UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


------------------------


FORM
10-K





ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d)


OF
THE SECURITIES EXCHANGE ACT OF 1934


For
the fiscal year ended: December 31, 2008


Commission
File Number 0-33505





------------------------





LIFE
SCIENCES RESEARCH INC.


(Exact
name of registrant as specified in its Charter)








MARYLAND
              (State
      of Incorporation)
            
            52-2340150
              (IRS
      Employer Identification No.)PO
      BOX 2360, METTLERS ROAD,
              EAST
      MILLSTONE, NEW JERSEY
              (Address
      of Principal Executive Offices)
            
            08875-2360
              (Zip
      Code)





Registrant’s
telephone number, including area code:(732) 649-9961





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





Title
      of Each Class
            
            Name
      of Each Exchange on
              Which
      RegisteredVoting
      Common Stock $0.01 par value
            
            NYSE
      Arca





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








Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.





Yes o                                                      No
x
  Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes o                                                      No
x




Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.




Yes x                                                      
No 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 of this
Form 10-K.      x




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




Large accelerated
filer o                                                      Accelerated
filer  x
 Non-accelerated
filer   o                                                      Smaller
Reporting Company   o
 
 Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
  Yes o                                                      No
x




The
aggregate market value of the Voting Common Stock held by non-affiliates of the
Registrant was $283,654,054 on June 30, 2008 (based upon the last reported sales
price of the registrant’s common stock on the NYSE Arca exchange), the last
business day of Registrant’s most recently completed second fiscal
quarter.





Indicate
the number of outstanding shares of each of the Registrant's classes of common
stock as of the latest practicable date.





As of
March 11, 2009 the Registrant had outstanding 13,347,295 shares of Voting Common
Stock.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the Registrant's Definitive Proxy Statement for its 2009 Annual Meeting of
Stockholders scheduled to be held on May 21, 2009, which will be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2008, are incorporated by reference into Part III of this Annual Report on Form
10-K.  With the exception of the portions of the 2009 Proxy Statement
expressly incorporated into this Annual Report on Form 10-K by reference, such
document shall not be deemed filed as part of this Form 10-K.








TABLE
OF CONTENTS








ITEM
                
                PAGEPART
      I1.
                Business
                41A.
                Risk
      Factors
                171B.
                Unresolved
      Staff Comments
                222.
                Properties
                223.
                Legal
      Proceedings
                224.
                Submission
      of Matters to a Vote of Security Holders
                22PART
      II5.
                Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                236.
                Selected
      Consolidated Financial Data
                267.
                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                287A.
                Quantitative
      and Qualitative Disclosures About Market Risk
                408.
                Financial
      Statements and Supplementary Data
                429.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                869A.
                Controls
      and Procedures
                869B.
                Other
      Information
                86PART
      III10.
                Directors,
      Executive Officers and Corporate Governance
                8711.
                Executive
      Compensation
                9012.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                9013.
                Certain
      Relationships, Related Transactions, and Director
    Independence
                9114.
                Principal
      Accountant Fees and Services
                91PART
      IV15.
                Exhibits,
      Financial Statement Schedules
                92Signatures
                96




















Forward-Looking
Statements





In
addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements, including statements regarding product plans, future
growth and market opportunities which involve risks and uncertainties that could
cause actual results to differ materially from these forward-looking statements.
Factors that might cause or contribute to such differences include, but are not
limited to, those discussed under Item 1A, Risk Factors. You should carefully
review the risks described herein and in other documents the Company files from
time to time with the Securities and Exchange Commission (“SEC”), including the
Quarterly Reports on Form 10-Q to be filed in 2009. When used in this report,
the words “expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to” and similar
expressions, as well as statements regarding the Company’s focus for the future,
are generally intended to identify forward-looking statements. You should not
place undue reliance on these forward-looking statements which speak only as of
the date of this Annual Report on Form 10-K. The Company undertakes no
obligation to publicly release any revisions to the forward-looking statements
or reflect events or circumstances after the date of this document.





PART
I





ITEM
1.  BUSINESS








GENERAL
DEVELOPMENT OF BUSINESS





Life
Sciences Research, Inc. ("LSR") and Subsidiaries (collectively, the "Company")
is a global Contract Research Organization (“CRO”), offering worldwide
pre-clinical and non-clinical testing services for biological safety evaluation
research to the pharmaceutical and biotechnology, as well as the agrochemical
and industrial chemical companies.  The Company serves the rapidly
evolving regulatory and commercial requirements to perform safety evaluations on
new pharmaceutical compounds and chemical compounds contained within the
products that humans use, eat and are otherwise exposed to.  In
addition, the Company tests the effect of such compounds on the environment and
also performs work on assessing the safety and efficacy of veterinary
products.





As the
Company continues to build on improving fundamentals, it has the following
strategy and goals:





·
            To
      grow to significant profitability and improved return on investment for
      its shareholders.


·
            To
      be appreciated as the listening, understanding and reliable partner in
      creative compound development and safety assessment and to be the first
      choice for the industries it
serves.


·
            To
      provide its employees with the opportunity for individual development in a
      caring, rewarding and safe working
environment.


·
            To
      be recognized positively in the local communities in which it
      operates.





LSR was
incorporated on July 19, 2001 as a Maryland corporation. It was formed
specifically for the purpose of making a recommended all share offer (the
"Offer") for Life Sciences Research Ltd ("LSR Ltd") formerly Huntingdon Life
Sciences Group plc ("Huntingdon"). The Offer was made in October 2001 and the
merger was completed in March 2002.




In April
2002, LSR began trading its common stock on the US Over the Counter Bulletin
Board (“OTCBB”). From February 6, 2006 to December 21, 2006 it traded on the
Other OTC Market. Since December 22, 2006, it has traded on NYSE
Arca.









On June
14, 2005, the Company entered into and consummated purchase and sale agreements
with Alconbury Estates Inc. and Subsidiaries (collectively “Alconbury”) for the
sale and leaseback of the Company’s three operating facilities in Huntingdon and
Eye, England and East Millstone, New Jersey (the “Sale/Leaseback Transaction”).
Alconbury was newly formed in June 2005 and controlled by LSR’s Chairman and
CEO, Andrew Baker. The total consideration paid by Alconbury for the three
properties was $40 million, consisting of $30 million in cash and a five year,
$10 million variable rate subordinated promissory note, which Alconbury paid in
full on June 30, 2006, together with accrued interest of $0.6
million.  The proceeds from the Sale/Leaseback Transaction (plus
additional cash on hand) were used by the Company to pay in full its £22.6
million non-bank debt ($41.1 million based on exchange rates at the
time).





LSR's
executive office is based at the Princeton Research Center in East Millstone,
New Jersey.








HISTORY





Huntingdon
was originally incorporated in the UK in 1951 as a limited liability company to
provide contract research services to the UK pharmaceutical, agrochemical and
food industries. In 1964, it was acquired by the US company, Becton Dickinson.
Over the next 20 years, it successfully established itself as a leading UK
Contract Research Organization (“CRO”) with business across a number of sectors
and with a number of leading pharmaceutical and agrochemical
companies.





In 1995,
it acquired the toxicology business of APBI, which included laboratories in East
Millstone, New Jersey and Eye, England for a total consideration of $43 million.
The US business acquired operates as Huntingdon Life Sciences, Inc.





In the
first half of 1997, allegations were made relating to animal care and Good
Laboratory Practice (“GLP”) against Huntingdon's operating Subsidiaries in the
UK and US. Those allegations and the UK Government's subsequent statement in the
House of Commons in July 1997 about its investigation into those allegations
caused the cancellation of booked orders and a decline in new orders.
Significant operating losses and cash outflows resulted during the period from
mid 1997 through 1998. Given the medium to long term element of many of
Huntingdon's activities and the reluctance of customers to place new work until
its finances were stabilized, Huntingdon required a substantial injection of
financing to both initially restore confidence and then to fund operations
during the period until it returned to profitability.





On
September 2, 1998, a group of new investors, led by Andrew Baker, recapitalized,
refinanced and strengthened the Company, bringing in a new senior management
team.





Since the
involvement of the new investor group in 1998, the management team, led by
Andrew Baker and Brian Cass, believes that LSR has successfully addressed many
of the Company’s past difficulties. Relationships with customers have been
restored and sales have grown consistently at an encouraging rate.








DESCRIPTION
OF BUSINESS





The
Company provides pre-clinical and non-clinical biological safety evaluation
research services to many of the world’s leading pharmaceutical and
biotechnology companies, as well as many agrochemical and industrial chemical
companies.  The purpose of this safety evaluation is to identify risks
to humans, animals or the environment resulting from the use or manufacture of a
wide range of chemicals, which are essential components of the Company’s
customers' products.  The Company’s services are designed to meet the
regulatory requirements of governments around the world.








The
Company’s aim is to develop its business within these markets, principally in
the pharmaceutical sector, and through organic growth.  In doing so,
the Company expects to benefit from strong drug pipelines in the pharmaceutical
industry and a growing trend towards greater outsourcing as customers focus more
internal resources on research and increasingly look to variabilize their
development costs and reduce their development timelines.





The
Company's sales and marketing functions are specifically focused on two main
groups, pharmaceutical and biotechnology, and non-pharmaceutical
customers.  As much of the research activity conducted for these two
customer groups is similar, the Company believes it is appropriate,
operationally, to view this as one business.





Pharmaceutical
and Biotechnology





The
pharmaceutical research and development pathway is shown below:









The
Company performs non-clinical testing in support of the drug development
process, primarily work outsourced from the bio-pharmaceutical
industry.  Over 85% of the Company’s orders are derived from this
pharmaceutical sector.  Essentially all of this work is performed as a
result of regulatory requirements that seek to minimize the risks associated
with the testing, and ultimately use of these compounds in humans.





Pre-clinical
testing helps to evaluate both how the drug affects the body as well as how the
body affects the drug.  Utilizing advanced laboratory and
toxicological evaluations, this work helps assess safe and appropriate dose
regimens.  Other non-clinical testing can focus on identifying and
avoiding the longer-term cancer implications of exposure to the compound, or the
potential for possible reproductive implications, as well as assessing the
stability of pharmaceuticals under a variety of storage conditions.





The
Company views its non-clinical market as extending all the way beyond marketing
authorization, although the core market extends to “proof of concept” in man
(Phase 2A).  The Company has had collaborative relationships with a
number of Phase I clinical trial units and offers certain laboratory services in
support of clinical trials.  The Company also provides analytical
chemistry support for clinical trials, establishes the stability of
pharmaceuticals under varied storage conditions and undertakes batch testing of
marketed pharmaceuticals for product release.





The
Company has also actively pursued opportunities to extend its range of
capabilities supporting late stage drug discovery, focused around in vitro and in vivo models for lead
candidate drug characterization and optimization.  This growing range
of biological services is intended to position the Company to take advantage of
the increasing demand for a greater understanding of the physical, chemical and
biological properties of intended therapeutics prior to the commencement of
pre-clinical and clinical testing.





The
outsourced market for the late stage clinical trials (Phase 3 and beyond) is
also relevant to the Company.  While the Company does not preclude
entering this market in the future, it has no plan to do so in the foreseeable
future, as it is a very different business and one in which a number of major
companies are already firmly established.










Market
Growth





It is
estimated that the pharmaceutical industry annual drug development spending is
around $80 billion per year and has had a long term growth rate of roughly 10%
per annum.  Approximately 20% of this is devoted solely to
pre-clinical testing.  The Company believes that approximately 20-25%
of the pre-clinical spending is outsourced which means that the Company is today
competing in a market of as much as $3.5 billion.  While the Company
believes that this market will continue to grow for the foreseeable future, both
in absolute dollar amount and in the percentage of pre-clinical work that is
outsourced, it is currently experiencing what it expects is near term softness
in demand driven by a number of factors, including reorganizations and
reprioritization within pharmaceutical industry customers, and contraction in
spending by biotechnology customers who are facing a challenging financing
environment. Although the Company cannot predict how long this will cause below
normal bookings, or how long these factors will continue to depress growth in
the market for outsourced services, it believes that historical growth levels
should resume, due, among other things, to the following:





•
            The
      Company believes pharmaceutical companies will continue to increase the
      numbers of drugs in development. It is estimated there has been a 62%
      increase in the numbers of projects in pre-clinical development since 2000
      and a 22% increase since 2007 alone (Source: PharmaProjects). This may be
      due, at least in part, to one or more of the
  following:





•
            The
      need to replace earnings from drugs coming off patent. For example, for
      just the top 10 global pharmaceutical companies, an estimated 30% of their
      revenues today are from drugs that will lose their patent protection by
      the end of 2012. This exposes these drugs to price erosion due to the
      ability of other companies to produce cheaper generics of the same active
      ingredient.





•
            Increasing
      personalization of medicines. As scientific advances are increasingly able
      to identify patients who may, or may not, respond well to particular
      medical interventions, the population as a whole may be sub-divided into
      sub-populations of responders and non-responders for a specific medicine.
      This could have the effect of decreasing the market available for each
      individual medicine, but increasing the numbers of sub-populations that
      each require their own treatment.





•
            The
      Company believes that there will be an increasing trend of pharmaceutical
      companies outsourcing more of their development work to CROs. They may do
      this due to one, or more, of the
following:





•
            To
      reduce drug development costs and timelines by replacing their high-cost
      fixed infrastructure with the cheaper and more flexible services offered
      by CROs. This will enable them to focus more internal resource on
      discovery research in the search for new lead compounds.  It is
      increasingly thought likely that large-scale strategic outsourcing
      agreements between pharmaceutical companies and CROs will become more
      commonplace in the future.





•
            Anticipated
      decreasing pricing power in key markets. In most developed economies aging
      populations are putting increasing pressures on healthcare budgets. One of
      the options considered by the governments of these countries is to, in
      turn, put pressure on pharmaceutical companies to lower the cost of their
      medicines.





•
            The
      process of consolidation within the pharmaceutical industry is also
      accelerating the move towards outsourcing.  While there is some
      short-term negative impact from mergers and acquisitions, with development
      pipelines being rationalized and a focus on integration rather than
      development, longer-term resources are increasingly invested in in-house
      facilities for discovery and lead optimization rather than development and
      regulatory safety evaluation.  The Company’s own research,
      supported by comments from the major competitors in this space, suggest
      that none of the major global pharmaceutical companies are currently
      investing in significant new safety evaluation
      facilities.  Undertaking development work and safety evaluation
      is the Company's core business.










•
            For
      certain, specialized types of testing, there is now likely a greater pool
      of experience and expertise within CROs than there is within
      pharmaceutical customers. In discussions with the Company’s customers,
      this has been the case for some time for specialized routes of
      administration of medicines (for example, medicines delivered via the
      lungs or infused over a long period into the bloodstream) and may be
      becoming the case in the growing field of development of biological
      medicines. For these latter medicines, an understanding of the complex
      safety testing regimes and technical specializations involved are
      increasingly found within CROs.








As a
result of these, amongst other factors, it is believed that the overall market
for outsourced services is estimated to be growing at a rate at least equal to
the growth of research and development expenditure by the pharmaceutical
industry.








Non-Pharmaceutical





The
Company currently generates approximately just under 15% of its orders from
safety and efficacy testing of compounds for the agrochemical, industrial
chemical, and veterinary and food industries.  During 2008,
non-pharmaceutical orders were above the average for the past five years, but
this represents a declining percent of total orders over the period, which is
expected to continue.  The work involved has many similarities, and
often uses many of the same facilities, equipment, and scientific disciplines,
to those employed in pre-clinical testing of pharmaceutical
compounds.





The
Company’s business in these areas is again driven by governmental regulatory
requirements.  The Company's services address safety concerns
surrounding a diverse range of products, spanning such areas as agricultural
herbicides and other pesticides, medical devices, veterinary medicines, and
specialty chemicals used in the manufacture of pharmaceutical intermediates, and
manufactured foodstuffs and products.  The Company believes it is a
clear market leader in programs designed to assess the safety, environmental
impact and efficacy of agricultural chemicals as well as in programs to take new
specialty chemicals to market.





Market
Growth





It is
estimated that the worldwide market for outsourced contract research from
non-pharmaceutical industries is approximately $300 million.  The
growth in the non-pharmaceutical business is driven both by the introduction of
novel compounds, and by legislation concerning the safety and environmental
impact of existing products.





The
Company believes that the non-pharmaceutical side of the business is likely to
experience relatively low growth in the next few years, although a number of
market subdivisions included in this broad area of business have the potential
for some growth in the future due to the following:














·
            Continued
      implementation of testing requirements for ‘high production volume’ (HPV)
      chemical products in the US and
Japan.


·
            Introduction
      of new legislation for the notification of new and existing chemicals that
      are in use within the European Union (“EU”)
  (REACH).


·
            Safety
      testing of specific formulations of crop protection products on a
      country-by-country basis within the European Union (Council Directive
      91/414/EEC).


·
            More
      stringent regulations affecting compounds, which have the potential to
      adversely affect the environment, (e.g. biocides and endocrine
      disrupters).


·
            Developments
      of new markets such as China and the EU accession
    countries.


·
            A
      modest increase in R&D by the world’s major agrochemical companies as
      they satisfy the need for more food, higher quality food, animal feed and
      biofuels.





Safety
testing in these industries is also more likely to be outsourced as, unlike the
pharmaceutical industry, fewer companies have comprehensive internal laboratory
facilities.  While overall R&D is not growing, the Company
believes that increased outsourcing could provide business opportunities in this
market.





Know-how
and Patents





The
Company believes that its proprietary know-how plays an important role in the
success of its business.  Where the Company considers it appropriate,
steps are taken to protect its know-how through confidentiality agreements and
protection through registration of title or use.  However, the Company
has no patents, trademarks, licenses, franchises or concessions which are
material and upon which any of the services offered are dependent.





Quality
Assurance





The
Company maintains extensive quality assurance programs, designed to ensure that
all testing programs meet customer requirements, as well as all relevant codes,
standards and regulations.  Periodic inspections are conducted as
testing programs are performed to assure adherence to project specifications or
protocols and final reports are extensively inspected to ensure consistency with
data collected.





Customers





The
Company offers worldwide pre-clinical and non-clinical testing for biological
safety evaluation research services to human and veterinary pharmaceutical and
biotechnology companies, as well as agrochemical, industrial chemical and food
companies.  In 2008 the Company received orders from companies ranging
from the largest in their industries to small and start-up
organizations.  43 customers placed over $1 million of orders with the
Company and the ten largest customers accounted for approximately 45% of
orders.  No single customer accounted for more than 10% of net
revenues for 2008.





For net
revenues from customers, assets attributable to each of the Company’s
geographical business areas and a geographical analysis of net revenues from
customers (based on the location of the customer) for each of the last three
fiscal years, see Note 14 to the audited consolidated financial statements
included elsewhere in this Annual Report.





Backlog





The
Company’s net revenues are earned under contracts ranging in duration from a few
months to three years.  Net revenue from these contracts is recognized
over the term of the contract as services are rendered.  The Company
maintains an order backlog to track anticipated net revenues for work that has
yet to be earned.  Aggregate backlog at December 31, 2008was $142 millioncompared to $190
million at December 31, 2007, which represents a decrease of 5% exclusive of the
impact of foreign exchange.








Competition





Competition
in both the pharmaceutical and non-pharmaceutical market segments ranges
from:


·
            in-house
      R&D divisions of large pharmaceutical, agrochemical and industrial
      chemical companies who perform their own safety assessments;
      to


·
            “full
      service” providers – CROs like LSR, who provide a full range of
      non-clinical safety services to the industries (such as Covance, Inc. and
      Charles River Laboratories, Inc.);
and


·
            “niche”
      suppliers focusing on specific services, geographic areas, or industries
      (such as CIT, RTI, Sequani).





Research
and Development





In
addition to experience gained through research activities performed for
customers, the Company engages in research in order to respond to the changing
needs of customers and to maintain competitiveness within the industries in
which it operates.  Most of the research undertaken, however, is an
inherent part of the research carried out on behalf of customers in completing
studies and as such it is not identified separately.





Regulatory
agencies





Services
provided by the Company are used to support pharmaceutical, biotechnology,
chemical or agrochemical product approval applications world wide. Its
laboratories are therefore subject to routine formal inspections by appropriate
regulatory and supervisory authorities, as well as by representatives from
customer companies.  The Company is regularly inspected by US and UK
governmental agencies because of the number and complexities of the studies it
undertakes.  In 1979, the US FDA promulgated the Good Laboratory
Practice (“GLP”) regulations, defining the standards under which biological
safety evaluations are to be conducted.  Since that time the
Organisation for Economic Co-Operation and Development (OECD) and the
International Congress on Harmonisation (ICH) have implemented international
principles which, together with compliance monitoring and mutual data acceptance
programs ensure that laboratory and clinical work is conducted to the highest
standards.





The
Company’s pre-clinical and clinical services are subject to these international
standards for the conduct of research and development studies that are embodied
in the regulations for GLP, Good Clinical Practice (GCP) and Good Manufacturing
Practice (GMP).  The FDA and other National and international
regulatory authorities require the test results submitted to such authorities be
based on studies conducted in accordance with GLP, GCP or GMP.  The
Company must also maintain records and reports for each study for specified
periods for auditing by the study sponsor and by any regulatory
authorities.





The
Company’s operations in the UK are regulated by the Animals (Scientific
Procedures) Act 1986.  This legislation, administered by the UK Home
Office, provides for the control of scientific procedures carried out on animals
and regulation of their environment.  Personal licenses are issued by
the UK Home Office to personnel who are competent to perform regulated
procedures and each program of work must be authorized in advance by a Project
Licensee.  Premises where procedures are carried out must also be
formally designated by the UK Home Office.  Consultations and
inspections are regularly undertaken in order to ensure continued compliance
with regulatory and legislative requirements, the Company had 20 such visits in
2008.





The
Company’s laboratory in the US is subject to the United States Department of
Agriculture (“USDA”) Animal Welfare Regulations (Title 9, Code of Federal
Regulations, Subchapter A).  The laboratory is regularly inspected by
USDA officials for compliance with these regulations.  Compliance is
assured through an Institutional Animal Care and Use Committee, comprising staff
from a broad range of disciplines within the Company and including external
representation.  Furthermore, in the US there is a voluntary
certification program run by an independent and internationally recognized
organization, the Association for Assessment and Accreditation of Laboratory
Animal Care (“AAALAC”).  The Company's laboratories in both the US and
UK are accredited under this program.








At each
of its research centers, the Company ensures the availability of suitably
experienced and qualified veterinary staff backed by a 24-hour call out
system.





Compliance
with Environmental Regulations





While the
Company conducts its business to comply with certain environmental regulations,
compliance with such regulations does not impact significantly on its earnings
or competitive position.  Management believes that its operations are
currently in material compliance with all applicable environmental
regulations.





Animal
Rights Activism





During
the last decade there was an escalation in animal rights activity that targeted
biomedical research internationally including academic, government and
commercial organizations. As part of this increase a new campaign group, Stop
Huntingdon Animal Cruelty, or SHAC, was formed in the UK in November 1999.
SHAC's broad aim is to end all animal research, while its immediate and publicly
stated goal at that time was to “shut HLS down within three years”. During 2000
this campaign broadened and intensified with a range of Huntingdon’s
stakeholders becoming targets, including staff, directors, institutional and
individual shareholders, customers, financial institutions and other suppliers.
The protest activities took many forms, both legal and illegal, such as
demonstrations outside the Company's facilities and in local towns; distribution
of propaganda; abuse, intimidation and threats directed at many of the
stakeholders listed above; and, in occasional cases, acts of
violence.





During
2002, the incidents of violent protest against the Company and its staff
diminished in the UK.  However, activists focused their protest activities
on the Company's financial institutions in unsuccessful attempts to deprive
Huntingdon of its bank financing and to stop the US re-domiciling transaction.
During this period, due in large part to Huntingdon’s successful US
re-domiciling, the activities of SHAC and other animal rights groups expanded to
and intensified in the US, focusing on a similar range of stakeholders as had
been targeted in the UK.





To
counter this animal rights campaign the Company adopted a strategy of openness
and direct co-operation with all its stakeholders, the media and the local
communities. The Company took every opportunity to promote the value of the work
it does in helping its customers bring to market safe and effective new
medicines and other products. Members of the media, national bodies, schools and
local groups visited the Company, toured the laboratories and animal facilities,
and talked with staff. These visitors have been consistently impressed with the
Company's ethics, its standards of animal welfare and the professionalism of its
staff.  As a consequence of the Company's constructive, high profile public
relations activities and the irrationality of the animal rights messages, media
coverage became increasingly positive towards the Company. Additionally, both in
the US and the UK, the media has consistently condemned the illegal protest
actions of the SHAC campaign.





Initiated
by, and in conjunction with, the Company's leadership on this issue, there has
been a marked increase in communication campaigns designed to inform the general
public. These have focused on the essential nature of animal based research and
the benefits of such research to society, the high standards of animal welfare
demanded and the commitment to developing non-animal alternatives. The Company’s
customers' recognition of its scientific and professional integrity and
leadership was evident in the granting of the prestigious UK Pharma Industry
Individual Achievement Award to Brian Cass, the Company's President and Managing
Director, in October 2001. In further recognition of his, and the Company’s,
contribution to science and professional achievements, Mr. Cass was appointed as
a Commander in the Most Excellent Order of the British Empire (“CBE”) in June
2002. The highly prestigious CBE is awarded on merit, for exceptional
achievement or service; it is recommended by the Prime Minister of Great
Britain, but is approved by the Queen. UK pro-research groups such as the
Research Defence Society and the Coalition for Medical Progress/ Understanding
Animal Research have added to the communications effort to spread the message of
the value of animalresearch. During 2006 a public petition in
support of animal research, dubbed the Peoples Petition, gathered tens of
thousands of signatures, including that of former Prime Minister Tony
Blair.








UK
Actions





In the UK
the Company successfully lobbied politicians and the British parliament, with
great support from industry trade bodies such as the Association of the British
Pharmaceutical Industry, Bioindustry Association, and Research Defence Society.
As a result, the British Government made very positive statements in support of
the Company specifically and of biomedical research using animals in general. It
has also been extremely critical of the illegal activities of some animal rights
supporters. The Government adopted legislation to offer more protection to those
targeted and encouraged the police and courts to ensure the law is enforced. Of
particular note, was the introduction in April 2005, of the Serious Organised
Crime and Police Act (SOCPA), with new powers to deal with protests outside
homes, harassment and economic damage. Moreover in July 2005 that Act was
further amended to introduce the new offense of “interference with business
contracts so as to damage an animal research organization”, commonly referred to
as the “economic terrorism law”. These new measures were designed to tackle
secondary and tertiary targeting by animal rights extremists, this is the
intimidation of organizations doing business with animal research facilities.
Utilizing these new laws, UK law enforcement significantly increased its
investigations and prosecutions of animal rights extremists.





On May
1,  2007, following years of investigation, the UK police mounted a
coordinated operation, dubbed “Operation Achilles” involving hundreds of
officers which resulted in the arrest of 32 individuals from across the country,
all suspected of being involved with criminal activity associated with animal
rights extremism. A number of those arrested were charged with conspiracy to
blackmail, including the three top leaders of SHAC, while others were charged
with a range of SOCPA related offences and burglary. Three of those charged with
conspiracy to blackmail pleaded guilty, including two of the SHAC leaders, and
the trial of the other five defendants began in September 2008. Four of the five
were found guilty in December 2008, including the third leader of SHAC, and
sentencing took place in January 2009. All seven received prison sentences - the
three leaders of SHAC received either 11 or 9 years in prison and the remaining
four defendants between 8 and 4 years.  Seven other activists charged
with SOCPA related offences and burglary will be tried in
criminal  court in July 2009. This investigation, the weight of
evidence presented in court, the guilty pleas and verdicts, and the sentences
has affected many of those involved in organizing SHAC and other UK animal
rights campaigns, as a result the level of extremist activity throughout the UK
has decreased dramatically.





In
parallel with the introduction of new UK legislation the Company used the civil
route to protect itself and its staff. In April 2003, the Company obtained a
groundbreaking legal injunction from the London High Court of Justice protecting
its employees against harassment from SHAC and similar animal rights activists.
This order, obtained under the Protection from Harassment Act, bans protesters
from approaching within 50 yards of employees’ homes and sets up similar
exclusion zones around the Company’s two UK research centers. Several months
later, a group of five international Japanese pharmaceutical companies followed
a similar course, obtaining protective injunctions for their employees who were
being harassed. Since then approximately two dozen other organizations similarly
targeted by animal rights extremists have obtained injunctions of this type.
Some were targeted for their perceived relationship with the Company; others for
their own independent animal research activities. Notably, during 2004, Oxford
University became the target of animal rights extremists attempting to halt the
construction of an animal research facility. The University successfully
obtained a broad-ranging injunction against such protests which was most
recently expanded in February 2008.










