in local currency, Canadian dollars, grew by 16% in 2001. Both
of our pre-clinical facilities experienced strong demand for
their services in 2001. The utilization rates in both of our
operations also increased in 2001, permitting the pre-clinical
segment to further improve its business mix by increasing the
proportion of its revenues represented by higher value-added
safety and pharmacology evaluation services. Our laboratory
sciences and clinical support operations also continued to
experience increased revenue levels in 2001.

Clinical.Net
service revenue in 2001 was $61.1 million, an increase of
$40.7 million, or 200%, over revenues of $20.4 million
in 2000. The acquisition of ClinTrials in April 2001 increased
net service revenue in 2001 by $40.3 million, or 198%. Net
service revenue at the original Inveresk Research clinical
development operations increased by $0.4 million, or 2%.
Net service revenue for the original Inveresk Research clinical
operations when expressed in local currency, pounds sterling,
grew by 7% in 2001. Net service revenue in the acquired
ClinTrials clinical trials operations increased by
$2.1 million, or 5%, over revenues of $38.3 million in the
comparable period from April 2000 to December 31, 2000. Our
clinical trials management business experienced stronger demand
for its services in 2001. Our Phase I clinical trials
operation benefited from expanded capacity for the whole of 2001
and improved business mix. Our Phase II-IV revenues
increased as the result of a full years revenues from the
opening of our offices in Prague and Warsaw in 2000 and from
increased stability in the client base at the acquired
ClinTrials clinical operations.

Direct Costs Excluding Depreciation.In 2001 direct costs excluding
depreciation totaled $84.0 million, an increase of
$47.9 million, or 132%, from $36.1 million in 2000.
These costs were 53.7% of net service revenue in 2001 compared
to 55.1% in 2000.

Pre-clinical.Direct
costs excluding depreciation in 2001 were $45.0 million, an
increase of $22.3 million, or 98%, over costs of
$22.7 million in 2000. In 2001 these costs were 47.2% of
net service revenue, compared to 50.2% in 2000. Both of our
pre-clinical facilities contributed to improved margins in 2001.
This was attributable to more efficient use of our facilities,
an improvement in the business mix and continuing attention to
cost control.

Clinical.Direct
costs excluding depreciation in 2001 were $39.0 million, an
increase of $25.6 million, or 190%, over costs of
$13.5 million in 2000. In 2001 these costs were 63.8% of
net service revenue, compared to 66.0% in 2000. The margin
improvement in 2001 was due primarily to stronger demand for our
services, improved pricing and continuing attention to cost
control, as well as restructuring measures undertaken within the
acquired ClinTrials clinical operations.

Selling, General and Administrative
Expenses.In 2001 selling, general
and administrative expenses totaled $41.9 million, an
increase of $28.1 million, or 203%, from $13.8 million
in 2000. Selling, general and administrative expenses in 2001
were 26.8% of net service revenue in 2001 compared to 21.1% in
2000.

Pre-clinical.Selling, general and administrative costs in 2001 were
$21.9 million, an increase of $12.1 million, or 122%,
over costs of $9.8 million in 2000. Selling general and
administrative costs increased from 21.8% of net service revenue
in 2000 to 23.0% in 2001. The increased level of costs was
associated with additional investment in infrastructure,
including quality assurance and information technology, to
support the growth of our pre-clinical business. This was offset
partially by transaction exchange gains totaling
$1.2 million arising mainly in our Canadian operations.

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##### Table of Contents



Clinical.Selling,
general and administrative costs in 2001 were
$15.6 million, an increase of $13.3 million, or 586%,
over costs of $2.3 million in 2000. Selling, general and
administrative expenses increased from 11.2% of net service
revenue in 2000 to 25.6% in 2001. This increase is wholly
attributable to the higher cost structure levels in the acquired
ClinTrials clinical development operations. The selling, general
and administrative costs in our original Inveresk Research
clinical operations, as a percentage of net service revenues,
marginally declined from 2000 levels. The clinical development
operations acquired with ClinTrials were unprofitable at the
time they were acquired, which resulted primarily from an
excessive overhead cost structure. We have successfully
implemented a restructuring plan in the acquired ClinTrials
European clinical business. This resulted in a reduction in head
count and the relocation of certain operations from Maidenhead
in England to more cost-effective locations in Scotland.
Additional cost reduction measures were undertaken in the
ClinTrials U.S. clinical development operations.

Corporate Overhead.The 160% increase in these costs during 2001 is attributable to
the increased corporate overhead following the ClinTrials
acquisition.

Amortization of Intangible
Assets.In 2001 amortization of
intangible assets totaled $7.9 million ($4.3 million
relating to our pre-clinical business and $3.6 million
relating to our clinical business), an increase of
$4.6 million, or 141%, from $3.3 million in 2000. The
increase was due to the additional amortization resulting from
the ClinTrials acquisition in April 2001. As described in Note 4
to the consolidated financial statements included herein, the
accounting policy relating to amortization of goodwill changed
from January 1, 2002 such that, unless it is necessary to
record an impairment of the goodwill values, we will not record
any amortization of goodwill for any period beginning on or
after January 1, 2002.

Income from
Operations.Income from operations
in 2001 was $14.4 million, an increase of
$6.7 million, or 86%, from $7.8 million in 2000.
Income from operations in 2001 was 9.2% of net service revenue,
compared to 11.9% in 2000.

Pre-clinical.Income
from operations increased by $11.9 million, or 194%, from
$6.1 million in 2000 to $18.0 million in 2001 for the
reasons set forth above.

Clinical.Income
from operations decreased by $2.5 million, or 73%, from
$3.4 million in 2000 to $0.9 million in 2001, for the
reasons set forth above.

Interest Expense.Interest expense in 2001 was
$17.1 million, an increase of $9.6 million or 127%
from $7.5 million in 2000. The main reason for this
increase was the additional borrowings that were used to finance
the ClinTrials acquisition in April 2001.

Provision for Income Taxes.Provision for income taxes in 2001
was $2.0 million on losses before income taxes of
$2.7 million. In 2000, the provision for income taxes was
$0.7 million on profits before income taxes of
$0.3 million.

Extraordinary
Item.The extraordinary item
reflected in our statement of operations for 2001 was the write
off of deferred debt issue costs on bank facilities cancelled
and replaced at the time of the ClinTrials acquisition in April
2001. There were no extraordinary items in 2000.

Quarterly
Results from Operations

Certain of our operations have experienced, and
may continue to experience, period-to-period fluctuations in net
service revenue and results from operations. Because we generate
a large proportion of our revenue from services billed at hourly
rates, our net service revenue in any period is directly related
to the number of employees and the number of hours worked by
those employees during that period. Our results of operations in
any one quarter can fluctuate depending upon, among other
things, the number of weeks in the quarter, the number and scope
of ongoing client engagements, the commencement, postponement
and termination of engagements in the quarter, the mix of
revenue, the extent of cost overruns, employee hiring, holiday
patterns, severe weather conditions, exchange rate fluctuations
and other factors. We may also, in any given quarter, be
required to make U.K. National Insurance contributions in
connection with the exercise of options issued prior to our
initial public offering by certain of our U.K. resident
employees. We have only limited ability to

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compensate for periods of underutilization during
one part of a fiscal period by augmenting revenues during
another part of that period. We believe that operating results
for any particular quarter are not necessarily a meaningful
indication of the health of our business or of future results.


The following table sets out the unaudited
quarterly consolidated financial data for the four quarters in
the period January 1, 2002 to December 31, 2002 and
the four quarters from January 1, 2001 to December 30,
2001. The unaudited quarterly consolidated financial data has
been prepared on a basis consistent with the audited
consolidated financial data, which are included in this
Form 10-K. In the opinion of management they reflect all
adjustments of a normal and recurring nature which are necessary
to present fairly the results of operations for the quarterly
periods.

|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |            |  
|-------------------------------------------------------------------- | ------- | ------------------------------------------------------ | ------ | ------------- |  | -------- | ------ | ---------- |  | - | ------- | ---------- | - | - | ------ | ---------- | -
|                                                                     |         | Quarter                                                |        | Quarter       |  | Quarter  |        | Quarter   
|                                                                     |         | Ended                                                  |        | Ended         |  | Ended    |        | Ended     
|                                                                     |         | December 31,                                           |        | September 30, |  | June 30, |        | March 31, 
|                                                                     |         | 2002                                                   |        | 2002          |  | 2002     |        | 2002      
|                                                                     |         |                                                        |        |               |  |          |        |           
|                                                                     |         |                                                       
|                                                                     |         | (Dollars in thousands except share and per share data)
|Net service revenue                                                  |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|Pre-clinical                                                         |         | $                                                      | 36,092 |               |  | $        | 35,236 |            |  | $ | 36,367  |            |   | $ | 34,479 |           
|Clinical                                                             |         |                                                        | 21,735 |               |  |          | 20,687 |            |  |   | 19,182  |            |   |   | 18,684 |           
|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|                                                                     |         | $                                                      | 57,827 |               |  | $        | 55,923 |            |  | $ | 55,549  |            |   | $ | 53,163 |           
|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|Income (loss) from operations                                        |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|Pre-clinical                                                         |         | $                                                      | 10,927 |               |  | $        | 10,839 |            |  | $ | 11,356  |            |   | $ | 10,382 |           
|Clinical                                                             |         |                                                        | 3,107  |               |  |          | 2,786  |            |  |   | 2,381   |            |   |   | 770    |           
|Corporate overhead including compensation expense
    and stamp duty |         |                                                        | (2,056 | )             |  |          | (1,930 | )          |  |   | (51,614 | )          |   |   | (5,920 | )         
|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|                                                                     |         | $                                                      | 11,978 |               |  | $        | 11,695 |            |  | $ | (37,877 | )          |   | $ | 5,232  |           
|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|Net income (loss)                                                    |         | $                                                      | 9,403  |               |  | $        | 7,339  |            |  | $ | (44,337 | )          |   | $ | (414   | )         
|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|Earnings (loss) per share before
    extraordinary items:            |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|                                                                     | Basic   |                                                        | $      | 0.26          |  |          | $      | 0.25       |  |   | $       | (1.87      | ) |   | $      | (0.02      | )
|                                                                     | Diluted |                                                        | $      | 0.25          |  |          | $      | 0.24       |  |   | $       | (1.87      | ) |   | $      | (0.02      | )
|Earnings (loss) per share after
    extraordinary items:             |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|                                                                     | Basic   |                                                        | $      | 0.26          |  |          | $      | 0.21       |  |   | $       | (1.87      | ) |   | $      | (0.02      | )
|                                                                     | Diluted |                                                        | $      | 0.25          |  |          | $      | 0.20       |  |   | $       | (1.87      | ) |   | $      | (0.02      | )
|Weighted average number of common shares
    outstanding:            |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|                                                                     | Basic   |                                                        |        | 35,984,350    |  |          |        | 35,570,449 |  |   |         | 23,770,595 |   |   |        | 23,485,654 |  
|                                                                     | Diluted |                                                        |        | 37,796,452    |  |          |        | 37,385,219 |  |   |         | 23,770,595 |   |   |        | 23,485,654 |  
|                                                                     |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           

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|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |            |  
|--------------------------------------------------------- | ------- | ------------------------------------------------------ | ------ | ------------- |  | -------- | ------ | ---------- | - | - | ------ | ---------- | - | - | ------ | ---------- | -
|                                                          |         | Quarter                                                |        | Quarter       |  | Quarter  |        | Quarter   
|                                                          |         | Ended                                                  |        | Ended         |  | Ended    |        | Ended     
|                                                          |         | December 30,                                           |        | September 30, |  | June 24, |        | March 25, 
|                                                          |         | 2001                                                   |        | 2001          |  | 2001     |        | 2001      
|                                                          |         |                                                        |        |               |  |          |        |           
|                                                          |         |                                                       
|                                                          |         | (Dollars in thousands except share and per share data)
|Net service revenue                                       |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|Pre-clinical                                              |         | $                                                      | 28,590 |               |  | $        | 27,998 |            |   | $ | 27,193 |            |   | $ | 11,392 |           
|Clinical                                                  |         |                                                        | 18,679 |               |  |          | 18,849 |            |   |   | 19,013 |            |   |   | 4,582  |           
|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|                                                          |         | $                                                      | 47,269 |               |  | $        | 46,847 |            |   | $ | 46,206 |            |   | $ | 15,974 |           
|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|Income (loss) from operations                             |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|Pre-clinical                                              |         | $                                                      | 6,203  |               |  | $        | 5,910  |            |   | $ | 4,795  |            |   | $ | 1,050  |           
|Clinical                                                  |         |                                                        | 1,068  |               |  |          | 403    |            |   |   | (1,352 | )          |   |   | 780    |           
|Corporate overhead                                        |         |                                                        | (1,474 | )             |  |          | (1,208 | )          |   |   | (1,361 | )          |   |   | (365   | )         
|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|                                                          |         | $                                                      | 5,797  |               |  | $        | 5,105  |            |   | $ | 2,082  |            |   | $ | 1,465  |           
|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|Net income (loss)                                         |         | $                                                      | 250    |               |  | $        | (1,961 | )          |   | $ | (3,217 | )          |   | $ | (192   | )         
|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|Earnings (loss) per share before
    extraordinary items: |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        | $      | 0.01          |  |          | $      | (0.08      | ) |   | $      | (0.12      | ) |   | $      | (0.01      | )
|                                                          | Diluted |                                                        | $      | 0.01          |  |          | $      | (0.08      | ) |   | $      | (0.12      | ) |   | $      | (0.01      | )
|Earnings (loss) per share after
    extraordinary items:  |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        | $      | 0.01          |  |          | $      | (0.08      | ) |   | $      | (0.14      | ) |   | $      | (0.01      | )
|                                                          | Diluted |                                                        | $      | 0.01          |  |          | $      | (0.08      | ) |   | $      | (0.14      | ) |   | $      | (0.01      | )
|Weighted average number of common shares
    outstanding: |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        |        | 23,469,088    |  |          |        | 23,469,088 |   |   |        | 22,626,740 |   |   |        | 15,803,724 |  
|                                                          | Diluted |                                                        |        | 23,469,088    |  |          |        | 23,469,088 |   |   |        | 22,626,740 |   |   |        | 15,803,724 |  
|                                                          |         |                                                        |        |               |  |          |        |            |   |   |        |            |   |   |        |           

Liquidity and Capital Resources

Cash and cash equivalents totaled
$19.9 million at December 31, 2002 compared with
$16.1 million at December 30, 2001. Our principal
sources of liquidity are cash flow from operations, borrowings
under our credit facility and proceeds raised from the sale of
our capital stock.

On July 3, 2002, we completed our initial
public offering of 12 million shares of common stock at a
price of $13 per share. The net proceeds of the offering,
together with drawings under our new bank credit facility and
existing cash resources, were used to repay all of the
outstanding principal and interest under our former bank
facility and our 10% unsecured subordinated loan stock due 2008.

At December 31, 2002, our bank credit
facility provided us with an aggregate of up to $75 million
through $50 million of term loans in U.S. dollars and up to
$25 million of multi-currency revolving loans. At
December 31, 2002, we had drawn approximately
$67.5 million in term and revolving loans under the
facility. Of that amount, $50 million has been drawn as a
five year term loan with repayments commencing in June 2004 and
ending in June 2007, and approximately $17.5 million was
drawn pursuant to the multi-currency revolver portion of the
facility. The approximately $17.5 million drawn under the
revolver is repayable on or prior to June 20, 2005. This
facility bears interest at floating, LIBOR-based rates. However,
we have limited our exposure to interest rate fluctuations on
the loans drawn under this facility through a series of interest
rate swaps. Our credit facility subjects us to significant
affirmative, negative and financial covenants, is guaranteed by
us and our significant subsidiaries and is secured by liens on
substantially all of our assets.

Working capital balances which arise from our
contracts with customers comprise accounts receivable, unbilled
receivables and advance billings. A summary of these balances at
December 31, 2002, September 30,

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2002, June 30, 2002, March 31, 2002 and
December 31, 2001 together with the number of days billings
that they represent is set forth below.


|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  
|-------------------- |  | ----------------- | ------- | ------------------ |  | ------------- | --- | -------------- |  | ----------------- | ------- | -------- |  | -------- | --- | -------- |  | -------- | ------- | -------- |  |  | --- | - |  | - | ------- | - |  |  | --- | - |  | - | ------- | - |  |  | --- | -
|                     |  |                   |         |                    |  |               |     |                |  |                  
|                     |  | December 31, 2002 |         | September 30, 2002 |  | June 30, 2002 |     | March 31, 2002 |  | December 30, 2001
|                     |  |                   |         |                    |  |               |     |                |  |                  
|                     |  |                   |         | No. of             |  |               |     | No. of         |  |                   |         | No. of   |  |          |     | No. of   |  |          |         | No. of  
|                     |  | Balance           |         | Days Net           |  | Balance       |     | Days Net       |  | Balance           |         | Days Net |  | Balance  |     | Days Net |  | Balance  |         | Days Net
|                     |  | ($000s)          |         | Revenue            |  | ($000s)      |     | Revenue        |  | ($000s)          |         | Revenue  |  | ($000s) |     | Revenue  |  | ($000s) |         | Revenue 
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |         
|Accounts receivable  |  | $                 | 39,266  |                    |  |               | 64  |                |  | $                 | 34,184  |          |  |          | 57  |          |  | $        | 35,323  |          |  |  | 59  |   |  | $ | 32,258  |   |  |  | 55  |   |  | $ | 32,646  |   |  |  | 66  |  
|Unbilled receivables |  |                   | 20,706  |                    |  |               | 34  |                |  |                   | 23,679  |          |  |          | 39  |          |  |          | 22,354  |          |  |  | 37  |   |  |   | 21,354  |   |  |  | 37  |   |  |   | 19,999  |   |  |  | 40  |  
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  
|Sub total            |  |                   | 59,972  |                    |  |               | 98  |                |  |                   | 57,863  |          |  |          | 96  |          |  |          | 57,677  |          |  |  | 96  |   |  |   | 53,612  |   |  |  | 92  |   |  |   | 52,645  |   |  |  | 106 |  
|Advance billings     |  |                   | (41,415 | )                  |  |               | (68 | )              |  |                   | (36,734 | )        |  |          | (61 | )        |  |          | (33,656 | )        |  |  | (56 | ) |  |   | (29,644 | ) |  |  | (51 | ) |  |   | (30,380 | ) |  |  | (61 | )
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  
|                     |  | $                 | 18,557  |                    |  |               | 30  |                |  | $                 | 21,129  |          |  |          | 35  |          |  | $        | 24,021  |          |  |  | 40  |   |  | $ | 23,968  |   |  |  | 41  |   |  | $ | 22,265  |   |  |  | 45  |  
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  

The impact of the above balances on our cash flow
from operations by quarter in 2002 and for the whole of 2001 was
as follows:

|                                                   |  |              |        |               |  |          |       |           |  |              |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ------------ | ------ | ------------- |  | -------- | ----- | --------- |  | ------------ | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                   |  | 13 Weeks     |        | 13 Weeks      |  | 13 Weeks |       | 13 Weeks  |  | 52 Weeks    
|                                                   |  | Ended        |        | Ended         |  | Ended    |       | Ended     |  | Ended       
|                                                   |  | December 31, |        | September 30, |  | June 30, |       | March 31, |  | December 30,
|                                                   |  | 2002         |        | 2002          |  | 2002     |       | 2002      |  | 2001        
|                                                   |  |              |        |               |  |          |       |           |  |             
|Cash inflow (outflow):                             |  |              |        |               |  |          |       |           |  |              |        |   |  |   |        |   |  |   |        |  
|Accounts receivable including unbilled receivables |  | $            | (2,109 | )             |  | $        | (186  | )         |  | $            | (4,065 | ) |  | $ | (967   | ) |  | $ | (1,682 | )
|Advance billings                                   |  |              | 4,681  |               |  |          | 3,078 |           |  |              | 4,012  |   |  |   | (736   | ) |  |   | (361   | )
|                                                   |  | $            | 2,572  |               |  | $        | 2,892 |           |  | $            | (53    | ) |  | $ | (1,703 | ) |  | $ | (2,043 | )
|                                                   |  |              |        |               |  |          |       |           |  |              |        |   |  |   |        |   |  |   |        |  

The cash generated by our operating activities
was $29.8 million in 2002, after paying $21.5 million
of accumulated interest on our 10% unsecured subordinated loan
stock due 2008 following our initial public offering. Cash
generated by operating activities was $19.5 million in
2001. Compared to this, the cash flows relating to working
capital movements are not a major factor affecting liquidity.

