**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**x****  Quarterly Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**For the quarterly period ended March 31, 2008**

 

**or**

 

**o****  Transition Report Pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934**

 

**       Forthe 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 telephonenumber, including area code:  **(609) 452-4440**

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act (the “ExchangeAct”) of 1934 during the preceding 12 months (or for such shorter period thatthe Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES x      NO o

 

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company. (See definition of “smallerreporting company, accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act).

Large AcceleratedFiler x  Accelerated Filer o

Non-AcceleratedFiler o  Smaller Reporting Company o

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

YES o     NO x

 

APPLICABLE ONLY TOCORPORATE ISSUERS:

 

As of April 25,2008, the Registrant had 62,862,920 shares of common stock outstanding.

 

** **

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**CovanceInc.**

**Form 10-QFor the Quarterly Period Ended March 31, 2008**

 

**INDEX**

 
| ** **                                                                                           | ** ** | **Page**   |
|------------------------------------------------------------------------------------------------------|------------|------------|
| ** **                                                                                           | ** ** | ** ** |
| **Part I. Financial  Information**                                                              |       |       |
|                                                                                                 |       |       |
| Item 1. Financial Statements (Unaudited)                                                             |       |       |
|                                                                                                 |       |       |
| Consolidated Balance Sheets—March 31,  2008 and December 31, 2007                     |       | 2          |
|                                                                                                 |       |       |
| Consolidated Statements of  Income—Three Months ended March 31, 2008 and 2007              |       | 3          |
|                                                                                                 |       |       |
| Consolidated Statements of  Cash Flows—Three Months ended March 31, 2008 and 2007          |       | 4          |
|                                                                                                 |       |       |
| Notes to Consolidated  Financial Statements                                                          |       | 5          |
|                                                                                                 |       |       |
|                                                                                                 |       |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations |       | 14         |
|                                                                                                 |       |       |
| Item 3.  Quantitative and Qualitative Disclosure About Market Risk                                   |       | 21         |
|                                                                                                 |       |       |
| Item 4. Controls and  Procedures                                                                     |       | 21         |
|                                                                                                 |       |       |
|                                                                                                 |       |       |
| **Part II. Other  Information**                                                                 |       |       |
|                                                                                                 |       |       |
| Item  1a. Risk Factors                                                                               |       | 22         |
|                                                                                                 |       |       |
| Item 2.  Unregistered Sales of Equity Securities and  Use of Proceeds                           |       | 27         |
|                                                                                                 |       |       |
| Item  6.  Exhibits                                                                              |       | 27         |
|                                                                                                 |       |       |
|                                                                                                 |       |       |
| **Signatures**                                                                                       |       | 28         |

 

1

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**COVANCE INC. AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**MARCH 31, 2008 AND DECEMBER 31, 2007**

** **
| ** **                                                                                                                                                                                                                             | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                                                                                                                                                                                                   | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                                                                                                             | ** ** | **(UNAUDITED)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                                                                             |       |               |       |                  |       |
| Current Assets:                                                                                                                                                                                                                        |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                                                              |       | $                  | 232,624    |                  | $          | 319,485 |   |
| Accounts receivable                                                                                                                                                                                                                    |       | 220,189            |       | 217,657               |       |
| Unbilled services                                                                                                                                                                                                                      |       | 96,115             |       | 88,835                |       |
| Inventory                                                                                                                                                                                                                              |       | 58,839             |       | 54,788                |       |
| Deferred income taxes                                                                                                                                                                                                                  |       | 7,960              |       | 7,825                 |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                             |       | 90,538             |       | 81,467                |       |
| Total Current Assets                                                                                                                                                                                                                   |       | 706,265            |       | 770,057               |       |
| Property and equipment,  net                                                                                                                                                                                                           |       | 699,498            |       | 646,040               |       |
| Goodwill, net                                                                                                                                                                                                                          |       | 105,486            |       | 105,486               |       |
| Other assets                                                                                                                                                                                                                           |       | 38,866             |       | 38,602                |       |
| Total Assets                                                                                                                                                                                                                           |       | $                  | 1,550,115  |                  | $          | 1,560,185 |   |
|                                                                                                                                                                                                                                   |       |               |       |                  |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                                         |       |               |       |                  |       |
| Current Liabilities:                                                                                                                                                                                                                   |       |               |       |                  |       |
| Accounts payable                                                                                                                                                                                                                       |       | $                  | 33,467     |                  | $          | 32,252 |   |
| Accrued payroll and  benefits                                                                                                                                                                                                          |       | 74,004             |       | 95,313                |       |
| Accrued expenses and  other current liabilities                                                                                                                                                                                        |       | 68,605             |       | 66,838                |       |
| Unearned revenue                                                                                                                                                                                                                       |       | 139,331            |       | 144,870               |       |
| Short-term debt                                                                                                                                                                                                                        |       | 43,000             |       | 3⁄4                |       |
| Income taxes payable                                                                                                                                                                                                                   |       | 29,327             |       | 18,887                |       |
| Total Current Liabilities                                                                                                                                                                                                              |       | 387,734            |       | 358,160               |       |
| Deferred income taxes                                                                                                                                                                                                                  |       | 31,918             |       | 32,562                |       |
| Other liabilities                                                                                                                                                                                                                      |       | 60,888             |       | 59,275                |       |
| Total Liabilities                                                                                                                                                                                                                      |       | 480,540            |       | 449,997               |       |
|                                                                                                                                                                                                                                   |       |               |       |                  |       |
| Commitments and  Contingent Liabilities                                                                                                                                                                                                |       |               |       |                  |       |
| Stockholders’ Equity:                                                                                                                                                                                                             |       |               |       |                  |       |
| Preferred Stock - Par  value $1.00 per share; 10,000,000 shares authorized; no shares issued and  outstanding at March 31, 2008 and December 31, 2007                                                                        |       | 3⁄4             |       | 3⁄4                |       |
| Common Stock - Par  value $0.01 per share; 140,000,000 shares authorized; 74,899,901 and  74,590,229 shares issued and outstanding, including those held in treasury, at  March 31, 2008 and December 31, 2007, respectively |       | 749                |       | 746                   |       |
| Paid-in capital                                                                                                                                                                                                                        |       | 507,612            |       | 492,373               |       |
| Retained earnings                                                                                                                                                                                                                      |       | 982,208            |       | 933,106               |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                |       | 48,804             |       | 24,154                |       |
| Treasury stock at cost  (12,083,228 and 10,548,248 shares at March 31, 2008 and  December 31, 2007, respectively)                                                                                                            |       | (469,798           | )          | (340,191              | )          |
| Total Stockholders’  Equity                                                                                                                                                                                                       |       | 1,069,575          |       | 1,110,188             |       |
| Total Liabilities and  Stockholders’ Equity                                                                                                                                                                                       |       | $                  | 1,550,115  |                  | $          | 1,560,185 |   |

 

**Theaccompanying notes are an integral part of these consolidated financialstatements.**

** **

**2**

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** **

**COVANCE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND2007**

**(UNAUDITED)**

** **
| ** **                                                                      | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands, except per share data)** | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                                                            |       |                                                |       |   |   |
| Net revenues                                                                    |       | $                                                   | 412,432    |   | $ | 358,319 |   |
| Reimbursable  out-of-pockets                                                    |       | 21,605                                              |       | 18,620 |   |
| Total revenues                                                                  |       | 434,037                                             |       | 376,939 |   |
|                                                                            |       |                                                |       |   |   |
| Costs and expenses:                                                             |       |                                                |       |   |   |
| Cost of revenue  (excluding depreciation and amortization)                      |       | 273,330                                             |       | 234,379 |   |
| Reimbursed  out-of-pocket expenses                                              |       | 21,605                                              |       | 18,620 |   |
| Selling, general and  administrative (excluding depreciation and amortization)  |       | 59,017                                              |       | 55,791 |   |
| Depreciation and  amortization                                                  |       | 17,348                                              |       | 16,111 |   |
| Total costs and  expenses                                                       |       | 371,300                                             |       | 324,901 |   |
| Income from operations                                                          |       | 62,737                                              |       | 52,038 |   |
|                                                                            |       |                                                |       |   |   |
| Other (income) expense,  net:                                                   |       |                                                |       |   |   |
| Interest income                                                                 |       | (2,858                                              | )          | (2,597 | ) |
| Interest expense                                                                |       | 262                                                 |       | 117 |   |
| Foreign exchange  transaction (gain) loss, net                                  |       | (1,065                                              | )          | 149 |   |
| Gain on sale of  business                                                       |       | (2,978                                              | )          | 3⁄4 |   |
| Other income, net                                                               |       | (6,639                                              | )          | (2,331 | ) |
| Income before taxes and  equity investee earnings                               |       | 69,376                                              |       | 54,369 |   |
| Taxes on income                                                                 |       | 20,723                                              |       | 16,041 |   |
| Equity investee  earnings                                                       |       | 449                                                 |       | 566 |   |
| Net income                                                                      |       | $                                                   | 49,102     |   | $ | 38,894 |   |
|                                                                            |       |                                                |       |   |   |
| Basic earnings per  share                                                       |       | $                                                   | 0.78       |   | $ | 0.61 |   |
| Weighted average shares  outstanding - basic                                    |       | 63,312,592                                          |       | 63,845,710 |   |
|                                                                            |       |                                                |       |   |   |
| Diluted earnings per  share                                                     |       | $                                                   | 0.76       |   | $ | 0.60 |   |
| Weighted average shares  outstanding - diluted                                  |       | 64,322,979                                          |       | 64,895,239 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

3

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**COVANCE INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND2007**

**(UNAUDITED)**

** **
| ** **                                                                                   | ** ** | **Three Months Ended March 31** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands)**                                                         | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                                       |       |                                                |       |   |   |
| Net income                                                                                   |       | $                                                   | 49,102     |   | $ | 38,894 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:           |       |                                                |       |   |   |
| Depreciation and  amortization                                                               |       | 17,348                                              |       | 16,111 |   |
| Non-cash compensation  expense associated with employee benefit and stock compensation plans |       | 6,044                                               |       | 8,256 |   |
| Deferred income tax  (benefit) provision                                                     |       | (779                                                | )          | (1,037 | ) |
| Gain on sale of  business                                                                    |       | (2,978                                              | )          | 3⁄4 |   |
| Loss on sale of  property and equipment                                                      |       | 13                                                  |       | 240 |   |
| Equity investee  earnings                                                                    |       | (449                                                | )          | (566 | ) |
| Changes in operating  assets and liabilities:                                                |       |                                                |       |   |   |
| Accounts receivable                                                                          |       | (2,532                                              | )          | (152 | ) |
| Unbilled services                                                                            |       | (7,280                                              | )          | (13,108 | ) |
| Inventory                                                                                    |       | (4,051                                              | )          | 1,342 |   |
| Accounts payable                                                                             |       | 1,215                                               |       | (6,042 | ) |
| Accrued liabilities                                                                          |       | (19,542                                             | )          | (15,875 | ) |
| Unearned revenue                                                                             |       | (5,539                                              | )          | 16,091 |   |
| Income taxes payable                                                                         |       | 11,177                                              |       | 8,618 |   |
| Other assets and  liabilities, net                                                           |       | (5,957                                              | )          | (17,866 | ) |
| Net cash provided by  operating activities                                                   |       | 35,792                                              |       | 34,906 |   |
|                                                                                         |       |                                                |       |   |   |
| Cash flows from  investing activities:                                                       |       |                                                |       |   |   |
| Capital expenditures                                                                         |       | (62,576                                             | )          | (31,800 | ) |
| Proceeds from sale of  business                                                              |       | 2,978                                               |       | 3⁄4 |   |
| Other, net                                                                                   |       | 77                                                  |       | 3⁄4 |   |
| Net cash used in  investing activities                                                       |       | (59,521                                             | )          | (31,800 | ) |
|                                                                                         |       |                                                |       |   |   |
| Cash flows from  financing activities:                                                       |       |                                                |       |   |   |
| Net borrowings under  revolving credit facility                                              |       | 43,000                                              |       | — |   |
| Stock issued under  employee stock purchase and option plans                                 |       | 8,461                                               |       | 6,438 |   |
| Purchase of treasury  stock                                                                  |       | (129,607                                            | )          | (48,142 | ) |
| Net cash used in  financing activities                                                       |       | (78,146                                             | )          | (41,704 | ) |
|                                                                                         |       |                                                |       |   |   |
| Effect of exchange rate  changes on cash                                                     |       | 15,014                                              |       | 336 |   |
| Net change in cash and  cash equivalents                                                     |       | (86,861                                             | )          | (38,262 | ) |
|                                                                                         |       |                                                |       |   |   |
| Cash and cash  equivalents, beginning of period                                              |       | 319,485                                             |       | 219,810 |   |
|                                                                                         |       |                                                |       |   |   |
| Cash and cash  equivalents, end of period                                                    |       | $                                                   | 232,624    |   | $ | 181,548 |   |

 

The accompanying notes are an integral part of theseconsolidated financial statements.