US
Actions





Although
the animal rights movement is less developed in the US and appears to enjoy less
public support than in the UK, the Company is addressing it proactively with
actions similar to those it has utilized in the UK. These steps include a
strategy of openness and media co-operation; legislative and regulatory lobbying
in association with industry trade bodies such as Americans for Medical
Progress, National Association for Biomedical Research and the Foundation for
Biomedical Research; and legal actions including close cooperation with law
enforcement authorities at all levels. For example, following incidents of
vandalism associated with home protests against the Company's US employees, the
Company obtained orders of the New Jersey Superior Court, the New York Supreme
Court and the California Supreme Court placing restrictions on both home
protests and protests at the Company’s Princeton Research Center by animal
rights activists. All of these court orders remain in effect. During 2002
criminal indictments were brought against SHAC extremists in New York City and
felony convictions, including prison terms, have been handed down. Legislation
was enacted in May 2002 which significantly increased the penalties under the
Federal Animal Enterprise Terrorism Act for acts of vandalism against medical
research and animal based research facilities. In October 2005, legislation was
introduced to expand the Animal Enterprise Terrorism Act to among other things,
address secondary and tertiary targeting. That legislation was signed into law
by President Bush on November 27, 2006. Its enactment has resulted in a decline
in criminal animal extremist activity.




In May
2004, seven leading US animal rights extremists were arrested and criminally
indicted by the New Jersey US Attorney’s Office on federal charges of animal
enterprise terrorism, interstate stalking and conspiracy to engage in interstate
stalking. An additional criminal charge of conspiracy to anonymously utilize a
telecommunications device to abuse, threaten and harass persons was added to the
indictment in September 2004. On March 2, 2006, SHAC-USA and the six individual
defendants remaining in the case were convicted on all counts. The six
individual defendants were sentenced to terms of between one year and one day
and six years in prison, which they began serving in October 2006. They were
also ordered to jointly pay restitution to the Company in the amount of
$1,000,000.




Management
recognizes that there are, and expects that there will always be, individuals
with strong views on animal rights. Such people believe that animals should not
be used in any way for the betterment of humanity, including biomedical
research. Regardless of whether this political issue directly impacts the
Company’s business, the Company remains committed to its strategy of informing
the public of the value of biomedical research using animals, of advancing
animal welfare, and of supporting its customers’ desire to maximize the safety
of vital new medicines and other products being developed for the benefit of
society.








Human
Resources





The
Company’s most important resource is its people.  They have created
the Company’s knowledge base, its expertise and its excellent scientific
reputation.  Scientists from the Company are represented at the
highest levels on several US, UK and international committees on safety and
toxicity testing.  Several staff members are considered leaders in
their respective fields.  They frequently lecture at scientific
seminars and regularly publish articles in scientific journals.  This
recognition has resulted in frequent assignments from customers for consultation
services.  Some of the Company's staff serve by invitation or election
on a number of scientific and industrial advisory panels and groups of certain
organizations and agencies such as the FDA, the EPA, the UK Department of
Health, and the World Health Organization.








To ensure
that this experience and expertise is transmitted throughout the organization,
the Company conducts training programs.  For example, the Company's
study director training programs train graduate staff in all phases of
toxicology.  Also, in conjunction with the Institute of Animal
Technology, the Company maintains what it believes to be one of the largest
animal technician training programs in the world.  The Company employs
approximately 348 licensed personnel at any one time.





The
number of employees in the Company at December 31, 2008 and 2007 were as
follows:





2008
                  
                  2007US
                  
                  333
                  
                  309UK
                  
                  1,303
                  
                  1,313Japan
                  
                  12
                  
                  121,648
                  
                  1,634





Management
and Labor Relations





The
Company’s labor force is non-union and there has never been any disruption of
the business through strikes or other employee action.  The Company
regularly reviews its pay and benefits packages and believes that its labor
relations, policies and practices and management structure are appropriate to
support its competitive position.








Executive
Officers and Directors of the Registrant





The
Company’s executive officers and directors as of July 31, 2008 were as
follows:





Name
                  Age
                  Position
      within the CompanyAndrew
      Baker
                  60
                  Director,
      Chairman of the Board and Chief Executive OfficerGabor
      Balthazar
                  67
                  DirectorMark
      Bibi
                  50
                  General
      Counsel and SecretaryBrian
      Cass
                  61
                  Director,
      Managing Director/PresidentJulian
      Griffiths
                  56
                  Vice
      President of OperationsAfonso
      Junqueiras
                  52
                  DirectorRichard
      Michaelson
                  57
                  Chief
      Financial OfficerYaya
      Sesay
                  66
                  Director





(a)
            Identification
      of Directors and Executive Officers





Andrew Baker became a
director and Chairman and Chief Executive Officer of LSR on January 10,
2002.  He was appointed to the Board of Huntingdon as Executive
Chairman in September 1998.  He is a chartered accountant and has
operating experience in companies involved in the delivery of healthcare
ancillary services.  He spent 18 years until 1992 with Corning
Incorporated (“Corning”) and held the posts of President and CEO of MetPath
Inc., Corning’s clinical laboratory subsidiary, from 1985 to 1989.  He
became President of Corning Laboratory Services Inc. in 1989, which at the time
controlled MetPath Inc. (now trading as part of Quest Diagnostics Inc.), and
Hazleton Corporation, G.H.Besselaar Associates and SciCor Inc., all three now
trading as part of Covance Inc.  Since leaving Corning in 1992, Mr.
Baker has focused on investing in and developing companies in the healthcare
sector including Unilab Corporation, a clinical laboratory services provider in
California, and Medical Diagnostics Management, a US based provider of radiology
and clinical laboratory services to health care payers.  In 1997, he
formed Focused Healthcare Partners (“FHP”), an investment partnership that acts
as general partner for healthcare startup and development
companies.








Gabor Balthazar became a
director of LSR on January 10, 2002.  He was appointed to the Board of
Huntingdon as the Senior Independent Non-Executive Director in March
2000.  He has been active in international marketing and management
consulting for almost 30 years.  He was a founding Board member of
Unilab Corporation, serving as President from 1989 to 1992, and continuing to
sit on Unilab’s Board until November 1999.  From 1985 to 1997, Mr.
Balthazar served as a consultant to Frankfurt Consult, the merger/acquisition
subsidiary of BHF-Bank, Frankfurt, Germany and to Unilabs Holdings SA, a Swiss
clinical laboratory testing holding company, from 1987 to 1992.  He is
a graduate of the Columbia Law School and the Columbia Business School in New
York City.





Mark Bibibecame Secretary
and General Counsel of LSR effective July 28, 2005.  Prior thereto he
served as General Counsel of LSR and Huntingdon Life Sciences Inc. from April 1,
2002.  He served as Executive Vice President, Secretary and General
Counsel of Unilab Corporation, a clinical laboratory testing company based in
Los Angeles, California from May 1998 to November 1999 and as Vice President,
Secretary and General Counsel of Unilab from June 1993 to May
1998.  Prior thereto, Mr. Bibi was affiliated with the New York City
law firms, Schulte Roth & Zabel and Sullivan & Cromwell.





Brian Cass, FCMA, CBE, became
a director and Managing Director/President of LSR on January 10,
2002.  He was appointed to the Board of Huntingdon as Managing
Director/Chief Operating Officer in September 1998.  Prior to joining
Huntingdon he was a Vice President of Covance Inc. and Managing Director of
Covance Laboratories Ltd., (previously Hazleton Europe Ltd) for nearly 12 years,
having joined the company in 1979 as Controller.  Brian Cass worked at
Huntingdon Research Center between 1972 and 1974 and has previous experience
with other companies in the electronics and heavy plant
industries.  He has also held directorships with North Yorkshire
Training & Enterprise Council Ltd and Business Link North Yorkshire
Ltd.  In June 2002, Mr. Cass was also appointed as a Commander in the
Most Excellent Order of the British Empire (CBE).





Julian Griffiths MA, FCA, has
served as Vice President of Operations of LSR since July 28,
2005.  Prior thereto he was Director of Operations of Huntingdon from
April 2003.  He was appointed to the Huntingdon Board as Finance
Director in April 1999 and Secretary in February 2000.  He served as a
director of LSR from January 10, 2002 to June 11, 2002.  Prior to
joining Huntingdon he was most recently Vice President of Analytical Services in
the European pre-clinical division of Covance Inc., having spent nine years as
Vice President of Finance in the same organization.  Prior to that he
held various positions with KPMG.





Afonso Junqueirasbecame a
director of LSR on January 15, 2003.  He is a civil engineer and has
been President and a director of a South American private civil engineering firm
since 1997.





Richard Michaelson became
Chief Financial Officer and Secretary of LSR effective January 10, 2002 and has
been Chief Financial Officer since July 28, 2005.  Mr. Michaelson was
Director of Strategic Finance of Huntingdon from September 1998 to December
2001.  He served as Senior Vice President of Unilab Corporation, a
clinical laboratory testing company based in Los Angeles, California, from
September 1997 to December 1997, Senior Vice President-Finance, Treasurer and
Chief Financial Officer of Unilab from February 1994 to September 1997, and Vice
President-Finance, Treasurer and Chief Financial Officer of Unilab from November
1993 to February 1994.  Mr. Michaelson also served as Vice President
of Unilab beginning in October 1990.  Mr. Michaelson joined MetPath,
Inc., the clinical laboratory subsidiary of Corning Incorporated, in 1980 and
served as Vice President of MetPath from 1983 and Treasurer of Corning Lab
Services, Inc. from 1990 through, in each case, September 1992.  He
currently serves as a director of Huntsman Corporation.








Yaya Sesay, served as a
senior government official of an African nation for approximately 25 years,
culminating in his service as Financial Secretary of the Ministry of Finance for
three years.  For the past five years, Mr. Sesay has been an
international businessman with an interest in the development of pharmaceutical
products.





The
Articles of Amendment and Restatement of LSR provide that the directors shall be
not less than one in number and there shall be no maximum number of
directors.  Any director appointed by the board of directors holds
office only until the next following annual meeting, at which time he shall be
eligible for re-election by the stockholders.Directors may be
removed from office only for cause.





No
director or executive officer has a family relationship with any other director
or executive officer.





FINANCIAL
INFORMATION ABOUT GEOGRAPHIC AREAS





For a
discussion of geographic areas, please see “Geographical Analysis” beginning on
page 35 and “Geographical Analysis” beginning on page 82.





AVAILABLE
INFORMATION





The
Company’s website is located at www.lsrinc.net.  The
Company posts on its website its filings with the Securities and Exchange
Commission (“SEC”) including those on Form 10-K, Form 10-Q and Form
8-K.  The reference to the Company’s Internet website does not
constitute incorporation by reference of the information contained on or
hyperlinked from the Internet website and should not be considered part of this
document.





The
public may read and copy any materials the Company files with the SEC at the
SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C.
20549.  The public may obtain information on the operation of the
Public Reference Rooms by calling the SEC at 1-800-SEC-0330.  The SEC
also maintains an Internet website that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the SEC.  The SEC’s website is located at www.sec.gov.





ITEM
1A.  RISK FACTORS





This
section discusses various risk factors that are attendant to the Company’s
business and the provision of its services,many of which are outside of the
Company’s control.  If the events outlined below were to occur
individually or in the aggregate, the Company’s business, results of operations,
financial condition, and cash flows could be materially adversely
affected.  The risks and uncertainties outlined below are not the only
ones facing the Company.





Changes
in government regulation or in practices relating to the pharmaceutical industry
could decrease the need for the services the Company provides





Governmental
agencies throughout the world, but particularly in the United States, strictly
regulate the drug development process.  The Company’s business
involves helping pharmaceutical and biotechnology companies navigate the
regulatory drug approval process.  Changes in regulation, such as a
relaxation in regulatory requirements or the introduction of simplified drug
approval procedures, or an increase in regulatory requirements that the Company
has difficulty satisfying or that make its services less competitive, could
eliminate or substantially reduce the demand for the Company’s
services.  Also, if government were to introduce measures to contain
drug costs or pharmaceutical and biotechnology company profits from new drugs,
the Company’s customers may spend less, or reduce their growth in spending on
research and development.





Failure
to comply with applicable governmental regulations could harm the Company’s
business





As a
company in the contract research industry, the Company is subject to a variety
of governmental regulations, both in the US and the UK, relating to animal
welfare and the conduct of its business.  Failure by it to comply with
such laws and regulations could result in material liabilities, the suspension
of licenses or a material adverse effect on its business or financial
condition.  In addition, these laws and regulations could
significantly restrict the Company’s ability to expand its facilities or require
it to acquire costly equipment or incur other material costs to comply with
regulations.





The
Company depends on the pharmaceutical and biotechnology industries





The
Company’s net revenues depend greatly on the expenditures made by the
pharmaceutical and biotechnology industries in research and
development.  Accordingly, economic factors and industry trends that
affect the Company’s customers in these industries also affect its
business.  For example, the availability of financing from the capital
markets to the biotechnology industry, especially small or non-revenue producing
companies, can have a material impact on their ability to fund development of
their compounds. Also, at any given time, pharmaceutical customers can choose to
allocate their R&D expenditures more heavily towards clinical testing than
non-clinical safety testing that the Company performs. As well, if health
insurers were to change their practices with respect to reimbursements for
pharmaceutical products, the Company’s customers may spend less, or reduce their
growth in spending on research and development.





Pharmaceutical
industry consolidation may negatively impact revenues





The
process of consolidation within the pharmaceutical industry should accelerate
the move towards outsourcing work to contract research organizations such as the
Company in the longer term as resources are increasingly invested in in-house
facilities for discovery and lead optimization, rather than development and
regulatory safety evaluation.  However, in the short term, there is a
negative impact with development pipelines being rationalized and a focus on
integration rather than development.  This can have a material adverse
impact on the Company’s net revenues and net income.











The
Company competes in a highly competitive market





Competition
in both the pharmaceutical and non-pharmaceutical market segments ranges from
in-house research and development divisions of large pharmaceutical,
agrochemical and industrial chemical companies, who perform their own safety
assessments, to contract research organizations like the Company who provide a
full range of services to the industries and niche suppliers focusing on
specific services or industries.





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;


·
            price;


·
            technological
      expertise and efficient drug development processes;
  and


·
            ability
      to acquire, process, analyze and report data in a time-saving, accurate
      manner.





The
Company has traditionally competed effectively in the above areas, but there can
be no assurance that it will be able to continue to do so.  If the
Company fails to compete successfully, its business could be seriously
harmed.





The
Company may not be able to successfully develop and market or acquire new
services





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





The
Company may expand its business through acquisitions





Although
acquisitions do not play a material role in the Company’s near term growth
strategy, the Company may expand its business through
acquisitions.  Factors which may affect its ability to grow
successfully through acquisitions include:





·
            difficulties
      and expenses in connection with integrating the acquired companies and
      achieving the expected benefits;


·
            diversion
      of management’s attention from current
  operations;


·
            the
      possibility that the Company may be adversely affected by risk factors
      facing the acquired companies;


·
            acquisitions
      could be dilutive to earnings, or in the event of acquisitions made though
      the issuance of the Company’s common stock to the shareholders of the
      acquired company, dilutive to the percentage of ownership of the Company’s
      existing stockholders;


·
            potential
      losses resulting from undiscovered liabilities of acquired companies not
      covered by the indemnification the Company may obtain from the
      seller;


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


·
            loss
      of key employees of the acquired
companies.














The
Company’s non-US locations account for a majority of its revenues, making the
Company exposed to risks associated with operating internationally





Approximately
77% of the Company’s net revenues are generated by its facilities outside the
United States.  As a result of these foreign sales and facilities, the
Company’s operations are subject to a variety of risks unique to international
operations, including the following:





·
            adverse
      changes in value of foreign currencies against the US dollar in which
      results are reported;


·
            import
      and export duties and value-added
taxes;


·
            import
      and export regulation changes that could erode profit margins or restrict
      exports;


·
            potential
      restrictions on the transfer of funds;
and


·
            the
      burden and cost of complying with foreign
laws.





The
Company is exposed to exchange rate fluctuations and exchange
controls





The
Company’s long term debt is primarily denominated in US dollars whereas the
Company’s functional currency is the UK pound sterling, which results in the
Company recording other income/loss associated with the debt as a function of
relative changes in foreign exchange rates.





The
Company operates on a world-wide basis and generally invoices its customers in
the currency of the country in which it operates.  Thus, for the most
part, exposure to exchange rate fluctuations is limited as sales are denominated
in the same currency as costs.  Trading exposures to currency
fluctuations do occur as a result of certain sales contracts, performed in the
UK for US customers, which are denominated in US dollars and contribute
approximately 8% of total net revenues.  Management has decided not to
hedge against this exposure.





As the
Company operates on an international basis, movements in exchange rates,
particularly against sterling, can have a significant impact on its price
competitiveness vis a vis competitors who trade in currencies other than
sterling or dollars.





The
Company is reliant upon debt provided by third party lenders





The
Company has approximately $78 million of outstanding debt.  $57
million of this debt is due on March 1, 2011 and the remaining debt is
represented by capital leases, primarily related to the sale and leaseback of
the Company’s facilities.  If the Company is unable to pay or
refinance this debt when it becomes due, or to pay its carrying costs on such
debt in the form of interest, the Company could face a default under the terms
of its loan agreement.  A variety of factors, including worsening
financial performance, failure to comply with financial covenants and pressure
from animal rights extremists, could make it difficult to pay or refinance this
debt.





The
Company’s quarterly operating results may vary





The
Company’s operating results may vary significantly from quarter to quarter and
are influenced by factors over which it has little control such as:





·
            exchange
      rate fluctuations;


·
            the
      commencement, completion, postponement or cancellation of large
      contracts;


·
            the
      progress of ongoing contracts; and


·
            changes
      in the mix of its services.





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











The
Company’s contracts are generally terminable on little or no
notice.  Termination of a large contract for services or multiple
contracts for services could adversely affect the Company’s revenue and
profitability





In
general, the Company’s customers may terminate the agreements that they enter
into with the Company or reduce the scope of services under these contracts upon
little or no notice.  Contracts may be terminated for various reasons,
including:





·
            unexpected
      or undesired study results;


·
            production
      problems resulting in shortages of the drug being
  tested;


·
            adverse
      reactions to the drug being tested;


·
            regulatory
      restrictions placed on the drug or compound being tested;
    or


·
            the
      customer’s decision to forego or terminate a particular
    study.





Because
most of the Company’s pre-clinical revenues are from fixed price contracts,
these contracts may be subject to under-pricing and cost overruns





The
majority of the Company’s contracts with its customers are fixed price contracts
creating the risk of cost overruns under these contracts.  The Company
typically has some flexibility under these contracts to adjust the price to be
charged under these contracts if it is asked to provide additional
services.  If the Company did have to bear significant costs of
under-pricing or cost-overruns under these contracts, its business, financial
condition and operating results could be adversely affected.





The
Company depends on its senior management team, and the loss of any member may
adversely affect its business





The
Company believes its success will depend on the continued employment of its
senior management team, especially Andrew Baker (Chairman and CEO) and Brian
Cass (President and Managing Director).  If one or more members of the
senior management team were unable or unwilling to continue in their present
positions, those persons could be difficult to replace and the Company’s
business could be harmed.  If any of the Company’s key employees were
to join a competitor or to form a competing company, some of the Company’s
customers might choose to use the services of that competitor or new company
instead of the Company.  Furthermore, customers or other companies
seeking to develop in-house capabilities may hire away some of the Company’s
senior management or key employees.  The loss of one or more of these
key employees could adversely affect the Company’s business.





The
Company must recruit and retain qualified personnel





Because
of the specialized scientific nature of the Company’s business, it is highly
dependent upon qualified scientific, technical and managerial
personnel.  There is intense competition for qualified personnel in
the pharmaceutical and biotechnology fields.  Therefore, although
traditionally the Company has experienced a relatively low turnover in its
staff, in the future it may not be able to attract and retain the qualified
personnel necessary for the conduct and further development of its
business.  The loss of the services of existing personnel, as well as
the failure to recruit additional key scientific, technical and managerial
personnel in a timely manner, could have a material adverse effect on the
Company’s ability to expand its businesses and remain competitive in the
industries in which it participates.











Reliance
on transportation





The
Company’s operations are reliant on transport for the movement of materials and
supplies, and a significant disruption to the transport systems could have a
material adverse effect on this business.





The
Company relies on third parties for important services





The
Company depends on third parties to provide it with services critical to its
business.  The failure of any of these third parties to adequately
provide the needed services could have a material adverse effect on the
Company’s business.





An
increase in energy costs may significantly increase the Company’s operating
costs





The
Company’s business is dependent on various energy sources, including fuel oil,
electricity and natural gas.  Rising oil and gas prices in the past
year have increased the Company’s operating costs and future increases would
have a similar effect.





Actions
of animal rights extremists may affect the Company’s business





The
Company’s development services utilize animals (predominantly rodents) to test
the safety and efficacy of drugs.  Such activities are required for
the development of new medicines and medical devices under regulatory regimes in
the United States, Europe, Japan and other countries.  The Company is
targeted by extreme animal rights activists who oppose all testing on animals,
for whatever purpose, including the Company’s animal testing activities in
support of its safety and efficacy testing for customers.  These
groups, which include Stop Huntingdon Animal Cruelty (“SHAC”), the Animal
Liberation Front (“ALF”), and Win Animal Rights (“WAR”), among others, have
publicly stated that the goal of their campaign is to “shut
Huntingdon”.  These groups have targeted not only the Company, but
also third parties that do business with the Company, including customers,
suppliers and advisors.  Acts of vandalism and other acts by these
animal rights extremists who object to the use of animals in drug development
could have a material adverse effect on the Company’s business.





Animal
rights extremists have targeted, and may continue to target, the financial
community associated with the trading of LSR Voting Common Stock, which has
caused and may continue to cause illiquidity and a lower market price of the
Voting Common Stock.





Animal
rights extremists have harassed and/or caused the fear of harassment to
individuals and entities in the financial community associated with the trading
of LSR shares, including market makers, stockbrokers, research analysts,
auditors, investors and trading platforms.  The liquidity and market
price of the shares of LSR Voting Common Stock could be adversely affected by
such actions.





ITEM
1B.  UNRESOLVED STAFF COMMENTS





None.








ITEM
2.  PROPERTIES





The
Company’s head office is situated within the Princeton Research Center in New
Jersey.





The
Company believes that its facilities, described below, are adequate for its
operations and that suitable additional space will be available if and when
needed.





The
following table shows the location and approximate size of the primary operating
facilities of the Company, as at December 31, 2008 and March 11,
2009.  The principal uses made of these facilities are as
laboratories, animal accommodation and offices.





Location
                  Laboratories
      and Offices
                  SizePrinceton
      Research Center, East Millstone, NJ, US
                  169,000
      sq. ft.
                  54
      acresHuntingdon
      Research Center, Huntingdon, England
                  539,000
      sq. ft.
                  84
      acresEye
      Research Center, Eye, England
                  258,000
      sq. ft.
                  27
      acres





All the
above properties are leased from entities controlled by the Company’s Chairman
and CEO, Andrew Baker.  The sale and leaseback agreement is discussed
in more detail in Note 2 within Item 8.





ITEM
3.  LEGAL PROCEEDINGS





From time
to time, the Company is subject to legal proceedings, claims and investigations
in the ordinary course of business, including commercial claims, employment and
other matters. In accordance with GAAP, the Company makes a provision for a
liability when it is both probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. These provisions are reviewed at
least quarterly and adjusted to reflect the impacts of negotiations,
settlements, rulings, advice of legal counsel and other information and events
pertaining to a particular case. Litigation is inherently unpredictable.
However, the Company believes that it has valid defenses with respect to the
legal matters pending against the Company. It is possible, nevertheless, that
the Company’s consolidated financial position, cash flows or results of
operations could be negatively affected by an unfavorable resolution of one or
more of such proceedings, claims or investigations.








ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





No matter
was submitted during the fourth quarter of the fiscal year ended December 31,
2008, to a vote of the stockholders.





PART
II





ITEM
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





LSR's
Voting Common Stock trades on the NYSE Arca under the symbol
"LSR".  The closing market price of the Voting Common Stock on March
11, 2009 was $6.75 per share.





The high
and low quarterly sales price of LSR’s common stock for the two years to
December 31, 2008 were as follows:





HIGH
      SALES
                    
                    LOW
      SALESQUARTER
      ENDED
                    PRICE
                    
                    PRICE$
                    
                    $March
      31, 2007
                    15.00
                    
                    11.53June
      30, 2007
                    16.60
                    
                    12.40September
      30, 2007
                    19.75
                    
                    14.52December
      31, 2007
                    22.71
                    
                    17.50March
      31, 2008
                    28.50
                    
                    18.30June
      30, 2008
                    30.51
                    
                    23.37September
      30, 2008
                    39.30
                    
                    26.05December
      31, 2008
                    36.48
                    
                    8.20





As of
March 11, 2009, LSR had 1,862 holders on record of Voting Common
Stock.





The
Company has not paid any cash dividends in the two most recent fiscal years and
does not expect to declare or pay cash dividends on the Company's Voting Common
Stock in the near future.  The Board of Directors (the “Board”) will
determine the extent to which legally available funds will be used to pay
dividends.  In making decisions regarding dividends, the Board will
exercise its business judgment and will take into account such matters as
results of operations and financial condition and any then-existing or proposed
commitments for the use of available funds.





Life
Sciences Research Limited, the UK holding company for the two main operating
companies Huntingdon Life Sciences Limited and Huntingdon Life Sciences Inc. has
a deficit on shareholders equity of £32.0 million.  Until this deficit
is cleared, under UK company law it is not permitted to pay dividends to its
parent company, LSR.  This may affect the payment of dividends by
LSR.








Repurchase
of equity securities





The
Company did not repurchase any equity securities during the fourth quarter of
2008.





Stock
performance graph





The graph
below compares the cumulative 5-year total return of holders of Life Sciences
Research, Inc.'s common stock with the cumulative total returns of the NASDAQ
Composite index, the RDG MicroCap Biotechnology index, and the NASDAQ
Biotechnology index. The graph tracks the performance of a $100 investment in
the Company’s common stock and in each index (with the reinvestment of all
dividends) from December 31, 2003 to December 31, 2008.








12/03
              12/04
              12/05
              12/06
              12/07
              12/08Life
      Sciences Research, Inc.
              100.00
              455.65
              431.45
              584.68
              810.48
              377.02NASDAQ
      Composite
              100.00
              110.08
              112.88
              126.51
              138.13
              80.47NASDAQ
      Biotechnology
              100.00
              112.17
              130.53
              130.05
              132.24
              122.10RDG
      MicroCap Biotechnology
              100.00
              86.91
              64.26
              50.42
              31.96
              12.28








The stock
price performance included in this graph is not necessarily indicative of future
stock price performance.





Securities
authorized for issuance under equity compensation plans





Information
on security ownership by certain beneficial owners and management of LSR is
incorporated by reference to the headings “Stock Ownership of Directors,
Executive Officers and Certain Stockholders” in the Company’s definitive Proxy
Statement in connection with its 2009 Annual Meeting of Stockholders to be held
on May 21, 2009, which Proxy Statement is intended to be filed not later than
120 days after December 31, 2008, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.





The
following table summarizes the Company’s equity compensation plan information as
of December 31, 2008.  Information is included for equity compensation
plans approved by LSR stockholders and equity compensation plans not approved by
LSR stockholders.








Plan
      Category
              Common
      shares to be issued upon exercise of outstanding options, warrants and
      rights
              Weighted-average
      exercise price of outstanding options warrants and rights
              Common
      shares available for future issuance under equity compensation plans
      (excluding securities reflected in column (a))(a)
              (b)
              (c)Equity
      compensation plans approved by LSR
                stockholders
              2,950,000
              4.59
              437,000Equity
      compensation plans not approved by LSR
                stockholders
              1,425,000
              11.00
              -Totals
              4,375,000
              6.37
              437,000





From time
to time US depositary institutions hold shares on behalf of their customers to
enable a market to be made in the LSR’s shares.  No holdings of 5% or
more have been reported by those institutions at March 11, 2009.











ITEM
6.  SELECTED CONSOLIDATED FINANCIAL DATA





The
selected consolidated financial data presented below as of and for each of the
years ended December 31, 2008, 2007, 2006, 2005 and 2004 has been derived from
LSR’s audited consolidated financial statements on Form 10-K.





