##### Table of Contents









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,
    2003                                             
|          
|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(State or other jurisdiction of
    incorporation or organization)                |  | 43-1955097(I.R.S. Employer
    Identification No.)
|                                                                                         
|11000 Weston Parkway, Suite 100, Cary,
    NC(Address of principal executive
    offices) |  | 27513(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 þ          No o

As of June 30, 2003, the aggregate market
value of the registrants common stock held by
non-affiliates was approximately $320.8 million. As of
February 17, 2004, there were outstanding
37,889,700 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 2004 Annual Stockholders Meeting
are incorporated herein by reference in Items 9 through 14.



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TABLE OF CONTENTS

|                               |          |  |                                                                                                        |      |  |    | 
|------------------------------ | -------- |  | ------------------------------------------------------------------------------------------------------ | ---- |  | -- | 
|                               |          |  |                                                                                                        | Page
|                               |          |  |                                                                                                        |     
|PART I                         |          |  | 2                                                                                                      |     
|                               | ITEM 1.  |  | Business                                                                                               |      |  | 2  | 
|                               | ITEM 2.  |  | Properties                                                                                             |      |  | 13 | 
|                               | ITEM 3.  |  | Legal Proceedings                                                                                      |      |  | 13 | 
|                               | ITEM 4.  |  | Submission of Matters to a
    Vote of Security Holders                                                |      |  | 14 | 
|PART II                        |          |  | 14                                                                                                     |     
|                               | ITEM 5.  |  | Market for Registrants
    Common Equity and Related Stockholder Matters                              |      |  | 14 | 
|                               | ITEM 6.  |  | Selected Consolidated
    Financial Data                                                               |      |  | 15 | 
|                               | ITEM 7.  |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operation               |      |  | 17 | 
|                               | ITEM 7A. |  | Quantitative and Qualitative
    Disclosures About Market Risk                                         |      |  | 35 | 
|                               | ITEM 8.  |  | Financial Statements and
    Supplementary Data                                                        |      |  | 37 | 
|                               | ITEM 9.  |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure               |      |  | 69 | 
|                               | ITEM 9A. |  | Controls and Procedures                                                                                |      |  | 69 | 
|PART III                       |          |  | 71                                                                                                     |     
|                               | ITEM 10. |  | Directors and Executive
    Officers                                                                   |      |  | 71 | 
|                               | ITEM 11. |  | Executive Compensation                                                                                 |      |  | 71 | 
|                               | ITEM 12. |  | Security Ownership of
    Certain Beneficial Owners and Management and Related Stockholder
    Matters |      |  | 71 | 
|                               | ITEM 13. |  | Certain Relationships and
    Transactions                                                             |      |  | 71 | 
|                               | ITEM 14. |  | Principal Accounting Fees
    and Services                                                             |      |  | 71 | 
|                               | ITEM 15. |  | Exhibits, Financial
    Statement Schedules, and Reports on Form 8-K                                   |      |  | 71 | 
|LIST OF SUBSIDIARIES          
|302 CERTIFICATION: CEO        
|302 CERTIFICATION: CFO        
|906 CERTIFICATION: CEO AND CFO



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PART I






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

Unless otherwise indicated, all references
below to we, us and our
refer to Inveresk Research Group, Inc, and its consolidated
subsidiaries.

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 36 years ago, employs approximately
1,800 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 second 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 10% of our net service
revenue in 2003 or in 2002. More than 85% of the net service
revenue from our pre-clinical business in 2002 and 2003 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 1,000 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, Scotland 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.

Our business is not subject to significant
seasonal fluctuations although historically, our earnings in the
first quarter have tended to be lower than other quarters.

Corporate History; Recent
Developments

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. In April 2001, we acquired
ClinTrials Research Inc., a Nasdaq traded company, 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.

In July 2002, we completed our initial public
offering of 12.0 million shares of common stock, at a price
of $13 per share. Shortly before our initial public
offering, we changed our ultimate parent company from a company
organized in Scotland to a corporation organized in Delaware.

On July 29, 2003 we completed our
acquisition of PharmaResearch Corporation, for
$37.1 million in cash, net of cash acquired of
$6.0 million. PharmaResearch was a U.S.-based drug
development services company focused on providing
Phase II-IV clinical trials and support services,
principally in the areas of respiratory and infectious diseases.

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On November 25, 2003 we completed a public
offering of 11.5 million shares of common stock at
$20 per share. Of the 11.5 million shares offered,
10.5 million were sold by existing shareholders,
principally Candover Investments PLC and related Candover
entities. One million new shares were issued by Inveresk
Research Group, Inc.

Healthcare Industry Trends we Consider in
Formulating our Corporate Strategy



| |        
| | -------
| | 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 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 vitro and in vivo pre-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

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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 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.

Our Corporate Strategy

Our corporate strategy has been developed to take
account of the trends described above, and to exploit
opportunities we believe are presented by those trends. 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. We anticipate achieving this strategy
primarily through:



| |   |                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | continuing to invest in our pre-clinical
    facilities in Tranent and Montreal to provide us with greater
    capacity to meet anticipated increases in demand for our
    pre-clinical development services;                                   
|
| |  | maintaining and enhancing the ability of our
    Phase I clinical operations in Edinburgh to provide high
    quality, value-added services while leveraging our experience
    and expertise in seeking to expand these services geographically;
|
| |  | continuing to position our Phase II-IV
    clinical development business as a provider of high value-added
    services; and                                                                                                                     
|
| |  | further leveraging the cross-selling
    opportunities between our two business segments.                                                                                                                                                        

We intend to implement our growth strategy in
part by making acquisitions of other companies or businesses, to
the extent we are able to do so on terms we find appropriate.

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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 2003, this
business segment generated net service revenue of
$163.1 million and income from operations of
$43.6 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
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
    studiesdesigned to detect
    physiological, biochemical and hematological, neurological and
    pathological effects of a pharmaceutical candidate;                                                                                                        
|
| |  | genetic toxicology
    studiesconducted on materials to
    assess the potential for induction of genetic mutations or
    chromosomal damage. Materials that we test include
    pharmaceuticals, industrial chemicals, food additives and
    agrochemicals;                          
|
| |  | immunotoxicology
    studiesdesigned to detect,
    in vitro, the effects of a pharmaceutical candidate
    on the human immune system;                                                                                                                                                 
|
| |  | bioanalytical chemistry
    studiesundertaken to provide a
    quantitative analysis of parent compounds (pharmaceutical
    candidates) and metabolites in a variety of biological matrices.
    These studies play a pivotal role in providing support for
    toxicology studies; and
|
| |  | toxicokinetic
    evaluationsdesigned to assess how a
    pharmaceutical candidate is absorbed by and eventually
    eliminated from the body. These studies are important for
    interpreting toxicology findings and providing information to
    support clinical studies.          

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.

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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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | bioanalytical
    services our bioanalytical
    group specializes in the quantitative analysis of drug
    candidates and metabolites in biological fluids and tissues to
    support toxicokinetic and clinical investigations. Over the past
    five years we have made considerable investment, including in
    LC/MS/MS technology, and in facilities and instrumentation;                                                                                                                                                                                                                                                                                
|
| |  | drug metabolism
    services our drug
    metabolism group has more than 25 years experience in a
    range of in vivo and in vitro ADME
    (absorption, distribution, metabolism and elimination)
    disciplines. Our in vitro group supports discovery
    and development programs and performs studies to investigate
    metabolic stability, P450 induction and inhibition, reaction
    phenotyping, extrahepatic and non-P450 metabolism and drug
    absorption. Our in vivo metabolism group conducts studies
    to investigate the disposition of radio labeled and non-radio
    labeled test items, both in pre-clinical and in clinical studies;
|
| |  | clinical support
    services our clinical
    pathology laboratory offers a full range of services from
    clinical chemistry and hematology to more specialized molecular
    and microbiology techniques (e.g. clinical immunology,
    genotyping and PCR and flow cytometry) and biochemical
    pharmacology (particularly for drugs targeting cardiovascular
    disease). We expanded this pre-clinical research group first to
    support our own Phase I clinical safety evaluation segment
    and then further to become a central laboratory for
    international multi-center clinical trials;                                                  
|
| |  | product characterization and stability
    testing we offer a range
    of chemistry quality-testing services and can test a wide range
    of drug candidates and products including demonstration that the
    source material is free from detectable contaminants,
    demonstration that the manufacturing process is capable of
    removing and/or inactivating contaminants, characterization of
    the product and demonstration of the storage stability of the
    product.                                                                                                                                                                          

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 and Phase II-IV clinical trials management
services (including medical data sciences and regulatory
support). In 2003 this business segment generated net service
revenue of $109.3 million and income from operations of
$12.5 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 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.

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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 Phase I clinic can conduct all types of
studies and has experience across a wide range of therapeutic
areas. On average, we have completed 11 first-in-man
studies annually over the past five years.



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

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



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

From our 15 offices worldwide and business
operations in more than 20 countries, we manage every aspect of
clinical trials from clinical development plans and protocol
design to New Drug Applications and post-marketing surveillance.
We provide a comprehensive range of services as either a
full-service package or as individual stand-alone services. In
addition to conducting single site studies in many parts of the
world, we have a proven track record of managing large
international multi-center trials culminating in regulatory
filings. We have supported studies in over 50 countries,
working in 19 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:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | strategy
    development in the initial
    planning stages, we provide advice on clinical development
    strategy, program content and its critical decision points;                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | study
    design in the critical
    area of study design, we assist clients in protocol design and
    prepare study protocols and case report forms taking into
    account current products and competing clinical trials with a
    view to building an effective database for regulatory
    authorities and post-marketing studies;                                                                                                                                                                                                                  
|
| |  | investigator
    recruitment during a
    clinical trial, physicians, also referred to as investigators,
    supervise the administration of the drugs to patients. We
    solicit the participation of investigators, who contract
    directly either with our clients or us. We maintain, and
    continually expand and refine, our investigator databases
    containing information regarding our experience with these
    investigators, including factors relevant to rapid study
    initiation, patient enrollment and quality of participation;
|
| |  | project
    management our skilled
    project management professionals oversee all aspects of our work
    on Phase II, III and IV clinical studies. They are
    responsible for overall service delivery to a client, working to
    ensure that studies proceed to agreed milestones on agreed
    terms, and for communicating with the client promptly and
    accurately on all relevant matters. Good project management
    plays a vital role in successful completion of a study;                                                               
|
| |  | quality
    assurance all of our
    activities are audited by staff independent of the study to
    ensure quality and compliance. We also offer this service to our
    clients;                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | patient recruitment
    services we assist our
    clients in recruiting patients to participate in clinical trials
    through investigator relationships, media advertising and other
    methods;                                                                                                                                                                                                                                                                                                                                                       

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | study
    monitoring we provide
    study-monitoring services by visiting investigator sites. These
    visits ensure that data is gathered according to Good Clinical
    Practice, the requirements of the sponsor, and other applicable
    regulations. Monitoring staff and project managers provide
    training to investigators and hospital staff, both on study and
    protocol specific matters, and, as necessary, on the regulatory
    requirements associated with the particular study. As patients
    are examined and tests are conducted in accordance with the
    study protocol, data are recorded on case report forms and
    laboratory reports. Specially trained Clinical Research
    Associates (CRAs) collect the data from study sites.
    CRAs visit sites regularly to ensure that the case report forms
    are completed correctly and that all data specified in the
    protocol are collected. We review case report forms for
    consistency and accuracy before we enter their data into an
    electronic database for purposes of medical and statistical
    analysis;
|
| |  | clinical data
    management our data
    management professionals assist in the design of protocols and
    case report forms, as well as training manuals and training
    sessions for investigational staff, to ensure that data are
    collected and coded in an organized and consistent format.
    Databases are designed according to the analytical
    specifications of the project and the particular needs of the
    sponsor. We provide clients with data abstraction, data review
    and coding, data entry, database verification and editing and
    problem data resolution. We have expertise in electronically
    capturing and using diverse study data from different locations
    and we have invested in our data management capability to ensure
    the provision of current technology, experienced resources and
    innovative ideas;                                                                                                                                                                                                                                               
|
| |  | biostatistical
    analysis our biostatistics
    professionals provide biostatistical consulting, database
    design, data analysis and statistical reporting. They often
    participate in assessing the number of patients required in
    particular programs and trials. Our biostatisticians provide
    sponsors with assistance in all phases of drug development.
    Biostatisticians develop and review protocols, design
    appropriate analysis plans and design report formats to address
    the objectives of the study protocol as well as the
    sponsors individual objectives and report results
    according to the analysis plan. Additionally, biostatisticians
    assist our clients before panel hearings at the FDA;                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | medical writing
    services we write
    integrated clinical/statistical reports, manuscripts,
    risk/benefit assessment reports and regulatory submissions.
    These services are fully integrated with our other clinical
    services and are designed to reduce overall drug development
    time;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | medical
    overview throughout the
    course of a development program, our physicians provide a wide
    range of medical research and consulting services to improve the
    speed and quality of clinical development, including medical
    supervision of clinical trials and compliance with medical
    standards and safety regulation;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | product
    safety we provide
    pharmacovigilance support for both full service and
    self-standing projects. We are experienced in writing safety
    narratives and reconciliation of Serious Adverse Events with the
    clinical database. In addition, in conjunction with our
    regulatory affairs group, we can provide regulatory reporting of
    all Serious Adverse Events to worldwide regulatory authorities;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Phase IV
    studies post-marketing
    studies are conducted after a drug has successfully undergone
    clinical efficacy and safety testing and the NDA has been
    submitted to the FDA. We offer a range of post-marketing
    studies, including: post-marketing surveillance (Phase IV
    trials); periodic safety update reports; support in regulatory
    agency liaison; advice on product claims and labeling; consumer
    acceptability studies; and pharmacovigilance; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Rx to OTC
    switches we provide
    consultancy for and conduct specifically designed studies to
    support clients in switching product classifications from
    prescription only to over-the-counter (OTC) approvals, including
    labeling requirements and new indications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |                                    
| | -----------------------------------
| | Registries and Epidemiology Studies

We have significant expertise in conducting
patient and other outcomes registries, such as pregnancy
registries on behalf of the pharmaceutical industry. Our
experience includes design, implementation, and analysis of
prospective, observational and exposure-registration studies,
for both single and multiple sponsors.

8



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##### Table of Contents



Our research methodology experience includes, but
is not limited to, survey research, focus groups, knowledge,
attitude and practice methods and quality of life
questionnaires. We also have extensive experience in performing
linkage analysis of secondary data sources. We can support
clinical studies via our call center facilities, ongoing working
relationships with professional bodies, the establishment of
advisory and steering committees and development of educational
material.




| |                   
| | ------------------
| | 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 2003 and 2002, no single client
accounted for more than 10% of our net service revenue. In 2003
our top 20 clients together accounted for less than 40% 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 2003 came
from repeat clients. Our clinical operations are marketed
primarily to our existing pre-clinical clients. In addition, we
have 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 the contracts with our clients are fixed
price contracts. Contracts may range from a few weeks to several
years depending upon the nature of the work performed. In many
of our 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 instalments over the study or
trial duration. Sometimes the instalments are tied to meeting
performance milestones; for example, in clinical trials,
instalment 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
our clients decisions to forego or terminate a particular
study.

9



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##### Table of Contents



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 studies and
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 study or project in backlog when
it is evidenced by written evidence of a clients intention
to proceed. Cancelled studies or projects are removed from
backlog. Based upon the foregoing, our aggregate backlog at
December 31, 2003 was approximately $285 million,
compared to approximately $210 million at December 31,
2002.

We believe our aggregate backlog as of any date
is not necessarily a meaningful indicator of our future results
for a variety of reasons. First, studies vary in duration. For
instance, some studies that are included in 2003 backlog may be
completed in 2004, 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.

As discussed further in the overview to
Managements Discussion and Analysis of Financial Condition
and Results of Operation, we believe that the cumulative last
twelve months new business signings is a better lead indicator
of our business than backlog. New business signings are the
amounts of contracts signed each period, net of cancellations.

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 second 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 Pharmaceutical Product Development,
Covance, MDS Pharma, Parexel, ICON, SFBC and Kendle, as
well as Quintiles and a number of other 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;

10



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##### Table of Contents





| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | 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.       

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.

11



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##### Table of Contents



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 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. The quality
assurance group in each business 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 contract, on behalf of our clients, 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.

12



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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, 2003, we had 2,827
employees, of whom 176 held a Ph.D. or M.D. degree, 20 held
D.V.M. degrees and 248 held masters degrees.
Approximately 19% of our employees are located in the United
States, 39% 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
vivo studies 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 Wilmington (North Carolina), 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, liquidity or financial
condition.

13



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##### Table of Contents








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

None.




PART II






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

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

|                                         |                                           |      |   |       |  |  |   |       | 
|---------------------------------------- | ----------------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                                         |                                           | High |   | Low  
|                                         |                                           |      |   |      
|Fiscal Year Ending December 31,
    2004 |                                           |      |   |       |  |  |   |      
|                                         | First quarter (through February 17, 2004) |      | $ | 28.90 |  |  | $ | 23.25 | 

|                                        |                |      |   |       |  |  |   |       | 
|--------------------------------------- | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                                        |                | High |   | Low  
|                                        |                |      |   |      
|Fiscal Year Ended December 31,
    2003 |                |      |   |       |  |  |   |      
|                                        | First quarter  |      | $ | 21.65 |  |  | $ | 11.50 | 
|                                        | Second quarter |      | $ | 19.53 |  |  | $ | 12.85 | 
|                                        | Third quarter  |      | $ | 21.73 |  |  | $ | 15.00 | 
|                                        | Fourth quarter |      | $ | 25.85 |  |  | $ | 19.75 | 

|                                        |                                     |      |   |       |  |  |   |       | 
|--------------------------------------- | ----------------------------------- | ---- | - | ----- |  |  | - | ----- | 
|                                        |                                     | High |   | Low  
|                                        |                                     |      |   |      
|Fiscal Year Ended December 31,
    2002 |                                     |      |   |       |  |  |   |      
|                                        | Second quarter (from June 28, 2002) |      | $ | 13.15 |  |  | $ | 12.96 | 
|                                        | Third quarter                       |      | $ | 19.05 |  |  | $ | 8.67  | 
|                                        | Fourth quarter                      |      | $ | 22.12 |  |  | $ | 16.55 | 

On February 17, 2004, the last reported sale
price of our common stock on the Nasdaq National Market was
$28.90 per share.

Stockholders

As of February 17, 2004, there were
approximately 17 holders of record of our common stock.
This does not include persons who hold our common stock in
accounts with brokers or banks.

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).

14



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##### Table of Contents



Equity Compensation Plan Information

|                                                               |       |                         |           |                      |  |                         |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | ----------------------- | --------- | -------------------- |  | ----------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       |                         |           |                      |  | Number of Securities   
|                                                               |       |                         |           |                      |  | Remaining Available for
|                                                               |       | Number of Securities to |           |                      |  | Future Issuance Under  
|                                                               |       | Be Issued upon          |           | Weighted-Average     |  | Equity Compensation    
|                                                               |       | Exercise of Outstanding |           | Exercise Price of    |  | Plans (Excluding       
|                                                               |       | Options, Warrants and   |           | Outstanding Options, |  | Securities Reflected in
|Plan Category                                                  |       | Rights                  |           | Warrants and Rights  |  | Column(a))             
|                                                               |       |                         |           |                      |  |                        
|                                                               |       | (a)                     |           | (b)                  |  | (c)                    
|Equity compensation plans approved by security
    holders     |       |                         | 1,819,948 |                      |  | $                       | 8.72 |      |  |  | 2,452,738 |          
|Equity compensation plans not approved by
    security holders |       |                         |          |                      |  |                         |     |      |  |  |          |          
|                                                               |       |                         |           |                      |  |                         |      |      |  |  |           |          
|                                                               | Total |                         |           | 1,819,948            |  |                         | $    | 8.72 |  |  |           | 2,452,738 | 
|                                                               |       |                         |           |                      |  |                         |      |      |  |  |           |          

The amounts shown in the table above for
securities to be issued under equity compensation plans approved
by security holders relate entirely to options issued under our
2002 stock option plan which provided for a total of
5,365,589 shares to be issued. At December 31, 2003, a
total of 2,912,851 options had been issued or exercised under
this plan. There are no equity compensation plans that have not
been approved by security holders.






|        |                                         
|------- | ----------------------------------------
|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 Operation and our consolidated
financial statements and the related notes. The financial
information for the period from December 28, 1998 to
September 19, 1999 reflects the results of operations of
our business while it operated as a division of SGS
Société Générale de Surveillance SA (the
Predecessor). The financial information for the
52 weeks ended December 30, 2001 includes the results
of operations of ClinTrials Research Inc. from April 5,
2001, the date of acquisition. The financial information for the
year ended December 31, 2003 includes the results of
operations of PharmaResearch Corporation from July 29,
2003, the date of acquisition.