 

4

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** **

**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unless otherwise indicated)**

** **

**1.   Basis ofPresentation**

** **

The accompanying unaudited consolidated financialstatements have been prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”) for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of theinformation and footnotes required by GAAP for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the three months ended March 31,2008 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2008.  Thebalance sheet at December 31, 2007 has been derived from the auditedfinancial statements at that date but does not include all of the informationand footnotes required by GAAP for complete financial statements.  You should read these unaudited consolidatedfinancial statements together with the historical consolidated financialstatements of Covance Inc. and subsidiaries (“Covance” or the “Company”) forthe years ended December 31, 2007, 2006 and 2005 included in our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**2.   Summary of Significant Accounting Policies**

 

**Principles ofConsolidation**

** **

These unaudited consolidated financial statementsinclude the accounts of all entities controlled by Covance. All significantintercompany accounts and transactions are eliminated.  The equity method of accounting is used forinvestments in affiliates in which Covance owns between 20 and 50 percent anddoes not have the ability to exercise control. See Note 4.

 

**Use of Estimates**

** **

These unaudited consolidated financial statements havebeen prepared in conformity with GAAP, which requires management to makeestimates and assumptions about future events that affect the reported amountsof assets and liabilities, disclosure of contingent assets and liabilities atthe date of the financial statements, and the reported amounts of revenues andexpenses during the reporting period.  Actualresults could differ from these estimates.

 

**Inventory**

** **

Inventories, which consist principally of finishedgoods and supplies, are valued at the lower of cost (first-in, first-outmethod) or market.

 

**Prepaid Expenses andOther Current Assets**

** **

In connection with the management of multi-siteclinical 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 orprofit. Amounts receivable from customers in connection with billed andunbilled investigator fees, volunteer payments and other out-of-pocketpass-through costs are included in prepaid expenses and other current assets inthe accompanying consolidated balance sheets and totaled $44.2 million and$47.4 million at March 31, 2008 and December 31, 2007,respectively.  See Note 2 “ReimbursableOut-of-Pocket Expenses”.

 

**Goodwill and Other Intangible Assets and Impairment**

** **

Goodwill represents costs in excess of the fair valueof net tangible and identifiable net intangible assets acquired in businesscombinations.  In accordance withStatement of Financial Accounting Standards No. 142, *Goodwill andOther Intangible Assets*, Covance performs an annual test forimpairment of goodwill and other indefinite lived intangible assets during thefourth quarter. This test is performed by comparing, at the reporting unitlevel, the carrying value of the reporting unit to its fair value. Covanceassesses fair value based upon its estimate of the present value of the futurecash flows that it expects to be generated by the reporting unit.  The most recent annual test for impairmentperformed for 2007 did not identify any instances of impairment and there wereno events through March 31, 2008 that warranted a reconsideration of ourimpairment test results.

 

5

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

** **

**Revenue Recognition**

** **

Covance recognizes revenue either as services areperformed or products are delivered, depending upon the nature of the workcontracted. Historically, a majority of Covance’s net revenues have been earnedunder contracts which range in duration from a few months to two years, but canextend in duration up to five years or longer. Service contracts generally takethe form of fee-for-service or fixed-price arrangements. In the case offee-for-service contracts, revenue is recognized as services are performed,based upon, for example, hours worked or samples tested. For long-termfixed-price service contracts, revenue is recognized as services are performed,with performance generally assessed using output measures, such asunits-of-work performed to date as compared to the total units-of-workcontracted. Changes in the scope of work generally result in a renegotiation ofcontract pricing terms. Renegotiated amounts are not included in net revenuesuntil earned and realization is assured. Estimates of costs to complete aremade to provide, where appropriate, for losses expected on contracts. Costs arenot deferred in anticipation of contracts being awarded, but instead are expensedas incurred. In some cases, a portion of the contract fee is paid at the timethe trial is initiated. These advances are deferred and recognized as revenueas services are performed or products are delivered, as discussed above.Additional payments may be made based upon the achievement of performance-basedmilestones over the contract duration. Most contracts are terminable by theclient either immediately or upon notice. These contracts typically requirepayment to Covance of expenses to wind down the study, fees earned to date and,in some cases, a termination fee or a payment to Covance of some portion of thefees or profits that could have been earned by Covance under the contract if ithad not been terminated early. Termination fees are included in net revenueswhen realization is assured. In connection with the management of multi-siteclinical trials, Covance pays on behalf of its customers fees to investigators,volunteers and other out-of-pocket costs (such as for travel, printing,meetings, couriers, etc.), for which it is reimbursed at cost, without mark-upor profit. Investigator fees are not reflected in total revenues or expenseswhere Covance acts in the capacity of an agent on behalf of the pharmaceuticalcompany sponsor, passing through these costs without risk or reward to Covance.All other out-of-pocket costs are included in total revenues and expenses.

 

Unbilled servicesare recorded for revenue recognized to date and relate to amounts that arecurrently unbillable to the customer pursuant to contractual terms. In general,amounts become billable upon the achievement of milestones or in accordancewith predetermined payment schedules. Unbilled services are billable tocustomers within one year from the respective balance sheet date. Unearnedrevenue is recorded for cash received from customers for which revenue has notbeen recognized at the balance sheet date.

 

**Taxes**

** **

Covance uses theasset and liability method of accounting for income taxes.  Under this method, deferred tax assets andliabilities are recognized for the expected future tax consequences ofdifferences between the carrying amounts of assets and liabilities and theirrespective tax bases using enacted tax rates in effect for the year in whichthe temporary differences are expected to reverse.  The effect on deferred taxes of a change inenacted tax rates is recognized in income in the period when the change iseffective.

 

The Company accounts for uncertain income taxpositions in accordance with the provisions of Financial Accounting StandardsBoard Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109*(“FIN 48”).  Under the guidance of FIN48, the Company may recognize the tax benefit from an uncertain tax position onlyif it is more likely than not to be sustained upon examination based on thetechnical merits of the position. The amount of the accrual for which anexposure exists is measured as the largest amount of benefit determined on acumulative probability basis that the Company believes is more likely than notto be realized upon ultimate settlement of the position.  Components of the reserve are classified aseither a current or long-term liability in the consolidated balance sheet basedon when the Company expects each of the items to be settled.  Covance records interest and penaltiesaccrued in relation to unrecognized tax benefits as a component of income taxexpense.

* *

As of March 31, 2008, the balance of the reservefor unrecognized tax benefits is $9.1 million, of which $2.6 millionis recorded as a current liability in accrued expenses and other currentliabilities, and $6.5 million is recorded as a long-term liability inother liabilities on the consolidated balance sheet, including accrued interestof $1.5 million.  As of December 31,2007, the balance of the reserve for unrecognized tax benefits was$8.9 million, of which $2.6 million was recorded as a current 

 

6

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 

liability in accruedexpenses and other current liabilities, and $6.3 million was recorded as along-term liability in other liabilities on the consolidated balance sheet,including accrued interest of $1.3 million.  This reserve relates to exposures for incometax matters such as transfer pricing, nexus, deemed dividends and research anddevelopment credits.

 

The Company also maintains a tax reserve related toexposures for non-income tax matters including value-added tax and state salesand use and other taxes, which are accounted for in accordance with Statementof Financial Accounting Standards No. 5, *Accountingfor Contingencies*. The balance of this reserve at both March 31,2008 and December 31, 2007 is $0.8 million and is recorded as acurrent liability in accrued expenses and other current liabilities on theconsolidated balance sheet.

 

While Covancebelieves it has identified all reasonably identifiable exposures and thereserve it has established for identifiable exposures is appropriate under thecircumstances, it is possible that additional exposures exist and thatexposures may be settled at amounts different than the amounts reserved. It isalso possible that changes in facts and circumstances could cause Covance toeither materially increase or reduce the carrying amount of its tax reserve.

 

Covance’shistorical policy has been to leave its unremitted foreign earnings investedindefinitely outside the United States. Except for the one-time opportunityprovided under the American Jobs Creation Act, pursuant to which Covancerepatriated $103 million in accumulated foreign earnings in the fourth quarterof 2005, Covance intends to continue to leave its unremitted foreign earningsinvested indefinitely outside the United States.  As a result, taxes have not been provided onany of the remaining accumulated foreign unremitted earnings as of March 31,2008.

 

**ComprehensiveIncome**

 

Covance’s totalcomprehensive income, which represents net income plus the change in thecumulative translation adjustment equity account for the periods presented, was$73.8 million and $40.0 million for the three months ended March 31, 2008and 2007, respectively.

 

**Reimbursable Out-of-Pocket Expenses**

** **

As discussed in Note 2 “Prepaid Expenses and OtherCurrent Assets”, Covance pays on behalf of its customers fees to investigators,volunteers and other out-of-pocket costs for which we are reimbursed at cost,without mark-up or profit.  In connectionwith the requirements of Financial Accounting Standards Board Emerging IssuesTask Force Rule No. 01-14 (“EITF 01-14”), *IncomeStatement Characterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred*, amounts paid to volunteers and other out-of-pocket costsare reflected in operating expenses, while the reimbursements received arereflected in revenues in the consolidated statements of income.  Covance will continue to exclude from revenueand expense in the consolidated statements of income fees paid to investigatorsand the associated reimbursement since Covance acts as an agent on behalf ofthe pharmaceutical company sponsors with regard to investigator payments, inaccordance with the Financial Accounting Standards Board Emerging Issues TaskForce Rule No. 99-19 (“EITF 99-19”), *ReportingRevenue Gross as a Principal Versus Net as an Agent.*

* *

**Stock-Based Compensation**

** **

The Company sponsors severalstock-based compensation plans pursuant to which non-qualified stock optionsand restricted stock awards are granted to eligible employees.  These plans are described more fully in Note8 herein and Note 10 to our audited consolidated financial statements includedin our Annual Report on Form 10-K for the year ended December 31,2007.

