Use these links to rapidly review the documentCovance Inc. Form 10-Q For the Quarterly Period Ended June 30, 2004 INDEX



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

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FORM 10-Q

ý

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the quarterly period ended June 30, 2004oro

Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934For the transition period from  toCommission File Number: 1-12213


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

Delaware(State of Incorporation)

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

08540(Zip Code)


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

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

Indicate by check mark whether the Registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange
Act). YES ý    NO o

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 16, 2004, the Registrant had 62,632,757 shares of Common Stock outstanding.



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Covance Inc.  Form 10-Q For the Quarterly Period Ended June 30, 2004        INDEX



PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Balance SheetsJune 30, 2004 and December 31, 2003

2Consolidated Statements of IncomeThree and Six Months ended June 30, 2004 and 2003

3Consolidated Statements of Cash FlowsSix Months ended June 30, 2004 and 2003

4Notes to Consolidated Financial Statements

5Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

12Item 3. Quantitative and Qualitative Disclosure About Market Risk

22Item 4. Controls and Procedures

22Part II. Other InformationItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

23Item 4. Submission of Matters to a Vote of Security Holders

23Item 6. Exhibits and Reports on Form 8-K

23Signatures

25


1

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003

(Dollars in thousands)

June 30,
2004

December 31,
2003(UNAUDITED)AssetsCurrent Assets:Cash and cash equivalents

$
152,610

$
171,600Accounts receivable


160,210


156,799Unbilled services


54,109


44,053Inventory


39,317


39,926Deferred income taxes


8,283


6,230Prepaid expenses and other current assets


48,550


31,246Total Current Assets


463,079


449,854Property and equipment, net


285,955


284,413Goodwill, net


56,876


56,876Other assets


38,111


16,482Total Assets

$
844,021

$
807,625Liabilities and Stockholders' EquityCurrent Liabilities:Accounts payable

$
22,787

$
20,129Accrued payroll and benefits


49,197


50,433Accrued expenses and other current liabilities


37,820


37,035Unearned revenue


71,282


82,227Income taxes payable


9,593


Total Current Liabilities


190,679


189,824Deferred income taxes


36,852


36,776Other liabilities


19,356


17,044Total Liabilities


246,887


243,644Commitments and Contingent LiabilitiesStockholders' Equity:Preferred StockPar value $1.00 per share; 10,000,000 shares authorized; no shares issued and outstanding at June 30, 2004 and December 31, 2003,
respectively





Common StockPar value $0.01 per share; 140,000,000 shares authorized; 68,599,775 and 66,345,070 shares issued, including those held in treasury, at June 30, 2004 and
December 31, 2003, respectively


686


663Paid-in capital


254,735


199,534Retained earnings


440,709


395,245Accumulated other comprehensive income
    Cumulative translation adjustment


24,530


21,960Treasury stock at cost (6,011,842 and 3,820,531 shares at June 30, 2004 and December 31, 2003, respectively)


(123,526
)

(53,421
)Total Stockholders' Equity


597,134


563,981Total Liabilities and Stockholders' Equity

$
844,021

$
807,625


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

2

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)

Three Months Ended
June 30

Six Months Ended
June 30(Dollars in thousands, except per share data)

2004

2003

2004

2003Net revenues

$
250,995

$
233,838

$
495,238

$
467,234Reimbursable out-of-pockets


7,622


8,507


14,879


18,160Total revenues


258,617


242,345


510,117


485,394Cost and expenses:Cost of revenue


167,120


157,708


328,696


318,728Reimbursed out-of-pocket expenses


7,622


8,507


14,879


18,160Selling, general and administrative


38,393


36,522


77,247


70,142Depreciation and amortization


11,453


11,452


23,191


22,611Total


224,588


214,189


444,013


429,641Income from operations


34,029


28,156


66,104


55,753Other expense (income), net:Interest expense


344


387


742


812Interest income


(544
)

(235
)

(1,486
)

(628
)Foreign exchange transaction loss (gain), net


218


(41
)

418


21Other expense (income), net


18


111


(326
)

205Income before taxes and equity investee earnings


34,011


28,045


66,430


55,548Taxes on Income


10,885


9,861


21,401


19,623Equity investee earnings


169


70


435


247Net income

$
23,295

$
18,254

$
45,464

$
36,172Basic earnings per share

$
0.37

$
0.30

$
0.73

$
0.59Weighted average shares outstanding  basic


62,512,302


61,445,088


62,553,616


61,515,200Diluted earnings per share

$
0.36

$
0.29

$
0.70

$
0.58Weighted average shares outstandingdiluted


64,795,264


62,267,702


64,726,789


62,769,974


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

3

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)

Six Months Ended
June 30(Dollars in thousands)

2004

2003Cash flows from operating activities:Net income

$
45,464

$
36,172Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization


23,191


22,611Stock issued under employee benefit and stock compensation plans


6,428


6,572Deferred income tax (benefit) provision


(1,977
)

4,106Other


(237
)

280Changes in operating assets and liabilities:Accounts receivable


(3,411
)

10,386Unbilled services


(10,056
)

(10,710
)Inventory


609


907Accounts payable


2,658


(5,040
)Accrued liabilities


(451
)

(23,579
)Unearned revenue


(10,945
)

(23,343
)Income taxes payable


9,593


Other assets and liabilities, net


(7,488
)

1,077Net cash provided by operating activities


53,378


19,439Cash flows from investing activities:Equity method investment


(20,741
)

Capital expenditures


(23,280
)

(20,358
)Other, net


71


(46
)Net cash used in investing activities


(43,950
)

(20,404
)Cash flows from financing activities:Stock issued under employee stock purchase and option plans