Our scheduled debt repayments during 2003 are
$0.2 million. We anticipate that our operating cash flow,
together with available borrowings under our credit facility and
the net proceeds we receive from any offerings, will be
sufficient to meet our anticipated future operating expenses,
capital expenditures (including our planned expansions at our
pre-clinical facilities) and debt service obligations as they
become due over the next twelve months. Our corporate strategy
of seeking continued growth contemplates the possibility of
growth through acquisitions of other businesses, should
appropriate opportunities become available. If we decide to seek
to acquire other businesses, we expect to fund these
acquisitions from existing cash resources, through additional
borrowings and, possibly, with the proceeds of sales of our
capital stock. We also may pursue acquisitions in which the
consideration we pay takes the form of our capital stock.



| |                                        
| | ---------------------------------------
| | Fiscal 2002 Compared to Fiscal
    2001

Cash flow from operations in 2002 was
$29.8 million after paying $21.5 million of
accumulated interest on our 10% unsecured subordinated loan
stock due 2008 following our initial public offering. Cash flow
from operations in 2002 before deducting this interest was
$51.2 million compared to $19.5 million in 2001. This
reflects the significant increase in the size of our business as
a result of the ClinTrials acquisition and also the improvement
in operating results of all our businesses as described above.
Capital expenditures were $25.5 million in 2002 compared to
$11.1 million in 2001. This increase in capital expenditure
is mainly attributable to the expansion of our pre-clinical
operations in Scotland and Canada.

The net cash outflow from our financing
activities in 2002 was $0.1 million after giving effect to
the completion of our initial public offering and related
repayment of debt discussed above. In 2001, the net cash
received from financing activities was $115.5 million,
representing cash flows associated with the financing of the
ClinTrials acquisition in April 2001.

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| |                                        
| | ---------------------------------------
| | Fiscal 2001 Compared to Fiscal
    2000

Cash flow from operations in 2001 was
$19.5 million compared to $12.7 million in 2000. Net
cash used in investing activities in 2001 was
$126.3 million compared to $6.8 million in 2000. The
increase was due primarily to the acquisition of ClinTrials for
$115.1 million net of cash acquired of $5.7 million.
Capital expenditures in 2001 were $11.1 million compared to
$6.8 million in 2000, the increase being accounted for primarily
by capital expenditures at our acquired pre-clinical operations
in Canada.

Net cash flows from financing activities in 2001
were $115.5 million versus net cash flows used in financing
activities of $3.1 million in 2000. The activities in 2001
consisted of the repayment of long-term debt amounting to
$38.3 million, repayment of short-term debt of
$3.0 million, the issue of new equity for $0.4 million
and the receipt of proceeds from long-term borrowings, net of
issue costs, of $156.4 million in connection with the
financing arrangements for the acquisition of ClinTrials.

Recent Accounting Pronouncements

In April 2002, the FASB issued FAS 145,
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections. The principal change reflected in these
pronouncements is that gains or losses from extinguishment of
debt which are classified as extraordinary items by FAS 4 will
no longer be classified as such. We plan to adopt FAS 145 for
our fiscal year ending December 31, 2003. When adopted,
prior extraordinary items related to the extinguishment of debt
will be reclassified. This will result in the extraordinary
items of $1.6 million (being $2.0 million before taxes
and $0.4 million of income taxes) in 2002 and
$0.4 million (being $0.6 million before taxes and
$0.2 million of income taxes) in 2001 being reclassified to
the interest expense and income taxes captions.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which clarifies
disclosure and recognition/ measurement requirements related to
certain guarantees. The disclosure requirements are effective
for financial statements issued after December 15, 2002 and
the recognition/measurement requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The application of the requirements of
FIN 45 did not have a material impact on our financial
position or results of operations.

In December 2002, the FASB issued FAS 148
Accounting for Stock-Based Compensation 
Transition and Disclosure which is an amendment of
FAS 123 Accounting for Stock-Based
Compensation. FAS 148 provides alternative methods of
transition from the intrinsic value method of accounting for
stock options prescribed in APB Opinion No. 25,
Accounting for Stock Issued to Employees to the fair
value-based method of accounting required by FAS 123. We
have not yet decided on what course of action to take in
response to this standard but management recognizes that a
change to the fair value method of accounting from the current
intrinsic value method may be required at some future date. It
is not possible at present to assess the impact that any such
change may have on our results of operations or financial
position.



|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

We are subject to market risks arising from
changes in interest rates and foreign currency exchange rates.

Our primary interest rate exposure results from
changes in LIBOR or the base rates that are used to determine
the applicable interest rates under our bank credit facility.
The bank facilities that we put in place at the time of our
initial public offering of shares in June 2002 bear interest at
LIBOR plus 1.25%.

In the third quarter of 2002 we cancelled the
interest rate hedges that we used to hedge the interest exposure
on our bank borrowings prior to our initial public offering. We
subsequently entered into two new interest rate swap
arrangements to hedge the interest rate exposure on our current
bank borrowings. The first arrangement is an interest rate swap,
which has a notional amount of $50 million and expires on
October 5, 2005. Under this agreement the interest rate on
$50 million of debt is fixed at 4.23%. The second
arrangement is an interest rate swap, which has a notional
amount of $10 million and expires on October 5, 2004.
Under this arrangement the interest rate on $10 million of
debt is fixed at 3.77%.

30



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As a consequence of these swaps, the current
level of our bank debt which is exposed to fluctuations in
interest rates is $5.0 million. Our potential loss over one
year that would result from a hypothetical, instantaneous change
of 100 basis points in the interest rate on all our variable
rate obligations would be approximately $0.1 million. Our
bank debt is all denominated in U.S. dollars and thus
fluctuations in exchange rates do not impact these borrowings.

We have not designated these swaps as hedges
pursuant to FAS 133. As a consequence, we record, through
the interest expense category in our statement of operations,
any changes in the fair value of the swaps. The fair value of
the swaps will fluctuate, mainly as a consequence of changes in
market rates of interest. Accordingly, changes in market rates
of interest can cause fluctuations in the level of our recorded
interest expense from period to period. However, over the terms
of the swaps, the total interest expense on our bank borrowings
will equate to the fixed rates of 4.23% on $50 million of
debt and 3.77% on $10 million of debt as mentioned above.

A significant proportion of the revenues of our
Canadian business are earned in U.S. dollars whereas the costs
of the business are predominantly in Canadian dollars.
Accordingly, fluctuations in the US dollar/ Canadian dollar
exchange rate will give rise to exchange gains and losses. These
gains and losses arise from the conversion of U.S. dollars
to Canadian dollars and the retranslation of cash, accounts
receivable and unbilled receivable balances and to a lesser
extent accounts payable balances. The amounts of these
U.S. dollar denominated balances will fluctuate from time
to time but based on the last six months of 2002, we estimate
that a hypothetical instantaneous 5% devaluation of the
U.S. dollar compared to the Canadian dollar would give rise
to an exchange loss in selling general and administrative
expenses of approximately $0.8 million before income tax
effects. On the same basis, we estimate that a hypothetical
instantaneous 5% devaluation of the Canadian dollar compared to
the U.S. dollar would give rise to an exchange gain in
selling general and administrative expenses of approximately
$0.8 million before income tax effects.

Our consolidated financial statements are
prepared in U.S. dollars. The functional currency of each of our
subsidiaries is the local currency of the country in which the
subsidiary is located. Our principal operating subsidiaries are
located in the United Kingdom and Canada and together they
accounted for 84% of our net service revenue in 2002.
Accordingly, fluctuations in the exchange rates between pounds
sterling, Canadian dollars and U.S. dollars will affect the
translation of our results for financial reporting purposes.

We would also have exposure to foreign currency
exchange rate fluctuations for the cash flows received from our
foreign affiliates. This risk is mitigated by the fact that
their operations are conducted in their respective local
currencies, and it is not our intention to repatriate earnings
prospectively.

Currently, we do not engage in any foreign
currency hedging activities as we do not believe that our
foreign currency exchange risk is material.

We do not use financial instruments for trading
or other speculative purposes.

Management does not believe that inflation in
past years has had a significant impact on our results from
operations. Management believes that, in the event inflation
affects our costs in the future, we will offset the effect of
inflation and maintain appropriate margins through increased
fees.

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Item 8.     Financial
Statements and Supplementary Data

INDEX

|                                  |                                                                                                                                                               |  |   
|--------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|Consolidated financial statements |                                                                                                                                                               | 
|                                  | Independent Auditors Report                                                                                                                                  |  | 33
|                                  | Consolidated Statements of Operations for the
    years ended December 31, 2002, December 30, 2001 and
    December 31, 2000                                  |  | 34
|                                  | Consolidated Balance Sheets as of
    December 31, 2002 and December 30, 2001                                                                                 |  | 35
|                                  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2002, December 30, 2001 and
    December 31, 2000                                  |  | 36
|                                  | Consolidated Statements of Comprehensive Loss and
    Shareholders Equity for the years ended December 31,
    2002, December 30, 2001 and December 31, 2000 |  | 37
|                                  | Notes to Consolidated Financial Statements                                                                                                                    |  | 38

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INVERESK RESEARCH GROUP, INC.

INDEPENDENT AUDITORS REPORT

To the Shareholders of Inveresk Research Group,
Inc.:

We have audited the accompanying consolidated
balance sheets of Inveresk Research Group, Inc. (a Delaware
corporation) and its subsidiaries as of December 31, 2002
and December 30, 2001, and the related consolidated
statements of operations, comprehensive loss and
shareholders equity, and cash flows for the years ended
December 31, 2002, December 30, 2001 and
December 31, 2000. These consolidated 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 of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, such consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Inveresk Research Group,
Inc. and its subsidiaries as of December 31, 2002, and
December 30, 2001 and the results of its operations and its
cash flows for the years ended December 31, 2002,
December 30, 2001, December 31, 2000 in conformity
with accounting principles generally accepted in the United
States of America.

As explained in Note 4 to the consolidated
financial statements, effective January 1, 2002 the Company
adopted Statements of Financial Accounting Standards
No. 142 Goodwill and Other Intangible Assets.

/s/ Deloitte & Touche

Edinburgh, Scotland

February 17, 2003


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INVERESK RESEARCH GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |            |         |  
|------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------- | ---------- | ------- | - | ------ | ---------- | ------- | -
|                                                              |                                                                                    |                                                                                       |         | 52 Weeks     |         | 53 Weeks    
|                                                              |                                                                                    | Year Ended                                                                            |         | Ended        |         | Ended       
|                                                              |                                                                                    | December 31,                                                                          |         | December 30, |         | December 31,
|                                                              |                                                                                    | 2002                                                                                  |         | 2001         |         | 2000        
|                                                              |                                                                                    |                                                                                       |         |              |         |             
|                                                              |                                                                                    |                                                                                      
|                                                              |                                                                                    | (In thousands, except share and per share data)                                      
|Net service revenue                                           |                                                                                    | $                                                                                     | 222,462 |              |         | $            | 156,296 |            |         | $ | 65,540 |           
|                                                              | Direct costs excluding depreciation of $3,596,
    $2,832 and $2,017, respectively |                                                                                       |         | (110,099     | )       |              |         | (83,975    | )       |   |        | (36,133    | )      
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|                                                              |                                                                                    |                                                                                       | 112,363 |              |         |              | 72,321  |            |         |   | 29,407 |           
|                                                              | Selling, general and administrative expenses:                                      |                                                                                       |         |              |         |              |         |            |         |   |        |            |        
|                                                              |                                                                                    | Compensation expense in respect of share options
    and management equity incentives |         |              | (53,020 | )            |         |            |        |   |        |            |        |  
|                                                              |                                                                                    | U.K. stamp duty taxes arising on change of
    ultimate parent company                |         |              | (1,545  | )            |         |            |        |   |        |            |        |  
|                                                              |                                                                                    | Other selling, general and administrative expenses                                    |         |              | (56,455 | )            |         |            | (41,934 | ) |        |            | (13,825 | )
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|                                                              | Total selling, general and administrative expenses                                 |                                                                                       |         | (111,020     | )       |              |         | (41,934    | )       |   |        | (13,825    | )      
|                                                              | Depreciation                                                                       |                                                                                       |         | (10,315      | )       |              |         | (8,028     | )       |   |        | (4,513     | )      
|                                                              | Amortization of goodwill and intangibles                                           |                                                                                       |         |             |         |              |         | (7,910     | )       |   |        | (3,281     | )      
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|Income (loss) from operations                                 |                                                                                    |                                                                                       | (8,972  | )            |         |              | 14,449  |            |         |   | 7,788  |           
|                                                              | Interest income                                                                    |                                                                                       |         | 344          |         |              |         | 483        |         |   |        | 367        |        
|                                                              | Interest expense                                                                   |                                                                                       |         | (11,656      | )       |              |         | (17,584    | )       |   |        | (7,889     | )      
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|Income (loss) before income taxes and
    extraordinary items |                                                                                    |                                                                                       | (20,284 | )            |         |              | (2,652  | )          |         |   | 266    |           
|Provision for income taxes (Note 13)                          |                                                                                    |                                                                                       | (6,144  | )            |         |              | (2,049  | )          |         |   | (682   | )         
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|Net income (loss) before extraordinary items                  |                                                                                    |                                                                                       | (26,428 | )            |         |              | (4,701  | )          |         |   | (416   | )         
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|Extraordinary items                                           |                                                                                    |                                                                                       | (1,581  | )            |         |              | (419    | )          |         |   |       |           
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|Net income (loss)                                             |                                                                                    | $                                                                                     | (28,009 | )            |         | $            | (5,120  | )          |         | $ | (416   | )         
|                                                              |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|Earnings (loss) per share before
    extraordinary items:     |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|                                                              | Basic                                                                              |                                                                                       | $       | (0.89        | )       |              | $       | (0.22      | )       |   | $      | (0.03      | )      
|                                                              | Diluted                                                                            |                                                                                       | $       | (0.89        | )       |              | $       | (0.22      | )       |   | $      | (0.03      | )      
|Earnings (loss) per share after
    extraordinary items:      |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|                                                              | Basic                                                                              |                                                                                       | $       | (0.94        | )       |              | $       | (0.24      | )       |   | $      | (0.03      | )      
|                                                              | Diluted                                                                            |                                                                                       | $       | (0.94        | )       |              | $       | (0.24      | )       |   | $      | (0.03      | )      
|Weighted average number of common shares
    outstanding:     |                                                                                    |                                                                                       |         |              |         |              |         |            |         |   |        |           
|                                                              | Basic                                                                              |                                                                                       |         | 29,735,957   |         |              |         | 21,489,571 |         |   |        | 15,803,724 |        
|                                                              | Diluted                                                                            |                                                                                       |         | 29,735,957   |         |              |         | 21,489,571 |         |   |        | 15,803,724 |        

See accompanying notes to consolidated financial
statements.

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INVERESK RESEARCH GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |         |  
|----------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------- | ------- | ------------ | - | - | ------- | ------- | -
|                                                      |                                                                                                                                                                    | December 31,                |         | December 30,
|                                                      |                                                                                                                                                                    | 2002                        |         | 2001        
|                                                      |                                                                                                                                                                    |                             |         |             
|                                                      |                                                                                                                                                                    |                            
|                                                      |                                                                                                                                                                    | (In thousands, except share
|                                                      |                                                                                                                                                                    | data)                      
|ASSETS                                               
|Current assets:                                       |                                                                                                                                                                    |                             |         |              |   |   |         |        
|                                                      | Cash and cash equivalents                                                                                                                                          |                             | $       | 19,909       |   |   | $       | 16,118  |  
|                                                      | Accounts receivable, net of allowance for
    doubtful accounts of $1,021 in 2002 and $760 in 2001                                                                 |                             |         | 39,266       |   |   |         | 32,646  |  
|                                                      | Unbilled receivables, net of reserve for losses
    on contracts of $1,110 in 2002 and $1,284 in 2001                                                              |                             |         | 20,706       |   |   |         | 19,999  |  
|                                                      | Income taxes receivable                                                                                                                                            |                             |         | 2,979        |   |   |         | 4,335   |  
|                                                      | Inventories                                                                                                                                                        |                             |         | 1,167        |   |   |         | 2,173   |  
|                                                      | Other current assets                                                                                                                                               |                             |         | 4,300        |   |   |         | 2,164   |  
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        
|Total current assets                                  |                                                                                                                                                                    |                             | 88,327  |              |   |   | 77,435  |        
|Property, plant and equipment (Note 8)                |                                                                                                                                                                    |                             | 108,570 |              |   |   | 87,922  |        
|Intangible assets (Note 9)                            |                                                                                                                                                                    |                             | 135,043 |              |   |   | 134,517 |        
|Deferred debt issue costs                             |                                                                                                                                                                    |                             | 527     |              |   |   | 1,952   |        
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        
|                                                      |                                                                                                                                                                    | $                           | 332,467 |              |   | $ | 301,826 |        
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        
|LIABILITIES AND SHAREHOLDERS
    EQUITY             
|Current liabilities:                                  |                                                                                                                                                                    |                             |         |              |   |   |         |        
|                                                      | Accounts payable                                                                                                                                                   |                             | $       | 10,792       |   |   | $       | 10,118  |  
|                                                      | Advance billings                                                                                                                                                   |                             |         | 41,415       |   |   |         | 30,380  |  
|                                                      | Accrued expenses (Note 10)                                                                                                                                         |                             |         | 21,399       |   |   |         | 21,520  |  
|                                                      | Income taxes payable                                                                                                                                               |                             |         | 2,871        |   |   |         | 2,103   |  
|                                                      | Deferred income taxes (Note 13)                                                                                                                                    |                             |         | 204          |   |   |         | 559     |  
|                                                      | Current portion of long term debt (Note 11)                                                                                                                        |                             |         | 217          |   |   |         | 127,648 |  
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        
|Total current liabilities                             |                                                                                                                                                                    |                             | 76,898  |              |   |   | 192,328 |        
|Deferred income taxes (Note 13)                       |                                                                                                                                                                    |                             | 22,139  |              |   |   | 27,053  |        
|Long term debt (Note 11)                              |                                                                                                                                                                    |                             | 67,768  |              |   |   | 85,109  |        
|Defined benefit pension plan obligation
    (Note 15) |                                                                                                                                                                    |                             | 13,259  |              |   |   | 4,721   |        
|Commitments and contingencies (Note 17)               |                                                                                                                                                                    |                             |         |              |   |   |         |        
|Shareholders equity:                                 |                                                                                                                                                                    |                             |         |              |   |   |         |        
|                                                      | Preferred stock, $0.01 par value 10,000,000
    authorized, none issued (Note 7)                                                                                   |                             |         |             |   |   |         |        |  
|                                                      | Common stock, $0.01 par value 150,000,000
    authorized; 36,004,777 and 23,469,088 issued and outstanding at
    December 31, 2002 and December 30, 2001 (Note 7) |                             |         | 360          |   |   |         | 235     |  
|                                                      | Additional paidin capital                                                                                                                                         |                             |         | 191,618      |   |   |         | 1,118   |  
|                                                      | Accumulated deficit                                                                                                                                                |                             |         | (33,793      | ) |   |         | (5,784  | )
|                                                      | Accumulated other comprehensive loss                                                                                                                               |                             |         | (5,782       | ) |   |         | (2,954  | )
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        
|Total shareholders equity (deficit)                  |                                                                                                                                                                    |                             | 152,403 |              |   |   | (7,385  | )      
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        
|                                                      |                                                                                                                                                                    | $                           | 332,467 |              |   | $ | 301,826 |        
|                                                      |                                                                                                                                                                    |                             |         |              |   |   |         |        

See accompanying notes to consolidated financial
statements.