 

The Company recognizesstock-based compensation under the provisions of Statement of FinancialAccounting Standards No. 123R, *Share-BasedPayments*, (“SFAS 123R”) using the modified prospective transitionmethod.  Under the modified prospectivetransition method, compensation expense is recognized in the financialstatements on a prospective basis for (a) all share-based payments grantedprior to, but not vested as of January 1, 2006, based upon the grant-datefair value estimated in accordance with the original provisions of SFAS 123,and (b) share-based payments granted on or subsequent to January 1,2006, based upon the grant-date fair value estimated in accordance with theprovisions of SFAS 123R.  The grant-datefair value of awards expected to vest is expensed on a straight-line basis overthe vesting period of the related awards. See Note 8.

 

7

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 

**Earnings Per Share (“EPS”)**

** **

Basic EPS is computed bydividing net income available to common stockholders by the weighted averagenumber of shares outstanding during the period. The computation of diluted EPS is similar to the computation of basicEPS, except that the denominator is increased to include the number ofadditional common shares that would have been outstanding if the dilutivepotential common shares had been issued; computed under the treasury stockmethod in accordance with the requirements of Statement of Financial AccountingStandards No. 128, *Earnings Per Share*.

 

In computing diluted EPSfor the three months ended March 31, 2008 and 2007, the denominator wasincreased by 1,010,387 shares and 1,049,529 shares, respectively, representingthe dilutive effect of stock options outstanding at March 31, 2008 and2007, with exercise prices less than the average market price of Covance’scommon stock during each respective period. Excluded from the computation of diluted EPS for the three months ended March 31,2008 were options to purchase 15,618 shares of common stock at prices rangingfrom $86.17 to $87.33 per share because the exercise prices of such optionswere greater than the average market price of Covance’s common stock duringthis period.  Excluded from thecomputation of diluted EPS for the three months ended March 31, 2007 wereoptions to purchase 133,647 shares of common stock at prices ranging from$61.26 to $66.86 per share because the exercise prices of such options weregreater than the average market price of Covance’s common stock during thisperiod.

 

**Supplemental Cash Flow Information**

** **

Cash paid for interest for the three month periodsended March 31, 2008 and 2007 was $0.2 million and $0.1 million,respectively.  Cash paid for income taxesfor the three months ended March 31, 2008 and 2007 totaled$9.0 million and $8.2 million, respectively. The change in incometaxes payable in the consolidated statement of cash flows for the three monthsended March 31, 2008 and 2007 includes as an operating cash outflow theexcess tax benefit received from the exercise of non-qualified stock options asmeasured under SFAS 123R of $1.7 million and $0.9 million,respectively (a corresponding cash inflow of $1.7 million and$0.9 million, respectively, has been included in financing cash flows).

 

**Recently Issued Accounting Standards**

** **

In September 2006,the Financial Accounting Standards Board (the “FASB”) issued Statement ofFinancial Accounting Standards No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132(R)*, (“SFAS 158”).As of December 31, 2006, Covance has adopted the recognition anddisclosure provisions of SFAS 158, which require an employer to recognizethe over funded or under funded status of its defined benefit postretirementplans—measured as the difference between the fair value of plan assets and theprojected benefit obligation—as an asset or liability, respectively, in itsbalance sheet and to recognize changes in the funded status of the plan in theyear in which such changes occur through other comprehensive income. Theadoption of SFAS 158 did not have an impact on our consolidated results ofoperations.  SFAS 158 also requires,effective for fiscal years ending after December 15, 2008, that themeasurement of the over funded or under funded status of a plan be made as ofthe employer’s fiscal year end and not as of an earlier measurement date.Covance will be required to conform the measurement dates of its plans to December 31stfor its fiscal year ending December 31, 2008. Covance does not expect thischange in measurement dates to have a material impact on its consolidatedresults of operations or financial position.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (“SFAS 141R”) which replaces SFASNo. 141, *Business Combinations*.  The scope of SFAS 141R is broader thanthat of SFAS No. 141, which applied only to business combinations in whichcontrol was obtained by transferring consideration.  SFAS 141R revises accounting andreporting standards for business combinations and applies to all transactionsor other events in which an entity obtains control of one or more businesses bytransferring consideration as well as combinations achieved without thetransfer of consideration. By applying the same method of accounting – theacquisition method – to all transactions and other events in which one entityobtains control over one or more other businesses, this statement is intendedto improve the comparability of the information about business combinationsprovided in financial reports. SFAS 141R applies prospectively to business combinations with anacquisition date on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. Covance is currently in the process of evaluating SFAS 141R, andhas not yet determined the impact, if any, that accounting for future businesscombinations under SFAS 141R, effective January 1, 2009, will have onits consolidated results of operations or financial position.

 

8

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 

On February 12, 2008, the FASB issued FASB StaffPosition 157-2 (“FSP 157-2”), which delays the effective date of theapplication of SFAS No. 157, *Fair ValueMeasurements,* (“SFAS 157”) to fiscal years beginning after November 15,2008 for all non-financial assets and liabilities that are recognized ordisclosed at fair value in the financial statements on a non-recurringbasis.  Covance’s assets and liabilitiessubject to the provisions of SFAS 157 are limited to non-recurringnon-financial assets such as goodwill and other indefinite lived intangibleassets measured at fair value for impairment testing.  As such, the adoption of SFAS 157, asamended by FSP 157-2, is deferred until our fiscal year beginning January 1,2009.  Covance does not expect theadoption of SFAS 157, as amended, to have a material impact on its consolidatedresults of operations or financial position.

 

**3.   TreasuryStock**

** **

In February 2007, the Covance Board of Directorsauthorized the repurchase of an additional 3.0 million shares under Covance’sstock repurchase program. At March 31, 2008, there are approximately 0.8million shares remaining for purchase under the 2007 authorization.  Covance also reacquires shares of its commonstock in connection with certain employee benefit plans primarily whenemployees tender shares to satisfy income tax withholdings associated with thevesting of stock awards.  The followingtable sets forth the treasury stock activity during the three month periodsended March 31, 2008 and 2007:

 
| ** **                              | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                              | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **(amounts in thousands)**    | ** ** | **$**                                               | ** ** | **# shares** | ** ** | **$** | ** ** | **# shares** | ** ** |
| Shares  repurchased in connection with: |       |                                                |       |   |   |   |   |   |   |
| Board approved  buyback programs        |       | $                                                   | 126,709    |   | 1,500.0 |   | $ | 46,436 |   | 780.8 |   |
| Employee benefit  plans                 |       | 2,898                                               |       | 35.0 |   | 1,706 |   | 27.2 |   |
| Total                                   |       | $                                                   | 129,607    |   | 1,535.0 |   | $ | 48,142 |   | 808.0 |   |

 

**4.   EquityMethod Investees**

** **

Covance has a 47%minority equity position in Noveprim Limited (“Noveprim”), an existing supplierof research products, which was acquired in March 2004 at a total cost of$20.7 million.  The excess of thepurchase price over the underlying equity in Noveprim’s net assets at the dateof acquisition of $13.8 million represents goodwill and is included in thecarrying value of Covance’s investment. This investment is reflected in other assets on the consolidated balancesheet. During the three month periods ended March 31, 2008 and 2007,Covance recognized income of $0.3 million and $0.4 million, respectively,representing its share of Noveprim’s earnings, less the elimination of profiton inventory purchased from Noveprim and still on hand at Covance at March 31,2008 and 2007.  The carrying value ofCovance’s investment in Noveprim at March 31, 2008 and December 31,2007 was $23.5 million and $23.2 million, respectively.

 

Covance has a minorityequity position (approximately 20*%* at March 31, 2008) inBio-Imaging Technologies, Inc. (“BITI”). BITI uses proprietary medical imaging technologies to process andanalyze medical images, and also provides other services, including thedata-basing and regulatory submission of medical images, quantitative data andtext.  During the three month periodsended March 31, 2008 and 2007, Covance recognized income of $0.2 millionand $0.1 million, respectively, representing its pro rata share of BITI’searnings.  The carrying value of Covance’sinvestment in BITI as of March 31, 2008 and December 31, 2007 was$1.1 million and $0.9 million, respectively, while the fair market valuewas $16.5 million and $19.0 million, respectively.

 

9

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 

**5.   Divestiture**

** **

On November 28,2007, Covance sold its centralized ECG business (“Cardiac Safety Services”),part of Covance’s late stage development segment, to eResearchTechnology Inc. (“eRT”)and simultaneously therewith entered into a ten year marketing agreement witheRT under which Covance will continue to offer its clients cardiac safetyservices.  Covance received initial cashproceeds of $35.2 million in connection with the sale and recorded apre-tax gain of $6.6 million ($4.1 million after tax) during thequarter ended December 31, 2007. During the quarter ended March 31, 2008, Covance receivedadditional proceeds from this sale reflecting contingent consideration relatedto transferred backlog totaling $3.0 million and recognized an additionalpre-tax gain of $3.0 million ($1.9 million after tax).  Covance may receive up to approximately$9 million in additional future contingent consideration relating totransferred backlog and revenues generated by eRT from new contracts securedunder the first three years of the marketing agreement.  In addition, Covance expects to receivereferral fees during the term of the long-term marketing agreement.

*** ***

**6.   Short-Term Debt**

** **

Covance has a$75.0 million revolving credit facility (the “Credit Facility”), which  may be expanded to $125.0 million at Covance’selection.  At March 31, 2008, therewere $43.0 million of outstanding borrowings and $1.1 million ofoutstanding letters of credit under the Credit Facility. At December 31,2007, there were no outstanding borrowings and $1.1 million of outstandingletters of credit under the Credit Facility. Interest on all outstanding borrowings under the Credit Facility isbased upon the London Interbank Offered Rate (“LIBOR”) plus a 75 basis pointmargin and approximated 3.47% per annum during the quarter ended March 31,2008.  The Credit Facility, which expiresin June 2009, contains various financial and other covenants and iscollateralized by guarantees of certain of Covance’s domestic subsidiaries anda pledge of 65 percent of the capital stock of certain of Covance’s foreignsubsidiaries.  At March 31, 2008,Covance was in compliance with the terms of the Credit Facility.

 

**7.   Defined Benefit Plans**

** **

Covance sponsorsvarious pension and other post-retirement benefit plans.

