UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

|[X] |  | Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|--- |  | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2003

or

|[  ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|---- |  | ----------------------------------------------------------------------------------------

For the transition period from _______________ to _______________

Commission File Number: 1-12213

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

|                                           |                                     
|------------------------------------------ | ------------------------------------
|Delaware                                   | 22-3265977                          
|(State of Incorporation)                   | (I.R.S. Employer Identification No.)
|                                           |                                     
|210 Carnegie Center, Princeton, New Jersey | 08540                               
|(Address of Principal Executive Offices)   | (Zip Code)                          

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

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of April 17, 2003, the Registrant had 61,453,184 shares of
Common Stock outstanding.





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##### 

#### Covance Inc.
Form 10-Q For the Quarterly Period Ended March 31, 2003
INDEX

|                                                                                              | Page
|--------------------------------------------------------------------------------------------- | ----
|                                                                                             
|Part I. Financial Information                                                                 |     
|                                                                                             
|Item 1. Financial Statements (Unaudited)                                                     
|                                                                                             
|Consolidated Balance Sheets--March 31, 2003 and December 31, 2002                             | 2   
|                                                                                             
|Consolidated Statements of Income--Three Months ended March 31, 2003 and 2002                 | 3   
|                                                                                             
|Consolidated Statements of Cash Flows--Three Months ended March 31, 2003 and 2002             | 4   
|                                                                                             
|Notes to Consolidated Financial Statements                                                    | 5   
|                                                                                             
|                                                                                             
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 9   
|                                                                                             
|Item 3. Quantitative and Qualitative Disclosure About Market Risk                             | 18  
|                                                                                             
|Item 4. Controls and Procedures                                                               | 18  
|                                                                                             
|                                                                                             
|Part II. Other Information                                                                   
|                                                                                             
|Item 6. Exhibits and Reports on Form 8-K                                                      | 18  
|                                                                                             
|                                                                                             
|Signatures                                                                                    | 19  
|                                                                                             
|Certifications                                                                                | 20  

1



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##### 

#### COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002

|(Dollars in thousands)                                    | March 31,2003 |                       | December 31,2002 |                     
|--------------------------------------------------------- | ------------- | --------------------- | ---------------- | --------------------
|Assets                                                    |               | (UNAUDITED)           |                  |                     
|Current Assets:                                           |              
|Cash and cash equivalents                                 |               | $              56,839 |                  | $             75,913
|Accounts receivable                                       |               | 156,996               |                  | 159,368             
|Unbilled services                                         |               | 45,979                |                  | 39,073              
|Inventory                                                 |               | 40,628                |                  | 40,472              
|Deferred income taxes                                     |               | 375                   |                  | 1,839               
|Prepaid expenses and other current assets                 |               | 39,789                |                  | 28,721              
|                                                          |               |                       |                  |                     
|Total Current Assets                                      |               | 340,606               |                  | 345,386             
|Property and equipment, net                               |               | 254,580               |                  | 258,407             
|Goodwill, net                                             |               | 56,876                |                  | 56,805              
|Other assets                                              |               | 16,013                |                  | 16,405              
|                                                          |               |                       |                  |                     
|Total Assets                                              |               | $            668,075  |                  | $           677,003 
|                                                          |               |                       |                  |                     
|Liabilities and Stockholders' Equity                      |              
|Current Liabilities:                                      |               |                       |                  |                     
|Accounts payable                                          |               | $              21,662 |                  | $             24,123
|Accrued payroll and benefits                              |               | 37,841                |                  | 57,803              
|Accrued expenses and other current liabilities            |               | 37,735                |                  | 40,828              
|Unearned revenue                                          |               | 77,475                |                  | 91,681              
|                                                          |               |                       |                  |                     
|Total Current Liabilities                                 |               | 174,713               |                  | 214,435             
|Deferred income taxes                                     |               | 16,747                |                  | 16,432              
|Other liabilities                                         |               | 14,769                |                  | 14,469              
|                                                          |               |                       |                  |                     
|Total Liabilities                                         |               | 206,229               |                  | 245,336             
|                                                          |               |                       |                  |                     
|Commitments and Contingent Liabilities                    |              
|Stockholders Equity:                                     |               |                       |                  |                     
|Preferred Stock - Par value $1.00 per share; 10,000,000   |              
|shares authorized; no shares issued and outstanding       |              
|at March 31, 2003 and December 31, 2002, respectively     |               | --                    |                  | --                  
|Common Stock - Par value $0.01 per share; 140,000,000     |               |                       |                  |                     
|shares authorized; 64,992,946 and 63,661,060 shares       |               |                       |                  |                     
|issued and outstanding, including those held in treasury, |               |                       |                  |                     
|at March 31, 2003 and December 31, 2002, respectively     |               | 650                   |                  | 637                 
|Paid-in capital                                           |               | 172,259               |                  | 147,745             
|Retained earnings                                         |               | 337,027               |                  | 319,109             
|Accumulated other comprehensive income                   |              
|Cumulative translation adjustment                         |               | 1,579                 |                  | 1,714               
|Treasury stock at cost (3,648,046 and 3,098,322 shares at |              
|March 31, 2003 and December 31, 2002, respectively)       |               | (49,669               | )                | (37,538             
|                                                          |               |                       |                  |                     
|Total Stockholders' Equity                                |               | 461,846               |                  | 431,667             
|                                                          |               |                       |                  |                     
|Total Liabilities and Stockholders' Equity                |               | $            668,075  |                  | $           677,003 
|                                                          |               |                       |                  |                     