The selected consolidated financial data
presented below as of December 31, 2003 and 2002 and for
each of the three years in the period ended December 31,
2003 were derived from our audited consolidated financial
statements, which are included in this Form 10-K. The
selected consolidated financial data presented below as of
December 30, 2001, December 31, 2000 and
December 26, 1999 and for the 53 weeks ended
December 31, 2000 and the period from September 20,
1999 to December 26, 1999 were derived from our audited
consolidated financial statements, which are not included
herein. The selected consolidated financial data presented below
for the period from December 28, 1998 to September 19,
1999 were derived from the audited consolidated financial
statements of the Predecessor, which are not included herein.
All consolidated financial

15



---



##### Table of Contents



data has been prepared in accordance with
accounting principles generally accepted in the United States
(U.S. GAAP).


|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |        |  
|--------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------------ | - | ------------ | -------- | ------------- | - | ------------ | ------- | ------------- | - | - | ------- | ---------- | - | - | ------ | ---------- | - | - | ------- | ------ | -
|                                                                |                                                                                       |                                                         |          |             
|                                                                |                                                                                       | Inveresk Research Group(1)(4)                           |          | Predecessor 
|                                                                |                                                                                       |                                                         |          |             
|                                                                |                                                                                       |                                                         |          | 52 Weeks     |   | 53 Weeks     |          | September 20, |   | December 28,
|                                                                |                                                                                       | Year Ended                                              |          | Year Ended   |   | Ended        |          | Ended         |   | 1999 to      |         | 1998 to      
|                                                                |                                                                                       | December 31,                                            |          | December 31, |   | December 30, |          | December 31,  |   | December 26, |         | September 19,
|                                                                |                                                                                       | 2003                                                    |          | 2002         |   | 2001         |          | 2000          |   | 1999         |         | 1999         
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |              
|                                                                |                                                                                       |                                                        
|                                                                |                                                                                       | (Dollars in thousands, except share and per share data)
|Statement of Operations Data:                                   |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|Net service revenues                                            |                                                                                       | $                                                       | 272,482  |              |   | $            | 222,462  |               |   | $            | 156,296 |               |   | $ | 65,540  |            |   | $ | 16,832 |            |   | $ | 47,088  |       
|Direct costs excluding depreciation                             |                                                                                       |                                                         | (141,603 | )            |   |              | (110,099 | )             |   |              | (83,975 | )             |   |   | (36,133 | )          |   |   | (9,645 | )          |   |   | (27,177 | )     
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|                                                                |                                                                                       |                                                         | 130,879  |              |   |              | 112,363  |               |   |              | 72,321  |               |   |   | 29,407  |            |   |   | 7,187  |            |   |   | 19,911  |       
|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        | ) |              |         |              |   |   |         |           |   |   |        |           |   |   |         |       |  
|                                                                | Share offering expenses                                                               |                                                         |          | (658         | ) |              |          |              |   |              |         |              |   |   |         |           |   |   |        |           |   |   |         |       |  
|                                                                | Restructuring and integration costs arising from
    business acquisitions            |                                                         |          | (1,088       | ) |              |          |              |   |              |         |              |   |   |         |           |   |   |        |           |   |   |         |       |  
|                                                                | Other selling, general and administrative expenses                                    |                                                         |          | (70,106      | ) |              |          | (56,455       | ) |              |         | (41,934       | ) |   |         | (13,825    | ) |   |        | (3,275     | ) |   |         | (9,013 | )
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|Total selling, general and administrative expenses              |                                                                                       |                                                         | (71,852  | )            |   |              | (111,020 | )             |   |              | (41,934 | )             |   |   | (13,825 | )          |   |   | (3,275 | )          |   |   | (9,013  | )     
|Depreciation                                                    |                                                                                       |                                                         | (12,301  | )            |   |              | (10,315  | )             |   |              | (8,028  | )             |   |   | (4,513  | )          |   |   | (809   | )          |   |   | (3,731  | )     
|Amortization of goodwill and intangibles(5)                     |                                                                                       |                                                         | (580     | )            |   |              |         |               |   |              | (7,910  | )             |   |   | (3,281  | )          |   |   | (973   | )          |   |   | (242    | )     
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|Income (loss) from operations                                   |                                                                                       |                                                         | 46,146   |              |   |              | (8,972   | )             |   |              | 14,449  |               |   |   | 7,788   |            |   |   | 2,130  |            |   |   | 6,925   |       
|Interest (expense), net(6)                                      |                                                                                       |                                                         | (3,464   | )            |   |              | (13,343  | )             |   |              | (17,694 | )             |   |   | (7,522  | )          |   |   | (2,004 | )          |   |   | (560    | )     
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|Income (loss) before income taxes                               |                                                                                       |                                                         | 42,682   |              |   |              | (22,315  | )             |   |              | (3,245  | )             |   |   | 266     |            |   |   | 126    |            |   |   | 6,365   |       
|Provision for income taxes                                      |                                                                                       |                                                         | (4,560   | )            |   |              | (5,694   | )             |   |              | (1,875  | )             |   |   | (682    | )          |   |   | (325   | )          |   |   | (2,308  | )     
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|Net income (loss)                                               |                                                                                       | $                                                       | 38,122   |              |   | $            | (28,009  | )             |   | $            | (5,120  | )             |   | $ | (416    | )          |   | $ | (199   | )          |   | $ | (4,057  | )     
|                                                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|Earnings (loss) per share:(2)(3)                                |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|                                                                | Basic                                                                                 |                                                         | $        | 1.04         |   |              | $        | (0.94         | ) |              | $       | (0.24         | ) |   | $       | (0.03      | ) |   | $      | (0.01      | ) |   |         | N/A    |  
|                                                                | Diluted                                                                               |                                                         | $        | 1.01         |   |              | $        | (0.94         | ) |              | $       | (0.24         | ) |   | $       | (0.03      | ) |   | $      | (0.01      | ) |   |         | N/A    |  
|Weighted average number of common shares
    outstanding:(2)(3) |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|                                                                | Basic                                                                                 |                                                         |          | 36,527,491   |   |              |          | 29,735,957    |   |              |         | 21,489,571    |   |   |         | 15,803,724 |   |   |        | 15,803,724 |   |   |         | N/A    |  
|                                                                | Diluted                                                                               |                                                         |          | 37,705,378   |   |              |          | 29,735,957    |   |              |         | 21,489,571    |   |   |         | 15,803,724 |   |   |        | 15,803,724 |   |   |         | N/A    |  
|Dividends per share(2)(3)                                       |                                                                                       |                                                         |         |              |   |              |         |               |   |              |        |               |   |   |        |            |   |   |       |            |   |   | N/A     |       
|Other data:                                                     |                                                                                       |                                                         |          |              |   |              |          |               |   |              |         |               |   |   |         |            |   |   |        |            |   |   |         |       
|                                                                | Depreciation and amortization                                                         |                                                         | $        | 12,881       |   |              | $        | 10,315        |   |              | $       | 15,938        |   |   | $       | 7,794      |   |   | $      | 1,782      |   |   | $       | 3,973  |  
|                                                                | Capital expenditures                                                                  |                                                         | $        | 30,414       |   |              | $        | 25,497        |   |              | $       | 11,145        |   |   | $       | 6,792      |   |   | $      | 1,307      |   |   | $       | 5,305  |  

|                                     |  |                               |         |              |  |              |         |              |  |              |         |   |  |   |         |  |  |   |         | 
|------------------------------------ |  | ----------------------------- | ------- | ------------ |  | ------------ | ------- | ------------ |  | ------------ | ------- | - |  | - | ------- |  |  | - | ------- | 
|                                     |  |                              
|                                     |  | Inveresk Research Group(1)(4)
|                                     |  |                              
|                                     |  | December 31,                  |         | December 31, |  | December 30, |         | December 31, |  | December 26,
|                                     |  | 2003                          |         | 2002         |  | 2001         |         | 2000         |  | 1999        
|                                     |  |                               |         |              |  |              |         |              |  |             
|                                     |  |                              
|                                     |  | (Dollars in thousands)       
|Balance Sheet Data:                  |  |                               |         |              |  |              |         |              |  |              |         |   |  |   |         |  |  |   |         | 
|Cash and cash equivalents            |  | $                             | 24,579  |              |  | $            | 19,909  |              |  | $            | 16,118  |   |  | $ | 9,686   |  |  | $ | 7,009   | 
|Total assets                         |  |                               | 449,079 |              |  |              | 332,467 |              |  |              | 301,826 |   |  |   | 124,568 |  |  |   | 129,180 | 
|Current portion of long-term debt    |  |                               | 7,857   |              |  |              | 217     |              |  |              | 127,648 |   |  |   | 3,080   |  |  |   | 3,261   | 
|Long-term debt                       |  |                               | 50,941  |              |  |              | 67,768  |              |  |              | 85,109  |   |  |   | 80,898  |  |  |   | 84,653  | 
|Total shareholders equity (deficit) |  | $                             | 234,175 |              |  | $            | 152,403 |              |  | $            | (7,385  | ) |  | $ | 247     |  |  | $ | 712     | 
|                                     |  |                               |         |              |  |              |         |              |  |              |         |   |  |   |         |  |  |   |         | 

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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, historical 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 the change in
    ultimate parent company which took place on June 25, 2002.
|   
|(4) | We have completed three significant acquisitions
    during the period covered by the selected consolidated financial
    information presented above. These were the management buyout
    completed on September 20, 1999, the acquisition of
    ClinTrials completed on April 5, 2001 and the acquisition
    of PharmaResearch completed on July 29, 2003.                                                                                                                                                      
|   
|(5) | Upon the adoption of SFAS 142 on
    January 1, 2002 we ceased amortization of goodwill and as a
    result the amortization expense shown for 2002 and 2003 is not
    on a consistent basis of accounting with earlier periods. The
    effect of adoption of SFAS 142 is described in Note 4
    of our consolidated financial statements included herein.                                                                                                                                                        
|   
|(6) | Upon the adoption of SFAS 145 on
    January 1, 2003, prior extraordinary items related to the
    extinguishment of debt were reclassified. This resulted in
    extraordinary items of $1.6 million ($2.0 million
    before taxes and $0.4 million of income taxes) in 2002 and
    $0.4 million ($0.6 million before taxes and
    $0.2 million of income taxes) in 2001 being reclassified to
    the interest expense and the provision for income taxes.                                                      






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|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.

Overview

The discussion and analysis of our financial
position which follows is intended to give investors an
understanding of our financial condition, liquidity and capital
resources and changes in financial conditions as well as our
results of operations. We are required to include much of the
detail in the discussion which follows by various regulatory
requirements that we are subject to. This introductory overview
is intended to assist investors to identify the areas that are
the main focus of management.

We undertake pre-clinical and clinical
development services on behalf of our clients. The scope of our
services for each project is agreed with the client and
documented in a contract prior to commencement of the work. Most
of the contracts with our clients are fixed price contracts,
ranging in length from up to a few weeks to several years. As we
perform the agreed services under each of the contracts with our
clients, we record revenues based on a percentage of completion
for each contract. Because we have large numbers of contracts
underway at any particular time, all of which are individually
priced, we do not analyze the results of operations based on
study type or based on the profitability of individual studies.

In evaluating the underlying health of our
business and its prospects, it is important to ensure that we
replace the revenues we have generated with new signed business
(i.e. future revenues), so as to maintain the growth of our
underlying businesses. Therefore, in addition to the results of
our operations which are discussed separately below, we monitor
closely new business signings for each of our operating units on
a cumulative latest twelve months basis (to address seasonal
factors). We compare this with revenues recorded over the same
period and, based upon past experience, this data provide an
indication of the future revenues of the Company.

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Our new business signings for the last three
financial years compared to reported net revenues are as follows:

|                            |  |                        |         |              |  |              |         |  |  |   |         | 
|--------------------------- |  | ---------------------- | ------- | ------------ |  | ------------ | ------- |  |  | - | ------- | 
|                            |  | Year Ended             |         | Year Ended   |  | Year Ended  
|                            |  | December 31,           |         | December 31, |  | December 30,
|                            |  | 2003                   |         | 2002         |  | 2001        
|                            |  |                        |         |              |  |             
|                            |  |                       
|                            |  | (Dollars in thousands)
|New business signings (net) |  | $                      | 331,485 |              |  | $            | 266,964 |  |  | $ | 242,878 | 
|Net service revenue         |  |                        | 272,482 |              |  |              | 222,462 |  |  |   | 156,296 | 

Each of our businesses operates principally under
a fee for service model. We have historically generated cash
flows from operations in excess of our requirements to fund
internal growth. Because we have large numbers of individually
small contracts, no single contract has a significant effect on
our cash flow, although historically our cash flow from
operations has been stronger in the second half of the year than
in the first. In addition, at December 31, 2003 we had bank
credit facilities totaling $75 million more than our
borrowings under the facilities.

We place significant emphasis on the process of
contract management and how we recognize revenue. This is a
significant area of focus for our management. Our operational
and our financial management are closely involved in the review
of progress and the analysis of expected outcomes of our studies
on a regular basis. We have no history of significant issues
arising in this area. Our net investment in accounts receivable,
unbilled receivables less advance payments, has historically
approximated 30 days of net revenue and at
December 31, 2003 stood at 28 days.

The main area of market risk that affects our
business is foreign exchange rate fluctuations. In 2003,
approximately 80% of our revenues were generated outside of the
U.S., principally in the United Kingdom and Canada. We
experienced considerable volatility in U.S. dollar exchange
rates in 2003, particularly against pounds sterling and against
the Canadian dollar. Whilst the depreciation of the
U.S. dollar against pounds sterling positively impacted our
financial results in 2003, its depreciation against the Canadian
dollar has had an adverse impact on our profitability. This is
because the costs of our Canadian operations arise predominantly
in Canadian dollars but a significant proportion of the income
of this business arises in U.S. dollars. The impact of
exchange rates on our financial results is discussed in more
detail in Item 7A below.

Recent Corporate History

On April 5, 2001, we completed the
acquisition of ClinTrials, a Nasdaq traded company. The total
acquisition cost was $115.1 million, net of cash acquired
of $5.7 million.

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 prior to the completion
of our initial public offering partly due to the structure of a
previous management buyout and in part to the incurrence of
additional significant indebtedness in connection with our
acquisition of ClinTrials in 2001. Our interest expense had
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 (or loss).

On July 29, 2003, we completed our
acquisition of PharmaResearch Corporation, a provider of
Phase II-IV clinical trials management services based in
the U.S. and with offices in the United Kingdom, France,
Spain and China. In 2002, PharmaResearch Corporation generated
net service revenue of $40.6 million and

18



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##### Table of Contents



income from operations of $4.8 million. We
acquired PharmaResearch Corporation for $37.1 million, net
of cash acquired of $6.0 million.


On November 25, 2003, we completed a public
offering of 11.5 million shares of common stock at
$20 per share. Of the 11.5 million shares sold in the
offering, 10.5 million were sold by existing shareholders,
principally Candover Investments PLC and associated Candover
entities. One million new shares were sold by Inveresk Research
Group, Inc. The net proceeds received from the sale of shares by
the Company were $18.2 million after deducting underwriting
discounts, commissions and other offering expenses.

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 31, |  | December 30,
|                                                                                                                                   |                                   | 2003                   |          | 2002         |  | 2001        
|                                                                                                                                   |                                   |                        |          |              |  |             
|                                                                                                                                   |                                   |                       
|                                                                                                                                   |                                   | (Dollars in thousands)
|Net service revenue:                                                                                                               |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Pre-clinical                                                                                                                       |                                   | $                      | 163,138  |              |  | $            | 142,174  |         |   | $ | 95,172  |       
|Clinical                                                                                                                           |                                   |                        | 109,344  |              |  |              | 80,288   |         |   |   | 61,124  |       
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   |                                   |                        | 272,482  |              |  |              | 222,462  |         |   |   | 156,296 |       
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Direct costs excluding depreciation:                                                                                               |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Pre-clinical                                                                                                                       |                                   |                        | (76,504  | )            |  |              | (62,959  | )       |   |   | (44,952 | )     
|Clinical                                                                                                                           |                                   |                        | (65,099  | )            |  |              | (47,140  | )       |   |   | (39,023 | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   |                                   |                        | (141,603 | )            |  |              | (110,099 | )       |   |   | (83,975 | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Selling, general and administrative
    expenses:                                                                                  |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Pre-clinical                                                                                                                       |                                   |                        | (33,275  | )            |  |              | (27,772  | )       |   |   | (21,907 | )     
|Clinical                                                                                                                           |                                   |                        | (28,608  | )            |  |              | (21,728  | )       |   |   | (15,619 | )     
|Corporate overhead:                                                                                                                |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Other selling, general and administrative expenses                                                                                 |                                   |                        | (8,223   | )            |  |              | (6,955   | )       |   |   | (4,408  | )     
|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   | )       |   |   |        |       
|Share offering expenses                                                                                                            |                                   |                        | (658     | )            |  |              |         |         |   |   |        |       
|Restructuring and integration costs arising from
    business acquisitions                                                         |                                   |                        | (1,088   | )            |  |              |         |         |   |   |        |       
|Other selling, general and administrative expenses                                                                                 |                                   |                        | (8,223   | )            |  |              | (6,955   | )       |   |   | (4,408  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   |                                   |                        | (71,852  | )            |  |              | (111,020 | )       |   |   | (41,934 | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Depreciation:                                                                                                                      |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Pre-clinical                                                                                                                       |                                   |                        | (9,724   | )            |  |              | (7,939   | )       |   |   | (6,062  | )     
|Clinical                                                                                                                           |                                   |                        | (2,576   | )            |  |              | (2,376   | )       |   |   | (1,966  | )     
|Corporate overhead                                                                                                                 |                                   |                        | (1       | )            |  |              |         |         |   |   |        |       
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   |                                   |                        | (12,301  | )            |  |              | (10,315  | )       |   |   | (8,028  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Amortization of goodwill and
    intangibles:(1)                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Pre-clinical                                                                                                                       |                                   |                        |         |              |  |              |         |         |   |   | (4,293  | )     
|Clinical                                                                                                                           |                                   |                        | (580     | )            |  |              |         |         |   |   | (3,617  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   |                                   |                        | (580     | )            |  |              |         |         |   |   | (7,910  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Income (loss) from operations:                                                                                                     |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Pre-clinical                                                                                                                       |                                   |                        | 43,635   |              |  |              | 43,504   |         |   |   | 17,958  |       
|Clinical                                                                                                                           |                                   |                        | 12,481   |              |  |              | 9,044    |         |   |   | 899     |       
|Corporate overhead including compensation expense
    and UK stamp duty and other selling, general and administrative
    expenses |                                   |                        | (9,970   | )            |  |              | (61,520  | )       |   |   | (4,408  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   |                                   |                        | 46,146   |              |  |              | (8,972   | )       |   |   | 14,449  |       
|Interest expense, net(2)                                                                                                           |                                   |                        | (3,464   | )            |  |              | (13,343  | )       |   |   | (17,694 | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|                                                                                                                                   | Income (loss) before income taxes |                        |          | 42,682       |  |              |          | (22,315 | ) |   |         | (3,245 | )
|Provision for income taxes                                                                                                         |                                   |                        | (4,560   | )            |  |              | (5,694   | )       |   |   | (1,875  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       
|Net income (loss)                                                                                                                  |                                   | $                      | 38,122   |              |  | $            | (28,009  | )       |   | $ | (5,120  | )     
|                                                                                                                                   |                                   |                        |          |              |  |              |          |         |   |   |         |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | SFAS 142 was adopted with effect from
    January 1, 2002. As a consequence, there is no amortization
    of goodwill after January 1, 2002. The effect of adoption
    of SFAS 142 is shown in Note 4 to our audited
    financial statements included herein.                                                                                                                                                                                                         
|   
|(2) | As a consequence of the adoption of SFAS 145
    on January 1, 2003, prior extraordinary items related to
    the extinguishment of debt were reclassified. This resulted in
    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 and income taxes caption.

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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 31, |   | December 30,
|                                              |              | 2003         |      | 2002         |   | 2001        
|                                              |              |              |      |              |   |             
|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 |              |      | 46.9         | % |              |      | 44.3  | %  |  |       | 47.2  | %
|                                              | Clinical     |              |      | 59.5         | % |              |      | 58.7  | %  |  |       | 63.8  | %
|                                              | Total        |              |      | 52.0         | % |              |      | 49.5  | %  |  |       | 53.7  | %
|Selling, general and administrative expenses: |              |              |      |              |   |              |      |       |    |  |       |      
|                                              | Pre-clinical |              |      | 20.4         | % |              |      | 19.5  | %  |  |       | 23.0  | %
|                                              | Clinical     |              |      | 26.2         | % |              |      | 27.1  | %  |  |       | 25.6  | %
|                                              | Total(1)     |              |      | 26.4         | % |              |      | 49.9  | %  |  |       | 26.8  | %
|Depreciation:                                 |              |              |      |              |   |              |      |       |    |  |       |      
|                                              | Pre-clinical |              |      | 6.0          | % |              |      | 5.6   | %  |  |       | 6.4   | %
|                                              | Clinical     |              |      | 2.4          | % |              |      | 3.0   | %  |  |       | 3.2   | %
|                                              | Total        |              |      | 4.5          | % |              |      | 4.6   | %  |  |       | 5.1   | %
|Amortization of goodwill and intangibles:     |              |              |      |              |   |              |      |       |    |  |       |      
|                                              | Pre-clinical |              |      | 0.0          | % |              |      | 0.0   | %  |  |       | 4.5   | %
|                                              | Clinical     |              |      | 0.5          | % |              |      | 0.0   | %  |  |       | 5.9   | %
|                                              | Total        |              |      | 0.2          | % |              |      | 0.0   | %  |  |       | 5.1   | %
|Income (loss) from operations:                |              |              |      |              |   |              |      |       |    |  |       |      
|                                              | Pre-clinical |              |      | 26.7         | % |              |      | 30.6  | %  |  |       | 18.9  | %
|                                              | Clinical     |              |      | 11.4         | % |              |      | 11.3  | %  |  |       | 1.5   | %
|                                              | Total(1)     |              |      | 16.9         | % |              |      | (4.0  | )% |  |       | 9.2   | %
|Interest expense, net                         |              |              | 1.3  | %            |   |              | (5.1 | )%    |    |  | (10.9 | )%   
|Income (loss) before income taxes             |              |              | 15.7 | %            |   |              | (9.1 | )%    |    |  | (1.7  | )%   



---



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

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

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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. Amortization
represents the amortization of goodwill and other intangible
assets over their estimated useful lives.

Interest Expense (Net).Interest expense, net includes
interest expense on our bank borrowings, amortization of
deferred debt issue costs and the impact of the marking to
market of our interest rate swaps, net of interest income.