The
selected consolidated financial data should be read in conjunction with LSR’s
audited consolidated statements and accompanying notes included elsewhere in
this Annual Report.  See also “Management’s Discussion and Analysis of
Financial Conditions and Results of Operations”.  Historical
consolidated financial data may not be indicative of the Company’s future
performance.











As
      of and for the year ended December 312008
                
                
                2007
                  (Restated)
                
                
                2006
                
                
                2005
                
                
                2004($000,
      except per share data)Statement
      of Operations DataNet
      revenues
                
                $
                242,422
                
                
                $
                236,800
                
                
                $
                192,217
                
                
                $
                172,013
                
                
                $
                157,551Cost
      of Sales
                
                
                (169,297
                )
                
                
                (165,790
                )
                
                
                (142,701
                )
                
                
                (124,820
                )
                
                
                (117,061
                )Gross
      profit
                
                
                73,125
                
                
                
                71,010
                
                
                
                49,516
                
                
                
                47,193
                
                
                
                40,490Selling,
      general andadministrative
      expenses
                
                
                (37,210
                )
                
                
                (39,135
                )
                
                
                (29,447
                )
                
                
                (26,174
                )
                
                
                (24,666
                )Operating
      income beforeother
      operating expenses
                
                
                35,915
                
                
                
                31,875
                
                
                
                20,069
                
                
                
                21,019
                
                
                
                15,824Other
      operating expenses
                
                
                -
                
                
                
                -
                
                
                
                (10,497
                )
                
                
                -
                
                
                
                -Operating
      income
                
                
                35,915
                
                
                
                31,875
                
                
                
                9,572
                
                
                
                21,019
                
                
                
                15,824Interest
      expense (net)
                
                
                (11,344
                )
                
                
                (13,596
                )
                
                
                (17,546
                )
                
                
                (10,773
                )
                
                
                (6,521
                )Other
      income/(expense):Foreign
      exchange (loss)/gain
                  on
      Financing andCapital
      Bonds
                
                
                (14,102
                )
                
                
                770
                
                
                
                6,210
                
                
                
                (5,144
                )
                
                
                3,345Foreign
      exchange gainon
      IntercompanyBalances
                
                
                1,329
                
                
                
                171
                
                
                
                692
                
                
                
                518
                
                
                
                -Cost
      of currency hedgeContract
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (455
                )Income/(loss)
      before income
                  taxes
                
                
                11,798
                
                
                
                19,220
                
                
                
                (1,072
                )
                
                
                5,620
                
                
                
                12,193Income
      tax (expense)/benefit
                
                
                (1,380
                )
                
                
                (33,194
                )
                
                
                6,856
                
                
                
                (4,129
                )
                
                
                5,401Income/(loss)
      before loss ondeconsolidation
      of variable
                  interest
      entity
                
                
                10,418
                
                
                
                (13,974
                )
                
                
                5,784
                
                
                
                1,491
                
                
                
                17,594Loss
      on deconsolidation of
                  Variable
      interest entity (netof
      income tax benefit of$22,218)
                
                
                -
                
                
                
                -
                
                
                
                (20,656
                )
                
                
                -
                
                
                
                -Net
      income/(loss)
                
                
                10,418
                
                
                
                (13,974
                )
                
                
                (14,872
                )
                
                
                1,491
                
                
                
                17,594




















As
      of and for the year ended December 312008
                
                
                2007
                  (Restated)
                
                
                2006
                
                
                2005
                
                
                2004Income/(loss)
      per share before loss on deconsolidation of variable interest entity
      (a)-  basic
                
                $
                0.81
                
                
                $
                (1.10
                )
                
                $
                0.46
                
                
                $
                0.12
                
                
                $
                1.45-  diluted
                
                $
                0.70
                
                
                $
                (1.10
                )
                
                $
                0.46
                
                
                $
                0.10
                
                
                $
                1.29Weighted
      average number ofCommon
      stock (000)-  basic
                
                
                12,798
                
                
                
                12,698
                
                
                
                12,644
                
                
                
                12,518
                
                
                
                12,153-  diluted
                
                
                14,970
                
                
                
                12,698
                
                
                
                12,644
                
                
                
                14,533
                
                
                
                13,607





(a)  See
Note 2 and Note 3 within Item 8 for further explanation.





As
      of and for the year ended December 312008
                
                
                2007
                  (Restated)
                
                
                2006
                
                
                2005
                
                
                2004($000,
      except per share data)Balance
      Sheet DataWorking
      capital (b)
                
                $
                13,527
                
                
                $
                (5,405
                )
                
                $
                20,364
                
                
                $
                (51,860
                )
                
                $
                1,800Total
      assets
                
                
                171,198
                
                
                
                201,583
                
                
                
                230,579
                
                
                
                184,369
                
                
                
                200,075Long
      term debt and related party loans
                
                
                71,943
                
                
                
                73,029
                
                
                
                86,751
                
                
                
                30,430
                
                
                
                89,685Total
      stockholders deficit
                
                
                (15,212
                )
                
                
                (29,327
                )
                
                
                (5,092
                )
                
                
                (14,568
                )
                
                
                (2,064
                )Common
      stock and paid in capital
                
                
                89,850
                
                
                
                87,342
                
                
                
                95,889
                
                
                
                75,974
                
                
                
                75,796Book
      value per share
                
                $
                (1.19
                )
                
                $
                (2.32
                )
                
                $
                (0.40
                )
                
                $
                (1.16
                )
                
                $
                (0.17
                )





(b)  Working
capital is defined as current assets less current liabilities.





As
      of and for the year ended December 312008
                
                
                2007
                  (Restated)
                
                
                2006
                
                
                2005
                
                
                2004($000,
      except per share data)Other
      Financial DataDepreciation
      and amortization
                
                $
                10,653
                
                
                $
                9,519
                
                
                $
                9,514
                
                
                $
                9,581
                
                
                $
                9,530Capital
      expenditure
                
                
                16,657
                
                
                
                16,439
                
                
                
                13,093
                
                
                
                15,973
                
                
                
                11,096Cash
      generated/(used) inthe
      year
                
                
                270
                
                
                
                (7,865
                )
                
                
                28,668
                
                
                
                (17,921
                )
                
                
                16,070Net
      days sales outstanding
                  (DSO)
                
                
                30
                
                
                
                13
                
                
                
                21
                
                
                
                16
                
                
                
                4Gross
      Profit %
                
                
                30.2
                %
                
                
                30.0
                %
                
                
                25.8
                %
                
                
                27.4
                %
                
                
                25.7
                %Operating
      income beforeother
      operating expenses %
                
                
                14.8
                %
                
                
                13.5
                %
                
                
                10.4
                %
                
                
                12.2
                %
                
                
                10.0
                %Operating
      income %
                
                
                14.8
                %
                
                
                13.5
                %
                
                
                5.0
                %
                
                
                12.2
                %
                
                
                10.0
                %Net
      income/(loss) %
                
                
                4.3
                %
                
                
                (5.9
                %)
                
                
                (7.7
                %)
                
                
                9.0
                %
                
                
                11.2
                %





ITEM
7.                     MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





GENERAL





The
following should be read in conjunction with the consolidated financial
statements of LSR as presented in “Item 8 Financial Statements and Supplementary
Data”.





The
Company provides pre-clinical and non-clinical biological safety evaluation
research services to most of the world’s leading pharmaceutical and
biotechnology companies, as well as many agrochemical and industrial chemical
companies.  The purpose of this safety evaluation is to identify risks
to humans, animals or the environment resulting from the use or manufacture of a
wide range of chemicals, which are essential components of the Company’s
customers' products.  The Company’s services are designed to meet the
regulatory requirements of governments around the world.




The
Company’s aim is to develop its business within these markets, principally in
the pharmaceutical sector, and through organic growth.  In doing so,
the Company expects to benefit from strong drug pipelines in the pharmaceutical
industry and a growing trend towards greater outsourcing as customers focus more
internal resources on research and increasingly look to variabilize their
development costs.





The
Company's business is characterized by high fixed costs, in particular staff and
facility related costs.  Such a high proportion creates favorable
conditions for the Company as excess capacity is utilized, such as has been the
case during the last three years.  However, during periods of
declining revenue, careful planning is required to reduce costs without
impairing revenue-generating activities.





While the
Company believes that the market it operates in will continue to grow for the
foreseeable future, both in absolute dollar amount and in the percentage of
pre-clinical work that is outsourced, it is currently experiencing what it
expects is near term softness in demand driven by a number of factors, including
reorganizations and reprioritization within pharmaceutical industry customers,
and contraction in spending by biotechnology customers who are facing a
challenging financing environment.  Although the Company cannot
predict how long these factors will continue to depress growth in the market for
outsourced services, it believes that historical growth levels should
resume





The
recent volatility in the currency markets has had an adverse effect on the
Company’s results during the latter part of 2008 due to the weakening of the
British Pound against the US Dollar, as more than 75% of the Company trade is
denominated in Pounds.  The continued uncertainty in the currency
markets means that there remains a risk of further volatility in the results in
the future.








CRITICAL
ACCOUNTING ESTIMATES





Management's
Discussion and Analysis of Financial Condition and Results of Operations
discusses the Company's consolidated financial statements, which have been
prepared in accordance with US GAAP.  The Company considers the
following accounting policies to be critical accounting estimates.





In
preparing its consolidated financial statements in accordance with GAAP and
pursuant to the rules and regulations of the SEC, the Company makes assumptions,
judgments and estimates that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosures of contingent assets and
liabilities. The Company bases its assumptions, judgments and estimates on
historical experience and various other factors that it believes to be
reasonable under the circumstances. These assumptions, judgments and estimates
are evaluated on a regular basis.  Critical accounting policies and
estimates are also discussed with the Audit Committee of the Board of
Directors.





Actual
outcomes may differ from these assumptions, judgments and estimates and these
differences may have a material impact on the consolidated financial
statements.





The
Company believes that the assumptions, judgments and estimates involved in the
accounting for revenue recognition, pensions and income taxes have the greatest
potential impact on its consolidated financial statements. These areas are key
components of the Company’s results of operations and are based on complex rules
which require the Company to make judgments and estimates, so it considers these
to be its critical accounting policies. Historically, the Company’s assumptions,
judgments and estimates relative to its critical accounting policies have not
differed materially from actual results.





A summary
of the significant accounting policies is set out below:








Revenue
Recognition





The
majority of the Company's net revenues have been earned under contracts, which
generally range in duration from a few months to three years.  Net
revenue from these contracts is generally recognized over the term of the
contracts as services are rendered.  Contracts may contain provisions
for re-negotiation in the event of cost overruns due to changes in the level of
work scope.  Renegotiated amounts are included in net revenue when
earned and realization is assured.  Provisions for losses to be
incurred on contracts are recognized in full in the period in which it is
determined that a loss will result from performance of the contractual
arrangement.  Most service contracts may be terminated for a variety
of reasons by the Company's customers either immediately or upon notice at a
future date.  The contracts generally require payments to the Company
to recover costs incurred, including costs to wind down the study, and payment
of fees earned to date, and in some cases to provide the Company with a portion
of the fees or income that would have been earned under the contract had the
contract not been terminated early.





Unbilled
receivables are recorded for net revenue recognized to date that is currently
not billable to the customer pursuant to contractual terms.  In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment
schedules.  Unbilled receivables are billable to customers within one
year from the respective balance sheet date.  Fees in advance are
recorded for amounts billed to customers for which net revenue has not been
recognized at the balance sheet date (such as upfront payments upon contract
authorization, but prior to the actual commencement of the study).





If the
Company does not accurately estimate the resources required or the scope of work
to be performed, or does not manage its projects properly within the planned
periods of time or satisfy its obligations under the contracts, then future
margins may be significantly and negatively affected or losses on existing
contracts may need to be recognized. While such issues have not historically
been significant, any such resulting reductions in margins or contract losses
could be material to the Company's results of operations.











Pension
Costs





Prior to
December 31, 2002, a defined benefit pension plan provided benefits to employees
in the UK based on their final pensionable salary.  As of December 31,
2002, the defined benefit pension plan was curtailed.  The pension
cost of the plan is accounted for in accordance with SFAS No. 87, "Employers'
Accounting for Pensions".  Pension information is presented in
accordance with the currently required provisions of SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits" and FAS158,
“Employers’ Accounting for Defined Benefit Pension and Other Post Retirement
Plans”.  The measurement of the related benefit obligation and net
periodic benefit cost recorded each year is based upon actuarial computations
which require the use of judgment as to certain assumptions. The more
significant of these assumptions are: (a) the appropriate discount rate to
use in computing the present value of the benefit obligation; and (b) the
expected return on plan assets (for funded plans). Actual results (such as the
return on plan assets and plan participation rates) will likely differ from the
assumptions used. Those differences, along with changes that may be made in the
assumptions used from period to period, will impact the amounts reported in the
financial statements and note disclosures.  The net (loss)/gain
subject to amortization, outside the corridor, is being amortized on a
straight-line basis over a period of 15 years.  The Company recognized
all actuarial gains and losses immediately for the purposes of its minimum
pension liability.








Taxation





The
Company accounts for income taxes under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting For Income Taxes" ("SFAS
109"). SFAS 109 requires recognition of deferred tax assets and liabilities for
the estimated future tax consequences of events attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted
rates in effect for the year in which the differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in the statement of operations in the period
in which the enactment rate changes. Deferred tax assets and liabilities are
reduced through the establishment of a valuation allowance at such time as,
based on available evidence, it is more likely than not that the deferred tax
assets will not be realized. While the Company has considered future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for the valuation allowance, in the event that the Company were to
determine that it would not be able to realize all or part of its net deferred
tax assets in the future, an adjustment to the deferred tax assets would be
charged to income in the period such determination was made. Likewise, should
the Company determine that it would be able to realize its deferred tax assets
in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was
made.




On
January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in financial statements in accordance
with SFAS 109. FIN 48 provides guidance on recognizing, measuring, presenting
and disclosing in the financial statements uncertain tax positions that a
company has taken or expects to take on a tax return.











RESULTS
OF OPERATIONS





Year
ended December 31, 2008 compared with year ended December 31, 2007





The
Company is currently experiencing what it expects is a near term softness in
demand driven by a number of factors, including reorganizations and
reprioritizations within pharmaceutical industry customers, and contraction in
spending by biotechnology customers who are facing a challenging financing
environment.  This impacted orders in the latter part of the year with
the result that orders for the year ended December 31, 2008 were $233.9 million,
an 8% decrease on orders for the year ended December 31, 2007 at constant
exchange rates.  This reduction in orders, together with a significant
weakening of the British Pound against the US dollar in the fourth quarter of
2008 reduced backlog and restricted the growth in revenues in
2008.  At December 31, 2008 backlog (booked-on work) amounted to
approximately $142 million, a decrease of 25% from the level at December 31,
2007 (5% net of foreign currency effect).   Net revenues for the
year ended December 31, 2008 were $242.4 million, an increase of 2.4% on net
revenues of $236.8 million for the year ended December 31, 2007.  The
underlying increase after adjusting for the impact of the movement in exchange
rates was 8.4%.





Cost of
sales in the year ended December 31, 2008 were $169.3 million (69.8% of net
revenue), an increase of 2.1% on cost of sales of $165.8 million (70.0% of net
revenue) for the year ended December 31, 2007.  The underlying
increase after adjusting for the impact of the movement in exchange rates was
8.5%.  The decrease in cost of sales as a % of net revenue was due to
a reduction of 70 basis points in overhead costs as a % of net revenue with
improved capacity utilization, and a reduction of 30 basis points in direct
study costs as a % of net revenue was due to a change in the mix of
business.  These were offset by an increase of 80 basis points in
labor costs as a % of revenue.  In addition to general headcount
increases during the first half of the year, which were mostly reversed during
the second half of the year through attrition, there were a limited number of
hires to strengthen the scientific and operational infrastructure of the
Company.  Compensation packages had also been increased, particularly
for certain key positions within the Company, but beginning in 2009, steps have
been taken to reduce staffing costs throughout the Company.





Selling,
general and administrative expenses declined by 4.9% to $37.2 million (15.3% of
net revenue) for the year ended December 31, 2008 from $39.1 million (16.5% of
net revenue) in the year ended December 31, 2007.  The underlying
decrease after adjusting for the impact of the movement in exchange rates was
1.1%.  The decrease in costs was due to a decrease in incentive
accruals and a decline in accrued UK employer taxes associated with the decrease
in value of outstanding management share options.





Net
interest expense decreased by 16.6% to $11.3 million for the year ended December
31, 2008 from $13.6 million in the year ended December 31, 2007.  This
decrease of $2.3 million was due to a $3.2 million net interest saving
associated with the reduction in the LIBOR based borrowing rate associated with
the March 2006 Financing, a $0.1 million decrease in capital lease interest
expense, and a $0.1 million decrease in interest expense related to the
amortization of debt issue and financing costs, offset by a reduction in
interest receivable of $1.1 million.  The Company reclassified from
other expense to interest expense $2.4 million and $2.8 million relating to
amortization of finance arrangement fees for 2008 and 2007,
respectively.  The Company believes this reclassification is
appropriate and in accordance with Regulation S-X, rule 5-03 – Income
Statements.  There was no effect on the consolidated financial statements
for the years ended December 31, 2008 and 2007 as a result of this
reclassification.





Other
expense of $12.8 million for the year ended December 31, 2008 comprised $14.1
million from the non-cash foreign exchange remeasurement expense on the March
2006 Financing denominated in US dollars (the functional currency of the
financing Subsidiary that holds the loan is UK sterling), offset by other
exchange gains of $1.3 million.  In the year ended December 31, 2007
other income of $0.9 million comprised $0.8 million from the non-cash foreign
exchange remeasurement gain on the March 2006 Financing denominated in US
dollars (the functional currency of the financing Subsidiary that holds the loan
is UK sterling) and other exchange gains of $0.1 million.








Income
tax expense on profits for the year ended December 31, 2008 was $1.4 million
representing an expense at 12% of pre-tax profit compared to an income tax
expense of $33.2 million representing a expense at 173% of pre-tax profit for
the year ended December 31, 2007.





A
reconciliation between the US statutory tax rate and the effective rate of tax
expense/benefit on income/losses before taxes for the year ended December 31,
2008 and December 31, 2007 is shown below:





%
      of income before income taxes2008
                
                2007%
                
                %US
      statutory rate
                
                35
                
                35Foreign
      rate differential
                
                (4)
                
                (5)UK
      R & D credit and non-deductible items
                
                (105)
                
                (53)Valuation
      allowance
                
                55
                
                195State
      taxes
                
                -
                
                -Change
      in estimate
                
                31
                
                1Effective
      tax rate
                
                12
                
                173








The
Company derives significant benefit from the UK Research and Development Tax
Credit for large companies.  In 2009, this will be amended and the
relief will be extended further.  As a result the Company does not
anticipate reporting any UK tax liability for the foreseeable
future.





Net
income for the year ended December 31, 2008 was $10.4 million compared with a
$14.0 million net loss for the year ended December 31, 2007.  Net
earnings per common and fully diluted share were $0.81 and $0.70 for the year
ended December 31, 2008 respectively, compared with a $1.10 loss per share,
basic and fully diluted, for the year ended December 31, 2007.








Year
ended December 31, 2007 compared with year ended December 31, 2006





Net
revenues in the year ended December 31, 2007 were $236.8 million, an increase of
23.2% on net revenues of $192.2 million for the year ended December 31,
2006.  The underlying increase, after adjusting for the impact of the
movement in exchange rates was 15.6%; with the UK showing a 14.0% increase and
the US a 21.2% increase.  The growth in net revenues reflects the
increase in orders and, consequently, backlog over the last two years,
principally from the pharmaceutical industry.  Orders for the year
ended December 31, 2007, of $266.7 million were 7% above the previous year at
constant exchange rates.  At December 31, 2007 backlog (booked-on
work) amounted to approximately $190 million, an increase of 9% above the level
at December 31, 2006 (7% net of foreign currency effect).





Cost of
sales in the year ended December 31, 2007 were $165.8 million (70.0% of net
revenue), an increase of 16.2% on cost of sales of $142.7 million (74.2% of net
revenue) or the year ended December 31, 2006.  The underlying increase
after adjusting for the impact of the movement in exchange rates was
9.0%.  The decrease in cost of sales as a % of net revenue was due to
improved efficiencies associated with net revenue increases and improved
capacity utilization, including a reduction of 140 basis points in overhead
costs as a % of net revenue and an 80 basis point reduction in labor costs as a
% of net revenues.  In addition a reduction of 200 basis points in
direct study costs as a % of net revenue was due to a change in the mix of
business.








Selling,
general and administrative expenses rose by 32.9% to $39.1 million (16.5% of net
revenue) for the year ended December 31, 2007 from $29.4 million (15.3% of net
revenue) in the year ended December 31, 2006.  The underlying increase
after adjusting for the impact of the movement in exchange rates was
28.1%.  The increase in costs was due to an increase in incentive
accruals as a result of improved performance and non-cash FAS123 charges
associated with management share options.





Other
operating expenses were $0 for the year end December 31, 2007, compared with
$10.5 million for the year end December 31, 2006.  The 2006 expenses
comprised $7.7 million for warrant costs and $1.0 million flotation expenses
associated with the listing of the Company’s shares on the NYSE Arca in 2006 and
$1.8 million litigation and other expenses associated with the Animal Rights
campaign against the Company.





Net
interest expense decreased by 22.5% to $13.6 million for the year ended December
31, 2007 from $17.5 million in the year ended December 31, 2006.  This
decrease of $3.9 million was due to a $2.3 million decrease in capital lease
interest expense, $1.1 million net interest saving associated with the March
2006 Financing, a $0.8 million saving caused by the deconsolidation of the
variable interest entity in 2006, and additional interest receivable of $0.7
million, offset by an additional $1.0 million interest expense related to the
amortization of debt issue and financing costs.  The Company
reclassified from other expense to interest expense $2.8 million and $5.0
million relating to amortization of finance arrangement fees for 2007 and 2006,
respectively.  The Company believes this reclassification is
appropriate and in accordance with Regulation S-X, rule 5-03 – Income
Statements.  There was no effect on the consolidated financial statements
for the years ended December 31, 2007 and 2006 as a result of this
reclassification.





Other
income of $0.9 million for the year ended December 31, 2007 comprised $0.8
million from the non-cash foreign exchange remeasurement gain on the March 2006
Financing denominated in US dollars (the functional currency of the financing
Subsidiary that holds the loan is UK sterling) and other exchange gains of $0.1
million.  In the year ended December 31, 2006 there was other income
of $6.9 million which comprised $6.2 million from the non-cash foreign exchange
remeasurement gain on the March 2006 Financing and Convertible Capital Bonds
denominated in US dollars (the functional currency of the financing Subsidiary
that held the loan and bond was UK sterling) and other exchange gains of $0.7
million.





Income
tax expense on profits for the year ended December 31, 2007 was $33.2 million
representing an expense at 173% of pre-tax profit compared to an income tax
benefit of $6.9 million representing a benefit at 640% of pre-tax losses for the
year ended December 31, 2006.  A reconciliation between the US
statutory tax rate and the effective rate of tax expense/benefit on
income/losses before taxes for the year ended December 31, 2007 and December 31,
2006 is shown below:














%
      of income before
                  income
      taxes2007
                
                2006%
                
                %US
      statutory rate
                
                35
                
                (35)Foreign
      rate differential
                
                (5)
                
                (23)UK
      R & D credit and non-deductible items
                
                (53)
                
                (468)Valuation
      allowance
                
                195
                
                -State
      taxes
                
                -
                
                (74)Change
      in estimate
                
                1
                
                (40)Effective
      tax rate
                
                173
                
                (640)








The
Company derives significant benefit from the UK Research and Development Tax
Credit for large companies.  In 2009, this will be amended and the
relief will be extended further.  As a result the Company does not
anticipate reporting any UK tax liability for the foreseeable
future.  The Company has therefore recorded a valuation allowance of
$37.4 million to reflect a reversal of the previously recorded tax provision
that recognized the net tax asset associated with the Company’s UK Net Operating
Losses (“NOLs”) and UK defined benefit pension plan liability.  This
changed treatment of the NOL tax asset does not impact their availability to the
Company in the future, should circumstances change.





In 2006,
the main reason for the change in estimate relates to the US leaseback gain that
arose from the sale of the US property as part of the Sale/Leaseback
Transaction.  Under FIN46R the gain was originally recognized in 2005 and
charged to income taxes.  This charge reversed in 2006 as the deferred gain
was recognized due to the deconsolidation of the variable interest
entity.  The gain on the sale of the UK assets was offset against
brought forward capital losses in 2005. A revision to the treatment of the
losses on the UK buildings sold as part of the Sale/Leaseback Transaction in
2005 also caused a change in estimate in 2006.





Net Loss
for the year ended December 31, 2007 was $14.0 million compared with $14.9
million for the year ended December 31, 2006.  Net loss per common and
fully diluted share was $1.10 for the year ended December 31, 2007 compared with
$1.18 for the year ended December 31, 2006.











GEOGRAPHICAL
ANALYSIS





The
analysis of the Company's net revenues, operating income/(loss) and total assets
between the two geographical areas and Corporate for the three years ended
December 31, 2008 is as follows:





The
performance of each the two geographical areas and Corporate is measured by net
revenues and operating income/(loss) before other operating
expenses.





Company
                    2008
                    
                    2007
                    
                    2006$000
                    
                    $000
                    
                    $000(Restated)Net
      revenuesUK
                    187,638
                    
                    186,935
                    
                    151,079US
                    54,784
                    
                    49,865
                    
                    41,138Corporate
                    -
                    
                    -
                    
                    -$242,422
                    
                    $236,800
                    
                    $192,217Operating
      income/(loss)UK
                    36,450
                    
                    34,951
                    
                    21,676US
                    9,819
                    
                    8,309
                    
                    5,268Corporate
      (a)
                    (10,354)
                    
                    (11,385)
                    
                    (17,372)$35,915
                    
                    $31,875
                    
                    $9,572Total
      AssetsUK
                    121,505
                    
                    154,640
                    
                    183,312US
                    46,923
                    
                    43,921
                    
                    39,781Corporate
                    2,770
                    
                    3,022
                    
                    7,486$171,198
                    
                    $201,583
                    
                    $230,579





(a)  Operating
loss for Corporate in 2006 included other operating expense of
$10,497.  See Note 9 Other Operating Expense within Item 8 for further
explanation.











LIQUIDITY
AND CAPITAL RESOURCES





Cash and
cash equivalents at December 31, 2008 were $36.5 million and were held in
accounts denominated in the following currencies:





Currency
                    2008(Amounts
      in USD Equivalents)
                    $000Dollar
                    23,165Sterling
                    12,093Euro
                    884Yen
                    35136,493





The
Company retains sufficient working capital in the appropriate currencies to meet
its local short term requirements.  These local currency balances are
normally funded by the collection of similar currency accounts
receivables.  Excess cash is converted into US Dollars and held on
deposit to act as an economic hedge against the Company’s US Dollar denominated
debt.





The
company has approximately $78 million of outstanding debt. $57 million of this
debt relates to the March 2006 Financing, and is repayable on March 1,
2011.  In addition, the company has a long term lease of $21 million
arising on the sale and leaseback deal (Alconbury) which is classed as long-term
debt.





The
company’s expected primary cash needs on both a short-term and a long-term basis
are for capital expenditures, expansion of services, possible future
acquisitions, geographic expansion, working capital and other general corporate
purposes, including possible share repurchases.





As of
December 31, 2008, the Company had a working capital surplus of $16.0 million,
and the Company believes that projected cash flow from operations will satisfy
its contemplated cash requirements for at least the next 12 months.





Net days
sales outstanding (DSOs) at December 31, 2008 were 30 days, an increase from the
13 days at December 31, 2007.  DSO is calculated as a sum of accounts
receivable, unbilled receivables and fees in advance over total net
revenue.  The impact on liquidity from a one-day change in DSO is
approximately $461,000.





During
the year ended December 31, 2008, the Company’s operating activities generated
net cash of $32.7 million. The change in net operating assets and liabilities
used $8.7 million during 2008, mainly caused by the increase in DSOs which used
$7.8 million, offset by the increase in defined benefit pension liabilities of
$3.1 million.  The remaining movement was due to an increase in
inventories and prepaid expenses, offset by an increase in accounts payable,
accrued expenses and other liabilities.