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 MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

|                                                  | Three Months Ended March 31
|------------------------------------------------- | ---------------------------
|
|                                                 
|Net revenues                                      |                            
|Reimbursable out-of-pockets                       |                            
|                                                  |                            
|Total revenues                                    |                            
|                                                  |                            
|                                                 
|Costs and expenses:                               |                            
|Cost of revenue (including reimbursable expenses) |                            
|Selling, general and administrative               |                            
|Depreciation and amortization                     |                            
|                                                  |                            
|Total                                             |                            
|                                                  |                            
|Income from operations                            |                            
|                                                  |                            
|Other (income) expense, net:                      |                            
|Interest expense                                  |                            
|Interest income                                   |                            
|Foreign exchange transaction loss (gain), net     |                            
|                                                  |                            
|Other expense, net                                |                            
|                                                  |                            
|Income before taxes                               |                            
|Taxes on income                                   |                            
|Equity investee earnings                          |                            
|                                                  |                            
|Net income                                        |                            
|                                                  |                            
|                                                 
|                                                 
|Basic earnings per share                          |                            
|                                                 
|Weighted average shares outstanding - basic       |                            
|                                                 
|                                                 
|Diluted earnings per share                        |                            
|                                                 
|Weighted average shares outstanding - diluted     |                            

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 THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

|                                                         | Three Months Ended March 31
|-------------------------------------------------------- | ---------------------------
|
|Cash flows from operating activities:                    |                            
|                                                        
|Net income                                               |                            
|Adjustments to reconcile net income to net cash provided |                            
|by operating activities:                                 |                            
|Depreciation and amortization                            |                            
|Stock issued under employee benefit and stock            |                            
|compensation plans                                       |                            
|Deferred income tax provision (benefit)                  |                            
|Other                                                    |                            
|Changes in operating assets and liabilities:             |                            
|Accounts receivable                                      |                            
|Unbilled services                                        |                            
|Inventory                                                |                            
|Accounts payable                                         |                            
|Accrued liabilities                                      |                            
|Unearned revenue                                         |                            
|Income taxes payable                                     |                            
|Other assets and liabilities, net                        |                            
|                                                         |                            
|Net cash (used in) provided by operating activities      |                            
|                                                         |                            
|                                                        
|Cash flows from investing activities:                    |                            
|Capital expenditures                                     |                            
|Other, net                                               |                            
|                                                         |                            
|Net cash used in investing activities                    |                            
|                                                         |                            
|                                                        
|Cash flows from financing activities:                    |                            
|Net repayments under revolving credit facilities         |                            
|Stock issued under employee stock purchase and           |                            
|option plans                                             |                            
|Purchase of treasury stock                               |                            
|                                                         |                            
|Net cash provided by (used in) financing activities      |                            
|                                                         |                            
|Net change in cash and cash equivalents                  |                            
|Cash and cash equivalents, beginning of period           |                            
|                                                         |                            
|Cash and cash equivalents, end of period                 |                            
|                                                         |                            

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)
March 31, 2003 and 2002
(dollars in thousands, unless otherwise indicated)

1.  Basis of Presentation

The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(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 months ended March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2003. The balance sheet at December 31, 2002 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, 2002, 2001 and 2000
included in our Annual Report on Form 10-K for the year ended December 31, 2002.

2.  Summary of Significant Accounting Policies

Principles of Consolidation

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. See Note 4.

Use of Estimates

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.

