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 September 30, 2002

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 [  ]

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of October 11, 2002, the Registrant had 59,843,632 shares of
Common Stock outstanding.



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##### 

Covance Inc.Form 10-Q For the Quarterly Period Ended
September 30, 2002INDEX

|                                                                                               | Page
|---------------------------------------------------------------------------------------------- | ----
|Part I.  Financial Information                                                                 |     
|                                                                                               |     
|Item 1.  Financial Statements (Unaudited)                                                      |     
|                                                                                               |     
|Consolidated Balance
Sheets--September 30, 2002 and December 31, 2001                          | 2   
|                                                                                               |     
|Consolidated Statements
of Income--Three and Nine Months ended September 30, 2002 and 2001     | 3   
|                                                                                               |     
|Consolidated Statements
of Cash Flows--Nine Months ended September 30, 2002 and 2001           | 4   
|                                                                                               |     
|Notes to Consolidated
Financial Statements                                                     | 5   
|                                                                                               |     
|Item 2.  Management's Discussion and Analysis of Financial
Condition and Results of Operations | 10  
|                                                                                               |     
|Item 3.  Quantitative and Qualitative Disclosure About
Market Risk                             | 19  
|                                                                                               |     
|Item 4.  Controls and Procedures                                                               | 19  
|                                                                                               |     
|                                                                                               |     
|Part II. Other Information                                                                     |     
|                                                                                               |     
|Item 6.  Exhibits and Reports on Form 8-K                                                      | 19  
|                                                                                               |     
|                                                                                               |     
|Signatures                                                                                     | 20  
|                                                                                               |     
|Certifications                                                                                 | 21  

1



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##### 

COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|(Dollars in thousands)                                    |  | September 30, | December 31,
|--------------------------------------------------------- |  | ------------- | ------------
|
|
|Assets                                                    |  |               |             
|Current Assets:                                           | 
|Cash and cash equivalents                                 |  | $   66,139    |             
|Accounts receivable                                       |  | 153,921       |             
|Unbilled services                                         |  | 41,218        |             
|Inventory                                                 |  | 36,666        |             
|Deferred income taxes                                     |  | 13,901        |             
|Prepaid expenses and other current assets                 |  | 28,723        |             
|                                                          |  |               |             
|Total Current Assets                                      |  | 340,568       |             
|Property and equipment, net                               |  | 240,447       |             
|Goodwill, net                                             |  | 56,720        |             
|Other assets                                              |  | 6,056         |             
|                                                          |  |               |             
|Total Assets                                              |  | $ 643,791     |             
|                                                          |  |               |             
|Liabilities and Stockholders' Equity                      | 
|Current Liabilities:                                      | 
|Accounts payable                                          |  | $   17,213    |             
|Accrued payroll and benefits                              |  | 56,717        |             
|Accrued expenses and other current liabilities            |  | 39,372        |             
|Unearned revenue                                          |  | 93,312        |             
|Income taxes payable                                      |  | 15,532        |             
|                                                          |  |               |             
|Total Current Liabilities                                 |  | 222,146       |             
|Long-term debt                                            |  | --            |             
|Deferred income taxes                                     |  | 12,338        |             
|Other liabilities                                         |  | 14,941        |             
|                                                          |  |               |             
|Total Liabilities                                         |  | 249,425       |             
|                                                          |  |               |             
|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    | 
|September 30, 2002 and December 31, 2001, respectively    |  | --            |             
|Common Stock - Par value $0.01 per share; 140,000,000     | 
|shares authorized, 62,906,138 and 61,882,084 shares       | 
|issued and outstanding, including those held in treasury, | 
|at September 30, 2002 and December 31, 2001, respectively |  | 629           |             
|Paid-in capital                                           |  | 134,503       |             
|Retained earnings                                         |  | 302,089       |             
|Accumulated other comprehensive income (loss)--           | 
|Cumulative translation adjustment                         |  | (5,528        | )           
|Treasury stock at cost (3,087,495 and 2,073,772 shares at | 
|September 30, 2002 and December 31, 2001, respectively)   |  | (37,327       | )           
|                                                          |  |               |             
|Total Stockholders' Equity                                |  | 394,366       |             
|                                                          |  |               |             
|Total Liabilities and Stockholders' Equity                |  | $ 643,791     |             
|                                                          |  |               |             