Significant Matters Affecting Our Financial
Condition and Results of Operation



| |               
| | --------------
| | PharmaResearch

On July 29, 2003 we completed our
acquisition of PharmaResearch Corporation which was formed and
began operations in 1995. PharmaResearch was a U.S.-based drug
development services company focused on providing
Phase II-IV clinical trials and support services,
principally in the areas of respiratory and infectious diseases.
At the time of the acquisition, PharmaResearch was primarily
based in Morrisville and Wilmington, North Carolina, with small
operations in England, France, Spain and China. We acquired
PharmaResearch for $37.1 million in cash, net of cash
acquired of $6.0 million. Its net service revenue and
income from operations for the year ended December 31, 2002
were $40.6 million and $4.8 million, respectively. The
acquisition of PharmaResearch allowed us to increase
significantly the scale and service of our North American
clinical development operations. Its strong presence in the
field of respiratory and infectious diseases enables us to build
value-added clinical laboratory support services for the benefit
of the enlarged client base.

We established a plan at the acquisition date to
integrate the operations of PharmaResearch with our existing
operations. The actions covered by the integration included a
reduction of 58 employees (37 employees of
PharmaResearch and 21 employees of our company), the
relocation of the Morrisville, North Carolina operations of
PharmaResearch to our premises in Cary, North Carolina,
integration of certain administrative functions and operating
entities between the two businesses, combination of the
PharmaResearch operations in London, Paris and Madrid with those
of our company and the closure of certain office premises. The
former PharmaResearch business operations have been functionally
integrated into our North American clinical business and
accordingly, for financial reporting purposes, we do not
separately present the results of those operations.

In connection with the integration plan we have
recorded a provision of $2.6 million that was reflected in
the purchase price allocation and a provision of
$1.1 million that is reflected on our consolidated
statement of operations in restructuring and integration costs
arising from business acquisitions. We implemented the headcount
reductions in early September, with 37 former
PharmaResearch employees and 21 former Inveresk employees
leaving the Company during September 2003. By January 2004, the
employees based at the PharmaResearch facility in Morrisville,
North Carolina were relocated to our nearby facility in Cary,
North Carolina and the office in China was closed. The following
amounts have been recorded in respect of the restructuring plan:

|                                                     |  |                        |       |             |  |                 |      |          |  |             |      |   |  |   |      |   |  |   |       | 
|---------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | --------------- | ---- | -------- |  | ----------- | ---- | - |  | - | ---- | - |  | - | ----- | 
|                                                     |  |                        |       |             |  |                 |      |         
|                                                     |  | Severance and          |       |             |  |                
|                                                     |  | Related Costs          |       | Other Costs |  | Lease          
|                                                     |  |                        |       |             |  | Termination and
|                                                     |  | Pharma                 |       |             |  | Pharma          |      |          |  | Abandonment
|                                                     |  | Research               |       | Inveresk    |  | Research        |      | Inveresk |  | Costs      
|                                                     |  |                        |       |             |  |                 |      |          |  |            
|                                                     |  |                       
|                                                     |  | (Dollars in thousands)
|Amount established at acquisition                    |  | $                      | 1,190 |             |  | $               | 676  |          |  | $           | 348  |   |  | $ | 412  |   |  | $ | 1,137 | 
|Utilized from July 29, 2003 to
    December 31, 2003 |  |                        | (877  | )           |  |                 | (676 | )        |  |             | (242 | ) |  |   | (344 | ) |  |   |      | 
|                                                     |  |                        |       |             |  |                 |      |          |  |             |      |   |  |   |      |   |  |   |       | 
|Balance at December 31, 2003                         |  | $                      | 313   |             |  | $               |     |          |  | $           | 106  |   |  | $ | 68   |   |  | $ | 1,137 | 
|                                                     |  |                        |       |             |  |                 |      |          |  |             |      |   |  |   |      |   |  |   |       | 

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We expect the remaining provisions for severance
costs to be utilized in 2004. The lease termination and
abandonment costs will be utilized over the periods of the
leases of the properties concerned.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | 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.

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. In 2003, we incurred compensation charges
related to U.K. National Insurance Contributions on the
exercise of these stock options amounting to $0.5 million.



| |                        
| | -----------------------
| | Share Offering Expenses

On February 18, 2003 we announced a proposed
public offering of up to 10,350,000 shares of common stock.
3,000,000 shares were to be offered by the Company and
7,350,000 shares were to be offered by certain selling
stockholders. On March 7, 2003, we announced the withdrawal
of the registration statement relating to this offering because
market conditions at the time made it inadvisable to proceed
with the offering. The costs relating to this offering were
expensed in the first quarter of 2003 and reduced the first
quarter net income by approximately $0.7 million. We do not
expect such costs to recur in the foreseeable future.



| |                                                  
| | -------------------------------------------------
| | Implementation of SFAS 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.
SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 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 net income

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(loss) and related per share amounts, calculated
as if SFAS 142 had been in effect throughout the periods
presented.


|                                                          |         |                                    |        |              |  |              |         |            |   |   |       |            | 
|--------------------------------------------------------- | ------- | ---------------------------------- | ------ | ------------ |  | ------------ | ------- | ---------- | - | - | ----- | ---------- | 
|                                                          |         |                                    |        |              |  | 52 Weeks    
|                                                          |         | Year Ended                         |        | Year Ended   |  | Ended       
|                                                          |         | December 31,                       |        | December 31, |  | December 30,
|                                                          |         | 2003                               |        | 2002         |  | 2001        
|                                                          |         |                                    |        |              |  |             
|                                                          |         |                                   
|                                                          |         | (Dollars in thousands except share
|                                                          |         | and per share amounts)            
|Net income (loss)                                         |         | $                                  | 38,122 |              |  | $            | (28,009 | )          |   | $ | 1,959 |           
|                                                          |         |                                    |        |              |  |              |         |            |   |   |       |           
|Earnings (loss) per share:                                |         |                                    |        |              |  |              |         |            |   |   |       |           
|                                                          | Basic   |                                    | $      | 1.04         |  |              | $       | (0.94      | ) |   | $     | 0.09       | 
|                                                          | Diluted |                                    | $      | 1.01         |  |              | $       | (0.94      | ) |   | $     | 0.09       | 
|Weighted average number of common shares
    outstanding: |         |                                    |        |              |  |              |         |            |   |   |       |           
|                                                          | Basic   |                                    |        | 36,527,491   |  |              |         | 29,735,957 |   |   |       | 21,489,571 | 
|                                                          | Diluted |                                    |        | 37,705,378   |  |              |         | 29,735,957 |   |   |       | 21,489,571 | 

In accordance with SFAS 128 there is no
dilution shown in the above table in relation to the share
options outstanding in the year ended December 30, 2001.
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.



| |                           
| | --------------------------
| | 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 |        | U.S. Dollars
|            |  | Per Pound    |        | Per Canadian
|            |  | Sterling     |        | Dollar      
|            |  |              |        |             
|Fiscal Year |  |              |        |              |  |   |        |    
|2001        |  | $            | 1.4405 |              |  | $ | 0.6428 | (1)
|2002        |  |              | 1.5032 |              |  |   | 0.6368 |    
|2003        |  |              | 1.6341 |              |  |   | 0.7159 |    



---



|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(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 |  |         |    |        |  |  |    |  
|2001        |  |         | 54 | %      |  |  | 31 | %
|2002        |  |         | 46 | %      |  |  | 38 | %
|2003        |  |         | 46 | %      |  |  | 34 | %

Our Canadian business invoices a significant
proportion of its revenues in U.S. dollars, although its
costs are largely in Canadian dollars. Our other businesses also
have revenues that arise in foreign currencies, but the impact
is not so significant as the effect on our Canadian operations.
This can result in transaction exchange gains or losses that are
reflected in its statement of operations. The foreign currency
gains or losses

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##### Table of Contents



recognized in the statement of operations and
included in Other selling, general and administrative
expenses were a loss of $3.2 million for the fiscal
year ended December 31, 2003, a loss of $0.4 million
for the fiscal year ended December 31, 2002 and a gain of
$1.2 million for the fiscal year ended December 30,
2001.


For ease of comparison and because we are a
global business, we provide revenue growth information based on
constant dollar exchange rates as well as based on actual
exchange rates.

Results of Operations



| |                                        
| | ---------------------------------------
| | Fiscal 2003 Compared to Fiscal
    2002

Net Service Revenue.Our aggregate net service revenue in
2003 was $272.5 million, an increase of $50.0 million,
or 22%, over 2002 net service revenue of
$222.5 million.

Pre-Clinical.Net
service revenue in 2003 was $163.1 million, an increase of
$21.0 million, or 15%, over revenues of $142.2 million
in 2002. At constant dollar exchange rates, net service revenue
would have increased by 4%.

Our North American pre-clinical operations
experienced some volatility in business flow in the first
quarter of 2003, resulting in an unusually high level of project
delays. The impact of this was largely reversed in the second
quarter of 2003, when these operations recorded net service
revenue 24% higher than recorded in the first quarter of 2003.
Slow or delayed decisions by its clients and an unfavorable
change in business mix adversely affected the revenues of our
North American operations in the third and fourth quarter.
Consequently the net service revenue for our North American
operations decreased year on year by 1% assuming a constant
dollar exchange rate with 2002. As reported, based on actual
exchange rates, net service revenue for our North American
pre-clinical operations increased by 11% as compared with 2002.
In Europe, our pre-clinical operations continued to experience
strong demand for their services in 2003, both for safety
evaluation services and laboratory sciences services. Room
occupancy rates have remained high during 2003 and we have
continued to benefit from a favorable business mix in these
operations. Phase 1 of the expansion of our European
operations was completed in the fourth quarter although the
impact on revenues in 2003 was not significant. As a
consequence, our European operations experienced growth in 2003
that at constant dollar exchange rates amounted to 11% compared
with 2002. As reported, based on actual exchange rates, net
service revenue at our European pre-clinical operations
increased by 21% in 2003 compared to 2002.

Clinical.Net
service revenue from our clinical operations in 2003 was
$109.3 million, an increase of $29.1 million, or 36%,
over revenues of $80.3 million in 2002. Assuming constant
dollar exchange rates, net service revenue in the clinical
segment increased by 31% compared with 2002.

The Phase II-IV business experienced a 39%
increase in net service revenue, attributable largely to the
acquisition of PharmaResearch on July 29, 2003 and to
higher activity levels in our other Phase II-IV clinical
businesses. Key steps in the integration of the PharmaResearch
acquisition are now complete. Consequently it is not meaningful
to report the revenues of this business separately.
Additionally, our Phase I clinical operations recorded
growth of 16% in 2003 compared with 2002, assuming constant
dollar exchange rates.

Direct Costs Excluding Depreciation.In 2003 direct costs excluding
depreciation totaled $141.6 million, an increase of
$31.5 million, or 29%, from $110.1 million in 2002.
Direct costs were 52% of net service revenue in 2003 compared to
49% in 2002.

Pre-Clinical.Direct
costs excluding depreciation of our pre-clinical business in
2003 were $76.5 million, an increase of $13.5 million,
or 22%, over costs of $63.0 million in 2002. In 2003, these
costs were 47% of net service revenue, compared to 44% in 2002.
This increase is attributable mainly to adverse movements in
exchange rates, particularly having an impact on our North
American pre-clinical operations. A majority of the revenues in
our North American operations are invoiced in U.S. dollars
whereas the costs incurred by these operations are almost
entirely denominated in Canadian dollars. Compared with 2002,
the Canadian dollar appreciated by approximately 12% against the
U.S. dollar in 2003.

Clinical.Direct
costs excluding depreciation of our clinical business in 2003
were $65.1 million, an increase of $18.0 million, or
38% over costs of $47.1 million in 2002. In 2003, these
costs were 60% of net

24



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##### Table of Contents



service revenues, compared to 59% in 2002. The
increase is mainly due to the results of the acquired
PharmaResearch business where historically direct costs
excluding depreciation as a percentage of net service revenue
have been significantly higher than in the equivalent Inveresk
businesses.


Selling, General and Administrative Expenses.In 2003, selling, general and
administrative expenses totaled $71.9 million, as compared
to $111.0 million in 2002. In 2003, an aggregate of
$1.7 million of these expenses consisted of charges
associated with the restructuring and integration of
PharmaResearch and with a withdrawn share offering in the first
quarter of 2003. 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 26% of net service revenues in 2003,
compared with 25% in 2002.

Pre-Clinical.Selling, general and administrative
costs in 2003 were $33.3 million, an increase of
$5.5 million, or 20%, from $27.8 million in 2002.
Selling, general and administrative costs were 20% of net
service revenue in 2003, compared to 19% in 2002. This increase
in selling, general and administrative costs as a percentage of
net service revenue is attributable primarily to exchange losses
during the year totaling $2.5 million compared to a loss of
$0.3 million in 2002.

Clinical.Selling,
general and administrative costs in 2003 were
$28.6 million, an increase of $6.9 million, or 32%,
from $21.7 million in 2002. When expressed as a percentage
of net service revenue, selling, general and administrative
costs were 26% in 2003, compared to 27% in 2002.

Corporate Overhead.Corporate overhead amounted to
$10.0 million in 2003, compared to $61.5 million in
2002. Corporate overhead in 2003 included an aggregate expense
of $1.7 million related to the withdrawn share offering in
the first quarter of 2003 and to restructuring and integration
incurred following our acquisition of PharmaResearch. Corporate
overhead in 2002 included a compensation charge of
$23.9 million in respect of stock options, a charge of
$29.1 million in respect of management equity incentives
and a charge of $1.5 million relating to stamp duty taxes
payable on the change of ultimate parent company effected by us
immediately prior to our initial public offering. Excluding
these costs, other corporate overhead amounted to
$8.2 million in 2003, compared with $7.0 million in
2002. This increase in other corporate overhead of
$1.3 million, or 18%, over 2002 is due primarily to
additional costs associated with the corporate governance and
other regulatory costs of a publicly listed company.

Amortization of Intangible Assets.Amortization of intangibles amounted
to $0.6 million in 2003. It arises in the clinical business
segment where, following the acquisition of PharmaResearch, we
have valued the customer contracts at acquisition at
$2.8 million. This amount is being amortized over a
two-year period from July 30, 2003.

Income from Operations.In 2003 the income from operations
amounted to $46.1 million or 17% of net service revenue.
Excluding share offering expenses, restructuring and integration
costs related to our acquisition of PharmaResearch and the
foreign exchange losses referred to above, income from
operations amounted to $51.0 million or 19% of net service
revenue. Loss from operations in 2002 amounted to
$9.0 million or 4% of net service revenue after deducting
the compensation expenses and stamp duty costs of
$54.6 million referred to above. Excluding these
compensation charges and stamp duty costs, income from
operations amounted to $45.6 million or 20% of net service
revenue.

Pre-Clinical.Income
from operations in our pre-clinical business was
$43.6 million in 2003 compared to $43.5 million in
2002 for the reasons set forth above.

Clinical.Income
from operations in our clinical business was $12.5 million
in 2003 compared to $9.0 million in 2002 for the reasons
set forth above.

Interest Expense.Interest expense in 2003 was
$3.5 million, a reduction of $9.9 million, or 74%,
from $13.3 million in 2002. In 2003, our interest expense
included $2.9 million of net interest and amortization of
deferred debt costs on our bank facilities and cash resources
and an expense of $0.7 million relating to the write-off of
deferred debt issue and other costs on the bank facilities
replaced when we acquired PharmaResearch, offset by a reduction
of $0.1 million in the mark-to-market liability recorded on
the interest

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rate swaps we entered into in 2002. The interest
expense of $13.3 million in 2002 included an expense of
$9.0 million for the first half of 2002 that reflected our
capital structure prior to our initial public offering. It also
included an expense of $2.0 million relating to the
write-off of deferred debt costs on the bank credit facilities
we replaced at the time of our initial public offering in July
2002, 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 and a net interest expense for the
second half of 2002 of $1.2 million that included
$0.9 million of net interest and amortization of deferred
debt costs on our bank credit facilities and $0.3 million
of interest expense relating to our pre-IPO debt and termination
of the hedges associated with our pre-IPO bank debt.


Provision for Income Taxes.Our provision for income taxes in 2003
was $4.6 million or 11% of income before taxes. The tax
charge in 2002 was $5.7 million on a loss before income
taxes of $22.3 million and represented 18% of income before
taxes after adding back the non-deductible compensation expense
and stamp duty. We recorded a reduction in tax expense amounting
to $1.6 million, net or 4% of income before taxes in 2003
in respect of the gains made by our U.K. employees on
exercise of stock options in 2003. In addition the Canadian
Federal tax rate was 2% lower in 2003 than in 2002. U.K. and
Canadian research and development tax credits reduced the
provision for income taxes by $7.7 million in 2003 and
$7.5 million in 2002.



| |                                        
| | ---------------------------------------
| | 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.

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.

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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 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
SFAS 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.

27



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Interest Expense.Interest expense in 2002 was
$13.3 million, a reduction of $4.4 million, or 25%,
from $17.7 million in 2001. Interest expense in 2002
includes $2.0 million arising from the write off of
deferred debt issue costs relating to the bank credit facilities
replaced at the time of our initial public offering. Interest
expense in 2001 includes $0.6 million arising from the
write off of deferred debt issue costs relating to the bank
credit facilities replaced at the time of the acquisition of
ClinTrials 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 $5.7 million, or 18% of adjusted income before taxes of
$32.3 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 23% of
adjusted income before taxes. In 2001 our provision for taxes
was $1.9 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.



| |                                      
| | -------------------------------------
| | 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, vacation
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 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, 2003 to December 31, 2003 and
the four quarters from January 1, 2002 to December 31,
2002. 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

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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, 
|                                                                                                                                   |         | 2003                                                   |        | 2003          |  | 2003     |        | 2003      
|                                                                                                                                   |         |                                                        |        |               |  |          |        |           
|                                                                                                                                   |         |                                                       
|                                                                                                                                   |         | (Dollars in thousands except share and per share data)
|Net service revenue                                                                                                                |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|Pre-clinical                                                                                                                       |         | $                                                      | 42,988 |               |  | $        | 41,590 |            |  | $ | 42,231 |            |  | $ | 36,329 |           
|Clinical                                                                                                                           |         |                                                        | 34,204 |               |  |          | 28,981 |            |  |   | 24,804 |            |  |   | 21,355 |           
|                                                                                                                                   |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|                                                                                                                                   |         | $                                                      | 77,192 |               |  | $        | 70,571 |            |  | $ | 67,035 |            |  | $ | 57,684 |           
|                                                                                                                                   |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|Income from operations                                                                                                             |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|Pre-clinical                                                                                                                       |         | $                                                      | 10,978 |               |  | $        | 11,668 |            |  | $ | 12,206 |            |  | $ | 8,782  |           
|Clinical                                                                                                                           |         |                                                        | 4,441  |               |  |          | 2,980  |            |  |   | 2,797  |            |  |   | 2,263  |           
|Corporate overhead including share offering
    expenses, restructuring and other selling, general and
    administrative expenses |         |                                                        | (2,649 | )             |  |          | (2,784 | )          |  |   | (2,062 | )          |  |   | (2,474 | )         
|                                                                                                                                   |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|                                                                                                                                   |         | $                                                      | 12,770 |               |  | $        | 11,864 |            |  | $ | 12,941 |            |  | $ | 8,571  |           
|                                                                                                                                   |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|Net income                                                                                                                         |         | $                                                      | 11,022 |               |  | $        | 9,564  |            |  | $ | 10,159 |            |  | $ | 7,377  |           
|                                                                                                                                   |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|Earnings per share:                                                                                                                |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|                                                                                                                                   | Basic   |                                                        | $      | 0.30          |  |          | $      | 0.26       |  |   | $      | 0.28       |  |   | $      | 0.20       | 
|                                                                                                                                   | Diluted |                                                        | $      | 0.29          |  |          | $      | 0.25       |  |   | $      | 0.27       |  |   | $      | 0.20       | 
|Weighted average number of common shares
    outstanding:                                                                          |         |                                                        |        |               |  |          |        |            |  |   |        |            |  |   |        |           
|                                                                                                                                   | Basic   |                                                        |        | 37,159,079    |  |          |        | 36,505,169 |  |   |        | 36,352,511 |  |   |        | 36,081,610 | 
|                                                                                                                                   | Diluted |                                                        |        | 38,336,966    |  |          |        | 37,720,565 |  |   |        | 37,624,192 |  |   |        | 37,366,463 | 

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|                                                                                                                             |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |            |  
|---------------------------------------------------------------------------------------------------------------------------- | ------- | ------------------------------------------------------ | ------ | ------------- |  | -------- | ------ | ---------- |  | - | ------- | ---------- | - | - | ------ | ---------- | -
|                                                                                                                             |         | 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, stamp duty and other selling, general and
    administrative expenses |         |                                                        | (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:                                                                                                   |         |                                                        |        |               |  |          |        |            |  |   |         |            |   |   |        |           
|                                                                                                                             | 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 |  

Liquidity and Capital Resources

Cash and cash equivalents totaled
$24.6 million at December 31, 2003 compared with
$19.9 million at December 31, 2002. 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 November 25, 2003, we completed a public
offering of 11.5 million shares of common stock at a price
of $20 per share. The Company sold one million shares of
common stock in this offering, raising net proceeds of
$18.2 million.

At December 31, 2003, our bank credit
facilities provided us with an aggregate of up to
$133.2 million comprising $58.2 million of term loans
in U.S. dollars and up to $75 million of
multi-currency revolving loans. At December 31, 2003, we
had drawn $58.2 million in term loans under the facility,
which are repayable in quarterly instalments over the period to
December 31, 2007. This facility bears interest at
floating, LIBOR-based rates. 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.