Prepaid Expenses and Other Current
Assets

In
connection with the management of multi-site clinical trials, Covance pays on
behalf of its customers fees to investigators, volunteers and other
out-of-pocket costs (such as travel, printing, meetings, couriers, etc.), for
which we are reimbursed at cost, without mark-up or profit. Amounts receivable
from customers in connection with billed and unbilled investigator fees,
volunteer payments and other out-of-pocket pass-through costs are included in
prepaid expenses and other current assets in the accompanying Consolidated
Balance Sheets and totaled $15.0 million and $13.3 million at March 31, 2003 and
December 31, 2002, respectively. See Note 2 Reimbursable Out-of-Pocket
Expenses.

Inventory

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

Goodwill

Effective
January 1, 2002, in accordance with the adoption of Financial Accounting
Standards Board (FASB) Statement No. 142, Goodwill and Other
Intangible Assets, Covance ceased amortization of goodwill. Statement No.
142 also outlines the requirements for annual goodwill impairment tests, and
accordingly, Covance performs an annual test for impairment of goodwill. The
most recent annual test performed for 2002 did not identify any instances of
impairment.

5



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##### 

#### COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
March 31, 2003 and 2002
(dollars in thousands, unless otherwise indicated)

Taxes on Income

Covance
uses the asset and liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are recognized for the expected
future tax consequences of differences between the carrying 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.

Comprehensive Income

Comprehensive
income has been calculated in accordance with FASB Statement No. 130,
Reporting Comprehensive Income. Covance has determined total
comprehensive income to be $17.8 million and $10.3 million for the three months
ended March 31, 2003 and 2002, respectively. Covances total comprehensive
income represents net income plus the change in the cumulative translation
adjustment equity account for the periods presented.

Earnings Per Share

Earnings
per share has been calculated in accordance with FASB Statement No. 128,
Earnings Per Share. In computing diluted earnings per share for the three
months ended March 31, 2003 and 2002, the denominator was increased by 1,743,273
shares and 1,425,576 shares, respectively, representing the dilutive effect of
stock options outstanding at March 31, 2003 and 2002 with exercise prices less
than the average market price of Covances Common Stock during each
respective period.

Reimbursable Out-of-Pocket Expenses

As
discussed in Note 2 Prepaid Expenses and Other Current Assets,
Covance pays on behalf of its customers fees to investigators, volunteers and
other out-of-pocket costs for which we are reimbursed at cost, without mark-up
or profit. Effective January 1, 2002, in connection with the required
implementation of Financial Accounting Standards Board Emerging Issues Task
Force Rule No. 01-14 (EITF 01-14), Income Statement
Characterization of Reimbursements Received for Out-of-Pocket
Expenses Incurred, amounts paid to volunteers and other out-of-pocket costs
are now included in cost of revenue, while the reimbursements received are
reported as revenues in the Consolidated Statements of Income. Covance will
continue to exclude from revenue and expense in the Consolidated Statements of
Income fees paid to investigators and the associated reimbursement since Covance
acts as an agent on behalf of the pharmaceutical company sponsors with regard to
investigator payments.

Stock-Based Compensation

Covance
has several stock-based compensation plans, which are described more fully in
Note 9 to our audited consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2002. 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.

6



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##### 

#### COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
March 31, 2003 and 2002
(dollars in thousands, unless otherwise indicated)

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 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 March 31 |                
|------------------------------------------------------------------------ | --------------------------- | ---------------
|
|                                                                        
|Net Income, as reported                                                  |                             | $      17,918  
|                                                                        
|Add: Stock award-based employee compensation included in reported net    |                            
|income, net of related tax effects                                       |                             | $           760
|                                                                        
|Deduct: Total stock-based employee compensation expense determined       |                             |                
|under fair value based method for all awards, net of related tax effects |                             | $      (2,978) 
|                                                                        
|Pro forma net income                                                     |                             | $      15,700  
|                                                                        
|Earnings per share:                                                      |                             |                
|Basicas reported                                                        |                             | $          0.29
|Basicpro forma                                                          |                             | $          0.25
|                                                                        
|Dilutedas reported                                                      |                             | $          0.28
|Dilutedpro forma                                                        |                             | $          0.25

Segment Reporting

Covance
reports information about its operating segments and related disclosures about
products, services, geographic areas and major customers in accordance with FASB
Statement No. 131, Disclosures About Segments of an Enterprise and Related
Information. See Note 6 Segment Information.

3.  Treasury Stock

During
March 2003, Covance purchased into treasury 540,300 shares of its Common Stock
under the Board approved 2003 share buyback program, for the aggregate cost of
$11.7 million. During the three months ended March 31, 2003, Covance also
acquired approximately 9,400 shares of its Common Stock into treasury to satisfy
income tax withholding associated with the vesting of stock awards and the
exercise of stock options, the fair value of which was approximately $0.4
million.