 

**Defined Benefit Pension Plans**

** **

Covance sponsors two defined benefit pension plans forthe benefit of its employees at two United Kingdom subsidiaries and one definedbenefit pension plan for the benefit of its employees at a German subsidiary,all of which are legacy plans of previously acquired companies.  Benefit amounts for all three plans are basedupon years of service and compensation. The German plan is unfunded, while the United Kingdom plans arefunded.  Covance’s funding policy hasbeen to contribute annually a fixed percentage of the eligible employee’ssalary at least equal to the local statutory funding requirements.  Pension plan assets are administered by theplans’ trustees and are principally invested in equity and debtsecurities.  The components of netperiodic pension expense for these plans for the three month periods ended March 31,2008 and 2007 are as follows:

 
| ** **                                | ** ** | **United Kingdom Plans**                  | ** ** | **German Plan**                                | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                | ** ** | **Three Months Ended March 31** | ** ** | **Three Months Ended March 31** | ** ** |
| ** **                                | ** ** | **2008**                                            | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Components of  Net Periodic Pension Cost: |       |                                                |       |                                                |       |   |   |   |   |
| Service cost                              |       | $                                                   | 1,383      |                                                | $          | 1,464 |   | $ | 146 |   | $ | 123 |   |
| Interest cost                             |       | 2,075                                               |       | 1,841                                               |       | 139 |   | 90 |   |
| Expected return  on plan assets           |       | (2,353                                              | )          | (2,116                                              | )          | — |   | — |   |
| Amortization of  net actuarial loss       |       | 319                                                 |       | 350                                                 |       | 11 |   | 17 |   |
| Participant  contributions                |       | (531                                                | )          | (550                                                | )          | — |   | — |   |
| Net periodic  pension cost                |       | $                                                   | 893        |                                                | $          | 989 |   | $ | 296 |   | $ | 230 |   |

 

10

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 
| ** **                                                | ** ** | **United Kingdom Plans**                  | ** ** | **German Plan**                                | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                | ** ** | **Three Months Ended March 31** | ** ** | **Three Months Ended March 31** | ** ** |
| ** **                                                | ** ** | **2008**                                            | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Assumptions Used  to Determine Net Periodic Pension Cost: |       |                                                |       |                                                |       |   |   |   |   |
| Discount rate                                             |       | 5.50                                                | %          | 5.25                                                | %          | 5.60 | % | 4.65 | % |
| Expected rate of  return on assets                        |       | 6.75                                                | %          | 6.75                                                | %          | n/a |   | n/a |   |
| Salary increases                                          |       | 4.25                                                | %          | 4.00                                                | %          | 3.00 | % | 2.50 | % |

 

**Supplemental Executive RetirementPlan**

** **

Inaddition to these foreign defined benefit pension plans, Covance also has anon-qualified Supplemental Executive Retirement Plan (“SERP”).  The SERP, which is not funded, is intended toprovide retirement benefits for certain executive officers of Covance.  Benefit amounts are based upon years ofservice and compensation of the participating employees.  The components of net periodic pension costfor the three month periods ended March 31, 2008 and 2007 are as follows:

 
| ** **                                                | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Components of  Net Periodic Pension Cost:                 |       |                            |       |   |   |
| Service cost                                              |       | $                               | 309        |   | $ | 271 |   |
| Interest cost                                             |       | 217                             |       | 193 |   |
| Amortization of  prior service cost                       |       | (29                             | )          | 19 |   |
| Amortization of  net actuarial loss                       |       | 26                              |       | 11 |   |
| Net periodic  pension cost                                |       | $                               | 523        |   | $ | 494 |   |
| Assumptions Used  to Determine Net Periodic Pension Cost: |       |                            |       |   |   |
| Discount rate                                             |       | 5.50                            | %          | 5.50 | % |
| Salary increases                                          |       | 4.00                            | %          | 4.00 | % |

 

**Post-Employment Retiree Health andWelfare Plan**

** **

Covancealso sponsors a post-employment retiree health and welfare plan for the benefitof eligible employees at certain U.S. subsidiaries who retire after satisfyingservice and age requirements.  This planis funded on a pay-as-you-go basis and the cost of providing these benefits isshared with the retirees.  The componentsof net periodic post-retirement benefits cost for the three month periods endedMarch 31, 2008 and 2007 are as follows:

 
| ** **                                                                | ** ** | **Three Months Ended March 31** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Components of  Net Periodic Post-retirement Benefit Cost:                 |       |                                                |       |   |   |
| Service cost                                                              |       | $                                                   | 38         |   | $ | 41 |   |
| Interest cost                                                             |       | 81                                                  |       | 70 |   |
| Net periodic  post-retirement benefit cost                                |       | $                                                   | 119        |   | $ | 111 |   |
| Assumptions Used  to Determine Net Periodic Post-retirement Benefit Cost: |       |                                                |       |   |   |
| Discount rate                                                             |       | 5.50                                                | %          | 5.50 | % |
| Health care cost  trend rate                                              |       | 9.00                                                | %(a)       | 9.00 | %(a) |

 

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(a) decreasingto ultimate trend of 5.00% in 2011

 

11

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**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 

**8.   Stock-Based Compensation Plans**

** **

Covance sponsors several employee stock-basedcompensation plans which are described more fully in Note 10 to our auditedconsolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2007.

 

In May 2007, Covance’s shareholders approved the2007 Employee Equity Participation Plan (the “2007 EEPP”) in replacement of the2002 Employee Equity Participation Plan (the “2002 EEPP”). Effective uponapproval of the 2007 EEPP, no further grants or awards were permitted under the2002 EEPP. Shares remaining for grant under the 2002 EEPP will be available forgrant under the 2007 EEPP. In addition, the Covance Board of Directors directedthat, effective May 3, 2007, no further grants would be permitted underthe 2002 Employee Stock Option Plan (the “2002 ESOP”) and, unlike the 2002EEPP, shares remaining for grant under the 2002 ESOP would not be available forgrant under the 2007 EEPP. The 2007 EEPP became effective on May 3, 2007and will expire on May 2, 2017.  The2007 EEPP authorizes the Compensation and Organization Committee of the Boardof Directors (the “Compensation Committee”), or such committee as is appointedby the Covance Board of Directors, to administer the 2007 EEPP, to grant awardsto employees and consultants of Covance or entities in which Covance has acontrolling or significant equity interest. The 2007 EEPP authorizes the Compensation Committee to grant thefollowing awards to eligible employees: options to purchase common stock; stockappreciation rights; and other stock awards either singly or incombination.  The exercise period forstock options granted under the 2007 EEPP is determined by the CompensationCommittee at the time of grant, and is generally ten years from the date ofgrant. The vesting period for stock options and stock awards granted under the2007 EEPP is determined by the Compensation Committee at the time of grant.Generally, options vest over a three year period for senior executives and overa two year period for all other optionees. Stock awards generally vest over a three year period for all employees.The number of shares of Covance common stock initially available for grantunder the 2007 EEPP totaled approximately 1.6 million plus approximately3.3 million shares remaining available under the 2002 EEPP at the time the2007 EEPP was approved. All stock option grants under the 2002 EEPP remainingoutstanding are now administered in accordance with the provisions of the 2002EEPP out of shares issuable under the 2007 EEPP. The Company issues authorizedbut previously unissued shares when options are exercised or for stock awards.  At March 31, 2008 there wereapproximately 4.4 million shares remaining available for grants or awardsunder the 2007 EEPP, up to 1.6 million of which are available for issuance asstock awards.  There have been no grantsof stock appreciation rights or grants to consultants of Covance or entities inwhich Covance has a controlling or significant equity interest under the 2002ESOP, the 2002 EEPP or the 2007 EEPP.

** **

The grant-date fair value of stock option awards isestimated using an option pricing model as more fully described in Note 10 toour audited consolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2007. The grant-date fair value of options expected to vest is expensed on astraight-line basis over the vesting period of the related awards.

 

The following table setsforth the weighted-average assumptions used to calculate the fair value ofoptions granted for the three month periods ended March 31, 2008 and 2007:

 
| ** **                        | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Expected stock  price volatility  |       | 39%                                                 |       | 42% |   |
| Risk free  interest rate(s)       |       | 1.9% - 3.7%                                         |       | 4.7% – 5.1% |   |
| Expected life of  options (years) |       | 4.4                                                 |       | 4.3  |   |

 

Restricted stock awards are granted subject tocertain restrictions, including in some cases service conditions and in othercases service and performance conditions. The grant-date fair value of restricted stock awards expected to vest,which has been determined based upon the market value of Covance’s shares onthe grant date, is expensed on a straight-line basis over the vesting period ofthe related awards.

 

12

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** **

**COVANCE INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**

**(UNAUDITED)**

**March 31, 2008 and 2007**

**(dollars in thousands, unlessotherwise indicated)**

 

Covance also has an employee stock purchase plan (“ESPP”)pursuant to which Covance may make available for sale to its employees sharesof its common stock at a price equal to 85% of the lower of the market value onthe first or last day of each calendar quarter. The ESPP is intended to give Covance employees the opportunity topurchase shares of Covance common stock through payroll deductions.

 

Results of operations for the three month periodended March 31, 2008 include total stock-based compensation expense of$6.1 million ($4.1 million net of tax benefit of $2.0 million), $2.3million of which has been included in cost of revenue and $3.8 million of whichhas been included in selling, general and administrative expenses.  Results of operations for the three monthperiod ended March 31, 2007 include total stock-based compensation expenseof $5.5 million ($3.7 million net of tax benefit of $1.8 million), $2.0 millionof which has been included in cost of revenue and $3.5 million of which hasbeen included in selling, general and administrative expenses.

 

**9.   Segment Information**

 

Covance has two reportable segments: early developmentand late-stage development.  Earlydevelopment services, which includes Covance’s preclinical and clinicalpharmacology service capabilities, involve evaluating a new compound for safetyand 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 pharmaceuticalcompany, based on available data, will generally decide whether to continuefurther development of a drug. Late-stage development services, which includes Covance’s centrallaboratory, clinical development, periapproval and market access services, aregeared toward demonstrating the clinical effectiveness of a compound intreating certain diseases or conditions, obtaining regulatory approval andmaximizing the drug’s commercial potential. The accounting policies of thereportable segments are the same as those described in Note 2.

 

Segment revenues,operating income and total assets for the three months ended March 31,2008 and 2007 are as follows:

 
| ** **                                    | ** ** | **Early  Development** | ** ** | **Late-Stage  Development** | ** ** | **Other  Reconciling Items** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|-----------------------------|------------|-----------------------------------|------------|-----------|------------|
|                                          |       |                   |       |                        |       |                              |       |      |       |
| ***Three  months ended March 31, 2008*** |       |                   |       |                        |       |                              |       |      |       |
| Total revenues  from external customers       |       | $                      | 202,045    |                        | $          | 210,387                           |       | $         | 21,605     | (a) | $ | 434,037 |   |
| Operating income                              |       | $                      | 50,574     |                        | $          | 38,870                            |       | $         | (26,707    | )(b) | $ | 62,737 |   |
| Total assets                                  |       | $                      | 983,454    |                        | $          | 491,210                           |       | $         | 75,451     | (c) | $ | 1,550,115 |   |
| *** ***                                  |       |                   |       |                        |       |                              |       |      |       |
| ***Three  months ended March 31, 2007*** |       |                   |       |                        |       |                              |       |      |       |
| Total revenues  from external customers       |       | $                      | 179,216    |                        | $          | 179,103                           |       | $         | 18,620     | (a) | $ | 376,939 |   |
| Operating income                              |       | $                      | 43,677     |                        | $          | 29,212                            |       | $         | (20,851    | )(b) | $ | 52,038 |   |
| Total assets                                  |       | $                      | 795,233    |                        | $          | 429,639                           |       | $         | 79,057     | (c) | $ | 1,303,929 |   |

 

----

(a)          Represents revenuesassociated with reimbursable out-of-pocket expenses.

(b)          Represents corporateexpenses (primarily information technology, marketing, communications, humanresources, finance, legal, and stock-based compensation expense).

(c)          Represents corporateassets.

 

13

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

You should read the following discussion together withthe unaudited Covance consolidated financial statements and the accompanyingnotes included in this Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2008.