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
(UNAUDITED)

|                                                  | Three Months EndedSeptember 30 |                   | Nine Months EndedSeptember 30
|------------------------------------------------- | ------------------------------ | ----------------- | -----------------------------
|
|                                                 
|Net revenues                                      |                                | $      220,968    |                              
|Reimbursable out-of-pockets                       |                                | 9,924             |                              
|                                                  |                                |                   |                              
|Total revenues                                    |                                | 230,892           |                              
|                                                  |                                |                   |                              
|                                                  |                               
|Cost and expenses:                                |                               
|Cost of revenue (including reimbursable expenses) |                                | 162,492           |                              
|Selling, general and administrative               |                                | 33,201            |                              
|Depreciation and amortization                     |                                | 10,329            |                              
|Restructuring charge                              |                                | --                |                              
|                                                  |                                |                   |                              
|Total                                             |                                | 206,022           |                              
|                                                  |                                |                   |                              
|Income from operations                            |                                | 24,870            |                              
|                                                  |                                |                   |                              
|                                                  |                               
|Other (income) expense, net:                      |                               
|Interest expense                                  |                                | 598               |                              
|Interest income                                   |                                | (338              | )                            
|Foreign exchange transaction losses (gains)       |                                | 541               |                              
|Gain on sale of businesses, net                   |                                | --                |                              
|                                                  |                                |                   |                              
|Other (income) expense, net                       |                                | 801               |                              
|                                                  |                                |                   |                              
|Income before taxes                               |                                | 24,069            |                              
|Taxes on income                                   |                                | 2,186             |                              
|                                                  |                                |                   |                              
|                                                  |                               
|Net income                                        |                                | $        21,883   |                              
|                                                  |                                |                   |                              
|                                                  |                               
|                                                  |                               
|Basic earnings per share                          |                                | $            0.36 |                              
|                                                  |                               
|Weighted average shares outstanding - basic       |                                | 60,076,986        |                              
|                                                  |                               
|                                                  |                               
|Diluted earnings per share                        |                                | $            0.36 |                              
|                                                  |                               
|Weighted average shares outstanding - diluted     |                                | 61,192,298        |                              

3



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##### 

COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)

|                                                         | Nine Months Ended September 30
|-------------------------------------------------------- | ------------------------------
|
|                                                        
|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 benefit (provision)                  |                               
|Gain on sale of businesses, net                          |                               
|Restructuring charge, net of cash paid                   |                               
|Other                                                    |                               
|Changes in operating assets and liabilities, net of      |                               
|businesses acquired and sold:                            |                               
|Accounts receivable                                      |                               
|Unbilled services                                        |                               
|Inventory                                                |                               
|Accounts payable                                         |                               
|Accrued liabilities                                      |                               
|Unearned revenue                                         |                               
|Income taxes payable                                     |                               
|Other assets and liabilities, net                        |                               
|                                                         |                               
|Net cash provided by operating activities                |                               
|                                                         |                               
|Cash flows from investing activities:                    |                               
|Capital expenditures                                     |                               
|Acquisition of business, net of cash acquired            |                               
|Proceeds from sale of businesses                         |                               
|Other, net                                               |                               
|                                                         |                               
|Net cash (used in) provided by investing activities      |                               
|                                                         |                               
|Cash flows from financing activities:                    |                               
|Net repayments under revolving credit facilities         |                               
|Repayments of debt                                       |                               
|Stock issued under employee stock purchase and           |                               
|option plans                                             |                               
|Purchase of treasury stock                               |                               
|                                                         |                               
|Net cash 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)
September 30, 2002 and 2001
(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 nine months ended September
30, 2002 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. The balance sheet at December 31, 2001 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, 2001, 2000, and 1999 included in our Annual Report on Form 10-K for the year
ended December 31, 2001.

2.   Summary of Significant Accounting Policies

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.

Reclassifications

Certain prior period balances have been reclassified to conform with current
year presentation.

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 $12.3 million and $17.2 million at September 30,
2002 and December 31, 2001, respectively. See Note 2 Reimbursable Out-of-Pocket
Expenses.

Inventory

Inventories, which consist principally of 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. Had amortization expense not been
recorded for the three months ended September 30, 2001, the impact on income from operations,
net income and earnings per share would have been an increase of $0.9 million, $0.7 million,
and $0.01 per share, respectively. Had amortization expense not been recorded for the nine
months ended September 30, 2001, the impact on income from operations, net income and earnings
per share would have been an increase of $2.7 million, $2.1 million, and $0.04 per share,
respectively. See Note 8 2001 Pro Forma Financial Information.

5



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
September 30, 2002 and 2001
(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 amounts 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. As a result of favorable income tax developments,
relating primarily to the settlement of a longstanding multi-year foreign income tax
audit, Covance reduced its income tax reserve and provision by $6.5 million.