4.  Investment in Affiliate

Covance
has a minority equity position (approximately 28%) 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 month period ended March 31, 2003, Covance recognized
$0.2 million, representing its share of BITIs earnings.

5.  Supplemental Cash Flow Information

Cash
paid for interest for the three months ended March 31, 2003 and 2002, totaled
$0.4 million and $0.5 million, respectively. Cash paid for income taxes for the
three months ended March 31, 2003 and 2002, totaled $0.8 million and $3.9
million, respectively.

7



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##### 

#### COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
March 31, 2003 and 2002
(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,
commercialization and other clinical support capabilities, are geared toward
demonstrating the clinical effectiveness of a compound in treating certain
diseases or conditions, obtaining regulatory approval and maximizing the
drugs commercial potential.

The
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
months ended March 31, 2003 and 2002 are as follows:

|                                       | EarlyDevelopment |            | Late-StageDevelopment |            | OtherReconciling Items | Total            | 
|-------------------------------------- | ---------------- | ---------- | --------------------- | ---------- | ---------------------- | ---------------- | 
|                                      
|Three months ended March 31, 2003      |                  |            |                       |            |                        |                  | 
|Total revenues from external customers |                  | $   99,995 |                       | $ 133,401  |                        | $      9,653 (a) | 
|Operating income                       |                  | $   19,089 |                       | $   19,141 |                        | $  (10,633)(b)   | 
|Total assets                           |                  | $ 345,222  |                       | $ 309,119  |                        | $   13,734 (c)   | 
|                                      
|Three months ended March 31, 2002      |                 
|Total revenues from external customers |                  | $   85,384 |                       | $ 123,198  |                        | $      9,700 (a) | 
|Operating income                       |                  | $   14,180 |                       | $   14,028 |                        | $    (9,056)(b)  | 
|Total assets                           |                  | $ 287,475  |                       | $ 302,838  |                        | $   15,983 (c)   | 

____________

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

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

|(c) |  | Represents
corporate assets.
|--- |  | ----------------------------

8



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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 March 31, 2003.

Overview

Covance
is a leading drug development services company providing a wide range of product
development services on a worldwide basis primarily to the pharmaceutical,
biotechnology and medical device industries. Covance also provides services such
as laboratory testing to the chemical, agrochemical and food industries. The
foregoing services comprise two segments for financial reporting purposes: early
development services, which includes preclinical and Phase I clinical; and
late-stage development services, which includes central laboratory, clinical
development, commercialization and other clinical support services. Covance
believes it is one of the largest drug development services companies, based on
2002 annual net revenues, and one of a few that is capable of providing
comprehensive global product development services. Covance offers its clients
high quality services designed to provide data to clients as rapidly as possible
and reduce product development time. We believe this enables Covances
customers to introduce their products into the marketplace faster and as a
result, maximize the period of market exclusivity and monetary return on their
research and development investments. Additionally, Covances comprehensive
services and broad experience provide its customers with a variable cost
alternative to fixed cost internal development capabilities.

Critical Accounting Policies

Covances
consolidated financial statements are prepared in accordance with accounting
principals generally accepted in the United States, which require management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from these estimates. The following discussion highlights what we believe to be
the critical accounting policies and judgments made in the preparation of these
consolidated financial statements.

Revenue
Recognition. Covance recognizes revenue either as services are
performed or products are delivered, depending upon the nature of the work
contracted. Historically, a majority of Covances net revenues have been
earned under contracts which range in duration from a few months to two years,
but can extend in duration up to five years or longer. Service contracts
generally take the form of fee-for-service or fixed-price arrangements. In the
case of fee-for-service contracts, revenue is recognized as services are
performed, based upon, for example, hours worked or samples tested. For
long-term fixed-price service contracts, revenue is recognized as services are
performed, with performance generally assessed using output measures, such as
units-of-work performed to date as compared to the total units-of-work
contracted. Changes in the scope of work generally result in a renegotiation of
contract pricing terms. Renegotiated amounts are not included in net revenues
until earned and realization is assured. Estimates of costs to complete are
made, as appropriate, to provide for losses expected on contracts. Costs are not
deferred in anticipation of contracts being awarded, but instead are expensed as
incurred. In some cases, for multi-year contracts a portion of the contract fee
is paid at the time the trial is initiated. These advances are deferred and
recognized as revenue as services are performed, as discussed above. Additional
payments may be made based upon the achievement of performance-based milestones
over the contract duration. Most contracts are terminable by the client either
immediately or upon notice. These contracts typically require payment to Covance
of expenses to wind down the study, fees earned to date and, in some cases, a
termination fee or a payment to Covance of some portion of the fees or profits
that could have been earned by Covance under the contract if it had not been
terminated early. Despite these provisions, the unexpected termination of a
large study or the termination of several studies over a relatively short period
of time could cause periods of excess capacity which could negatively impact
revenues and earnings. In connection with the management of multi-site clinical
trials, Covance pays on behalf of its customers fees to investigators,
volunteers and other out-of-pocket costs (such as for travel, printing,
meetings, couriers, etc.), for which it is reimbursed at cost, 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.