 

**Overview**

 

Covanceis a leading drug development services company providing a wide range ofearly-stage and late-stage product development services on a worldwide basisprimarily 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 tworeportable segments for financial reporting purposes: early developmentservices, which includes preclinical and clinical pharmacology serviceofferings; and late-stage development services, which includes centrallaboratory, clinical development, periapproval and market access services.Although each segment has separate services within it, they can be combined injoint service offerings and we believe clients increasingly are interested inopportunities for such combined services. Covance believes it is one of the largest drug development servicescompanies, based on annual net revenues, and one of a few that is capable ofproviding comprehensive global product development services. Covance offers itsclients high quality services designed to provide data to clients as rapidly aspossible and reduce product development time. We believe this enables Covance’s customers to introduce their productsinto the marketplace faster and as a result, maximize the period of marketexclusivity and monetary return on their research and development investments.Additionally, Covance’s comprehensive services and broad experience provide itscustomers with a variable cost alternative to fixed cost internal developmentcapabilities.

 

**CriticalAccounting Policies**

 

Covance’s consolidatedfinancial statements are prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”), which require management to make estimates andassumptions about future events that affect the amounts reported in thefinancial statements and the accompanying notes.  Actual results could differ from theseestimates.  The following discussionhighlights what we believe to be the critical accounting policies and judgmentsmade in the preparation of these consolidated financial statements.

 

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

 

***Bad Debts. ***Covanceendeavors to assess and monitor the creditworthiness of its customers to whichit grants credit terms in the ordinary course of business.  Covance maintains a provision for doubtfulaccounts relating to amounts due that may not be collected.  This bad debt provision is monitored on amonthly basis and adjusted as circumstances warrant.  Since the recorded bad debt provision isbased upon management’s judgment, actual bad debt write-offs may be greater orless than the amount recorded. Historically, bad debt write-offs have not been material.

 

14

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***Taxes. ***Since Covance conductsoperations on a global basis, its effective tax rate has and will continue todepend upon the geographic distribution of its pre-tax earnings among locationswith varying tax rates. Covance’s profits are further impacted by changes inthe tax rates of the various jurisdictions in which Covance operates. Inaddition, Covance maintains a reserve for unrecognized tax benefits, changes towhich could impact Covance’s effective tax rate in the period such changes aremade.

 

The Companyaccounts for uncertain income tax positions in accordance with the provisionsof Financial Accounting Standards Board Interpretation No. 48, *Accounting for Uncertainty in Income Taxes – anInterpretation of FASB Statement No. 109* (“FIN 48”).  Under the guidance of FIN 48, the Company mayrecognize the tax benefit from an uncertain tax position only if it is morelikely than not to be sustained upon examination based on the technical meritsof the position. The amount of the accrual for which an exposure exists ismeasured as the largest amount of benefit determined on a cumulativeprobability basis that the Company believes is more likely than not to berealized upon ultimate settlement of the position.  Components of the reserve are classified aseither a current or long-term liability in the consolidated balance sheet basedon when the Company expects each of the items to be settled.  Covance records interest and penaltiesaccrued in relation to uncertain income tax positions as a component of incometax expense.

 

As of March 31,2008, the balance of the reserve for unrecognized tax benefits is$9.1 million, of which $2.6 million is recorded as a currentliability in accrued expenses and other current liabilities, and$6.5 million is recorded as a long-term liability in other liabilities onthe consolidated balance sheet, including accrued interest of$1.5 million.  This reserve relatesto exposures for income tax matters such as transfer pricing, nexus, deemeddividends and research and development credits.

 

TheCompany also maintains a tax reserve related to exposures for non-income taxmatters including value-added tax and state sales and use and other taxes,which are accounted for in accordance with Statement of Financial AccountingStandards No. 5, *Accounting forContingencies*. The balance of this reserve at March 31, 2008 isapproximately $0.8 million and is recorded as a current liability inaccrued expenses and other current liabilities on the consolidated balancesheet.

 

While Covancebelieves that it has identified all reasonably identifiable exposures and thatthe reserve it has established for identifiable exposures is appropriate underthe circumstances, it is possible that additional exposures exist and thatexposures will be settled at amounts different than the amounts reserved. It isalso possible that changes in facts and circumstances could cause Covance toeither materially increase or reduce the carrying amount of its tax reserve.

 

Covance’s policyis to provide income taxes on earnings of foreign subsidiaries only to theextent those earnings are taxable or are expected to be remitted. Covance’shistorical policy has been to leave its unremitted foreign earnings investedindefinitely outside the United States. Except for the amounts repatriated inthe fourth quarter of 2005 under the American Jobs Creation Act of 2004,Covance intends to continue to leave its unremitted foreign earnings investedindefinitely outside the United States. As a result, taxes have not been provided on any of the remainingaccumulated foreign unremitted earnings as of March 31, 2008.

 

***Stock-Based Compensation.*** The Company sponsors several stock-basedcompensation plans pursuant to which non-qualified stock options and restrictedstock awards are granted to eligible employees. These plans are described more fully in Note 10 to our audited financialstatements included in our Annual Report on Form 10-K for the year ended December 31,2007 and Note 8 to our consolidated financial statements in our QuarterlyReport on Form 10-Q for the quarter ended March 31, 2008 includedelsewhere herein.

 

Thegrant-date fair value of stock awards is based upon the underlying price of thestock on the date of grant.  The grant-datefair value of stock option awards must be determined using an option pricingmodel.  Option pricing models require theuse of estimates and assumptions as to (a) the expected term of theoption, (b) the expected volatility of the price of the underlying stock, (c) therisk-free interest rate for the expected term of the option and (d) pre-vestingforfeiture rates.

 

Theexpected term of the option is based upon the contractual term and expectedemployee exercise and expected post-vesting employment terminationbehavior.  The expected volatility of theprice of the underlying stock is based upon the historical volatility of theCompany’s stock computed over a period of time equal to the expected term ofthe option.  The risk free interest rateis based upon the implied yields currently available from the U.S. Treasuryzero-coupon yield curve for issues with a remaining duration equal to theexpected term of the option.  Pre-vestingforfeiture rates are estimated based upon past voluntary termination behaviorand past option forfeitures.

 

15

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The following table sets forth the weighted-averageassumptions used to calculate the fair value of options granted for the threemonth periods ended March 31, 2008 and 2007:

 
| ** **                        | ** ** | **Three Months Ended March 31** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------|------------|
| ** **                        | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Expected stock price  volatility  |       | 39%                                                 |       | 42% |   |
| Risk free interest  rate(s)       |       | 1.9% - 3.7%                                         |       | 4.7% - 5.1% |   |
| Expected life of  options (years) |       | 4.4                                                 |       | 4.3 |   |

 

Changesin any of these assumptions could impact, potentially materially, the amount ofexpense recorded in future periods related to stock-based awards.

 

***Impairment of Assets.***Covance reviews its long-livedassets other than goodwill and other indefinite lived intangible assets forimpairment, when events or changes in circumstances occur that indicate thatthe carrying value of the asset may not be recoverable.  The assessment of possible impairment isbased upon Covance’s judgment of its ability to recover the asset from theexpected future undiscounted cash flows of the related operations.  Actual future cash flows may be greater orless than estimated.

 

Covanceperforms an annual test for impairment of goodwill and other indefinite livedintangible assets during the fourth quarter. This test is performed bycomparing, at the reporting unit level, the carrying value of the reportingunit to its fair value.  Covance assessesfair value based upon its estimate of the present value of the future cashflows that it expects to be generated by the reporting unit.  The most recent test for impairment performedfor 2007 did not identify any instances of impairment and there were no eventsthrough March 31, 2008 that warranted a reconsideration of our impairmenttest results.  However, changes inexpectations as to the present value of the reporting unit’s future cash flowsmight impact subsequent years’ assessments of impairment.

 

***Defined Benefit PensionPlans.***Covance sponsors defined benefit pension plans for thebenefit of its employees at three foreign subsidiaries, as well as anon-qualified supplemental executive retirement plan and a post-employmentretiree health and welfare plan for the benefit of eligible employees atcertain U.S. subsidiaries. The measurement of the related benefit obligationand net periodic benefit cost recorded each year is based upon actuarialcomputations, which require the use of judgment as to certain assumptions. Themore significant of these assumptions are: (a) the appropriate discountrate to use in computing the present value of the benefit obligation; (b) theexpected return on plan assets (for funded plans); and (c) the expectedfuture rate of salary increases (for pay-related plans). Actual results (suchas the return on plan assets, future rate of salary increases and plan participationrates) will likely differ from the assumptions used. Those differences, alongwith changes that may be made in the assumptions used from period to period,will impact the amounts reported in the financial statements and footnotedisclosures.

 

Set forth below is a discussionof the impact that (a) differences between assumed results and actual results and (b) assumptionchanges have had on our results of operations for the years ended December 31,2007, 2006 and 2005 and on the financial position of the plans as of December 31,2007 and 2006 for our United Kingdom defined benefit pension plans (the largestof our defined benefit-type pension plans).

 
| ** **                                                                 | ** ** | **United Kingdom Plans** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(amounts in millions)**                                        | ** ** | **2007**                           | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net periodic pension  cost                                                 |       | $                                  | 4.0        |   | $ | 4.6 |   | $ | 4.1 |   | $ | 4.3 |   |
|                                                                       |       |                               |       |   |   |   |   |   |   |
| Weighted average  assumptions used to determine net periodic pension cost: |       |                               |       |   |   |   |   |   |   |
| Discount rate                                                              |       | 5.25                               | %          | 5.00 | % | 5.75 | % | 6.00 | % |
| Expected rate of return  on assets                                         |       | 6.75                               | %          | 6.75 | % | 6.75 | % | 6.00 | % |
| Salary increases                                                           |       | 4.00                               | %          | 4.00 | % | 4.00 | % | 3.50 | % |
|                                                                            |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

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The increase (decrease) in the net periodic benefit cost from period toperiod is attributable to the following:

 
| ** **                                                                                               | ** **   | **United Kingdom Plans** | ** ** |
|----------------------------------------------------------------------------------------------------------|--------------|------------------------------------|------------|
| **(amounts in millions)**                                                                      | ** **   | **2006 to 2007**         | ** ** | **2005 to 2006** | ** ** | **2004 to 2005** | ** ** |
| Change in discount rate                                                                                  |         | $                                  | (1.3       | ) | $ | 2.4 |   | $ | 0.4 |   |
| Change in expected rate  of return on assets                                                             | *** *** | ***—***                       |       | — |   | (0.6 | ) |
| Change in rate of  salary increases                                                                      | *** *** | ***—***                       |       | — |   | 0.4 |   |
| Other, including  differences between actual experience and assumptions used                             |         | 0.3                                |       | (1.9 | ) | $ | (0.4 | ) |
| Foreign currency  exchange rate changes                                                                  |         | 0.4                                |       | — |   | — |   |
| Net change in periodic  benefit cost                                                                     |         | $                                  | (0.6       | ) | $ | 0.5 |   | $ | (0.2 | ) |
|                                                                                                     |         |                               |       |   |   |   |   |
|                                                                                                     |         | **United Kingdom Plans** |       |
|                                                                                                     |         | **2007**                           | ** ** | **2006** | ** ** | **2005** |   |
| Weighted average  assumptions used to determine benefit obligation:                                      | ** **   | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                                            |         | 5.50                               | %     | 5.25 | % | 5.00 | % |
| Salary increases                                                                                         |         | 4.25                               | %     | 4.00 | % | 4.00 | % |
|                                                                                                     |         |
| The change in the  projected benefit obligation from period to period is attributable to the  following: |         |
|                                                                                                     |         |
|                                                                                                     |         | **United Kingdom Plans** |       |
| **(amounts in millions)**                                                                      | ** **   | **2006 to 2007**         | ** ** | **2005 to 2006** |   |
| Projected benefit  obligation, beginning of year                                                         |         | $                                  | 141.3      |   | $ | 119.8 |   |
| Service/interest cost  components of net periodic benefit cost in year                                   |         | 13.5                               |       | 12.2 |   |
| Benefits paid                                                                                            |         | (2.1                               | )          | (1.3 | ) |
| Increase in discount  rate                                                                               |         | (8.5                               | )          | (8.6 | ) |
| Other, including  differences between actual experience and assumptions used                             |         | 6.3                                |       | 3.9 |   |
| Foreign currency  exchange rate changes                                                                  |         | 1.6                                |       | 15.3 |   |
| Projected benefit  obligation, end of year                                                               |         | $                                  | 152.1      |   | $ | 141.3 |   |
|                                                                                                          |              |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