Investing
activities for the year ended December 31, 2008 used $18.4 million, as a result
of capital expenditure of $16.6 million and a $1.8 million additional cash
payment for the 2007 fold-in acquisition.





Financing
activities for the year ended December 31, 2008 used $0.8 million. This was due
to $1.6 million capital repayments of the March 2006 Financing, a $1.0 million
payment to repurchase 40,600 warrants and $0.6 million repayment of short-term
financing, offset by a $1.0 million decrease in other assets, $0.8 million
generated by the proceeds of the exercise of stock options and $0.6 million
generated by the exercise of warrants.





The
effect of exchange rate movements on cash for the year ended December 31, 2008
was a decrease of $13.2 million.





The
Company’s cash balances increased by $0.3 million during 2008.











Contractual
Obligations





As
discussed in Note 11 to the audited consolidated financial statements included
elsewhere in this Annual Report, and as set out in the table below, the Company
is obligated under non-cancellable operating and capital leases.





The
Company leases certain equipment under various non-cancellable operating and
capital leases.  The Company is also obligated under purchase
agreements, including long term power contracts.  Finally Life
Sciences Research Limited is obliged to make contributions to its defined
benefit pension plan of £2.7 million ($3.9 million) per year, plus expenses
estimated at £0.7 million ($1.0 million) a year for the next 7
years.  These commitments are set out in the table below:





Total
              
              Less
      than 1 year
              1 –
      3 years
              3 –
      5 years
              More
      than 5 years$000
              
              $000
              $000
              $000
              $000Alconbury
      operating lease obligations (a)
              $67,049
              
              $1,896
              $3,965
              $4,206
              $56,982Operating
      leases
              2,375
              
              928
              1,022
              425
              -Alconbury
      capital lease obligations (a) (b)
              148,379
              
              2,925
              6,116
              6,488
              132,850Other
      capital lease obligations (b)
              202
              
              202
              -
              -
              -Purchase
      obligations
              9,322
              
              9,322
              -
              -
              -Pension
      plan contributions
              39,408
              
              4,926
              9,852
              9,852
              14,77Contingent
      acquisitionpayments  (c)
              1,587
              
              554
              1,033
              -
              -$268,322
              
              $20,753
              $21,988
              $20,971
              $204,610





(a) The
Alconbury capital and operating lease contractual obligations include the fixed
3% per year rental increases on the UK leases, and an estimate of 3% for the
future United States Consumer Price Index (CPI) increases required under the US
lease.





(b) The
Alconbury and Other capital lease contractual obligations reflected above
include imputed interest.





(c) The
purchase agreement, (see Note 5) contains contingent payment
amounts.  The amounts of the payments due under these provisions
cannot be determined until the specific targets are attained.








Contingencies




The
Company is party to certain legal actions arising in the normal course of its
business. In management's opinion, none of these actions will have a material
effect on the Company's operations, financial condition or liquidity. No form of
proceedings has been brought, instigated or is known to be contemplated against
the Company by any government agency.





The
Compensation Committee approved and adopted at its December 6, 2006 meeting the
2007 Long Term Incentive Plan (the “2007 LTIP”), which provides for awards of
cash compensation to executive officers and other members of the senior
management team if certain performance goals are achieved during the 2007-2010
performance period.  The Compensation Committee established a specific
level of operating margin percentage to be achieved over any four consecutive
quarters during such performance period that would trigger such
awards.  The aggregate amount payable to all participants under the
2007 LTIP if the threshold performance level is achieved is approximately $5
million.








Management
is ratably accruing for the 2007 LTIP, as compensation expense, an amount equal
to the estimated cash bonus that would be payable over the performance period
during which the specified performance goals are achieved.  Management
will re-evaluate this estimate periodically throughout the performance period
and, if applicable, will adjust the estimate accordingly.








ORDERS




Net new
business signings totaled $233.9 million for the year ended December 31, 2008.
Excluding the effects of movements in foreign exchange, this was a decrease of
8% from the prior year. Orders from the pharmaceutical industry were $199.5
million, representing a reduction of 9% at constant exchange rates, from the
prior year. The pharmaceutical industry therefore represented 85% of all new
business in 2008, down from 86% in 2007. Orders from non-pharmaceutical
customers, primarily agrochemical companies, were $34.4 million, down 2% at
constant exchange rates, from the prior year.





While the
Company believes that the market it operates in will continue to grow for the
foreseeable future, both in absolute dollar amount and in the percentage of
pre-clinical work that is outsourced, it is currently experiencing what it
expects is near term softness in demand driven by a number of factors, including
reorganizations and reprioritization within pharmaceutical industry customers,
and contraction in spending by biotechnology customers who are facing a
challenging financing environment.  Although the Company cannot
predict how long these factors will continue to depress growth in the market for
outsourced services, it believes that historical growth levels should
resume








INFLATION





While
most of the Company's net revenues are earned under fixed price contracts, the
effects of inflation do not generally have a material adverse effect on its
operations or financial condition as only a minority of the contracts have a
duration in excess of one year.








RECENTLY
ISSUED ACCOUNTING STANDARDS




In
December 2007, the FASB issued FAS 141(R), "Business Combinations - a
replacement of FASB Statement No. 141" (“SFAS 141R”), which significantly
changes the principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree.  The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  This
statement is effective prospectively, except for certain retrospective
adjustments to deferred tax balances, for fiscal years beginning after
December 15, 2008.  Beginning January 1, 2009, the Company will
adopt SFAS 141R and the impact of implementing this statement will depend on the
nature and significance of business combinations consummated that would be
subject to this statement.





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








In
April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends
FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS
No. 142”) to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under FASB Statement No
141, “Business Combinations” (“SFAS No. 141”) and other U.S.
GAAP.  This FSP is effective for fiscal years beginning after
December 15, 2008.  The guidance for determining the useful life
of a recognized intangible asset is to be applied prospectively, therefore, the
impact of the implementation of this pronouncement cannot be determined until
the transactions occur.





In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles”.  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting
principles.  SFAS No. 162 is effective 60 days following the
Securities and Exchange Commission’s approval of the Public Company Accounting
Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles.”  The Company does not expect the adoption of SFAS No. 162
to change its current practice nor does the Company anticipate an effect on the
Company’s consolidated results of operations or financial position.





In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF 03-6-1”).  FSP EITF 03-6-1 concludes that unvested share-based
payment awards that contain rights to receive non-forfeitable dividends or
dividend equivalents are participating securities, and thus, should be included
in the two-class method of computing earnings per share (“EPS”).  FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years.  Early application of EITF 03-6-1
is prohibited.  This FSP also requires that all prior-period EPS data
be adjusted retrospectively.  The Company is currently evaluating the
impact FSP EITF 03-6-1 will have on the Company’s consolidated results of
operations or financial position.





In
December 2008, the FASB issued FASB Staff Position 132(R)-1 (“FSP 1232(R)-1”),
which provides guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan.  FSP 132(R)-1
requires disclosure of investment allocation methodologies and information that
enables users of financial statements to assess the inputs and valuation
techniques used to develop fair value measurements of plan assets in order to
provide users with an understanding of significant concentrations of risk in
plan assets.  FSP 132(R)-1 is effective for years ending after
December 15, 2009.  FSP 132(R)-1 requires additional disclosure only
and therefore, will not impact the Company’s consolidated results of operations
or financial position.





Management
does not believe that any other recently issued, but not yet effective,
accounting standard if currently adopted would have a material effect on the
accompanying financial statements.











ITEM
7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





LSR is
subject to market risks arising from changes in interest rates and foreign
currency exchange rates.








EXCHANGE
RATE FLUCTUATIONS AND EXCHANGE CONTROLS





Volatility
in the currency markets has an effect on the Company’s results due principally
to movements of the British Pound against the US Dollar, as more than 75% of the
Company trade is denominated in Pounds.  A 10% movement in the
exchange rate between the British Pound and the US Dollar would result in
approximately a 7.5% movement in both the revenue and operating profit of the
Company.





The
consolidated financial statements of LSR are denominated in US
dollars.  Changes in exchange rates between the UK pound sterling and
the US dollar will affect the translation of the UK Subsidiary's financial
results into US dollars for the purposes of reporting the consolidated financial
results.  The process by which each foreign Subsidiary's financial
results are translated into US dollars is as follows: income statement accounts
are translated at average exchange rates for the period; balance sheet asset and
liability accounts are translated at end of period exchange rates; and equity
accounts are translated at historical exchange rates.  Translation of
the balance sheet in this manner affects the stockholders' equity account
referred to as the accumulated other comprehensive loss
account.  Management has decided not to hedge against the impact of
exposures giving rise to these translation adjustments as such hedges may impact
upon the Company's cash flow compared to the translation adjustments which do
not affect cash flow in the medium term.





The
Company operates on a worldwide basis and generally invoices its customers in
the currency of the country in which the Company operates.  Thus, for
the most part, exposure to exchange rate fluctuations in each of its operating
units is limited as sales are denominated in the same currency as
costs.  Trading exposures to currency fluctuations do occur as a
result of certain sales contracts, performed in the UK for US customers, which
are denominated in US dollars and contribute approximately 8% of total net
revenues.  Management has decided not to hedge against this
exposure.





Also,
exchange rate fluctuations may have an impact on the relative price
competitiveness of the Company vis á vis competitors who trade in currencies
other than sterling or dollars.





The
Company has debt denominated in US dollars, whereas the Company’s functional
currency is the UK pound sterling, which results in the Company recording other
income/loss associated with the US dollar debt as a function of relative changes
in foreign exchange rates.  The Company is unable to predict whether
it will experience future gains or future losses from such exchange–related
risks on the debt.  To manage the volatility relating to these
exposures, from time to time, the Company might enter into certain derivative
transactions.  The Company holds and issues derivative financial
instruments for economic hedging purposes only.  There were no
derivative financial instruments in place at December 31, 2008.








Exchange
rates for translating sterling into US dollars were as follows:





At
      December 31
                Average
      rate (a)2004
                1.9199
                1.83212005
                1.7168
                1.81952006
                1.9572
                1.84322007
                1.9906
                2.00112008
                1.4378
                1.8528


(a)  Based
on the average of the exchange rates on each day during the period.











On March
11, 2009 the noon buying rate for sterling was £1.00 = $1.3815.





The
Company has not experienced difficulty in transferring funds to and receiving
funds remitted from those countries outside the US or UK in which it operates
and management expects this situation to continue.





The
following table summarizes the financial instruments denominated in currencies
other than the US dollar held by LSR and its Subsidiaries as of December 31,
2008:





Expected
      Maturity Date2008
                
                
                2009
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                Thereafter
                
                
                Total
                
                
                Fair
      Value$
                000
                
                
                $
                000
                
                
                $
                000
                
                
                $
                000
                
                
                $
                000
                
                
                $
                000
                
                
                $
                000
                
                
                $
                000Cash
                -
      Pound Sterling
                
                
                12,093
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                12,093
                
                
                
                12,093-
      Euro
                
                
                884
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                884
                
                
                
                884-
      Japanese Yen
                
                
                351
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                351
                
                
                
                351Short
      term investments
                -
      Pound Sterling
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Accounts
      receivable
                -
      Pound Sterling
                
                
                14,319
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                14,319
                
                
                
                14,319-
      Euro
                
                
                1,324
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,324
                
                
                
                1,324-
      Japanese Yen
                
                
                2,157
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,157
                
                
                
                2,157Capital
      leases
                -
      Pound Sterling
                
                
                -
                
                
                
                41
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,025
                
                
                
                6,066
                
                
                
                6,066








LIBOR





In the
year ended December 31, 2008, where LIBOR has been above 4.25%, the floor
stipulated in the amendment to the Company’s March 2006 Financing, a 1% change
in LIBOR would have resulted in a fluctuation in interest expense of
$572,000.  Below 4.25%, fluctuations in LIBOR do not result in a
change in interest expense.








See
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.





ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA








INDEX
      TO CONSOLIDATED FINANCIAL STATEMENTS
              PAGEManagements’
      Report on Consolidated Financial Statements
                and
      Internal Control
              43Report
      of Independent Registered Public Accounting Firm on Internal
      Control
                Over
      Financial Reporting
              44Report
      of Independent Registered Public Accounting Firm on
                Consolidated
      Financial Statements– December 31, 2008
      and 2007
              45Consolidated
      Statements of Operations –
                Years
      ended December 31, 2008, 2007 and 2006
              46Consolidated
      Balance Sheets – December 31, 2008 and 2007
              47Consolidated
      Statements of Stockholders’ Deficit and
                Comprehensive
      Loss – Years ended December 31, 2008, 2007 and 2006
              49Consolidated
      Statements of Cash Flows –
                Years
      ended December 31, 2008, 2007 and 2006
              50Notes
      to Consolidated Financial Statements
              52




















Managements’
Report on Consolidated Financial Statements and Internal Control





The
management of Life Sciences Research, Inc. and Subsidiaries (the “Company”) has
prepared, and is responsible for, the Company’s consolidated financial
statements and related footnotes.  These consolidated financial
statements have been prepared in conformity with U.S. generally accepted
accounting principles.





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





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











/ S
/    Andrew Baker


Chairman
and Chief Executive Officer - Principal Executive Officer











/ S
/    Richard Michaelson


Chief
Financial Officer - Principal Financial and Accounting Officer











East
Millstone, New Jersey





March 13,
2009





Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting




The Board
of Directors and Stockholders of Life Sciences Research, Inc.




We have
audited Life Sciences Research, Inc. and Subsidiaries’ internal control over
financial reporting as of December 31, 2008, based on criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the COSO
criteria).  Life Sciences Research, Inc.’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial
reporting.  Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.




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




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




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




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




We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the consolidated
balance sheets of Life Sciences Research, Inc. and Subsidiaries as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ deficit and comprehensive loss, and cash flows for
each of the three years in the period ended December 31, 2008 and our
report dated March 13, 2009 expressed an unqualified opinion
thereon.







/s/ Hugh
Scott, P.C.




Lakewood,
New Jersey


March 13,
2009





Report
of Independent Registered Public Accounting Firm on Financial
Statements




The Board
of Directors and Stockholders of Life Sciences Research, Inc.




We have
audited the accompanying consolidated balance sheets of Life Sciences Research,
Inc. and Subsidiaries (the “Company”) as of December 31, 2008 and
2007, and the related consolidated statements of operations, stockholders’
deficit and comprehensive loss, and cash flows for each of the years in the
three year period ended December 31, 2008.  These financial
statements are the responsibility of the Company’s management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.




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





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





As
described in Note 2 to the consolidated financial statements, the previously
filed 2007 consolidated balance sheet and statement of cash flows have been
restated due to the change in the Company's policy relating to classification of
certain short term investments as cash and cash equivalents.





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





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 13, 2009 expressed an unqualified opinion thereon.













/s/ Hugh
Scott, P.C.




Lakewood,
New Jersey


March 13,
2009


Life
Sciences Research Inc. and Subsidiaries
 Consolidated
Statements of Operations
 Dollars
in (000’s), except per share amounts





Year
      Ended December 31,2008
                
                
                2007
                  (Restated)
                
                
                2006Net
      revenues
                
                $
                242,422
                
                
                $
                236,800
                
                
                $
                192,217Cost
      of sales
                
                
                (169,297
                )
                
                
                (165,790
                )
                
                
                (142,701
                )Gross
      profit
                
                
                73,125
                
                
                
                71,010
                
                
                
                49,516Selling,
      general and administrative expenses
                
                
                (37,210
                )
                
                
                (39,135
                )
                
                
                (29,447
                )Other
      operating expense
                
                
                -
                
                
                
                -
                
                
                
                (10,497
                )Operating
      income
                
                
                35,915
                
                
                
                31,875
                
                
                
                9,572Interest
      income
                
                
                587
                
                
                
                1,721
                
                
                
                1,061Interest
      income, related parties
                
                
                513
                
                
                
                450
                
                
                
                450Interest
      expense
                
                
                (9,356
                )
                
                
                (12,800
                )
                
                
                (17,610
                )Interest
      expense, related parties
                
                
                (3,088
                )
                
                
                (2,967
                )
                
                
                (1,447
                )Other
      (expense)/income
                
                
                (12,773
                )
                
                
                941
                
                
                
                6,902Income/(loss)
      before income taxes
                
                
                11,798
                
                
                
                19,220
                
                
                
                (1,072
                )Income
      tax (expense)/benefit
                
                
                (1,380
                )
                
                
                (33,194
                )
                
                
                6,856Income/(loss)
      before loss on deconsolidation of variable interest entity
                
                
                10,418
                
                
                
                (13,974
                )
                
                
                5,784Loss
      on deconsolidation of variable interest entity (net of income tax benefit
      of $22,218)
                
                
                -
                
                
                
                -
                
                
                
                (20,656
                )Net
      income/(loss)
                
                $
                10,418
                
                
                $
                (13,974
                )
                
                $
                (14,872
                )Basic
      income/(loss) per shareIncome/(loss)
      before loss on deconsolidation of variable interest entity
                
                $
                0.81
                
                
                $
                (1.10
                )
                
                $
                0.46Loss
      on deconsolidation of variable interest entity
                
                
                -
                
                
                
                -
                
                
                
                (1.64
                )Basic
      income/(loss) per share
                
                $
                0.81
                
                
                $
                (1.10
                )
                
                $
                (1.18
                )Diluted
      income/(loss) per shareIncome/(loss)
      before loss on deconsolidation of variable interest entity
                
                $
                0.70
                
                
                $
                (1.10
                )
                
                $
                0.46Loss
      on deconsolidation of variable interest entity
                
                
                -
                
                
                
                -
                
                
                
                (1.64
                )Diluted
      income/(loss) per share
                
                $
                0.70
                
                
                $
                (1.10
                )
                
                $
                (1.18
                )Weighted
      average number of common stock outstanding-basic
                
                
                12,798,599
                
                
                
                12,697,992
                
                
                
                12,643,590-diluted
                
                
                14,970,366
                
                
                
                12,697,992
                
                
                
                12,643,590








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




Life
Sciences Research Inc. and Subsidiaries
 Consolidated
Balance Sheets
 Dollars
in (000’s), except per share amounts





December
      31,ASSETS
                
                2008
                
                
                2007(Restated)Current
      assets:Cash
      and cash equivalents
                
                $
                36,493
                
                
                $
                36,223Accounts
      receivable, net
                
                
                19,607
                
                
                
                30,116Unbilled
      receivables, net
                
                
                21,683
                
                
                
                25,935Inventories
                
                
                2,854
                
                
                
                2,530Prepaid
      expenses and other current assets (includes related parties of $985 and $985 in 2008 and
      2007)
                
                
                5,031
                
                
                
                5,363Total
      current assets
                
                $
                85,668
                
                
                $
                100,167Property,
      plant and equipment, net
                
                
                63,610
                
                
                
                70,994Goodwill
                
                
                2,684
                
                
                
                3,138Intangible
      assets, net
                
                
                6,449
                
                
                
                12,512Other
      assets, related parties
                
                
                3,074
                
                
                
                3,907Deferred
      income taxes
                
                
                9,713
                
                
                
                10,865Total
      assets
                
                $
                171,198
                
                
                $
                201,583LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Accounts
      payable
                
                $
                12,061
                
                
                $
                15,477Accrued
      payroll and other benefits
                
                
                3,882
                
                
                
                6,644Accrued
      expenses and other liabilities
                
                
                25,921
                
                
                
                33,086Short-term
      debt
                
                
                2,596
                
                
                
                3,018Fees
      invoiced in advance
                
                
                27,681
                
                
                
                47,347Total
      current liabilities
                
                $
                72,141
                
                
                $
                105,572Long-term
      debt, net (includes related parties of $21,025 and $23,341 in
      2008 and
      2007)
                
                
                71,943
                
                
                
                73,029Deferred
      gain on disposal of US property
                
                
                8,467
                
                
                
                8,787Pension
      liabilities
                
                
                33,859
                
                
                
                43,522Total
      liabilities
                
                $
                186,410
                
                
                $
                230,910





(Continued)


Life
Sciences Research Inc. and Subsidiaries
 Consolidated
Balance Sheets (Cont’d)
 Dollars
in (000’s), except per share amounts





December
      31,LIABILITIES
      AND STOCKHOLDERS' DEFICIT
                (Continued)
              2008
              
              2007
                (Restated)





Commitments
      and contingenciesStockholders'
      deficitPreferred
      Stock, $0.01 par value.  Authorized: 5,000,000Issued
      and outstanding: None
                  
                  
                  -
                  
                  
                  
                  -Non-Voting
      Common Stock, $0.01 par value.  Authorized:
      5,000,000Issued
      and outstanding: None
                  
                  
                  -
                  
                  
                  
                  -Voting
      Common Stock, $0.01 par value.Authorized: 50,000,000Issued
      and outstanding at December 31, 2008:13,345,495
                    13,345,495(December
      31, 2007
      12,626,498)                                    December
      31, 2007:
                    12,626,498
                  
                  
                  133
                  
                  
                  
                  126Paid
      in capital
                  
                  
                  89,717
                  
                  
                  
                  87,216Accumulated
      other comprehensive loss
                  
                  
                  (45,686
                  )
                  
                  
                  (46,875
                  )Accumulated
      deficit
                  
                  
                  (59,376
                  )
                  
                  
                  (69,794
                  )Total
      stockholders' deficit
                  
                  $
                  (15,212
                  )
                  
                  $
                  (29,327
                  )Total
      liabilities and stockholders' deficit
                  
                  $
                  171,198
                  
                  
                  $
                  201,583








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


Life
Sciences Research Inc. and Subsidiaries
 Consolidated
Statements of Stockholders’ Deficit and Comprehensive Loss
 Dollars
in (000’s), except per share amounts


Common
                  Stock
                
                
                Common
                  Stock
                  at
      Par
                
                
                Promissory
      Notes for Issuance of Common Stock
                
                
                Additional
      Paid in
                  Capital
                
                
                Accum-ulated
      Deficit
                
                
                Accum-ulated
      Other Compre-hensive Loss
                
                
                TotalBalance,
      December 31, 2005
                
                
                12,533
                
                
                $
                126
                
                
                $
                (205
                )
                
                $
                75,848
                
                
                $
                (40,948
                )
                
                $
                (49,389
                )
                
                $
                (14,568
                )Issue
      of shares
                
                
                191
                
                
                
                2
                
                
                
                -
                
                
                
                1,764
                
                
                
                -
                
                
                
                -
                
                
                
                1,766Exercise
      of stock options
                
                
                31
                
                
                
                -
                
                
                
                -
                
                
                
                62
                
                
                
                -
                
                
                
                -
                
                
                
                62Stock
      based compensation expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                18,088
                
                
                
                -
                
                
                
                -
                
                
                
                18,088Increase
      in value net of repayment of Promissory notes
                
                
                -
                
                
                
                -
                
                
                
                205
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                205Comprehensive
      loss:Net
      loss for the year
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,872
                )
                
                
                -
                
                
                
                -Minimum
      pension liability,
                  net
      of $2,650 deferred tax
                  –Deficiency
      on UK defined
                  benefit
      pension plan
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                6,183
                
                
                
                -Translation
      adjustments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,956
                )
                
                
                -Total
      comprehensive loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (10,645
                )Balance,
      December 31, 2006
                
                
                12,775
                
                
                $
                128
                
                
                $
                -
                
                
                $
                95,762
                
                
                $
                (55,820
                )
                
                $
                (45,162
                )
                
                $
                (5,092
                )Issue
      of shares
                
                
                13
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Exercise
      of stock options
                
                
                88
                
                
                
                -
                
                
                
                -
                
                
                
                238
                
                
                
                -
                
                
                
                -
                
                
                
                238Stock
      based compensation expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,908
                
                
                
                -
                
                
                
                -
                
                
                
                1,908Repurchase
      of shares
                
                
                (250
                )
                
                
                (2
                )
                
                
                -
                
                
                
                (3,998
                )
                
                
                -
                
                
                
                -
                
                
                
                (4,000
                )Repurchase
      of warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,694
                )
                
                
                -
                
                
                
                -
                
                
                
                (6,694
                )Comprehensive
      loss:Net
      loss for the year
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (13,974
                )
                
                
                -
                
                
                
                -Minimum
      pension liability,
                  net
      of $309 deferred tax
                  –Deficiency
      on UK defined
                  benefit
      pension plan
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (721
                )
                
                
                -Translation
      adjustments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (992
                )
                
                
                -Total
      comprehensive loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (15,687
                )Balance,
      December 31, 2007 (Restated)
                
                
                12,626
                
                
                $
                126
                
                
                $
                -
                
                
                $
                87,216
                
                
                $
                (69,794
                )
                
                $
                (46,875
                )
                
                $
                (29,327
                )Issue
      of shares
                
                
                411
                
                
                
                4
                
                
                
                -
                
                
                
                612
                
                
                
                -
                
                
                
                -
                
                
                
                616Exercise
      of stock options
                
                
                308
                
                
                
                3
                
                
                
                -
                
                
                
                783
                
                
                
                -
                
                
                
                -
                
                
                
                786Stock
      based compensation expense
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,106
                
                
                
                -
                
                
                
                -
                
                
                
                2,106Repurchase
      of warrants
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,000
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,000
                )Comprehensive
      income:Net
      income for the year
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                10,418
                
                
                
                -
                
                
                
                -Minimum
      pension liability,
                  net
      of $0 deferred tax
                  –Deficiency
      on UK defined
                  benefit
      pension plan
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (6,082
                )
                
                
                -Translation
      adjustments
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                7,271
                
                
                
                -Total
      comprehensive income
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                11,607Balance,
      December 31, 2008
                
                
                13,345
                
                
                $
                133
                
                
                $
                -
                
                
                $
                89,717
                
                
                $
                (59,376
                )
                
                $
                (45,686
                )
                
                $
                (15,212
                )The
      accompanying notes are an integral part of these consolidated financial
      statements.