9



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##### 

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

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

The
second risk results from the passage of time between the invoicing of customers
under these contracts and the ultimate collection of customer payments against
such invoices. Because the contract is denominated in a currency other than the
subsidiarys local currency, Covance recognizes a receivable at the time of
invoicing for the local currency equivalent of the foreign currency invoice
amount. Changes in exchange rates from the time the invoice is prepared and
payment from the customer is received will result in Covance receiving either
more or less in local currency than the local currency equivalent of the invoice
amount at the time the invoice was prepared and the receivable established. This
difference is recognized by Covance as a foreign currency transaction gain or
loss, as applicable, and is reported in other expense (income) in Covances
Consolidated Statements of Income. Foreign currency transaction losses for the
three months ended March 31, 2003 were $0.1 million.

Finally,
Covances consolidated financial statements are denominated in U.S.
dollars. Accordingly, changes in exchange rates between the applicable foreign
currency and the U.S. dollar will affect the translation of each foreign
subsidiarys financial results into U.S. dollars for purposes of reporting
Covances consolidated financial results. The process by which each foreign
subsidiarys financial results are translated into U.S. dollars is as
follows: income statement accounts are translated at average exchange rates for
the period; balance sheet asset and liability accounts are translated at end of
period exchange rates; and equity accounts are translated at historical exchange
rates. Translation of the balance sheet in this manner affects the
stockholders equity account, referred to as the cumulative translation
adjustment account. This account exists only in the foreign subsidiarys
U.S. dollar balance sheet and is necessary to keep the foreign balance sheet
stated in U.S. dollars in balance. To date such cumulative translation
adjustments have not been material to Covances consolidated financial
position.

Taxes
on Income. Since Covance conducts operations on a global basis,
its effective tax rate has and will continue to depend upon the geographic
distribution of its pre-tax earnings among locations with varying tax rates.
Covances profits are further impacted by changes in the tax rates of the
various jurisdictions. In particular, as the geographic mix of Covances
pre-tax earnings among various tax jurisdictions changes, Covances
effective tax rate may vary from period to period. Covance has established, and
periodically reevaluates, an estimated income tax reserve on its consolidated
balance sheet to provide for the possibility of adverse outcomes in income tax
proceedings. While Covance believes that it has identified all reasonably
identifiable exposures and that the reserve it has established for identifiable
exposures is appropriate under the circumstances, it is possible that additional
exposures exist and that exposures will be settled at amounts different 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 $88.9 million as of December
31, 2002 because Covance currently intends to leave these earnings invested in
those countries. If Covance were to repatriate these earnings, or a portion of
these earnings, Covance might incur a significant income tax liability.

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

10



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

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

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

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

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 March 31, 2003 Compared with Three Months Ended March 31, 2002.
Net revenues increased 11.9% to $233.4 million for the three
months ended March 31, 2003 from $208.6 million for the corresponding 2002
period. Excluding the impact of foreign exchange rate variances between both
periods net revenues increased 6.8% as compared to the corresponding 2002
period. Net revenues from Covances early development segment grew 17.1%,
or 12.3% excluding the impact of foreign exchange rate variances between both
periods, on strong performance in our pharmaceutical chemistry and Phase I
clinical services. Net revenues from Covances
late-stage development segment increased 8.3%, or 3.0% excluding the impact of
foreign exchange rate variances between both periods. Growth in our late-stage
development segment was driven by our Phase II/III clinical and central
laboratory services, partially offset by softness in Phase IV net revenues.

Cost
of revenue, excluding reimbursable out-of-pocket expenses totaling $9.7 million,
increased 8.8% to $161.0 million or 69.0% of net revenues for the three months
ended March 31, 2003 as compared to $148.1 million (excluding reimbursable
out-of-pocket expenses totaling $9.7 million) or 71.0% of net revenues for the
corresponding 2002 period. Excluding reimbursable out-of-pocket expenses, gross
margins were 31.0% for the three months ended March 31, 2003 and 29.0% for the
corresponding 2002 period.