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INVERESK RESEARCH GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |       |       |  
|--------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ------------------------------------- | -------- | ------------ | ------ | ------------ | -------- | ----- | ------ | - | ------ | ----- | ----- | -
|                                                                                        |                                                                                                                 |                                       |          | 52 Weeks     |        | 53 Weeks    
|                                                                                        |                                                                                                                 | Year Ended                            |          | Ended        |        | Ended       
|                                                                                        |                                                                                                                 | December 31,                          |          | December 30, |        | December 31,
|                                                                                        |                                                                                                                 | 2002                                  |          | 2001         |        | 2000        
|                                                                                        |                                                                                                                 |                                       |          |              |        |             
|                                                                                        |                                                                                                                 |                                      
|                                                                                        |                                                                                                                 | (In thousands)                       
|Cash flows from operating activities                                                    |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Net (loss)                                                                              |                                                                                                                 | $                                     | (28,009  | )            |        | $            | (5,120   | )     |        | $ | (416   | )    
|Adjustments to reconcile net (loss) to net cash
    provided by operating activities:   |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|                                                                                        | Non-cash compensation expense in respect of
    exercise of share options and management equity incentives      |                                       |          | 52,934       |        |              |          |      |        |   |        |      |      
|                                                                                        | Depreciation of property, plant and equipment                                                                   |                                       |          | 10,315       |        |              |          | 8,028 |        |   |        | 4,513 |      
|                                                                                        | Amortization of goodwill and intangible assets                                                                  |                                       |          |             |        |              |          | 7,910 |        |   |        | 3,281 |      
|                                                                                        | Deferred pension obligations                                                                                    |                                       |          | 209          |        |              |          | 130   |        |   |        | (195  | )    
|                                                                                        | Deferred income taxes                                                                                           |                                       |          | 2,238        |        |              |          | 210   |        |   |        | 439   |      
|                                                                                        | Amortization of deferred loan issue costs                                                                       |                                       |          | 2,240        |        |              |          | 1,040 |        |   |        | 322   |      
|                                                                                        | Interest on 10% unsecured subordinated loan stock
    due 2008, not payable until the loan stock is redeemed    |                                       |          | 6,058        |        |              |          | 8,970 |        |   |        | 4,278 |      
|                                                                                        | Payment of interest on 10% unsecured subordinated
    loan stock due 2008 following the initial public offering |                                       |          | (21,454      | )      |              |          |      |        |   |        |      |      
|                                                                                        | Changes in operating assets and liabilities:                                                                    |                                       |          |              |        |              |          |       |        |   |        |       |      
|                                                                                        |                                                                                                                 | Accounts receivable                   |          |              | (7,328 | )            |          |       | (1,682 | ) |        |       | (720  | )
|                                                                                        |                                                                                                                 | Advance billings                      |          |              | 11,035 |              |          |       | (361   | ) |        |       | 1,369 |  
|                                                                                        |                                                                                                                 | Inventories                           |          |              | 1,006  |              |          |       | 176    |   |        |       | 87    |  
|                                                                                        |                                                                                                                 | Accounts payable and accrued expenses |          |              | 553    |              |          |       | 640    |   |        |       | (616  | )
|                                                                                        |                                                                                                                 | Income taxes                          |          |              | 2,124  |              |          |       | (1,277 | ) |        |       | (919  | )
|                                                                                        |                                                                                                                 | Other assets and liabilities          |          |              | (2,136 | )            |          |       | 829    |   |        |       | 1,270 |  
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Net cash provided by operating activities                                               |                                                                                                                 |                                       | 29,785   |              |        |              | 19,493   |       |        |   | 12,693 |      
|Cash flows from investing activities                                                    |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Purchase of ClinTrials Research Inc., net of cash
    acquired of $5,700                |                                                                                                                 |                                       |         |              |        |              | (115,147 | )     |        |   |       |      
|Purchases of property, plant and equipment                                              |                                                                                                                 |                                       | (25,497  | )            |        |              | (11,145  | )     |        |   | (6,792 | )    
|Proceeds from sale of investments                                                       |                                                                                                                 |                                       |         |              |        |              |         |       |        |   | 40     |      
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Net cash used in investing activities                                                   |                                                                                                                 |                                       | (25,497  | )            |        |              | (126,292 | )     |        |   | (6,752 | )    
|Cash flows from financing activities                                                    |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Issue of common stock, net of issue costs                                               |                                                                                                                 |                                       | 137,691  |              |        |              | 388      |       |        |   |       |      
|Repayments of short-term borrowings                                                     |                                                                                                                 |                                       | (3,661   | )            |        |              | (3,038   | )     |        |   | (109   | )    
|Proceeds from long-term borrowings, net of issue
    costs                              |                                                                                                                 |                                       | 66,904   |              |        |              | 156,440  |       |        |   |       |      
|Repayments of longterm debt                                                            |                                                                                                                 |                                       | (201,027 | )            |        |              | (38,311  | )     |        |   | (3,031 | )    
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Net cash provided by (used in) financing
    activities                                 |                                                                                                                 |                                       | (93      | )            |        |              | 115,479  |       |        |   | (3,140 | )    
|Effect of foreign currency exchange rate changes
    on cash                            |                                                                                                                 |                                       | (404     | )            |        |              | (2,248   | )     |        |   | (124   | )    
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Increase in cash and cash equivalents                                                   |                                                                                                                 |                                       | 3,791    |              |        |              | 6,432    |       |        |   | 2,677  |      
|Cash and cash equivalents at beginning of period                                        |                                                                                                                 |                                       | 16,118   |              |        |              | 9,686    |       |        |   | 7,009  |      
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Cash and cash equivalents at end of period                                              |                                                                                                                 | $                                     | 19,909   |              |        | $            | 16,118   |       |        | $ | 9,686  |      
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Supplemental cash flow information:                                                     |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Interest paid, excluding interest on 10%
    unsecured subordinated loan stock due 2008 |                                                                                                                 | $                                     | 7,749    |              |        | $            | 3,686    |       |        | $ | 3,375  |      
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      
|Income tax paid                                                                         |                                                                                                                 | $                                     | 1,504    |              |        | $            | 2,796    |       |        | $ | 1,085  |      
|                                                                                        |                                                                                                                 |                                       |          |              |        |              |          |       |        |   |        |      

See accompanying notes to consolidated financial
statements.

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INVERESK RESEARCH GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS

AND SHAREHOLDERS EQUITY


|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |        |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------- | ------- | --------------- | - | --------- | ---------- | ---------- |  | ------------ | --- | ------------- |  | - | ------- | - |  | - | ------- | ------- | - | - | ------ | ------ | -
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     | Accumulated  
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  | Retained     |     | Other        
|                                                                                      |                                                                                               | Total                             |         |                 |   | Par Value |            | Additional |  | Earnings     |     | Comprehensive
|                                                                                      |                                                                                               | Shareholders                     |         | Common Stock    |   | Paid-in   |            | Paid-in    |  | (Accumulated |     | Income       
|                                                                                      |                                                                                               | Equity                            |         | $0.01 par value |   | Capital   |            | Capital    |  | Deficit)     |     | (Loss)       
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |              
|                                                                                      |                                                                                               |                                  
|                                                                                      |                                                                                               | (In thousands, except share data)
|Balance at December 26, 1999                                                          |                                                                                               | $                                 | 712     |                 |   |           | 15,803,724 |            |  | $            | 158 |               |  | $ | 807     |   |  | $ | (248    | )       |   | $ | (5     | )     
|Comprehensive loss:                                                                   |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Foreign currency translation adjustments                                                      |                                   |         | (49             | ) |           |            |           |  |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (49    | )
|                                                                                      | Net loss for period to December 31, 2000                                                      |                                   |         | (416            | ) |           |            |           |  |              |     |              |  |   |         |  |  |   |         | (416    | ) |   |        |       |  
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|Comprehensive loss                                                                    |                                                                                               |                                   | (465    | )               |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|Balance at December 31, 2000                                                          |                                                                                               | $                                 | 247     |                 |   |           | 15,803,724 |            |  | $            | 158 |               |  | $ | 807     |   |  | $ | (664    | )       |   | $ | (54    | )     
|Issue of common stock                                                                 |                                                                                               |                                   | 388     |                 |   |           | 7,665,364  |            |  |              | 77  |               |  |   | 311     |   |  |   |        |         |   |   |       |       
|Comprehensive loss:                                                                   |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Foreign currency translation adjustments                                                      |                                   |         | (1,675          | ) |           |            |            |  |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (1,675 | )
|                                                                                      | Cumulative-effect adjustment for FAS 133
    (net of income taxes of $58)                     |                                   |         | (135            | ) |           |            |            |  |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (135   | )
|                                                                                      | Provision for accumulated benefit obligation
    under FAS 87 (net of income taxes of $484)   |                                   |         | (1,090          | ) |           |            |            |  |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (1,090 | )
|                                                                                      | Net loss for period to December 30, 2001                                                      |                                   |         | (5,120          | ) |           |            |            |  |              |     |              |  |   |         |  |  |   |         | (5,120  | ) |   |        |       |  
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|Comprehensive loss                                                                    |                                                                                               |                                   | (8,020  | )               |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|Balance at December 30, 2001                                                          |                                                                                               | $                                 | (7,385  | )               |   |           | 23,469,088 |            |  | $            | 235 |               |  | $ | 1,118   |   |  | $ | (5,784  | )       |   | $ | (2,954 | )     
|Issue of common stock, net of offering costs of
    $18,425                           |                                                                                               |                                   | 137,691 |                 |   |           | 12,535,689 |            |  |              | 125 |               |  |   | 137,566 |   |  |   |        |         |   |   |       |       
|Compensation expense in respect of share options
    and management equity incentives |                                                                                               |                                   | 52,934  |                 |   |           |            |            |  |              |    |               |  |   | 52,934  |   |  |   |        |         |   |   |       |       
|Comprehensive income (loss):                                                          |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Foreign currency translation adjustments                                                      |                                   |         | 2,655           |   |           |            |            |  |              |     |              |  |   |         |  |  |   |         |        |   |   |        | 2,655  |  
|                                                                                      | Provision for accumulated benefit obligation
    under FAS 87 (net of income taxes of $2,350) |                                   |         | (5,483          | ) |           |            |            |  |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (5,483 | )
|                                                                                      | Net loss for year to December 31, 2002                                                        |                                   |         | (28,009         | ) |           |            |            |  |              |     |              |  |   |         |  |  |   |         | (28,009 | ) |   |        |       |  
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Comprehensive loss                                                                            |                                   |         | (30,837         | ) |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |        |  
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|Balance at December 31, 2002                                                          |                                                                                               | $                                 | 152,403 |                 |   |           | 36,004,777 |            |  | $            | 360 |               |  | $ | 191,618 |   |  | $ | (33,793 | )       |   | $ | (5,782 | )     
|                                                                                      |                                                                                               |                                   |         |                 |   |           |            |            |  |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       

See accompanying notes to consolidated financial
statements.

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INVERESK RESEARCH GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Description of
Business

Inveresk Research Group, Inc. and its
subsidiaries (collectively the Company) provide drug
development services to companies in the pharmaceutical and
biotechnology industries. Through the Companys
pre-clinical and clinical business segments, it offers a broad
range of drug development services, including pre-clinical
safety and pharmacology evaluation, laboratory sciences services
and clinical development services. The Company is one of a small
number of drug development service companies currently providing
a comprehensive range of pre-clinical and clinical development
services on a worldwide basis. The Companys client base
includes major pharmaceutical companies in North America,
Europe, and Japan, as well as many biotechnology and specialty
pharmaceutical companies.

2.     Basis of
Presentation

Effective January 1, 2002, the Company has
changed its fiscal year end to the last calendar day in the
year. In 2001 and prior years the fiscal year ended on the last
Sunday of each calendar year. In 2001 the fiscal year contained
52 weeks and ended on December 30, 2001. In 2000 the
fiscal year contained 53 weeks and ended on
December 31, 2000. The change was made so that the
Companys reporting periods will end on the same date each
year and will be of equal length. The impact on the results of
the periods presented in these financial statements is not
significant.

On June 25, 2002 there was a change in
ultimate parent company from a company organized in Scotland to
a corporation organized in Delaware. This was accomplished
through a share exchange transaction in which all the
shareholders of Inveresk Research Group Limited (the former
ultimate parent company) exchanged their shares for shares of
common stock of Inveresk Research Group, Inc. (the current
ultimate parent company). With the exception of the incurrence
of U.K. stamp duty charges of $1.5 million, this
transaction had no impact on the consolidated assets or
liabilities of the Company. The consolidated financial
statements have been prepared as if the change of ultimate
parent company had taken place prior to the periods presented.
Accordingly, the shareholders equity and earnings per
share at the dates and for periods before June 25, 2002 are
presented on the basis of the capital structure of Inveresk
Research Group, Inc. calculated by multiplying the numbers of
shares of Inveresk Research Group Limited outstanding at the
dates and for the periods presented by the weighted average
exchange ratio used in the share exchange transaction.

3.     Initial Public
Offering

The Company completed its initial public offering
of 12 million shares of common stock, at a price of
$13 per share on July 3, 2002. It used the net
proceeds of the offering, together with drawings under a new
bank credit facility, to repay all of the outstanding principal
and interest under the previously outstanding bank debt and
under the 10% unsecured subordinated loan stock due 2008.
In connection with that debt repayment, it also recorded an
extraordinary charge of $1.6 million net of taxes,
attributable to the elimination of deferred financing costs
associated with the debt that was repaid. The extraordinary item
in 2001 of $0.4 million, net of taxes, was also
attributable to the elimination of deferred financing costs on
the debt facilities in place prior to the ClinTrials acquisition
in April 2001. As discussed below in Note 14, the Company
recorded additional compensation-related charges of
$48.5 million in connection with the initial public
offering and related change of ultimate parent during 2002.

4.     Summary of
Significant Accounting Policies

Principles of
Consolidation

The accompanying financial statements include the
accounts of Inveresk Research Group, Inc. and its subsidiaries.
All intercompany transactions, balances and profits are
eliminated. All business combinations have been accounted for
using the purchase method.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the purchase method, goodwill represents
the excess of the cost of an acquisition over the fair value of
the Companys share of the net assets of the acquired
subsidiary at the date of acquisition. Goodwill is reported in
the balance sheet as an intangible asset and, prior to
January 1, 2002, was amortized using the straight-line
method over its estimated useful life. The accounting policy for
goodwill that took effect from January 1, 2002 is described
in the Intangible Assets section of this Note. The gain or loss
on disposal of an entity includes the unamortised balance of
goodwill relating to the entity disposed of.

Accounting
Estimates

The preparation of financial statements in
conformity with the accounting principles generally accepted in
the United States of America (U.S. GAAP)
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. The significant
estimates underlying the accompanying consolidated financial
statements include the estimates made in the Companys
revenue recognition process, the reserve for losses on contracts
and the assumptions underlying the accounting for our U.K.
defined benefit pension plan. Actual results could differ from
those estimates.

Foreign
Currencies

The consolidated financial statements are
prepared in U.S. Dollars. The functional currency of each
of the Companys subsidiaries is the local currency in
which each subsidiary is located. Transactions in foreign
currencies are measured at the exchange rate in effect at the
date of each transaction. Differences in exchange rates during
the period between the date a transaction denominated in a
foreign currency is consummated and the date on which it is
either settled or remeasured are recognized in the statement of
operations.

The financial statements of foreign subsidiaries
are translated into U.S. Dollars using the current-rate method.
Accordingly, assets and liabilities denominated in foreign
currencies are translated at rates of exchange in effect at the
balance sheet date. Revenues and expenses are translated at
average rates of exchange in effect during the year. Differences
arising from the translation are recorded to accumulated other
comprehensive loss.

The foreign currency exchange gain or loss
recognized in the statements of operation and included in
Selling, general and administrative expenses was a
loss of $0.4 million for the year ended December 31,
2002, a gain of $1.2 million for the 52 weeks ended
December 30, 2001, and a loss of less than
$0.1 million for the 53 weeks ended December 31,
2000.

Revenue
Recognition

Many of the Companys contracts are
fixed-price contracts over one year in duration. Revenue for
such contracts is recorded in accordance with the American
Institute of Certified Public Accountants (AICPA) Statement of
Position (SOP)81-1 Accounting for Performance of
Construction-Type and Certain Production-Type Contracts.
Revenue is recognized as costs are incurred and includes
estimated earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs
(cost-to-cost type of percentage-of-completion method of
accounting). The Company also has contracts with a duration of
less than one year. Revenue is recognized on these contracts in
the same manner as for contracts of more than one year duration
except for contracts that are at an agreed fee per hour. Revenue
on agreed fee per hour contracts is recognized as services under
the contract are provided.

Where the scope of a contract is extended, the
costs incurred prior to the contract extension being agreed in
writing by the client are included in the calculation of the
percentage-of-completion of the existing contract, prior to the
extension. The estimated revenues are not updated until the
contract extension has been agreed in

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

writing with the client. However, when this
occurs, the estimated total contract revenues are recalculated
and a cumulative adjustment to revenues earned to that point
under the contract is recorded.

The Company follows the guidance in the
Securities and Exchange Commissions Staff Accounting
Bulletin No. 101, Revenue Recognition
(SAB 101). SAB 101 states that revenue
should be recognized when all four of the following conditions
exist: persuasive evidence of an arrangement exists; services
have been rendered or delivery has occurred; the price is fixed
or determinable; and collectibility is reasonably assured. When
estimated contract costs indicate that a loss will be incurred
on a contract, the entire loss is provided for in such period.

The Company routinely subcontracts with third
party investigators in connection with multi-site clinical
trials and with other third party service providers for
laboratory analysis and other specialized services. Costs
associated with contracting with third party investigators are
excluded from net service revenue and expenses where they are
the responsibility of the client and they are passed through to
clients without any mark up.