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##### Table of Contents



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, 2003, September 30, 2003, June 30,
2003, March 31, 2003 and December 31, 2002 together
with the number of days billings that they represent is set
forth below.

|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  
|-------------------- |  | ----------------- | ------- | ------------------ |  | ------------- | --- | -------------- |  | ----------------- | ------- | -------- |  | -------- | --- | -------- |  | -------- | ------- | -------- |  |  | --- | - |  | - | ------- | - |  |  | --- | - |  | - | ------- | - |  |  | --- | -
|                     |  |                   |         |                    |  |               |     |                |  |                  
|                     |  | December 31, 2003 |         | September 30, 2003 |  | June 30, 2003 |     | March 31, 2003 |  | December 31, 2002
|                     |  |                   |         |                    |  |               |     |                |  |                  
|                     |  |                   |         | No. of             |  |               |     | No. of         |  |                   |         | No. of   |  |          |     | No. of   |  |          |         | No. of  
|                     |  |                   |         | Days Net           |  |               |     | Days Net       |  |                   |         | Days Net |  |          |     | Days Net |  |          |         | Days Net
|                     |  | Balance           |         | Revenue            |  | Balance       |     | Revenue        |  | Balance           |         | Revenue  |  | Balance  |     | Revenue  |  | Balance  |         | Revenue 
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |         
|                     |  | ($000s)          |         |                    |  | ($000s)      |     |                |  | ($000s)          |         |          |  | ($000s) |     |          |  | ($000s) |         |         
|Accounts receivable  |  | $                 | 53,391  |                    |  |               | 71  |                |  | $                 | 45,012  |          |  |          | 62  |          |  | $        | 36,428  |          |  |  | 53  |   |  | $ | 36,289  |   |  |  | 57  |   |  | $ | 39,266  |   |  |  | 64  |  
|Unbilled receivables |  |                   | 24,331  |                    |  |               | 33  |                |  |                   | 26,144  |          |  |          | 36  |          |  |          | 25,643  |          |  |  | 37  |   |  |   | 24,371  |   |  |  | 38  |   |  |   | 20,706  |   |  |  | 34  |  
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  
|Sub total            |  |                   | 77,722  |                    |  |               | 104 |                |  |                   | 71,156  |          |  |          | 98  |          |  |          | 62,071  |          |  |  | 90  |   |  |   | 60,660  |   |  |  | 95  |   |  |   | 59,972  |   |  |  | 98  |  
|Advance billings     |  |                   | (56,745 | )                  |  |               | (76 | )              |  |                   | (48,266 | )        |  |          | (67 | )        |  |          | (40,840 | )        |  |  | (59 | ) |  |   | (40,625 | ) |  |  | (64 | ) |  |   | (41,415 | ) |  |  | (68 | )
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  
|                     |  | $                 | 20,977  |                    |  |               | 28  |                |  | $                 | 22,890  |          |  |          | 31  |          |  | $        | 21,231  |          |  |  | 31  |   |  | $ | 20,035  |   |  |  | 31  |   |  | $ | 18,557  |   |  |  | 30  |  
|                     |  |                   |         |                    |  |               |     |                |  |                   |         |          |  |          |     |          |  |          |         |          |  |  |     |   |  |   |         |   |  |  |     |   |  |   |         |   |  |  |     |  

The impact of the above balances on our cash flow
from operations by quarter in 2003 and for the whole of 2002 was
as follows:

|                                                   |  |              |        |               |  |          |        |           |  |              |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ------------ | ------ | ------------- |  | -------- | ------ | --------- |  | ------------ | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Quarter      |        | Quarter       |  | Quarter  |        | Quarter   |  |             
|                                                   |  | Ended        |        | Ended         |  | Ended    |        | Ended     |  | Year Ended  
|                                                   |  | December 31, |        | September 30, |  | June 30, |        | March 31, |  | December 31,
|                                                   |  | 2003         |        | 2003          |  | 2003     |        | 2003      |  | 2002        
|                                                   |  |              |        |               |  |          |        |           |  |             
|Cash inflow (outflow):                             |  |              |        |               |  |          |        |           |  |              |        |   |  |   |        |   |  |   |        |  
|Accounts receivable including unbilled receivables |  | $            | (6,566 | )             |  | $        | 2,884  |           |  | $            | (1,411 | ) |  | $ | (688   | ) |  | $ | (7,328 | )
|Advance billings                                   |  |              | 8,479  |               |  |          | (2,806 | )         |  |              | 215    |   |  |   | (790   | ) |  |   | 11,035 |  
|                                                   |  |              |        |               |  |          |        |           |  |              |        |   |  |   |        |   |  |   |        |  
|                                                   |  | $            | 1,913  |               |  | $        | 78     |           |  | $            | (1,196 | ) |  | $ | (1,478 | ) |  | $ | 3,707  |  
|                                                   |  |              |        |               |  |          |        |           |  |              |        |   |  |   |        |   |  |   |        |  

The cash generated by our operating activities
was $56.3 million in 2003. Cash generated by operating
activities was $29.8 million in 2002. Compared with cash
generated by operating activities, the cash flows relating to
working capital movements have not been a major factor affecting
liquidity.

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

|                              |  |                        |         |                        |  |              |        |              |  |         |        |  |  |   |        |  |  |   |        | 
|----------------------------- |  | ---------------------- | ------- | ---------------------- |  | ------------ | ------ | ------------ |  | ------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                              |  |                        |         |                       
|                              |  |                        |         | Payments Due by Period
|                              |  |                        |         |                       
|                              |  |                        |         | Less Than              |  |              |        | More Than   
|                              |  | Total                  |         | 1 Year                 |  | 1 to 3 Years |        | 3 to 5 Years |  | 5 Years
|                              |  |                        |         |                        |  |              |        |              |  |        
|                              |  |                       
|                              |  | (Dollars in thousands)
|Long-term debt obligations(1) |  | $                      | 58,798  |                        |  | $            | 7,857  |              |  | $       | 32,066 |  |  | $ | 18,875 |  |  | $ |       | 
|Capital lease obligations     |  |                        | 353     |                        |  |              | 161    |              |  |         | 192    |  |  |   |       |  |  |   |       | 
|Operating lease obligations   |  |                        | 52,829  |                        |  |              | 7,049  |              |  |         | 12,516 |  |  |   | 11,887 |  |  |   | 21,377 | 
|Purchase obligations(2)       |  |                        | 3,104   |                        |  |              | 3,104  |              |  |         |       |  |  |   |       |  |  |   |       | 
|Pension obligation(3)         |  |                        | 24,576  |                        |  |              | 3,568  |              |  |         | 7,570  |  |  |   | 8,187  |  |  |   | 5,251  | 
|                              |  |                        |         |                        |  |              |        |              |  |         |        |  |  |   |        |  |  |   |        | 
|                              |  | $                      | 139,660 |                        |  | $            | 21,739 |              |  | $       | 52,344 |  |  | $ | 38,949 |  |  | $ | 26,628 | 
|                              |  |                        |         |                        |  |              |        |              |  |         |        |  |  |   |        |  |  |   |        | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our long-term debt, excluding capital lease
    obligations was $58.8 million at December 31, 2003.
    The main component was $58.3 million of term loan
    borrowings under our bank credit facility. These borrowings are
    repayable quarterly based on our credit agreement. The
    facilities contain various restrictive covenants and breach of
    these covenants may result in accelerated repayment. In
    addition, we may choose to repay this debt early without any
    penalty.

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Our purchase obligations represent our
    commitments for capital expenditure at December 31, 2003.
    The majority of our operating expenses excluding depreciation
    and amortization are payroll and property related. Accordingly,
    although we have not conducted a detailed investigation to
    identify all other purchase commitments as may exist, we believe
    any additional commitments are insignificant.                                                                                                                                               
|   
|(3) | The payments reflected in the table above are
    based on the expected contribution rate applied to the
    pensionable payroll at December 31, 2003. The payments
    arise in pounds sterling and thus may fluctuate as a consequence
    of changes in exchange rates. The U.K. defined benefit pension
    plan is closed to new entrants. We have assumed that the
    pensionable payroll will rise in line with the assumptions made
    by our actuary in valuing the plans obligations and that
    the contributions rates will not change from the current levels.
|   
|(4) | This table does not reflect any amounts in
    respect of the long-term deferred taxation liabilities at
    December 31, 2003 as we are not able to predict when such
    amounts will fall due for payment.                                                                                                                                                                                                                                                                                                                                                                  

We anticipate that our operating cash flow,
together with available borrowings under our bank 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 and lease
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.



| |                                       
| | --------------------------------------
| | Cash Flow in 2003 Compared to
    2002

Cash flow from operations in 2003 was
$56.3 million compared to $29.8 million in 2002 (after
paying in 2002 $21.5 million of accumulated interest on the
10% unsecured subordinated loan stock due 2008 following the
completion of our initial public offering). The cash outflow on
capital expenditures was $25.1 million compared to
$25.5 million in 2002. There was a decrease in purchases of
property, plant and equipment at our pre-clinical operations in
Canada where payments amounted to $10.8 million in 2003
compared to $18.5 million in 2002. The decrease arose
because the first stage of the expansion in our Canadian
pre-clinical operations was completed in December 2002 and the
next phase of expansion at these facilities has only recently
commenced. We are also expanding our United Kingdom pre-clinical
operations where purchases of property, plant and equipment were
$9.9 million in 2003, an increase of $3.8 million over
2002. In addition we are investing in our systems in the
clinical business and capital expenditure in clinical amounted
to $4.3 million in 2003 compared to $1.0 million in
2002.

In 2003 the net cash outflow in respect of the
acquisition of PharmaResearch was $38.9 million. This
comprised the acquisition price of $43.2 million less cash
acquired of $6.0 million plus acquisition costs and
restructuring costs of approximately $1.6 million paid in
2003. We also repaid $67.5 million of borrowings under our
former bank credit facilities and drew down net new borrowings
under the new $150 million facility amounting to
$58.2 million. We received $18.2 million net of
expenses from the share issue we completed in November 2003 and
we also received $2.2 million as a result of the exercise
of share options in 2003. In 2002 we repaid $94.8 million
of bank debt as well as $109.8 million of 10% unsecured
subordinated loan stock due 2008 excluding accrued interest.
This comprised all of the debt under the bank facilities in
place prior to our initial public offering and all of the 10%
unsecured subordinated loan stock due 2008. We also received IPO
proceeds of $137.6 million net of expenses and drew down
bank borrowings of $66.9 million, net of expenses under the
bank credit facility arranged at the time of our initial public
offering. We received $0.1 million in respect of the
exercise of share options. As a consequence, the net cash
outflow from financing activities was $0.1 million in 2002.

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Critical Accounting Policies and
Estimates

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, the 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. These estimates and assumptions are affected by the way
we apply our accounting policies. An accounting estimate is
considered critical if: the estimate requires us to make
assumptions about matters that were highly uncertain at the time
the estimate was made; different estimates reasonably could have
been used; or if changes in the estimate that would have a
material impact our financial condition or results of operations
are reasonably likely to occur from period to period. We believe
that the accounting estimates employed are appropriate and
resulting balances are reasonable; however, actual results could
differ from the original estimates, requiring adjustments to
these balances in future periods. The accounting policies which
we consider to be critical accounting policies include revenue
recognition and cost estimation on certain contracts for which
we the proportional performance method of accounting, accounting
for income taxes and accounting for pension obligations.



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

The majority of our revenues are recorded from
fixed-price contracts on a proportional performance method 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 portion of completion of 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.

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, 2003 and 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. The impact on our income from operations
resulting from the net movement in the reserve for contract
losses was an expense of $0.6 million in the year ended
December 31, 2003 and a reduction in expenses of
$0.1 million in each of the years ended December 31,
2002 and December 30, 2001.



| |             
| | ------------
| | Income Taxes

We operate in numerous countries but the tax
regulations in the U.S., Canada and the United Kingdom have the
most significant effect on our income tax and deferred tax
assets and liabilities and our income tax expense. The tax
regulations are highly complex and whilst we aim to ensure the
estimates of tax assets and liabilities that we record are
accurate, there may be instances where the process of agreeing
our tax liabilities

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with the tax authorities could require
adjustments to be made to estimates previously recorded. Our
provision for income taxes is affected by various factors.


We receive research and development tax credits
in Canada and the United Kingdom. The level of such credits is
dependent upon the amount of qualifying costs in these
jurisdictions. We estimate the amounts of these credits each
period based on our experience and knowledge of the relevant tax
regulations. Because the level of the credits are based on the
levels of qualifying costs, the tax credits are not directly
related to income before income taxes and therefore the level of
tax credits may fluctuate from period to period when compared to
income before income taxes. Research and development tax credits
reduced our income tax expense by $7.7 million,
$7.5 million and $1.8 million in the three years ended
December 31, 2003, December 31, 2002 and
December 30, 2001.

We have deferred tax assets of $25.8 million
and $21.4 million at December 31, 2003 and 2002 with
corresponding valuation allowances of $15.8 million and
$15.8 million at the same dates. These assets, and
associated valuation allowances, relate mainly to
pre-acquisition tax losses in certain operating subsidiaries. We
assess the likelihood of the utilization of such assets and
based on the historical performance of the relevant operations,
limitations on the utilization of the assets and anticipated
operating results, we have established valuation allowances. We
continue to assess the allowances on the information available
each period and our assessment may change in future periods. Any
recognition of assets in respect of the pre-acquisition losses
will result in a reduction in goodwill and will not generate an
income tax benefit that is recognized in the statement of
operations.



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

Certain of our U.K. based subsidiaries
maintain a defined benefit pension plan. 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 pension
liabilities that we record are based on a number of actuarial
assumptions. These assumptions include discount rate, expected
long term rate of return on plan assets and inflation rates. Our
assumptions are based on current market conditions, historical
information and consultation with and input from our actuaries.
We review these assumptions annually at December 31. If the
assumptions change, or if actual experience is different from
the assumptions made previously, the funding status of the plan
will change and we may need to record adjustments to our
previously recorded pension liabilities.

At December 31, 2003 and 2002, the total
pension liabilities recorded at the current exchange rate on
those dates amounted to $24.6 million and
$13.3 million. The funded status of the plan on those dates
reflected deficits of $35.8 million and $24.3 million.
If the actuarial assumptions underlying these liabilities were
to be borne out exactly, we would be required to fund these
deficits over a period of years which would approximate
17 years, the average remaining service lives of the
existing scheme members. However, the assumptions are likely to
change and the actual amounts that we are required to fund may
increase or decrease as a consequence. The plans actuary,
having considered the funding of the plan, has recommended that
the current funding rate for the Company should be set at 14% of
pensionable payroll which we estimate will approximate
$3.6 million in 2004.

New Accounting Pronouncements

In April 2002, the FASB issued SFAS 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 were classified as extraordinary items by SFAS 4
are no longer classified as such. We adopted SFAS 145 for
our fiscal year ending December 31, 2003. When adopted,
prior extraordinary items related to the extinguishment of debt
were reclassified. This resulted 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.

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SFAS No. 132 (Revised 2003)
(SFAS 132R) requires an entity to make
additional disclosures about pensions and other post-retirement
benefits. These disclosures include information describing the
types of plan assets, investment strategy, measurement dates,
plan obligations, cash flows and components of net periodic
pension cost. SFAS 132R is effective for domestic plans
beginning with fiscal years ending after December 15, 2003
and for non-U.S. plans beginning with fiscal years ending
after June 15, 2004. SFAS132R is effective for interim
reporting period disclosures beginning after December 15,
2003 and after the provisions of this statement are adopted. The
Company has adopted this statement for its U.K. plan in this
form 10-K for the year ending December 31, 2003 and will
adopt the quarterly reporting requirements in its Form 10-Q
for the quarter ending March 31, 2004.

In December 2003, the FASB issued a revision to
Interpretation No. 46 Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51
(FIN46R or the Interpretation). FIN46R
clarifies the application of ARB No. 51
Consolidated Financial Statements to certain
entities in which equity investors do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support.
FIN46R requires the consolidation of these entities, known as
variable interest entities, by the primary beneficiary of the
entity. The primary beneficiary is the entity, if any, that will
absorb a majority of the entitys expected losses or
receive a majority of the entitys expected residual
returns, or both.

Among other changes, FIN46R (a) clarified
some requirements of the original FIN46 which had been issued in
January 2003, (b) eased some implementation problems and
(c) added new exceptions. FIN46R deferred the effective
date of the Interpretation for public companies to the end of
the first reporting period after March 15, 2004 except that
all public companies must, at a minimum, apply the provisions of
the Interpretation to all entities that were previously
considered special purpose entities under the FASB
literature prior to the issuance of FIN46R by the end of the
first reporting period ending after December 15, 2003. The
Company does not anticipate that the adoption of FIN46 will have
a material impact on its financial position, cash flows or
results of operations.




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 is in respect
of future changes in the LIBOR or base rates that are used to
determine the amounts of interest we are required to pay on
borrowings under our bank credit facility. The outstanding
indebtedness at December 31, 2003 under our bank credit
facility , bore interest at a rate equal to LIBOR plus a margin
of between 1.5% . That margin is set each quarter based on
specified financial ratio tests and may vary between LIBOR plus
1.25% and LIBOR plus 2.0%.

In the third quarter of 2002 we cancelled the
interest rate hedges we had used to hedge the interest exposure
on our bank borrowings before our initial public offering. We
subsequently entered into two new interest rate swap
arrangements to hedge the interest rate exposure on our bank
borrowings. The first arrangement is an interest rate swap with
a notional amount of $50 million, which expires on
September 30, 2005. Under this arrangement the LIBOR rate
applicable to $50 million of bank debt is fixed at 2.9975%.
The second arrangement is an interest rate swap with a notional
amount of $10 million, which expires on September 30,
2004. Under this arrangement the LIBOR rate applicable to
$10 million of bank debt is fixed at 2.5225%.

The interest rate swaps exceed our bank
borrowings at December 31, 2003 by $1.8 million and
this amount is exposed to unhedged fluctuations in interest
rates. Our potential loss over one year that would result from a
hypothetical, instantaneous change of 100 basis points in
the interest rate is not significant.

We have not designated the interest rate swaps as
hedges for financial reporting purposes pursuant to
SFAS 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 term of the swaps, the

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total LIBOR rates applicable to our bank
borrowings will equate to the fixed rates of 2.9975% on
$50 million of debt and 2.5225% on $10 million of debt
as mentioned above.


Our Canadian business has a significant
proportion of its working capital represented by assets and
liabilities that are denominated in U.S. dollars.
Accordingly, fluctuations in the U.S. dollar/ Canadian
dollar exchange rate 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. We have entered
into a forward contract to sell U.S.$14 million and buy
Can$18.6 million on March 31, 2004. This contract
reduces our exposure to exchange gains and losses arising from
the retranslation of the above balances during the life of the
contract. The amounts of the U.S. dollar denominated
balances held by our Canadian subsidiary fluctuate from time to
time and based on the average balances in the five month period
from June 30, 2003 to November 30, 2003 offset by the
effects of the forward contract, we estimate that a hypothetical
instantaneous 5% devaluation of the U.S. dollar against the
Canadian dollar would give rise to recognition of an exchange
loss (which would be included for financial reporting purposes
in selling, general and administrative expenses) of less than
$0.1 million, before income tax effects. On the same basis,
we estimate that a hypothetical instantaneous 5% devaluation of
the Canadian dollar against the U.S. dollar would give rise
to recognition of an exchange gain (which for financial
reporting purposes would be netted against and therefore reduce
selling, general and administrative expenses) of less than
$0.1 million before income tax effects.

A significant proportion of the revenues in our
Canadian operations arise in U.S. dollars but the costs in
these operations arise mainly in Canadian dollars. To monitor
this we look at the results of operations of our Canadian
business that arise in Canadian dollars. This is a net loss
because it excludes the U.S. dollar denominated revenue
stream but includes most of our Canadian costs. In 2003, we
estimate that the net loss arising in Canadian dollars in our
Canadian operations amounted to approximately $29 million.
Based on this, a 5% strengthening of the Canadian dollar against
the US dollar would reduce our group net income by
$1.5 million over a period of a year and a 5% weakening of
the Canadian $ against the US $ would increase group net
income by $1.5 million over a period of a year.

Our European operations are less exposed to
fluctuations in exchange rates than our Canadian operations.
However, the net income of our European operations is recorded
in the local currencies of the operations, principally pounds
sterling, and then translated into U.S. dollars. In 2003,
the net income arising in pounds sterling amounted to
approximately $18 million. Based on this, a 5%
strengthening of the pound sterling against the US dollar would
increase our group net income by $0.9 million over a period
of a year and a 5% weakening of the pound sterling against the
US $ would decrease group net income by $0.9 million
over a period of a year.

We also would potentially have exposure to
foreign currency exchange rate fluctuations in respect of 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.