11



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Overall,
selling, general and administrative expenses increased 7.5% to $33.6 million for
the three months ended March 31, 2003 from $31.3 million for the corresponding
2002 period. As a percentage of net revenues, selling, general and
administrative expenses decreased to 14.4% for the three months ended March 31,
2003 from 15.0% for the corresponding 2002 period.

Depreciation
and amortization increased 10.4% to $11.2 million or 4.8% of net revenues for
the three months ended March 31, 2003 from $10.1 million or 4.8% of net revenues
for the corresponding 2002 period.

Income
from operations increased 44.1% to $27.6 million for the three months ended
March 31, 2003 from $19.2 million for the corresponding 2002 period. Income from
operations from Covances early development segment increased $4.9 million
or 34.6% to $19.1 million or 19.1% of net revenues for the three months ended
March 31, 2003 from $14.2 million or 16.6% of net revenues for the corresponding
2002 period, primarily driven by strong performance in our preclinical labs
(toxicology and pharmaceutical chemistry) and in our Phase I clinics. Income
from operations from Covances late-stage development segment increased
$5.1 million or 36.4% to $19.1 million or 14.3% of net revenues for the three
months ended March 31, 2003 from $14.0 million or 11.4% of net revenues for the
corresponding 2002 period, primarily driven by our central laboratories and
Phase II/III clinical development service offerings. Corporate expenses
increased $1.6 million to $10.6 million or 4.6% of net revenues for the three months
ended March 31, 2003 from $9.1 million or 4.3% of net revenues for the three
months ended March 31, 2002. The increase is primarily attributable to increased
investment in centralized information technology and higher marketing expenses.

Other
expense, net decreased $0.1 million to $0.1 million for the three months ended
March 31, 2003 from $0.2 million for the corresponding 2002 period, due
primarily to a $0.3 million reduction in interest expense resulting from lower weighted
average borrowings under our long-term credit facility, partially offset by a
$0.2 million increase in foreign exchange transaction losses, as a result of the
weakening U.S. dollar.

Covances
effective tax rate for the three month period ended March 31, 2003 was 35.5%
compared to 37.9% for the corresponding 2002 period.

Covance
has a minority equity position (approximately 28%) 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 month period ended March 31, 2003, Covance recognized
$0.2 million, representing its share of BITIs earnings.

Net
income of $17.9 million for the three months ended March 31, 2003 increased $6.1
million or 52.1% as compared to $11.8 million for the corresponding 2002 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. Covance has a $150 million senior revolving credit
facility (the Credit Facility) which expires in June 2004. Covance
believes cash from operations and available borrowings under the Credit Facility
will provide the Company with sufficient liquidity for the foreseeable future.
Covance is confident that it will be able to enter into a replacement credit
facility or otherwise obtain access to credit on satisfactory terms when the
Credit Facility expires. During the three month period ended March 31, 2003 and
at both March 31, 2003 and December 31, 2002, there were no outstanding
borrowings and $1.6 million of outstanding letters of credit under the Credit
Facility. Interest on all outstanding borrowings under the Credit Facility is
based upon the London Interbank Offered Rate (LIBOR) plus a margin
and approximated 3.22% per annum for the three month period ended March 31,
2002. Costs associated with obtaining the Credit Facility, consisting primarily
of bank fees totaling $1.7 million, are being amortized to interest expense over
the three year facility term.

During
the three months ended March 31, 2003, Covances operations used net cash
of $11.8 million, a decrease of $31.6 million from the corresponding 2002
period. The change in net operating assets used $45.9 million in cash during the
three months ended March 31, 2003, primarily due to a reduction in accrued
payroll and benefits (primarily attributable to significant incentive
compensation payments made during the first quarter relating to 2002 incentive
compensation accruals) and unearned revenue, while this net change used $4.6
million in cash during the three months ended March 31, 2002, primarily due to a
reduction in accrued payroll and benefits. Covances ratio of current
assets to current liabilities was 1.95 at March 31, 2003 and 1.61 at December
31, 2002.

12



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Net
days sales outstanding (DSOs) represents accounts receivable plus
unbilled services less unearned revenue divided by average daily revenue for the
trailing three months. DSOs at March 31, 2003 were 49 days, up from 41 days at
December 31, 2002, primarily due to a reduction in client advances. DSOs have
historically followed a seasonal pattern whereby they are generally at their
lowest levels at year end and increase during the first six to nine months of
the year, before returning to their seasonally lower levels at year end. The
impact upon liquidity from a one day change in DSOs is approximately $2 million
in cash flow.