Earnings
(Loss) Per Share

Earnings (loss) per share is computed in
accordance with FAS 128, Earnings per Share.
FAS 128 requires presentation of both Basic Earnings per
Share (Basic EPS) and Diluted Earnings per Share (Diluted EPS).
Basic EPS is based on the weighted average number of shares of
common stock outstanding during the year while Diluted EPS also
includes the dilutive effect of stock options. The number of
stock options not reflected in Diluted EPS because they were
anti-dilutive or their exercise was conditional were 2,366,217
in 2002, 1,148,532 in 2001 and 213,286 in 2000. Historical
earnings (loss) per share have been computed assuming the
historical outstanding shares in Inveresk Research Group Limited
were converted to ordinary shares in Inveresk Research Group,
Inc. using the conversion ratios applied when the change of
ultimate parent company became effective.

Cash and Cash
Equivalents

Cash and cash equivalents include demand deposits
and money market accounts held with financial institutions. The
Company considers all highly liquid investments with a maturity
of three months or less when purchased to be cash equivalents.

Unbilled
Receivables and Advance Billings

Billings are generally determined by contractual
provisions that include predetermined date-certain payment
schedules (which may include payment at or near the time the
trial is initiated), the achievement of negotiated performance
requirements or milestones, or the submission of required
billing detail. Unbilled receivables arise from those contracts
under which billings are rendered upon the achievement of
certain negotiated performance requirements or on a date-certain
basis and services rendered exceed billings. The Company expects
to bill and collect these unbilled receivables within one year
of revenue recognition. Advance billings represent contractual
billings for services not yet rendered.

Concentration
of Credit Risk

Financial instruments which potentially expose
the Company to credit risk include unsecured accounts
receivable. Concentrations of credit risk on accounts receivable
is limited due to the large number of clients. Additionally, the
Company maintains allowances for potential credit losses and
credit losses incurred have not exceeded managements
expectations. The Companys exposure to credit loss in the
event that payment is not received for revenue recognized equals
the outstanding accounts receivable and unbilled services
balance.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Inventories

Inventories, which comprise consumables and
supplies, are stated at the lower of cost and net realizable
value. Cost is determined using the first-in, first-out method.

Property,
Plant and Equipment

Property, plant and equipment are stated at cost.

Maintenance repairs and minor renewals are
charged to expense as incurred. Major renewals and betterments
are capitalized and depreciated over their estimated useful
lives. When assets are retired or otherwise disposed of, the
cost is removed from the asset account and the corresponding
accumulated depreciation is removed from the related reserve
account. Any gain or loss resulting from such retirement or
disposal is included in current income.

Depreciation is provided on a straight-line basis
over the estimated useful economic lives of the assets as set
out below:

|                              |  |                                                   
|----------------------------- |  | --------------------------------------------------
|Land                          |  | not depreciated                                   
|Buildings                     |  | 40 years                                          
|Leasehold improvements        |  | lesser of the term of the lease or the useful life
|Machinery and equipment       |  | 5 to 10 years                                     
|Office furniture and machines |  | 3 to 10 years                                     
|Vehicles                      |  | 3 to 5 years                                      

Intangible
assets

In July 2001, the Financial Accounting Standards
Board (FASB) issued FAS 141, Business
Combinations, and FAS 142, Goodwill and Other
Intangible Assets. FAS 141 requires that the purchase
method of accounting be used for all business combinations
initiated after June 30, 2001. FAS 141 also specifies
the criteria that intangible assets acquired in a purchase
method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price
allocable to an assembled workforce may not be accounted for
separately. FAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance
with the provisions of FAS 142. FAS 142 also requires
that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
FAS 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of and
after December 31, 2002, FAS 144, Accounting for
the Impairment or Disposal of Long-Lived Assets.

FAS 142 is effective from January 1,
2002. Furthermore, any goodwill and any intangible asset
determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30,
2001 will not be amortized, but instead tested for impairment at
least annually in accordance with the provisions of
FAS 142. We continued to amortize goodwill and intangible
assets acquired in business combinations completed before
July 1, 2001 prior to the effective date of FAS 142.

FAS 142 required that we complete a first
phase of the impairment review for goodwill and intangible
assets with indefinite lives by June 30, 2002. That
required review was completed as at January 1, 2002 and
annual impairment tests have also been completed during the
second quarter of 2002 using balances recorded as at
March 31, 2002. These reviews did not result in any changes
to the carrying value of goodwill. In the future, the annual
impairment test will be performed by the Company during the
second quarter using data as of March 31.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

FAS 142 required that the net book value of
intangible assets relating to the assembled workforce acquired
in prior business contributions be transferred to goodwill at
the effective date of FAS 142 on January 1, 2002. If
FAS 142 had been applied from January 1, 2000 our
amortization expense in the years ended December 31, 2000,
and December 30, 2001 would have been reduced by
approximately $3.3 million and $7.9 million,
respectively. The following table contains a presentation of our
income before extraordinary item, net income (loss) and related
per share amounts, calculated as if FAS 142 had been in
effect throughout the periods presented.

|                                                          |         |                                        |         |              |   |              |       |            |  |   |       |            | 
|--------------------------------------------------------- | ------- | -------------------------------------- | ------- | ------------ | - | ------------ | ----- | ---------- |  | - | ----- | ---------- | 
|                                                          |         |                                        |         | 52 Weeks     |   | 53 Weeks    
|                                                          |         | Year Ended                             |         | Ended        |   | Ended       
|                                                          |         | December 31,                           |         | December 30, |   | December 31,
|                                                          |         | 2002                                   |         | 2001         |   | 2000        
|                                                          |         |                                        |         |              |   |             
|                                                          |         |                                       
|                                                          |         | (Dollars in thousands except share and
|                                                          |         | per share data)                       
|Net Income (loss) before extraordinary items              |         | $                                      | (26,428 | )            |   | $            | 2,378 |            |  | $ | 2,529 |           
|Net income (loss)                                         |         | $                                      | (28,009 | )            |   | $            | 1,959 |            |  | $ | 2,529 |           
|Earnings (loss) per share before
    extraordinary items: |         |                                        |         |              |   |              |       |            |  |   |       |           
|                                                          | Basic   |                                        | $       | (0.89        | ) |              | $     | 0.11       |  |   | $     | 0.16       | 
|                                                          | Diluted |                                        | $       | (0.89        | ) |              | $     | 0.11       |  |   | $     | 0.16       | 
|Earnings (loss) per share after
    extraordinary items:  |         |                                        |         |              |   |              |       |            |  |   |       |           
|                                                          | Basic   |                                        | $       | (0.94        | ) |              | $     | 0.09       |  |   | $     | 0.16       | 
|                                                          | Diluted |                                        | $       | (0.94        | ) |              | $     | 0.09       |  |   | $     | 0.16       | 
|Weighted average number of common shares
    outstanding: |         |                                        |         |              |   |              |       |            |  |   |       |           
|                                                          | Basic   |                                        |         | 29,735,957   |   |              |       | 21,489,571 |  |   |       | 15,803,724 | 
|                                                          | Diluted |                                        |         | 29,735,957   |   |              |       | 21,489,571 |  |   |       | 15,803,724 | 

In accordance with FAS 128, there is no dilution
shown in the above table in respect of stock options outstanding
in the years ended December 30, 2001 or December 31,
2000. This was because exercise of all the options concerned was
conditional upon completion of a listing of the Companys
shares on a recognized stock exchange and this condition had not
been satisfied by the end of 2001.

Impairment of
Long-Lived Assets

The Company evaluates long-lived assets and
intangibles other than goodwill for impairment whenever events
or changes in circumstances indicate that the value of an asset
may not be recoverable. An impairment loss is recognized when
estimated undiscounted future cash flows expected to result from
the use of the asset and its eventual disposal are less than its
carrying amount including any attributable goodwill. In such
instances, the carrying value of long-lived assets is reduced to
the estimated fair value, as determined using an appraisal or
discounted cash flow analysis, as appropriate.

Income
Taxes

Income taxes are accounted for under the
liability method in accordance with FAS 109,
Accounting for Income Taxes. Deferred tax assets and
liabilities are determined based on differences between the
financial reporting and tax basis of assets and liabilities and
are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent
that it is more likely than not that a portion of the asset will
not be realized.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock-Based
Compensation

The Company accounts for stock-based awards to
employees using the intrinsic value method prescribed in APB
Opinion No. 25, Accounting for Stock Issued to
Employees. Compensation cost for stock options granted to
employees is based on the excess of the quoted market price of
the Companys stock on the measurement date over the amount
an employee must pay to acquire the stock (the intrinsic
value) and is recognized over the vesting period. No
compensation cost was recognized in respect of options where the
vesting of the options was conditional upon the listing of the
Companys shares on a recognized stock exchange, prior to
the condition being met. Once the condition was met, the
compensation expense was recorded in full on the date when the
condition was satisfied.

As required by FAS 123, Accounting for
Stock-Based Compensation, the Company has included in
Note 14 the required FAS 123 pro forma disclosures of
net income (loss) and earnings (loss) per share as if the fair
value-based method of accounting has been applied.

Research and
Development

Many of the Companys activities are
directed towards the performance of research on behalf of its
clients and the Company is continually improving its scientific
methods and techniques. All costs relating to the performance of
client projects are expensed as incurred and there are no
significant levels of expenditure on research and development on
the Companys own behalf.

Derivative
and Financial Instruments

Foreign exchange forward contracts are legal
agreements between two parties to purchase and sell foreign
currency for a specified price, with delivery and settlement in
the future. During the periods covered by the financial
statements the Company did not have any foreign currency
derivative instruments and did not engage in any foreign
currency hedging activities.

It is the strategy of the Company to enter into
derivative contracts to hedge exposure to variability in cash
flows for floating rate financial instruments and forecasted
transactions, which primarily include the rollover of short-term
assets and liabilities and loan repayments. Interest rate caps
and collars and swaps are the most common instruments used to
reduce the impact of interest rate changes on future earnings.

Until December 31, 2000, the premium paid
for the interest rate cap and collar transaction then in place,
was deferred and amortized to income on a straight-line basis
over the term of the contract. The benefits or losses of the cap
and collar contract were recognized as they were received
(synthetic instrument accounting).

On January 1, 2001, the Company adopted
FAS 133, Accounting for Derivative Instruments and
Hedging Activities, which establishes accounting and
reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and
used for hedging activities. All derivatives, whether designated
for hedging relationships or not, are required to be recorded on
the balance sheet at fair value. If the derivative is designated
as a fair value hedge, all changes in the fair value of the
derivative and changes in the fair value of the hedged item
attributable to the hedged risk are recognized in earnings. If
the derivative is designated as a cash flow hedge, the effective
portions of the changes in the fair value of the derivative are
recorded in other comprehensive income and are recognized in the
statement of operations when the hedged item affects earnings.
The ineffective portions of both fair value and cash flow hedges
are immediately recognized in earnings.

The adoption of FAS 133 resulted in
recording the fair value of the cap and collar transaction at
fair value and writing off the remaining unamortized premium to
other comprehensive income. The impact of this, net of deferred
taxes, was a charge of $0.1 million to other comprehensive
income recorded on January 1, 2001.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Because of hedge ineffectiveness and
managements decision not to apply hedge accounting but to
continue to enter into economic hedges to support certain
business strategies, adoption of FAS 133 may cause
volatility in quarterly earnings in the future.

Following adoption of FAS 133, the interest
rate cap and collar transactions are accounted for at fair
value, being the premium paid at the inception date, and marking
to market (fair value) any differences between periods through
the interest expense category in the statement of operations at
the end of each reporting period. Swap contracts are recorded at
fair value and any differences between periods are recorded
through the interest expense category in the statement of
operations at the end of each reporting period.

Debt Issuance
Costs

Debt issuance costs relating to the
Companys bank loans and unsecured fixed rate debt are
deferred and amortized to interest expense using the effective
interest method over the respective terms of the debt concerned.

Grant
Income

The European operations of ClinTrials has
received two grants from a Scottish governmental authority, the
Scottish Executive, relating to projects to establish a clinical
data management operation in Glasgow. The grants concerned are
Regional Selective Assistance grants for pounds sterling
£0.5 million ($0.9 million) relating to the
establishment of clinical data management facilities in Glasgow,
leasing premises and creating 98 permanent full time jobs, and
for pounds sterling £0.1 million ($0.2 million)
for the development of clinical data management systems and
creating 20 permanent full time jobs. The grants concerned can
be claimed in stages once certain targets relating to completion
of the project have been achieved. The principal targets relate
to the number of jobs created, commitments for leasing of assets
under operating leases and other expenditures.

Grant income is recognized on a straight-line
basis over the performance period once the grant has been
received. The performance period is the period from the date of
the receipt of the first instalment of grant to the date when
the grant is no longer subject to being reclaimed. Grant income
totaling pounds sterling £0.3 million
($0.5 million) was recognized by the subsidiary in the
periods prior to its acquisition by the Company. No grant income
has been recognized in 2002 or 2001, nor by the Company in any
prior period covered by these financial statements.

The grants can potentially be reclaimed by the
Scottish Executive within 18 months of the final stage
payment in the case of the first grant or 36 months of the
final stage payment in the case of the second grant if the
conditions for receiving the grant are not maintained. In the
event that, subsequent to receiving a payment, the conditions
for claiming a grant are no longer met, the Company provides for
its best estimate of the potential repayment of the grant until
such time as the period for potential repayment has expired.
Management does not believe that repayment of any grant
recognized to date will be necessary.

Recent
Accounting Pronouncements

In June 2001, the FASB issued FAS 143,
Accounting for Asset Retirement Obligations.
FAS 143 requires the fair value of a liability for asset
retirement obligations to be recognized in the period in which
it is incurred if a reasonable estimate of the fair value can be
made. The associated asset retirement costs are capitalized as
part of the carrying amount of the related long-lived asset.
FAS 143 is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company
does not have any significant asset retirement obligations and,
accordingly, the adoption of FAS 143, is not expected to
have a material impact on its results of operations or its
financial position.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In April 2002, the FASB issued FAS 145,
Rescission of FASB Statements Nos. 4, 44 and 64,
Amendment of FASB Statement No. 13 and Technical
Corrections. The principal change reflected in these
pronouncements is that gains or losses from extinguishment of
debt which are classified as extraordinary items by FAS 4
will no longer be classified as such. The provisions of
FAS 145 are effective for fiscal years beginning after
May 15, 2002 although early application of the Statement
related to the rescission of FAS 4 is encouraged. The
Company plans to adopt FAS 145 on January 1, 2003.
This will result in the extraordinary items of $1.6 million
(being $2.0 million before taxes and $0.4 million of
income taxes) in 2002 and $0.4 million in 2001 (being
$0.6 million before taxes and $0.2 million of income
taxes), being reclassified to the interest expense and income
taxes captions.

In June 2002, the FASB issued FAS 146,
Accounting for costs associated with disposal or exit
activities. This Statement addresses financial accounting
and reporting for costs associated with exit or disposal
activities and supercedes Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring) (EITF 94-3). This
Statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is
incurred. Under EITF 94-3, a liability for an exit cost as
defined in EITF 94-3 was recognized at the date of an
entitys commitment to an exit plan. FAS 146 provides
that an entitys commitment to a plan, by itself, does not
create a present obligation to others that meets the definition
of a liability. Therefore, FAS 146 eliminates the
definition and requirements for recognition of exit costs in
EITF 94-3 until a liability has been incurred and
establishes that fair value is the objective for initial
measurement of the liability. However, this standard does not
apply to costs associated with exit activities involving
entities acquired under business combinations or disposal
activities covered under FAS 144. The provisions of
FAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. No such exit or
disposal activities have been initiated since December 31,
2002.

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which clarifies
disclosure and recognition/ measurement requirements related to
certain guarantees. The disclosure requirements are effective
for financial statements issued after December 15, 2002 and
the recognition/ measurements requirements are effective on a
prospective basis for guarantees issued or modified after
December 31, 2002. The application of the requirements of
FIN 45 did not have a material impact on our financial
position or results of operations.

In December 2002, the FASB issued FAS 148,
Accounting for Stock-Based Compensation 
Transition and Disclosure which is an amendment of
FAS 123, Accounting for Stock  Based
Compensation. FAS 148 provides alternative methods of
transition from the intrinsic value method of accounting for
stock options prescribed in APB Opinion No. 25,
Accounting for Stock Issued to Employees to the fair
value-based method of accounting required by FAS 123. The
Company has not yet decided on what course of action to take in
response to this standard but management recognise that a change
to the fair value method of accounting from the current
intrinsic value method may be required at some future date.

It is not possible at present to assess the
impact that any such change may have on the results of
operations or the financial position of the Company.

5.     Business
Acquisitions

The Company made one significant acquisition
during the three year period ended December 31, 2002. This
acquisition was accounted for under the purchase method of
accounting, with the results of operations of the acquired
business included from the date of acquisition.

45



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On April 5, 2001, the Company acquired the
whole of the outstanding stock of ClinTrials Research Inc. for
cash of $120.8 million. The estimated fair value of assets
acquired and liabilities assumed are summarized below:

|                                              |           |                        |  |        |  |   |         |   | 
|--------------------------------------------- | --------- | ---------------------- |  | ------ |  | - | ------- | - | 
|                                              |           |                       
|                                              |           | (Dollars in thousands)
|Allocation of purchase price:                 |           |                        |  |        |  |   |         |  
|Net current assets (including cash of $5,700) |           |                        |  |        |  | $ | 1,201   |  
|Property, plant and equipment                 |           |                        |  |        |  |   | 37,353  |  
|Intangible assets                             |           |                        |  |        |  |   |         |  
|                                              | Workforce |                        |  | 22,050 |  |   |         |   | 
|                                              | Goodwill  |                        |  | 73,649 |  |   |         |   | 
|                                              |           |                        |  |        |  |   |         |  
|                                              |           |                        |  |        |  |   | 95,699  |  
|Deferred taxation liabilities                 |           |                        |  |        |  |   | (13,183 | )
|Long term liabilities                         |           |                        |  |        |  |   | (223    | )
|                                              |           |                        |  |        |  |   |         |  
|Purchase price                                |           |                        |  |        |  | $ | 120,847 |  
|                                              |           |                        |  |        |  |   |         |  

Tax losses at the acquisition date amounted to
approximately $40 million and these remain unutilised at
December 31, 2002. A valuation allowance has been
established against the whole of these losses, and to the extent
that this valuation allowance is reduced in future, the
reduction will be allocated to reduce goodwill.

The following selected unaudited pro forma
consolidated results of operations are presented as if the
acquisition had occurred as of the beginning of the period
immediately preceding the period of acquisition after giving
effect to certain adjustments for the amortization of goodwill,
interest costs relating to the financing of the acquisition and
related income tax effects. The pro forma data is for
information purposes only and does not necessarily reflect the
results of operations had the companies operated as one during
the period. No effect has been included for synergies, if any,
that may have been realized through the acquisition.

|                                   |  |                        |         |      |  |   |         |  
|---------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                   |  | 2001                   |         | 2000
|                                   |  |                        |         |     
|                                   |  |                       
|                                   |  | (Dollars in thousands 
|                                   |  | except per share data)
|Net service revenue                |  | $                      | 180,553 |      |  | $ | 170,865 |  
|Gross profit                       |  |                        | 80,379  |      |  |   | 71,714  |  
|Income from operations             |  |                        | 11,373  |      |  |   | 2,143   |  
|Loss before tax                    |  |                        | (8,631  | )    |  |   | (16,738 | )
|Net loss                           |  |                        | (10,719 |      |  |   | (18,023 | )
|Loss per share (basic and diluted) |  | $                      | (0.50   | )    |  | $ | (1.14   | )
|                                   |  |                        |         |      |  |   |         |  

Provision was made at acquisition for
restructuring of the European Clinical operation of ClinTrials
Research Inc. This was based upon a plan formulated at
acquisition, approved by the directors of the Company in August
2001 and wholly implemented in 2001. The plan involved reducing
the headcount in the acquired business, relocating certain
functions from Maidenhead in England to various locations in
Scotland and vacating office space in Maidenhead.