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

Our management does not believe that inflation in
past years has had a significant impact on our results from
operations. Our 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

|                                  |                                                                                                                                                                            |      |  |    | 
|--------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- |  | -- | 
|                                  |                                                                                                                                                                            | Page
|                                  |                                                                                                                                                                            |     
|Consolidated financial statements |                                                                                                                                                                            |      |  |   
|                                  | Independent Auditors Report                                                                                                                                               |      |  | 38 | 
|                                  | Consolidated Statements of Operations for the
    years ended December 31, 2003, December 31, 2002 and
    December 30, 2001                                               |      |  | 39 | 
|                                  | Consolidated Balance Sheets as of
    December 31, 2003 and December 31, 2002                                                                                              |      |  | 40 | 
|                                  | Consolidated Statements of Cash Flows for the
    years ended December 31, 2003, December 31, 2002 and
    December 30, 2001                                               |      |  | 41 | 
|                                  | Consolidated Statements of Comprehensive Income
    (Loss) and Shareholders Equity for the years ended
    December 31, 2003, December 31, 2002 and
    December 30, 2001 |      |  | 42 | 
|                                  | Notes to Consolidated Financial Statements                                                                                                                                 |      |  | 43 | 

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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. and subsidiaries
as of December 31, 2003 and December 31, 2002, and the
related consolidated statements of operations, comprehensive
income (loss) and shareholders equity, and cash flows for
each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States 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 present fairly, in all material respects, the
financial position of the companies as of December 31,
2003, and December 31, 2002 and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2003 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 LLP

Edinburgh, Scotland

February 20, 2004


38



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |            |         |  
|--------------------------------------------------------- | --------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ------- | ------------ | ------- | ------------ | ------- | ---------- | ------- | - | ------- | ---------- | ------- | -
|                                                          |                                                                                   |                                                                                       |         |              |         | 52 Weeks    
|                                                          |                                                                                   | Year Ended                                                                            |         | Year Ended   |         | Ended       
|                                                          |                                                                                   | December 31,                                                                          |         | December 31, |         | December 30,
|                                                          |                                                                                   | 2003                                                                                  |         | 2002         |         | 2001        
|                                                          |                                                                                   |                                                                                       |         |              |         |             
|                                                          |                                                                                   |                                                                                      
|                                                          |                                                                                   | (In thousands, except share and per share data)                                      
|Net service revenue                                       |                                                                                   | $                                                                                     | 272,482 |              |         | $            | 222,462 |            |         | $ | 156,296 |           
|                                                          | Direct costs excluding depreciation of $5,074,
    $3,596 and $2,832 respectively |                                                                                       |         | (141,603     | )       |              |         | (110,099   | )       |   |         | (83,975    | )      
|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|                                                          |                                                                                   |                                                                                       | 130,879 |              |         |              | 112,363 |            |         |   | 72,321  |           
|                                                          | 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  | ) |         |            |        |  
|                                                          |                                                                                   | Share offering expenses (Note 3)                                                      |         |              | (658    | )            |         |            |        |   |         |            |        |  
|                                                          |                                                                                   | Restructuring and integration costs arising from
    business acquisitions (Note 5)   |         |              | (1,088  | )            |         |            |        |   |         |            |        |  
|                                                          |                                                                                   | Other selling, general and administrative expenses                                    |         |              | (70,106 | )            |         |            | (56,455 | ) |         |            | (41,934 | )
|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|                                                          | Total selling, general and administrative expenses                                |                                                                                       |         | (71,852      | )       |              |         | (111,020   | )       |   |         | (41,934    | )      
|                                                          | Depreciation                                                                      |                                                                                       |         | (12,301      | )       |              |         | (10,315    | )       |   |         | (8,028     | )      
|                                                          | Amortization of goodwill and intangibles
    (Note 8)                             |                                                                                       |         | (580         | )       |              |         |           |         |   |         | (7,910     | )      
|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|Income (loss) from operations                             |                                                                                   |                                                                                       | 46,146  |              |         |              | (8,972  | )          |         |   | 14,449  |           
|                                                          | Interest income                                                                   |                                                                                       |         | 422          |         |              |         | 344        |         |   |         | 483        |        
|                                                          | Interest expense                                                                  |                                                                                       |         | (3,886       | )       |              |         | (13,687    | )       |   |         | (18,177    | )      
|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|Income (loss) before income taxes                         |                                                                                   |                                                                                       | 42,682  |              |         |              | (22,315 | )          |         |   | (3,245  | )         
|Provision for income taxes (Note 12)                      |                                                                                   |                                                                                       | (4,560  | )            |         |              | (5,694  | )          |         |   | (1,875  | )         
|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|Net income (loss)                                         |                                                                                   | $                                                                                     | 38,122  |              |         | $            | (28,009 | )          |         | $ | (5,120  | )         
|                                                          |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|Earnings (loss) per share:                                |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|                                                          | Basic                                                                             |                                                                                       | $       | 1.04         |         |              | $       | (0.94      | )       |   | $       | (0.24      | )      
|                                                          | Diluted                                                                           |                                                                                       | $       | 1.01         |         |              | $       | (0.94      | )       |   | $       | (0.24      | )      
|Weighted average number of common shares
    outstanding: |                                                                                   |                                                                                       |         |              |         |              |         |            |         |   |         |           
|                                                          | Basic                                                                             |                                                                                       |         | 36,527,491   |         |              |         | 29,735,957 |         |   |         | 21,489,571 |        
|                                                          | Diluted                                                                           |                                                                                       |         | 37,705,378   |         |              |         | 29,735,957 |         |   |         | 21,489,571 |        

See accompanying notes to consolidated financial
statements.

39



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.

CONSOLIDATED BALANCE SHEETS

|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |         |  
|----------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------------ |  | - | ------- | ------- | -
|                                                      |                                                                                                                                                           | December 31        |         | December 31,
|                                                      |                                                                                                                                                           | 2003               |         | 2002        
|                                                      |                                                                                                                                                           |                    |         |             
|                                                      |                                                                                                                                                           |                   
|                                                      |                                                                                                                                                           | (In thousands,    
|                                                      |                                                                                                                                                           | except share data)
|ASSETS                                               
|Current assets:                                       |                                                                                                                                                           |                    |         |              |  |   |         |        
|                                                      | Cash and cash equivalents                                                                                                                                 |                    | $       | 24,579       |  |   | $       | 19,909  |  
|                                                      | Accounts receivable, net of allowance for
    doubtful accounts of $1,525 in 2003 and $1,021 in 2002                                                      |                    |         | 53,391       |  |   |         | 39,266  |  
|                                                      | Unbilled receivables, net of reserve for losses
    on contracts of $897 in 2003 and $1,110 in 2002                                                       |                    |         | 24,331       |  |   |         | 20,706  |  
|                                                      | Income taxes receivable                                                                                                                                   |                    |         | 4,045        |  |   |         | 2,979   |  
|                                                      | Inventories                                                                                                                                               |                    |         | 1,619        |  |   |         | 1,167   |  
|                                                      | Deferred income taxes (Note 12)                                                                                                                           |                    |         | 144          |  |   |         |        |  
|                                                      | Other current assets                                                                                                                                      |                    |         | 6,902        |  |   |         | 4,300   |  
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        
|Total current assets                                  |                                                                                                                                                           |                    | 115,011 |              |  |   | 88,327  |        
|Property, plant and equipment (Note 6)                |                                                                                                                                                           |                    | 145,364 |              |  |   | 108,570 |        
|Goodwill (Note 7)                                     |                                                                                                                                                           |                    | 184,239 |              |  |   | 135,043 |        
|Intangible assets (Note 8)                            |                                                                                                                                                           |                    | 2,203   |              |  |   |        |        
|Deferred income taxes (Note 12)                       |                                                                                                                                                           |                    | 669     |              |  |   |        |        
|Deferred debt issue costs                             |                                                                                                                                                           |                    | 1,593   |              |  |   | 527     |        
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        
|                                                      |                                                                                                                                                           | $                  | 449,079 |              |  | $ | 332,467 |        
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        
|                                                     
|LIABILITIES AND SHAREHOLDERS
    EQUITY             
|Current liabilities:                                  |                                                                                                                                                           |                    |         |              |  |   |         |        
|                                                      | Accounts payable                                                                                                                                          |                    | $       | 20,389       |  |   | $       | 10,792  |  
|                                                      | Advance billings                                                                                                                                          |                    |         | 56,745       |  |   |         | 41,415  |  
|                                                      | Accrued expenses (Note 9)                                                                                                                                 |                    |         | 29,050       |  |   |         | 21,399  |  
|                                                      | Income taxes payable                                                                                                                                      |                    |         | 2,018        |  |   |         | 2,871   |  
|                                                      | Deferred income taxes (Note 12)                                                                                                                           |                    |         | 334          |  |   |         | 204     |  
|                                                      | Current portion of long term debt (Note 10)                                                                                                               |                    |         | 7,857        |  |   |         | 217     |  
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        
|Total current liabilities                             |                                                                                                                                                           |                    | 116,393 |              |  |   | 76,898  |        
|Deferred income taxes (Note 12)                       |                                                                                                                                                           |                    | 22,994  |              |  |   | 22,139  |        
|Long term debt (Note 10)                              |                                                                                                                                                           |                    | 50,941  |              |  |   | 67,768  |        
|Defined benefit pension plan obligation
    (Note 14) |                                                                                                                                                           |                    | 24,576  |              |  |   | 13,259  |        
|Commitments and contingencies
    (Note 11)           |                                                                                                                                                           |                    |         |              |  |   |         |        
|Shareholders equity:                                 |                                                                                                                                                           |                    |         |              |  |   |         |        
|                                                      | Preferred stock, $0.01 par value 10,000,000
    authorized, none issued                                                                                   |                    |         |             |  |   |         |        |  
|                                                      | Common stock, $0.01 par value 150,000,000
    authorized; 37,863,498 and 36,004,777 issued and outstanding at
    December 31, 2003 and December 31, 2002 |                    |         | 379          |  |   |         | 360     |  
|                                                      | Additional paid-in capital                                                                                                                                |                    |         | 211,963      |  |   |         | 191,618 |  
|                                                      | Retained earnings (accumulated deficit)                                                                                                                   |                    |         | 4,329        |  |   |         | (33,793 | )
|                                                      | Accumulated other comprehensive income (loss)                                                                                                             |                    |         | 17,504       |  |   |         | (5,782  | )
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        
|Total shareholders equity                            |                                                                                                                                                           |                    | 234,175 |              |  |   | 152,403 |        
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        
|                                                      |                                                                                                                                                           | $                  | 449,079 |              |  | $ | 332,467 |        
|                                                      |                                                                                                                                                           |                    |         |              |  |   |         |        

See accompanying notes to consolidated financial
statements.

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INVERESK RESEARCH GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |       |        |  
|-------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ------- | ------------ | ------ | ------------ | -------- | ------- | ------ | - | -------- | ----- | ------ | -
|                                                                                             |                                                                                                                 |                                              |         |              |        | 52 Weeks    
|                                                                                             |                                                                                                                 | Year Ended                                   |         | Year Ended   |        | Ended       
|                                                                                             |                                                                                                                 | December 31,                                 |         | December 31, |        | December 30,
|                                                                                             |                                                                                                                 | 2003                                         |         | 2002         |        | 2001        
|                                                                                             |                                                                                                                 |                                              |         |              |        |             
|                                                                                             |                                                                                                                 |                                             
|                                                                                             |                                                                                                                 | (In thousands)                              
|Cash flows from operating activities                                                         |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Net income (loss)                                                                            |                                                                                                                 | $                                            | 38,122  |              |        | $            | (28,009  | )       |        | $ | (5,120   | )    
|Adjustments to reconcile net income (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                                                                   |                                              |         | 12,301       |        |              |          | 10,315  |        |   |          | 8,028 |       
|                                                                                             | Amortization of goodwill and intangible assets                                                                  |                                              |         | 580          |        |              |          |        |        |   |          | 7,910 |       
|                                                                                             | Deferred pension obligations                                                                                    |                                              |         | 1,124        |        |              |          | 209     |        |   |          | 130   |       
|                                                                                             | Deferred income taxes                                                                                           |                                              |         | (576         | )      |              |          | 2,238   |        |   |          | 210   |       
|                                                                                             | Amortization of deferred loan issue costs                                                                       |                                              |         | 839          |        |              |          | 2,240   |        |   |          | 1,040 |       
|                                                                                             | Interest on 10% unsecured subordinated loan stock
    due 2008, not payable until the loan stock is redeemed    |                                              |         |             |        |              |          | 6,058   |        |   |          | 8,970 |       
|                                                                                             | 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 and unbilled receivables |         |              | (5,781 | )            |          |         | (7,328 | ) |          |       | (1,682 | )
|                                                                                             |                                                                                                                 | Advance billings                             |         |              | 5,098  |              |          |         | 11,035 |   |          |       | (361   | )
|                                                                                             |                                                                                                                 | Inventories                                  |         |              | (452   | )            |          |         | 1,006  |   |          |       | 176    |  
|                                                                                             |                                                                                                                 | Accounts payable and accrued expenses        |         |              | 6,322  |              |          |         | 553    |   |          |       | 640    |  
|                                                                                             |                                                                                                                 | Income taxes                                 |         |              | 704    |              |          |         | 2,124  |   |          |       | (1,277 | )
|                                                                                             |                                                                                                                 | Other assets and liabilities                 |         |              | (1,972 | )            |          |         | (2,136 | ) |          |       | 829    |  
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Net cash provided by operating activities                                                    |                                                                                                                 |                                              | 56,309  |              |        |              | 29,785   |         |        |   | 19,493   |      
|Cash flows from investing activities                                                         |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Purchase of ClinTrials Research Inc., net of cash
    acquired of $5,700                     |                                                                                                                 |                                              |        |              |        |              |         |         |        |   | (115,147 | )    
|Purchase of PharmaResearch Corporation, net of
    cash acquired of $5,976                   |                                                                                                                 |                                              | (38,968 | )            |        |              |         |         |        |   |         |      
|Purchases of property, plant and equipment                                                   |                                                                                                                 |                                              | (25,076 | )            |        |              | (25,497  | )       |        |   | (11,145  | )    
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Net cash used in investing activities                                                        |                                                                                                                 |                                              | (64,044 | )            |        |              | (25,497  | )       |        |   | (126,292 | )    
|Cash flows from financing activities                                                         |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Issue of common stock, net of issue costs                                                    |                                                                                                                 |                                              | 20,364  |              |        |              | 137,691  |         |        |   | 388      |      
|Repayments of short-term borrowings                                                          |                                                                                                                 |                                              | (259    | )            |        |              | (3,661   | )       |        |   | (3,038   | )    
|Proceeds from long-term borrowings, net of issue
    costs                                   |                                                                                                                 |                                              | 56,680  |              |        |              | 66,904   |         |        |   | 156,440  |      
|Repayments of long-term debt                                                                 |                                                                                                                 |                                              | (67,500 | )            |        |              | (201,027 | )       |        |   | (38,311  | )    
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Net cash provided by (used in) financing
    activities                                      |                                                                                                                 |                                              | 9,285   |              |        |              | (93      | )       |        |   | 115,479  |      
|Effect of foreign currency exchange rate changes
    on cash                                 |                                                                                                                 |                                              | 3,120   |              |        |              | (404     | )       |        |   | (2,248   | )    
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Increase in cash and cash equivalents                                                        |                                                                                                                 |                                              | 4,670   |              |        |              | 3,791    |         |        |   | 6,432    |      
|Cash and cash equivalents at beginning of period                                             |                                                                                                                 |                                              | 19,909  |              |        |              | 16,118   |         |        |   | 9,686    |      
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Cash and cash equivalents at end of period                                                   |                                                                                                                 | $                                            | 24,579  |              |        | $            | 19,909   |         |        | $ | 16,118   |      
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Supplemental cash flow information:                                                          |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Interest paid                                                                                |                                                                                                                 | $                                            | 3,770   |              |        | $            | 29,203   |         |        | $ | 3,686    |      
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      
|Income tax paid                                                                              |                                                                                                                 | $                                            | 2,930   |              |        | $            | 1,504    |         |        | $ | 2,796    |      
|                                                                                             |                                                                                                                 |                                              |         |              |        |              |          |         |        |   |          |      

See accompanying notes to consolidated financial
statements.

41



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

AND SHAREHOLDERS EQUITY


|                                                                                      |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |        |  
|------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | --------------------------------- | ---------- | ------------- |  | --------- | ------- | ---------- | - | ------------ | --- | ------------- |  | - | ------- | - |  | - | ------- | ------- | - | - | ------ | ------ | -
|                                                                                      |                                                                                                |                                   |            |               |  |           |         |            |   |              |     | Accumulated  
|                                                                                      |                                                                                                | Shares of                         |            |               |  |           |         |            |   | Retained     |     | Other        
|                                                                                      |                                                                                                | Common Stock                      |            | Total         |  | Par Value |         | Additional |   | Earnings     |     | Comprehensive
|                                                                                      |                                                                                                | $0.01 Par                         |            | Shareholders |  | Paid-In   |         | Paid-In    |   | (Accumulated |     | Income       
|                                                                                      |                                                                                                | Value                             |            | Equity        |  | Capital   |         | Capital    |   | Deficit)     |     | (Loss)       
|                                                                                      |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |              
|                                                                                      |                                                                                                |                                  
|                                                                                      |                                                                                                | (In thousands, except share data)
|Balance at December 31, 2000                                                          |                                                                                                |                                   | 15,803,724 |               |  | $         | 247     |            |   | $            | 158 |               |  | $ | 807     |   |  | $ | (664    | )       |   | $ | (54    | )     
|Issue of common stock                                                                 |                                                                                                |                                   | 7,665,364  |               |  |           | 388     |            |   |              | 77  |               |  |   | 311     |   |  |   |        |         |   |   |       |       
|Comprehensive loss:                                                                   |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Foreign currency translation adjustments                                                       |                                   |            |               |  |           |         | (1,675     | ) |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (1,675 | )
|                                                                                      | Cumulative-effect adjustment for SFAS 133
    (net of income taxes of $58)                     |                                   |            |               |  |           |         | (135       | ) |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (135   | )
|                                                                                      | Provision for accumulated benefit obligation
    under SFAS 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                                                          |                                                                                                |                                   | 23,469,088 |               |  | $         | (7,385  | )          |   | $            | 235 |               |  | $ | 1,118   |   |  | $ | (5,784  | )       |   | $ | (2,954 | )     
|Issue of common stock, net of offering costs of
    $18,425                           |                                                                                                |                                   | 12,535,689 |               |  |           | 137,691 |            |   |              | 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 SFAS 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                                                          |                                                                                                |                                   | 36,004,777 |               |  | $         | 152,403 |            |   | $            | 360 |               |  | $ | 191,618 |   |  | $ | (33,793 | )       |   | $ | (5,782 | )     
|Issue of common stock, net of offering costs of
    $1,000                            |                                                                                                |                                   | 1,858,721  |               |  |           | 20,364  |            |   |              | 19  |               |  |   | 20,345  |   |  |   |        |         |   |   |       |       
|Comprehensive income (loss):                                                          |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Foreign currency translation adjustments                                                       |                                   |            |               |  |           |         | 29,089     |   |              |     |              |  |   |         |  |  |   |         |        |   |   |        | 29,089 |  
|                                                                                      | Tax benefit arising on options granted on or
    after June 27, 2002                           |                                   |            |               |  |           |         | 219        |   |              |     |              |  |   |         |  |  |   |         |        |   |   |        | 219    |  
|                                                                                      | Provision for accumulated benefit obligation
    under SFAS 87 (net of income taxes of $2,581) |                                   |            |               |  |           |         | (6,022     | ) |              |     |              |  |   |         |  |  |   |         |        |   |   |        | (6,022 | )
|                                                                                      | Net income for year to December 31, 2003                                                       |                                   |            |               |  |           |         | 38,122     |   |              |     |              |  |   |         |  |  |   |         | 38,122  |   |   |        |       |  
|                                                                                      |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|                                                                                      | Comprehensive income                                                                           |                                   |            |               |  |           |         | 61,408     |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |        |  
|                                                                                      |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       
|Balance at December 31, 2003                                                          |                                                                                                |                                   | 37,863,498 |               |  | $         | 234,175 |            |   | $            | 379 |               |  | $ | 211,963 |   |  | $ | 4,329   |         |   | $ | 17,504 |       
|                                                                                      |                                                                                                |                                   |            |               |  |           |         |            |   |              |     |               |  |   |         |   |  |   |         |         |   |   |        |       

See accompanying notes to consolidated financial
statements.

42



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##### Table of Contents



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. 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. | Issuance of Common Stock

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. As
discussed below in Note 13, 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.

In February 2003, the Company announced a
proposed public offering of up to 10.5 million shares of
common stock. On March 7, 2003, the Company announced the
withdrawal of the registration statement relating to this
offering because market conditions at the time made it
inadvisable to proceed with the offering. The costs relating to
this proposed offering amounted to $0.7 million and were
expensed in 2003.

On November 25, 2003 the Company completed
an offering of 11.5 million shares of common stock at
$20 per share. Of the 11.5 million share offering,
10.5 million were sold by existing shareholders,
principally Candover Investments PLC and associated Candover
entities and one million new shares were sold by the Company.
The net proceeds received on the sale of shares by the Company
amounted to $18.2 million.

43



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                                               
|-- | ----------------------------------------------
|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.

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 unamortized 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
Other selling, general and administrative expenses
was a loss of $3.2 million for the year ended
December 31, 2003, a loss of $0.4 million for the year
ended December 31, 2002 and a gain of $1.2 million for
the 52 weeks ended December 30, 2001.



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

Many of the Companys contracts are
fixed-price contracts over one year in duration. Revenue for
such contracts is recognized based on the proportional
performance method of accounting. 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

44



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 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 Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share
(SFAS 128). SFAS 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 nil in 2003, 2,366,217 in
2002 and 1,148,532 in 2001. 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.

45



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.



| |            
| | -----------
| | 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 improvements
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                                      



| |         
| | --------
| | Goodwill

Goodwill represents the excess of the fair value
of the consideration over the fair value of the identifiable
assets and liabilities acquired. For the periods ending before
January 1, 2002, goodwill was amortized on a straight-line
basis over twenty years.

Effective January 1, 2002, the Company
adopted SFAS No. 142 Goodwill and Other
Intangible Assets (SFAS 142) which applies to all
goodwill and other intangible assets recognized in the balance
sheet at that date, regardless of when the assets were initially
recognized. Under SFAS 142, the Company no longer amortizes
goodwill or other intangible assets with indefinite lives, but
instead reviews them at least annually for impairment. The
Company completes its impairment assessment in the second
quarter of each year based on balances recorded at
March 31. This has not resulted in any impairment for the
periods presented.