Investing
activities for the three months ended March 31, 2003 used $8.5 million, compared
to using $7.7 million for the corresponding 2002 period. Capital spending for
the first three months of 2003 totaled $8.5 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. Capital spending for
the corresponding 2002 period was primarily for the expansion of Covances
toxicology capacity, 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 three months ended March 31, 2003 provided $1.3 million and
consisted primarily of $13.4 million received from stock option exercises and
employee contributions to Covances noncompensatory employee stock purchase
plan, offset by the purchase of 540,300 shares of Common Stock for an aggregate
cost of $11.7 million, pursuant to a 3.0 million share buyback program
authorized by Covances Board of Directors in February 2003. Financing
activities for the three months ended March 31, 2002 used $13.1 million, and
primarily consisted of repayments under the Credit Facility totaling $15.0
million, offset by $2.0 million received from stock option exercises and
employee contributions to Covances noncompensatory employee stock purchase
plan.

Covances
sale of its biomanufacturing business in 2001 to Akzo Nobels pharma
business unit, Diosynth, is subject to post-closing adjustments, including
finalization of the closing balance sheet and earnout provision in accordance
with the Stock Purchase Agreement between Covance and Akzo Nobel, which remains
to be resolved between the parties.

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.

Recently Issued Accounting Pronouncements

On
December 31, 2002, the Financial Accounting Standards Board issued FASB Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure.
Statement No. 148 amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition to Statement No. 123's fair
value method of accounting for stock-based employee compensation for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. Statement No. 148 also requires prominent disclosure of the
effects of an entity's accounting policy with respect to stock-based employee
compensation on reported net income and earnings per share in annual and interim
financial statements. Covance adopted this statement for the quarter ended March
31, 2003 and will continue to follow the disclosure-only provisions of FASB Statement
No. 123 and, accordingly, will continue to apply Accounting Principles Board Opinion
No. 25 and its related interpretations in accounting for its plans. The adoption of
Statement No. 148 had no impact on Covance's results of operations, financial position
or cash flows.

Forward Looking Statements.Statements in this
Managements Discussion and Analysis of Financial Condition and Results of
Operations, as well as in certain other parts of this 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 profitability of its clinical development
services and to increase order volume in central laboratory and
commercialization services, and continued growth in demand for bioanalytical
services and Covances ability to provide these services on a large scale
basis, and other factors described in Covances filings with the Securities
and Exchange Commission, including, its Annual Report on Form 10-K.

13



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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 could decrease the need for
the services we provide.

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

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

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

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

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

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

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

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

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

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

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

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

We may bear financial risk if we 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. If we are unable to develop new services and or create demand
for those newly developed services, our future business, results of operations,
financial condition, and cash flows could be adversely affected.

14



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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 as:

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

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

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

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

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

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

We depend on the pharmaceutical and biotechnology
industries.

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

We operate in a highly competitive industry.

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

| |  | reputation
for on-time quality performance;
|- |  | -------------------------------------------

| |  | expertise
and experience in specific areas;
|- |  | -------------------------------------------

| |  | scope
of service offerings;
|- |  | ---------------------------

| |  | strengths
in various geographic markets;
|- |  | ----------------------------------------

| |  | price;
|- |  | ------

| |  | technological
expertise and efficient drug development processes;
|- |  | -----------------------------------------------------------------

| |  | ability
to acquire, process, analyze and report data in a time-saving and accurate manner;
|- |  | ------------------------------------------------------------------------------------------

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

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

| |  | size.
|- |  | -----

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

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

15



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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:

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

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

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

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

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

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

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

We may be affected by potential health care reform.

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

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

Our revenues and earnings are exposed to exchange rate
fluctuations.

We
derive a large portion of our net revenues from international operations. In the
three month period ended March 31, 2003, we derived approximately 34% 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.

16



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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:

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

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

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

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

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

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

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

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

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

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

Reliance on air transportation.

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

Actions of animal rights extremists may affect our business.

Our
early development services utilize animals (predominantly rodents) in
preclinical testing of the safety and efficacy of drugs and also breed and sell
animals for biomedical research. Acts of vandalism and other acts by animal
rights extremists who object to the use of animals in drug development could
have a material adverse effect on our business.

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

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

17



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##### 

Item 3.  Quantitative and Qualitative Disclosure About Market
Risk

Our
$150.0 million credit facility is U.S. Dollar denominated and is not subject to
transaction or translation exposure. Interest on all outstanding borrowings
under this credit facility is based upon LIBOR plus a margin. We did not have
any outstanding borrowings under our credit facility during any part of the
three month period ended March 31, 2003.