40,623


14,919Purchase of treasury stock


(70,105
)

(13,931
)Net cash (used in) provided by financing activities


(29,482
)

988Effect of exchange rate changes on cash


1,064


2,904Net change in cash and cash equivalents


(18,990
)

2,927Cash and cash equivalents, beginning of period


171,600


75,913Cash and cash equivalents, end of period

$
152,610

$
78,840


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

4

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COVANCE INC. AND SUBSIDIARIES  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (UNAUDITED)  June 30, 2004 and 2003  (dollars in thousands, unless otherwise indicated)

1.    Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending
December 31, 2004. The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes
required by GAAP for complete financial statements. You should read these consolidated financial statements together with the historical consolidated financial statements of Covance Inc. and
subsidiaries ("Covance") for the years ended December 31, 2003, 2002, and 2001 included in our Annual Report on Form 10-K for the year ended December 31, 2003.

2.    Summary of Significant Accounting Policies



These unaudited consolidated financial statements include the accounts of all entities controlled by Covance. All significant intercompany accounts and
transactions are eliminated. The equity method of accounting is used for investments in affiliates in which Covance owns between 20 and 50 percent and does not have the ability to exercise
control. See Note 4.



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



In connection with the management of multi-site clinical trials, Covance pays on behalf of its customers fees to investigators, volunteers and other
out-of-pocket costs (such as travel, printing, meetings, couriers, etc.), for which we are reimbursed at cost, without mark-up or profit. Amounts receivable from
customers in connection with billed and unbilled investigator fees, volunteer payments and other out-of-pocket pass-through costs are included in prepaid expenses
and other current assets in the accompanying Consolidated Balance Sheets and totaled $23.6 million and $14.5 million at June 30, 2004 and December 31, 2003, respectively.
See Note 2 "Reimbursable Out-of-Pocket Expenses".



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



Goodwill represents investment costs in excess of the fair value of net tangible and identifiable net intangible assets acquired. In accordance with Financial
Accounting Standards Board ("FASB") Statement No. 142,Goodwill and Other Intangible Assets, Covance performs an annual test for impairment of
goodwill. The most recent annual test performed for 2003 did not identify any instances of impairment and there were no events through June 30, 2004 that warranted a reconsideration of our
impairment test results.

5

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2004 and 2003
(dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



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

Covance
has established, and periodically reviews and reevaluates, an estimated income tax reserve on its consolidated balance sheet to provide for the possibility of adverse outcomes in
tax proceedings. When matters are settled or when facts indicate a material change in the probability or amount of the potential exposure, Covance adjusts the carrying value of the related reserve.



Covance's total comprehensive income, which represents net income plus the change in the cumulative translation adjustment equity account for the periods
presented, was $26.2 million and $25.0 million for the three months ended June 30, 2004 and 2003, respectively, and $48.0 million and $42.8 million for the six
months ended June 30, 2004 and 2003, respectively.



Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of shares outstanding during the period. The
computation of diluted EPS is similar to the computation of basic EPS, except that the denominator is increased to include the number of additional common shares that would have been outstanding if
the dilutive potential common shares had been issued; computed under the treasury stock method in accordance with the requirements of SFAS No. 128,Earnings Per
Share. In computing diluted earnings per share for the three months ended June 30, 2004 and 2003, the denominator was increased by 2,282,962 shares and 822,614 shares,
respectively, and for the six months ended June 30, 2004 and 2003, the denominator was increased by 2,173,173 shares and 1,254,774 shares, respectively, representing the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued for stock options outstanding at June 30, 2004 and 2003 with exercise prices less than the
average market price of Covance's Common Stock during each respective period.



As discussed in Note 2 "Prepaid Expenses and Other Current Assets", Covance pays on behalf of its customers fees to investigators, volunteers and other
out-of-pocket costs for which we are reimbursed at cost, without mark-up or profit. In connection with the requirements of Financial Accounting Standards Board
Emerging Issues Task Force Rule No. 01-14 ("EITF 01-14"),Income Statement Characterization of Reimbursements Received for
"Out-of-Pocket" Expenses Incurred, amounts paid to volunteers and other out-of-pocket costs are reflected in operating expenses,
while the reimbursements received are reflected in revenues in the Consolidated Statements of Income. Covance will continue to exclude from revenue and expense in the Consolidated Statements of Income
fees paid to investigators and the associated reimbursement since Covance acts as an agent on behalf of the pharmaceutical company sponsors with regard to investigator payments.

6

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2004 and 2003
(dollars in thousands, unless otherwise indicated)

2.    Summary of Significant Accounting Policies (Continued)



Covance has several stock-based compensation plans, which are described more fully in Note 10 to our audited consolidated financial statements included in
our Annual Report on Form 10-K for the year ended December 31, 2003. Effective January 1, 2003, Covance adopted FASB Statement No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure.Statement No. 148 amends FASB Statement No. 123,Accounting for Stock-Based Compensation, to provide, among other things, prominent disclosure of the effects of an entity's accounting policy with
respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. Covance intends to continue to follow the
disclosure-only provisions of FASB Statement No. 123 and, accordingly, will continue to account for these plans under the recognition and measurement principles of APB Opinion
No. 25,Accounting for Stock Issued to Employees, and related interpretations. Under APB 25, when stock options are issued with an exercise price
equal to the market price of the underlying stock price on the date of grant, no compensation expense is recognized.

While
Covance does record compensation expense related to awards of stock, no compensation cost is recorded for option grants under Covance's stock option plans as all options granted
under these plans are issued with an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings
per share for the three and six months ended June 30, 2004 and 2003 had Covance applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation,
 to all of its stock-based employee compensation plans.