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 $24.1
million and $15.7 million for the three months ended September 30, 2002 and 2001,
respectively, and $53.5 million and $42.6 million for the nine months ended September 30,
2002 and 2001, 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 September
30, 2002 and 2001, the denominator was increased by 1,115,402 shares and 1,936,157
shares, respectively, and for the nine months ended September 30, 2002 and 2001, the
denominator was increased by 1,318,929 shares and 1,484,240 shares, respectively,
representing the dilutive effect of stock options outstanding at September 30, 2002 and
2001 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.

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 7
Segment Information.

6



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
September 30, 2002 and 2001
(dollars in thousands, unless otherwise indicated)

3.   Treasury Stock

During July 2002, Covance purchased into treasury all of the 1,005,000 shares of its Common
Stock remaining under the Board approved 1999 share buyback program, for the aggregate
cost of $16.2 million. During the nine months ended September 30, 2002, Covance also
acquired approximately 8,700 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 $0.2 million.

4.   Supplemental Cash Flow Information

Cash paid for interest for the nine months ended September 30, 2002 and 2001 totaled $1.2
million and $8.5 million, respectively. Cash paid for income taxes for the nine months
ended September 30, 2002 and 2001 totaled $15.7 million and $17.1 million, respectively.

5.   Acquisition

In July 2002, Covance acquired the stock of Virtual Central Laboratory b.v. (now known as
Covance Virtual Central Laboratory b.v.) for a cash payment of $3.0 million. The goodwill
resulting from this transaction aggregated $2.6 million.

6.   Divestitures

On June 15, 2001, Covance sold its biomanufacturing business (Biomanufacturing)
to Akzo Nobels pharma business unit, Diosynth, for gross proceeds of $113.6
million, 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. Covance
recognized a loss of $7.5 million ($4.5 million after tax) from this transaction. Covance
used the net proceeds from the sale of approximately $95 million to reduce borrowings
under its senior revolving credit facility.

On February 14, 2001, Covance sold its pharmaceutical packaging business (Packaging)
to Fisher Scientific International Inc. for gross proceeds of $137.5 million. Covance
recognized a pre-tax gain of $38.4 million ($24.3 million after tax) from this
transaction, of which $39.2 million was recorded during the three months ended March 31,
2001 in connection with the sale, and $(0.9) million was recorded during the three months
ended June 30, 2001 in connection with a final working capital adjustment. Covance used
the net proceeds from the sale to repay the $18.5 million balance outstanding on the
mortgage on its North American packaging facility and the remaining net proceeds of
approximately $95 million were used to reduce borrowings under its senior revolving
credit facility.

7.   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, biomanufacturing (through June 15, 2001),
commercialization and other clinical support capabilities (including our Packaging
operations through February 14, 2001), 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 following information for 2001 is on an as reportedbasis and has not been
restated to exclude the results of Biomanufacturing and Packaging, which were divested
during 2001. Certain of the information below has been presented on a pro forma basis in
Note 8. The accounting policies of the reportable segments are the same as those
described in Note 2. Segment net revenues, operating income and total assets for the
three and nine months ended September 30, 2002 and 2001 are as follows:

7



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
September 30, 2002 and 2001
(dollars in thousands, unless otherwise indicated)

|                                       | EarlyDevelopment | Late-StageDevelopment | OtherReconciling Items | Total     
|-------------------------------------- | ---------------- | --------------------- | ---------------------- | ----------
|                                       |                  |                       |                        |           
|Three months ended September 30, 2002  |                 
|Total revenues from external customers |                  | $  93,816             |                        | $127,152  
|Operating income                       |                  | $  18,177             |                        | $  18,183 
|Total assets                           |                  | $317,206              |                        | $306,243  
|                                      
|Three months ended September 30, 2001  |                 
|Total revenues from external customers |                  | $  79,705             |                        | $116,689  
|Operating income                       |                  | $  12,524             |                        | $    8,972
|Total assets                           |                  | $246,568              |                        | $301,810  
|                                      
|Nine months ended September 30, 2002   |                 
|Total revenues from external customers |                  | $270,582              |                        | $378,174  
|Operating income                       |                  | $  49,276             |                        | $  48,790 
|Total assets                           |                  | $317,206              |                        | $306,243  
|                                      
|Nine months ended September 30, 2001   |                 
|Total revenues from external customers |                  | $232,477              |                        | $418,996  
|Operating income                       |                  | $  34,984             | (b)                    | $  22,531 
|Total assets                           |                  | $246,568              |                        | $301,810  

_______________

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

|(b) |  | Includes restructuring charge incurred in the second quarter of 2001 totaling $8,178 ($4,985 after
tax).
|--- |  | --------------------------------------------------------------------------------------------------------