For
the three months ended March 31, 2003, approximately 34% 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 Policies  Foreign Currency Risks for a more
detailed discussion of our foreign currency risks and exposures.

Item 4.  Controls and Procedures

|(a) |  | Evaluation
of disclosure controls and procedures. The Companys Principal Executive Officer
and Principal Financial Officer have reviewed and evaluated the effectiveness of the
Companys disclosure controls and procedures (as defined in Exchange Act Rules
240.13a-14(c) and 15d-14(c)) as of a date within ninety days before the filing date of
this quarterly report. Based on that evaluation, the Principal Executive Officer and the
Principal Financial Officer have concluded that the Companys current disclosure
controls and procedures are effective.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) |  | Changes
in internal controls. There were no significant changes in the Companys internal
controls or in other factors that could significantly affect those controls subsequent
to the date of evaluation.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Part II. Other Information

Item 6.  Exhibits and Reports on Form 8-K

|(a) |  | Exhibits
|--- |  | --------

| |  | 99.1
| |  | ----

| |  | 99.2
| |  | ----

|(b) |  | Reports
on Form 8-K
|--- |  | -------------------

| |  | During
the three month period ended March 31, 2003, no reports on Form 8-K were filed.
| |  | --------------------------------------------------------------------------------------

18



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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: April 30, 2003 | By: | /s/ CHRISTOPHER A. KUEBLER                            
|                      |     | Christopher A. Kuebler                                
|                      |     | Chairman of the Board and
     Chief Executive Officer

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

|Signature                  | Title                                   | Date          
|-------------------------- | --------------------------------------- | --------------
|                          
|/s/ CHRISTOPHER A. KUEBLER |                                         |               
|Christopher A. Kuebler     | Chairman of the Board and               | April 30, 2003
|                           | Chief Executive Officer                
|                           | (Principal Executive Officer)          
|                          
|/s/ WILLIAM E. KLITGAARD   |                                         |               
|William E. Klitgaard       | Corporate Senior Vice President         | April 30, 2003
|                           | and Chief Financial Officer            
|                           | (Principal Financial Officer)          
|                          
|/s/ MICHAEL GIANNETTO     
|Michael Giannetto          | Corporate Vice President and Controller | April 30, 2003
|                           | (Principal Accounting Officer)         

19



---



##### 

#### CERTIFICATIONS

I, Christopher A. Kuebler, certify that:

|1. |  | I
have reviewed this quarterly report on Form 10-Q of Covance Inc.;
|-- |  | -------------------------------------------------------------------

|2. |  | Based
on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Based
on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | The
registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | designed
such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this quarterly report is
being prepared;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | evaluated
the effectiveness of the registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the Evaluation
Date); and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | presented
in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|a) |  | all
significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | any
fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal controls; and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | The
registrants other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: April 30, 2003

| |                                                                                          
| | -----------------------------------------------------------------------------------------
| | /s/ CHRISTOPHER A. KUEBLER                                                               
| | Christopher A. Kuebler                                                                   
| | Chairman of the Board
     and Chief Executive Officer
     (Principal Executive Officer)

20



---



##### 

#### CERTIFICATIONS

I, William E. Klitgaard, certify that:

|1. |  | I
have reviewed this quarterly report on Form 10-Q of Covance Inc.;
|-- |  | -------------------------------------------------------------------

|2. |  | Based
on my knowledge, this quarterly report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. |  | Based
on my knowledge, the financial statements, and other financial information included in
this quarterly report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods
presented in this quarterly report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4. |  | The
registrants other certifying officers and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14
and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|a) |  | designed
such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this quarterly report is
being prepared;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | evaluated
the effectiveness of the registrants disclosure controls and procedures as of a
date within 90 days prior to the filing date of this quarterly report (the Evaluation
Date); and
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) |  | presented
in this quarterly report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|a) |  | all
significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|b) |  | any
fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal controls; and
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|6. |  | The
registrants other certifying officers and I have indicated in this quarterly
report whether or not there were significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: April 30, 2003

| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | /s/ WILLIAM E. KLITGAARD                                                                           
| | William E. Klitgaard                                                                               
| | Corporate Senior Vice President
     and Chief Financial Officer
     (Principal Financial Officer)

21



---



##### 

#### EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                                     
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|             
|99.1          | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 - Christopher A. Kuebler. Filed herewith.
|             
|99.2          | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 - William E. Klitgaard. Filed herewith.  

22