46



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The movement on the restructuring provision was:

|                                     |  |                        |       |  
|------------------------------------ |  | ---------------------- | ----- | -
|                                     |  | (Dollars in thousands)
|Amount established at acquisition    |  | $                      | 3,416 |  
|Utilized during 2001                 |  |                        | 2,251 |  
|                                     |  |                        |       |  
|Balance accrued at December 30, 2001 |  |                        | 1,165 |  
|Utilized during 2002                 |  |                        | (945  | )
|                                     |  |                        |       |  
|Balance accrued at December 31, 2002 |  | $                      | 220   |  
|                                     |  |                        |       |  

The provision established at acquisition
comprised $1.7 million in respect of severance payments to
74 people in the statistical and data management and various
administrative functions, $1.3 million relating to rental
and services costs on the surplus space vacated at Maidenhead,
$0.3 million relating to dilapidations on the Maidenhead
property and $0.1 million of other expenditures. The
residual balance accrued at December 31, 2002 of
$0.22 million and at December 30, 2001 of
$1.165 million primarily relates to future lease
obligations on the vacated Maidenhead property.

6.     Earnings
(Loss) Per Share

The presentation of historical earnings per share
data using the Inveresk Research Group Limited capital structure
prior to the change of ultimate parent company would not be
meaningful and has not been included herein. Rather, historical
earnings (loss) per share have been computed assuming the
historical shares outstanding shares in Inveresk Research Group
Limited were converted to ordinary shares in Inveresk Research
Group, Inc using a weighted average conversion ratio derived
from the conversion ratios which applied when the change of
ultimate parent company became effective.

7.     Shareholders
Equity

As described in Note 2, on June 25, 2002, we
completed a transaction that created a new ultimate parent
company for our group. All the outstanding shares of Inveresk
Research Group Limited (the former ultimate holding company,
organized in Scotland) were exchanged for shares of common stock
of Inveresk Research Group, Inc. (the current ultimate parent
company, organized in Delaware).

The capital structure is presented on the basis
described in Note 2 and is as follows:

|                                                                                                                                                                 |  |                        |     |              |  |   |     | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --- | ------------ |  | - | --- | 
|                                                                                                                                                                 |  | December 31,           |     | December 30,
|                                                                                                                                                                 |  | 2002                   |     | 2001        
|                                                                                                                                                                 |  |                        |     |             
|                                                                                                                                                                 |  |                       
|                                                                                                                                                                 |  | (Dollars in thousands)
|Preferred stock, $0.01 par value 10,000,000
    shares authorized, none issued                                                                                   |  | $                      |    |              |  | $ |    | 
|Common stock, $0.01 par value 150,000,000 shares
    authorized; issued and outstanding 36,004,777 and 23,469,088 at
    December 31, 2002 and December 30, 2001 |  |                        | 360 |              |  |   | 235 | 
|                                                                                                                                                                 |  |                        |     |              |  |   |     | 
|                                                                                                                                                                 |  | $                      | 360 |              |  | $ | 235 | 
|                                                                                                                                                                 |  |                        |     |              |  |   |     | 

The increase of 12,535,689 shares during 2002
resulted from the exercise of employee stock options to acquire
535,689 shares at an average exercise price of $0.22 per share
and the sale of 12 million shares in our initial public
offering.

47



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8.     Property,
Plant and Equipment

The composition of property, plant and equipment
is as follows:

|                                           |  |                        |         |              |  |   |         |  
|------------------------------------------ |  | ---------------------- | ------- | ------------ |  | - | ------- | -
|                                           |  | December 31,           |         | December 30,
|                                           |  | 2002                   |         | 2001        
|                                           |  |                        |         |             
|                                           |  |                       
|                                           |  | (Dollars in thousands)
|Land, buildings and leasehold improvements |  | $                      | 98,974  |              |  | $ | 79,394  |  
|Plant and equipment                        |  |                        | 86,246  |              |  |   | 76,291  |  
|                                           |  |                        |         |              |  |   |         |  
|                                           |  |                        | 185,220 |              |  |   | 155,685 |  
|Less accumulated depreciation              |  |                        | (76,650 | )            |  |   | (67,763 | )
|                                           |  |                        |         |              |  |   |         |  
|                                           |  | $                      | 108,570 |              |  | $ | 87,922  |  
|                                           |  |                        |         |              |  |   |         |  

Included in plant and equipment are assets with a
cost of $2.9 million and $2.0 million at
December 31, 2002 and December 30, 2001 which are the
subject of capital leases.

9.     Intangible
Assets

The following table sets forth an analysis of the
balance in intangible assets, including the changes required
when FAS 142 took effect (see Note 4 above).

|                              |  |                        |         |              |  |   |         |  
|----------------------------- |  | ---------------------- | ------- | ------------ |  | - | ------- | -
|                              |  | December 31,           |         | December 30,
|                              |  | 2002                   |         | 2001        
|                              |  |                        |         |             
|                              |  |                       
|                              |  | (Dollars in thousands)
|Goodwill                      |  | $                      | 147,765 |              |  | $ | 115,709 |  
|Workforce                     |  |                        |        |              |  |   | 30,831  |  
|                              |  |                        |         |              |  |   |         |  
|                              |  |                        | 147,765 |              |  |   | 146,540 |  
|Less accumulated amortization |  |                        | (12,722 | )            |  |   | (12,023 | )
|                              |  |                        |         |              |  |   |         |  
|                              |  | $                      | 135,043 |              |  | $ | 134,517 |  
|                              |  |                        |         |              |  |   |         |  

10.     Accrued
expenses

The composition of accrued expenses is as follows:

|                                                                       |  |                        |        |              |  |   |        | 
|---------------------------------------------------------------------- |  | ---------------------- | ------ | ------------ |  | - | ------ | 
|                                                                       |  | December 31,           |        | December 30,
|                                                                       |  | 2002                   |        | 2001        
|                                                                       |  |                        |        |             
|                                                                       |  |                       
|                                                                       |  | (Dollars in thousands)
|Restructuring provision in respect of European
    Clinical operations |  | $                      | 220    |              |  | $ | 1,165  | 
|Fair value of Canadian $ interest rate swap                            |  |                        |       |              |  |   | 1,763  | 
|Fair value of pounds sterling interest rate swap                       |  |                        |       |              |  |   | 218    | 
|Fair value of US $ interest rate swap                                  |  |                        | 1,096  |              |  |   |       | 
|Reserve for losses on contracts                                        |  |                        | 2,471  |              |  |   | 2,200  | 
|Accrued payroll costs and social taxes                                 |  |                        | 6,966  |              |  |   | 4,672  | 
|Interest accrued on bank loans and interest rate
    swaps             |  |                        | 603    |              |  |   | 2,956  | 
|Other accrued expenses                                                 |  |                        | 10,043 |              |  |   | 8,546  | 
|                                                                       |  |                        |        |              |  |   |        | 
|                                                                       |  | $                      | 21,399 |              |  | $ | 21,520 | 
|                                                                       |  |                        |        |              |  |   |        | 

48



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Credit
Facilities and Debt

Facilities



| |     
| | ----
| | 2002

At December 31, 2002, $67.5 million of
bank debt had been drawn under a bank credit facility (the
facility). Such debt is repayable in U.S. dollars and
bears interest at the London Inter-Bank Offered Rate
(LIBOR) plus 1.25%. The total amount available to
the Company under this facility is $75 million. The
facility is secured by the Companys principal assets. The
borrowings of a subsidiary company which had utilized this
facility at December 31, 2002 were guaranteed by the
Company, the principal trading subsidiaries in the group and
certain intermediate holding companies. $25 million of the
facility expires on June 20, 2005 and $50 million is
repayable in seven equal six monthly instalments the first of
which falls due on June 30, 2004 with the final instalment
due on June 30, 2007.

The facility is governed by an agreement that
contains certain financial covenants, including but not limited
to, covenants related to Minimum Net Tangible Assets, Minimum
Earnings before Interest, Taxes, Depreciation, Amortization and
Rents (EBITDAR) to Consolidated Borrowings Costs,
Maximum Senior Debt to Earnings before Interest, Taxes,
Depreciation and Amortization (EBITDA) and Minimum
Consolidated Cash Flow to Consolidated Debt Service Liabilities.
These covenants are calculated with reference to the
consolidated financial statements of the Company. The Company is
in compliance with these covenants at December 31, 2002.



| |     
| | ----
| | 2001

At December 30, 2001 the Company had
$104.5 million of unsecured subordinated loan stock
outstanding, which was repayable at face value plus accrued
interest on the earlier of the date of listing of the
Companys stock on a recognized investment exchange, the
date of sale of 50% or more of the Companys issued equity
share capital, or June 30, 2008. This loan stock
accumulated interest at 10% of the principal balance per annum,
which was not payable until redemption. It was not practicable
to estimate the fair value of the loan stock because it was held
by the Companys principal shareholder and because its
repayment date was dependent upon uncertain future events.
Accordingly, it was carried at its original historic cost. This
loan stock was classified in the December 30, 2001 balance
sheet within current portion of long term debt because the loan
stock was repayable when the Company completed its initial
public offering.

Derivative
Instruments



| |     
| | ----
| | 2002

The Company has entered into interest swap
arrangements related to its bank borrowings under its current
bank facilities. The first arrangement is an interest rate swap,
which has a notional amount of $50 million and expires on
October 5, 2005. Under this agreement the interest rate on
$50 million of debt is fixed at 4.23%. The second
arrangement is an interest rate swap, which has a notional
amount of $10 million and expires on October 5, 2004.
Under this arrangement the interest rate on $10 million of
debt is fixed at 3.77%. The estimated fair value of these two
swaps is based on the quoted market prices. At December 31,
2002, the fair value was estimated to be a liability of
$1.1 million. These unrealized losses were recorded as
additional interest cost in the year ended December 31,
2002.

2001

Prior to its initial public offering, the Company
entered into three transactions to hedge its exposure to
fluctuating interest rates. All three transactions have now been
terminated. On December 20, 1999, the Company entered into
an interest rate cap and collar transaction for a cost of pounds
sterling £0.2 million. This

49



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

transaction covered the period from
December 20, 1999 to December 31, 2002 and related to
pounds sterling £16.2 million initially, reducing to
pounds sterling £15.75 million on June 30, 2000,
pounds sterling £15.3 million on December 29,
2000, pounds sterling £14.7 million on June 29,
2001, pounds sterling £14.1 million on
December 31, 2001 and pounds sterling
£13.35 million on June 28, 2002. Under the terms
of the agreement, the Company was compensated if LIBOR exceeded
7.5% but was required to make payments if LIBOR fell below 5.0%.
The estimated fair value was based on the quoted market prices.
At December 31, 2000, the fair value was estimated to be a
liability of less than $0.1 million. At December 30,
2001, the fair value was estimated to be a liability of
$0.1 million. The increase of $0.1 million in the
unrealized losses was recorded as additional interest costs in
the 52 week period ended December 30, 2001.

On July 5, 2001, the Company entered into
two interest rate swap transactions to hedge its exposure to
interest rate fluctuations. These agreements did not require an
initial investment by the Company. Net settlements to be
received or paid under the agreements were reflected as
adjustments to interest expense.

Additionally, included in interest expense for
the year ended December 31, 2001 were unrealized losses of
$2.0 million related to these swap agreements that were
incurred in the year. The two swaps had notional amounts as
follows:

|                                  |  |                 |       | 
|--------------------------------- |  | --------------- | ----- | 
|                                  |  | Pounds Sterling
|                                  |  |                
|July 5, 2001 - December 31, 2001  |  |                 | 5.6m  | 
|December 31, 2001 - June 30, 2002 |  |                 | 6.0m  | 
|June 30, 2002 - December 31, 2002 |  |                 | 5.1m  | 
|December 31, 2002 - June 30, 2003 |  |                 | 17.3m | 
|June 30, 2003 - December 31, 2003 |  |                 | 16.2m | 
|December 31, 2003 - June 30, 2004 |  |                 | 14.7m | 

|                                  |  |                  |     | 
|--------------------------------- |  | ---------------- | --- | 
|                                  |  | Canadian Dollars
|                                  |  |                 
|July 5, 2001 - December 30, 2001  |  |                  | 60m | 
|December 30, 2001 - June 30, 2002 |  |                  | 60m | 
|June 30, 2002 - December 30, 2002 |  |                  | 55m | 
|December 30, 2002 - June 30, 2003 |  |                  | 55m | 
|June 30, 2003 - December 30, 2003 |  |                  | 50m | 
|December 30, 2003 - June 30, 2004 |  |                  | 45m | 

The Company paid a fixed rate of 6.03% on the
Pounds Sterling amounts and 5.41% on the Canadian Dollar amounts
and received floating rate amounts based on LIBOR. The cap and
collar and the above two interest swap agreements were
terminated in the third quarter of 2002 following the repayment
of the related borrowings.

50



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

12.     Leases and
Capital Commitments



| |                 
| | ----------------
| | Operating leases

The Company leases office space and office
equipment under various operating leases. Minimum rental
commitments payable in future years under operating leases
having initial or remaining noncancellable terms of one year or
more at December 31 are as follows:

|                                                            |  |                        |        |  
|----------------------------------------------------------- |  | ---------------------- | ------ | -
|                                                            |  | (Dollars in thousands)
|2003                                                        |  | $                      | 6,788  |  
|2004                                                        |  |                        | 5,846  |  
|2005                                                        |  |                        | 4,982  |  
|2006                                                        |  |                        | 4,640  |  
|2007                                                        |  |                        | 4,637  |  
|Thereafter                                                  |  |                        | 23,068 |  
|                                                            |  |                        |        |  
|Total minimum rentals                                       |  |                        | 49,961 |  
|Less minimum rentals due under noncancellable
    subleases |  |                        | (876   | )
|                                                            |  |                        |        |  
|                                                            |  | $                      | 49,085 |  
|                                                            |  |                        |        |  

Rent expense is comprised of the following:

|                      |  |                        |       |              |  |              |       |   |  |   |     | 
|--------------------- |  | ---------------------- | ----- | ------------ |  | ------------ | ----- | - |  | - | --- | 
|                      |  |                        |       | 52 Weeks     |  | 53 Weeks    
|                      |  | Year Ended             |       | Ended        |  | Ended       
|                      |  | December 31,           |       | December 30, |  | December 31,
|                      |  | 2002                   |       | 2001         |  | 2000        
|                      |  |                        |       |              |  |             
|                      |  |                       
|                      |  | (Dollars in thousands)
|Minimum rentals       |  | $                      | 6,112 |              |  | $            | 5,466 |   |  | $ | 294 | 
|Less sublease rentals |  |                        | (944  | )            |  |              | (670  | ) |  |   |    | 
|                      |  |                        |       |              |  |              |       |   |  |   |     | 
|                      |  | $                      | 5,168 |              |  | $            | 4,796 |   |  | $ | 294 | 
|                      |  |                        |       |              |  |              |       |   |  |   |     | 

Capital
Leases

The Company has capital lease obligations
relating to scientific machinery, vehicles and office equipment.
The Companys commitments under capital leases are:

|           |  |                        |     | 
|---------- |  | ---------------------- | --- | 
|           |  | (Dollars in thousands)
|2003       |  | $                      | 198 | 
|2004       |  |                        | 163 | 
|2005       |  |                        | 137 | 
|2006       |  |                        | 43  | 
|2007       |  |                        |    | 
|Thereafter |  |                        |    | 
|           |  |                        |     | 
|           |  | $                      | 541 | 
|           |  |                        |     | 

Capital
Commitments

The Company has commitments in relation to
capital expenditure amounting to $12.1 million at
December 31, 2002.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the Companys
commitments relating to its long-term debt, capital lease and
operating lease obligations and its purchase obligations for
capital expenditure.

|           |  |             |        |                        |  |             |     |             |  |       |        |  |  |   |        |  |  |   |         | 
|---------- |  | ----------- | ------ | ---------------------- |  | ----------- | --- | ----------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|           |  | Long-term   |        | Capital                |  | Operating   |     |             |  |      
|           |  | Debt        |        | Lease                  |  | Lease       |     | Purchase    |  |      
|           |  | Obligations |        | Obligations            |  | Obligations |     | Obligations |  | Total
|           |  |             |        |                        |  |             |     |             |  |      
|           |  |             |        |                        |  |             |     |            
|           |  |             |        | (Dollars in thousands) |  |             |     |            
|2003       |  | $           | 217    |                        |  | $           | 198 |             |  | $     | 6,788  |  |  | $ | 12,110 |  |  | $ | 19,313  | 
|2004       |  |             | 14,568 |                        |  |             | 163 |             |  |       | 5,846  |  |  |   |       |  |  |   | 20,577  | 
|2005       |  |             | 31,800 |                        |  |             | 137 |             |  |       | 4,982  |  |  |   |       |  |  |   | 36,919  | 
|2006       |  |             | 14,300 |                        |  |             | 43  |             |  |       | 4,640  |  |  |   |       |  |  |   | 18,983  | 
|2007       |  |             | 7,100  |                        |  |             |    |             |  |       | 4,637  |  |  |   |       |  |  |   | 11,737  | 
|Thereafter |  |             |        |                        |  |             |    |             |  |       | 23,068 |  |  |   |       |  |  |   | 23,068  | 
|           |  |             |        |                        |  |             |     |             |  |       |        |  |  |   |        |  |  |   |         | 
|           |  | $           | 67,985 |                        |  | $           | 541 |             |  | $     | 49,961 |  |  | $ | 12,110 |  |  | $ | 130,597 | 
|           |  |             |        |                        |  |             |     |             |  |       |        |  |  |   |        |  |  |   |         | 

13.     Income
taxes

Significant components of the Companys
deferred tax assets and liabilities are as follows:

|                                            |                                        |                        |         |              |  |   |         |        | 
|------------------------------------------- | -------------------------------------- | ---------------------- | ------- | ------------ |  | - | ------- | ------ | 
|                                            |                                        | December 31,           |         | December 30,
|                                            |                                        | 2002                   |         | 2001        
|                                            |                                        |                        |         |             
|                                            |                                        |                       
|                                            |                                        | (Dollars in thousands)
|Deferred tax assets:                        |                                        |                        |         |              |  |   |         |       
|                                            | Defined benefit pension obligations    |                        | $       | 3,987        |  |   | $       | 1,416  | 
|                                            | Federal and state net operating losses |                        |         | 14,893       |  |   |         | 11,425 | 
|                                            | Foreign net operating losses           |                        |         | 768          |  |   |         | 2,400  | 
|                                            | Interest rate swaps                    |                        |         | 329          |  |   |         | 658    | 
|                                            | Other deferred tax assets              |                        |         | 1,451        |  |   |         |       | 
|                                            |                                        |                        |         |              |  |   |         |       
|Total deferred tax assets                   |                                        |                        | 21,428  |              |  |   | 15,899  |       
|Valuation allowance for deferred tax assets |                                        |                        | (15,830 | )            |  |   | (13,825 | )     
|                                            |                                        |                        |         |              |  |   |         |       
|Net deferred tax assets                     |                                        | $                      | 5,598   |              |  | $ | 2,074   |       
|Deferred tax liabilities                    |                                        |                        |         |              |  |   |         |       
|Property, plant and equipment               |                                        |                        | (27,241 | )            |  |   | (21,938 | )     
|Assembled workforce                         |                                        |                        |        |              |  |   | (6,884  | )     
|Unbilled receivables                        |                                        |                        |        |              |  |   | (864    | )     
|Other deferred tax liabilities              |                                        |                        | (700    | )            |  |   |        |       
|                                            |                                        |                        |         |              |  |   |         |       
|Net deferred tax liabilities                |                                        | $                      | (22,343 | )            |  | $ | (27,612 | )     
|                                            |                                        |                        |         |              |  |   |         |       