Three Months Ended June 30

Six Months Ended June 302004

2003

2004

2003Net Income, as reported

$
23,295

$
18,254

$
45,464

$
36,172Add: Stock award-based employee
compensation included in reported net income, net
of related tax effects

$
764

$
848

$
1,389

$
1,608Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects

$
(3,563
)
$
(3,226
)
$
(6,446
)
$
(6,204
)Pro forma net income

$
20,496

$
15,876

$
40,407

$
31,576Earnings per share:Basicas reported

$
0.37

$
0.30

$
0.73

$
0.59Basicpro forma

$
0.33

$
0.26

$
0.65

$
0.51Dilutedas reported

$
0.36

$
0.29

$
0.70

$
0.58Dilutedpro forma

$
0.32

$
0.25

$
0.63

$
0.50




Cash paid for interest for each of the six month periods ended June 30, 2004 and 2003 totaled $0.8 million. Cash paid for income taxes for the six
month periods ended June 30, 2004 and 2003 totaled $6.6 million and $9.2 million, respectively.

7

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2004 and 2003
(dollars in thousands, unless otherwise indicated)

3.    Treasury Stock

In June 2004, the Covance Board of Directors authorized the repurchase of an additional 3.0 million shares under Covance's stock repurchase program.
At June 30, 2004, there were 3.0 million shares remaining for purchase under this program, and another 0.3 million shares remaining under a previous 3.0 million share
buyback program approved by the Covance Board of Directors in 2003. Covance also reacquires shares of its common stock in connection with certain employee benefit plans when employees tender shares
upon choosing the reload option for stock option exercises and when employees tender shares to satisfy income tax withholdings associated with the vesting of stock awards. The following table sets
forth the treasury stock activity during the six month periods ended June 30, 2004 and 2003.

Six Months Ended June 302004

2003$

# shares

$

# sharesShares repurchased in connection with:Board approved buyback programs

$
66,883


2,095.0

$
13,515


640.3Employee benefit plans


3,222


96.3


416


9.4Total

$
70,105


2,191.3

$
13,931


649.7


4.    Equity Method Investees

In March 2004, Covance acquired a 47% minority equity position in Noveprim Limited, an existing supplier of research products, for a total cost of
$20.7 million. The excess of the purchase price over the underlying equity in Noveprim's net assets is approximately $13.8 million. This investment is reflected in Other Assets on the
Consolidated Balance Sheet. During the three month period ended June 30, 2004, Covance recognized $0.1 million, representing its share of Noveprim's earnings, less an elimination of
profit on inventory purchased from Noveprim Limited and still on hand at Covance at June 30, 2004.

Covance
has a minority equity position (approximately 22% at June 30, 2004) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging
technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text.
During the three and six month periods ended June 30, 2004, Covance recognized $0.1 million and $0.4 million, respectively, representing its share of BITI's earnings. During the
three and six month periods ended June 30, 2003, Covance recognized $0.1 million and $0.2 million, respectively, representing its share of BITI's earnings. The carrying value of
Covance's investment in BITI as of June 30, 2004 was $0.8 million while the fair market value was $10.8 million.

5.    Defined Benefit Plans

Covance sponsors various pension and other post-retirement benefit plans. During the first quarter of 2004, Covance adopted the interim disclosure
provisions of SFAS No. 132 (revised 2003),Employers' Disclosure About Pensions and Other Post-Retirement Benefits.This statement
requires the interim disclosures as shown below.

8

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COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2004 and 2003
(dollars in thousands, unless otherwise indicated)

5.    Defined Benefit Plans (Continued)



Covance sponsors two defined benefit pension plans for the benefit of its employees at two United Kingdom subsidiaries and one defined benefit pension plan for
the benefit of its employees at a German subsidiary, all of which are legacy plans of previously acquired companies. Benefit amounts for all three plans are based upon years of service and
compensation. The German plan is unfunded while the UK plans are funded. Covance's funding policy has been to contribute annually a fixed percentage of the eligible employee's salary at least equal to
the local statutory funding requirements. Pension plan assets are administered by the plans' trustees and are principally invested in equity and fixed income securities. The components of net periodic
pension expense for these plans for the three and six month periods ended June 30, 2004 and 2003 are as follows:

United Kingdom Plans

German PlanThree Months Ended June 30

Three Months Ended June 302004

2003

2004

2003Components of Net Periodic Pension Cost:Service cost

$
1,167

$
1,050

$
72

$
63Interest cost


1,217


943


60


52Expected return on plan assets


(1,089
)

(806
)




Amortization of net actuarial loss


281


296


1


2Participant contributions


(507
)

(463
)




Net periodic pension cost

$
1,069

$
1,020

$
133

$
117Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


6.00
%

6.00
%

5.75
%

5.75
%Expected rate of return on assets


6.00
%

6.00
%

n/a


n/aSalary increases


3.50
%

3.50
%

3.00
%

3.00
%


United Kingdom Plans

German PlanSix Months
Ended June 30

Six Months
Ended June 302004

2003

2004

2003Components of Net Periodic Pension Cost:Service cost

$
2,339

$
2,100

$
145

$
126Interest cost


2,439


1,886


121


104Expected return on plan assets


(2,183
)

(1,612
)




Amortization of net actuarial loss


563


592


3


3Participant contributions


(1,017
)

(926
)




Net periodic pension cost

$
2,141

$
2,040

$
269

$
239Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


6.00
%

6.00
%

5.75
%

5.75
%Expected rate of return on assets


6.00
%

6.00
%

n/a


n/aSalary increases


3.50
%

3.50
%

3.00
%

3.00
%


9

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2004 and 2003
(dollars in thousands, unless otherwise indicated)