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

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

8.   2001 Pro Forma Financial Information

The following is a reconciliation between amounts on an as reportedbasis and
amounts on a pro forma basis for the three and nine months ended September 30, 2001. The
pro forma results for 2001 reflect (1) the exclusion of the results of Packaging and
Biomanufacturing, (2) reduced interest expense from the application of the net proceeds
from the sales of these businesses to outstanding debt, (3) the exclusion of the gain
(loss) recognized on the sale of businesses during the period, (4) the exclusion of
restructuring charges during the period and (5) the exclusion of goodwill amortization in
accordance with the adoption of FASB Statement No. 142.

|                                      | Pro Forma Adjustments to Remove
|------------------------------------- | -------------------------------
|                                     
|
|                                     
|Three Months Ended September 30, 2001
|                                     
|Net revenues                          |                                
|                                     
|Income from operations                |                                
|                                     
|Income before taxes                   |                                
|                                     
|Taxes on income                       |                                
|                                     
|Net income                            |                                
|                                     
|Diluted earnings per share            |                                

8



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##### 

COVANCE INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
September 30, 2002 and 2001
(dollars in thousands, unless otherwise indicated)

|                                     | Pro Forma Adjustments to Remove
|------------------------------------ | -------------------------------
|                                    
|
|                                    
|Nine Months Ended September 30, 2001
|                                    
|Net revenues                         |                                
|                                    
|Income from operations               |                                
|                                    
|Income before taxes                  |                                
|                                    
|Taxes on income                      |                                
|                                    
|Net income                           |                                
|                                    
|Diluted earnings per share           |                                

9



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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 September 30, 2002.

Overview

Covance is a leading contract research organization 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, biomanufacturing (through June 15, 2001),
commercialization and other clinical support services (including our packaging operations
through February 14, 2001). Covance believes it is one of the largest biopharmaceutical
contract research organizations, based on 2001 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 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.

On June 15, 2001, Covance sold its biomanufacturing business (Biomanufacturing)
to Akzo Nobels pharma business unit, Diosynth, for gross proceeds of $113.6
million, 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. Covance
recognized a loss of $7.5 million ($4.5 million after tax) from this transaction. On
February 14, 2001, Covance sold its pharmaceutical packaging business (Packaging)
to Fisher Scientific International Inc. for gross proceeds of $137.5 million. Covance
recognized a pre-tax gain of $38.4 million ($24.3 million after tax) from this
transaction, of which $39.2 million was recorded during the three months ended March 31,
2001 in connection with the sale, and $(0.9) million was recorded during the three months
ended June 30, 2001 in connection with a final working capital adjustment.

Historically, a majority of Covances net revenues have been earned under contracts. These
contracts generally range in duration from a few months to two years, but can extend in
duration up to five years. Revenue from these contracts is generally recognized under
either the percentage of completion method of accounting or as services are rendered or
products are delivered, depending upon the nature of the work contracted. Where the
percentage of completion method is used, Covance generally measures progress toward
completion in terms of units-of-work performed as compared to the total units-of-work
contracted. The contracts may contain provisions for renegotiation for cost overruns
arising from changes in the scope of work. Renegotiated amounts are included in net
revenues when earned and realization is assured. In some cases, for multi-year contracts
a portion of the contract fee is paid at the time the trial is initiated. These amounts
are deferred and recognized as revenue as services are performed. Additional payments are
made based upon the achievement of performance-based milestones over the contract
duration. 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. Investigator fees are not reflected in total revenues
or expenses since 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. Most contracts are terminable either immediately or upon notice by the client.
These contracts typically require payment to Covance of expenses to wind down a study,
payment to Covance of fees earned to date, and, in some cases, a termination fee or a
payment to Covance of some portion of the fees or profit that could have been earned by
Covance under the contract if it had not been terminated early.

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 benefit charges, other direct costs and an
allocation of facility charges and information technology costs and excludes depreciation
and amortization. Also, as mentioned above, cost of revenue now includes 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

10



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travel and an allocation of facility charges and information
technology costs, and excludes depreciation and amortization.

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

Variances
explained below are on an as reportedbasis, but also include certain pro
forma variances (where so noted)  that is, variances between the three months ended
September 30, 2002 and 2001 and between the nine months ended September 30, 2002 and
2001, after giving effect to 1) the exclusion of a $6.5 million reduction in our income
tax reserve and provision recorded in the third quarter of 2002 explained below, 2) the
divestiture of Packaging and Biomanufacturing as if these transactions had occurred on
January 1, 2001, 3) the exclusion of the impact of restructuring charges totaling $8,178
($4,985 net of tax) recorded in the quarter ended June 30, 2001, and 4) the exclusion of
goodwill amortization in accordance with the adoption of FASB Statement No. 142.