**ForeignCurrency Risks**

** **

Since Covance operates ona global basis, it is exposed to various foreign currency risks. Two specificrisks arise from the nature of certain contracts. The first risk can occur whenCovance executes contracts with its customers where the contracts are denominatedin a currency different than the local currencies of the Covance subsidiariesperforming work under the contracts. As a result, revenue recognized forservices rendered may be denominated in a currency different from thecurrencies in which the subsidiaries’ expenses are incurred. Fluctuations inexchange rates (from those in effect at the time the contract is executed andpricing is established to the time services are rendered and revenue isrecognized) can affect the subsidiary’s net revenues and resultant earnings.This risk is generally applicable only to a portion of the contracts executedby Covance’s subsidiaries providing clinical services. Historically,fluctuations in exchange rates from those in effect at the time contracts wereexecuted have not had a material effect upon Covance’s consolidated financialresults. See “Risk Factors”.

 

We also have othercross-currency contracts executed by other Covance subsidiaries where theforeign currency amounts billed are determined by converting local currencyrevenue amounts to the contract billing currency using the exchange rates ineffect at the time services are rendered. These contracts do not give rise to foreign currency denominated revenueand local currency denominated expenses, but they do give rise to a second typeof risk.  This second type of riskresults from the passage of time between the invoicing of customers under bothof these types of contracts and the ultimate collection of customer paymentsagainst such invoices. Because such invoices are denominated in a currencyother than the subsidiary’s local currency, Covance recognizes a receivable atthe time of invoicing for the local currency equivalent of the foreign currencyinvoice amount as of the invoice date. Subsequent changes in exchange ratesfrom the time the invoice is prepared to the time payment from the customer isreceived will result in Covance receiving either more or less in local currencythan the local currency equivalent of the invoice amount at the time the invoicewas prepared and the receivable was recorded. This difference is recognized byCovance as a foreign currency transaction gain or loss, as applicable, in theconsolidated statements of income.

 

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Finally, Covance’sconsolidated 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 financialresults into U.S. dollars for purposes of reporting Covance’s consolidatedfinancial results. The process by which each foreign subsidiary’s financialresults are translated into U.S. dollars is as follows: income statementaccounts are translated at average exchange rates for the period; balance sheetasset and liability accounts are translated at end of period exchange rates;and equity accounts are translated at historical exchange rates. Translation ofthe balance sheet in this manner affects the stockholders’ equity account,referred to as the cumulative translation adjustment account. This accountexists only in the foreign subsidiary’s U.S. dollar balance sheet and isnecessary to keep the foreign balance sheet stated in U.S. dollars inbalance.  At March 31, 2008,accumulated other comprehensive income on the consolidated balance sheetincludes the cumulative translation account balance of $70.0 million.

 

### **OperatingExpenses and Reimbursable Out-of-Pockets**

### ** **

Covancesegregates its recurring operating expenses among four categories: cost ofrevenue; reimbursed out-of-pocket expenses; selling, general and administrativeexpenses; and depreciation and amortization. Cost of revenue includes directlabor and related benefits, other direct costs, shipping and handling fees, andan allocation of facility charges and information technology costs, andexcludes depreciation and amortization. Cost of revenue, as a percentage of netrevenues, tends and is expected to fluctuate from one period to another, as aresult of changes in labor utilization and the mix of service offeringsinvolving hundreds of studies conducted during any period of time. Selling,general and administrative expenses consist primarily of administrative payrolland related benefit charges, advertising and promotional expenses,administrative travel and an allocation of facility charges and informationtechnology costs, and excludes depreciation and amortization.

 

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

 

**Quarterly Results**

** **

Covance’squarterly operating results are subject to variation, and are expected tocontinue to be subject to variation, as a result of factors such as (1) delaysin initiating or completing significant drug development trials, (2) terminationor reduction in size of drug development trials, (3) acquisitions anddivestitures, (4) changes in the mix of our services, and (5) exchangerate fluctuations. Delays and terminations of trials are often the result ofactions taken by Covance’s customers or regulatory authorities and are nottypically controllable by Covance. Since a large amount of Covance’s operatingcosts are relatively fixed while revenue is subject to fluctuation, moderatevariations in the commencement, progress or completion of drug developmenttrials may cause significant variations in quarterly results.

 

**Results of Operations**

** **

***Three Months Ended March 31,2008 Compared with Three Months Ended March 31, 2007. ***Net revenues increased15.1% to $412.4 million for the three months ended March 31, 2008from $358.3 million for the corresponding 2007 period.  Excluding the impact of foreign exchange ratevariances between both periods net revenues increased 11.7% as compared to the corresponding2007 period.  Net revenues from Covance’searly development segment grew 12.7%,or 11.6% excluding the impact of foreign exchange rate variances betweenboth periods, driven primarily by growth in chemistry and toxicologyservices.  Net revenues from Covance’slate-stage development segment increased 17.5%, or 11.9% excluding the impact of foreign exchange ratevariances between both periods, driven by strength in central laboratory andclinical development services.

 

Cost of revenue increased 16.6% to $273.3 millionor 66.3% of net revenues for the three months ended March 31, 2008 ascompared to $234.4 million or 65.4% of net revenues for the corresponding2007 period.  Gross margins decreased by90 basis points to 33.7% for the three months ended March 31, 2008from 34.6% for the corresponding 2007 period.

 

Overall, selling,general and administrative expenses increased 5.8% to $59.0 million forthe three months ended March 31, 2008 from $55.8 million for thecorresponding 2007 period. As a percentage of net revenues, selling, generaland administrative expenses decreased to 14.3% for the three months ended March 31,2008 from 15.6% for the corresponding 2007 period. This percentage can varyfrom quarter to quarter depending on the timing and nature of variousprofessional fees and other discretionary spending. The 130 basis pointdecrease over the corresponding 2007 period also reflects increasedefficiencies gained from the leveraging of our existing support functionsacross a larger base of revenues.

 

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Depreciation and amortization increased 7.7% to$17.3 million for the three months ended March 31, 2008 from$16.1 million for the corresponding 2007 period as a result of higherlevels of capital spending over the last eighteen months.  As a percentage of net revenues, depreciationand amortization decreased slightly by 30 basis points to 4.2% for thethree months ended March 31, 2008 from 4.5% for the corresponding 2007period.

 

Income from operations increased 20.6% to$62.7 million or 15.2% of net revenues for the three months ended March 31,2008 from $52.0 million or 14.5% of net revenues for the corresponding2007 period.  Income from operations fromCovance’s early development segment increased $6.9 million or 15.8% to$50.6 million or 25.0% of net revenues for the three months ended March 31,2008 from $43.7 million or 24.4% of net revenues for the corresponding2007 period, driven primarily by growth in chemistry and toxicologyservices.  Income from operations fromCovance’s late-stage development segment increased $9.7 million or 33.1%to $38.9 million or 18.5% of net revenues for the three months ended March 31,2008 from $29.2 million or 16.3% of net revenues for the corresponding2007 period, driven by central laboratory services.  Corporate expenses increased$5.9 million to $26.7 million or 6.5% of net revenues for the threemonths ended March 31, 2008 from $20.9 million or 5.8% of netrevenues for the three months ended March 31, 2007.  Included in Corporate expense is stock-basedcompensation expense of $6.1 million or 1.5% of net revenues for the threemonths ended March 31, 2008, as compared to $5.5 million or 1.5% ofnet revenues for the corresponding 2007 period. The increase in Corporate expenses also reflects an increase incompensation-related expenses and investments in infrastructure to supporthigher levels of current and future growth.

 

Other income, net increased $4.3 million to$6.6 million for the three months ended March 31, 2008 from$2.3 million for the corresponding 2007 period primarily as a result of anadditional $3.0 million gain from the receipt of contingent consideration ontransferred backlog on the sale of Covance’s cardiac safety service offeringand a $1.2 million increase in foreign exchange gains.

 

Covance’s effective tax rate for the three monthsended March 31, 2008 was 29.9% compared to 29.5% for the corresponding2007 period.  The year-over-year increasein Covance’s effective tax rate is attributable to a number of factors,including the higher effective tax rate on the gain on sale of business, themix of our pre-tax earnings across various tax jurisdictions and other planninginitiatives.

 

Covance has a minority equity position (approximately 20% at March 31,2008) in Bio-Imaging Technologies, Inc. (“BITI”).  BITI uses proprietary medical imagingtechnologies to process and analyze medical images, and also provides otherservices, including the data-basing and regulatory submission of medicalimages, quantitative data and text.  Forthe three month periods ended March 31, 2008 and 2007, Covance recognizedincome of $0.2 million and $0.1 million, representing its pro ratashare of BITI’s earnings.

 

Covance has a 47% minority equity position in NoveprimLimited (“Noveprim”), a supplier of research products.  For the three month periods ended March 31,2008 and 2007, Covance recognized $0.3 million and $0.4 million,respectively, representing its share of Noveprim’s earnings, less theelimination of profit on inventory purchased from Noveprim and still on hand atCovance at March 31, 2008 and 2007.

 

Net income of $49.1 million for the three monthsended March 31, 2008 increased $10.2 million or 26.2% as compared to$38.9 million for the corresponding 2007 period.

 

**Liquidity andCapital Resources**

** **

Cash and cash equivalents at March 31, 2008 and December 31,2007 were $232.6 million and $319.5 million, respectively.  Amounts are principally invested inshort-term money market funds.  Covance’sexpected primary cash needs on both a short and long-term basis are for capitalexpenditures, expansion of services, possible future acquisitions, geographicexpansion, working capital and other general corporate purposes, includingpossible share repurchases. Covance’s $75.0 million revolving credit facility(the “Credit Facility”) expires in June 2009 and may be expanded to $125.0million at Covance’s election.  Covancebelieves cash on hand plus cash from operations and available borrowings underthe Credit Facility will provide sufficient liquidity for the foreseeablefuture.  At March 31, 2008, therewere $43.0 million of outstanding borrowings and $1.1 million ofoutstanding letters of credit under the Credit Facility.  Interest on all outstanding borrowings underthe Credit Facility is based upon the London Interbank Offered Rate (“LIBOR”)plus a 75 basis point margin and approximated 3.47% per annum during thequarter ended March 31, 2008.  TheCredit Facility contains various financial and other covenants.  At March 31, 2008, Covance was incompliance with the terms of the Credit Facility. The Credit Facility iscollateralized by guarantees of certain of Covance’s domestic subsidiaries anda pledge of 65 percent of the capital stock of certain of Covance’s foreignsubsidiaries.