5.    Defined Benefit Plans (Continued)



In addition to these foreign defined benefit pension plans, Covance also has a non-qualified Supplemental Executive Retirement Plan ("SERP"). The
SERP, which is not funded, is intended to provide retirement benefits for certain executive officers of Covance. Benefit amounts are based upon years of service and compensation of the participating
employees. The components of net periodic pension cost for the three and six month periods ended June 30, 2004 and 2003 are as follows:

Three Months Ended
June 30



Six Months Ended
June 302004



2003



2004



2003Components of Net Periodic Pension Cost:Service cost

$
237



$
141



$
474



$
282Interest cost


131




98




262




196Amortization of prior service cost


19









38




Amortization of net actuarial loss


5




2




10




4Net periodic pension cost

$
392



$
241



$
784



$
482Assumptions Used to Determine Net Periodic Pension Cost:Discount rate


6.25
%



6.75
%



6.25
%



6.75
%Salary increases


4.00
%



4.50
%



4.00
%



4.50
%




Covance also sponsors a post-employment retiree health and welfare plan for the benefit of eligible employees at certain U.S. subsidiaries who retire
after satisfying service and age requirements. This plan is funded on a pay-as-you-go basis and the cost of providing these benefits is shared with the retirees.
The components of net periodic post-retirement benefits cost for the three and six month periods ended June 30, 2004 and 2003 are as follows:

Three Months Ended
June 30



Six Months Ended
June 302004



2003



2004



2003Components of Net Periodic Post-retirement Benefits Cost:Service cost

$
60



$
56



$
120



$
112Interest cost


98




96




196




192Amortization of prior service cost (benefit)


(98
)



(99
)



(196
)



(198
)Amortization of net actuarial loss


50




45




100




90Net periodic post-retirement benefits cost

$
110



$
98



$
220



$
196Assumptions Used:Discount rate


6.25
%



6.75
%



6.25
%



6.75
%Health care cost trend rate


9.00
%
(a)


9.90
%
(a)


9.00
%
(a)


9.90
%
(a)


---

10

---



COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
June 30, 2004 and 2003
(dollars in thousands, unless otherwise indicated)

6.    Segment Information

Covance has two reportable segments: early development and late-stage development. Early development services, which includes Covance's preclinical
and Phase I clinical service capabilities, involve evaluating a new compound for safety and early effectiveness as well as evaluating the absorption, distribution, metabolism and excretion of the
compound in the human body. It is at this stage that a pharmaceutical company, based on available data, will generally decide whether to continue further development of a drug. Late-stage
development services, which include Covance's central laboratory, clinical development, periapproval, central ECG diagnostic services, and healthcare economic and reimbursement services, are geared
toward demonstrating the clinical effectiveness of a compound in treating certain diseases or conditions, obtaining regulatory approval and maximizing the drug's commercial potential.

The
accounting policies of the reportable segments are the same as those described in Note 2. Segment net revenues, operating income and total assets for the three and six months
ended June 30, 2004 and 2003 are as follows:

Early
Development

Late-Stage
Development

Other
Reconciling Items



TotalThree months ended June 30, 2004Total revenues from external customers

$
120,688

$
130,307

$
7,622

(a)

$
258,617Operating income

$
27,915

$
19,508

$
(13,394
)
(b)

$
34,029Total assets

$
426,125

$
341,815

$
76,081

(c)

$
844,021Three months ended June 30, 2003Total revenues from external customers

$
98,693

$
135,145

$
8,507

(a)

$
242,345Operating income

$
19,199

$
20,949

$
(11,992
)
(b)

$
28,156Total assets

$
342,651

$
320,045

$
24,630

(c)

$
687,326Six months ended June 30, 2004Total revenues from external customers

$
236,002

$
259,236

$
14,879

(a)

$
510,117Operating income

$
54,831

$
37,960

$
(26,687
)
(b)

$
66,104Total assets

$
426,125

$
341,815

$
76,081

(c)

$
844,021Six months ended June 30, 2003Total revenues from external customers

$
198,688

$
268,546

$
18,160

(a)

$
485,394Operating income

$
38,288

$
40,090

$
(22,625
)
(b)

$
55,753Total assets

$
342,651

$
320,045

$
24,630

(c)

$
687,326


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11

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with the unaudited Covance consolidated financial statements and the accompanying notes included in this
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004.

Overview

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

Critical Accounting Policies

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

Revenue Recognition.Covance recognizes revenue either as services are performed or products are
delivered, depending upon the nature of the work contracted. Historically, a majority of Covance's net revenues have been earned under contracts which range in duration from a few months to two years,
but can extend in duration up to five years or longer. Service contracts generally take the form of fee-for-service or fixed-price arrangements. In the case of
fee-for-service contracts, revenue is recognized as services are performed, based upon, for example, hours worked or samples tested. For long-term fixed-price
service contracts, revenue is recognized as services are performed, with performance generally assessed using output measures, such as units-of-work performed to date as
compared to the total units-of-work contracted. Changes in the scope of work generally result in a renegotiation of contract pricing terms. Renegotiated amounts are not
included in net revenues until earned and realization is assured. Estimates of costs to complete are made to provide, where appropriate, for losses expected on contracts. Costs are not deferred in
anticipation of contracts being awarded, but instead are expensed as incurred. In some cases, for multi-year contracts, a portion of the contract fee is paid at the time the trial is
initiated. These advances are deferred and recognized as revenue as services are performed, as discussed above. Additional payments may be made based upon the achievement of performance-based
milestones over the contract duration. Most contracts are terminable by the client either immediately or upon notice. These contracts typically require payment to Covance of expenses to wind down the
study, fees earned to date and, in some cases, a termination fee or a payment to Covance of some portion of the fees or profits that could have been earned by Covance under the contract if it had not
been terminated early. Termination fees are included in net revenues when realization is assured.