Three Months Ended September 30, 2002 Compared with Three Months
Ended September 30, 2001. Net revenues increased 12.5% to $221.0 million
for the three months ended September 30, 2002 from $196.4 million for the corresponding
2001 period. Excluding the impact of foreign exchange rate variances between both
periods, net revenues increased 9.1% as compared to the corresponding 2001 period. Net
revenues from Covances early development segment grew 17.7%, or 14.8% excluding the
impact of foreign exchange rate variances between both periods, driven primarily by
growth in our toxicology service offering. Net revenues from Covances late-stage
development segment increased 9.0%, or 5.3% excluding the impact of foreign exchange rate
variances between both periods. The improvement in late-stage development revenue growth
was primarily driven by improved performance in our Phase III and central laboratory
services.

Cost
of revenue, excluding reimbursable out-of-pocket expenses totaling $9.9 million,
increased 7.7% to $152.6 million or 69.0% of net revenues for the three months ended
September 30, 2002 as compared to $141.7 million (excluding reimbursable out-of-pocket
expenses totaling $9.7 million) or 72.1% of net revenues for the corresponding 2001
period. Excluding reimbursable out-of-pocket expenses, gross margins were 31.0% for the
three months ended September 30, 2002 and 27.9% for the corresponding 2001 period. Margin
improvement, although broad based, was particularly significant in our toxicology, Phase
III and central laboratory service offerings.

Overall,
selling, general and administrative expenses increased 13.5% to $33.2 million for the
three months ended September 30, 2002 from $29.2 million for the corresponding 2001
period. As a percentage of net revenues, selling, general and administrative expenses
increased to 15.0% for the three months ended September 30, 2002 from 14.9% for the
corresponding 2001 period.

Depreciation
and amortization decreased 0.9% to $10.3 million or 4.7% of net revenues for the three
months ended September 30, 2002 as compared to $10.4 million or 5.3% of net revenues for
the corresponding 2001 period, due primarily to the implementation of FASB Statement No.
142 in the first quarter of 2002, which has eliminated the amortization of goodwill.
Excluding the impact of this statement, depreciation and amortization increased $0.8
million or 8.3%.

Income
from operations increased 65.0% to $24.9 million or 11.3% of net revenues for the three
months ended September 30, 2002 from $15.1 million or 7.7% of revenues for the
corresponding 2001 period. Income from operations from Covances early development
segment increased $5.7 million or 45.1% to $18.2 million or 19.4% of net revenues for the
three months ended September 30, 2002 from $12.5 million or 15.7% of net revenues for the
corresponding 2001 period, primarily driven by growth in our toxicology services
offering. Income from operations from Covances late-stage development segment
increased $9.2 million or 102.7% to $18.2 million or 14.3% of net revenues for the three
months ended September 30, 2002 from $9.0 million or 7.7% of net revenues for the
corresponding 2001 period, primarily driven by stronger performance in our Phase III and
central laboratory service offerings.

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Other
expense, net increased $0.7 million to $0.8 million for the three months ended September
30, 2002 from $0.1 million for the corresponding 2001 period. This increase was due
primarily to $0.5 million in foreign exchange transaction losses reported during the 2002
period, driven by the weakening of the U.S. dollar, as compared to $0.2 million in gains
reported during the corresponding 2001 period.

Covances
effective tax rate for the three months ended September 30, 2002 was 9.1% as compared to
39.4% for the corresponding 2001 period. Covances 2002 effective tax rate reflects
the reversal of a $6.5 million income tax reserve relating primarily to the favorable
settlement of a longstanding multi-year foreign income tax audit. Excluding the effect of
this adjustment, Covances effective tax rate for the three months ended September
30, 2002 was 36.1%, as compared to a pro forma effective tax rate of 38.2% for the
corresponding 2001 period.

Net
income increased to $21.9 million or 141.6% for the three months ended September 30, 2002
from $9.1 million for the corresponding 2001 period. On a pro forma basis, net income
increased to $15.4 million or 57.4% as compared to $9.8 million for the corresponding
2001 period.

Nine Months Ended September 30, 2002 Compared with Nine Months
Ended September 30, 2001. Net revenues decreased 0.4% to $648.8 million
for the nine months ended September 30, 2002 from $651.5 million for the corresponding
2001 period, as the 2001 period includes revenues from Covances biomanufacturing
operations through June 15, 2001 and includes revenues from Covances packaging
operations through February 14, 2001. On a pro forma basis, net revenues increased 8.9%
to $648.8 million for the nine months ended September 30, 2002 from $595.9 million for
the corresponding 2001 period. Excluding the impact of foreign exchange rate variances
between both periods, on a pro forma basis, net revenues increased 7.5% as compared to
the corresponding 2001 period. Net revenues from Covances early development
services grew 16.4%, or 15.4% excluding the impact of foreign exchange rate variances
between both periods, driven primarily by growth in our toxicology service offering. On a
pro forma basis, net revenues from Covances late-stage development segment
increased 4.1%, or 2.4% excluding the impact of foreign exchange rate variances between
both periods. The modest late-stage development revenue growth was impacted by our
strategy to first improve our operating margins by an increased focus on contract
selectivity, particularly in our Phase II/III services, and the slower conversion of our
backlog to revenue, particularly in our central laboratory business during the first half
of 2002.