The balance sheet classification of net deferred
tax liabilities is as follows:

|                                        |  |                        |         |              |  |   |         |  
|--------------------------------------- |  | ---------------------- | ------- | ------------ |  | - | ------- | -
|                                        |  | December 31,           |         | December 30,
|                                        |  | 2002                   |         | 2001        
|                                        |  |                        |         |             
|                                        |  |                       
|                                        |  | (Dollars in thousands)
|Net current deferred tax liabilities    |  | $                      | (204    | )            |  | $ | (559    | )
|Net noncurrent deferred tax liabilities |  |                        | (22,139 | )            |  |   | (27,053 | )
|                                        |  |                        |         |              |  |   |         |  
|Net deferred tax liabilities            |  | $                      | (22,343 | )            |  | $ | (27,612 | )
|                                        |  |                        |         |              |  |   |         |  

52



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For financial reporting purposes, income
(loss) before income taxes includes the following
components:

|                            |               |                        |         |              |   |              |        |        |   |   |     |      |  
|--------------------------- | ------------- | ---------------------- | ------- | ------------ | - | ------------ | ------ | ------ | - | - | --- | ---- | -
|                            |               |                        |         | 52 Weeks     |   | 53 Weeks    
|                            |               | Year Ended             |         | Ended        |   | Ended       
|                            |               | December 31,           |         | December 30, |   | December 31,
|                            |               | 2002                   |         | 2001         |   | 2000        
|                            |               |                        |         |              |   |             
|                            |               |                       
|                            |               | (Dollars in thousands)
|Income (loss) before taxes: |               |                        |         |              |   |              |        |        |   |   |     |     
|                            | United States |                        | $       | (699         | ) |              | $      | (3,152 | ) |   | $   | (367 | )
|                            | Foreign       |                        |         | (19,585      | ) |              |        | 500    |   |   |     | 633  |  
|                            |               |                        |         |              |   |              |        |        |   |   |     |     
|                            |               | $                      | (20,284 | )            |   | $            | (2,652 | )      |   | $ | 266 |     
|                            |               |                        |         |              |   |              |        |        |   |   |     |     

The Companys Canadian subsidiary qualifies
for Canadian federal and Quebec Scientific Research and
Development deductions and tax credits. Expenditures on certain
capital assets are fully deductible or may be carried forward
indefinitely until utilized. The tax credits are equal to 30% of
certain capital and current expenditures. The Canadian federal
tax credits are accounted for using the flow through method, in
which the Canadian federal credits are recognized as a reduction
of income taxes in the year the credit arises. Quebec provincial
tax credits are reported as a component of income from
operations in the statement of operations, rather than as a
reduction of income tax expense. The only periods in which this
is relevant are year ended December 31, 2002 and the period
ended December 30, 2001 where $3.4 million and
$1.8 million of Quebec provincial tax credits were offset
against direct costs in the statement of operations.

Provision has not been made for United States or
additional foreign taxes on undistributed earnings of foreign
subsidiaries as those earnings have been permanently reinvested
and the Company has no plans in the foreseeable future to remit
these earnings to the United States. It is not practicable to
determine the amounts involved.

Significant components of the provision
(benefit) for income taxes are as follows:

|                           |                                              |                        |       |              |   |              |       |        |   |   |     |     | 
|-------------------------- | -------------------------------------------- | ---------------------- | ----- | ------------ | - | ------------ | ----- | ------ | - | - | --- | --- | 
|                           |                                              |                        |       | 52 Weeks     |   | 53 Weeks    
|                           |                                              | Year Ended             |       | Ended        |   | Ended       
|                           |                                              | December 31,           |       | December 30, |   | December 31,
|                           |                                              | 2002                   |       | 2001         |   | 2000        
|                           |                                              |                        |       |              |   |             
|                           |                                              |                       
|                           |                                              | (Dollars in thousands)
|Current:                   |                                              |                        |       |              |   |              |       |        |   |   |     |    
|                           | Foreign                                      |                        | $     | 3,906        |   |              | $     | 1,839  |   |   | $   | 243 | 
|Deferred:                  |                                              |                        |       |              |   |              |       |        |   |   |     |    
|                           | Foreign                                      |                        |       | 9,745        |   |              |       | 2,011  |   |   |     | 439 | 
|                           | Foreign Research and Development tax credits |                        |       | (7,507       | ) |              |       | (1,801 | ) |   |     |    | 
|                           |                                              |                        |       |              |   |              |       |        |   |   |     |    
|Provision for income taxes |                                              | $                      | 6,144 |              |   | $            | 2,049 |        |   | $ | 682 |    
|                           |                                              |                        |       |              |   |              |       |        |   |   |     |    

There are no net amounts in respect of United
States federal, state and local current or deferred taxes.

53



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Companys consolidated effective tax
rate differed from the U.S. federal statutory rate as set forth
below:

|                                                                                                            |  |                        |        |              |  |              |        |   |  |   |      |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ---- | -
|                                                                                                            |  |                        |        | 52 Weeks     |  | 53 Weeks    
|                                                                                                            |  | Year Ended             |        | Ended        |  | Ended       
|                                                                                                            |  | December 31,           |        | December 30, |  | December 31,
|                                                                                                            |  | 2002                   |        | 2001         |  | 2000        
|                                                                                                            |  |                        |        |              |  |             
|                                                                                                            |  |                       
|                                                                                                            |  | (Dollars in thousands)
|Federal statutory rate  35%                                                                                |  | $                      | (7,099 | )            |  | $            | (928   | ) |  | $ | 93   |  
|Non deductible compensation expense on exercise
    of share options and other management equity incentives |  |                        | 15,906 |              |  |              |       |   |  |   |     |  
|Non deductible U.K. stamp duty tax expense                                                                  |  |                        | 464    |              |  |              |       |   |  |   |     |  
|U.K. and Canadian Research and Development tax
    credits                                                  |  |                        | (7,507 | )            |  |              | (1,801 | ) |  |   |     |  
|Amortization of goodwill                                                                                    |  |                        |       |              |  |              | 1,156  |   |  |   | 648  |  
|Difference between foreign income taxed at US
    Federal Statutory rates and foreign income tax expense    |  |                        | 2,946  |              |  |              | 776    |   |  |   | (32  | )
|Increase in federal valuation allowance                                                                     |  |                        | 229    |              |  |              | 1,103  |   |  |   | 128  |  
|Increase in valuation allowance against losses of
    foreign subsidiaries                                  |  |                        | 357    |              |  |              | 1,247  |   |  |   |     |  
|Other                                                                                                       |  |                        | 848    |              |  |              | 496    |   |  |   | (155 | )
|                                                                                                            |  |                        |        |              |  |              |        |   |  |   |      |  
|                                                                                                            |  | $                      | 6,144  |              |  | $            | 2,049  |   |  | $ | 682  |  
|                                                                                                            |  |                        |        |              |  |              |        |   |  |   |      |  

A valuation allowance has been established for
the amount of United States deferred tax assets primarily
related to the Companys potential tax benefit associated
with loss carryforwards. At December 31, 2002, the Company
had approximately $39 million of federal net operating loss
carryforwards, $31 million of which begin to expire in
2018. Foreign tax losses available for offset against future
profits of the business in which they arose amount to
approximately $19 million and have no expiry date.

14.     Stock Option
and Other Equity-Based Compensation Plans

The Company has issued options to employees
pursuant to the Inveresk Research Group, Inc. 2002 Stock Option
Plan and to its non-employee directors pursuant to the Inveresk
Research Group, Inc 2002 Non-employee Directors Stock Option
Plan. The objectives of these plans include attracting and
retaining personnel and promoting the success of the Company by
providing employees and non-executive directors with the
opportunity to acquire shares.

All options issued prior to June 27, 2002
were issued by Inveresk Research Group Limited. Those options
subsequently were exchanged for stock options (the
replacement options) issued by Inveresk Research
Group, Inc. under its 2002 Stock Option Plan on June 28,
2002. The replacement options had exercise prices, exercise
periods and other terms substantially the same as those that
were replaced. The data with respect to stock options set forth
below gives effect to the issuance of the replacement options as
if they had been issued at the same time as the options they
replaced.

The replacement options became fully vested
(immediately exercisable in full) upon completion of the
Companys initial public offering and such options will
expire 10 years after the original date of grant. At
December 31, 2002 the number of replacement options
remaining outstanding was 1,285,917. The Company has also issued
options that vest in equal annual installments over the three
years following the date of grant. At December 31, 2002 the
amounts of these options outstanding are 35,000 shares at
an option price of

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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$13 per share, 1,034,300 shares at an
option price of $10.60 per share, 3,500 at an option price of
$16.35 and 7,500 shares at an option price of $20.14.

|                                                               |  |                |           |                |  |                |               |  |  |   |      | 
|-------------------------------------------------------------- |  | -------------- | --------- | -------------- |  | -------------- | ------------- |  |  | - | ---- | 
|                                                               |  | Shares of      |           |                |  |               
|                                                               |  | Common         |           |                |  | Weighted      
|                                                               |  | Stock Issuable |           |                |  | Average       
|                                                               |  | Upon Exercise  |           | Exercise Price |  | Exercise Price
|                                                               |  |                |           |                |  |               
|Outstanding at December 26, 1999                               |  |                |          |                |  |                |              |  |  |   |     | 
|Granted during the twelve months ended
    December 31, 2000   |  |                | 217,394   |                |  | $              | 0.19          |  |  | $ | 0.19 | 
|Forfeited during the twelve months ended
    December 31, 2000 |  |                | (4,108    | )              |  | $              | 0.19          |  |  | $ | 0.19 | 
|Exercised during the twelve months ended
    December 31, 2000 |  |                |          |                |  |                |              |  |  |   |     | 
|                                                               |  |                |           |                |  |                |               |  |  |   |      | 
|Outstanding at December 31, 2000                               |  |                | 213,286   |                |  | $              | 0.19          |  |  | $ | 0.19 | 
|Granted during the twelve months ended
    December 30, 2001   |  |                | 948,159   |                |  | $              | 0.03  $0.40  |  |  | $ | 0.22 | 
|Forfeited during the twelve months ended
    December 30, 2001 |  |                | (12,913   | )              |  | $              | 0.19          |  |  | $ | 0.19 | 
|Exercised during the twelve months ended
    December 30, 2001 |  |                |          |                |  |                |              |  |  |   |     | 
|                                                               |  |                |           |                |  |                |               |  |  |   |      | 
|Outstanding at December 30, 2001                               |  |                | 1,148,532 |                |  | $              | 0.03  $0.40  |  |  | $ | 0.22 | 
|Granted during the twelve months ended
    December 31, 2002   |  |                | 1,809,941 |                |  | $              | 0.03  $20.14 |  |  | $ | 6.84 | 
|Forfeited during the twelve months ended
    December 31, 2002 |  |                | (56,567   | )              |  | $              | 0.19  $13.00 |  |  | $ | 9.88 | 
|Exercised during the twelve months ended
    December 31, 2002 |  |                | (535,689  | )              |  | $              | 0.05  $0.40  |  |  | $ | 0.22 | 
|                                                               |  |                |           |                |  |                |               |  |  |   |      | 
|Outstanding at December 31, 2002                               |  |                | 2,366,217 |                |  | $              | 0.03  $20.14 |  |  | $ | 5.05 | 
|                                                               |  |                |           |                |  |                |               |  |  |   |      | 

The following table summarizes the exercise
prices of the options outstanding at December 31, 2002:

|               |  |           |  |  |  |                |  |  |                  | 
|-------------- |  | --------- |  |  |  | -------------- |  |  | ---------------- | 
|               |  |           |  |  |  |               
|Shares of      |  |           |  |  |  |               
|Common         |  |           |  |  |  |               
|Stock Issuable |  |           |  |  |  |               
|Upon Exercise  |  |           |  |  |  | Exercise Price
|               |  |           |  |  |  |               
|               |  | 329,891   |  |  |  |                |  |  | $0.03 per share  | 
|               |  | 134,992   |  |  |  |                |  |  | $0.05 per share  | 
|               |  | 80,643    |  |  |  |                |  |  | $0.19 per share  | 
|               |  | 740,391   |  |  |  |                |  |  | $0.40 per share  | 
|               |  | 1,034,300 |  |  |  |                |  |  | $10.60 per share | 
|               |  | 35,000    |  |  |  |                |  |  | $13.00 per share | 
|               |  | 3,500     |  |  |  |                |  |  | $16.35 per share | 
|               |  | 7,500     |  |  |  |                |  |  | $20.14 per share | 
|               |  |           |  |  |  |                |  |  |                  | 
|               |  | 2,366,217 |  |  |  |                |  |  |                  | 
|               |  |           |  |  |  |                |  |  |                  | 

The weighted average exercise price of our
outstanding stock options was $5.05 per share at
December 31, 2002 and $0.22 per share at December 30,
2001.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company accounts for stock-based compensation
plans under the provisions of APB 25. For options granted on or
after June 27, 2002, the exercise price was equal to the
market price of the underlying stock and accordingly no
compensation expense is recorded. The exercise of all options
granted prior to June 27, 2002 was conditional upon the
listing of the Companys shares on a recognized stock
exchange. No compensation cost was recognized in respect of
these options prior to this condition being met. Once the
condition was met, the compensation expense was recorded in full
on the date when the condition was satisfied. This resulted in
compensation expense of $19.4 million being recorded in
respect of the outstanding share options that vested in June
2002 at the time of our initial public offering.

In the quarter ended March 31, 2002, the
terms of the options held by one individual were amended to
enable him to exercise his options prior to the completion of
our initial public offering. Compensation expense was recorded
in respect of those options in the quarter ended March 31,
2002, reducing income from operations by $4.5 million and
net income by $4.5 million.

The Company recorded an additional compensation
expense of $29.1 million in connection with its initial
public offering, when the percentage equity interest held by
certain members of the management team increased in accordance
with the terms governing the original issuance of shares held by
those individuals.

Pro forma information regarding net income is
required by FAS 123, which also requires that the
information be determined as if the Company has accounted for
its employee stock options under the fair value method of that
statement.

For purposes of this disclosure, the fair value
of the fixed option grants were estimated using the
Black-Scholes option-pricing model with the following weighted
average assumptions used for option grants:

|                                                        |  |  |      |  
|------------------------------------------------------- |  |  | ---- | -
|Risk-free interest rate                                 |  |  | 3.0  | %
|Volatility factor                                       |  |  | 60   | %
|Weighted average expected life of options in
    months |  |  | 21.4 |  

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly
subjective valuation assumptions including the expected stock
price volatility. Because the Companys stock options have
characteristics significantly different from those of traded
options, and because changes in subjective assumptions can
materially affect the fair value estimates, in managements
opinion the existing models do not necessarily provide a
reliable single measure of the fair value of the Companys
stock options.

Had compensation expense been determined for the
Companys option grants consistent with the provisions of
FAS 123, the Companys net loss for the year ended
December 31, 2002 would have been increased to the pro
forma amounts set forth in the table below. There would have
been no impact on earlier years because at that time all the
outstanding options were conditional upon the listing of the
Companys shares on a recognized stock exchange.

56



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                   |  |                        |         |  
|---------------------------------- |  | ---------------------- | ------- | -
|                                   |  | Year Ended            
|                                   |  | December 31,          
|                                   |  | 2002                  
|                                   |  |                       
|                                   |  | (Dollars in thousands 
|                                   |  | except per share data)
|Reported net (loss)                |  | $                      | (28,009 | )
|Pro forma net (loss)               |  | $                      | (28,775 | )
|Reported basic (loss) per share    |  | $                      | (0.94   | )
|Pro forma basic (loss) per share   |  | $                      | (0.97   | )
|Reported diluted (loss) per share  |  | $                      | (0.94   | )
|Pro forma diluted (loss) per share |  | $                      | (0.97   | )

The Company is currently evaluating whether such
compensation expense would generate tax deductions in the
various jurisdictions where the Company operates. As it is not
clear at present whether such tax allowances will be available,
the disclosures in the above table are calculated on the basis
of no tax allowances.

15.     Employee
Benefits

The Company operates both defined contribution
plans and a funded defined benefit pension plan, covering
certain qualifying employees. Contributions under defined
contribution plans are determined as a percentage of gross
salary. The expense related to these plans for the year ended
December 31, 2002 was $0.9 million, for the
52 weeks ended December 30, 2001 was $1.4 million
and for the 53 weeks ended December 31, 2000 was nil.