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

12

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Taxes on Income.Since Covance conducts operations on a global basis, its effective tax rate has and
will continue to depend upon the geographic distribution of its pre-tax earnings among locations with varying tax rates. Covance's profits are further impacted by changes in the tax rates
of the various jurisdictions. In particular, as the geographic mix of Covance's pre-tax earnings among various tax jurisdictions changes, Covance's effective tax rate may vary from period
to period. Covance has established, and periodically reevaluates, an estimated income tax reserve on its consolidated balance sheet to provide for the possibility of adverse outcomes in income tax
proceedings. While Covance believes that it has identified all reasonably identifiable exposures and that the reserve it has established for identifiable exposures is appropriate under the
circumstances, it is possible that additional exposures exist and that exposures will be settled at amounts different than the amounts reserved. It is possible that changes in estimates in the future
could cause Covance to either materially increase or reduce the carrying amount of its income tax reserve. In addition, Covance's policy is to provide income taxes on earnings of foreign subsidiaries
to the extent those earnings are taxable or are expected to be remitted. Taxes have not been provided on accumulated foreign unremitted earnings totaling $127.0 million as of
December 31, 2003 because Covance currently intends to leave these earnings invested in those countries. If
Covance were to repatriate these earnings, or a portion of these earnings, Covance might incur a significant income tax liability.

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

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

Covance
performs an annual test for impairment of goodwill. This test is performed by comparing, at the reporting unit level, the carrying value of goodwill to its fair value. Covance
assesses fair value based upon its best estimate of the present value of the future cash flows that it expects to be generated by the reporting unit. The test performed for 2003 did not identify any
instances of impairment. However, changes in expectations as to the present value of the reporting unit's future cash flows might impact subsequent years' assessments of impairment.

Defined Benefit Pension Plans.Covance sponsors defined benefit pension plans for the benefit of its
employees at three foreign subsidiaries. The measurement of the related pension benefit obligation and the expense recorded in each year is based upon actuarial computations which require judgment as
to (a) the appropriate discount rate to use in computing the present value of the benefit obligation, (b) the expected return on plan assets and (c) the expected future rate of
salary increases. Actual results will likely differ, in some periods materially, from the assumptions used in the actuarial valuation.

Foreign Currency Risks

Since Covance operates on a global basis, it is exposed to various foreign currency risks. Two specific risks arise from the nature of the contracts Covance
executes with its customers since from time to time contracts are denominated in a currency different than the particular Covance subsidiary's local currency. These risks are generally applicable only
to a portion of the contracts executed by Covance's foreign subsidiaries providing clinical services. The first risk occurs as revenue recognized for services rendered is denominated in a currency
different from the currency in which the subsidiary's expenses are incurred. As a result, the subsidiary's net revenues and resultant earnings can be affected by fluctuations in exchange rates.
Historically, fluctuations in exchange rates from those in effect at the time contracts were executed have not had a material effect upon Covance's consolidated financial results. See "Risk Factors".

The
second risk results from the passage of time between the invoicing of customers under these contracts and the ultimate collection of customer payments against such invoices. Because
the contract is denominated in a currency other than the subsidiary's local currency, Covance recognizes a receivable at the time of invoicing for the local currency equivalent of the foreign currency
invoice amount. Changes in exchange rates from the time the invoice
is prepared and payment from the customer is received will result in Covance receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the
invoice was prepared and the receivable established. This difference is recognized by Covance as a foreign currency transaction gain or loss, as applicable, and is reported in other expense (income)
in Covance's Consolidated Statements of Income.

13

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

Operating Expenses and Reimbursable Out-of-Pockets

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

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

Quarterly Results

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

Results of Operations

Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003.Net
revenues increased 7.3% to $251.0 million for the three months ended June 30, 2004 from $233.8 million for the corresponding 2003 period. Excluding the impact of foreign exchange
rate variances between both periods net revenues increased 4.9% as compared to the corresponding 2003 period. Net revenues from Covance's early development segment grew 22.3%, or 18.4% excluding the
impact of foreign exchange rate variances between both periods, primarily on continuing strong performance in our global toxicology, chemistry and North American Phase I services. Net revenues from
Covance's late-stage development segment decreased 3.6%, or 5.0% excluding the impact of foreign exchange rate variances between both periods. Growth in our late-stage
development segment continued to be negatively impacted by reduced testing volumes in our central laboratory service offering due to low order volume in the first half of 2003.

Cost
of revenue increased 6.0% to $167.1 million or 66.6% of net revenues for the three months ended June 30, 2004 as compared to $157.7 million or 67.4% of net
revenues for the corresponding 2003 period. Gross margins improved 80 basis points to 33.4% for the three months ended June 30, 2004 from 32.6% for the corresponding 2003 period on process
improvements and cost controls, especially across most of our early development service offerings.

14

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Overall,
selling, general and administrative expenses increased 5.1% to $38.4 million for the three months ended June 30, 2004 from $36.5 million for the
corresponding 2003 period. As a percentage of net revenues, selling, general and administrative expenses decreased 30 basis points to 15.3% for the three month period ended June 30, 2004 from
15.6% for the corresponding 2003 period.

Depreciation
and amortization was $11.5 million for each of the three month periods ended June 30, 2004 and 2003, or 4.6% and 4.9% of net revenues for the corresponding
2004 and 2003 periods, respectively.