46



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table reflects the consolidated
results of operations and the related per share amounts, as if
SFAS 142 had been in effect for all periods presented.

|                                                          |         |                                        |        |              |  |              |         |            |   |   |        |            | 
|--------------------------------------------------------- | ------- | -------------------------------------- | ------ | ------------ |  | ------------ | ------- | ---------- | - | - | ------ | ---------- | 
|                                                          |         |                                        |        |              |  | 52 Weeks    
|                                                          |         | Year Ended                             |        | Year Ended   |  | Ended       
|                                                          |         | December 31,                           |        | December 31, |  | December 30,
|                                                          |         | 2003                                   |        | 2002         |  | 2001        
|                                                          |         |                                        |        |              |  |             
|                                                          |         |                                       
|                                                          |         | (Dollars in thousands except share and
|                                                          |         | per share data)                       
|Net income (loss), as reported                            |         | $                                      | 38,122 |              |  | $            | (28,009 | )          |   | $ | (5,120 | )         
|Add back amortization expense                             |         |                                        |       |              |  |              |        |            |   |   | 7,910  |           
|Effect on income taxes                                    |         |                                        |       |              |  |              |        |            |   |   | (831   | )         
|                                                          |         |                                        |        |              |  |              |         |            |   |   |        |           
|Net income (loss), adjusted                               |         | $                                      | 38,122 |              |  | $            | (28,009 | )          |   | $ | 1,959  |           
|                                                          |         |                                        |        |              |  |              |         |            |   |   |        |           
|Earnings (loss) per share:                                |         |                                        |        |              |  |              |         |            |   |   |        |           
|                                                          | Basic   |                                        | $      | 1.04         |  |              | $       | (0.94      | ) |   | $      | 0.09       | 
|                                                          | Diluted |                                        | $      | 1.01         |  |              | $       | (0.94      | ) |   | $      | 0.09       | 
|Weighted average number of common shares
    outstanding: |         |                                        |        |              |  |              |         |            |   |   |        |           
|                                                          | Basic   |                                        |        | 36,527,491   |  |              |         | 29,735,957 |   |   |        | 21,489,571 | 
|                                                          | Diluted |                                        |        | 37,705,378   |  |              |         | 29,735,957 |   |   |        | 21,489,571 | 

In accordance with SFAS 128, there is no
dilution shown in the above table in respect of stock options
outstanding in the 52 weeks ended December 30, 2001.
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 SFAS 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.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for stock-based awards to
employees using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to
Employees(APB 25). 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

47



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

Had compensation expense been determined for the
Companys option grants consistent with the provisions of
SFAS No. 123 Accounting for Stock Based
Compensation (SFAS 123), the
Companys net income (loss) for the periods shown below
would have reflected the pro forma amounts set forth in the
table below. For periods prior to our initial public offering in
June 2002, there would have been no change in the reported net
income or loss.

|                                                                                               |  |                        |        |                        |  |   |         |  
|---------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---------------------- |  | - | ------- | -
|                                                                                               |  | Year Ended             |        | Year Ended            
|                                                                                               |  | December 31, 2003      |        | December 31, 2002     
|                                                                                               |  |                        |        |                       
|                                                                                               |  | (Dollars in thousands  |        | (Dollars in thousands 
|                                                                                               |  | except per share data) |        | except per share data)
|Reported net income (loss)                                                                     |  | $                      | 38,122 |                        |  | $ | (28,009 | )
|Compensation expense in respect of stock options
    deducted in the computation of net income |  |                        |       |                        |  |   | 23,873  |  
|Compensation expense in respect of stock options
    computed on the fair value method         |  |                        | (1,885 | )                      |  |   | (24,639 | )
|                                                                                               |  |                        |        |                        |  |   |         |  
|Pro forma net income (loss)                                                                    |  | $                      | 36,237 |                        |  | $ | (28,775 | )
|                                                                                               |  |                        |        |                        |  |   |         |  
|Reported basic earnings (loss) per share                                                       |  | $                      | 1.04   |                        |  | $ | (0.94   | )
|Pro forma basic earnings (loss) per share                                                      |  | $                      | 0.99   |                        |  | $ | (0.97   | )
|Reported diluted earnings (loss) per share                                                     |  | $                      | 1.01   |                        |  | $ | (0.94   | )
|Pro forma diluted earnings (loss) per share                                                    |  | $                      | 0.96   |                        |  | $ | (0.97   | )

The assumptions underlying the calculation of
this pro forma information are described in Note 14.



| |                         
| | ------------------------
| | 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

The Company follows the requirements of
SFAS 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 Company has not designated any of its
derivative financial instruments as hedges for accounting
purposes, and therefore the changes in fair value are reflected
in income each period. This may cause volatility in quarterly
earnings in the future.

48



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                    
| | -------------------
| | 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.
Any unamortized debt issuance costs are written off in the
period in which the associated indebtedness is repaid.



| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements



| |                      
| | ---------------------
| | Adopted in the Period

In April 2002, the FASB issued SFAS 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 were classified as extraordinary items by SFAS 4
are no longer classified as such. The Company adopted
SFAS 145 for our fiscal year ending December 31, 2003.
When adopted, prior extraordinary items related to the
extinguishment of debt were reclassified. This resulted 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.

SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement
Benefits (Revised 2003), (SFAS 132R)
requires an entity to make additional disclosures about pensions
and other post-retirement benefits. These disclosures include
information describing the types of plan assets, investment
strategy, measurement dates, plan obligations, cash flows and
components of net periodic pension cost. SFAS 132R is
effective for the Company beginning with fiscal years ending
after December 15, 2003 and for non-U.S. plans
beginning with fiscal years ending after June 15, 2004.
SFAS132R is effective for interim reporting period disclosures
beginning after December 15, 2003 and after the provisions
of this statement are adopted. The Company has adopted this
statement for its U.K. plan in this form 10-K for the year
ending December 31, 2003 and will adopt the quarterly
reporting requirements in its Form 10-Q for the quarter
ending March 31, 2004.



| |                                
| | -------------------------------
| | To Be Adopted in Future Periods

In December 2003, the FASB issued a revision to
Interpretation No. 46 Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51
(FIN46R or the Interpretation). FIN46R
clarifies the application of ARB No. 51 Consolidated
Financial Statements to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support. FIN46R requires the
consolidation of these entities, known as variable interest
entities, by the primary beneficiary of the entity. The primary
beneficiary is the entity, if any, that will absorb a majority
of the entitys expected losses or receive a majority of
the entitys expected residual returns, or both.

Among other changes, FIN46R (a) clarified
some requirements of the original FIN46 which had been issued in
January 2003, (b) eased some implementation problems and
(c) added new exceptions. FIN46R deferred the effective
date of the Interpretation for public companies to the end of
the first reporting period after March 15, 2004 except that
all public companies must, at a minimum, apply the provisions of
the Interpretation to all entities that were previously
considered special purpose entities under the FASB
literature prior to the issuance of FIN46R by the end of the
first reporting period ending after December 15, 2003. The
Company does not anticipate that the adoption of FIN46 will have
a material impact on its financial position, cash flows or
results of operations.

49



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                      
|-- | ---------------------
|5. | Business Acquisitions

The Company made two significant acquisitions
during the three year period ended December 31, 2003. The
acquisitions were accounted for under the purchase method of
accounting and accordingly, the assets acquired and liabilities
assumed were recorded at fair value as of the acquisition dates.
The excess of the purchase price over the fair value of the
assets acquired less the liabilities assumed has been recorded
as goodwill. The results of operations of the acquired business
have been included from the date of the acquisitions.



| |                                 
| | --------------------------------
| | Year Ended December 31,
    2003

On July 29, 2003 the Company acquired all of
the outstanding capital stock of PharmaResearch Corporation
(PharmaResearch) for $43.2 million, financed
through bank borrowings. PharmaResearch is a US-based drug
development services group focused on the provision of
Phase II-IV clinical trials support services, principally
in the areas of respiratory and infectious diseases. At the time
of the acquisition PharmaResearch was primarily based in
Morrisville and Wilmington, North Carolina, with foreign
operations based in the United Kingdom, France, Spain and China.

The acquisition of PharmaResearch allowed the
Company to increase significantly the scale and service of its
North American clinical development operations. Its strong
presence in the field of respiratory and infectious diseases
enabled Inveresk Research to build value-added clinical support
services for the benefit of the enlarged client base. The
following table summarizes the fair value of the assets acquired
and liabilities assumed at the acquisition date.

|                                             |  |             |         |  
|-------------------------------------------- |  | ----------- | ------- | -
|                                             |  | (Dollars in
|                                             |  | thousands) 
|                                             |  |            
|Cash                                         |  | $           | 5,976   |  
|Other current assets                         |  |             | 15,571  |  
|                                             |  |             |         |  
|Total current assets                         |  |             | 21,547  |  
|Property, plant and equipment                |  |             | 2,249   |  
|Customer contracts                           |  |             | 2,783   |  
|Goodwill                                     |  |             | 34,907  |  
|Current liabilities                          |  |             | (18,236 | )
|Deferred taxation liabilities                |  |             | (53     | )
|Long term portion of capital leases          |  |             | (9      | )
|                                             |  |             |         |  
|Purchase price (including acquisition costs) |  | $           | 43,188  |  
|                                             |  |             |         |  

The purchase price payable for PharmaResearch is
subject to partial holdback. The customer contracts acquired
have an estimated useful life of two years. The goodwill arising
from the transaction was all assigned for financial reporting
purposes to the clinical segment of the business. The customer
contracts and goodwill are not deductible for tax purposes.

Restructuring and Integration costs

The Company established a plan at the acquisition
date to integrate the operations of PharmaResearch with certain
of its existing operations. The actions necessary to complete
the integration included a reduction of 58 employees across the
enlarged Company (37 employees of PharmaResearch and 21
employees of the Company), the relocation of the Morrisville
operations of PharmaResearch to the Companys premises in
Cary, North Carolina, integration of certain administrative
functions and operating entities between the two

50



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

businesses, combination of the PharmaResearch
operations in London, Paris and Madrid with those of the Company
and the closure of certain office premises.

In connection with this plan the Company has
recorded provisions that have been reflected in the purchase
price allocation of $2.6 million and provisions of
$1.1 million that are included in restructuring and
integration costs arising from business acquisitions in the
consolidated statement of operations. The Company implemented
the restructuring plan in early September, with 37 former
PharmaResearch employees and 21 former Inveresk employees
leaving the Company during September. By January 2004, the
employees based at the PharmaResearch facility in Morrisville,
North Carolina were relocated to the Companys nearby
facility in Cary, North Carolina and the office in China was
closed. The following amounts have been recorded in respect of
the restructuring plan:

|                                                     |  |                        |       |             |  |                   |      |          |  |                 |      |   |  |   |      |   |  |   |       | 
|---------------------------------------------------- |  | ---------------------- | ----- | ----------- |  | ----------------- | ---- | -------- |  | --------------- | ---- | - |  | - | ---- | - |  | - | ----- | 
|                                                     |  |                        |       |             |  |                   |      |         
|                                                     |  | Severance and          |       |             |  |                  
|                                                     |  | Related Costs          |       | Other Costs |  |                  
|                                                     |  |                        |       |             |  | Lease Termination
|                                                     |  | Pharma                 |       |             |  | Pharma            |      |          |  | and Abandonment
|                                                     |  | Research               |       | Inveresk    |  | Research          |      | Inveresk |  | Costs          
|                                                     |  |                        |       |             |  |                   |      |          |  |                
|                                                     |  |                       
|                                                     |  | (Dollars in thousands)
|Amount established at acquisition                    |  | $                      | 1,190 |             |  | $                 | 676  |          |  | $               | 348  |   |  | $ | 412  |   |  | $ | 1,137 | 
|Utilized from July 29, 2003 to
    December 31, 2003 |  |                        | (877  | )           |  |                   | (676 | )        |  |                 | (242 | ) |  |   | (344 | ) |  |   |      | 
|                                                     |  |                        |       |             |  |                   |      |          |  |                 |      |   |  |   |      |   |  |   |       | 
|Balance at December 31, 2003                         |  | $                      | 313   |             |  | $                 |     |          |  | $               | 106  |   |  | $ | 68   |   |  | $ | 1,137 | 
|                                                     |  |                        |       |             |  |                   |      |          |  |                 |      |   |  |   |      |   |  |   |       | 

The Company expects the remaining provisions for
severance costs to be utilized in 2004. The lease termination
and abandonment costs will be utilized over the terms of the
property leases concerned.



| |                                 
| | --------------------------------
| | Year Ended December 30,
    2001

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  |  
|Goodwill                                      |  |             | 95,699  |  
|Deferred taxation liabilities                 |  |             | (13,183 | )
|Long term liabilities                         |  |             | (223    | )
|                                              |  |             |         |  
|Purchase price (including acquisition costs)  |  | $           | 120,847 |  
|                                              |  |             |         |  

Tax losses at the acquisition date amounted to
approximately $40 million and these remain unutilized at
December 31, 2003. 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.

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.

51



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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    |  
|Utilized during 2003                 |  |             | (220   | )
|                                     |  |             |        |  
|Balance accrued at December 31, 2003 |  | $           |       |  
|                                     |  |             |        |  

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 following unaudited consolidated pro forma
results of operations for the years ended December 31, 2003
and 2002 give effect to the acquisition of PharmaResearch as if
it was completed at the beginning of each period. These pro
forma results reflect incremental financing costs resulting from
the acquisition and the amortization of acquired intangible
assets.

|                                                                   |         |                        |         |              |  |   |         |            |  
|------------------------------------------------------------------ | ------- | ---------------------- | ------- | ------------ |  | - | ------- | ---------- | -
|                                                                   |         | Year Ended             |         | Year Ended  
|                                                                   |         | December 31,           |         | December 31,
|                                                                   |         | 2003                   |         | 2002        
|                                                                   |         |                        |         |             
|                                                                   |         |                       
|                                                                   |         | (Dollars in thousands)
|Net service revenue                                                |         | $                      | 296,375 |              |  | $ | 263,061 |           
|                                                                   |         |                        |         |              |  |   |         |           
|Net income (loss)                                                  |         | $                      | 37,176  |              |  | $ | (26,885 | )         
|                                                                   |         |                        |         |              |  |   |         |           
|Earnings (loss) per share                                          |         |                        |         |              |  |   |         |           
|                                                                   | Basic   |                        | $       | 1.02         |  |   | $       | (0.90      | )
|                                                                   | Diluted |                        | $       | 0.99         |  |   | $       | (0.90      | )
|Number of shares used in calculating earnings
    (loss) per share |         |                        |         |              |  |   |         |           
|                                                                   | Basic   |                        |         | 36,527,491   |  |   |         | 29,735,957 |  
|                                                                   | Diluted |                        |         | 37,705,378   |  |   |         | 29,735,957 |  

This unaudited pro forma financial information
has been prepared for comparative purposes only and does not
purport to represent the results of operations which would
actually have occurred had the companies operated as one during
the period, nor to predict the Companys results of future
operations. No effect has been included for synergies, if any,
that might have been realized through the acquisition.

52



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                              
|-- | -----------------------------
|6. | Property, Plant and Equipment

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

|                                           |  |                        |         |              |  |   |         |  
|------------------------------------------ |  | ---------------------- | ------- | ------------ |  | - | ------- | -
|                                           |  | December 31,           |         | December 31,
|                                           |  | 2003                   |         | 2002        
|                                           |  |                        |         |             
|                                           |  |                       
|                                           |  | (Dollars in thousands)
|Land, buildings and leasehold improvements |  | $                      | 128,506 |              |  | $ | 98,974  |  
|Plant and equipment                        |  |                        | 113,717 |              |  |   | 86,246  |  
|                                           |  |                        |         |              |  |   |         |  
|                                           |  |                        | 242,223 |              |  |   | 185,220 |  
|Less accumulated depreciation              |  |                        | (96,859 | )            |  |   | (76,650 | )
|                                           |  |                        |         |              |  |   |         |  
|                                           |  | $                      | 145,364 |              |  | $ | 108,570 |  
|                                           |  |                        |         |              |  |   |         |  

Included in plant and equipment are assets with a
cost of $0.7 million and $2.9 million at
December 31, 2003 and December 31, 2002 which are the
subject of capital leases.



|   |         
|-- | --------
|7. | Goodwill

The following table sets forth an analysis of
goodwill.

|                              |  |                        |         |              |  |   |         |  
|----------------------------- |  | ---------------------- | ------- | ------------ |  | - | ------- | -
|                              |  | December 31,           |         | December 31,
|                              |  | 2003                   |         | 2002        
|                              |  |                        |         |             
|                              |  |                       
|                              |  | (Dollars in thousands)
|Goodwill                      |  | $                      | 198,306 |              |  | $ | 147,765 |  
|Less accumulated amortization |  |                        | (14,067 | )            |  |   | (12,722 | )
|                              |  |                        |         |              |  |   |         |  
|                              |  | $                      | 184,239 |              |  | $ | 135,043 |  
|                              |  |                        |         |              |  |   |         |  



|   |                  
|-- | -----------------
|8. | Intangible Assets

The composition of intangible assets is as
follows:

|                              |  |                        |       |              |  |   |   | 
|----------------------------- |  | ---------------------- | ----- | ------------ |  | - | - | 
|                              |  | December 31,           |       | December 31,
|                              |  | 2003                   |       | 2002        
|                              |  |                        |       |             
|                              |  |                       
|                              |  | (Dollars in thousands)
|Customer contracts            |  | $                      | 2,783 |              |  | $ |  | 
|Less accumulated amortization |  |                        | (580  | )            |  |   |  | 
|                              |  |                        |       |              |  |   |   | 
|                              |  | $                      | 2,203 |              |  | $ |  | 
|                              |  |                        |       |              |  |   |   | 

The customer contracts were acquired in
connection with the acquisition of PharmaResearch. Future
amortization expense is expected to be $1.4 million in 2004
and $0.8 million in 2005.

53



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                 
|-- | ----------------
|9. | Accrued expenses

The composition of accrued expenses is as follows:

|                                                                                                                               |  |                        |        |              |  |   |        | 
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | ------------ |  | - | ------ | 
|                                                                                                                               |  | December 31,           |        | December 31,
|                                                                                                                               |  | 2003                   |        | 2002        
|                                                                                                                               |  |                        |        |             
|                                                                                                                               |  |                       
|                                                                                                                               |  | (Dollars in thousands)
|Restructuring provision in respect of European
    Clinical Operations (Note 5)                                                |  | $                      |       |              |  | $ | 220    | 
|Provision in respect of restructuring and
    integration costs associated with the acquisition of
    PharmaResearch (Note 5) |  |                        | 1,624  |              |  |   |       | 
|Invoices received not processed                                                                                                |  |                        | 3,136  |              |  |   | 2,190  | 
|Fair value of US $ interest rate swap
    (Note 10)                                                                            |  |                        | 986    |              |  |   | 1,096  | 
|Reserve for losses on contracts                                                                                                |  |                        | 3,986  |              |  |   | 2,471  | 
|Accrued payroll costs and social taxes                                                                                         |  |                        | 8,139  |              |  |   | 6,966  | 
|Interest accrued on bank loans and interest rate
    swaps                                                                     |  |                        |       |              |  |   | 603    | 
|Other accrued expenses                                                                                                         |  |                        | 11,179 |              |  |   | 7,853  | 
|                                                                                                                               |  |                        |        |              |  |   |        | 
|                                                                                                                               |  | $                      | 29,050 |              |  | $ | 21,399 | 
|                                                                                                                               |  |                        |        |              |  |   |        | 



|    |                                                 
|--- | ------------------------------------------------
|10. | Credit Facilities and Derivative
    Instruments



| |           
| | ----------
| | Facilities



| |     
| | ----
| | 2003

In July 2003, the Company entered into a new
$150 million syndicated bank credit facility part of which
was used to finance the acquisition of PharmaResearch and also
to repay the borrowings outstanding under our former bank credit
facility. Scheduled principal repayments of $1.9 million
were made on each of September 30, 2003 and
December 31, 2003. In addition on December 31, 2003,
we repaid $13 million of the term loan facility ahead of
schedule. At December 31, 2003 the facility totaled
$133.2 million comprised of $58.2 million of term
loans in U.S. dollars and up to $75 million of loans
available in multiple currencies under a revolving credit
arrangement.

At December 31, 2003, the borrowings under
the facility comprised $58.2 million drawn down as a five
year term loan with repayments due quarterly until
December 31, 2007. Such borrowings bear interest at rates
between LIBOR plus 1.25% and LIBOR plus 2.00% depending on the
ratio of Earnings before Interest, Taxes, Depreciation and
Amortization (EBITDA) to borrowings. Based on the
financial position of the company at September 30, 2003 the
borrowings currently bear interest at LIBOR plus 1.5%. The
exposure to interest rate fluctuations on the loans drawn under
this facility has been limited by retaining, with minor
amendments, the interest rate swaps entered into previously in
connection with the previous bank credit facility. The bank
credit facility subjects the Company to significant affirmative,
negative and financial covenants, is guaranteed by the Company
and its significant subsidiaries and is secured by liens on
substantially all of the assets and pledges of the shares of the
subsidiaries. The covenants include, but are not limited to, a
maximum leverage ratio, a minimum net worth amount and a minimum
amount for the ratio of consolidated EBITDA to consolidated
financial charges. The Company was in compliance with these
covenants at December 31, 2003.



| |     
| | ----
| | 2002

At December 31, 2002, $67.5 million of
bank debt had been drawn under a bank credit facility (the
facility). Such debt was repayable in U.S. dollars
and bore interest at the London Inter-Bank Offered Rate
(LIBOR) plus 1.25%. The facility was secured by
the Companys principal assets. The borrowings were

54



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

repaid in part on various dates during 2003 and
we made a final repayment of the borrowings under the facility
immediately prior to completing the acquisition of
PharmaResearch on July 29, 2003.



| |                                                                   
| | ------------------------------------------------------------------
| | Fair Value of Financial Instruments and
    Derivative Instruments

The carrying amounts of cash and cash
equivalents, accounts receivable, inventory, accounts payable
and accrued liabilities approximate fair value because of the
short term maturity of these instruments. The carrying amount of
the Companys long term debt approximates fair value
because of the variability of the interest cost associated with
these borrowings.

The Company uses foreign exchange contracts to
manage the risk of foreign exchange rate fluctuations. At
December 31, 2003 the Company had one forward currency
contract outstanding. This was to sell $14 million and buy
Can$18.552 million on March 31, 2004. This contract
was recorded at fair value of $0.3 million at
December 31, 2003 and an unrealized gain of
$0.3 million was recorded in selling general and
administrative expenses.