Life
Sciences Research Inc. and Subsidiaries
 Consolidated
Statements of Cash Flows (Cont’d)
 Dollars
in (000’s) except per share amounts


Year
      Ended December 31,2008
                
                
                2007
                  (Restated)
                
                
                2006Cash
      flows from operating activities:Net
      income/(loss)
                
                $
                10,418
                
                
                $
                (13,974
                )
                
                $
                (14,872
                )Adjustments
      to reconcile net loss to net cash provided by operating
      activitiesDepreciation
      and amortization
                
                
                10,653
                
                
                
                9,519
                
                
                
                9,514Amortization
      of gain on disposal of US property
                
                
                (320
                )
                
                
                (320
                )
                
                
                (161
                )Non-cash
      compensation expense associated with employee stock compensation
      plans
                
                
                2,106
                
                
                
                1,908
                
                
                
                2,441Loss
      on deconsolidation of variable interest entity
                
                
                -
                
                
                
                -
                
                
                
                42,874Foreign
      exchange loss/(gain) on March 2006 Financing and Capital
    Bonds
                
                
                14,102
                
                
                
                (770
                )
                
                
                (6,210
                )Foreign
      exchange gain on intercompany balances
                
                
                (1,313
                )
                
                
                (169
                )
                
                
                (692
                )Deferred
      income tax expense/(benefit)
                
                
                1,380
                
                
                
                33,194
                
                
                
                (29,074
                )Provision
      for losses on accounts receivable
                
                
                126
                
                
                
                26
                
                
                
                73Amortization
      of Capital Bonds issue costs
                
                
                -
                
                
                
                -
                
                
                
                70Amortization
      of debt issue and financing costs included in interest
    expense
                
                
                4,296
                
                
                
                3,923
                
                
                
                4,740Amortization
      of warrants
                
                
                -
                
                
                
                -
                
                
                
                9,265Changes
      in operating assets and liabilities:Accounts
      receivable, unbilled receivables and prepaid expenses
                
                
                (4,762
                )
                
                
                3,082
                
                
                
                (3,540
                )Inventories
                
                
                (1,211
                )
                
                
                (522
                )
                
                
                301Accounts
      payable, accrued expenses and other liabilities
                
                
                2,553
                
                
                
                9,775
                
                
                
                5,692Fees
      invoiced in advance
                
                
                (8,432
                )
                
                
                1,795
                
                
                
                7,028Defined
      benefit pension plan liabilities
                
                
                3,122
                
                
                
                (4,969
                )
                
                
                (12,878
                )Net
      cash provided by operating activities
                
                $
                32,718
                
                
                $
                42,498
                
                
                $
                14,571Cash
      flows used in investing activities:Purchase
      of property, plant and equipment
                
                
                (16,657
                )
                
                
                (16,439
                )
                
                
                (13,093
                )Sale
      of property, plant and equipment
                
                
                -
                
                
                
                17
                
                
                
                6Payment
      for acquisition, net of cash acquired
                
                
                (1,779
                )
                
                
                (4,340
                )
                
                
                -Net
      cash used in investing activities
                
                $
                (18,436
                )
                
                $
                (20,762
                )
                
                $
                (13,087
                )Cash
      flows (used in)/provided by financing activities:Proceeds
      from issue of Voting Common Stock
                
                
                1,400
                
                
                
                238
                
                
                
                648Proceeds
      from long-term borrowings
                
                
                -
                
                
                
                -
                
                
                
                70,000Repurchase
      of Voting Common Stock
                
                
                -
                
                
                
                (4,000
                )
                
                
                -Repurchase
      of warrants
                
                
                (1,000
                )
                
                
                (6,694
                )
                
                
                -Decrease/(increase)
      in other assets
                
                
                985
                
                
                
                (4,775
                )
                
                
                (8,145
                )Repayments
      of long-term borrowings
                
                
                (1,630
                )
                
                
                (10,729
                )
                
                
                (71
                )Repayments
      of short-term borrowings
                
                
                (593
                )
                
                
                (904
                )
                
                
                (46,871
                )Net
      cash (used in)/provided by financing activities
                
                $
                (838
                )
                
                $
                (26,864
                )
                
                $
                15,561Effect
      of exchange rate changes on cash and cash equivalents
                
                
                (13,174
                )
                
                
                (2,737
                )
                
                
                11,623Increase/(decrease)
      in cash and cash equivalents
                
                
                270
                
                
                
                (7,865
                )
                
                
                28,668Cash
      and cash equivalents at beginning of year
                
                
                36,223
                
                
                
                44,088
                
                
                
                15,420Cash
      and cash equivalents at end of year
                
                $
                36,493
                
                
                $
                36,223
                
                
                $
                44,088











Year
      Ended December 31,2008
                
                
                2007
                  (Restated)
                
                
                2006Supplementary
      Disclosures:Interest
      paid
                
                $
                7,984
                
                
                $
                11,609
                
                
                $
                10,572Income
      taxes paid
                
                $
                389
                
                
                $
                307
                
                
                $
                142Supplementary
      disclosures of non-cash investing activity:Increase
      in acquisition consideration
                
                $
                479
                
                
                $
                1,769
                
                
                $
                -Supplementary
      disclosures of non-cash financing activity:Effect
      on accumulated other comprehensive loss for pension
      liabilities
                
                $
                6,082
                
                
                $
                721
                
                
                $
                (6,183
                )Issuance
      of warrants to lender
                
                $
                -
                
                
                $
                -
                
                
                $
                5,281Issuance
      of warrants to financial advisor
                
                $
                -
                
                
                $
                -
                
                
                $
                3,278





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











Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 Dollars
in (000’s) except per share amounts





1.  THE
COMPANY AND ITS OPERATIONS





Life
Sciences Research, Inc. ("LSR") and Subsidiaries (collectively, the "Company")
is a global contract research organization, offering worldwide pre-clinical and
non-clinical testing services for biological safety evaluation research to the
pharmaceutical and biotechnology, as well as the agrochemical and industrial
chemical companies.  The Company serves the rapidly evolving
regulatory and commercial requirements to perform safety evaluations on new
pharmaceutical compounds and chemical compounds contained within the products
that humans use, eat and are otherwise exposed to.  In addition, the
Company tests the effect of such compounds on the environment and also performs
work on assessing the safety and efficacy of veterinary products.





2.  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES





A summary
of the significant accounting policies, is set out below:





Basis
of Presentation and Principles of Consolidation





The
Company’s financial statements are prepared in conformity with US generally
accepted accounting principles ("GAAP").





The
consolidated financial statements incorporate the accounts of LSR and each of
its Subsidiaries.  All inter-company balances have been eliminated
upon consolidation.





Certain
reclassifications have been made to the 2007 and 2006 financial information to
conform to the current period presentation.





On June
14, 2005, the Company entered into and consummated purchase and sale agreements
with Alconbury Estates Inc. and Subsidiaries (collectively “Alconbury”) for the
sale and leaseback of the Company’s three operating facilities in Huntingdon and
Eye, England and East Millstone, New Jersey (the “Sale/Leaseback
Transaction”).  Alconbury was newly formed in June 2005 and controlled
by LSR’s Chairman and CEO, Andrew Baker.  The total consideration paid
by Alconbury for the three properties was $40 million, consisting of $30 million
in cash and a five year, $10 million variable rate subordinated promissory note,
which Alconbury paid in full on June 30, 2006, together with accrued interest of
$0.6 million.





In
accordance with the provisions of the Financial Accounting Standards Board
(“FASB”) Interpretation No. 46R (“FIN 46R”), the Company has reflected the
consolidation of Alconbury from June 14, 2005 through June 29, 2006, the period
in which the Company was considered the “primary beneficiary” of Alconbury’s
variable interests.  The Company has determined that as of June 29,
2006 it was no longer the primary beneficiary of Alconbury, and therefore was
required to deconsolidate Alconbury’s assets and liabilities from the Company’s
Condensed Consolidated Balance Sheet as of that date.  Please refer to
Note 3 for detail of the impact of this deconsolidation.








Foreign
Currencies





Transactions
in currencies other than the functional currency of the entity are recorded at
the rates of exchange at the date of the transaction.  Monetary assets
and liabilities in currencies other than the functional currency are translated
at the rates of exchange at the balance sheet date and the related transaction
gains and losses are reported in the statements of
operations.  Exchange gains and losses on foreign currency
transactions are recorded as other income or expense.  Certain
intercompany loans are determined to be of a long-term investment
nature.  The Company records gains and losses from re-measuring such
loans as a component of other comprehensive income.








Upon
consolidation, the results of operations of Subsidiaries whose functional
currency is other than the US dollar are translated into US dollars at the
average exchange rate, assets and liabilities are translated at year-end
exchange rates, capital accounts are translated at historical exchange rates,
and retained earnings are translated at the weighted average of historical
rates.  Translation adjustments are presented as a separate component
of other accumulated comprehensive loss in the financial
statements.








Use
of estimates





The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the dates
of the financial statements and the results of operations during the reporting
periods.  These include management estimate in the calculation and
timing of revenue recognition.  These also include management
estimates in the calculation of pension liabilities covering discount rates,
return on plan assets and other actuarial assumptions.  These also
include management estimates in the calculation of deferred tax assets and
liabilities and the valuation allowance on deferred tax.  Although
these estimates are based upon management’s best knowledge of current events and
actions, actual results could differ from those estimates.








Segment
Analysis





In
accordance with the Statement of Financial Accounting Standards (“SFAS”) No.
131, “Disclosures About Segments of an Enterprise and Related Information”
(“SFAS 131”), the Company discloses financial and descriptive information about
its reportable operating segments.  Operating segments are components
of an enterprise about which separate financial information is available and
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and in assessing performance.








Revenue
Recognition





The
majority of the Company's net revenues have been earned under contracts, which
generally range in duration from a few months to three years.  Net
revenue from these contracts is generally recognized over the term of the
contracts as services are rendered.  Contracts may contain provisions
for re-negotiation in the event of cost overruns due to changes in the level of
work scope.  Renegotiated amounts are included in net revenue when
earned and realization is assured.  Provisions for losses to be
incurred on contracts are recognized in full in the period in which it is
determined that a loss will result from performance of the contractual
arrangement.  Most service contracts may be terminated for a variety
of reasons by the Company's customers either immediately or upon notice at a
future date.  The contracts generally require payments to the Company
to recover costs incurred, including costs to wind down the study, and payment
of fees earned to date, and in some cases to provide the Company with a portion
of the fees or income that would have been earned under the contract had the
contract not been terminated early.


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


Unbilled
receivables are recorded for net revenue recognized to date that is currently
not billable to the customer pursuant to contractual terms.  In
general, amounts become billable upon the achievement of certain aspects of the
contract or in accordance with predetermined payment
schedules.  Unbilled receivables are billable to customers within one
year from the respective balance sheet date.  Fees in advance are
recorded for amounts billed to customers for which net revenue has not been
recognized at the balance sheet date (such as upfront payments upon contract
authorization, but prior to the actual commencement of the study).








Earnings
Per Share





Earnings per share are computed in
accordance with SFAS No. 128, "Earnings Per Share" (“SFAS
128”).  Basic income per share is computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during the year.  The computation of diluted income per
share is similar to the computation of basic income per share, except that the
denominator is increased to include the number of additional common shares that
would have been outstanding if the dilutive potential common shares had been
issued.  Diluted income per share reflects the potential dilution that
could occur if dilutive securities and other contracts to issue common stock
were exercised or converted into common shares or resulted in the issuance of
common shares that then shared in the income of the Company.





The
following table presents the calculation of weighted-average shares used to
calculate basic and diluted net income (loss) per share:





Year
      Ended December 31,2008
                
                2007
                  (Restated)
                
                2006Weighted-average
      shares outstanding – basic
                12,798,599
                
                12,697,992
                
                12,643,590Plus:
      Effect of dilutive potential common shares
                2,171,767
                
                -
                
                -Weighted-average
      shares used in calculating diluted net income (loss)
                  per
      share
                14,970,366
                
                12,697,992
                
                12,643,590





Options
to purchase 1,021,432 and 971,817 common shares (weighted average) were
outstanding during 2007 and 2006 respectively, but were not included in the
computation of diluted earnings per share because the effect was
anti-dilutive.  Warrants to purchase 1,256,680 and 901,218 common
shares (weighted average) were outstanding during 2007 and 2006 respectively,
but were not included in the computation of diluted earnings per share because
the effect was anti-dilutive.








Income
Taxes





The
Company accounts for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes" ("SFAS 109").  SFAS 109 requires
recognition of deferred tax assets and liabilities for the estimated future tax
consequences of events attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carry
forwards.  Deferred tax assets and liabilities are measured using
enacted rates in effect for the year in which the differences are expected to be
recovered or settled.  The effect on deferred tax assets and
liabilities of changes in tax rates is recognized in the statement of operations
in the period in which the enactment rate changes.  Deferred tax
assets and liabilities are reduced through the establishment of a valuation
allowance at such time as, based on available evidence, it is more likely than
not that the deferred tax assets will not be realized.








On
January 1, 2007, the Company adopted FASB Interpretation No. 48 “Accounting for
Uncertainty in Income Taxes” (“FIN 48”).  FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with SFAS 109.  FIN 48 provides guidance on recognizing,
measuring, presenting and disclosing in the financial statements uncertain tax
positions that a company has taken or expects to take on a tax
return.








Cash
and Cash Equivalents





Effective
December 31, 2008, the Company changed its accounting policy relating to the
classification of certain short term investments as cash and cash
equivalents.  Previously, cash and cash equivalents included all highly
liquid investments with an original maturity date of three months or less at the
date of purchase. The Company now determines cash and cash equivalents to also
include investments in U.S. government agency securities with original maturity
dates of six months or less at the date of purchase.  These are securities
that have a liquid market to facilitate buying or selling prior to the maturity
date, which is done as part of the Company's money management
activities.





The
consolidated balance sheet as of December 31, 2007 and the consolidated
statement of cash flows for the year ended December 31, 2007 have been restated
to reflect the change in classification of those short term investments. 
The above change in accounting policy resulted in an increase in cash and cash
equivalents and a corresponding decrease in short-term investments of
approximately $3.9 million as of December 31, 2007.  Cash flows from
Investing activities and cash and cash equivalents increased by $3.9 million for
the year ended December 31, 2007.  There was no effect on net income or
stockholders' equity for the year ended December 31, 2007 and no effect on the
consolidated financial statements as of and for the year ended December 31,
2006.








Fair
Value of Financial Instruments





The
carrying amounts of the Company's significant financial instruments, which
include cash equivalents, marketable securities, accounts receivable, accounts
payable, and short and long-term debt approximate their fair values at
December 31, 2008 and 2007.








Allowance
for Uncollectible Accounts





The
Company establishes an allowance for uncollectible accounts which it believes is
adequate to cover anticipated losses on the collection of all outstanding trade
receivable balances.  The adequacy of the uncollectible account
allowance is based on historical information, a review of customer accounts and
related receivable balances, and management’s assessment of current economic
conditions.  The Company reassesses the allowance for uncollectible
accounts annually.








Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


Inventories





Inventories
are valued on a FIFO (first-in, first out) method at the lower of cost, or
market value.  They comprise materials and supplies.








Property,
Plant and Equipment





Property,
plant and equipment, stated at cost, is depreciated over the estimated useful
lives of the assets on a straight-line basis.  Leased property is
depreciated over the lesser of its useful life or remaining lease
term.  Estimated useful lives are as follows:





Asset
              Remaining
      LivesLeasehold
      land and buildings
              over
      the remaining lease termLeasehold
      improvements
              15
      years – the remaining lease termPlant
      and equipment
              4 -
      25 yearsVehicles
              5
      yearsComputers
      and software
              3 -
      5 years





Repair
and maintenance expenses on these assets arising from the normal course of
business are expensed in the period incurred.








Concentration
of Credit Risk





The
Company maintains cash and cash equivalents with various financial
institutions.  These financial institutions are located primarily in
the US and the Company's policy is designed to limit exposure with any one
institution.





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist primarily of trade receivables from customers in the pharmaceutical
and biotechnology industries.  The Company believes its exposure to
credit risk to be minimal, as these industries have experienced growth and the
customers are predominantly well established and
viable.  Additionally, the Company maintains allowances for potential
credit losses.  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 receivables less fees invoiced in advance.








Goodwill
and Other Intangible Assets





The
Company accounts for “Goodwill and Other Intangible Assets,” under the
provisions of SFAS No. 142, which establishes financial accounting and reporting
standards for acquired goodwill and other intangible assets (Note
5).  In accordance with SFAS No. 142, goodwill and indefinite-lived
intangible assets are not amortized but are reviewed at least annually for
impairment.  Separate intangible assets that have finite useful lives
continue to be amortized over their estimated useful lives.





The
Company allocates the purchase price of acquisitions to identified tangible and
intangible assets acquired and liabilities assumed based on their estimated fair
values at the date of acquisition, with any residual amounts allocated to
goodwill.





SFAS No.
142 requires that goodwill be tested annually for impairment using a two-step
process.  The first step is to identify a potential
impairment.  The second step of the impairment test measures the
amount of the impairment loss.  The Company, after completing the
first step of the process, concluded there was no impairment of goodwill at
December 31, 2008 and 2007.











Impairment
of Long-Lived Assets





In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-lived Assets”, the Company evaluates long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.  An impairment loss would be 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.  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 flows, as
appropriate.  For the years ended December 31, 2008 and 2007, no
assets were impaired.








Leased
Assets





Assets
held under the terms of capital leases are included in property and equipment
and are depreciated on a straight-line basis over the lesser of the useful life
of the asset or the term of the lease.  Obligations for future lease
payments under capital leases, less attributable finance charges are shown
within liabilities and are analyzed between amounts falling due within and after
one year.  Operating lease rentals are expensed.








Pension
Costs





The
Company has two defined contribution plans.  One of the defined
contribution pension plans covers all employees in the US; the other, employees
in the UK.  Prior to December 31, 2002, a defined benefit pension plan
provided benefits to employees in the UK based on their final pensionable
salary.  As of December 31, 2002, the defined benefit pension plan was
curtailed.  The gain on curtailment was recognized in the Statement of
Operations according to SFAS No. 88, “Employees’ Accounting for Settlements and
Curtailments of Deferred Benefit Pension Plan and for Termination
Benefits”.  The pension cost of the plan is accounted for in
accordance with SFAS No. 87, "Employers' Accounting for
Pensions".  Pension information is presented in accordance with the
currently required provisions of SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits" and FAS158, “Employers’ Accounting
for Defined Benefit Pension and Other Post Retirement Plans”.  The net
(loss)/gain subject to amortization, outside the corridor, is being amortized on
a straight-line basis over a period of 15 years.  The Company
recognizes all actuarial gains and losses immediately for the purposes of its
minimum pension liability.








Loans
and Stock Warrants





In
accordance with Accounting Principles Board ("APB") Opinion No. 14 "Accounting
for Convertible Debt and Debt issued with Share Purchase Warrants", loans and
warrants were recorded at their pro-rata fair values in relation to the proceeds
received with the portion allocable to the warrants accounted for as
paid-in-capital for periods up to December 31, 2005.  From January 1,
2006, the Company adopted Financial Accounting Standards (“FAS”) No. 123R,
“Share-Based Payment,” (“FAS 123R”) utilizing a Black-Scholes option pricing
model to value its warrants.  See Note 12.





The costs
of raising long-term financing are capitalized as an asset and a debt discount,
and are amortized, using the effective interest method, over the term of the
debt.  “Amortization of warrants” of $861,000 presented in the 2006
cash flow statement is now reflected as "Amortization of debt issue and
financing costs included in interest expense" to conform to the 2008 and 2007
presentations.











Stock-Based
Compensation





Effective
January 1, 2006, the Company adopted FAS 123R utilizing the “modified
prospective” method as described in FAS 123R.  FAS 123R is a revision
of FAS No. 123, “Accounting for Stock Based Compensation”.





In the
“modified prospective” method, compensation cost is recognized for all stock
option and stock-based arrangements granted after the effective date and for all
unvested awards granted prior to the effective date.  FAS 123R also
requires the tax benefits associated with these share-based payments to be
classified as financing activities in the Consolidated Statements of Cash Flows,
rather than as operating cash flows as required under previous
regulations.




At
December 31, 2008, the Company had two stock-based compensation plans with total
unvested stock-based compensation expense of $1.4 million compared to $2.4
million for the year ended December 31, 2007, and a total weighted average
remaining term of 8.18 years compared to 8.92 years in the same period in
2007.  Total stock-based compensation expense, recognized in Cost of
Sales and Selling, General and Administrative expenses, aggregated $2.1 million
for the year ended December 31, 2008 compared to $1.9 million for the year ended
December 31, 2007 and compared to $0.7 million for the year ended December 31,
2006.  The Company has not recorded any tax benefit relating to this
expense as the majority of the compensation will be paid to employees that are
located outside of the United States and the deduction is disallowed in that
taxing jurisdiction.  Accordingly, no tax benefit will be realized by
the Company.






The per
share weighted average exercise price of the stock options granted during 2008,
2007 and 2006 was $24.31, $16.65 and $9.90, respectively.  The fair
values of the Company’s employee stock options were estimated at the date of
grant of each issuance using a Black-Scholes option-pricing model, with the
following weighted average assumptions for all options expensed/proforma
calculated during the years ended December 31, 2008, 2007 and 2006:











FAS
      123R
                Expense
              FAS
      123R
                Expense
              FAS
      123R
                Expense2008
              2007
              2006Expected
      dividend yield of stock
              0%
              0%
              0%Expected
      volatility of stock, range
              115.0%
      - 130.8%
              49.4%
      - 130.8%
              49.4%
      - 146.4%Risk-free
      interest rate, range
              2.83%
      - 4.98%
              3.52%
      - 4.98%
              3.71%
      - 4.98%Expected
      term of options
              5.0
      – 6.53 years
              5.5
      - 10 years
              5 -
      10 years








Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


Recently
Issued Accounting Standards




In
December 2007, the FASB issued FAS 141(R), "Business Combinations - a
replacement of FASB Statement No. 141" (“SFAS 141R”), which significantly
changes the principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree.  The statement also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination.  This
statement is effective prospectively, except for certain retrospective
adjustments to deferred tax balances, for fiscal years beginning after
December 15, 2008.  Beginning January 1, 2009, the Company will
adopt SFAS 141R and the impact of implementing this statement will depend on the
nature and significance of business combinations consummated that would be
subject to this statement.






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






In
April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3 amends
FASB Statement No. 142, “Goodwill and Other Intangible Assets” (“SFAS
No. 142”) to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected
cash flows used to measure the fair value of the asset under FASB Statement No
141, “Business Combinations” (“SFAS No. 141”) and other U.S.
GAAP.  This FSP is effective for fiscal years beginning after
December 15, 2008.  The guidance for determining the useful life
of a recognized intangible asset is to be applied prospectively, therefore, the
impact of the implementation of this pronouncement cannot be determined until
the transactions occur.






In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles”.  SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting
principles.  SFAS No. 162 is effective 60 days following the
Securities and Exchange Commission’s approval of the Public Company Accounting
Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting
Principles.”  The Company does not expect the adoption of SFAS No. 162
to change its current practice nor does the Company anticipate an effect on the
Company’s consolidated results of operations or financial position.






In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF 03-6-1”).  FSP EITF 03-6-1 concludes that unvested share-based
payment awards that contain rights to receive non-forfeitable dividends or
dividend equivalents are participating securities, and thus, should be included
in the two-class method of computing earnings per share (“EPS”).  FSP
EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and
interim periods within those years.  Early application of EITF 03-6-1
is prohibited.  This FSP also requires that all prior-period EPS data
be adjusted retrospectively.  The Company is currently evaluating the
impact FSP EITF 03-6-1 will have on the Company’s consolidated results of
operations or financial position.






In
December 2008, the FASB issued FASB Staff Position 132(R)-1 (“FSP 1232(R)-1”),
which provides guidance on an employer’s disclosures about plan assets of a
defined benefit pension or other postretirement plan.  FSP 132(R)-1
requires disclosure of investment allocation methodologies and information that
enables users of financial statements to assess the inputs and valuation
techniques used to develop fair value measurements of plan assets in order to
provide users with an understanding of significant concentrations of risk in
plan assets.  FSP 132(R)-1 is effective for years ending after
December 15, 2009.  FSP 132(R)-1 requires additional disclosure only
and therefore, will not impact the Company’s consolidated results of operations
or financial position.




Management
does not believe that any other recently issued, but not yet effective,
accounting standard if currently adopted would have a material effect on the
accompanying financial statements.







Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


3.  LOSS
ON DECONSOLIDATION OF VARIABLE INTEREST ENTITY





As
described in Note 2, and in compliance with FIN 46R, the Company had included
the operating results and accounts of Alconbury in its Condensed Consolidated
Financial Statements since the inception of Alconbury on June 14, 2005, based on
the Company being the primary beneficiary of Alconbury.  On June 29,
2006 the Company determined that it was no longer the primary beneficiary of
Alconbury, and therefore was required to deconsolidate Alconbury's assets and
liabilities from the Company's Condensed Consolidated Balance Sheet as of that
date.  The effect of removing Alconbury can be summarized as
follows:




The
assets and liabilities of Alconbury removed from the Condensed Consolidated
Balance Sheet as of:





June
      29, 2006Cash
                  $1,436Deferred
      charges
                  713Accrued
      mortgage interest payable
                  (767)Mortgage
      loans payable
                  (30,000)Net
      assets (liabilities) of Alconbury
                  $(28,618)Since
      Alconbury is now deconsolidated, the Company will also no longer be
      eliminating certain inter-company transactions and balances relating to
      its dealings with Alconbury and affecting the Condensed Consolidated
      Balance Sheet, as
follows:





June
      29, 2006Net
      book value of property and equipment prior to
    sale-leaseback
                  $80,515Net
      book value of property and equipment for property under capital
      leases
                  (22,750)Accumulated
      depreciation on properties sold, net
                  (2,725)Deferred
      gain on sale-leaseback transaction, net of amortization of
      $336
                  9,267Capital
      lease obligations relating to sale-leaseback
                  22,750Rents
      received in advance from Alconbury
                  (1,056)Advances
      to Alconbury for sale-leaseback costs, net
                  (2,656)Accrued
      interest receivable from Alconbury
                  (628)Note
      receivable from Alconbury relating to sale-leaseback
                  (10,000)Accumulated
      comprehensive loss - translation gain
                  (1,225)Total
      removal of previously required elimination entries
                  $71,492The
      income tax effects relating to the removal of the assets and liabilities
      of Alconbury and the reinstatement of certain Company assets and
      liabilities previously eliminated in consolidation with Alconbury yields a
      deferred income tax benefit as
follows:





June
      29, 2006Deferred
      income tax benefit
              $(22,218)The
      net effect after taxes of the foregoing items has been to record a loss on
      deconsolidation of variable interest entity during the quarter ended June
      30, 2006 as follows:





June
      29, 2006Loss
      on deconsolidation of variable interest entity
                  $20,656


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


4.  PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment as of December 31 consisted of the following:





2008
                  
                  2007
                    (Restated)Property,
      plant and equipment, at cost:Building
      and facilities
                  
                  $-
                  
                  $-Leasehold
      buildings and improvements
                  
                  36,436
                  
                  40,392Plant,
      equipment, vehicles, computers and software
                  
                  108,492
                  
                  133,123Assets
      in the course of construction
                  
                  3,744
                  
                  290148,672
                  
                  173,805Less:
      Accumulated depreciation
                  
                  (85,062)
                  
                  (102,811)Property,
      plant and equipment, net
                  
                  $63,610
                  
                  $70,994





Depreciation
expense aggregated $9,729, $9,519 and $9,514 for
2008, 2007 and 2006,
respectively.





The net
book value of assets held under capital leases and included above is as
follows:









2008
                
                2007
                  (Restated)Cost
                Accumulated
      Depreciation
                Net
      book
                  Value
                
                Cost
                Accumulated
      Depreciation
                Net
      book
                  ValueAlconbury
      capital
                $21,025
                $2,491
                $18,534
                
                $23,341
                $1,989
                $21,352Other
      capital leases
                2,298
                1,182
                1,116
                
                2,752
                1,018
                1,734$23,323
                $3,673
                $19,650
                
                $26,093
                $3,007
                $23,086










The
assets and liabilities under capital leases are recorded at the lower of the
present value of the minimum lease payments or the fair value of the
asset.





The
Alconbury capital leases are included in Leasehold buildings and improvements
whilst Other capital leases are included in Plant, equipment, vehicles,
computers and software.





Depreciation
expense on these capital leases and included above, amounted to $1,119 (of which $701 related to Alconbury
capital leases), $1,284 (of which $778 related to Alconbury capital leases), and
$1,017 (of which $683 related to Alconbury capital leases) for the years ended
December 31, 2008, 2007
and 2006, respectively.








Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


5.
            ACQUISITIONS,
      GOODWILL AND INTANGIBLE ASSETS





Huntingdon
Life Sciences KK (“HLS KK”) has acted as the Company’s marketing representative
in Japan since 1996.  This Company was a joint venture, 50% of which
was owned by Huntingdon.  On July 1, 2003, the remaining 50% of the
shares in HLS KK, not previously owned by Huntingdon, was purchased, resulting
in HLS KK becoming a wholly owned subsidiary of Huntingdon.  At
December 31, 2008 and
2007, goodwill on purchase of HLS KK, when translated at year end rates was
$1,026 and $1,506,
respectively.





During
December 2007, the Company acquired all of the outstanding stock of a company
providing pharmaceutical development services ("Services
Company”).  The acquisition was accounted for as a purchase and the
Services Company's results of operation for the period subsequent to the
acquisition have been included in the Company’s Consolidated Statements of
Operations.  During 2008, an independent third party valuation was
performed, of the Services Company as of the acquisition date, utilizing a fair
value measurement that assumes the highest and best use of the asset by market
participants.





At
December 31, 2008, the purchase price of the Services Company, including
acquisition expenses, was approximately $6,085, of which $4,343 was paid in cash
at closing.  A working capital adjustment was payable to the sellers
of the Service Company in the first quarter of 2008 of $1,262, which was
included in the recorded purchase price at December 31, 2007.  The
purchase agreement also provides for annual contingent payments totaling
approximately $1,438 if the Services Company's profits, as defined in the
purchase agreement, meet certain base profit levels during each of the three
years ended December 31, 2010.  At the conclusion of the three year
period, based upon cumulative profits of the Services Company during that
period, there may be a final adjustment increasing the total amount of these
contingent payments.  The Company has accrued $479 to goodwill at
December 31, 2008 as the Services Company’s base profit level for the year ended
December 31, 2008 was sufficient to guarantee the first annual contingent
payment.





At
December 31, 2007, the purchase price of the Services Company, including
acquisition expenses, was approximately $7,761, of which $6,014 was paid in cash
at closing.  A working capital adjustment of $1,747 was payable to the
sellers in the first quarter of 2008, which was included in the recorded
purchase price at December 31, 2007.  The purchase agreement also
provides for annual contingent payments totaling approximately $1,991 if the
Services Company's profits, as defined in the purchase agreement, meet certain
base profit levels during each of the three years ended December 31,
2010.  At the conclusion of the three year period, based upon
cumulative profits of the Services Company during that period, there may be a
final adjustment increasing the total amount of these contingent
payments.