Income
from operations increased 20.9% to $34.0 million or 13.6% of net revenues for the three months ended June 30, 2004 from $28.2 million or 12.0% of net revenues
for the corresponding 2003 period. Income from operations from Covance's early development segment increased $8.7 million or 45.4% to $27.9 million or 23.1% of net revenues for the three
months ended June 30, 2004 from $19.2 million or 19.5% of net revenues for the corresponding 2003 period, primarily driven by strong performance in our global toxicology, chemistry and
North American Phase I services. Income from operations from Covance's late-stage development segment decreased $1.4 million or 6.9% to $19.5 million or 15.0% of net revenues
for the three months ended June 30, 2004 from $20.9 million or 15.5% of net revenues for the corresponding 2003 period. Late-stage development operating income continued to
be negatively impacted by reduced testing volumes in our central laboratory service offering resulting from low order volume in the first half of 2003. Corporate expenses increased $1.4 million
to $13.4 million or 5.3% of net revenues for the three months ended June 30, 2004 from $12.0 million or 5.1% of net revenues for the three months ended June 30, 2003. The
increase is primarily attributable to increased centralized information technology costs.

Covance's
effective tax rate for the three months ended June 30, 2004 was 32.0% compared to 35.2% for the corresponding 2003 period. The year over year 320 basis point reduction
in Covance's effective tax rate is attributable to a number of factors, including the mix of our pre-tax earnings across various tax jurisdictions, recently enacted research and
development tax credits in the United Kingdom, and other planning measures.

Covance
has a minority equity position (approximately 22% at June 30, 2004) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging
technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text.
During each of the three month periods ended June 30, 2004 and 2003, Covance recognized $0.1 million, representing its share of BITI's earnings.

In
March 2004, Covance acquired a 47% minority equity position in Noveprim Limited, an existing supplier of research products. Covance began recognizing earnings from this
investment in the second quarter of 2004. For the three month period ended June 30, 2004, Covance recognized $0.1 million, representing its share of Noveprim's earnings, less an
elimination of profit on inventory purchased from Noveprim Limited and still on hand at Covance at June 30, 2004.

Net
income of $23.3 million for the three months ended June 30, 2004 increased $5.0 million or 27.6% as compared to $18.3 million for the corresponding 2003
period.

Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003.Net revenues increased 6.0% to
$495.2 million for the six months ended June 30, 2004 from $467.2 million for the corresponding 2003 period. Excluding the impact of foreign exchange rate variances between both
periods, net revenues increased 2.9% as compared to the corresponding 2003 period. Net revenues from Covance's early development segment grew 18.8%, or 14.2% excluding the impact of foreign exchange
rate variances between both periods, primarily on strong performance in our global toxicology, chemistry and North American Phase I services. Net revenues from Covance's late-stage
development segment decreased 3.5%, or 5.4% excluding the impact of foreign exchange rate variances between both periods. Growth in our late-stage development segment was negatively
impacted by reduced testing volumes in our central laboratory service offering due to low order volume in the first half of 2003.

Cost
of revenue increased 3.1% to $328.7 million or 66.4% of net revenues for the six months ended June 30, 2004 as compared to $318.7 million or 68.2% of net
revenues for the corresponding 2003 period. Gross margins improved 180 basis points to 33.6% for the six months ended June 30, 2004 from 31.8% for the corresponding 2003 period primarily, on
process improvements and cost controls, especially across most of our early development service offerings.

15

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Overall,
selling, general and administrative expenses increased 10.1% to $77.2 million for the six months ended June 30, 2004 from $70.1 million for the
corresponding 2003 period. As a percentage of net revenues, selling, general and administrative expenses increased 60 basis points to 15.6% for the six months ended June 30, 2004 from 15.0% for
the corresponding 2003 period.

Depreciation
and amortization increased 2.6% to $23.2 million or 4.7% of net revenues for the six months ended June 30, 2004 from $22.6 million or 4.8% of net
revenues for the corresponding 2003 period.

Income
from operations increased 18.6% to $66.1 million or 13.3% of net revenues for the six months ended June 30, 2004 from $55.8 million or 11.9% of net revenues
for the corresponding 2003 period. Income from operations from Covance's early development segment increased $16.5 million or 43.2% to $54.8 million or 23.2% of net revenues for the six
months ended June 30, 2004 from $38.3 million or 19.3% of net revenues for the corresponding 2003 period, primarily driven by strong performance in our global toxicology, chemistry and
North American Phase I services. Income from operations from Covance's late-stage development segment decreased $2.1 million or 5.3% to $38.0 million or 14.6% of net revenues
for the six months ended June 30, 2004 from $40.1 million or 14.9% of net revenues for the corresponding 2003 period, primarily due to reduced testing volumes in our central laboratory
service offering resulting from low order volume in the first half of 2003. Corporate expenses increased $4.1 million to $26.7 million or 5.4% of net revenues for the six months ended
June 30, 2004 from $22.6 million or 4.8% of net revenues for the six months ended June 30, 2003. The increase is primarily attributable to increased centralized information
technology and human resources costs and increased spending in sales and marketing, finance, legal and resource management.

Other
income, net increased $0.5 million to $0.3 million for the six months ended June 30, 2004 from net expense of $0.2 million for the corresponding 2003
period. This increase is the result of a $0.9 million increase in net interest income due primarily to higher invested cash balances, partially offset by a $0.4 million increase in
foreign exchange losses due to the weakening of the U.S. dollar during the six months ended June 30, 2004.