The Company also enters into interest swap
arrangements related to its bank borrowings to manage its
exposure to variability in cash flows associated with floating
interest rates. At December 31, 2003 the Company had two
outstanding interest rate swap arrangements. The first
arrangement is an interest rate swap, which has a notional
amount of $50 million and expires on September 30,
2005. Under this agreement the LIBOR rate applicable to
$50 million of debt is fixed at 2.9975%. The second
arrangement is an interest rate swap, which has a notional
amount of $10 million and expires on September 30,
2004. Under this arrangement the LIBOR rate applicable to
$10 million of debt is fixed at 2.5225%. The estimated fair
value of these two swaps is based on the quoted market prices.
At December 31, 2003 and December 31, 2002, the fair
value was estimated to be a liability of $1.0 million and
$1.1 million, respectively. The unrealized gains or losses
recorded as additional interest income or cost in the years
ended December 31, 2003 and December 31, 2002 were a
gain of $0.1 million and a loss of $1.1 million. In
the year ended December 30, 2001, an additional interest
cost of $2.0 million was recorded on the mark to market of
interest rate swaps in place during that year.



|    |            
|--- | -----------
|11. | 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 non-cancellable terms of one year or
more at December 31 are as follows:

|                                                             |  |             |        |  
|------------------------------------------------------------ |  | ----------- | ------ | -
|                                                             |  | (Dollars in
|                                                             |  | thousands) 
|                                                             |  |            
|2004                                                         |  | $           | 7,049  |  
|2005                                                         |  |             | 5,849  |  
|2006                                                         |  |             | 6,667  |  
|2007                                                         |  |             | 6,272  |  
|2008                                                         |  |             | 5,615  |  
|Thereafter                                                   |  |             | 21,377 |  
|                                                             |  |             |        |  
|Total minimum rentals                                        |  |             | 52,829 |  
|Less minimum rentals due under non-cancellable
    subleases |  |             | (674   | )
|                                                             |  |             |        |  
|                                                             |  | $           | 52,155 |  
|                                                             |  |             |        |  

55



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Rent expense is comprised of the following:

|                      |  |                        |       |              |  |              |       |   |  |   |       |  
|--------------------- |  | ---------------------- | ----- | ------------ |  | ------------ | ----- | - |  | - | ----- | -
|                      |  |                        |       |              |  | 52 Weeks    
|                      |  | Year Ended             |       | Year Ended   |  | Ended       
|                      |  | December 31,           |       | December 31, |  | December 30,
|                      |  | 2003                   |       | 2002         |  | 2001        
|                      |  |                        |       |              |  |             
|                      |  |                       
|                      |  | (Dollars in thousands)
|Minimum rentals       |  | $                      | 7,935 |              |  | $            | 6,112 |   |  | $ | 5,466 |  
|Less sublease rentals |  |                        | (437  | )            |  |              | (944  | ) |  |   | (670  | )
|                      |  |                        |       |              |  |              |       |   |  |   |       |  
|                      |  | $                      | 7,498 |              |  | $            | 5,168 |   |  | $ | 4,796 |  
|                      |  |                        |       |              |  |              |       |   |  |   |       |  



| |               
| | --------------
| | 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) 
|           |  |            
|2004       |  | $           | 161 | 
|2005       |  |             | 147 | 
|2006       |  |             | 45  | 
|2007       |  |             |    | 
|2008       |  |             |    | 
|Thereafter |  |             |    | 
|           |  |             |     | 
|           |  | $           | 353 | 
|           |  |             |     | 



| |                    
| | -------------------
| | Capital Commitments

The Company has commitments in relation to
capital expenditure amounting to $3.1 million at
December 31, 2003 and had commitments of $12.1 million
at December 31, 2002. Payments of the capital commitments
at December 31, 2003 are all expected to be made in 2004.

56



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |             
|--- | ------------
|12. | Income taxes

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

|                                                           |                                        |                        |         |              |  |   |         |        | 
|---------------------------------------------------------- | -------------------------------------- | ---------------------- | ------- | ------------ |  | - | ------- | ------ | 
|                                                           |                                        | December 31,           |         | December 31,
|                                                           |                                        | 2003                   |         | 2002        
|                                                           |                                        |                        |         |             
|                                                           |                                        |                       
|                                                           |                                        | (Dollars in thousands)
|Deferred tax assets:                                       |                                        |                        |         |              |  |   |         |       
|                                                           | Defined benefit pension obligations    |                        | $       | 7,364        |  |   | $       | 3,987  | 
|                                                           | Federal and state net operating losses |                        |         | 13,652       |  |   |         | 14,893 | 
|                                                           | Foreign net operating losses           |                        |         | 425          |  |   |         | 768    | 
|                                                           | Interest rate swaps                    |                        |         | 296          |  |   |         | 329    | 
|                                                           | U.K. share option deductions           |                        |         | 555          |  |   |         |       | 
|                                                           | Other deferred tax assets              |                        |         | 3,583        |  |   |         | 1,451  | 
|                                                           |                                        |                        |         |              |  |   |         |       
|Total deferred tax assets                                  |                                        |                        | 25,875  |              |  |   | 21,428  |       
|Valuation allowance for deferred tax assets                |                                        |                        | (15,789 | )            |  |   | (15,830 | )     
|                                                           |                                        |                        |         |              |  |   |         |       
|Net deferred tax assets                                    |                                        | $                      | 10,086  |              |  | $ | 5,598   |       
|Deferred tax liabilities Property, plant and
    equipment |                                        |                        | (31,569 | )            |  |   | (27,241 | )     
|Intangible assets                                          |                                        |                        | (532    | )            |  |   |        |       
|Other deferred tax liabilities                             |                                        |                        | (500    | )            |  |   | (700    | )     
|                                                           |                                        |                        |         |              |  |   |         |       
|Net deferred tax liabilities                               |                                        | $                      | (22,515 | )            |  | $ | (22,343 | )     
|                                                           |                                        |                        |         |              |  |   |         |       

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

|                                         |  |                        |         |              |  |   |         |  
|---------------------------------------- |  | ---------------------- | ------- | ------------ |  | - | ------- | -
|                                         |  | December 31,           |         | December 31,
|                                         |  | 2003                   |         | 2002        
|                                         |  |                        |         |             
|                                         |  |                       
|                                         |  | (Dollars in thousands)
|Net current deferred tax assets          |  | $                      | 144     |              |  | $ |        |  
|Net non-current deferred tax assets      |  |                        | 669     |              |  |   |        |  
|Net current deferred tax liabilities     |  |                        | (334    | )            |  |   | (204    | )
|Net non-current deferred tax liabilities |  |                        | (22,994 | )            |  |   | (22,139 | )
|                                         |  |                        |         |              |  |   |         |  
|Net deferred tax liabilities             |  | $                      | (22,515 | )            |  | $ | (22,343 | )
|                                         |  |                        |         |              |  |   |         |  

Income (loss) before income taxes arises as
follows:

|                            |               |                        |        |              |  |              |         |         |   |   |        |        |  
|--------------------------- | ------------- | ---------------------- | ------ | ------------ |  | ------------ | ------- | ------- | - | - | ------ | ------ | -
|                            |               |                        |        |              |  | 52 Weeks    
|                            |               | Year Ended             |        | Year Ended   |  | Ended       
|                            |               | December 31,           |        | December 31, |  | December 30,
|                            |               | 2003                   |        | 2002         |  | 2001        
|                            |               |                        |        |              |  |             
|                            |               |                       
|                            |               | (Dollars in thousands)
|Income (loss) before taxes: |               |                        |        |              |  |              |         |         |   |   |        |       
|                            | United States |                        | $      | 1,458        |  |              | $       | (699    | ) |   | $      | (3,152 | )
|                            | Foreign       |                        |        | 41,224       |  |              |         | (21,696 | ) |   |        | (93    | )
|                            |               |                        |        |              |  |              |         |         |   |   |        |       
|                            |               | $                      | 42,682 |              |  | $            | (22,315 | )       |   | $ | (3,245 | )     
|                            |               |                        |        |              |  |              |         |         |   |   |        |       

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

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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. In the three years ended
December 31, 2003, December 31, 2002 and
December 30, 2001, $3.5 million, $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    
|                           |                                              | Year Ended             |       | Year Ended   |   | Ended       
|                           |                                              | December 31,           |       | December 31, |   | December 30,
|                           |                                              | 2003                   |       | 2002         |   | 2001        
|                           |                                              |                        |       |              |   |             
|                           |                                              |                       
|                           |                                              | (Dollars in thousands)
|Current:                   |                                              |                        |       |              |   |              |       |        |   |   |       |       
|                           | Domestic                                     |                        | $     | 1,774        |   |              | $     |       |   |   | $     |       |  
|                           | Foreign                                      |                        |       | 3,406        |   |              |       | 3,456  |   |   |       | 1,665  |  
|Deferred:                  |                                              |                        |       |              |   |              |       |        |   |   |       |       
|                           | Domestic                                     |                        |       | (868         | ) |              |       |       |   |   |       |       |  
|                           | Foreign                                      |                        |       | 7,984        |   |              |       | 9,745  |   |   |       | 2,011  |  
|                           | Foreign Research and Development tax credits |                        |       | (7,736       | ) |              |       | (7,507 | ) |   |       | (1,801 | )
|                           |                                              |                        |       |              |   |              |       |        |   |   |       |       
|Provision for income taxes |                                              | $                      | 4,560 |              |   | $            | 5,694 |        |   | $ | 1,875 |       
|                           |                                              |                        |       |              |   |              |       |        |   |   |       |       

58



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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    
|                                                                                                            |  | Year Ended             |        | Year Ended   |  | Ended       
|                                                                                                            |  | December 31,           |        | December 31, |  | December 30,
|                                                                                                            |  | 2003                   |        | 2002         |  | 2001        
|                                                                                                            |  |                        |        |              |  |             
|                                                                                                            |  |                       
|                                                                                                            |  | (Dollars in thousands)
|Federal statutory rate  35%                                                                                |  | $                      | 14,939 |              |  | $            | (7,810 | ) |  | $ | (1,135 | )
|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                                                  |  |                        | (7,736 | )            |  |              | (7,507 | ) |  |   | (1,801 | )
|Amortization of goodwill                                                                                    |  |                        |       |              |  |              |       |   |  |   | 1,156  |  
|Difference between foreign income taxed at
    U.S. Federal Statutory rates and foreign income tax expense  |  |                        | (1,398 | )            |  |              | 3,207  |   |  |   | 809    |  
|Increase in federal valuation allowance                                                                     |  |                        | 373    |              |  |              | 229    |   |  |   | 1,103  |  
|Increase in valuation allowance of foreign
    subsidiaries                                                 |  |                        | 729    |              |  |              | 357    |   |  |   | 1,247  |  
|U.K. share option deductions                                                                                |  |                        | (2,156 | )            |  |              |       |   |  |   |       |  
|Other                                                                                                       |  |                        | (191   | )            |  |              | 848    |   |  |   | 496    |  
|                                                                                                            |  |                        |        |              |  |              |        |   |  |   |        |  
|                                                                                                            |  | $                      | 4,560  |              |  | $            | 5,694  |   |  | $ | 1,875  |  
|                                                                                                            |  |                        |        |              |  |              |        |   |  |   |        |  

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, 2003, 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.



|    |                                                           
|--- | ----------------------------------------------------------
|13. | 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 non-executive 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 before June 27, 2002 were
issued by Inveresk Research Group Limited. Those options
subsequently were exchanged for stock options issued by Inveresk
Research Group, Inc. (the replacement options) on
June 28, 2002 under its 2002 Stock Option Plan. The
replacement options were issued with exercise prices, exercise
periods and other terms substantially the same as those of 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 date of grant of the options they
replaced. At December 31, 2003 the number of replacement
options remaining outstanding was 615,479. The Company has also
issued options that vest in equal annual instalments over the
three years following the date of grant. At December 31,
2003 the number of shares issuable on exercise of these options
outstanding was 1,204,469.

59



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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the options
outstanding and exercisable under these plans:

|                                 |  |                  |           |                |  |                |              |  |  |   |       | 
|-------------------------------- |  | ---------------- | --------- | -------------- |  | -------------- | ------------ |  |  | - | ----- | 
|                                 |  | Shares of Common |           |                |  | Weighted      
|                                 |  | Stock Issuable   |           |                |  | Average       
|                                 |  | upon Exercise    |           | Exercise Price |  | Exercise Price
|                                 |  |                  |           |                |  |               
|Outstanding at December 31, 2000 |  |                  | 213,286   |                |  | $              | 0.19         |  |  | $ | 0.19  | 
|Granted during 2001              |  |                  | 948,159   |                |  | $              | 0.03-$ 0.40  |  |  | $ | 0.22  | 
|Forfeited during 2001            |  |                  | (12,913   | )              |  | $              | 0.19         |  |  | $ | 0.19  | 
|Exercised during 2001            |  |                  |          |                |  |                |             |  |  |   |      | 
|                                 |  |                  |           |                |  |                |              |  |  |   |       | 
|Outstanding at December 30, 2001 |  |                  | 1,148,532 |                |  | $              | 0.03-$ 0.40  |  |  | $ | 0.22  | 
|Granted during 2002              |  |                  | 1,809,941 |                |  | $              | 0.03-$20.14  |  |  | $ | 6.84  | 
|Forfeited during 2002            |  |                  | (56,567   | )              |  | $              | 0.19-$13.00  |  |  | $ | 9.88  | 
|Exercised during 2002            |  |                  | (535,689  | )              |  | $              | 0.05-$ 0.40  |  |  | $ | 0.22  | 
|                                 |  |                  |           |                |  |                |              |  |  |   |       | 
|Outstanding at December 31, 2002 |  |                  | 2,366,217 |                |  | $              | 0.03-$20.14  |  |  | $ | 5.05  | 
|Granted during 2003              |  |                  | 421,950   |                |  | $              | 14.68-$17.75 |  |  | $ | 17.40 | 
|Forfeited during 2003            |  |                  | (109,498  | )              |  | $              | 10.60-$17.75 |  |  | $ | 11.46 | 
|Exercised during 2003            |  |                  | (858,721  | )              |  | $              | 0.03-$10.60  |  |  | $ | 2.52  | 
|                                 |  |                  |           |                |  |                |              |  |  |   |       | 
|Outstanding at December 31, 2003 |  |                  | 1,819,948 |                |  | $              | 0.03-$20.14  |  |  | $ | 8.72  | 
|                                 |  |                  |           |                |  |                |              |  |  |   |       | 

The following table summarizes the exercise
prices of the options outstanding at December 31, 2003:

|                       |           |                |  |   |                 | 
|---------------------- | --------- | -------------- |  | - | --------------- | 
|Shares of Common Stock |           |               
|Issuable Upon Exercise |           | Exercise Price
|                       |           |               
|                       | 207,891   |                |  | $ | 0.03 per share  | 
|                       | 11,736    |                |  | $ | 0.05 per share  | 
|                       | 27,634    |                |  | $ | 0.19 per share  | 
|                       | 368,218   |                |  | $ | 0.40 per share  | 
|                       | 749,619   |                |  | $ | 10.60 per share | 
|                       | 35,000    |                |  | $ | 13.00 per share | 
|                       | 40,000    |                |  | $ | 14.68 per share | 
|                       | 3,500     |                |  | $ | 16.35 per share | 
|                       | 40,000    |                |  | $ | 17.17 per share | 
|                       | 328,850   |                |  | $ | 17.75 per share | 
|                       | 7,500     |                |  | $ | 20.14 per share | 
|                       |           |                |  |   |                 | 
|                       | 1,819,948 |                |  |   |                 | 
|                       |           |                |  |   |                 | 
|                       |           |                |  |   |                 | 

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.

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

60



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

was recorded in respect of those options in the
quarter ended March 31, 2002, reducing income from
operations by $4.545 million and net income by
$4.490 million.

In the quarter ended June 30, 2002,
compensation expense of $19.383 million was recorded in
respect of the outstanding share options that vested in
accordance with their terms. The Company recorded an additional
compensation expense of $29.092 million in connection with
its initial public offering, when the percentage equity interest
held by certain members of its management team increased in
accordance with the terms governing the original issuance of
shares of those individuals.

Pro forma information regarding net income is
required by SFAS 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. The information required is shown in Note 4.

For purposes of this disclosure, the fair values
of the fixed option grants were estimated using the
Black-Scholes option-pricing model. The assumptions used have
not changed between periods and are as follows:

|                                                        |  |  |      |  
|------------------------------------------------------- |  |  | ---- | -
|Risk-free interest rate                                 |  |  | 3.0  | %
|Volatility factor                                       |  |  | 60   | %
|Weighted average expected life of options in
    months |  |  | 21.8 |  

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.



|    |                  
|--- | -----------------
|14. | 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, 2003 was $1.9 million, for the year ended
December 31, 2002 was $0.9 million and for the
52 weeks ended December 30, 2001 was $1.4 million.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company operates a funded 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    
|                                                                              |  | Year Ended             |        | Year Ended   |  | Ended       
|                                                                              |  | December 31,           |        | December 31, |  | December 30,
|                                                                              |  | 2003                   |        | 2002         |  | 2001        
|                                                                              |  |                        |        |              |  |             
|                                                                              |  |                       
|                                                                              |  | (Dollars in thousands)
|Change in benefit obligations Benefit obligation
    at beginning of the year |  | $                      | 63,382 |              |  | $            | 49,836 |   |  | $ | 48,801 |  
|Service cost                                                                  |  |                        | 3,226  |              |  |              | 2,921  |   |  |   | 2,731  |  
|Interest cost                                                                 |  |                        | 3,587  |              |  |              | 3,058  |   |  |   | 2,796  |  
|Plan participants contributions                                               |  |                        | 1,165  |              |  |              | 1,055  |   |  |   | 899    |  
|Actuarial losses (gains)                                                      |  |                        | 11,790 |              |  |              | 2,321  |   |  |   | (1,979 | )
|Benefits paid                                                                 |  |                        | (1,088 | )            |  |              | (1,422 | ) |  |   | (2,201 | )
|Foreign currency exchange rate changes                                        |  |                        | 8,818  |              |  |              | 5,613  |   |  |   | (1,211 | )
|                                                                              |  |                        |        |              |  |              |        |   |  |   |        |  
|Benefit obligation at end of the year                                         |  | $                      | 90,880 |              |  | $            | 63,382 |   |  | $ | 49,836 |  
|                                                                              |  |                        |        |              |  |              |        |   |  |   |        |  
|Change in plan assets Fair value of plan assets
    at beginning of the year  |  | $                      | 39,066 |              |  | $            | 40,414 |   |  | $ | 46,490 |  
|Actual return on plan assets                                                  |  |                        | 7,172  |              |  |              | (8,011 | ) |  |   | (6,183 | )
|Company contributions                                                         |  |                        | 3,376  |              |  |              | 3,254  |   |  |   | 2,638  |  
|Plan participants contributions                                               |  |                        | 1,165  |              |  |              | 1,055  |   |  |   | 899    |  
|Benefits paid                                                                 |  |                        | (1,088 | )            |  |              | (1,422 | ) |  |   | (2,201 | )
|Foreign currency exchange rate changes                                        |  |                        | 5,353  |              |  |              | 3,776  |   |  |   | (1,229 | )
|                                                                              |  |                        |        |              |  |              |        |   |  |   |        |  
|Plan assets at end of the year                                                |  | $                      | 55,044 |              |  | $            | 39,066 |   |  | $ | 40,414 |  
|                                                                              |  |                        |        |              |  |              |        |   |  |   |        |  

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

|                                       |  |                        |         |              |  |              |         |   |  |   |        |  
|-------------------------------------- |  | ---------------------- | ------- | ------------ |  | ------------ | ------- | - |  | - | ------ | -
|                                       |  |                        |         |              |  | 52 Weeks    
|                                       |  | Year Ended             |         | Year Ended   |  | Ended       
|                                       |  | December 31,           |         | December 31, |  | December 30,
|                                       |  | 2003                   |         | 2002         |  | 2001        
|                                       |  |                        |         |              |  |             
|                                       |  |                       
|                                       |  | (Dollars in thousands)
|Funded status                          |  | $                      | (35,836 | )            |  | $            | (24,316 | ) |  | $ | (9,422 | )
|Unrecognized net actuarial loss (gain) |  |                        | 30,504  |              |  |              | 20,626  |   |  |   | 6,275  |  
|                                       |  |                        |         |              |  |              |         |   |  |   |        |  
|Net amount recognized                  |  |                        | (5,332  | )            |  |              | (3,690  | ) |  |   | (3,147 | )
|Accrued (liability)                    |  |                        | (19,244 | )            |  |              | (9,569  | ) |  |   | (1,574 | )
|                                       |  |                        |         |              |  |              |         |   |  |   |        |  
|Accrued cost                           |  | $                      | (24,576 | )            |  | $            | (13,259 | ) |  | $ | (4,721 | )
|                                       |  |                        |         |              |  |              |         |   |  |   |        |  

62



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##### Table of Contents



INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2003 and 2002 and
December 30, 2001, the accumulated benefit obligations of
$79.6 million, $52.3 million and $45.1 million
exceeded the plan assets by $24.6 million,
$13.3 million and $4.7 million respectively. The
weighted average assumptions used to determine the projected
benefit obligation are:

|                                        |  |              |      |              |  |              |      |  |  |  |      | 
|--------------------------------------- |  | ------------ | ---- | ------------ |  | ------------ | ---- |  |  |  | ---- | 
|                                        |  | December 31, |      | December 31, |  | December 30,
|                                        |  | 2003         |      | 2002         |  | 2001        
|                                        |  |              |      |              |  |             
|Discount rate                           |  |              | 5.5% |              |  |              | 5.6% |  |  |  | 6.0% | 
|Expected return on plan assets          |  |              | 7.5% |              |  |              | 7.5% |  |  |  | 6.0% | 
|Rate of compensation increase           |  |              | 4.0% |              |  |              | 3.5% |  |  |  | 4.0% | 
|Rate of increase in pensions in payment |  |              | 2.5% |              |  |              | 2.0% |  |  |  | 2.0% | 
|Price inflation                         |  |              | 2.5% |              |  |              | 2.0% |  |  |  | 2.0% | 

The weighted average assumptions used to
determine the net periodic pension cost are:

|                                        |  |              |      |              |  |              |      |  |  |  |      | 
|--------------------------------------- |  | ------------ | ---- | ------------ |  | ------------ | ---- |  |  |  | ---- | 
|                                        |  |              |      |              |  | 52 Weeks    
|                                        |  | Year Ended   |      | Year Ended   |  | Ended       
|                                        |  | December 31, |      | December 31, |  | December 30,
|                                        |  | 2003         |      | 2002         |  | 2001        
|                                        |  |              |      |              |  |             
|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% | 

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

|                                 |  |                        |        |              |  |              |        |   |  |   |        |  
|-------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ------ | -
|                                 |  |                        |        |              |  | 52 Weeks    
|                                 |  | Year Ended             |        | Year Ended   |  | Ended       
|                                 |  | December 31,           |        | December 31, |  | December 30,
|                                 |  | 2003                   |        | 2002         |  | 2001        
|                                 |  |                        |        |              |  |             
|                                 |  |                       
|                                 |  | (Dollars in thousands)
|Service cost                     |  | $                      | 3,226  |              |  | $            | 2,921  |   |  | $ | 2,731  |  
|Interest cost                    |  |                        | 3,587  |              |  |              | 3,058  |   |  |   | 2,796  |  
|Return on plan assets (expected) |  |                        | (3,121 | )            |  |              | (2,589 | ) |  |   | (2,759 | )
|Amortization of actuarial loss   |  |                        | 809    |              |  |              | 74     |   |  |   |       |  
|                                 |  |                        |        |              |  |              |        |   |  |   |        |  
|Net periodic pension cost        |  | $                      | 4,501  |              |  | $            | 3,464  |   |  | $ | 2,768  |  
|                                 |  |                        |        |              |  |              |        |   |  |   |        |  

The major asset categories of the defined benefit
plan are as follows:

|                          |  |              |      |              |  |  |      | 
|------------------------- |  | ------------ | ---- | ------------ |  |  | ---- | 
|                          |  | December 31, |      | December 31,
|                          |  | 2003         |      | 2002        
|                          |  |              |      |             
|Equity securities         |  |              | 82%  |              |  |  | 78%  | 
|Fixed interest securities |  |              | 18%  |              |  |  | 22%  | 
|                          |  |              |      |              |  |  |      | 
|Total                     |  |              | 100% |              |  |  | 100% | 
|                          |  |              |      |              |  |  |      | 

The trustees of the defined benefit plan follow a
defined investment policy that is set out in the plans
statement of investment principles prepared in accordance with
the requirements of the United Kingdom Pensions Act 1995. The
investment policy is guided by an overall objective of achieving
over the long term, a return on investments which is consistent
with the long term assumptions made by the plans actuary
in determining the funding of the plan. Over the shorter term
the objective is to achieve favorable returns against

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the investment managers respective
benchmarks. The target asset allocation is 80% equities and 20%
fixed interest securities.