Cost
of revenue, excluding reimbursable out-of-pocket expenses totaling $30.2 million,
decreased 4.4% to $452.9 million or 69.8% of net revenues for the nine months ended
September 30, 2002 as compared to $473.7 million (excluding reimbursable out-of-pocket
expenses totaling $30.0 million) or 72.7% of net revenues for the corresponding 2001
period. Excluding reimbursable out-of-pocket expenses, gross margins were 30.2% for the
nine months ended September 30, 2002 and 27.3% for the corresponding 2001 period, as the
2001 period includes Covances biomanufacturing operations through June 15, 2001 and
Covances packaging operations through February 14, 2001. Also, the 2001 period
included higher investment spending on internet initiatives and lower margins on
bioanalytical services. On a pro forma basis, as a percentage of net revenues, cost of
revenue, excluding reimbursable out-of-pocket expenses, was 72.1% for the 2001 period.

Overall,
selling, general and administrative expenses increased 4.2% to $98.7 million for the nine
months ended September 30, 2002 from $94.7 million for the corresponding 2001 period. As
a percentage of net revenues, selling, general and administrative expenses increased to
15.2% for the nine months ended September 30, 2002 from 14.5% for the corresponding 2001
period, as the 2001 period includes Covances biomanufacturing operations through
June 15, 2001 and Covances packaging operations through February 14, 2001. On a pro
forma basis, as a percentage of net revenues, selling, general and administrative
expenses were 15.1% for the 2001 period.

Depreciation
and amortization decreased 16.3% to $30.6 million or 4.7% of net revenues for the nine
months ended September 30, 2002 from $36.6 million or 5.6% of net revenues for the
corresponding 2001 period, due primarily to the divestiture of our capital intensive
biomanufacturing and packaging businesses in the first half of 2001, and the
implementation of FASB Statement No. 142 in the first quarter of 2002, which has
eliminated the amortization of goodwill. On a pro forma basis, depreciation and
amortization increased 5.0%.

Income
from operations increased 73.7% to $66.5 million for the nine months ended September 30,
2002 from $38.3 million for the corresponding 2001 period. Income from operations from
Covances early development segment increased $14.3 million or 40.9% to $49.3
million or 18.2% of net revenues for the nine months ended September 30, 2002 from $35.0
million or 15.0% of net revenues for the corresponding 2001 period, primarily driven by
growth in our toxicology services offering. Income from operations from Covances
late-stage development segment increased $26.3 million or 116.6% to $48.8

12



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million or 12.9% of net revenues for the nine months ended September
30, 2002 from $22.5 million or 5.4% of net revenues for the corresponding 2001 period.

On
a pro forma basis, income from operations increased 42.1% to $66.5 million for the nine
months ended September 30, 2002 from $46.8 million for the corresponding 2001 period. As
a percentage of net revenues on a pro forma basis, income from operations increased to
10.3% for the nine months ended September 30, 2002 from 7.9% for the corresponding 2001
period. On a pro forma basis, income from operations from Covances early
development segment increased $13.3 million or 37.0% to $49.3 million as compared to
$35.9 million for the nine months ended September 30, 2001. On a pro forma basis, income
from operations from Covances late-stage development segment increased $18.7
million or 62.2% to $48.8 million as compared to $30.1 million for the nine months ended
September 30, 2001. The increase in late-stage development operating income on a pro
forma basis was due to Covances continued focus on margin improvements in our Phase
II/III services, increased demand for our Phase III and central laboratory services
during the third quarter of 2002, and margin growth in Phase IV services.

Other
expense, net for the 2001 period includes a $30.8 million net pre-tax gain on the sale of
Packaging and Biomanufacturing in the first half of 2001. Excluding this gain, other
expense, net decreased $4.1 million to $2.7 million for the nine months ended September
30, 2002 from $6.8 million for the corresponding 2001 period, due primarily to a $6.1
million reduction in interest expense resulting from lower weighted average borrowings
under our long-term credit facility, partially offset by a $2.0 million increase in
foreign exchange transaction losses, as a result of the weakening U.S. dollar.