Covance's
effective tax rate for the six months ended June 30, 2004 was 32.2% compared to 35.3% for the corresponding 2003 period. The 310 basis point reduction in Covance's
effective tax rate year over year is attributable to a number of factors, including the mix of our pre-tax earnings across various tax jurisdictions, recently enacted research and
development tax credits in the United Kingdom, and other initiatives.

Covance
has a minority equity position (approximately 22% at June 30, 2004) in Bio-Imaging Technologies, Inc. ("BITI"). BITI uses proprietary medical imaging
technologies to process and analyze medical images, and also provides other services, including the data-basing and regulatory submission of medical images, quantitative data and text.
During the six month period ended June 30, 2004, Covance recognized $0.4 million, representing its share of BITI's earnings, as compared to $0.2 million for the corresponding 2003
period.

In
March 2004, Covance acquired a 47% minority equity position in Noveprim Limited, an existing supplier of research products. Covance began recognizing earnings from this
investment in the second quarter of 2004. For the three month period ended June 30, 2004, Covance recognized $0.1 million, representing its share of Noveprim's earnings, less an
elimination of profit on inventory purchased from Noveprim Limited and still on hand at Covance at June 30, 2004.

Net
income of $45.5 million for the six months ended June 30, 2004 increased $9.3 million or 25.7% as compared to $36.2 million for the corresponding 2003
period.

Liquidity and Capital Resources

Covance's expected primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible future
acquisitions, geographic expansion, working capital and other general corporate purposes, including possible share repurchases. On June 30, 2004, Covance entered into a new $75.0 million
revolving credit facility which expires in June 2009. Covance believes cash from operations and available borrowings under its new credit facility will provide sufficient liquidity for the
foreseeable future. At June 30, 2004, there were no outstanding borrowings and no outstanding letters of credit under the new credit facility. Interest on all outstanding borrowings under the
new credit facility is based upon the London Interbank Offered Rate ("LIBOR") plus a 75 basis point margin. Costs associated with the new credit facility consisted primarily of bank and legal fees
totaling $0.4 million which will be amortized over the five year facility term. The new credit facility contains various financial and other covenants. The new credit facility is collateralized
by guarantees of

16

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certain
of Covance's domestic subsidiaries and a pledge of 65 percent of the capital stock of certain of Covance's foreign subsidiaries. A commitment fee of 15 basis points on the undrawn
balance of the new credit facility will be payable in arrears on the first day of each July, October, January and April, beginning in October 2004.

During
the six months ended June 30, 2004, Covance's operations provided net cash of $53.4 million, an increase of $33.9 million from the corresponding 2003 period.
The change in net operating assets used $19.5 million in cash during the six months ended June 30, 2004, primarily due to a reduction in unearned revenue and an increase in unbilled
services, while this net change used $50.3 million in cash during the six months ended June 30, 2003, primarily due to a reduction in accrued liabilities (primarily from the payment of
2002 bonuses in the first quarter
of 2003) and unearned revenue. Covance's ratio of current assets to current liabilities was 2.43 at June 30, 2004 and 2.37 at December 31, 2003.

Investing
activities for the six months ended June 30, 2004 used $44.0 million, compared to using $20.4 million for the corresponding 2003 period. Capital spending
for the first six months of 2004 totaled $23.3 million, and was primarily for the outfitting of new facilities, purchase of new equipment, upgrade of existing equipment and computer equipment
and software for newly hired employees. Investment activities for the six months ended June 30, 2004 also include a 47% equity investment in Noveprim Limited, an existing supplier of research
products, totaling $20.7 million. Capital spending for the corresponding 2003 period totaled $20.4 million, and was primarily for the expansion and enhancement of our Harrogate, England
facility, outfitting of new facilities, purchase of new equipment, upgrade of existing equipment and computer equipment and software for newly hired employees.

Financing
activities for the six months ended June 30, 2004 used $29.5 million and consisted primarily of the purchase of 2,095,000 shares of Covance common stock for an
aggregate cost of $70.1 million, primarily in connection with a 3.0 million share buyback program authorized by Covance's Board of Directors in February 2003, partially offset by
$40.6 million received from stock option exercises and employee contributions to Covance's noncompensatory employee stock purchase plan. Financing activities for the six months ended
June 30, 2003 provided $1.0 million, and consisted primarily of $14.9 million received from stock option exercises and employee contributions to Covance's noncompensatory employee
stock purchase plan, partially offset by the purchase of 649,700 shares of Covance common stock for an aggregate cost of $13.9 million, primarily in connection with a 3.0 million share
buyback program authorized by Covance's Board of Directors in February 2003.

In
June 2004, Covance's Board of Directors authorized the repurchase of up to 3.0 million additional shares of Covance common stock. At June 30, 2004, there are also
264,700 shares remaining for repurchase under the 2003 Board approved repurchase program.

Inflation

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

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

17

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Risk Factors

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

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

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

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

Any failure on our part to comply with applicable regulations could result in the termination of on-going research or the disqualification of data for
submission to regulatory authorities. For example, if we were to fail to verify that patient participants were fully informed and have fully consented to a particular clinical trial, the data
collected from that trial could be disqualified. If this were to happen, we could be contractually required to repeat the trial at no further cost to our customer, but at substantial cost to us.

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

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



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

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

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

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

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

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Our quarterly operating results may vary.

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



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

We depend on the pharmaceutical and biotechnology industries.

Our revenues depend greatly on the expenditures made by the pharmaceutical and biotechnology industries in research and development. Accordingly, economic factors
and industry trends that affect our clients in these industries also affect our business. If companies in these industries were to reduce the number of research and development projects they
outsource, our business could be materially adversely affected.

We operate in a highly competitive industry.