The table
below summarizes the purchase price allocations for the Services Company
acquisition:





2008
                  
                  2007
      (Restated)Estimated
      fair value of net tangible assets acquired
                  
                  $1,436
                  
                  $1,989Fair
      value of intangible assets acquired
                  
                  2,991
                  
                  4,140Goodwill
      acquired during 2007
                  
                  1,179
                  
                  1,632Goodwill
      acquired during 2008 from contingent payment
                  
                  479
                  
                  -Net
      assets acquired
                  
                  $6,085
                  
                  $7,761





Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


The
following table summarizes the Company’s acquired amortizable intangible assets,
which are reflected in Intangibles asset, net on the Consolidated Balance Sheet,
as of December 31, 2008
and 2007:





2008
                  
                  2007Intangible
      assets at costCustomer
      relationships (7 years useful life)
                  
                  $1,869
                  
                  $2,588Customer
      contracts (3 year weighted average useful life)
                  
                  863
                  
                  1,194Trade
      name (7 years useful life)
                  
                  259
                  
                  358$2,991
                  
                  $4,140Less:
      Accumulated amortization
                  
                  (896)
                  
                  -Net
      carrying value
                  
                  $2,095
                  
                  $4,140








Amortization
expense for the years ended December 31, 2008, 2007 and 2006 was $0.9 million, Nil and Nil,
respectively.  Amortization expense expected to be recorded for each
of the next five years is as follows:





Year
      Ending December 31,
                    
                    Amortization
      Expense2009
                    
                    $4872010
                    
                    $3922011
                    
                    $3042012
                    
                    $3042013
                    
                    $304








At
December 31, 2008, Intangible assets, net also included finance costs associated
with the sale/leaseback transaction of $1,102 and finance costs associated with
the March 2006 Financing of $8,112, net of amortization of $4,860.  At
December 31, 2007, intangible assets, net also included finance costs associated
with the sale/leaseback transaction of $1,207 and finance costs associated with
the March 2006 Financing of $11,231, net of amortization of
$4,066.  The movement in the asset values has occurred due to the
revaluation of functional currencies during the period.  Amortization
of these other intangible assets is expensed over the period of the lease and
the March 2006 Financing.  Amortization expense for these other
intangible assets is expected to be $1,836 in 2009, $2,203 in 2010, $435 in
2011, $39 in 2012 and $39 in 2013.








6.  OTHER
ASSETS, RELATED PARTIES





At
December 31, 2008, Other assets, related parties consisted of deposits relating
to the Sale/Leaseback Transaction with Alconbury of $1,095 and the long-term
portion of the outstanding reimbursement of the expenses incurred by Alconbury
in the Sale/Leaseback Transaction of $1,979.  Both of these
transactions are more fully explained in Note 8.





At
December 31, 2007, Other assets, related parties consisted of deposits relating
to the Sale/Leaseback Transaction with Alconbury of $1,333 and the long-term
portion of the outstanding reimbursement of the expenses incurred by Alconbury
in the Sale/Leaseback Transaction of $2,574.











7.  INCOME
TAXES





The
components of income / (loss) before taxes and the related benefit/(expense) for
tax for the years ended December 31 are as follows:





Income/(loss)
      before taxes
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006(Restated)United
      Kingdom
                  
                  $
                  10,563
                  
                  
                  $
                  19,907
                  
                  
                  $
                  16,173United
      States
                  
                  
                  627
                  
                  
                  
                  (1,200
                  )
                  
                  
                  (15,285
                  )Japan
                  
                  
                  608
                  
                  
                  
                  513
                  
                  
                  
                  (319
                  )British
      Virgin Islands
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (1,641
                  )$
                  11,798
                  
                  
                  $
                  19,220
                  
                  
                  $
                  (1,072
                  )





The
(expense)/benefit for income taxes by location of the taxing jurisdiction for
the years ended December 31, consisted of the following:





2008
                  
                  
                  2007
                    (Restated)
                  
                  
                  2006Current
      Taxation:-   State
      Taxes – US
                  
                  $
                  -
                  
                  
                  $
                  60
                  
                  
                  $
                  --   Corporate
      Tax – US
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  --   Corporate
      Tax – Japan
                  
                  
                  (284
                  )
                  
                  
                  (126
                  )
                  
                  
                  -Deferred
      taxation:-   United
      Kingdom
                  
                  
                  (36
                  )
                  
                  
                  (32,044
                  )
                  
                  
                  (3,327
                  )-   Corporate
      Tax – US
                  
                  
                  (855
                  )
                  
                  
                  (1,073
                  )
                  
                  
                  9,267-   State
      Tax – US
                  
                  
                  (31
                  )
                  
                  
                  -
                  
                  
                  
                  793-   Japan
                  
                  
                  (174
                  )
                  
                  
                  (11
                  )
                  
                  
                  123$
                  (1,380
                  )
                  
                  $
                  (33,194
                  )
                  
                  $
                  6,856





Reconciliation
between the US statutory rate and the effective rate is as follows:





%
      of income/(loss) before income taxes2008
                
                
                2007
                  (Restated)
                
                
                2006%
                
                
                %
                
                
                %US
      statutory rate
                
                
                35
                
                
                
                35
                
                
                
                (35
                )Foreign
      rate differential
                
                
                (4
                )
                
                
                (5
                )
                
                
                (23
                )UK
      R & D credit and non-deductible items
                
                
                (105
                )
                
                
                (53
                )
                
                
                (468
                )Valuation
      allowance
                
                
                55
                
                
                
                195
                
                
                
                -State
      taxes
                
                
                -
                
                
                
                -
                
                
                
                (74
                )Change
      in estimate
                
                
                31
                
                
                
                1
                
                
                
                (40
                )Effective
      tax rate
                
                
                12
                
                
                
                173
                
                
                
                (640
                )







The 2008
and 2007 effective tax percentages include the valuation allowance adjustment of
the UK net operating losses.  The 2008 effective percentage includes a
valuation allowance adjustment of the Japanese net operating
losses.  The 2006 effective tax percentages are exaggerated due to the
low value of the loss before income taxes.








The UK
government introduced a new tax allowance, ‘Research and Development Tax Credit’
(UK R & D credit), for large companies in 2002.  This UK R & D
credit allows the UK companies to recover an additional 25% of their research
and development expenses in addition to the 100% normally
allowed.  The 2008, 2007 and 2006 R&D claims are part of the
non-deductible items above.




The
valuation allowance adjustment in 2008 and 2007 were the result of the UK taxing
authority's review of the Company's UK R & D credit in the fourth quarter of
2007 and a statutory increase in the allowable credit starting in
2008.  As a result of the change in the law, the UK R & D credit
will eliminate all UK taxable income of the Company and the company will not
need to utilize its net operating loss carry-forwards.  As long as the
UK R & D credit exists in its current form, the Company will maintain a full
valuation allowance against the deferred tax assets in the UK until sufficient
positive evidence exists to reduce or eliminate the allowance.




Interest
and penalty costs related to unrecognized tax benefits, are classified as a
component of interest income and other income / (expense), net, in the
accompanying consolidated statements of operations.  The Company did
not recognize any interest and penalty expenses related to unrecognized tax
benefits for the year ended December 31, 2008.




The
Company and its Subsidiaries conducts business primarily in the UK, US and
Japan. With a few exceptions, the Company is no longer subject to US federal,
state or local income tax audits by taxing authorities for years before 2007.
The most significant US jurisdictions in which the Company is required to file
income tax returns include the states of New Jersey and Maryland. The Company's
UK and US tax filings through December 31, 2006 have been reviewed and approved
by the UK and US taxing authorities, respectively.





The main
reason for the change in estimate in 2006 relates to the US leaseback gain that
arose from the sale of the US property as part of the Sale/Leaseback
Transaction.  Under FIN46R the gain was originally recognized in 2005 and
charged to income taxes.  This charge reversed in 2006 as the deferred gain
was recognized due to the deconsolidation of the variable interest
entity.  The gain on the sale of the UK assets was offset against
brought forward capital losses in 2005. A revision to the treatment of the
losses on the UK buildings sold as part of the Sale/Leaseback Transaction in
2005 also caused a change in estimate in 2006.





The
losses before tax of the British Virgin Islands in 2006 represents the Alconbury
balances which were consolidated in accordance with the provisions of FASB
Interpretation No. 46R.




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


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts





2008
                
                
                2007
                  (Restated)Non-current
      deferred tax assets:Net
      operating losses – US
                
                $
                7,229
                
                
                $
                4,307Net
      operating losses – UK
                
                
                23,166
                
                
                
                28,476Valuation
      allowance – Net operating losses – UK
                
                
                (22,783
                )
                
                
                (24,123
                )Net
      operating losses – Japan
                
                
                111
                
                
                
                157Valuation
      allowance – Net operating losses – Japan
                
                
                (111
                )
                
                
                -Deferred
      gain on Sale/Leaseback Transaction
                
                
                3,387
                
                
                
                3,515Unexercised
      warrant amortization
                
                
                1,228
                
                
                
                3,999Net
      pension plan minimum liability adjustment – UK
                
                
                10,158
                
                
                
                13,056Valuation
      allowance – Net pension plan minimum liability
                
                
                (10,158
                )
                
                
                (13,056
                )Capital
      losses – UK
                
                
                8,558
                
                
                
                11,849Valuation
      allowance – UK
                
                
                (8,558
                )
                
                
                (11,849
                )Net
      non-current deferred tax assets
                
                $
                12,227
                
                
                $
                16,331Non-current
      deferred tax liabilities:Property
      and equipment -  US
                
                $
                2,130
                
                
                $
                1,113Property
      and equipment -  UK
                
                
                384
                
                
                
                4,353Total
                
                $
                2,514
                
                
                $
                5,466Net
      non-current deferred tax assets
                
                $
                9,713
                
                
                $
                10,865





In
accordance with SFAS No. 109, the Company nets all current and non-current
assets and liabilities by tax jurisdiction.





The gross
amount of net operating losses in the US is $15,424 of which $268 expires in
2018, $523 expires in 2019, $1,087 expires in 2021, $414 expires in 2022, $1,783
expires in 2024, $3,840 expires in 2026 $1,049 expires in 2027 and $6,460
expires in 2028.  The gross amount of net operating losses in the UK
of $71,767 has no expiration date.  The Company has provided a
valuation allowance on the net operating loss carry forwards because it believes
that it is more likely than not that those amounts will not be realized through
taxable income in the foreseeable future.  A full valuation allowance
has been recorded for the total benefit of capital losses incurred in prior
years, as the Company does not anticipate that the benefit will be realized in
the foreseeable future through the recognition of capital gains.





The
Company’s historical policy has been to leave its unremitted foreign earnings
invested indefinitely outside the United States.  The Company intends
to continue to leave its unremitted foreign earnings invested indefinitely
outside the United States.  As a result, United States income taxes
have not been provided on any accumulated foreign unremitted earnings as of
December 31, 2008.










8.  LONG-TERM
DEBT AND RELATED PARTY LOANS








2008
                
                
                2007
                  (Restated)March
      2006 Financing
                
                $
                54,787
                
                
                $
                56,800Warrants
      and Financing costs
                
                
                (3,869
                )
                
                
                (7,209
                )Capital
      leases, net of current portion
                
                
                -
                
                
                
                97Alconbury
      leases
                
                
                21,025
                
                
                
                23,341$
                71,943
                
                
                $
                73,029








Repayment
      Schedule
                
                Total
                
                
                2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                ThereafterMarch
      2006 Financing
                
                $
                54,787
                
                
                $
                2,400
                
                
                $
                52,387
                
                
                $
                -
                
                
                $
                -
                
                
                $
                -Alconbury
      leases
                
                
                21,025
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                21,025$
                75,812
                
                
                $
                2,400
                
                
                $
                52,387
                
                
                $
                -
                
                
                $
                -
                
                
                $
                21,025








Bank
Loans and Non-Bank Loans





On June
14, 2005, the Company entered into and consummated the Sale/Leaseback
Transaction with Alconbury.  Alconbury was newly formed in June 2005
and controlled by LSR’s Chairman and CEO, Andrew Baker.  The total
consideration paid by Alconbury for the three properties was $40 million,
consisting of $30 million cash and a five year, $10 million variable rate
subordinated promissory note, which Alconbury paid in full on June 30, 2006,
together with accrued interest of $0.6 million.  The Company agreed to
pay the expenses incurred by Alconbury in the Sale/Leaseback Transaction of $4.9
million, subject to Alconbury’s obligation to reimburse those expenses in the
future.  Such reimbursement shall be made in equal installments in
each year of the five-year period beginning on June 14, 2008, the third
anniversary of the closing date of the Sale/Leaseback
Transaction.  Interest has been imputed on this loan at 15% and a
discount (expense) of $2.5 million was recorded by the Company on June 14,
2005.  This $2.5 million is being ratably recorded as interest income
over the seven year term of the loan.





As part
of the Sale/Leaseback Transaction, the Company (through Subsidiaries) entered
into thirty-year leases with Alconbury for each facility, with two five-year
renewal options.  The initial base aggregate annual rent for the
facilities was $4.9 million (approximately $1.8 million in the US and
approximately $3.1 million in the UK) which increases by 3% each year for the UK
facilities and by an amount equal to the annual US consumer price index for the
US facility.  Under the terms of the leases, no security deposit was
initially required, but a three-month security deposit was required to be paid
at the time that Alconbury refinanced its financing
arrangements.  Additionally, because the leases are “triple net”
leases, LSR also pays for all of the costs associated with the operation of the
facilities, including costs such as insurance, taxes and
maintenance.





Since the
Sale/Leaseback Transaction was with a related party (Mr. Baker, LSR’s Chairman
and CEO and the controlling owner of Alconbury), an Independent Committee of
LSR’s Board of Directors (the “Committee”) was formed to analyze and consider
the proposed Sale/Leaseback Transaction.  The Committee was comprised
of the three independent directors of LSR:  Gabor Balthazar, Afonso
Junqueiras and Yaya Sesay.  The Committee retained independent legal
and financial advisors to assist in its analysis.  The Committee and
LSR’s senior management (other than Mr. Baker) negotiated the key terms and
provisions of the Sale/Leaseback Transaction with Alconbury.  In
evaluating the total consideration negotiated for this transaction, the
committee took into consideration an assessment and review of the levels of
consideration that were proposed to be paid by independent third party bidders
over the prior several years for sale/leaseback transactions of the Company’s
operating facilities in transactions that were proposed and negotiated but not
ultimately consummated.  The Committee also obtained appraisals of the
facilities from independent real estate appraisal firms and a fairness opinion
from an independent investment banking firm.








The
proceeds from the Sale/Leaseback Transaction (plus additional cash on hand) were
used by the Company to pay in full its £22.6 million non-bank debt
(approximately $41.1 million based on exchange rates at the time).





In
accordance with the provisions of FASB Interpretation No. 46R (FIN 46R), the
Company reflected the consolidation of Alconbury from June 14, 2005 through June
29, 2006, the period in which the Company was considered the “primary
beneficiary” of Alconbury’s variable interests.  The Company
determined that as of June 29, 2006 it was no longer the primary beneficiary of
Alconbury, and therefore was required to deconsolidate Alconbury’s assets and
liabilities from the Company’s Condensed Consolidated Balance Sheet as of that
date.  Please refer to Note 3 for detail of the impact of this
deconsolidation.





Due to
the consolidation resulting from the Company’s adoption of FIN 46R, for the
period of June 14, 2005 through June 29, 2006, the Company’s financial
statements reflected a loan payable to an unrelated third party in the aggregate
principal amount of $30 million.  This loan had a maturity date of
June 14, 2006, with the right to extend the term one additional
year.  The loan, carried an annual interest rate of 15%, was secured
by first priority lien on all the assets, including the facilities, of
Alconbury, and was also personally guaranteed by the owner of
Alconbury.  This loan was payable in twelve monthly installments of
interest only, with a balloon payment of $30 million due on June 14,
2006.  Alconbury refinanced this debt on a long-term basis on June 13,
2006 with an interest rate of 12%.  However, due to the June 30, 2006
deconsolidation of Alconbury (see Note 3), the Company did not reflect this new
loan on the Condensed Consolidated Balance Sheet as at June 30,
2006.





On March
2, 2006, the Company entered into a $70 million loan (the “March 2006
Financing”) under the terms of a Financing Agreement dated March 1, 2006 with a
third party lender.  The borrower under the Financing Agreement is
Huntingdon Life Sciences Limited and LSR and substantially all of LSR’s other
Subsidiaries guarantee all of the borrower’s obligations
thereunder.  The loan matures on March 1, 2011 and had an interest
rate of LIBOR + 825 basis points (which reduced to LIBOR + 800 basis points upon
the Company meeting certain financial tests).  The Financing Agreement
contains standard financial and business covenants, including, without
limitation, reporting requirements, limitations on the incurrence of additional
indebtedness, events of default, limitations on dividends and other payment
restrictions and various financial ratio requirements.  The loan is
secured by substantially all of the assets of the Company and the Company has in
connection therewith entered into a customary Security Agreement and a customary
Pledge and Security Agreement.  On August 1, 2007 the Company entered
into an amendment to its $70 million March 2006 Financing in which the principal
amount was reduced to $60 million and the interest rate was reduced from the
reduced rate of LIBOR + 800 basis points to LIBOR + 350 basis points.  A
closing fee of $4.3 million was paid to the lender in connection with this
amendment which has been recorded as a deferred debt premium and is being
amortized to interest expense over the remaining term of the loan.  For
financial statement presentation purposes, the unamortized amount of the closing
fee has been netted against the loan in long-term debt.  On November
30, 2007, the Company entered into a Second Amendment to the Financing Agreement
in which certain financial covenants were modified and consent was given by the
lender to permit the Company to complete a fold-in acquisition.








As
partial consideration for the March 2006 Financing, LSR issued to the lender 10
year warrants to acquire 500,000 shares of LSR’s common stock at an exercise
price of $12.00 per share (such exercise price was determined by a premium
formula based on LSR’s then-recent closing market prices).  These
warrants were fully vested on the closing date of the loan, March 2,
2006.  Accordingly, the fair value of these warrants ($4,994) has been
recorded as a deferred debt premium and is being amortized to interest expense
over the term of the loan.  For financial statement presentation
purposes, the unamortized amount of these warrants has been netted against the
loan in long-term debt.  Concurrent with the August 1, 2007 amendment
to the loan, the Company repurchased 250,000 of these warrants for an aggregate
consideration of $2,750.  Accordingly, the lender now owns warrants to
acquire 250,000 shares of LSR common stock at an exercise price of $12.00 per
share.





In
addition, as partial consideration for providing financial advisory services to
assist the Company in obtaining the March 2006 Financing, LSR issued to its
independent third party financial advisor 10 year warrants to acquire 300,000
shares of LSR common stock at an exercise price of $10.46 per share (the closing
market price on the date the Company engaged the financial
advisor).  These warrants became fully vested on March 2, 2006, the
closing date of the loan.  The fair value of these warrants ($3,113)
has been recorded as deferred financing costs and is being amortized to interest
expense over the term of the loan.  For financial statement
presentation purposes, the unamortized amount of these warrants has been
classified as intangible assets, net.  Certain customary registration
rights were granted in connection with these warrants.  The warrants
are subject to customary anti-dilution provisions.





Net
proceeds from the March 2006 Financing were approximately $63 million and a
portion of these proceeds were used to redeem the $46.2 million outstanding
principal amount of the Company’s 7.5% Convertible Capital Bonds, which were due
to mature in September 2006.  The balance of the proceeds was held for
general corporate purposes.





Related
Party Transactions





On June
11, 2002 LSR issued to FHP warrants to purchase up to 410,914 shares of LSR
Voting Common Stock at a purchase price of $1.50 per share.  These LSR
warrants were exercisable at any time and would have expired on June 11,
2012.  These warrants arose out of negotiations regarding the
provision of the $2.9 million loan facility made available to the Company on
September 25, 2000 by Mr. Baker, who controls FHP.  In accordance with
APB 14 the loan and warrants were recorded at their pro rata fair values in
relation to the proceeds received.  As a result, the value of the
warrants was $250.  These warrants were exercised in full on October
27, 2008 and none remain outstanding.





On June
14, 2005, the Company entered into and consummated the Sale/Leaseback
Transaction with Alconbury.  Alconbury was newly formed in June 2005
and controlled by LSR’s Chairman and CEO, Andrew Baker.  The total
consideration paid by Alconbury for the three properties was $40 million,
consisting of $30 million cash and a five year, $10 million variable rate
subordinated promissory note, which Alconbury paid in full on June 30, 2006,
together with accrued interest of $0.6 million.  The Company agreed to
pay the expenses incurred by Alconbury in the Sale/Leaseback Transaction of $4.9
million, subject to Alconbury’s obligation to reimburse those expenses in the
future.  Such reimbursement shall be made in equal installments in
each year of the five-year period beginning on June 14, 2008, the third
anniversary of the closing date of the Sale/Leaseback
Transaction.  Interest has been imputed on this loan at 15% and a
discount (expense) of $2.5 million was recorded by the Company on June 14,
2005.  This $2.5 million is being ratably recorded as interest income
over the seven year term of the loan.








As part
of the Sale/Leaseback Transaction, the Company (through Subsidiaries) entered
into thirty-year leases with Alconbury for each facility, with two five-year
renewal options.  The initial base aggregate annual rent for the
facilities was $4.9 million (approximately $1.8 million in the US and
approximately $3.1 million in the UK) which increases by 3% each year for the UK
facilities and by an amount equal to the annual US consumer price index for the
US facility.  Under the terms of the leases, no security deposit was
initially required, but a three-month security deposit was required to be paid
at the time that Alconbury refinanced its financing
arrangements.  Additionally, because the leases are “triple net”
leases, LSR also pays for all of the costs associated with the operation of the
facilities, including costs such as insurance, taxes and
maintenance.





Since the
Sale/Leaseback Transaction was with a related party (Mr. Baker, LSR’s Chairman
and CEO and the controlling owner of Alconbury), an Independent Committee of
LSR’s Board of Directors (the “Committee”) was formed to analyze and consider
the proposed Sale/Leaseback Transaction.  The Committee was comprised
of the three independent directors of LSR:  Gabor Balthazar, Afonso
Junqueiras and Yaya Sesay.  The Committee retained independent legal
and financial advisors to assist in its analysis.  The Committee and
LSR’s senior management (other than Mr. Baker) negotiated the key terms and
provisions of the Sale/Leaseback Transaction with Alconbury.  In
evaluating the total consideration negotiated for this transaction, the
committee took into consideration an assessment and review of the levels of
consideration that were proposed to be paid by independent third party bidders
over the prior several years for sale/leaseback transactions of the Company’s
operating facilities in transactions that were proposed and negotiated but not
ultimately consummated.  The Committee also obtained appraisals of the
facilities from independent real estate appraisal firms and a fairness opinion
from an independent investment banking firm.








9.  OTHER
OPERATING EXPENSE





2008
                
                
                2007
                  (Restated)
                
                
                2006Litigation
      and other expenses associated with obtaining first time legal protections
      against Animal Rights Extremists
                
                $
                -
                
                
                $
                -
                
                
                $
                1,790NYSE
      listing related expenses
                
                
                -
                
                
                
                -
                
                
                
                1,046Amortization
      of financing costs
                
                
                -
                
                
                
                -
                
                
                
                7,661$
                -
                
                
                $
                -
                
                
                $
                10,497








10.  OTHER
(EXPENSE)/INCOME





2008
                
                
                2007
                  (Restated)
                
                
                2006Exchange
      (loss)/gain on  March 2006 Financing and Capital
      Bonds
                
                $
                (14,102
                )
                
                $
                770
                
                
                $
                6,210Other
      exchange gains – intercompany balances
                
                
                1,329
                
                
                
                171
                
                
                
                692$
                (12,773
                )
                
                $
                941
                
                
                $
                6,902





The
Company reclassified from other expense to interest expense $2.4 million, $2.8
million and $5.0 million relating to amortization of finance arrangement fees
for 2008, 2007 and 2006, respectively.  The Company believes this
reclassification is appropriate and in accordance with Regulation S-X, rule 5-03
– Income Statements.  There was no effect on the consolidated financial
statements for the years ended December 31, 2008, 2007 and 2006 as a result of
this reclassification.











11.  COMMITMENTS
AND CONTINGENCIES








Commitments





The
Company leases certain equipment under various non-cancellable operating and
capital leases.  The Company is also obligated under purchase
agreements, including long term power contracts.  Finally Life
Sciences Research Limited is obliged to make contributions to its defined
benefit pension plan of £2.7 million ($3.9 million) per year, plus expenses
estimated at £0.7 million ($1.0 million) per year, for the next 7
years.  These commitments are set out in the table below:





Total
                
                
                Less
      than 1 year
                
                
                1 –
      3 years
                
                
                3 –
      5 years
                
                
                More
      than 5 yearsAlconbury
      operating lease obligations (a)
                
                $
                67,049
                
                
                $
                1,896
                
                
                $
                3,965
                
                
                $
                4,206
                
                
                $
                56,982Operating
      leases
                
                
                2,375
                
                
                
                928
                
                
                
                1,022
                
                
                
                425
                
                
                
                -Alconbury
      capital lease obligations (a) (b)
                
                
                148,379
                
                
                
                2,925
                
                
                
                6,116
                
                
                
                6,488
                
                
                
                132,850Other
      capital lease obligations (b)
                
                
                202
                
                
                
                202
                
                
                
                -
                
                
                
                -
                
                
                
                -Purchase
      obligations
                
                
                9,322
                
                
                
                9,322
                
                
                
                -
                
                
                
                -
                
                
                
                -Pension
      plan contributions
                
                
                39,408
                
                
                
                4,926
                
                
                
                9,852
                
                
                
                9,852
                
                
                
                14,778Contingent
      acquisition
                  payments  (c)
                
                
                1,587
                
                
                
                554
                
                
                
                1,033
                
                
                
                -
                
                
                
                -$
                268,322
                
                
                $
                20,753
                
                
                $
                21,988
                
                
                $
                20,971
                
                
                $
                204,610





(a) The
Alconbury capital and operating lease contractual obligations include the fixed
3% per year rental increases on the UK leases, and an estimate of 3% for the
future United States Consumer Price Index (CPI) increases required under the US
lease.





(b) The
Alconbury and Other capital lease contractual obligations reflected above
include imputed interest.





(c) The
purchase agreement, (see Note 5) contains contingent payment
amounts.  The amounts of the payments due under these provisions
cannot be determined until the specific targets are attained.





Leases





In 2005,
the Company entered into a sale-leaseback arrangement for its two UK and one US
properties with a related party, Andrew Baker, the Company’s Chairman and CEO,
as more fully described in Note 2 to the financial statements.  The UK
buildings and the US land and buildings were determined to be capital leases,
while the land portion of the UK properties were determined to be operating
leases under FASB No. 13.  The gain of approximately $9.6 million on
the sale of the US property has been deferred and is being amortized over the
30-year term of the lease.  The leases on these properties are for 30
year terms and expire in 2035.  The leases also have two 5-year
renewal options under the same terms and conditions in effect under the leases
immediately prior to the renewal periods.  The annual rental payments
on the US leases currently approximate $2.0 million and call for annual CPI
increases.  The annual rental payments on the UK leases currently
approximate $3.5 million and have fixed annual increases of 3% per year during
the term of the lease.  All of the Alconbury leases are "triple net"
leases and the Company is required to pay for all of the costs associated with
the operation of the facilities, including insurance, taxes and
maintenance.  The implicit interest rate on the Alconbury capital
leases approximate 12.25%, representing the rate required to discount the future
stream of rental payments to equal the appraised value of the properties at the
date of the sale/leaseback transaction.








The
following is a schedule by year of future minimum lease payments under capital
leases, together with the present value of net minimum lease payments as of
December 31, 2008:





Alconbury
      capital leases
                
                
                Other
      capital leases
                
                
                Total
      capital leasesTotal
      payments due
                
                $
                148,379
                
                
                $
                202
                
                
                $
                148,581Less
      amounts representing interest
                
                
                (127,354
                )
                
                
                (6
                )
                
                
                (127,360
                )Present
      value of net minimum lease payments
                
                
                21,025
                
                
                
                196
                
                
                
                21,221Less
      current portion of capital lease obligations
                
                
                -
                
                
                
                (196
                )
                
                
                (196
                )Non-current
      portion of capital lease obligations
                
                $
                21,025
                
                
                $
                -
                
                
                $
                21,025





Depreciation
expense on these capital leases amounted to $1,119, (of which $701 related to the Alconbury
capitalized leased assets) for the year ended December 31, 2008.