The expected rate of return on assets is based on
a weighted average expected rate of return on equities of 8.0%
and of 5.25% on fixed interest securities. These rates are
established with reference to market rates of return and are
reviewed annually.

As of December 31, 2003, the expected future
benefits to be paid for each of the next five years and in the
aggregate for the succeeding five years thereafter translated
from pounds sterling at the December 31, 2003 exchange rate
are as follows:

|           |  |             |        | 
|---------- |  | ----------- | ------ | 
|           |  | (Dollars in
|           |  | thousands) 
|           |  |            
|2004       |  | $           | 1,031  | 
|2005       |  |             | 1,086  | 
|2006       |  |             | 1,145  | 
|2007       |  |             | 1,374  | 
|2008       |  |             | 1,649  | 
|Thereafter |  |             | 14,729 | 
|           |  |             |        | 
|           |  | $           | 21,014 | 
|           |  |             |        | 

As of December 31, 2003, the best estimate
of contributions expected to be paid to fund the plan for the
next year is £2.0 million (equivalent to
$3.6 million). This is based on the funding rate of 14% of
pensionable payroll recommended by the plans actuary.

The measurement date used to determine the
majority of the plan assets and benefit obligations was
December 31, 2003.



|    |                  
|--- | -----------------
|15. | Segment Reporting

The Company is a full-service drug development
services group serving the pharmaceutical, biotechnology and
medical device industries. Its 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 Edinburgh, Scotland and
Montreal, 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

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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, 2003                 |  |                        |         |          |  |       |         |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 163,138 |          |  | $     | 109,344 |  |  | $ | 272,482 | 
|Depreciation and amortization                |  |                        | 9,724   |          |  |       | 3,156   |  |  |   | 12,880  | 
|Segment income                               |  |                        | 43,635  |          |  |       | 12,481  |  |  |   | 56,116  | 
|Segment assets                               |  |                        | 375,384 |          |  |       | 266,117 |  |  |   | 641,501 | 
|Intangible assets                            |  |                        | 65,064  |          |  |       | 121,378 |  |  |   | 186,442 | 
|Long-lived assets                            |  |                        | 195,275 |          |  |       | 137,143 |  |  |   | 332,418 | 
|Expenditures for long-lived assets           |  |                        | 26,044  |          |  |       | 4,311   |  |  |   | 30,355  | 
|Year Ended December 31, 2002                 |  |                        |         |          |  |       |         |  |  |   |         | 
|Net service revenues from external customers |  | $                      | 142,174 |          |  | $     | 80,288  |  |  | $ | 222,462 | 
|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 | 
|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  | 

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 31, 2003                 |  |                        |        |        |  |        |        |       |  |   |         |  |  |   |         | 
|Net service revenue from external customers  |  | $                      | 52,328 |        |  | $      | 93,670 |       |  | $ | 126,484 |  |  | $ | 272,482 | 
|Long-lived assets at December 31, 2003       |  |                        | 77,510 |        |  |        | 97,251 |       |  |   | 157,657 |  |  |   | 332,418 | 
|Year Ended December 31, 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 | 

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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    
|                                                                                                                                       |  | Year Ended             |        | Year Ended   |  | Ended       
|                                                                                                                                       |  | December 31,           |        | December 31, |  | December 30,
|                                                                                                                                       |  | 2003                   |        | 2002         |  | 2001        
|                                                                                                                                       |  |                        |        |              |  |             
|                                                                                                                                       |  |                       
|                                                                                                                                       |  | (Dollars in thousands)
|Segment income per above segment analysis                                                                                              |  | $                      | 56,116 |              |  | $            | 52,548  |   |  | $ | 18,857 |  
|Corporate overhead, including compensation
    charges, stamp duty share offering expenses and restructuring
    and integration costs |  |                        | (9,970 | )            |  |              | (61,520 | ) |  |   | (4,408 | )
|                                                                                                                                       |  |                        |        |              |  |              |         |   |  |   |        |  
|Income (loss) from operations per financial
    statements                                                                             |  | $                      | 46,146 |              |  | $            | (8,972  | ) |  | $ | 14,449 |  
|                                                                                                                                       |  |                        |        |              |  |              |         |   |  |   |        |  
|Expenditures for long-lived assets per above
    segment analysis                                                                      |  | $                      | 30,355 |              |  | $            | 25,497  |   |  | $ | 11,143 |  
|Expenditures for long-lived assets not allocated
    to segments                                                                       |  |                        | 59     |              |  |              |        |   |  |   |       |  
|                                                                                                                                       |  |                        |        |              |  |              |         |   |  |   |        |  
|Expenditures for long-lived assets per financial
    statements                                                                        |  | $                      | 30,414 |              |  | $            | 25,497  |   |  | $ | 11,143 |  
|                                                                                                                                       |  |                        |        |              |  |              |         |   |  |   |        |  

|                                                        |  |                        |          |              |  |   |          |  
|------------------------------------------------------- |  | ---------------------- | -------- | ------------ |  | - | -------- | -
|                                                        |  | Year Ended             |          | Year Ended  
|                                                        |  | December 31,           |          | December 31,
|                                                        |  | 2003                   |          | 2002        
|                                                        |  |                        |          |             
|                                                        |  |                       
|                                                        |  | (Dollars in thousands)
|Segment assets per above segment analysis               |  | $                      | 641,501  |              |  | $ | 467,303  |  
|Long lived assets not allocated to segments             |  |                        | 57       |              |  |   |         |  
|Deferred debt issue costs not allocated to
    segments |  |                        | 1,593    |              |  |   | 527      |  
|Elimination of inter segment balances                   |  |                        | (194,072 | )            |  |   | (135,363 | )
|                                                        |  |                        |          |              |  |   |          |  
|Assets per financial statements                         |  | $                      | 449,079  |              |  | $ | 332,467  |  
|                                                        |  |                        |          |              |  |   |          |  
|Long-lived assets per above segment analysis            |  | $                      | 332,418  |              |  | $ | 243,613  |  
|Long-lived assets not allocated to segments             |  |                        | 57       |              |  |   |         |  
|Deferred debt issue costs not allocated to
    segments |  |                        | 1,593    |              |  |   | 527      |  
|                                                        |  |                        |          |              |  |   |          |  
|                                                        |  | $                      | 334,068  |              |  | $ | 244,140  |  
|                                                        |  |                        |          |              |  |   |          |  

No client accounted for more than 10% of the
Companys consolidated net revenue for any of the periods
covered by these financial statements.



|    |              
|--- | -------------
|16. | 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.

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                           
|--- | --------------------------
|17. | Related Party Transactions

Prior to its initial public offering in 2002, the
Company 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
its initial public offering, 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 $0.7 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 and 2001.

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



|    |                                  
|--- | ---------------------------------
|18. | Other Comprehensive Income (Loss)

The balance of other comprehensive income (loss)
comprised:

|                                          |  |                        |         |             |  |            |       |  |  |   |         |  
|----------------------------------------- |  | ---------------------- | ------- | ----------- |  | ---------- | ----- |  |  | - | ------- | -
|                                          |  | Before-Tax             |         |             |  | Net-of-Tax
|                                          |  | Amount                 |         | Tax Benefit |  | Amount    
|                                          |  |                        |         |             |  |           
|                                          |  |                       
|                                          |  | (Dollars in thousands)
|December 31, 2003                         |  |                        |         |             |  |            |       |  |  |   |         |  
|Foreign currency translation              |  | $                      | 29,881  |             |  | $          |      |  |  | $ | 29,881  |  
|Minimum pension liability adjustment      |  |                        | (18,010 | )           |  |            | 5,414 |  |  |   | (12,596 | )
|Tax benefit of share option exercises     |  |                        |        |             |  |            | 219   |  |  |   | 219     |  
|                                          |  |                        |         |             |  |            |       |  |  |   |         |  
|                                          |  | $                      | 11,871  |             |  | $          | 5,633 |  |  | $ | 17,504  |  
|                                          |  |                        |         |             |  |            |       |  |  |   |         |  
|December 31, 2002                         |  |                        |         |             |  |            |       |  |  |   |         |  
|Foreign currency translation              |  | $                      | 926     |             |  | $          |      |  |  | $ | 926     |  
|Cumulative-effect adjustment for SFAS 133 |  |                        | (193    | )           |  |            | 58    |  |  |   | (135    | )
|Minimum pension liability adjustment      |  |                        | (9,407  | )           |  |            | 2,834 |  |  |   | (6,573  | )
|                                          |  |                        |         |             |  |            |       |  |  |   |         |  
|                                          |  | $                      | (8,674  | )           |  | $          | 2,892 |  |  | $ | (5,782  | )
|                                          |  |                        |         |             |  |            |       |  |  |   |         |  



|    |                                                                        
|--- | -----------------------------------------------------------------------
|19. | Allowance for Doubtful Accounts and Reserve
    for Losses on Contracts

|                              |  |                        |       |              |  |              |       |   |  |   |      |  
|----------------------------- |  | ---------------------- | ----- | ------------ |  | ------------ | ----- | - |  | - | ---- | -
|                              |  |                        |       |              |  | 52 Weeks    
|                              |  | Year Ended             |       | Year Ended   |  | Ended       
|                              |  | December 31,           |       | December 31, |  | December 30,
|                              |  | 2003                   |       | 2002         |  | 2001        
|                              |  |                        |       |              |  |             
|                              |  |                       
|                              |  | (Dollars in thousands)
|Doubtful accounts allowance   |  |                        |       |              |  |              |       |   |  |   |      |  
|Balance, beginning of period  |  | $                      | 1,021 |              |  | $            | 760   |   |  | $ | 312  |  
|Acquisition of subsidiaries   |  |                        |      |              |  |              |      |   |  |   | 724  |  
|Utilized                      |  |                        | (88   | )            |  |              | (29   | ) |  |   | (163 | )
|Net charge (credit) to income |  |                        | 413   |              |  |              | 269   |   |  |   | (24  | )
|Translation                   |  |                        | 179   |              |  |              | 21    |   |  |   | (89  | )
|                              |  |                        |       |              |  |              |       |   |  |   |      |  
|Balance, end of period        |  | $                      | 1,525 |              |  | $            | 1,021 |   |  | $ | 760  |  
|                              |  |                        |       |              |  |              |       |   |  |   |      |  

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INVERESK RESEARCH GROUP, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                |  |                        |        |              |  |              |        |   |  |   |       |  
|------------------------------- |  | ---------------------- | ------ | ------------ |  | ------------ | ------ | - |  | - | ----- | -
|                                |  |                        |        |              |  | 52 Weeks    
|                                |  | Year Ended             |        | Year Ended   |  | Ended       
|                                |  | December 31,           |        | December 31, |  | December 30,
|                                |  | 2003                   |        | 2002         |  | 2001        
|                                |  |                        |        |              |  |             
|                                |  |                       
|                                |  | (Dollars in thousands)
|Reserve for losses on contracts |  |                        |        |              |  |              |        |   |  |   |       |  
|Balance, beginning of period    |  | $                      | 3,581  |              |  | $            | 3,484  |   |  | $ | 1,259 |  
|Acquisition of subsidiaries     |  |                        | 375    |              |  |              |       |   |  |   | 2,395 |  
|Utilized                        |  |                        | (2,112 | )            |  |              | (1,256 | ) |  |   | (890  | )
|Net charge to income            |  |                        | 2,682  |              |  |              | 1,119  |   |  |   | 743   |  
|Translation                     |  |                        | 361    |              |  |              | 234    |   |  |   | (23   | )
|                                |  |                        |        |              |  |              |        |   |  |   |       |  
|Balance, end of period          |  | $                      | 4,887  |              |  | $            | 3,581  |   |  | $ | 3,484 |  
|                                |  |                        |        |              |  |              |        |   |  |   |       |  

At December 31, 2003 and December 31,
2002, $0.9 million and $1.1 million respectively of
the reserve for losses on contracts was offset against unbilled
receivables and $4.0 million and $2.5 million
respectively 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)                                           
|2003                                                      |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Net service revenue                                       |         | $                                                      | 57,684 |            |   | $     | 67,035  |            |   | $ | 70,571 |            |  | $ | 77,192 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Income from operations                                    |         |                                                        | 8,571  |            |   |       | 12,941  |            |   |   | 11,864 |            |  |   | 12,770 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Income before income taxes                                |         |                                                        | 7,672  |            |   |       | 12,025  |            |   |   | 10,791 |            |  |   | 12,194 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Net income (loss)                                         |         | $                                                      | 7,377  |            |   | $     | 10,159  |            |   | $ | 9,564  |            |  | $ | 11,022 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Earnings (loss) per share                                 |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|                                                          | Basic   |                                                        | $      | 0.20       |   |       | $       | 0.28       |   |   | $      | 0.26       |  |   | $      | 0.30       | 
|                                                          | Diluted |                                                        | $      | 0.20       |   |       | $       | 0.27       |   |   | $      | 0.25       |  |   | $      | 0.29       | 
|Weighted average number of common shares
    outstanding: |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|                                                          | Basic   |                                                        |        | 36,081,610 |   |       |         | 36,352,511 |   |   |        | 36,505,169 |  |   |        | 37,159,079 | 
|                                                          | Diluted |                                                        |        | 37,366,463 |   |       |         | 37,624,192 |   |   |        | 37,720,565 |  |   |        | 38,336,966 | 
|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 | )          |   |   | 8,758  |            |  |   | 10,589 |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Net income (loss)                                         |         | $                                                      | (414   | )          |   | $     | (44,337 | )          |   | $ | 7,339  |            |  | $ | 9,403  |           
|                                                          |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|Earnings (loss) per share                                 |         |                                                        |        |            |   |       |         |            |   |   |        |            |  |   |        |           
|                                                          | 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 | 






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

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed no later than March 31, 2004.






|         |                        
|-------- | -----------------------
|Item 9A. | 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, and disclosing their conclusions about
the effectiveness of the disclosure controls and procedures
based on the review.

69



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| |                                                                
| | ---------------------------------------------------------------
| | 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.

There is a continuous process of identifying,
evaluating and managing the risks to which the Company is
exposed that has been in place throughout 2003. 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 analyzed 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 or audit of the annual financial
    statements and any internal control matters arising from such
    review or audit.                                                                                                                                                                                                                                                                         
|
| |  | 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
has an internal audit function and a formal plan is now in
place. The internal audit function has been outsourced to one of
the big four international accounting firms other than our
external independent auditors. The internal audit team reports
regularly to the Audit Committee and senior management.

Evaluation of Disclosure Controls and
Procedures

Based on their review of the disclosure controls
and procedures as of December 31, 2003, 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, 2003.

Code of Ethics

We maintain a code of ethics governing the
conduct of our business and behavior by our personnel. A copy of
this code may be obtained by sending a written request to
11000 Weston Parkway, Cary, North Carolina, 27513,
Attention: Martha Boyd.

70



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##### Table of Contents



Audit Committee Composition

Our audit committee is chaired by S. Louise
McCrary who is independent of management and fulfills the
criteria for qualification as a financial expert.

Additional Information

Copies of our annual reports on Form 10-K,
our quarterly reports on Form 10-Q and our current reports
on Form 8-K may be obtained free of charge through our
website at www.inveresk.com.




PART III






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

Except for information relating to our code of
ethics, as mentioned in Item 9A above, the information
required by this item is incorporated herein by reference to our
definitive proxy statement, which will be filed no later than
March 31, 2004.






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

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed no later than March 31, 2004.






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

Except for information relating to equity
compensation plans, as disclosed in Item 5 above, the
information required by this item is incorporated herein by
reference to our definitive proxy statement, which will be filed
no later than March 31, 2004.






|         |                                           
|-------- | ------------------------------------------
|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 no later than March 31, 2004.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accounting Fees and
    Services

The information required by this item is
incorporated herein by reference to our definitive proxy
statement, which will be filed no later than March 31, 2004.






|         |                                                                     
|-------- | --------------------------------------------------------------------
|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 29, 2003, including our press release announcing
our earnings information for the quarter ended
September 30, 2003, a transcript of a conference call held
on

71



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##### Table of Contents



October, 29, 2003, discussing the results
for the quarter ended September 30, 2003 and a slide
presentation given on October 29, 2003 with respect to the
results for the quarter ended September 30, 2003.


We filed an amended Current Report on
Form 8-K/ A, dated October 30, 2003 containing an
amended consent of independent auditors relating to the
consolidated financial statements of PharmaResearch Corporation.

We filed a Current Report on Form 8-K, dated
November 7, 2003 including our press release announcing a
proposed public offering of 10,000,000 shares of common
stock (with an additional 1,500,000 shares issuable upon
exercise of the underwriters over allotment option).

We filed a Current Report on Form 8-K, dated
November 20, 2003 including our press release announcing
the pricing of a public offering of stock.

We filed a Current Report on Form 8-K, dated
November 20, 2003 containing a copy of the form of
underwriting agreement expected to be used in connection with
the public offering.

We filed a Current Report on Form 8-K, dated
November 26, 2003 including our press release announcing
the closing of a public offering of 11,500,000 shares of
common stock.

72



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##### Table of Contents



SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange 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 and
    Treasurer

Date: February 20, 2004

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 20, 2004
|                                          
|/s/ D.J. PAUL E. COWAND.J. Paul E. Cowan   |  | Chief Financial Officer (Principal Financial
    Officer and Principal Accounting Officer) |  | February 20, 2004
|                                          
|/s/ ROLAND W. BOYDRoland W. Boyd           |  | Company Controller                                                                         |  | February 20, 2004
|                                          
|/s/ IAN P. SWORDIan P. Sword               |  | Chairman of the Board of Directors                                                         |  | February 20, 2004
|                                          
|/s/ JOHN URQUHARTJohn Urquhart             |  | Vice Chairman of the
    Board of Directors                                                |  | February 20, 2004
|                                          
|/s/ VANESSA C. L. CHANGVanessa C. L. Chang |  | Director                                                                                   |  | February 20, 2004
|                                          
|/s/ JOHN T. HENDERSONJohn T. Henderson     |  | Director                                                                                   |  | February 20, 2004
|                                          
|/s/ S. LOUISE MCCRARYS. Louise McCrary     |  | Director                                                                                   |  | February 20, 2004

73



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##### Table of Contents



EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                     
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | 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.*                                                                                       
|        | 21 | .1          |  | List of Subsidiaries.                                                                                                                                                                                               
|        | 31 | .1          |  | Rule 13a-14(a) Certification by Inveresk Research
    Group, Inc.s Chief Executive Officer, Walter S. Nimmo.                                                                                                       
|        | 31 | .2          |  | Rule 13a-14(a) Certification by Inveresk Research
    Group, Inc.s Chief Financial Officer,
    D.J. Paul E. Cowan.                                                                                                
|        | 32 | .1          |  | Section 1350 Certifications.                                                                                                                                                                                        



---



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



|  |                                                                                            
|- | -------------------------------------------------------------------------------------------
| | Incorporated by reference to our Form 10-K
    filing for the year ended December 31, 2002.