Covances
effective tax rate for the nine months ended September 30, 2002 was 26.8% as compared to
38.8% for the corresponding 2001 period. The pro forma effective tax rate for the 2001
period was 38.5%. Covances 2002 effective tax rate reflects the reversal of a $6.5
million income tax reserve relating primarily to the favorable settlement of a
longstanding multi-year foreign income tax audit. Excluding the effect of this
adjustment, Covances effective tax rate for the nine months ended September 30,
2002 was 36.9%.

Net
income was $46.8 million for the nine months ended September 30, 2002 versus $38.1
million for the corresponding 2001 period. On a pro forma basis, net income increased
46.2% or $12.7 million to $40.2 million for the nine months ended September 30, 2002 as
compared to $27.5 million for the corresponding 2001 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. On June 28, 2001, Covance replaced
its credit facility with a new $150 million senior revolving credit facility (the
Credit Facility). Covance believes cash from operations and available borrowings
under the Credit Facility will provide sufficient liquidity for the foreseeable future.
At September 30, 2002 there were no outstanding borrowings and $1.6 million of
outstanding letters of credit under the Credit Facility. At December 31, 2001, there was
$15.0 million of outstanding borrowings and $0.9 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 3.32% per annum for the nine month period ended September 30,
2002. Interest on the credit facilities approximated 5.08% for the same period in 2001.
Costs associated with replacing the previous credit facility in June 2001, consisting
primarily of bank fees totaling $1.7 million, are being amortized to interest expense
over the three year facility term.

During
the nine months ended September 30, 2002, Covances operations provided net cash of
$99.0 million, an increase of $58.2 million from the corresponding 2001 period. The
change in net operating assets provided $12.5 million in cash during the nine months
ended September 30, 2002 primarily due to a reduction in accounts receivable, income
taxes payable and accrued liabilities, offset by a reduction in unearned revenue, while
this net change used $21.5 million in cash during the nine months ended September 30,
2001, primarily due to a decrease in accrued liabilities and an increase in accounts
receivable during the nine months ended September 30, 2001. Covances ratio of
current assets to current liabilities was 1.53 at September 30, 2002 and 1.43 at December
31, 2001.

Net
days sales outstanding (DSOs) at September 30, 2002 were 42 days, up 1 day
from December 31, 2001, but down 4 days from June 30, 2002. DSOs have historically
followed a seasonal pattern whereby they are generally at their lowest levels at year end
and increase during the first six and sometimes 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.

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Investing
activities for the nine months ended September 30, 2002 used $41.3 million, compared to
using $38.7 million for the corresponding 2001 period, excluding the $251.1 million in
proceeds from the sales of Packaging and Biomanufacturing in the first half of 2001.
Capital spending for the first nine months of 2002 totaled $38.5 million, and 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. Investing activities for the three and
nine months ended September 30, 2002 also include the July 2002 acquisition of Virtual
Central Laboratory b.v. for a gross cash payment of $3.0 million. Capital spending for
the corresponding 2001 period totaled $38.8 million, and was primarily for the outfitting
of new facilities, purchase of new equipment, upgrade of existing equipment and computer
equipment and software for newly hired employees. Planned capital expenditures in 2002
include spending associated with the $27 million expansion of Covances toxicology
capacity in Madison, Wisconsin and the $13 million expansion and enhancement of our
Harrogate, England facility.

Free
cash flow (operating cash flow less capital expenditures) for the nine months ended
September 30, 2002 totaled $60.5 million, up $58.4 million from the $2.1 million
generated during the corresponding 2001 period, as a result of our strong 2002 earnings
and improved working capital management.

Foreign Currency

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.

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

Since
Covance conducts operations on a global basis, Covances 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.

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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 effect on its operations or financial condition.

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

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 and financial condition 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.

As
described in our discussion of contractual arrangements in the description of our
business, most 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. Since our contracts are predominantly structured as fixed price or
fee-for-service with a cap, we bear the risk of a financial loss 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 or financial condition. Cancellations may occur for a variety of reasons,
including:

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

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

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| |  | 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, usually in the form of a pre-set penalty or a
percentage of the revenue expected to be earned for completion of the project.

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

An
important element of our strategy is the successful development and marketing of new
services that complement or expand our existing business. If we are unable to (1) develop
new services and (2) create demand for those newly developed services, we will not be
able to implement this element of our strategy, and our future business, results of
operations and financial condition could be adversely affected. For example, we have
recently introduced our bioanalytical service offerings. If demand for these services
does not develop as anticipated, our business, financial condition, or results of
operations may be materially adversely affected. We cannot assure you that we will be
able to develop or market this type of service successfully.

Our quarterly operating results may vary.