Operating
lease expenses were as follows:


2008
                
                
                2007
                  (Restated)
                
                
                2006Alconbury
      operating leases
                
                $
                2,303
                
                
                $
                2,487
                
                
                $
                1,104Plant
      and equipment
                
                
                1,127
                
                
                
                1,306
                
                
                
                1,403Other
      operating leases
                
                
                204
                
                
                
                220
                
                
                
                209











Contingencies





The
Company is party to certain legal actions arising out of the normal course of
its business.  In management's opinion, none of these actions will
have a material effect on the Company's operations, financial condition or
liquidity.  No form of proceedings has been brought, instigated or is
known to be contemplated against the Company by any government
agency.





The
Compensation Committee approved and adopted at its December 6, 2006, meeting the
2007 Long Term Incentive Plan (the “2007 LTIP”), which provides for awards of
cash compensation to executive officers and other members of the senior
management team if certain performance goals are achieved during the 2007-2010
performance period.  The Compensation Committee established a specific
level of operating margin percentage to be achieved over any four consecutive
quarters during such performance period that would trigger such
awards.  The aggregate amount payable to all participants under the
2007 LTIP if the threshold performance level is achieved is approximately $5
million.





Management
is ratably accruing for the 2007 LTIP, as compensation expense, an amount equal
to the estimated cash bonus that would be payable over the performance period
during which the specified performance goals are achieved.  Management
will re-evaluate this estimate periodically throughout the performance period
and, if applicable, will adjust the estimate accordingly.


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


12.  STOCKHOLDERS'
EQUITY





Common
Stock





As of
December 31, 2008 and
2007 LSR had outstanding 13,345,495 and 12,626,498
shares of Voting Common Stock of par value of $0.01 each
respectively.





Stock
based option plans





LSR 2001 Equity Incentive
Plan (the "LSR 2001 Equity Incentive Plan")





The LSR
Board has adopted the LSR 2001 Equity Incentive Plan.  Adoption of the
LSR 2001 Equity Incentive Plan enables LSR to use stock options (and other
stock-based awards) as a means to attract, retain and motivate key
personnel.  This stock option plan was approved by the stockholders of
LSR, prior to the acquisition of Huntingdon.





Awards
under the LSR 2001 Equity Incentive Plan (which has designated the Compensation
Committee for such purpose) may be granted by a committee designated by the LSR
Board pursuant to the terms of the LSR 2001 Equity Incentive Plan and may
include: (i) options to purchase shares of LSR Voting Common Stock, including
incentive stock options ("ISOs"), non-qualified stock options or both; (ii)
stock appreciation rights ("SARs"), whether in conjunction with the grant of
stock options or independent of such grant, or stock appreciation rights that
are only exercisable in the event of a change in control or upon other events;
(iii) restricted stock consisting of shares that are subject to forfeiture based
on the failure to satisfy employment-related restrictions; (iv) deferred stock,
representing the right to receive shares of stock in the future; (v) bonus stock
and awards in lieu of cash compensation; (vi) dividend equivalents, consisting
of a right to receive cash, other awards, or other property equal in value to
dividends paid with respect to a specified number of shares of LSR Voting Common
Stock or other periodic payments; or (vii) other awards not otherwise provided
for, the value of which are based in whole or in part upon the value of the LSR
Voting Common Stock.  Awards granted under the LSR 2001 Equity
Incentive Plan are generally not assignable or transferable except pursuant to a
will and by operation of law.





The
flexible terms of the LSR 2001 Equity Incentive Plan are intended to, among
other things, permit the Compensation Committee to impose performance conditions
with respect to any award, thereby requiring forfeiture of all or part of any
award if performance objectives are not met or linking the time of
exercisability or settlement of an award to the attainment of performance
conditions.  For awards intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the United States Internal
Revenue Code such performance objectives shall be based solely on (i) annual
return on capital; (ii) annual earnings or earnings per share; (iii) annual cash
flow provided by operations; (iv) changes in annual revenues; (v) stock price;
and/or (vi) strategic business criteria, consisting of one or more objectives
based on meeting specified revenue, market penetration, geographic business
expansion goals, cost targets, and goals relating to acquisitions or
divestitures.





LSR's
Compensation Committee, which administers the 2001 LSR Equity Incentive Plan,
has the authority, among other things, to: (i) select the directors, officers
and other employees and independent contractors entitled to receive awards under
the 2001 LSR Equity Incentive Plan; (ii) determine the form of awards, or
combinations of awards, and whether such awards are to operate on a tandem basis
or in conjunction with other awards; (iii) determine the number of shares of LSR
Voting Common Stock or units or rights covered by an award; and (iv) determine
the terms and conditions of any awards granted under the 2001 LSR Equity
Incentive Plan, including any restrictions or limitations on transfer, any
vesting schedules or the acceleration of vesting schedules, any forfeiture
provision or waiver of the same and including any terms and conditions necessary
or desirable to ensure the optimal tax result for participating personnel and
the Company including by way of example to ensure that there is no tax on the
grant of the rights and that such tax only arises on the exercise of rights or
otherwise when the LSR Voting Common Stock unconditionally vests and is at the
disposal of such participating personnel.  The exercise price at which
shares of LSR Voting Common Stock may be purchased pursuant to the grant of
stock options under the 2001 LSR Equity Incentive Plan is to be determined by
the option committee at the time of grant in its discretion, which discretion
includes the ability to set an exercise price that is below the fair market
value of the shares of LSR Voting Common Stock covered by such grant at the time
of grant.








The
number of shares of LSR Voting Common Stock that may be subject to outstanding
awards granted under the 2001 LSR Equity Incentive Plan (determined immediately
after the grant of any award) may not exceed 20 percent of the aggregate number
of shares of LSR Voting Common Stock then outstanding.





The 2001
LSR Equity Incentive Plan may be amended, altered, suspended, discontinued, or
terminated by the LSR Board without LSR Voting Common Stockholder approval
unless such approval is required by law or regulation or under the rules of any
stock exchange or automated quotation system on which LSR Voting Common Stock is
then listed or quoted.  Thus, LSR Voting Common Stockholder approval
will not necessarily be required for amendments, which might increase the cost
of the plan or broaden eligibility.  LSR Voting Common Stockholder
approval will not be deemed to be required under laws or regulations that
condition favorable tax treatment on such approval, although the LSR Board may,
in its discretion, seek LSR Voting Common Stockholder approval in any
circumstances in which it deems such approval advisable.





The LSR
Board has designated the Compensation Committee of the Board to serve as the
stock option committee.  LSR made grants under the LSR 2001 Equity
Incentive Plan on March 1, 2002 to certain directors, executive officers and key
employees at the time.








Grants to
Employees, Executive Officers and Directors under LSR 2001 Equity Incentive
Plan





Date
      of Grant
                
                Number
      Granted
                
                
                Exercise
      Price
                
                Terms
                Date
      1st
      50% become exerciseable
                
                No.
      of options exercise-able –
                  1st50%
                
                Date
      2nd
      50% become exerciseable
                
                No.
      of options exercise-able – 2nd50%May16,
      2006
                
                
                48,900
                
                
                $
                9.25
                
                10
      years
                May16,
      2007
                
                
                24,450
                
                May16,
      2008
                
                
                24,450June8,
      2006
                
                
                7,500
                
                
                $
                10.75
                
                10
      years
                June8,
      2007
                
                
                3,750
                
                June8,
      2008
                
                
                3,750December
      6, 2006
                
                
                480,000
                
                
                $
                9.95
                
                10
      years
                December
      31, 2008
                
                
                240,000
                
                December
      31, 2009
                
                
                240,000January9,
      2007
                
                
                5,000
                
                
                $
                13.79
                
                10
      years
                December
      31, 2008
                
                
                2,500
                
                December
      31, 2009
                
                
                2,500December
      19, 2007
                
                
                5,000
                
                
                $
                19.50
                
                10
      years
                December
      31, 2008
                
                
                2,500
                
                December
      31, 2009
                
                
                2,500March11,
      2008
                
                
                48,600
                
                
                $
                24.10
                
                10
      years
                March11,
      2010
                
                
                24,300
                
                March11,
      2011
                
                
                24,300May2,
      2008
                
                
                2,700
                
                
                $
                27.25
                
                10
      years
                May2,
      2008
                
                
                1,350
                
                May2,
      2009
                
                
                1,350June4,
      2008
                
                
                900
                
                
                $
                26.58
                
                10
      years
                June4,
      2010
                
                
                450
                
                June4,
      2011
                
                
                450










At
December 31, 2008, 890,000 shares under the LSR 2001 Equity Incentive
Plan were outstanding and were exercisable.








Issuances of Common
Stock





In
addition in June 2006, a total of 7,500 shares of the Company’s common stock
were issued to non-management directors of the Company.





In
addition in December 2006, a total of 100,000 shares of the Company’s common
stock were awarded to two of the executive officers of the Company (50,000 each
to Richard Michaelson and Mark Bibi).








2004 Long Term Incentive
Plan





Effective
June 1, 2004 the Company adopted the 2004 Long Term Incentive Plan (“2004
LTIP”), pursuant to the terms of the 2001 Equity Incentive Plan.  The
2004 LTIP had two components: a grant of stock options, with a vesting date of
March 31, 2007, and a cash bonus to be awarded in 2007 based on 2006 Company
financial performance.  Based upon the 2006 performance no cash bonus
was awarded.





Grants to 32 Key Employees,
June 1, 2004, under 2004 Long Term Incentive Plan





Options
to purchase an aggregate of 362,663 shares of common stock were granted to 32
key employees of the Company as of June 1, 2004 under the 2004
LTIP.





At
December 31, 2008, 275,290 shares under the 2004 LTIP option plan were
outstanding and were exercisable.





The
following table summarizes stock option activity under the Company’s option
plans.





Shares
                
                
                Weighted
      Average Exercise Price
                
                
                Weighted
      Average Fair Value per OptionOptions
      outstanding as of December 31, 2005
                
                
                1,284,269
                
                
                $
                2.35Options
      granted
                
                
                536,400
                
                
                $
                9.90
                
                
                $
                8.34Options
      lapsed
                
                
                -
                
                
                $
                -Options
      exercised
                
                
                (31,300
                )
                
                $
                2.01Options
      outstanding as of December 31, 2006
                
                
                1,789,369
                
                
                $
                4.62Options
      granted
                
                
                10,000
                
                
                $
                16.65
                
                
                $
                14.75Options
      lapsed
                
                
                (2,700
                )
                
                $
                7.70Options
      exercised
                
                
                (88,046
                )
                
                $
                2.70Options
      outstanding as of December 31, 2007
                
                
                1,708,623
                
                
                $
                4.78Options
      granted
                
                
                52,200
                
                
                $
                24.31
                
                
                $
                21.05Options
      lapsed
                
                
                (5,600
                )
                
                $
                9.88Options
      exercised
                
                
                (299,083
                )
                
                $
                2.51Options
      outstanding as of December 31, 2008
                
                
                1,456,140
                
                
                $
                5.93








Shares
                
                
                Weighted
      Average Exercise Price
                
                Weighted
      Average Fair Value per OptionOptions
      exercisable as of December 31, 2006
                
                
                900,300
                
                
                $
                2.02Options
      exercisable as of December 31, 2007
                
                
                1,194,173
                
                
                $
                2.51Options
      exercisable as of December 31, 2008
                
                
                1,165,290
                
                
                $
                4.27








Warrants





On
October 9, 2001, on behalf of Huntingdon, LSR issued to Stephens Group Inc.
warrants to purchase up to 704,425 shares of LSR Voting Common Stock at a
purchase price of $1.50 per share.  Stephens Group Inc. subsequently
sold the warrants to independent third parties.  The LSR warrants are
exercisable at any time and will expire on October 9, 2011.  These
warrants arose out of negotiations regarding the refinancing of the bank loan by
the Stephens Group Inc., (“Stephens’ Loan”) in January 2001.  The
value of the warrants was $430.  154,425 of such warrants were
exercised in 2004.  No additional exercises have been made to
date.





On June
11, 2002, LSR issued to FHP warrants to purchase up to 410,914 shares of LSR
Voting Common Stock at a purchase price of $1.50 per share.  These LSR
warrants were exercisable at any time and would have expired on June 11,
2012.  These warrants arose out of negotiations regarding the
provision of the $2.9 million loan facility made available to the Company on
September 25, 2000 by Mr. Baker, who controls FHP.  The value of the
warrants was $250. These warrants were exercised in full on October 27, 2008 and
none remain outstanding.





On
October 24, 2003, 100,000 warrants were issued to an independent consultant at
the market price on the day of $2.05.  50,000 of these were exercisable on
the first business day following the date of grant and 50,000 became exercisable
on June 15, 2005, the business day following the closing date on which the
Company’s non-bank debt became refinanced.  The value of the warrants
was $195.  None of these warrants have been exercised as of December
31, 2008.





On
January 4, 2005, 100,000 warrants were issued at the market price on the day of
$10.70.  50,000 were exercisable from January 4, 2007 but later
accelerated to August 8, 2005, and 50,000 from January 4, 2008.  In
all cases, these warrants were issued to independent consultants in connection
with financial and strategic advice.  The FAS 123R fair value of the
warrants was $811.  These warrants have all been exercised and none
remain outstanding.





On
November 9, 2005, 625,000 warrants were issued to a third party
advisory/lobbying firm at the closing market price on the day of
$10.46.  These warrants fully vested on December 26, 2006 following
the successful completion of the specific goal outlined in the engagement letter
with such firm, namely the listing of the Company’s common stock on the
NYSE.  Accordingly, the fair value of these warrants ($7,661) has been
recorded in other operating expense.  On August 30, 2007, the Company
repurchased 312,500 of the warrants for an aggregate consideration of
$3,594.  On August 29, 2008, the Company repurchased an additional 40,600
of these warrants for an aggregate consideration of $1,000. Accordingly, the
third party advisory/lobbying firm now owns warrants to acquire
271,900 shares of LSR common stock at an exercise price of $10.46 per
share.








On
November 9, 2005, 300,000 warrants were issued to an independent third party
financial advisor as partial consideration for providing financial advisory
services to the Company in obtaining financing.  These were issued at
an exercise price of $10.46 per share, the closing market price on the date the
Company engaged the financial advisor.  These warrants became fully
vested on March 2, 2006, the closing date of the loan.  The fair value
of these warrants ($3,113) has been recorded as deferred financing costs and is
being amortized to interest expense over the term of the loan.  For
financial statement presentation purposes, the unamortized amount of these
warrants has been classified as Intangible assets, net.  Certain
customary registration rights were granted in connection with these
warrants.  The warrants are subject to customary anti-dilution
provisions.  None of these warrants have been exercised.





As
partial consideration for the March 2006 Financing, LSR issued to the lender 10
year warrants to acquire 500,000 shares of LSR’s common stock at an exercise
price of $12.00 per share (such exercise price was determined by a premium
formula based on LSR’s then-recent closing market prices).  These
warrants were fully vested on the closing date of the loan, March 2,
2006.  Accordingly, the fair value of these warrants ($4,994) has been
recorded as a deferred debt premium and is being amortized to interest expense
over the term of the loan.  For financial statement presentation
purposes, the unamortized amount of these warrants has been netted against the
loan in long-term debt.  Concurrent with the August 1, 2007 amendment
to the loan, the Company repurchased 250,000 of these warrants for an aggregate
consideration of $2,750.  Accordingly, the lender now owns warrants to
acquire 250,000 shares of LSR common stock at an exercise price of $12.00 per
share.  None of these warrants have been exercised.








A summary
of warrants outstanding at December 31, 2008 is as follows:





Date of Issue
                
                Warrants
                
                
                Exercise Price
                
                Expiration DateOctober
      9, 2001
                
                
                550,000
                
                
                $
                1.50
                
                October
      9, 2011October
      24, 2003
                
                
                100,000
                
                
                $
                2.05
                
                October
      24, 2013November
      9, 2005
                
                
                271,900
                
                
                $
                10.46
                
                November
      9, 2010November
      9, 2005
                
                
                300,000
                
                
                $
                10.46
                
                November
      9, 2015March
      1, 2006
                
                
                250,000
                
                
                $
                12.00
                
                March
      2, 2016


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


13.  EMPLOYEE
BENEFITS





The
Company operated the Huntingdon Life Sciences Pension and Life Assurance Scheme,
subsequently renamed “LSR Pension and Life Assurance Scheme” (the “Plan”)
through to December 31, 2002.  The Plan has been closed to new
entrants since April 5, 1997.  As of December 31, 2002, the
accumulation of plan benefits of employees in the scheme was permanently
suspended, and therefore, the Plan was curtailed.





The
components of the net periodic cost of the Plan for the years ended December 31,
are as follows:





2008
                
                
                2007
                  (Restated)
                
                
                2006Interest
      cost on projected benefit obligation
                
                $
                10,661
                
                
                $
                9,934
                
                
                $
                8,565Expected
      return on plan assets
                
                
                (11,421
                )
                
                
                (12,209
                )
                
                
                (10,042
                )Amortization
      of actuarial loss
                
                
                2,392
                
                
                
                2,525
                
                
                
                2,899Net
      periodic cost
                
                $
                1,632
                
                
                $
                250
                
                
                $
                1,422




The major
assumptions used in calculating the pension expense were:





2008
                
                
                2007
                
                
                2006Discount
      rate
                
                
                5.75
                %
                
                
                5.00
                %
                
                
                5.00
                %Rate
      of increase of future compensation
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/ALong-term
      rate of return on plan assets
                
                
                7.75
                %
                
                
                8.00
                %
                
                
                8.00
                %









The
overall expected return on the Plan assets for 2008 was the average of 5.65% per
annum expected for debt securities and 8.1% per annum for equity securities and
other assets held.  The expected returns were based on market yields
at the measurement date.  Expected returns on the equity and ‘other’
assets allowed for expected economic growth.


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts




A
reconciliation of the projected benefit obligation for the Plan to the accrued
pension expense recorded as of December 31 is as follows:







2008
                
                
                2007
                  (Restated)
                
                
                2006Projected
      benefit obligation
                
                $
                (127,015
                )
                
                $
                (201,464
                )
                
                $
                (196,402
                )Plan
      assets at market value
                
                
                93,156
                
                
                
                157,942
                
                
                
                148,750Funded
      status
                
                $
                (33,859
                )
                
                $
                (43,522
                )
                
                $
                (47,652
                )Unrecognized
      net actuarial loss
                
                
                48,467
                
                
                
                58,681
                
                
                
                56,684Adjustment
      for minimum liability - pretax
                
                
                (48,467
                )
                
                
                (58,681
                )
                
                
                (56,684
                )Accrued
      pension expense
                
                $
                (33,859
                )
                
                $
                (43,522
                )
                
                $
                (47,652
                )








Change
      in plan assetsFair
      value of assets, beginning of year
                
                $
                157,942
                
                
                $
                148,750
                
                
                $
                116,305Foreign
      currency changes
                
                
                (43,861
                )
                
                
                2,539
                
                
                
                16,286Actual
      (loss)/gain on plan assets
                
                
                (21,674
                )
                
                
                5,886
                
                
                
                15,552Employer
      contributions
                
                
                4,926
                
                
                
                6,221
                
                
                
                5,827Benefit
      payments
                
                
                (4,177
                )
                
                
                (5,454
                )
                
                
                (5,220
                )Fair
      value of assets, end of year
                
                $
                93,156
                
                
                $
                157,942
                
                
                $
                148,750Change
      in projected benefit obligationsProjected
      benefit obligation, beginning of year
                
                $
                201,465
                
                
                $
                196,402
                
                
                $
                169,640Foreign
      currency changes
                
                
                (55,948
                )
                
                
                3,352
                
                
                
                23,754Interest
      cost
                
                
                8,273
                
                
                
                9,881
                
                
                
                9,095Actuarial
      (gains)/losses
                
                
                (22,598
                )
                
                
                (2,717
                )
                
                
                (867
                )Benefit
      payments
                
                
                (4,177
                )
                
                
                (5,454
                )
                
                
                (5,220
                )Projected
      benefit obligation, end of year
                
                $
                127,015
                
                
                $
                201,464
                
                
                $
                196,402





All Plan
assets and projected benefit obligations have been converted from pounds
sterling to US dollar using year end exchange rates.





The major
assumptions used in calculating the pension obligations were:





2008
                
                
                2007
                
                
                2006Discount
      rate
                
                
                6.40
                %
                
                
                5.75
                %
                
                
                5
                %Rate
      of compensation increase
                
                
                N/A
                
                
                
                N/A
                
                
                
                N/A





The
accumulated benefit obligation is the same as the projected benefit obligation
as the Plan has been curtailed.





The
Trustee’s target split of investment types for the Plan assets is as
follows:





Equity
      Securities
                
                
                45
                %Debt
      Securities
                
                
                40
                %Real
      Estate
                
                
                6
                %Other
                
                
                9
                %Total
                
                
                100
                %





These
percentages are approximate and kept under review, and the total UK Equity
exposure is capped at £43m with quarterly “top-slicing” if that cap is
reached.








The
Plan’s assets are invested with two investment managers.  The first
manager invests in unit funds that hold portfolios of shares, cash, hedge funds
and property funds.  The second manager invests in funds holding
predominantly index-linked bonds, gilts and investment grade and sub investment
grade corporate bonds and in a fund of UK equities designed to track the FTSE
All-Share Index.





The asset
allocation is weighted towards equity investment while the liability profile
contains a greater proportion of monetary liabilities.  The investment
stance has been undertaken in expectation of higher long-term returns, but is
kept under review by the Trustee.  Over the year the Trustee has
continued to reduce its exposure to equities investing in commercial property
and ‘absolute return’ products, so as to increase the range of investments used
by the Plan.  In principle, this wider range of assets should help
maintain the overall portfolio return, whilst reducing variability (and hence
reduce the risk to the Plan).





The Plan
weighted average asset allocations at December 31, 2008 and 2007, by asset
category are as follows:





2008
                    
                    
                    2007Equity
      Securities
                    
                    
                    45
                    %
                    
                    
                    57
                    %Debt
      Securities
                    
                    
                    40
                    %
                    
                    
                    28
                    %Real
      Estate
                    
                    
                    5
                    %
                    
                    
                    6
                    %Other
                    
                    
                    10
                    %
                    
                    
                    9
                    %Total
                    
                    
                    100
                    %
                    
                    
                    100
                    %








The
Company expects to contribute $3,882,000 (£2,700,000) plus expenses to the Plan
in 2009.  The following benefit payments are expected to be paid in
each of the next five years, and in aggregate for the following five years
thereafter.





Pension
      Benefits2009
                    
                    
                    3,3792010
                    
                    
                    3,5662011
                    
                    
                    3,7402012
                    
                    
                    3,9582013
                    
                    
                    4,1982014
      - 2018
                    
                    
                    27,085








On April
6, 1997, the Company established a defined contribution plan, the Group Personal
Pension Plan, for Company employees in the UK.  Additionally, a
defined contribution plan (401-K plan) is also available for employees in the
US.  The retirement benefit expense for these plans for the year ended
December 31, 2008, 2007
and 2006 were $3.7
million, $3.6 million and $2.7 million respectively.


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


14.  GEOGRAPHICAL
ANALYSIS





During
each of the years ended December 31, 2008, 2007 and 2006, the
Company operated from within two segments based on geographical markets, the
United Kingdom and the United States.  The Company had one continuing
activity, Contract Research, throughout these periods.





The
accounting policies of the operating segments are the same as those described in
the summary of significant accounting policies.  Transactions between
segments, which are immaterial, are carried out on an arms-length
basis.  Interest income, interest expense and income taxes are also
not reported on an operating segment basis because they are not considered in
the performance evaluation by the Company's chief operating
decision-maker.





Geographical
segment information is as follows:





US
                
                
                UK
                
                
                Corporate
                
                
                Total2008
                  Net
      revenues
                
                $
                54,784
                
                
                $
                187,638
                
                
                $
                -
                
                
                $
                242,422Operating
      income before other operating income/(expense)
                
                
                9,819
                
                
                
                36,450
                
                
                
                (10,354
                )
                
                
                35,915Operating
      income
                
                
                9,819
                
                
                
                36,450
                
                
                
                (10,354
                )
                
                
                35,915Long-lived
      assets (a)
                
                
                45,907
                
                
                
                86,047
                
                
                
                2,751
                
                
                
                134,705Property
      and equipment, net
                
                
                25,711
                
                
                
                37,860
                
                
                
                39
                
                
                
                63,610Depreciation
      and
      amortization(b)
                
                
                2,089
                
                
                
                7,630
                
                
                
                10
                
                
                
                9,729Capital
      expenditure
                
                
                4,641
                
                
                
                12,031
                
                
                
                (15
                )
                
                
                16,657Total
      assets
                
                
                46,923
                
                
                
                121,505
                
                
                
                2,770
                
                
                
                171,1982007 (Restated)
                  Net
      revenues
                
                $
                49,865
                
                
                $
                186,935
                
                
                $
                -
                
                
                $
                236,800Operating
      income before other
                  operating
      income/(expense)
                
                
                8,309
                
                
                
                34,951
                
                
                
                (11,385
                )
                
                
                31,875Operating
      income
                
                
                8,309
                
                
                
                34,951
                
                
                
                (11,385
                )
                
                
                31,875Long-lived
      assets (a)
                
                
                43,017
                
                
                
                119,349
                
                
                
                2,994
                
                
                
                165,360Property
      and equipment, net
                
                
                23,159
                
                
                
                47,791
                
                
                
                44
                
                
                
                70,994Depreciation
      and amortization
                
                
                1,756
                
                
                
                7,747
                
                
                
                16
                
                
                
                9,519Capital
      expenditure
                
                
                3,834
                
                
                
                12,560
                
                
                
                45
                
                
                
                16,439Total
      assets
                
                
                43,921
                
                
                
                154,640
                
                
                
                3,022
                
                
                
                201,5832006
                  Net
      revenues
                
                $
                41,138
                
                
                $
                151,079
                
                
                $
                -
                
                
                $
                192,217Operating
      income before other
                  operating
      income/(expense)
                
                
                5,268
                
                
                
                21,676
                
                
                
                (6,875
                )
                
                
                20,069Operating
      income
                
                
                5,268
                
                
                
                21,676
                
                
                
                (17,372
                )
                
                
                9,572Long-lived
      assets (a)
                
                
                37,827
                
                
                
                141,216
                
                
                
                7,448
                
                
                
                186,491Property
      and equipment, net
                
                
                21,082
                
                
                
                42,535
                
                
                
                13
                
                
                
                63,630Depreciation
      and amortization
                
                
                1,700
                
                
                
                7,798
                
                
                
                16
                
                
                
                9,514Capital
      expenditure
                
                
                2,025
                
                
                
                11,068
                
                
                
                -
                
                
                
                13,093Total
      assets
                
                
                39,781
                
                
                
                183,312
                
                
                
                7,486
                
                
                
                230,579




(a)
Long-lived assets exclude cash and cash equivalents and unamortized costs of
raising long-term debt.


(b)
Depreciation and amortization excludes the amortization of the acquired
intangible other assets





Net
revenues from customers, based on location of customers, is as
follows:





2008
                
                
                2007
                  (Restated)
                
                
                2006United
      States
                
                $
                73,259
                
                
                $
                69,517
                
                
                $
                53,215Europe
                
                
                136,485
                
                
                
                118,258
                
                
                
                109,668Rest
      of World
                
                
                32,678
                
                
                
                49,025
                
                
                
                29,334$
                242,422
                
                
                $
                236,800
                
                
                $
                192,217








15.  VALUATION
AND QUALIFYING ACCOUNTS





Balance
                  at
      beginning of period
                
                
                Effects
      of Foreign Exchange
                
                
                Additions/
      Charged to Expense
                
                
                Deductions
                
                
                Balance
                  at
      end of periodYear
      Ended December 31, 2008Accounts
      receivable allowances (a)
                
                
                1,575
                
                
                
                (420
                )
                
                
                428
                
                
                
                (461
                )
                
                
                1,122Valuation
      allowance for deferred tax asset
                
                
                49,028
                
                
                
                (15,371
                )
                
                
                7,953
                
                
                
                -
                
                
                
                41,610Year
      Ended December 31, 2007
                  (Restated)Accounts
      receivable allowances (a)
                
                
                691
                
                
                
                6
                
                
                
                340
                
                
                
                538
                
                
                
                1,575Valuation
      allowance for deferred tax asset
                
                
                12,317
                
                
                
                (749
                )
                
                
                37,460
                
                
                
                -
                
                
                
                49,028Year
      Ended December 31, 2006Accounts
      receivable allowances (a)
                
                
                618
                
                
                
                78
                
                
                
                133
                
                
                
                (138
                )
                
                
                691Valuation
      allowance for deferred tax asset
                
                
                10,739
                
                
                
                1,509
                
                
                
                69
                
                
                
                -
                
                
                
                12,317





(a)  Allowances
are for doubtful accounts and chargebacks


Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


16.  UNAUDITED
QUARTERLY FINANCIAL INFORMATION





The
following is a summary of unaudited quarterly financial information for the 12
months ended December 31, 2008and December 31, 2007.