The Company operates funded a defined benefit
pension plan. The benefits under the defined benefit plan are
based on years of service and salary levels. Plan assets are
primarily comprised of marketable securities. The following
provides a reconciliation of benefit obligations, plan assets
and the funded status of the defined benefit plan.

|                                            |  |                        |        |              |  |              |        |   |  |   |        |  
|------------------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                            |  |                        |        | 52 Weeks     |  | 53 Weeks    
|                                            |  | Year Ended             |        | Ended        |  | Ended       
|                                            |  | December 31,           |        | December 30, |  | December 31,
|                                            |  | 2002                   |        | 2001         |  | 2000        
|                                            |  |                        |        |              |  |             
|                                            |  |                       
|                                            |  | (Dollars in thousands)
|Change in benefit obligations               |  |                        |        |              |  |              |        |   |  |   |        |  
|Benefit obligation at beginning of the year |  | $                      | 49,836 |              |  | $            | 48,801 |   |  | $ | 48,130 |  
|Service cost                                |  |                        | 2,921  |              |  |              | 2,731  |   |  |   | 2,581  |  
|Interest cost                               |  |                        | 3,058  |              |  |              | 2,796  |   |  |   | 2,913  |  
|Plan participants contributions             |  |                        | 1,055  |              |  |              | 899    |   |  |   | 847    |  
|Actuarial (gains) losses                    |  |                        | 2,321  |              |  |              | (1,979 | ) |  |   | (906   | )
|Benefits paid                               |  |                        | (1,422 | )            |  |              | (2,201 | ) |  |   | (1,182 | )
|Foreign currency exchange rate changes      |  |                        | 5,613  |              |  |              | (1,211 | ) |  |   | (3,582 | )
|                                            |  |                        |        |              |  |              |        |   |  |   |        |  
|Benefit obligation at end of the year       |  | $                      | 63,382 |              |  | $            | 49,836 |   |  | $ | 48,801 |  
|                                            |  |                        |        |              |  |              |        |   |  |   |        |  

57



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                   |  |                        |        |              |  |              |        |   |  |   |        |  
|-------------------------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                                   |  |                        |        | 52 Weeks     |  | 53 Weeks    
|                                                   |  | Year Ended             |        | Ended        |  | Ended       
|                                                   |  | December 31,           |        | December 30, |  | December 31,
|                                                   |  | 2002                   |        | 2001         |  | 2000        
|                                                   |  |                        |        |              |  |             
|                                                   |  |                       
|                                                   |  | (Dollars in thousands)
|Change in plan assets                              |  |                        |        |              |  |              |        |   |  |   |        |  
|Fair value of plan assets at beginning of the year |  | $                      | 40,414 |              |  | $            | 46,490 |   |  | $ | 49,403 |  
|Actual return on plan assets                       |  |                        | (8,011 | )            |  |              | (6,183 | ) |  |   | (1,555 | )
|Company contributions                              |  |                        | 3,254  |              |  |              | 2,638  |   |  |   | 2,601  |  
|Plan participants contributions                    |  |                        | 1,055  |              |  |              | 899    |   |  |   | 847    |  
|Benefits paid                                      |  |                        | (1,422 | )            |  |              | (2,201 | ) |  |   | (1,182 | )
|Foreign currency exchange rate changes             |  |                        | 3,776  |              |  |              | (1,229 | ) |  |   | (3,624 | )
|                                                   |  |                        |        |              |  |              |        |   |  |   |        |  
|Plan assets at end of the year                     |  | $                      | 39,066 |              |  | $            | 40,414 |   |  | $ | 46,490 |  
|                                                   |  |                        |        |              |  |              |        |   |  |   |        |  

The following table sets forth the funded status
of the defined benefit pension plan:

|                                       |  |                        |         |              |  |              |        |   |  |   |        |  
|-------------------------------------- |  | ---------------------- | ------- | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                       |  |                        |         | 52 Weeks     |  | 53 Weeks    
|                                       |  | Year Ended             |         | Ended        |  | Ended       
|                                       |  | December 31,           |         | December 30, |  | December 31,
|                                       |  | 2002                   |         | 2001         |  | 2000        
|                                       |  |                        |         |              |  |             
|                                       |  |                       
|                                       |  | (Dollars in thousands)
|Funded status                          |  | $                      | (24,316 | )            |  | $            | (9,422 | ) |  | $ | (2,311 | )
|Unrecognized net actuarial loss (gain) |  |                        | 20,626  |              |  |              | 6,275  |   |  |   | (784   | )
|                                       |  |                        |         |              |  |              |        |   |  |   |        |  
|Net amount recognized                  |  |                        | (3,690  | )            |  |              | (3,147 | ) |  |   | (3,095 | )
|Accrued (liability)                    |  |                        | (9,569  | )            |  |              | (1,574 | ) |  |   |       |  
|                                       |  |                        |         |              |  |              |        |   |  |   |        |  
|Accrued cost                           |  | $                      | (13,259 | )            |  | $            | (4,721 | ) |  | $ | (3,095 | )
|                                       |  |                        |         |              |  |              |        |   |  |   |        |  

As at December 31, 2002, the accumulated
benefit obligation of $52.3 million exceeded the plan
assets by $13.3 million. The weighted average assumptions
used are:

|                                        |  |              |     |              |  |              |     |   |  |  |     |  
|--------------------------------------- |  | ------------ | --- | ------------ |  | ------------ | --- | - |  |  | --- | -
|                                        |  |              |     | 52 Weeks     |  | 53 Weeks    
|                                        |  | Year Ended   |     | Ended        |  | Ended       
|                                        |  | December 31, |     | December 30, |  | December 31,
|                                        |  | 2002         |     | 2001         |  | 2000        
|                                        |  |              |     |              |  |             
|Discount rate                           |  |              | 5.6 | %            |  |              | 6.0 | % |  |  | 6.0 | %
|Expected return on plan assets          |  |              | 7.5 | %            |  |              | 6.0 | % |  |  | 6.0 | %
|Rate of compensation increase           |  |              | 3.5 | %            |  |              | 4.0 | % |  |  | 4.0 | %
|Rate of increase in pensions in payment |  |              | 2.0 | %            |  |              | 2.0 | % |  |  | 2.5 | %
|Price inflation                         |  |              | 2.0 | %            |  |              | 2.0 | % |  |  | 2.5 | %
|                                        |  |              |     |              |  |              |     |   |  |  |     |  

58



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net periodic pension costs for the defined
benefit pension plan include the following components:

|                                 |  |                        |        |              |  |              |        |   |  |   |        |  
|-------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                 |  |                        |        | 52 Weeks     |  | 53 Weeks    
|                                 |  | Year Ended             |        | Ended        |  | Ended       
|                                 |  | December 31,           |        | December 30, |  | December 31,
|                                 |  | 2002                   |        | 2001         |  | 2000        
|                                 |  |                        |        |              |  |             
|                                 |  |                       
|                                 |  | (Dollars in thousands)
|Service cost                     |  | $                      | 2,921  |              |  | $            | 2,731  |   |  | $ | 2,581  |  
|Interest cost                    |  |                        | 3,058  |              |  |              | 2,796  |   |  |   | 2,913  |  
|Return on plan assets (expected) |  |                        | (2,589 | )            |  |              | (2,759 | ) |  |   | (3,089 | )
|Amortization of actuarial loss   |  |                        | 74     |              |  |              |       |   |  |   |       |  
|                                 |  |                        |        |              |  |              |        |   |  |   |        |  
|Net periodic pension cost        |  | $                      | 3,464  |              |  | $            | 2,768  |   |  | $ | 2,405  |  
|                                 |  |                        |        |              |  |              |        |   |  |   |        |  

16.     Segment
Reporting

The Company is a full-service drug development
services group serving the pharmaceutical, biotechnology and
medical device industries. Our drug development services
comprise two operating segments  pre-clinical and
clinical. Pre-clinical services include pre-clinical safety and
pharmacology evaluation as well as laboratory sciences services.
Pre-clinical services are performed in Tranent, Scotland and
Montreal, Quebec, Canada. Clinical services consist of
designing, monitoring, and managing trials of new pharmaceutical
and biotechnology products on humans, and providing clinical
data management, biostatistical, product registration, and
pharmacovigilance services. Clinical service activities and
revenues are performed and earned primarily in the United States
and Europe. The Companys European clinical operations are
performed in Maidenhead, England and Edinburgh, Scotland with
its primary satellite offices in Brussels, Belgium and Glasgow,
Scotland. The operating results of the Company in the individual
European countries apart from the United Kingdom are not
material. Financial data by segment are as follows:

|                                             |  |                        |         |          |  |       |         |  |  |   |         | 
|-------------------------------------------- |  | ---------------------- | ------- | -------- |  | ----- | ------- |  |  | - | ------- | 
|                                             |  | Pre-clinical           |         | Clinical |  | Total
|                                             |  |                        |         |          |  |      
|                                             |  |                       
|                                             |  | (Dollars in thousands)
|Year Ended December 31, 2002                 |  |                        |         |          |  |       |         |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 142,174 |          |  | $     | 80,288  |  |  | $ | 222,462 | 
|Inter segment revenues                       |  |                        | 2,565   |          |  |       | 3,718   |  |  |   | 6,283   | 
|Depreciation and amortization                |  |                        | 7,939   |          |  |       | 2,376   |  |  |   | 10,315  | 
|Segment income                               |  |                        | 43,504  |          |  |       | 9,044   |  |  |   | 52,548  | 
|Segment assets                               |  |                        | 290,557 |          |  |       | 176,746 |  |  |   | 467,303 | 
|Intangible assets                            |  |                        | 56,063  |          |  |       | 78,980  |  |  |   | 135,043 | 
|Long-lived assets                            |  |                        | 155,485 |          |  |       | 88,128  |  |  |   | 243,613 | 
|Expenditures for longlived assets           |  |                        | 24,545  |          |  |       | 952     |  |  |   | 25,497  | 
|52 Weeks Ended December 30, 2001             |  |                        |         |          |  |       |         |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 95,172  |          |  | $     | 61,124  |  |  | $ | 156,296 | 
|Inter segment revenues                       |  |                        | 5,867   |          |  |       | 1,841   |  |  |   | 7,708   | 
|Depreciation and amortization                |  |                        | 10,355  |          |  |       | 5,583   |  |  |   | 15,938  | 
|Segment income                               |  |                        | 17,958  |          |  |       | 899     |  |  |   | 18,857  | 
|Segment assets                               |  |                        | 239,260 |          |  |       | 159,252 |  |  |   | 398,612 | 
|Intangible assets                            |  |                        | 59,678  |          |  |       | 74,839  |  |  |   | 134,517 | 
|Longlived assets                            |  |                        | 137,634 |          |  |       | 84,805  |  |  |   | 222,439 | 
|Expenditures for longlived assets           |  |                        | 10,640  |          |  |       | 505     |  |  |   | 11,143  | 

59



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                             |  |                        |         |          |  |       |        |  |  |   |         | 
|-------------------------------------------- |  | ---------------------- | ------- | -------- |  | ----- | ------ |  |  | - | ------- | 
|                                             |  | Pre-clinical           |         | Clinical |  | Total
|                                             |  |                        |         |          |  |      
|                                             |  |                       
|                                             |  | (Dollars in thousands)
|53 Weeks Ended December 31, 2000             |  |                        |         |          |  |       |        |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 45,136  |          |  | $     | 20,404 |  |  | $ | 65,540  | 
|Inter segment revenues                       |  |                        | 4,224   |          |  |       | 855    |  |  |   | 5,079   | 
|Depreciation and amortization                |  |                        | 6,522   |          |  |       | 1,272  |  |  |   | 7,794   | 
|Segment income                               |  |                        | 6,098   |          |  |       | 3,387  |  |  |   | 9,485   | 
|Segment assets                               |  |                        | 100,572 |          |  |       | 31,509 |  |  |   | 132,081 | 
|Intangible assets                            |  |                        | 31,990  |          |  |       | 15,283 |  |  |   | 47,273  | 
|Longlived assets                            |  |                        | 76,931  |          |  |       | 19,101 |  |  |   | 96,032  | 
|Expenditures for longlived assets           |  |                        | 6,313   |          |  |       | 479    |  |  |   | 6,792   | 

The following table summarizes net service
revenues and long-lived assets by geographic area based on the
location of the business providing the service.

|                                             |  |                        |        |        |  |        |        |       |  |   |         |  |  |   |         | 
|-------------------------------------------- |  | ---------------------- | ------ | ------ |  | ------ | ------ | ----- |  | - | ------- |  |  | - | ------- | 
|                                             |  | USA                    |        | Canada |  | Europe |        | Total
|                                             |  |                        |        |        |  |        |        |      
|                                             |  |                       
|                                             |  | (Dollars in thousands)
|Year Ended December 30, 2002                 |  |                        |        |        |  |        |        |       |  |   |         |  |  |   |         | 
|Net service revenue from external customers  |  | $                      | 34,551 |        |  | $      | 84,567 |       |  | $ | 103,344 |  |  | $ | 222,462 | 
|Long-lived assets at December 31, 2002       |  |                        | 36,185 |        |  |        | 75,052 |       |  |   | 132,376 |  |  |   | 243,613 | 
|52 Weeks Ended December 30, 2001             |  |                        |        |        |  |        |        |       |  |   |         |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 23,367 |        |  | $      | 48,150 |       |  | $ | 84,779  |  |  | $ | 156,296 | 
|Long-lived assets at December 30, 2001       |  |                        | 36,956 |        |  |        | 65,053 |       |  |   | 120,430 |  |  |   | 222,439 | 
|53 Weeks Ended December 31, 2000             |  |                        |        |        |  |        |        |       |  |   |         |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 1,240  |        |  | $      |       |       |  | $ | 64,300  |  |  | $ | 65,540  | 
|Long-lived assets at December 31, 2000       |  |                        | 282    |        |  |        |       |       |  |   | 95,750  |  |  |   | 96,032  | 

The Companys operations in Europe comprise
operations in a number of countries that are co-ordinated from
the United Kingdom. No European country is significant in terms
of revenues generated or assets held apart from the United
Kingdom.

The following table reconciles the above totals
for net service revenues, segment income (loss), segment assets
and long-lived assets to the appropriate figures in the
financial statements.

|                                                                      |  |                        |         |              |  |              |         |   |  |   |        |  
|--------------------------------------------------------------------- |  | ---------------------- | ------- | ------------ |  | ------------ | ------- | - |  | - | ------ | -
|                                                                      |  |                        |         | 52 Weeks     |  | 53 Weeks    
|                                                                      |  | Year Ended             |         | Ended        |  | Ended       
|                                                                      |  | December 31,           |         | December 30, |  | December 31,
|                                                                      |  | 2002                   |         | 2001         |  | 2000        
|                                                                      |  |                        |         |              |  |             
|                                                                      |  |                       
|                                                                      |  | (Dollars in thousands)
|Net service revenue per above segment analysis                        |  | $                      | 228,745 |              |  | $            | 164,004 |   |  | $ | 70,619 |  
|Less elimination of inter segment revenues                            |  |                        | (6,283  | )            |  |              | (7,708  | ) |  |   | (5,079 | )
|                                                                      |  |                        |         |              |  |              |         |   |  |   |        |  
|Net service revenue per financial statements                          |  | $                      | 222,462 |              |  | $            | 156,296 |   |  | $ | 65,540 |  
|                                                                      |  |                        |         |              |  |              |         |   |  |   |        |  
|Segment income per above segment analysis                             |  | $                      | 52,548  |              |  | $            | 18,857  |   |  | $ | 9,485  |  
|Corporate overhead, including compensation
    charges and stamp duty |  |                        | (61,520 | )            |  |              | (4,408  | ) |  |   | (1,697 | )
|                                                                      |  |                        |         |              |  |              |         |   |  |   |        |  
|Income (loss) from operations per financial
    statements            |  | $                      | (8,972  | )            |  | $            | 14,449  |   |  | $ | 7,788  |  
|                                                                      |  |                        |         |              |  |              |         |   |  |   |        |  

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                        |  |                        |          |              |  |   |         |   |  |  |  | 
|------------------------------------------------------- |  | ---------------------- | -------- | ------------ |  | - | ------- | - |  |  |  | 
|                                                        |  |                        |          | 52 Weeks     |  |  
|                                                        |  | Year Ended             |          | Ended        |  |  
|                                                        |  | December 31,           |          | December 30, |  |  
|                                                        |  | 2002                   |          | 2001         |  |  
|                                                        |  |                        |          |              |  |  
|                                                        |  |                        |          |             
|                                                        |  | (Dollars in thousands) |          |             
|Segment assets per above segment analysis               |  | $                      | 467,303  |              |  | $ | 398,612 |   |  |  |  | 
|Elimination of inter segment balances                   |  |                        | (134,836 | )            |  |   | (96,786 | ) |  |  |  | 
|                                                        |  |                        |          |              |  |   |         |   |  |  |  | 
|Assets per financial statements                         |  | $                      | 332,467  |              |  | $ | 301,826 |   |  |  |  | 
|                                                        |  |                        |          |              |  |   |         |   |  |  |  | 
|Long-lived assets per above segment analysis            |  | $                      | 243,613  |              |  | $ | 222,439 |   |  |  |  | 
|Deferred debt issue costs not allocated to
    segments |  |                        | 527      |              |  |   | 1,952   |   |  |  |  | 
|                                                        |  |                        |          |              |  |   |         |   |  |  |  | 
|                                                        |  | $                      | 244,140  |              |  | $ | 224,391 |   |  |  |  | 
|                                                        |  |                        |          |              |  |   |         |   |  |  |  | 

No client accounted for more than 7.5% of the
Companys consolidated net revenue for any of the periods
covered by these financial statements.

17.     Contingencies

From time to time the Company is subject to
claims, suits and administrative proceedings arising in the
ordinary course of business. The company does not expect that
any of the claims, suits or proceedings of which we have been
notified will have a material adverse effect upon its liquidity,
results of operations or financial condition.

18.     Related Party
Transactions

The Company has entered into various transactions
with its principal shareholder, Candover Investments PLC. The
Companys unsecured subordinated loan stock that was repaid
at the time of the Companys initial public offering as
described in Note 11, was held by Candover Investments PLC
and certain other Candover Investors. The Company paid costs
associated with the issue of the loan stock to Candover
Investments PLC amounting to $0.4 million in 1999 and
$0.7 million in 2001. The Company paid charges to Candover
Investments PLC for the services of Mr. I. Gray as a
director of Inveresk Research Group Limited amounting to less
than $0.1 million in each of 2002, 2001 and 2000.

Certain of the directors of Inveresk Research
Group, Inc. own common stock of the Company and also hold stock
options.

19.     Other
Comprehensive Loss

The balance of other comprehensive loss comprised:

|                                         |  |                        |        |             |  |            |       |  |  |   |        |  
|---------------------------------------- |  | ---------------------- | ------ | ----------- |  | ---------- | ----- |  |  | - | ------ | -
|                                         |  | Before-Tax             |        |             |  | Net-of-Tax
|                                         |  | Amount                 |        | Tax Benefit |  | Amount    
|                                         |  |                        |        |             |  |           
|                                         |  |                       
|                                         |  | (Dollars in thousands)
|December 31, 2002                        |  |                        |        |             |  |            |       |  |  |   |        |  
|Foreign currency translation             |  | $                      | 926    |             |  | $          |      |  |  | $ | 926    |  
|Cumulative-effect adjustment for FAS 133 |  |                        | (193   | )           |  |            | 58    |  |  |   | (135   | )
|Minimum pension liability adjustment     |  |                        | (9,407 | )           |  |            | 2,834 |  |  |   | (6,573 | )
|                                         |  |                        |        |             |  |            |       |  |  |   |        |  
|                                         |  | $                      | (8,674 | )           |  | $          | 2,892 |  |  | $ | (5,782 | )
|                                         |  |                        |        |             |  |            |       |  |  |   |        |  

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                         |  |                        |        |             |  |            |     |  |  |   |        |  
|---------------------------------------- |  | ---------------------- | ------ | ----------- |  | ---------- | --- |  |  | - | ------ | -
|                                         |  | Before-Tax             |        |             |  | Net-of-Tax
|                                         |  | Amount                 |        | Tax Benefit |  | Amount    
|                                         |  |                        |        |             |  |           
|                                         |  |                       
|                                         |  | (Dollars in thousands)
|December 30, 2001                        |  |                        |        |             |  |            |     |  |  |   |        |  
|Foreign currency translation             |  | $                      | (1,729 | )           |  | $          |    |  |  | $ | (1,729 | )
|Cumulativeeffect adjustment for FAS 133 |  |                        | (193   | )           |  |            | 58  |  |  |   | (135   | )
|Minimum pension liability adjustment     |  |                        | (1,574 | )           |  |            | 484 |  |  |   | (1,090 | )
|                                         |  |                        |        |             |  |            |     |  |  |   |        |  
|                                         |  | $                      | (3,496 | )           |  | $          | 542 |  |  | $ | (2,954 | )
|                                         |  |                        |        |             |  |            |     |  |  |   |        |  

20. Allowance for Doubtful Accounts and
Reserve for Losses on Contracts

|                              |  |                        |       |              |  |              |      |   |  |   |     |  
|----------------------------- |  | ---------------------- | ----- | ------------ |  | ------------ | ---- | - |  | - | --- | -
|                              |  |                        |       | 52 Weeks     |  | 53 Weeks    
|                              |  | Year Ended             |       | Ended        |  | Ended       
|                              |  | December 31,           |       | December 30, |  | December 31,
|                              |  | 2002                   |       | 2001         |  | 2000        
|                              |  |                        |       |              |  |             
|                              |  |                       
|                              |  | (Dollars in thousands)
|Doubtful accounts allowance   |  |                        |       |              |  |              |      |   |  |   |     |  
|Balance, beginning of period  |  | $                      | 760   |              |  | $            | 312  |   |  | $ | 389 |  
|Acquisition of subsidiaries   |  |                        |      |              |  |              | 724  |   |  |   |    |  
|Utilized                      |  |                        | (29   | )            |  |              | (163 | ) |  |   | (12 | )
|Net charge (credit) to income |  |                        | 269   |              |  |              | (24  | ) |  |   | (37 | )
|Translation                   |  |                        | 21    |              |  |              | (89  | ) |  |   | (28 | )
|                              |  |                        |       |              |  |              |      |   |  |   |     |  
|Balance, end of period        |  | $                      | 1,021 |              |  | $            | 760  |   |  | $ | 312 |  
|                              |  |                        |       |              |  |              |      |   |  |   |     |  

|                                |  |                        |        |              |  |              |       |   |  |   |       |  
|------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ----- | - |  | - | ----- | -
|                                |  |                        |        | 52 Weeks     |  | 53 Weeks    
|                                |  | Year Ended             |        | Ended        |  | Ended       
|                                |  | December 31,           |        | December 30, |  | December 31,
|                                |  | 2002                   |        | 2001         |  | 2000        
|                                |  |                        |        |              |  |             
|                                |  |                       
|                                |  | (Dollars in thousands)
|Reserve for losses on contracts |  |                        |        |              |  |              |       |   |  |   |       |  
|Balance, beginning of period    |  | $                      | 3,484  |              |  | $            | 1,259 |   |  | $ | 793   |  
|Acquisition of subsidiaries     |  |                        |       |              |  |              | 2,395 |   |  |   |      |  
|Utilized                        |  |                        | (1,256 | )            |  |              | (890  | ) |  |   | (318  | )
|Net charge to income            |  |                        | 1,119  |              |  |              | 743   |   |  |   | 850   |  
|Translation                     |  |                        | 234    |              |  |              | (23   | ) |  |   | (66   | )
|                                |  |                        |        |              |  |              |       |   |  |   |       |  
|Balance, end of period          |  | $                      | 3,581  |              |  | $            | 3,484 |   |  | $ | 1,259 |  
|                                |  |                        |        |              |  |              |       |   |  |   |       |  

At December 31, 2002 and December 30,
2001, $1.1 million and $1.3 million of the reserve for
losses on contracts was offset against unbilled receivables and
$2.5 million and $2.2 million was included within
accrued expenses in the consolidated balance sheets.