 

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During the three months ended March 31, 2008,Covance’s operations provided net cash of $35.8 million, an increase of$0.9 million from the corresponding 2007 period.  The change in net operating assets used$32.5 million in cash during the three months ended March 31, 2008,primarily due to a reduction in accrued payroll and benefits (primarilyattributable to incentive compensation payments made during the first quarterof 2008 relating to 2007 incentive compensation accruals) and unearned revenueand an increase in prepaid expenses and other current assets, unbilledservices, and inventory, partially offset by an increase in income taxespayable.  The change in net operatingassets used $27.0 million in cash during the three months ended March 31,2007, primarily due to an increase in prepaid expenses and other current assetsand unbilled services and a reduction in accrued payroll and benefits(primarily attributable to incentive compensation payments made during thefirst quarter of 2007 relating to 2006 incentive compensation accruals),partially offset by an increase in unearned revenue.  Covance’s ratio of current assets to currentliabilities was 1.82 at March 31, 2008 and 2.15 at December 31, 2007.

 

Investing activities for the three months ended March 31,2008 used $59.5 million, compared to using $31.8 million for thecorresponding 2007 period.  Capitalspending for the first three months of 2008 totaled $62.6 million, and wasprimarily for the expansion of our preclinical facilities in North America andEurope, outfitting of new facilities, upgrade of existing equipment, and thepurchase of new equipment, hardware and software.  Capital spending for the corresponding 2007period totaled $31.8 million, and was primarily for the expansion of ourpreclinical facilities in North America and Europe, outfitting of newfacilities, upgrade of existing equipment, and the purchase of new equipment,hardware and software for newly hired employees.  Investing activities for the three monthsended March 31, 2008 also included $3.0 million of additionalproceeds received during the quarter reflecting contingent considerationrelated to transferred backlog from the sale of Covance’s cardiac safetyservice offering on November 28, 2007.

 

Financingactivities for the three months ended March 31, 2008 and 2007 used$78.1 million and $41.7 million, respectively.  During the three months ended March 31,2008, $126.7 million was used to purchase into treasury1,500,000 shares of common stock under the share buyback programauthorized by Covance’s Board of Directors and $2.9 million was used topurchase into treasury 34,980 shares of common stock in connection withemployee benefit plans; partially offset by $5.4 million in proceeds fromthe exercise of stock options, $1.7 million in excess tax benefitsrealized on the exercise of stock options and $1.4 million from employeecontributions to the Company’s employee stock purchase plan.  Additionally, Covance borrowed$43.0 million under the Credit Facility during the first quarter of 2008to partially fund the purchase into treasury of common stock.  During the three months ended March 31,2007, $48.1 million was used to purchase into treasury 780,800 sharesof common stock under the share buyback program authorized by Covance’s Boardof Directors and the purchase into treasury of 27,161 shares of commonstock in connection with employee benefit plans; partially offset by$4.4 million in proceeds from the exercise of stock options,$0.9 million in excess tax benefits realized on the exercise of stockoptions and $1.1 million from employee contributions to the Company’semployee stock purchase plan.

 

**Inflation**

** **

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

 

**Recently Issued Accounting Standards**

 

In September 2006,the Financial Accounting Standards Board (the “FASB”) issued Statement ofFinancial Accounting Standards No. 158, *Employers’Accounting for Defined Benefit Pension and Other Postretirement Plans, anamendment of FASB Statements No. 87, 88, 106 and 132(R)*, (“SFAS 158”).As of December 31, 2006, Covance has adopted the recognition anddisclosure provisions of SFAS 158, which require an employer to recognizethe over funded or under funded status of its defined benefit postretirementplans—measured as the difference between the fair value of plan assets and theprojected benefit obligation—as an asset or liability, respectively, in itsbalance sheet and to recognize changes in the funded status of the plan in theyear in which such changes occur through other comprehensive income. Theadoption of SFAS 158 did not have an impact on our consolidated results ofoperations.  SFAS 158 also requires,effective for fiscal years ending after December 15, 2008, that themeasurement of the over funded or under funded status of a plan be made as ofthe employer’s fiscal year end and not as of an earlier measurement date.Covance will be required to conform the measurement dates of its plans toDecember 31st for its fiscal year ending December 31, 2008. Covance does notexpect this change in measurement dates to have a material impact on itsconsolidated results of operations or financial position.

 

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In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations* (“SFAS 141R”) which replaces SFAS No. 141,*Business Combinations*.  The scope of SFAS 141R is broader than thatof SFAS No. 141, which applied only to business combinations in whichcontrol was obtained by transferring consideration.  SFAS 141R revises accounting and reportingstandards for business combinations and applies to all transactions or otherevents in which an entity obtains control of one or more businesses bytransferring consideration as well as combinations achieved without thetransfer of consideration. By applying the same method of accounting – theacquisition method – to all transactions and other events in which one entityobtains control over one or more other businesses, this statement is intendedto improve the comparability of the information about business combinationsprovided in financial reports.  SFAS 141Rapplies prospectively to business combinations with an acquisition date on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  Covance is currently in theprocess of evaluating SFAS 141R, and has not yet determined the impact, if any,that accounting for future business combinations under SFAS 141R, effective January 1,2009, will have on its consolidated results of operations or financialposition.

 

On February 12,2008, the FASB issued FASB Staff Position 157-2 (“FSP 157-2”), which delays theeffective date of the application of SFAS No. 157, *Fair Value Measurements,* (“SFAS 157”) tofiscal years beginning after November 15, 2008 for all non-financialassets and liabilities that are recognized or disclosed at fair value in thefinancial statements on a non-recurring basis. Covance’s assets and liabilities subject to the provisions of SFAS 157are limited to non-recurring non-financial assets such as goodwill and otherindefinite lived intangible assets measured at fair value for impairmenttesting.  As such, the adoption of SFAS157, as amended by FSP 157-2, is deferred until our fiscal year beginning January 1,2009.  Covance does not expect theadoption of SFAS 157, as amended, to have a material impact on its consolidatedresults of operations or financial position.

 

***Forward Looking Statements. ****Statementsin this Management’s Discussion and Analysis of Financial Condition and Resultsof Operations, as well as in certain other parts of this Quarterly Report on Form 10-Qthat look forward in time, are forward looking statements made pursuant to thesafe 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, andassumptions and other statements which are other than statements of historicalfacts. All such forward looking statements are based on the currentexpectations of management and are subject to, and are qualified by, risks anduncertainties that could cause actual results to differ materially from thoseexpressed or implied by those statements. These risks and uncertaintiesinclude, without limitation, competitive factors, outsourcing trends in thepharmaceutical 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, risksassociated with acquisitions and investments, the Company’s ability to increaseorder volume, the pace of translation of orders into revenue in late-stagedevelopment services, and other factors described in Covance’s filings with theSecurities and Exchange Commission, including its Annual Report on Form 10-K.*

 

**Item 3. Quantitative and Qualitative Disclosure About Market Risk**

 

For the three months ended March 31, 2008,approximately 41% of our net revenues were derived from our operations outsidethe United States. We do not engage in material or long-term derivative orhedging activities related to our potential foreign exchange exposures.  See “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations – Foreign Currency Risks” for amore detailed discussion of our foreign currency risks and exposures.

 

**Item 4.  Controls and Procedures**

 

Disclosurecontrols and procedures. The Company’s Principal Executive Officer andPrincipal Financial Officer have reviewed and evaluated the effectiveness ofthe Company’s disclosure controls and procedures as of the end of the periodcovered in this report.  Based on thatevaluation, the Principal Executive Officer and the Principal Financial Officerhave concluded that the Company’s current disclosure controls and proceduresare effective.  There have been nosignificant changes in the Company’s internal controls or in the other factorsthat significantly affect those controls.

 

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**Part II. Other Information**

 

**Item1a.  Risk Factors**

 

This section discusses variousrisk factors that are attendant with our business and the provision of ourservices. If the events outlined below were to occur individually or in theaggregate, our business, results of operations, financial condition, and cashflows could be materially adversely affected.

 

**Changes in government regulation or in practices relating tothe pharmaceutical industry could decrease the need for the services weprovide.**

 

Governmental agencies throughoutthe world, including in the United States, strictly regulate the drugdevelopment process. Our business involves helping pharmaceutical andbiotechnology companies navigate the regulatory drug approval process. Changesin regulation, such as a relaxation in regulatory requirements or theintroduction of simplified drug approval procedures, or an increase inregulatory requirements that we have difficulty satisfying or that make ourservices less competitive, could eliminate or substantially reduce the demandfor our services. Also, if government efforts to contain drug costs andpharmaceutical and biotechnology company profits from new drugs, our customersmay spend less, or reduce their growth in spending on research and development.If health insurers were to change their practices with respect toreimbursements for pharmaceutical products, our customers may spend less, orreduce their growth in spending on research and development.

 

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

 

Any failure on our part to complywith applicable regulations could result in the termination of on-goingresearch or the disqualification of data for submission to regulatoryauthorities. For example, if we were to fail to properly monitor compliance byclinical trial investigators with study protocols, the data collected from thattrial could be disqualified. If this were to happen, we could be contractuallyrequired to repeat the trial at no further cost to our customer, but atsubstantial cost to us.

 

**We may bear financial losses because most of our contractsare of a fixed price nature and may be delayed or terminated or reduced inscope for reasons beyond our control.**

 

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

 

·      the failure of products to satisfy safetyrequirements;

·      unexpected or undesired results of theproducts;

·      insufficient patient enrollment;

·      insufficient investigator recruitment;

·      the client’s decision to terminate thedevelopment of a product or to end a particular study; and

·      our failure to perform properly our dutiesunder the contract.

 

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

 

**We may bear financial risk if we under price our contracts oroverrun cost estimates.**

 

Since our contracts are oftenstructured as fixed price or fee-for-service with a cap, we bear the financialrisk if we initially under price our contracts or otherwise overrun our costestimates. Such under pricing or significant cost overruns could have amaterial adverse effect on our business, results of operations, financialcondition, and cash flows.

 

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

 

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

 

**Our quarterly operating results may vary.**

 

Our operating results may varysignificantly from quarter to quarter and are influenced by factors over whichwe have little control such as:

 

·      exchange rate fluctuations;

·      the commencement, completion orcancellation of large contracts;

·      the progress of ongoing contracts;

·      the timing of and charges associated withcompleted acquisitions or other events; and

·      changes in the mix of our services.

 

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

 

**We depend on the pharmaceutical and biotechnology industries.**

 

Our revenues depend greatly onthe expenditures made by the pharmaceutical and biotechnology industries inresearch and development. Accordingly, economic factors and industry trendsthat affect our clients in these industries also affect our business. Ifcompanies in these industries were to reduce the number of research anddevelopment projects they outsource, our business could be materially adverselyaffected.

 

**We operate in a highly competitive industry.**

 

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

 

·                                          reputation for on-time quality performance andregulatory compliance;

·                                          expertise and experience in specific areas;

·                                          scope of service offerings;

·                                          strengths in various geographic markets;

·                                          price;

·                                          technological expertise and efficient drugdevelopment processes;

·                                          quality of facilities;

·                                          ability to acquire, process, analyze and reportdata in an accurate manner;

·                                          ability to manage large scale clinical trials bothdomestically and internationally;

·                                          expertise and experience in market accessservices; and

·                                          size.