Year
      ended December 31, 2008
                
                Quarter
      EndedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Net
      revenues
                
                $
                63,227
                
                
                $
                64,330
                
                
                $
                63,560
                
                
                $
                51,305Cost
      of sales
                
                
                (43,364
                )
                
                
                (43,507
                )
                
                
                (44,643
                )
                
                
                (37,783
                )Gross
      profit
                
                
                19,863
                
                
                
                20,823
                
                
                
                18,917
                
                
                
                13,522Selling
      and administrative expense
                
                
                (10,199
                )
                
                
                (10,796
                )
                
                
                (9,374
                )
                
                
                (6,841
                )Operating
      income
                
                
                9,664
                
                
                
                10,027
                
                
                
                9,543
                
                
                
                6,681Interest
      income (a)
                
                
                200
                
                
                
                128
                
                
                
                141
                
                
                
                118Interest
      income, related parties
                
                
                123
                
                
                
                128
                
                
                
                98
                
                
                
                164Interest
      expense
                
                
                (2,303
                )
                
                
                (2,361
                )
                
                
                (2,179
                )
                
                
                (2,497
                )Interest
      expense, related parties
                
                
                (818
                )
                
                
                (779
                )
                
                
                (774
                )
                
                
                (717
                )Other
      (expense)/income (a)
                
                
                (60
                )
                
                
                23
                
                
                
                (4,641
                )
                
                
                (8,111
                )Income/(loss)
      before taxes
                
                
                6,806
                
                
                
                7,166
                
                
                
                2,188
                
                
                
                (4,362
                )Income
      tax (expense)/benefit
                
                
                (71
                )
                
                
                118
                
                
                
                (120
                )
                
                
                (1,307
                )Net
      income/(loss)
                
                $
                6,735
                
                
                $
                7,284
                
                
                $
                2,068
                
                
                $
                (5,669
                )Earnings/(loss)
      per share
                
                $
                0.53
                
                
                $
                0.58
                
                
                $
                0.16
                
                
                $
                (0.43
                )Diluted
      earnings/(loss) per share
                
                $
                0.44
                
                
                $
                0.47
                
                
                $
                0.13
                
                
                $
                (0.43
                )











Year
      ended December 31, 2007
                
                Quarter
      EndedMarch
      31
                
                
                June
      30
                
                
                September
      30
                
                
                December
      31Net
      revenues
                
                $
                54,297
                
                
                $
                58,191
                
                
                $
                60,874
                
                
                $
                63,438Cost
      of sales
                
                
                (40,283
                )
                
                
                (40,411
                )
                
                
                (42,525
                )
                
                
                (42,571
                )Gross
      profit
                
                
                14,014
                
                
                
                17,780
                
                
                
                18,349
                
                
                
                20,867Selling
      and administrative expense
                
                
                (7,795
                )
                
                
                (10,254
                )
                
                
                (9,777
                )
                
                
                (11,309
                )Operating
      income
                
                
                6,219
                
                
                
                7,526
                
                
                
                8,572
                
                
                
                9,558Interest
      income
                
                
                276
                
                
                
                693
                
                
                
                392
                
                
                
                363Interest
      income, related parties
                
                
                106
                
                
                
                110
                
                
                
                114
                
                
                
                117Interest
      expense (a)
                
                
                (3,287
                )
                
                
                (3,312
                )
                
                
                (2,883
                )
                
                
                (3,319
                )Interest
      expense, related parties
                
                
                (734
                )
                
                
                (740
                )
                
                
                (745
                )
                
                
                (747
                )Other
      income/(expense) (a)
                
                
                122
                
                
                
                1,278
                
                
                
                604
                
                
                
                (1,063
                )Income
      before taxes
                
                
                2,702
                
                
                
                5,555
                
                
                
                6,054
                
                
                
                4,909Income
      tax benefit/(expense)
                
                
                752
                
                
                
                (46
                )
                
                
                (185
                )
                
                
                (33,715
                )Net
      income/(loss)
                
                $
                3,454
                
                
                $
                5,509
                
                
                $
                5,869
                
                
                $
                (28,806
                )Earnings/(loss)
      per share
                
                $
                0.27
                
                
                $
                0.43
                
                
                $
                0.47
                
                
                $
                (2.28
                )Diluted
      earnings/(loss) per share
                
                $
                0.23
                
                
                $
                0.36
                
                
                $
                0.39
                
                
                $
                (2.28
                )





(a)Certain
itemshave been
reclassified to conform to fourth quarter presentation (see Note
10).





Life
Sciences Research Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements (Cont’d)
 Dollars
in (000’s) except per share amounts


17.
            SUBSEQUENT
      EVENTS





A.         In
a letter to the Company’s Board of Directors, dated March 3, 2009, Andrew Baker,
Chairman and CEO of the Company, made a non-binding proposal to acquire all of
the outstanding shares of the Company for a price of $7.50 per
share.  The Company’s common stock closed at $4.79 per share on March
3, 2009.





The
proposal letter indicated that the proposal was conditional upon satisfactory
completion of due diligence, negotiation of definitive transaction documents,
receipt of the requisite financing commitments and receipt of necessary board
approval.  Mr. Baker indicated in the letter that he had commenced
exploring potential financing sources and that while he was confident that he
would be able to secure the requisite financing for the proposal, there could be
no assurance of success.





The Board
of Directors has established a special committee of independent directors to act
on behalf of the Company with respect to consideration of the proposal and other
strategic alternatives.  The special committee has the authority to
engage its own legal, financial and other advisors.





The
process of considering the proposal is only in its initial stages and
consequently no decisions have been made by the special committee of the Board
in respect of the Company’s response, if any, to the
proposal.  Shareholders are not being asked to take any action as a
result of the proposal.  There can be no assurance that the proposed
transaction or any other transaction will be approved or completed.











B.         On
March 12, 2009 the Company disclosed that a purported class action lawsuit had
been filed against the Company in New Jersey state court in connection with the
non-binding proposal received from Andrew Baker as described in paragraph A.
above.  The lawsuit names as defendants Mr. Baker, all other members of the
Company's Board of Directors and the Company.  The lawsuit alleges, among
other things, that the directors breached their fiduciary duties with respect to
the Baker proposal.








ITEM
9.                      CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES





None.








ITEM
9A.  CONTROLS AND PROCEDURES





Evaluation
of disclosure controls and procedures.  The Company’s Principal
Executive Officer (the CEO) and Principal Financial Officer (the CFO) have
reviewed and evaluated the effectiveness of the Company’s disclosure controls
and procedures as of the end of the period covered in this
report.  Based on that evaluation, the Principal Executive Officer and
the Principal Financial Officer have concluded that the Company’s current
disclosure controls and procedures are effective.  There have been no
significant changes in the Company’s internal controls or in the other factors
that significantly affect those controls.





Internal
control over financial reporting.  Please refer to pages 43-44 of this
Form 10-K for Management’s Report on Consolidated Financial Statements and
Internal Control, and the Internal Control Reports of the Company’s
Auditors.








ITEM
9B. OTHER INFORMATION





None.







PART
III





ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The table
below sets forth certain information with respect to the current directors and
executive officers of LSR.





Name
              Age
              Position
      within the CompanyAndrew
      Baker
              60
              Director,
      Chairman of the Board and Chief Executive OfficerGabor
      Balthazar
              67
              DirectorMark
      Bibi
              50
              General
      Counsel and SecretaryBrian
      Cass
              61
              Director,
      Managing Director/PresidentJulian
      Griffiths
              56
              Vice
      President of OperationsAfonso
      Junqueiras
              52
              DirectorRichard
      Michaelson
              57
              Chief
      Financial OfficerYaya
      Sesay
              66
              Director








(b)
            Identification
      of Directors and Executive Officers





Andrew Baker became a
director and Chairman and Chief Executive Officer of LSR on January 10,
2002.  He was appointed to the Board of Huntingdon as Executive
Chairman in September 1998.  He is a chartered accountant and has
operating experience in companies involved in the delivery of healthcare
ancillary services.  He spent 18 years until 1992 with Corning
Incorporated (“Corning”) and held the posts of President and CEO of MetPath
Inc., Corning’s clinical laboratory subsidiary, from 1985 to 1989.  He
became President of Corning Laboratory Services Inc. in 1989, which at the time
controlled MetPath Inc. (now trading as part of Quest Diagnostics Inc.), and
Hazleton Corporation, G.H.Besselaar Associates and SciCor Inc., all three now
trading as part of Covance Inc.  Since leaving Corning in 1992, Mr.
Baker has focused on investing in and developing companies in the healthcare
sector including Unilab Corporation, a clinical laboratory services provider in
California, and Medical Diagnostics Management, a US based provider of radiology
and clinical laboratory services to health care payers.  In 1997, he
formed Focused Healthcare Partners (“FHP”), an investment partnership that acts
as general partner for healthcare startup and development
companies.





Gabor Balthazar became a
director of LSR on January 10, 2002.  He was appointed to the Board of
Huntingdon as the Senior Independent Non-Executive Director in March
2000.  He has been active in international marketing and management
consulting for almost 30 years.  He was a founding Board member of
Unilab Corporation, serving as President from 1989 to 1992, and continuing to
sit on Unilab’s Board until November 1999.  From 1985 to 1997, Mr.
Balthazar served as a consultant to Frankfurt Consult, the merger/acquisition
subsidiary of BHF-Bank, Frankfurt, Germany and to Unilabs Holdings SA, a Swiss
clinical laboratory testing holding company, from 1987 to 1992.  He is
a graduate of the Columbia Law School and the Columbia Business School in New
York City.





Mark Bibibecame Secretary
and General Counsel of LSR effective July 28, 2005.  Prior thereto he
served as General Counsel of LSR and Huntingdon Life Sciences Inc. from April 1,
2002.  He served as Executive Vice President, Secretary and General
Counsel of Unilab Corporation, a clinical laboratory testing company based in
Los Angeles, California from May 1998 to November 1999 and as Vice President,
Secretary and General Counsel of Unilab from June 1993 to May
1998.  Prior thereto, Mr. Bibi was affiliated with the New York City
law firms, Schulte Roth & Zabel and Sullivan & Cromwell.








Brian Cass, FCMA, CBE, became
a director and Managing Director/President of LSR on January 10,
2002.  He was appointed to the Board of Huntingdon as Managing
Director/Chief Operating Officer in September 1998.  Prior to joining
Huntingdon he was a Vice President of Covance Inc. and Managing Director of
Covance Laboratories Ltd., (previously Hazleton Europe Ltd) for nearly 12 years,
having joined the company in 1979 as Controller.  Brian Cass worked at
Huntingdon Research Center between 1972 and 1974 and has previous experience
with other companies in the electronics and heavy plant
industries.  He has also held directorships with North Yorkshire
Training & Enterprise Council Ltd and Business Link North Yorkshire
Ltd.  In June 2002, Mr. Cass was also appointed as a Commander in the
Most Excellent Order of the British Empire (CBE).





Julian Griffiths MA, FCA, has
served as Vice President of Operations of LSR since July 28,
2005.  Prior thereto he was Director of Operations of Huntingdon from
April 2003.  He was appointed to the Huntingdon Board as Finance
Director in April 1999 and Secretary in February 2000.  He served as a
director of LSR from January 10, 2002 to June 11, 2002.  Prior to
joining Huntingdon he was most recently Vice President of Analytical Services in
the European pre-clinical division of Covance Inc., having spent nine years as
Vice President of Finance in the same organization.  Prior to that he
held various positions with KPMG.





Afonso Junqueirasbecame a
director of LSR on January 15, 2003.  He is a civil engineer and has
been President and a director of a South American private civil engineering firm
since 1997.





Richard Michaelson became
Chief Financial Officer and Secretary of LSR effective January 10, 2002 and has
been Chief Financial Officer since July 28, 2005.  Mr. Michaelson was
Director of Strategic Finance of Huntingdon from September 1998 to December
2001.  He served as Senior Vice President of Unilab Corporation, a
clinical laboratory testing company based in Los Angeles, California, from
September 1997 to December 1997, Senior Vice President-Finance, Treasurer and
Chief Financial Officer of Unilab from February 1994 to September 1997, and Vice
President-Finance, Treasurer and Chief Financial Officer of Unilab from November
1993 to February 1994.  Mr. Michaelson also served as Vice President
of Unilab beginning in October 1990.  Mr. Michaelson joined MetPath,
Inc., the clinical laboratory subsidiary of Corning Incorporated, in 1980 and
served as Vice President of MetPath from 1983 and Treasurer of Corning Lab
Services, Inc. from 1990 through, in each case, September 1992.  He
currently serves as a director of Huntsman Corporation.





Yaya Sesay, served as a
senior government official of an African nation for approximately 25 years,
culminating in his service as Financial Secretary of the Ministry of Finance for
three years.  For the past five years, Mr. Sesay has been an
international businessman with an interest in the development of pharmaceutical
products.





The
Articles of Amendment and Restatement of LSR provide that the directors shall be
not less than one in number and there shall be no maximum number of
directors.  Any director appointed by the board of directors holds
office only until the next following annual meeting, at which time he shall be
eligible for re-election by the stockholders.Directors may be
removed from office only for cause.





No
director or executive officer has a family relationship with any other director
or executive officer.








SECTION
16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE





Based
upon a review of Forms 3, 4, and 5 filed with the Commission by the Company’s
directors and officers in 2008 the Company believes that all such required forms
were filed on a timely basis.














Code
of Ethics





The
Company has adopted a Code of Business Conduct and Ethics that is applicable to
the Company’s employees and establishes special obligations for senior officers
(including the Principal Executive Officer, Principal Financial Officer,
Controller, directors and employees with financial reporting
responsibilities).  The Code of Business Conduct and Ethics is posted
on the Company’s website on www.lsrinc.net, under the “Corporate Governance”
icon.





Audit
Committee





The Audit
Committee of the Board of Directors of LSR is authorized to retain and evaluate
the Company’s independent accountants; to review and approve any major changes
in accounting policy; to review the arrangements for, scope and results of the
independent audit; to review and approve the scope of non-audit services to be
performed by independent accountants and to consider the possible effect on the
independence of the accountants; to review the effectiveness of internal
auditing procedures and personnel; to review LSR’s policies and procedures for
compliance with disclosure requirements with respect to conflicts of interest
and for prevention of unethical, questionable or illegal payments; and to take
other such actions as the Board shall from time to time so
authorize.  Messrs. Balthazar, Junqueiras and Sesay comprise the Audit
Committee.  Mr. Balthazar serves as Chairman.  The Board of
Directors has determined that Mr. Balthazar meets the definition of “audit
committee financial expert” as such term is defined under the SEC
rules.  Each member of the Audit Committee is considered to be an
independent director.





The Audit
Committee operates under a written charter adopted by the Board of Directors
that is posted on the Company’s website on www.lsrinc.net, under
the “Corporate Governance” icon.





The
Company intends to satisfy any disclosure requirements under Item 5.05 of Form
8-K regarding an amendment to or waiver from a provision of the Code of Ethics
or other corporate governance-related committee charter by posting such
information on the Company's website at the address and location specified
above.





ITEM
11.  EXECUTIVE COMPENSATION





Information
on Director and executive compensation is incorporated by reference to the
headings “Directors’ Compensation” and “Executive Compensation” in the Company’s
definitive Proxy Statement in connection with its 2009 Annual Meeting of
Shareholders to be held on May 21, 2009, which Proxy Statement is intended to be
filed not later than 120 days after December 31, 2008, pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.








ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





Information
on security ownership by certain beneficial owners and management of LSR is
incorporated by reference to the headings “Stock Ownership of Directors,
Executive Officers and Certain Shareholders” in the Company’s definitive Proxy
Statement in connection with its 2009 Annual Meeting of Stockholders to be held
on May 21, 2009, which Proxy Statement is intended to be filed not later than
120 days after December 31, 2008, pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.





The
following table summarizes the Company’s equity compensation plan information as
of December 31, 2008.  Information is included for equity compensation
plans approved by LSR stockholders and equity compensation plans not approved by
LSR stockholders.





Plan
      Category
                  
                  Common
      shares to be issued upon exercise of outstanding options, warrants and
      rights
                  
                  
                  Weighted-average
      exercise price of outstanding options warrants and rights
                  
                  
                  Common
      shares available for future issuance under equity compensation plans
      (excluding securities reflected in column (a))(a)
                  
                  
                  (b)
                  
                  
                  (c)Equity
      compensation plans approved by LSR stockholders
                  
                  
                  2,950,000
                  
                  
                  
                  4.59
                  
                  
                  
                  437,000Equity
      compensation plans not approved by LSR stockholders
                  
                  
                  1,425,000
                  
                  
                  
                  11.00
                  
                  
                  
                  -Totals
                  
                  
                  4,375,000
                  
                  
                  
                  6.37
                  
                  
                  
                  437,000





From time
to time US depositary institutions hold shares on behalf of their customers to
enable a market to be made in the LSR’s shares.  No holdings of 5% or
more have been reported by those institutions at March 11,
2009.














ITEM
13.  CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE


Incorporated
by reference to the headings “The Board of Directors and its Committees” in the
Company’s definitive Proxy Statement in connection with its 2009 Annual Meeting
of Stockholders to be held on May 21, 2009, which Proxy Statement is intended to
be filed not later than 120 days after December 31, 2008, pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.





ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES





Incorporated
by reference to the headings “Principal Accountant Fees and Services” in the
Company’s definitive Proxy Statement in connection with its 2009 Annual Meeting
of Stockholders to be held on May 21, 2009, which Proxy Statement is intended to
be filed not later than 120 days after December 31, 2008, pursuant to Regulation
14A under the Securities Exchange Act of 1934, as amended.








PART
IV







ITEM
15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES




1.           List of documents filed as
part of this report





2.           Index
to Financial Statements


Life Sciences Research, Inc. and
Subsidiaries





Managements’ Report on Consolidated
Financial Statements and Internal Control





Report of Independent Registered Public
Accounting Firm on Internal Control


Over Financial
Reporting





Report of
Independent Registered Public Accounting Firm on Consolidated


Financial
Statements– December
31, 2008 and 2007





Consolidated Statements of Operations
–


Years ended December 31, 2008, 2007,
and 2006





Consolidated Balance Sheets – December
31, 2008 and 2007





Consolidated Statements of
Stockholders’ Deficit and Comprehensive Loss –


Years ended December 31, 2008, 2007 and
2006





Consolidated Statements of Cash Flows
–


Years ended December 31, 2008, 2007,
and 2006





Notes to Consolidated Financial
Statements





3.           Financial
Statement Schedules




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











List of
Exhibits





Exhibit No.
              Description of Exhibit2.1
              Letter
      of Intent, dated August 27, 2001, between the Registrant and
      HLS.  INCORPORATED BY REFERENCE TO REGISTRANT’S REGISTRATION
      STATEMENT ON FORM S-4, REGISTRATION NUMBER 333-71408.3.1
              Articles
      of Amendment and Restatement of the Registrant adopted on November 7,
      2001.  INCORPORATED BY REFERENCE TO REGISTRANT’S REGISTRATION
      STATEMENT ON FORM S-4, REGISTRATION NUMBER 333-71408.3.2
              Bylaws
      of the Registrant.  INCORPORATED BY REFERENCE TO REGISTRANT’S
      REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER
      333-71408.10.1
              A
      Management Services Agreement dated August 7, 1998 between HLS and Focused
      Healthcare Partners.  INCORPORATED BY REFERENCE TO HLS’ ANNUAL
      REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31,
      1998.10.2
              A
      Deed of Undertaking between HLS and Andrew Baker.  INCORPORATED
      BY REFERENCE TO HLS’ ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
      DECEMBER 31, 1998.10.3
              Amendment
      dated January 26, 2000 to the Management Services Agreement dated August
      7, 1999 between HLS and Focused Healthcare
      Partners.  INCORPORATED BY REFERENCE TO HLS’ ANNUAL REPORT ON
      FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.10.4
              Service
      Contract dated April 29, 1999 between Huntingdon Life Sciences Ltd and Mr.
      B Cass INCORPORATED BY REFERENCE TO HLS’ ANNUAL REPORT ON FORM 20-F FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 1998.10.5
              Service
      Contract dated April 29, 1999 between Huntingdon Life Sciences Ltd and Mr.
      J Griffiths.  INCORPORATED BY REFERENCE TO HLS’ ANNUAL REPORT ON
      FORM 20-F FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.10.6
              A
      letter of appointment dated March 21, 2000 between HLS and Mr. G
      Balthazar.  INCORPORATED BY REFERENCE TO HLS’ ANNUAL REPORT ON
      FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.10.7
              Option
      Deed dated September 2, 1998 between HLS and Andrew Baker INCORPORATED BY
      REFERENCE TO HLS’ ANNUAL REPORT ON FORM 20-F FOR THE FISCAL YEAR ENDED
      DECEMBER 31, 1998.10.8
              Registrant’s
      2001 Equity Incentive Plan.  INCORPORATED BY REFERENCE TO
      REGISTRANT’S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION NUMBER
      333-71408.10.9
              Loan
      Facility Letter, dated September 25, 2000, between HLS and Andrew
      Baker.  INCORPORATED BY REFERENCE TO HLS’ ANNUAL REPORT ON FORM
      10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000.10.10
              Amendment
      No. 1 to Loan Facility Letter, dated as of February 22, 2001, between HLS
      and Andrew Baker.  INCORPORATED BY REFERENCE TO HLS’ ANNUAL
      REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
      2000.10.11
              Amendment
      No. 2 to Loan Facility Letter, dated as of March 20, 2001, by and among
      Andrew Baker, HLS and Focused Healthcare Partners.  INCORPORATED
      BY REFERENCE TO REGISTRANT’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL
      YEAR ENDED DECEMBER 31, 2002.10.12
              Subscription
      and Investor Rights Agreement, dated October 9, 2001, between LSR and
      Walter Stapfer.  INCORPORATED BY REFERENCE TO REGISTRANT’S
      REGISTRATION STATEMENT ON FORM S-4, REGISTRATION STATEMENT NUMBER
      333-71408.10.13
              Subscription
      and Investor Rights Agreement, dated October 9, 2001, between LSR and the
      persons named therein as Investors.  INCORPORATED BY REFERENCE
      TO REGISTRANT’S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION STATEMENT
      NUMBER 333-71408.10.14
              Warrant,
      dated October 9, 2001, issued by the Registrant.  INCORPORATED
      BY REFERENCE TO REGISTRANT’S REGISTRATION STATEMENT ON FORM S-4,
      REGISTRATION STATEMENT NUMBER 333-71408.10.15
              Form
      of Director’s Irrevocable Undertaking.  INCORPORATED BY
      REFERENCE TO REGISTRANT’S REGISTRATION STATEMENT ON FORM S-4, REGISTRATION
      STATEMENT NUMBER 333-71408.10.16
              Inducement
      Agreement, dated October 9, 2001 between the Registrant and
      HLS.  INCORPORATED BY REFERENCE TO REGISTRANT’S REGISTRATION
      STATEMENT ON FORM S-4, REGISTRATION STATEMENT NUMBER
      333-71408.10.17
              Service
      Agreement, dated as of April 1, 2000, between Huntingdon Life Sciences,
      Inc. and Richard Michaelson.  INCORPORATED BY REFERENCE TO
      REGISTRANT’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
      31, 2002.10.18
              Service
      Agreement, dated as of April 1, 2000, between Huntingdon Life Sciences,
      Inc. and Mark Bibi INCORPORATED BY REFERENCE TO REGISTRANT’S ANNUAL REPORT
      ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31,
  2002.10.19
              Amendment
      No. 1 to Service Agreement between Huntingdon Life Sciences, Inc. and
      Richard Michaelson, dated as of April 15, 2002.  INCORPORATED BY
      REFERENCE TO REGISTRANT’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR
      ENDED DECEMBER 31, 2002.10.20
              Amendment
      No. 1 to Service Agreement between Huntingdon Life Sciences Limited and
      Brian Cass, dated as of April 15, 2002 INCORPORATED BY REFERENCE TO
      REGISTRANT’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
      31, 2002.10.21
              Amendment
      No. 1 to Service Agreement between Huntingdon life Sciences Limited and
      Julian Griffiths, dated as of April 15, 2002 INCORPORATED BY REFERENCE TO
      REGISTRANT’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
      31, 2002.10.22
              Amendment
      No. 2 to Management Services Agreement between Huntingdon Life Sciences
      Group plc and Focused Healthcare Partners, dated as of April 15, 2002
      INCORPORATED BY REFERENCE TO REGISTRANT’S ANNUAL REPORT ON FORM 10-K FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2002.10.23
              Financing
      Agreement between Huntingdon Life Sciences Limited and the Lenders
      thereto, dated as of March 1, 2006 INCORPORATED BY REFERENCE TO
      REGISTRANT’S CURRENT REPORT ON FORM 8-K DATED MARCH 7,
    2006.10.24
              First
      Amendment to Financing Agreement, dated as of August 1, 2007 INCORPORATED
      BY REFERENCE TO REGISTRANT’S CURRENT REPORT ON FORM 8-K DATED AUGUST 3,
      2007.10.25
              Second
      Amendment to Financing Agreement, dated as of November 30,
      2007.  INCORPORATED BY REFERENCE TO REGISTRANT’S ANNUAL REPORT
      ON FORM 10-K DATED MARCH 13, 2008.18.1
              Hugh
      Scott, P.C. Preferability Letter. FILED HEREWITH21.1
              Subsidiaries
      – FILED HEREWITH31.1
              Certification
      of Chief Executive Officer pursuant to SEC Rule 13(a) –
      14(a).  FILED HEREWITH31.2
              Certification
      of Chief Financial Officer pursuant to SEC Rule 13(a) –
      14(a).  FILED HEREWITH32.1
              Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section
      1350.  FILED HEREWITH32.2
              Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section
      1350.  FILED HEREWITH99.1
              Press
      Release dated March 2, 2009, announcing fourth quarter and full year 2008
      results.  INCORPORATED BY REFERENCE TO REGISTRANT'S CURRENT
      REPORT ON FORM 8-K DATED MARCH 3, 2009.99.2
              Press
      Release dated March 4, 2009 announcing proposal by Andrew Baker, LSR’s
      chairman and CEO, to acquire all of the outstanding shares of
      LSR.  INCORPORATED BY REFERENCE TO REGISTRANT’S CURRENT REPORT
      ON FORM 8-K DATED MARCH 4, 2009.99.3
              Letter
      dated March 3, 2009 from LSR’s chairman and CEO Andrew Baker announcing
      proposal to acquire all the outstanding shares of
      LSR.  INCORPORATED BY REFERENCE TO REGISTRANT’S CURRENT REPORT
      ON FORM 8-K DATED MARCH 4, 2009.99.4
              Announcement,
      dated March 12, 2009, that a purported class action lawsuit had been filed
      against the Company and its Board of Directors in New Jersey State
      Court.  INCORPORATED BY REFERENCE TO REGISTRANT'S CURRENT REPORT ON
      FORM 8-K DATED MARCH 12,
2009.








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.




Life
Sciences Research Inc.


(Registrant)


By:
                              /s/
      Andrew BakerName:
                              Andrew
      BakerTitle:
                              Chairman
      and Chief Executive Officer and Director – Principal Executive
      OfficerDate:
                              March
      13, 2009By:
                              /s/
      Richard MichaelsonName:
                              Richard
      MichaelsonTitle:
                              CFO
      – Principal Financial and Accounting OfficerDate:
                              March
      13,
2009





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.





Signature
                                    Title
                                    Date/s/
      Gabor Balthazar
                                    Director
                                    March
      13, 2009Gabor
      Balthazar/s/
      Brian Cass
                                    Director
                                    March
      13, 2009Brian
      Cass/s/
      Afonso Junqueiras
                                    Director
                                    March
      13, 2009Afonso
      Junqueiras/s/
      Yaya Sesay
                                    Director
                                    March
      13, 2009Yaya
      Sesay