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INVERESK RESEARCH GROUP, INC.

QUARTERLY FINANCIAL INFORMATION

|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |            | 
|--------------------------------------------------------- | ------- | ------------------------------------------------------ | ------ | ---------- | - | ----- | ------- | ---------- | - | - | ------ | ---------- | - | - | ------ | ---------- | 
|                                                          |         | First                                                  |        | Second     |   | Third |         | Fourth    
|                                                          |         |                                                        |        |            |   |       |         |           
|                                                          |         |                                                       
|                                                          |         | (Dollars in thousands except share and per share data)
|                                                          |         | (Unaudited)                                           
|2002                                                      |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Net service revenue                                       |         | $                                                      | 53,163 |            |   | $     | 55,549  |            |   | $ | 55,923 |            |   | $ | 57,827 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Income (loss) from operations                             |         |                                                        | 5,232  |            |   |       | (37,877 | )          |   |   | 11,695 |            |   |   | 11,978 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Income (loss) before income taxes                         |         |                                                        | 1,216  |            |   |       | (42,878 | )          |   |   | 10,789 |            |   |   | 10,589 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Income (loss) before extraordinary items                  |         |                                                        | (414   | )          |   |       | (44,337 | )          |   |   | 8,920  |            |   |   | 9,403  |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Net income (loss)                                         |         | $                                                      | (414   | )          |   | $     | (44,337 | )          |   | $ | 7,339  |            |   | $ | 9,403  |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Earnings (loss) per share pre extraordinary
    items:    |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        | $      | (0.02      | ) |       | $       | (1.87      | ) |   | $      | 0.25       |   |   | $      | 0.26       | 
|                                                          | Diluted |                                                        | $      | (0.02      | ) |       | $       | (1.87      | ) |   | $      | 0.24       |   |   | $      | 0.25       | 
|Earnings (loss) per share post extraordinary
    items:   |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        | $      | (0.02      | ) |       | $       | (1.87      | ) |   | $      | 0.21       |   |   | $      | 0.26       | 
|                                                          | Diluted |                                                        | $      | (0.02      | ) |       | $       | (1.87      | ) |   | $      | 0.20       |   |   | $      | 0.25       | 
|Weighted average number of common shares
    outstanding: |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        |        | 23,485,654 |   |       |         | 23,770,595 |   |   |        | 35,570,449 |   |   |        | 35,984,350 | 
|                                                          | Diluted |                                                        |        | 23,485,654 |   |       |         | 23,770,595 |   |   |        | 37,385,219 |   |   |        | 37,796,452 | 
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|2001                                                      |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Net service revenue                                       |         | $                                                      | 15,974 |            |   | $     | 46,206  |            |   | $ | 46,847 |            |   | $ | 47,269 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Income from operations                                    |         |                                                        | 1,465  |            |   |       | 2,082   |            |   |   | 5,105  |            |   |   | 5,797  |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Income (loss) before income taxes                         |         |                                                        | (120   | )          |   |       | (2,060  | )          |   |   | (1,334 | )          |   |   | 862    |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Income (loss) before extraordinary items                  |         |                                                        | (192   | )          |   |       | (2,798  | )          |   |   | (1,961 | )          |   |   | 250    |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Net income (loss)                                         |         | $                                                      | (192   | )          |   | $     | (3,217  | )          |   | $ | (1,961 | )          |   | $ | 250    |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|Earnings (loss) per share before
    extraordinary items: |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        | $      | (0.01      | ) |       | $       | (0.12      | ) |   | $      | (0.08      | ) |   | $      | 0.01       | 
|                                                          | Diluted |                                                        | $      | (0.01      | ) |       | $       | (0.12      | ) |   | $      | (0.08      | ) |   | $      | 0.01       | 
|Earnings (loss) per share after
    extraordinary items:  |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        | $      | (0.01      | ) |       | $       | (0.14      | ) |   | $      | (0.08      | ) |   | $      | 0.01       | 
|                                                          | Diluted |                                                        | $      | (0.01      | ) |       | $       | (0.14      | ) |   | $      | (0.08      | ) |   | $      | 0.01       | 
|Weighted average number of common shares
    outstanding: |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           
|                                                          | Basic   |                                                        |        | 15,803,724 |   |       |         | 22,626,740 |   |   |        | 23,469,088 |   |   |        | 23,469,088 | 
|                                                          | Diluted |                                                        |        | 15,803,724 |   |       |         | 22,626,740 |   |   |        | 23,469,088 |   |   |        | 23,469,088 | 
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |   |   |        |           

63



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##### Table of Contents








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

Not applicable.

PART III



|         |                                     
|-------- | ------------------------------------
|Item 10. | Directors and Executive
    Officers

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed not later than April 30,
2003.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed not later than April 30,
2003.






|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed not later than April 30,
2003.






|         |                                           
|-------- | ------------------------------------------
|Item 13. | Certain Relationships and
    Transactions

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed not later than April 30,
2003.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

The Chief Executive Officer and the Chief
Financial Officer are responsible for establishing and
maintaining a system of disclosure controls and procedures to
ensure the accuracy and completeness of the Companys
quarterly and annual reports. They are also responsible for
conducting a review of the effectiveness of the disclosure
controls and procedures as of a date within 90 days of the
filing date of the quarterly or annual report and disclosing
their conclusions about the effectiveness of the disclosure
controls and procedures based on the review.



| |                                                                
| | ---------------------------------------------------------------
| | Description of Principal Disclosure
    Controls and Procedures

The system of disclosure controls and procedures
cannot provide absolute assurance on the accuracy and
completeness of the Companys annual and quarterly reports,
but it has been designed to meet the Companys needs and
the risks to which it is exposed. The key elements of the
process are:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Formal reporting on a monthly basis to the Chief
    Executive Officer and Chief Financial Officer on the results of
    operations and on any emerging risks and issues. The monthly
    results are analysed by business segment and all significant
    variations from budget and the prior year are investigated. The
    day-to-day responsibility for each business unit rests with
    experienced management and the Company has a clear organization
    structure that includes appropriate delegation of authority.
    There is regular contact between the Chief Executive Officer and
    Chief Financial Officer and the President of each business unit.
|
| |  | Formal Board approval of the annual budget for
    each financial year. Annual budgets are prepared in detail for
    each business unit.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Review of each quarterly or annual report by the
    Audit Committee. The Audit Committee also meets with the
    Companys external auditors on a quarterly basis to discuss
    the results of the external auditors review of the
    quarterly financial statements and any internal control matters
    arising from such review.                                                                                                                                                                                                                                                                                                                                  

64



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##### Table of Contents





| |   |                                                                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Confirmation each quarter from the President of
    each business unit covering the accuracy of the reported
    financial results of the business and that all significant
    issues affecting the business have been reported to the Chief
    Executive Officer and Chief Financial Officer.
|
| |  | Confirmation from the Vice-President of Finance
    for each business unit that certain financial control procedures
    have been completed.                                                                                                                                                   
|
| |  | Consultation on significant matters with the
    Companys professional advisers.                                                                                                                                                                                                               

In addition to the above procedures, the Company
is in the process of implementing an internal audit function and
a formal plan is now in place. The internal audit function is
being outsourced to one of the big four international accounting
firms other than Deloitte & Touche, our external
auditors. The internal audit team will meet regularly with the
Audit Committee during 2003.

Evaluation of Disclosure Controls and
Procedures

Based on their review of the disclosure controls
and procedures as of December 31, 2002, the Chief Executive
Officer and Chief Financial Officer have concluded that the
Company has effective disclosure controls and procedures.

Changes in Internal Controls

There have been no significant changes in the
internal controls nor in other factors that could significantly
affect these controls subsequent to December 31, 2002.



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

(a) The following documents are filed as
part of this report:



| |                                
| | -------------------------------
| | 1.     Financial
    Statements



| |                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------
| | The financial statements listed in the Index to
    Consolidated Financial Statements are filed as part of this
    report.



| |                 
| | ----------------
| | 2.     Schedules



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



| |                
| | ---------------
| | 3.     Exhibits



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | The Exhibits listed in the Exhibit Index are
    incorporated by reference in or filed as part of this report.

(b) Reports on Form 8-K



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We filed a Current Report on Form 8-K, dated
    October 28, 2002, including our press release announcing
    our earnings information for the period ended September 30,
    2002.
|
| | We filed a Current Report on Form 8-K, dated
    December 10, 2002, relating to the appointment of a new
    member to our board of directors.                                     

65



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##### Table of Contents






SIGNATURES

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



| |                              
| | -----------------------------
| | INVERESK RESEARCH GROUP, INC.



| |     |                       
| | --- | ----------------------
| | By: | /s/ D.J. PAUL E. COWAN

| |                                                 
| | ------------------------------------------------
| |                                                 
| | D.J. Paul E. Cowan                              
| | Chief Financial Officer, Treasurer and Secretary

Date:

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

|                                           |  |                                                                                            |  |      |                   |  |  | 
|------------------------------------------ |  | ------------------------------------------------------------------------------------------ |  | ---- | ----------------- |  |  | 
|                                           |  |                                                                                            |  |     
|Name and Signature                         |  | Title                                                                                      |  | Date
|                                           |  |                                                                                            |  |     
|/s/ WALTER S. NIMMOWalter S. Nimmo         |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)          |  |      | February 17, 2003 | 
|                                          
|/s/ D. J. PAUL E. COWAND. J. Paul E. Cowan |  | Chief Financial Officer (Principal Financial
    Officer and Principal Accounting Officer) |  |      | February 17, 2003 | 
|                                          
|/s/ ROLAND W. BOYDRoland W. Boyd           |  | Company Controller                                                                         |  |      | February 17, 2003 | 
|                                          
|/s/ IAN P. SWORDIan P. Sword               |  | Chairman of the Board of Directors                                                         |  |      | February 17, 2003 | 
|                                          
|/s/ JOHN URQUHARTJohn Urquhart             |  | Vice Chairman of the Board of Directors                                                    |  |      | February 17, 2003 | 
|                                          
|/s/ VANESSA C. L. CHANGVanessa C. L. Chang |  | Director                                                                                   |  |      | February 17, 2003 | 
|                                          
|/s/ JOHN T. HENDERSONJohn T. Henderson     |  | Director                                                                                   |  |      | February 17, 2003 | 
|                                          
|/s/ S. LOUISE MCCRARYS. Louise McCrary     |  | Director                                                                                   |  |      | February 17, 2003 | 

66



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##### Table of Contents



CERTIFICATIONS

I, Walter S. Nimmo, certify that:



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



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



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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officer and I have indicated
    in this annual report whether there were significant changes in
    internal controls or other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                         
| | ------------------------
| | /s/ WALTER S. NIMMO     
| |                         
| | Chief Executive Officer,
| | President and Director  

Date: February 17, 2003

67



---



##### Table of Contents



I, D. J. Paul E. Cowan, certify that:



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



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



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



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



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6.     The
    registrants other certifying officer and I have indicated
    in this annual report whether there were significant changes in
    internal controls or other factors that could significantly
    affect internal controls subsequent to the date of our most
    recent evaluation, including any corrective actions with regard
    to significant deficiencies and material weaknesses.



| |                         
| | ------------------------
| | /s/ D.J. PAUL E. COWAN  
| |                         
| | Chief Financial Officer,
| | Secretary and Treasurer 

Date: February 17, 2003

68



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##### Table of Contents



OFFICERS CERTIFICATE

The undersigned officers of Inveresk Research
Group, Inc., a Delaware corporation (the Company),
hereby certify that (i) the Companys Form 10-K
for the year ended December 31, 2002 fully complies with
the requirements of Section 13(a) of the Securities
Exchange Act of 1934 and (ii) the information contained in
the Companys Form 10-K for the year ended
December 31, 2002 fairly presents, in all material
respects, the financial condition and results of operations of
the Company.



| |                      
| | ---------------------
| | /s/ WALTER S. NIMMO  
| |                      
| | Name: WALTER S. NIMMO

| |        |                         
| | ------ | ------------------------
| | Title: | Chief Executive Officer,

| |                       
| | ----------------------
| | President and Director

Date: February 17, 2003



| |                          
| | -------------------------
| | /s/ D. J. PAUL E. COWAN  
| |                          
| | Name: D. J. PAUL E. COWAN

| |        |                         
| | ------ | ------------------------
| | Title: | Chief Financial Officer,

| |                        
| | -----------------------
| | Secretary and Treasurer

Date: February 17, 2003

69



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##### Table of Contents






EXHIBIT INDEX

|            |    |             |  |                                                                                                                                                                                                                                     
|----------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of Inveresk Research Group, Inc.*                                                                                                                                             
|            | 3  | .2          |  | Bylaws of Inveresk Research Group, Inc.*                                                                                                                                                                                            
|            | 4  | .1          |  | Form of Stock Certificate.*                                                                                                                                                                                                         
|            | 10 | .1          |  | Lease Agreement, dated September 30, 1996,
    between Highwoods/ Forsyth Limited Partnership and ClinTrials
    Research Inc.*                                                                                                     
|            | 10 | .2          |  | Lease Agreement, dated November 2, 1993,
    between Ortem Developments Limited and ClinTrials Research
    Limited.*                                                                                                               
|            | 10 | .3          |  | Lease Agreement, dated March 7, 1996,
    between Ortem Developments Limited and ClinTrials Research
    Limited.*                                                                                                                  
|            | 10 | .4          |  | Lease Agreement, dated March 13, 1998,
    between Taylor Woodrow Property Company Limited and ClinTrials
    Research Limited.*                                                                                                    
|            | 10 | .5          |  | Registration Rights Agreement, dated as of
    May 15, 2002, among Inveresk Research Group, Inc. and the
    stockholders of Inveresk Research Group, Inc. listed therein.*                                                         
|            | 10 | .6          |  | Amendment No. 1 to Registration Rights
    Agreement, dated January 30, 2003.                                                                                                                                                       
|            | 10 | .7          |  | Inveresk Research Group, Inc. 2002 Non-Employee
    Directors Stock Option Plan.*                                                                                                                                                   
|            | 10 | .8          |  | Inveresk Research Group, Inc. 2002 Stock Option
    Plan*                                                                                                                                                                           
|            | 10 | .9          |  | ClinTrials BioResearch Ltd. Pension Plan for
    Senior Management Employees, dated September 1, 2000.*                                                                                                                             
|            | 10 | .10         |  | Pension Plan for Designated Employees of
    ClinTrials BioResearch Ltd., dated August 1, 1996.*                                                                                                                                    
|            | 10 | .11         |  | Memorandum of Agreement, dated June 19, 1997
    between ClinTrials BioResearch Ltd. and Michael F. Ankcorn.*                                                                                                                       
|            | 10 | .12         |  | Agreement, dated February 1997, among ClinTrials
    BioResearch Ltd., Bio-Research Laboratories Ltd. and Norah K.
    Taylor.*                                                                                                     
|            | 10 | .13         |  | Service Agreement, dated as of September 20,
    1999, between Inveresk Research International Limited and Walter
    S. Nimmo.*                                                                                                    
|            | 10 | .14         |  | Employment Agreement, dated as of June 21,
    2002, between Inveresk Research International Limited and D.J.
    Paul E. Cowan.*                                                                                                   
|            | 10 | .15         |  | Amendment No. 1 to Employment Agreement
    between Inveresk Research International Limited and D.J.
    Paul E. Cowan, dated as of February 17, 2003.                                                                              
|            | 10 | .16         |  | Executive Employment Agreement, dated as of
    July 24, 1996, between ClinTrials BioResearch Ltd. and
    Michael F. Ankcorn, together with Addendum, dated
    August 29, 2001, and Addendum, dated June 3, 2002.*                
|            | 10 | .17         |  | Employment Agreement, dated as of June 21,
    2002, between Inveresk Research International Limited and
    Nicholas J. Thornton.*                                                                                                 
|            | 10 | .18         |  | Employment Agreement, dated as of June 21,
    2002, between Inveresk Research International Limited and
    Alastair S. McEwan.*                                                                                                   
|            | 10 | .19         |  | Employment Agreement, dated as of June 21,
    2002, between Inveresk Research International Limited and Brian
    Bathgate.*                                                                                                       
|            | 10 | .20         |  | Facility Agreement, dated as of June 25,
    2002, among Inveresk Research Group, Inc., certain of its
    subsidiaries party thereto, the lenders party thereto and The
    Royal Bank of Scotland, as security trustee and agent.*
|            | 10 | .21         |  | Letter from The Royal Bank of Scotland to
    Inveresk Research Group, Inc., dated January 24, 2003,
    amending the Facility Agreement.                                                                                           



---



##### Table of Contents



|            |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|----------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |    | Description
|            |    |            
|            | 10 | .22         |  | Deed among The Royal Bank of Scotland and
    Inveresk Research Group, Inc., Inveresk Research Group Limited,
    Inveresk Research Holdings Limited, Inveresk Research
    International Limited, Inveresk Clinical Research Limited,
    Inveresk Research (Canada) Inc., Inveresk Research North
    Carolina Inc., Inveresk Research Limited, Inveresk Research Inc.
    and CTBR Bio-Research Inc., dated December 2002.
|            | 21 | .1          |  | List of Subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                        
|            | 23 | .1          |  | Consent of Deloitte & Touche.                                                                                                                                                                                                                                                                                                                                                                                                



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|- | ---------------------------------------------------------------------------------------------
|* | Incorporated by reference to our Registration
    Statement on Form S-1 (File No. 333-83536).