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



For
instance, our clinical development services have from time to time experienced periods of increased price competition which had a material adverse effect on Covance's
late-stage development profitability and consolidated net revenues and net income. Covance took actions in 2000 to mitigate the effects of this price competition; however, if market
conditions were to deteriorate, additional actions might be required in the future.

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

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We may expand our business through acquisitions.

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



We may be affected by potential health care reform.

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

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

We rely on third parties for important services.

We depend on third parties to provide us with services critical to our business. For instance, we have entered into an agreement with IBM to manage our
information technology infrastructure including our computer and telephone network, e-mail system, help desks, computer support and data centers worldwide. The failure of any of these
third parties to adequately provide the needed services could have a material adverse effect on our business.

Our revenues and earnings are exposed to exchange rate fluctuations.

We derive a large portion of our net revenues from international operations. In the six month period ended June 30, 2004, we derived approximately 35% of
our net revenues from outside the United States. Our financial statements are denominated in U.S. dollars. As a result, factors associated with international operations, including changes in foreign
currency exchange rates, could significantly affect our results of operations, financial condition, and cash flows.

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

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

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Contract research services create a risk of liability.

In contracting to work on drug development trials, we face a range of potential liabilities. For example:



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



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

Reliance on air transportation.

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

Actions of animal rights extremists may affect our business.

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

Our animal populations may suffer diseases that can damage our inventory, harm our reputation and result in decreased sales of research products.

It is important that our research products be free of diseases, including infectious diseases. The presence of diseases can distort or compromise the quality of
research results, can cause loss of animals in our inventory or other losses. Such results could harm our reputation or have a material adverse effect on our financial condition, results of
operations, and cash flows.

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

For the six months ended June 30, 2004, approximately 35% of our net revenues were derived from our operations outside the United States. We do not engage
in derivative or hedging activities related to our potential foreign exchange exposures. See "Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical
Accounting EstimatesForeign Currency Risks" for a more detailed discussion of our foreign currency risks and exposures.

Item 4. Controls and Procedures

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

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Part II. Other Information

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Repurchases of equity securities as reported on a settlement date basis during the quarter ended June 30, 2004 were as follows:

Issuer Purchases of Equity Securities(a)(b):

Period

Total # of
Shares
Purchased

Average Price
Paid Per
Share

Total # of
Shares
Purchased as
Part of
Currently
Authorized
Programs

Maximum # of
Shares that May
Yet Be Purchased
Currently
Under
Authorized
ProgramsApril 1, 2004April 30, 2004


84,000

$
34.4671


1,905,300


1,094,700

(a)May 1, 2004May 31, 2004


830,000

$
34.6847


2,735,300


264,700

(a)June 1, 2004June 30, 2004








2,735,300


3,264,700

(b)




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

The Annual Meeting of Stockholders of Covance was held on April 29, 2004, pursuant to notice.

Two
directors were reelected to the Board of Directors with the following votes cast: Robert M. Baylis received 34,850,129 votes for and 21,016,311 votes were withheld; Irwin Lerner
received 33,773,714 votes for and 22,092,726 votes were withheld. The following directors' terms of office as a director continued after the meeting: Robert Barchi, Sandra L. Helton, Christopher A.
Kuebler, J. Randall McDonald, Kathleen G. Murray and William C. Ughetta.

In
addition, a shareholder proposal seeking to require the annual election of all members of the Board of Directors received 40,388,789 votes for, 10,542,742 votes against, 271,282 votes
abstained and 4,663,627 broker non-votes.

Item 6. Exhibits and Reports on Form 8-K

10.1



Letter Agreement between Covance Inc. and Wendel Barr dated as of February 25, 2004.Filed herewith.10.2



Letter Agreement between Covance Laboratories Limited and Anthony Cork dated as of February 25, 2004.Filed herewith.10.3



Credit Agreement among Covance Inc., PNC Bank, National Association, as agent, and the banks named therein dated as of June 30, 2004.Filed herewith.31.1



CertificationChristopher A. Kuebler.Filed herewith.31.2



CertificationWilliam E. Klitgaard.Filed herewith.32.1



Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Christopher A. Kuebler.Filed herewith.32.2



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


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During
the three month period ended June 30, 2004, one report on Form 8-K was filed. The report dated April 22, 2004, was filed reporting the issuance of
a press release on April 21, 2004 announcing Covance's financial results for the quarter ended March 31, 2004.

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SIGNATURES

Pursuant to the requirements 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.

COVANCE INC.Dated: July 23, 2004

By:

/s/CHRISTOPHER A. KUEBLERChristopher A. Kuebler
Chairman of the Board and Chief Executive Officer


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

Signature

Title

Date/s/ CHRISTOPHER A. KUEBLERChristopher A. Kuebler

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

July 23, 2004/s/ WILLIAM E. KLITGAARDWilliam E. Klitgaard

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

July 23, 2004/s/ MICHAEL GIANNETTOMichael Giannetto

Corporate Vice President and Controller
(Principal Accounting Officer)

July 23, 2004


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EXHIBIT INDEX

ExhibitNumber

Description10.1

Letter Agreement between Covance Inc. and Wendel Barr dated as of February 25, 2004.Filed herewith.10.2

Letter Agreement between Covance Laboratories Limited and Anthony Cork dated as of February 25, 2004.Filed herewith.10.3

Credit Agreement among Covance Inc., PNC Bank, National Association, as agent, and the banks named therein dated as of June 30, 2004.Filed herewith.31.1

CertificationChristopher A. Kuebler.Filed herewith.31.2

CertificationWilliam E. Klitgaard.Filed herewith.32.1

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Christopher A. Kuebler.Filed herewith.32.2

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


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