Our
operating results may vary significantly from quarter to quarter and are influenced by
such factors as:

| |  | 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;
|- |  | ---------------------------------------------------------------------------------

| |  | changes
in the mix of our services; and
|- |  | ---------------------------------------

| |  | exchange
rate fluctuations.
|- |  | ---------------------------

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 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. For example, the
practice of many companies in these industries has been to hire outside organizations
such as ourselves to conduct large preclinical and clinical research and development
projects. This practice has grown significantly in the last decade, and we have benefited
from this trend. However, if this trend were to change and 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;
|- |  | -----------------------------------------------------------------

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| |  | 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.

Finally,
an increase in investment community interest in our industry could result in an increased
availability of financial resources for contract research organizations. Such
availability of resources could lead to increased competition. We cannot assure you that
competing pressures we face will not have a material effect on us.

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. Health care
reform may again be addressed by the United States Congress and state legislatures. We
are unable to predict what legislative proposals will be adopted in the future, if any.
Similar reform movements have occurred in Europe and Asia.

Implementation
of health care reform legislation that contain costs could limit the profits that can be
made from the development of new drugs. This could adversely affect research and
development expenditures by pharmaceutical and biotechnology companies which could in
turn decrease the business opportunities available to us both in the United States and
abroad. In addition, new laws or regulations may create a risk of liability, increase our
costs or limit our service offerings. We cannot predict the likelihood of any of these
events.

Our revenues and earnings are exposed to exchange rate fluctuations.

We
derive a large portion of our net revenues from international operations. For the nine
month period ended September 30, 2002, 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 and
financial condition.

17



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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. We do not maintain insurance on the life of any of our
employees. The loss of the services of such personnel could adversely affect our
business. 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 we cannot assure you that we will be successful
in recruiting or retaining qualified personnel to enable us to conduct our business and
compete effectively in our industry.

Our contract research services create a risk of liability.

In
connection with many clinical trials, we 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 do not believe we are legally accountable for the medical
care rendered by third-party investigators and we seek to limit our liability with trial
sponsors, third party investigators and others. However, it is possible that we could be
exposed to liability. For example, we could be held liable for the following:

| |  | our
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 by our preclinical or central laboratories that cause harm to study
volunteers or consumers of an approved drug;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------

| |  | errors
or omissions by our preclinical laboratories arising from our tests conducted for the
agrochemical and food industries; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------

| |  | risks
that animals in our 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.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
believe that our risks are generally reduced by the following:

| |  | contracts
with our clients and, where applicable, investigators containing provisions entitling us
to be indemnified by them;
|- |  | -----------------------------------------------------------------------------------------------------------------------------

| |  | insurance
maintained by our clients, investigators, where applicable, 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. We could be materially and adversely affected if we
were required to pay damages or bear the costs of defending any claim (1) which is not
covered by a contractual indemnification provision, (2) in the event that a party who
must indemnify us does not fulfill its indemnification obligations or (3) 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.
While we have developed contingency plans for a variety of events that could disrupt or
limit available air transportation, there are no assurances that such plans will be
effective or sufficient to avert such a material adverse effect.

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 breeds 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.

18



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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 and approximated 3.32% per annum for
the nine months ended September 30, 2002. At September 30, 2002 we did not have any
outstanding borrowings under our credit facility.

For
the nine months ended September 30, 2002, approximately 34% of our net revenues were from
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  Foreign Currency 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
|--- |  | --------

| | Not
Applicable
| | --------------

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

| | During
the three month period ended September 30, 2002, no reports on Form 8-K were filed.
| | ------------------------------------------------------------------------------------------

19



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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: October 30, 2002 | 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 Boardand Chief Executive Officer(Principal Executive Officer)           | October 30, 2002
|                           |                                                                                         |                 
|                           |                                                                                         |                 
|/s/ WILLIAM E. KLITGAARD   |                                                                                         |                 
|William E. Klitgaard       | Corporate Senior Vice Presidentand Chief Financial Officer(Principal Financial Officer) | October 30, 2002
|                           |                                                                                         |                 
|                           |                                                                                         |                 
|/s/ MICHAEL GIANNETTO      |                                                                                         |                 
|Michael Giannetto          | Corporate Vice President and Controller(Principal Accounting Officer)                   | October 30, 2002

20



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##### 

#### 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: October 30, 2002

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

21



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##### 

#### 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: October 30, 2002

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

22



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##### 

#### EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                                     
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|              |                                                                                                                                                                 
|10.1          | 2002 Employee Stock Option Plan. Incorporated by reference to Covance's
Registration Statement on Form S-8 filed with the SEC on July 31, 2002.                 
|              |                                                                                                                                                                 
|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.  

23



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