 

For instance, our clinicaldevelopment services have from time-to-time experienced periods of increasedprice competition which had a material adverse effect on Covance’s late-stagedevelopment profitability and consolidated net revenues and net income.

 

There is competition among thelarger contract research organizations for both clients and potentialacquisition candidates. Additionally, small, limited service entitiesconsidering entering the contract research organization industry will find fewbarriers to entry, thus further increasing possible competition. Thesecompetitive pressures may affect the attractiveness of our services and couldadversely affect our financial results.

 

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**We may expand our business through acquisitions.**

 

We review many acquisitioncandidates and, in addition to acquisitions which we have already made, we arecontinually evaluating new acquisition opportunities. Factors which may affectour ability to grow successfully through acquisitions include:

 

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

·      diversion of management’s attention fromcurrent operations;

·      the possibility that we may be adverselyaffected by risk factors facing the acquired companies;

·                  acquisitions could be dilutive to earnings, or inthe event of acquisitions made through the issuance of our common stock to theshareholders of the acquired company, dilutive to the percentage of ownershipof our existing stockholders;

·                  potential losses resulting from undiscoveredliabilities of acquired companies not covered by the indemnification we mayobtain from the seller;

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

·                  loss of key employees of the acquired companies.

 

**We may be affected by potential health care reform**.

 

In recent years the United StatesCongress and state legislatures have considered various types of health carereform in order to control growing health care costs. We are unable to predictwhat legislative proposals will be adopted in the future, if any. Similarreform movements have occurred in Europe and Asia.

 

Implementation of health carereform legislation that contain costs could limit the profits that can be madefrom the development of new drugs. This could adversely affect research anddevelopment expenditures by pharmaceutical and biotechnology companies whichcould in turn decrease the business opportunities available to us both in theUnited States and abroad. In addition, new laws or regulations may create arisk of liability, increase our costs or limit our service offerings.

 

**We rely on third parties for important services.**

 

We depend on third parties toprovide us with services critical to our business.  The failure of any of these third parties toadequately provide the needed services could have a material adverse effect onour business.

 

**Our revenues and earnings are exposed to exchange ratefluctuations**.

 

We derive a large portion of ournet revenues from international operations. For the three months ended March 31,2008, we derived approximately 41% of our net revenues from outside the UnitedStates. Our financial statements are denominated in U.S. dollars. In addition,in certain circumstances, we may incur costs in one currency related to ourservices or products for which we are paid in a different currency. As aresult, factors associated with international operations, including changes inforeign currency exchange rates, could significantly affect our results ofoperations, financial condition and cash flows.

 

**The loss of our key personnel could adversely affect ourbusiness.**

 

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

 

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**Contract research services create a risk of liability**.

 

In contracting to work on drugdevelopment trials and studies, we face a range of potential liabilities, forexample:

 

·                  errors or omissions that create harm during atrial to study volunteers or after a trial to consumers of the drug afterregulatory approval of the drug;

·                  general risks associated with clinicalpharmacology facilities, including negative consequences from theadministration of drugs to clinical trial participants or the professionalmalpractice of clinical pharmacology medical care providers;

·                  errors or omissions from tests conducted for theagrochemical and food industries;

·                  risks that animals in our breeding facilities maybe infected with diseases that may be harmful and even lethal to themselves andhumans despite preventive measures contained in our company policies for thequarantine and handling of imported animals; and

·                  errors and omissions during a trial that mayundermine the usefulness of a trial or data from the trial or study.

 

We also contract with physicians,also referred to as investigators, to conduct the clinical trials to test newdrugs on human volunteers. These tests can create a risk of liability forpersonal injury or death to volunteers, resulting from negative reactions tothe drugs administered or from professional malpractice by third partyinvestigators. We believe that our risks in this area are generally reduced bythe following:

 

·                                          contract provisions entitling us to be indemnifiedor entitling us to a limitation of liability;

·                                          insurance maintained by our clients,investigators, and by us; and

·                                          our efforts to comply with various regulatoryrequirements we must follow in connection with our business.

 

Contractual indemnificationsgenerally do not protect us against liability arising from certain of our ownactions, such as negligence or misconduct. We could be materially and adverselyaffected if we were required to pay damages or bear the costs of defending anyclaim which is not covered by a contractual indemnification provision or in theevent that a party who must indemnify us does not fulfill its indemnificationobligations or which is beyond the level of our insurance coverage. There canbe no assurance that we will be able to maintain such insurance coverage onterms acceptable to us.

 

**Hardwareand software failures, delays in the operation of our computer andcommunications systems or the failure to implement system enhancements may harmour business.**

 

Oursuccess depends on the efficient and uninterrupted operation of our computerand communications systems. A failure of our network or data gatheringprocedures could impede the processing of data, delivery of databases andservices, client orders and day-to-day management of our business and couldresult in the corruption or loss of data. While certain of our operations haveappropriate disaster recovery plans in place, we currently do not haveredundant facilities everywhere in the world to provide IT capacity in theevent of a system failure. Despite any precautions we may take, damage fromfire, floods, hurricanes, power loss, telecommunications failures, computerviruses, break-ins and similar events at our various computer facilities couldresult in interruptions in the flow of data to our servers and from our serversto our clients. In addition, any failure by our computer environment to provideour required data communications capacity could result in interruptions in ourservice. In the event of a delay in the delivery of data, we could be requiredto transfer our data collection operations to an alternative provider of serverhosting services. Such a transfer could result in delays in our ability todeliver our products and services to our clients. Additionally, significantdelays in the planned delivery of system enhancements, improvements andinadequate performance of the systems once they are completed could damage ourreputation and harm our business. Finally, long-term disruptions in theinfrastructure caused by events such as natural disasters, the outbreak of war,the escalation of hostilities, and acts of terrorism (particularly involvingcities in which we have offices) could adversely affect our businesses.Although we carry property and business interruption insurance, our coveragemay not be adequate to compensate us for all losses that may occur.

 

**Relianceon facilities.**

 

Covancerelies on certain of its facilities.  Inparticular, Covance’s preclinical and central laboratory facilities are highlyspecific and would be difficult to replace in a short period of time.  Any event that causes a disruption of theoperation of these facilities might impact the Company’s ability to provideservice to its customers and therefore could have a material adverse affect onits financial condition, results of operations and cash flows.

 

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**Reliance on air transportation.**

 

Our central laboratories andcertain of our other businesses are heavily reliant on air travel for transportof clinical trial kits and other material, products and people, and asignificant disruption to the air travel system, or our access to it, couldhave a material adverse effect on our business.

 

**Certain service offerings and research products are dependenton limited sources of supply of services or products which if interrupted couldaffect our business.**

 

We depend on a limited number ofsuppliers for certain services and for certain animal populations. Disruptionsto the continued supply of these services or products may arise from exportimport restrictions or embargoes, foreign political or economic instability, orotherwise. Disruption of supply could have a material adverse effect on our business.

 

**Actions of animal rights extremists may affect our business.**

 

Our early development servicesutilize animals in preclinical testing of the safety and efficacy of drugs andalso breed and sell animals for biomedical research. Such activities are requiredfor the development of new medicines and medical devices under regulatoryregimes in the United States, Europe, Japan and other countries. Acts ofvandalism and other acts by animal rights extremists who object to the use ofanimals in drug development could have a material adverse effect on ourbusiness.

 

**Our animal populations may suffer diseases that can damageour inventory, harm our reputation, result in decreased sales of researchproducts or result in other liability to us.**

 

Itis important that our research products be free of diseases, includinginfectious diseases. The presence of diseases can distort or compromise thequality of research results, can cause loss of animals in our inventory, canresult in harm to humans or outside animal populations if the disease is notcontained to animals in inventory, or can result in other losses. Such resultscould harm our reputation or have a material adverse effect on our financialcondition, results of operations, and cash flows.

 

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**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

Repurchasesof equity securities as reported on a settlement date basis during the quarterended March 31, 2008 were as follows:

 

**Issuer Purchases of Equity Securities**

 
| **Period**                                           | ** ** | **Total # of  Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total # of  Shares  Purchased as  Part of  Currently  Authorized  Programs** | ** ** | **Maximum # of  Shares that May  Yet Be Purchased  Under Currently  Authorized  Programs** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1, 2008 –  January 31, 2008   |       | 3⁄4                                      |       | 3⁄4                                       |       | 3,717,700                                                                                          |       | 2,282,300                                                                                                                     |       |
| February 1, 2008 –  February 29, 2008 |       | 1,000,000                                   |       | $                                            | 85.206     |                                                                                               | 4,717,700  |                                                                                                                          | 1,282,300  |   |
| March 1, 2008 –  March 31, 2008       |       | 500,000                                     |       | $                                            | 83.007     |                                                                                               | 5,217,700  |                                                                                                                          | 782,300    |   |

 

**Item 6. Exhibits**

 

31.1                           Certification– Joseph L. Herring.  ***Filed herewith.***

 

31.2                           Certification– William E. Klitgaard.  ***Filed herewith.***

 

32.1                           CertificationPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002 – Joseph L. Herring.  ***Filed herewith.***

 

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

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                     | **COVANCE INC.**          |
|--------------------------|---------------------------|
|                     |                      |
|                     |                      |
| Dated:  May 5, 2008 | By:                       | /s/  Joseph L. Herring |   |
|                     | Joseph L. Herring         |
|                     | Chairman of the Board and |
|                     | Chief Executive Officer   |

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.

 

 
| **Signature** | ** **            | **Title**                         | ** **                            | **Date** |
|---------------|-----------------------|-----------------------------------|---------------------------------------|----------|
|          |                  |                              |                                  |     |
| /s/           | Joseph  L. Herring    |                              |                                  |     |   |   |
|          | Joseph  L. Herring    |                              | Chairman  of the Board                |     | May 5, 2008 |
|          |                  | and Chief  Executive Officer |                                  |     |
|          |                  | (Principal Executive  Officer)    |                                  |     |
|          |                  |                              |                                  |     |
| /s/           | William  E. Klitgaard |                              |                                  |     |   |   |
|          | William  E. Klitgaard |                              | Corporate  Senior Vice President      |     | May 5, 2008 |
|          |                  | and  Chief Financial Officer      |                                  |     |
|          |                  | (Principal  Financial Officer)    |                                  |     |
|          |                  |                              |                                  |     |
| /s/           | Michele  A. Kennedy   |                              |                                  |     |   |   |
|          | Michele A. Kennedy    |                              | Corporate Vice  President, Controller |     | May 5, 2008 |
|          |                  | and  Chief Accounting Officer     |                                  |     |
|          |                  | (Principal  Accounting Officer)   |                                  |     |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                        |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                   |
| 31.1                |       | Certification – Joseph L. Herring. ***Filed herewith.***                                                                                                                          |
|                |       |                                                                                                                                                                                   |
| 31.2                |       | Certification – William E. Klitgaard. ***Filed herewith.***                                                                                                                       |
|                |       |                                                                                                                                                                                   |
| 32.1                |       | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 – Joseph L. Herring. ***Filed  herewith.***    |
|                |       |                                                                                                                                                                                   |
| 32.2                |       | Certification Pursuant to 18 U.S.C.  Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002 – William E. Klitgaard. ***Filed  herewith.*** |

 

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